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



                                                        S. Hrg. 112-699

 
                FISCAL CLIFF: HOW TO PROTECT THE MIDDLE
   CLASS, SUSTAIN LONG-TERM ECONOMIC GROWTH, AND REDUCE THE FEDERAL 
                                DEFICIT

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

                                HEARING

                               before the

                        JOINT ECONOMIC COMMITTEE
                     CONGRESS OF THE UNITED STATES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                            DECEMBER 6, 2012

                               __________

          Printed for the use of the Joint Economic Committee



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                        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. Robert P. Casey, Jr., Chairman, a U.S. Senator from 
  Pennsylvania...................................................     1
Hon. Michael C. Burgess, M.D., a U.S. Representative from Texas..     3

                               Witnesses

Dr. Mark M. Zandi, Chief Economist, Moody's Analytics, 
  Philadelphia, PA...............................................     6
Dr. Kevin Hassett, Senior Fellow and Director of Economic Policy 
  Studies, American Enterprise Institute, Washington, DC.........     8

                       Submissions for the Record

Prepared statement of Dr. Mark M. Zandi..........................    36
Prepared statement of Dr. Kevin Hassett..........................    47
Chart titled ``Grow the Economy & Cut the Deficit''..............    56
Chart titled ``Fiscal Consolidations''...........................    57
Chart titled ``Private Business Investment Drives Job Creation''.    58


                    FISCAL CLIFF: HOW TO PROTECT THE
                    MIDDLE CLASS, SUSTAIN LONG-TERM
            ECONOMIC GROWTH, AND REDUCE THE FEDERAL DEFICIT

                              ----------                              


                       THURSDAY, DECEMBER 6, 2012

             Congress of the United States,
                          Joint Economic Committee,
                                                    Washington, DC.
    The committee met, pursuant to call, at 9:32 a.m. in Room 
216 of the Hart Senate Office Building, the Honorable Robert P. 
Casey, Jr., Chairman, presiding.
    Senators present: Casey, Bingaman, Klobuchar, Coats, Lee, 
and Toomey.
    Representatives present: Brady, Burgess, Mulvaney, Maloney, 
and Cummings.
    Staff present: Conor Carroll, Gail Cohen, Will Hansen, 
Colleen Healy, Ian Jannetta, Madi Joyce, Jessica Knowles, 
Patrick Miller, Robert O'Quinn, Christina Forsberg, and John 
Trantin.

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

    Chairman Casey. The Committee will come to order.
    We want to thank everyone for being here today. I did not 
have a chance to personally greet our witnesses, but I will 
have time to do that later. I want to thank both of our 
witnesses for being here, Dr. Hassett and Dr. Zandi.
    I will have an opening statement that I will make, and then 
I will turn to Dr. Burgess who will be making the opening. I 
know that Vice Chairman Brady will be with us, as well.
    So thanks, everyone, for being here. We all know the 
challenges we confront here in Congress on a whole range of 
issues, which are sometimes broadly described under the 
umbrella of the terminology ``fiscal cliff,'' but I think when 
we confront those difficult challenges we have to ask ourselves 
of course a couple of basic questions.
    One of the basic questions I think we must ask is: What 
will be the result, and what will be the impact as it relates 
to middle-income families? What will happen to them in the 
midst of all of these tough issues we have to work out?
    We know already that there is broad agreement that going 
over the so-called fiscal cliff would jeopardize the economic 
recovery. It would do that by increasing taxes on families, 
halting employment growth, driving unemployment up instead of 
down, and triggering deep cuts to programs that families across 
the country count on.
    The job before the United States Congress is to reach an 
agreement that builds on the economic progress that we are 
making, and puts us on a path to fiscal sustainability. We need 
to cut more spending and generate more revenue, and we need to 
do it in a smart way that keeps our economy growing.
    Earlier this year Congress extended the payroll tax cut 
through 2012. The 2 percentage point payroll tax cut has played 
an important role to sustain the recovery, boosting economic 
growth by an estimated one-half of a percentage point in 2012 
alone, and saving or creating some 400,000 jobs.
    We should continue the payroll tax cut through 2013. And 
yesterday I introduced legislation that would keep the employee 
payroll tax at 4.2 percent next year.
    To keep the economy growing--and there is good evidence of 
that just in the last couple of months when we saw the numbers 
for August, September, and October, job growth of about 
511,000--but to keep that momentum going, we should also 
provide tax credits to small businesses that add jobs or 
increase wages from one year to the next. My legislation 
includes such an incentive for small businesses to grow.
    I am confident that Congress will again be successful in 
reaching a compromise in the days ahead, and I look forward to 
hearing today from the experts that we have before us on how to 
reduce the deficit while protecting middle-income families.
    As we enter the holiday season, Americans should not have 
to face the uncertainty that many will face with regard to 
their taxes. There is no reason that middle-income families 
should go into this holiday season without knowing whether 
their taxes will go up next year.
    Last year, Democrats and Republicans worked together to cut 
nearly a trillion dollars of spending. Now we need to continue 
that bipartisan work to cut more spending, and to bring in 
additional revenues.
    If Congress fails to reach an agreement under the Budget 
Control Act of 2011, $1.2 trillion in automatic spending cuts 
will take place between 2013 and 2021. Republicans and 
Democrats agree that indiscriminate, across-the-board cuts are 
not the right thing to do at this time in our Nation's history.
    If we go over the cliff, triggering the automatic spending 
cuts and tax increases, the gross domestic product will fall by 
half a percentage point in 2013, according to the Congressional 
Budget Office. In other words, we would return to recession, 
reversing the hard-fought gains of the past few years.
    We cannot do this. We cannot afford to go backwards. 
Instead, we need a balanced and bipartisan approach, one that 
balances short- and long-term needs, distinguishes between core 
investments that must be preserved and spending that we can 
live without, and utilizes both spending cuts and revenue 
increases.
    The first order of business should be to protect those 
middle-income families I talked about, protect them from a tax 
increase. The CBO estimates that simply extending the middle-
class tax cuts would boost GDP by 1.3 percent and create 1.6 
million jobs. Let me say that again: Boost GDP by 1.3 percent 
and create 1.6 million jobs from that tax cut alone that we can 
enact.
    Importantly, it would resolve much of the economic 
uncertainty facing these middle-income families. There is broad 
recognition that the wealthiest among us can help us reduce the 
debt by paying more. It is encouraging in the last couple of 
weeks to see Republican Members of the House and Senate speak 
out on the need for a balanced approach that includes raising 
taxes on the wealthiest individuals, and moving right away to 
ensure that 98 percent of families do not face a tax increase.
    We need to look at history, recent history, when it comes 
to the impact of raising individual rates at the highest income 
levels. As we saw in the 1990s and the 2000s, there is no 
relationship between lower marginal tax rates for the 
wealthiest among us and faster economic growth.
    First, during the Clinton Administration to address the 
growing budget deficit, the top marginal tax rate was raised on 
the wealthiest individuals and the economy grew at its fastest 
rate in a generation, adding more than 22 million jobs.
    During the following eight years, the top marginal rate was 
lowered for the wealthiest individuals, but the economy never 
regained the strength of the previous decade. Job growth slowed 
and wages stagnated, leaving middle-income families especially 
vulnerable when the Great Recession began at the end of 2007.
    I hope today's hearing is helpful to people in not just 
Pennsylvania but across the country who are watching, who are 
weighing in, and who are waiting for Congress to act.
    I just want to say--and I will say more at the end about 
some of our Members who are leaving the Congress--I want to say 
that it has been an honor for me to serve as Chair of this 
Committee, and also a great honor to serve with my friend Kevin 
Brady as the Vice Chair. He has been great to work with. We 
have worked well together, and I think some of the ways we 
worked together I hope can be a harbinger of future bipartisan 
success here in the Congress and I look forward to working with 
him as I change seats in a sense for the next Congress.
    I am grateful to our witnesses that I will introduce, but 
before I do that I would turn to Dr. Burgess for his opening 
statement.

  OPENING STATEMENT OF HON. MICHAEL C. BURGESS, M.D., A U.S. 
                   REPRESENTATIVE FROM TEXAS

    Representative Burgess. I thank the Chairman for the 
recognition.
    I observe that this is the concluding hearing of the Joint 
Economic Committee for the 112th Congress. So, Mr. Chairman, on 
behalf of Vice Chairman Kevin Brady, on behalf of the 
Republican Members and myself, I wish to thank you for your 
service as the 36th Chairman of the Joint Economic Committee.
    The American people in their wisdom in 2010 gave us a 
divided Legislative Branch. Consequently, this unique Committee 
was also equally divided. People are used to seeing such 
division producing gridlock in Washington, but Chairman Casey 
and Vice Chairman Brady have worked together and shared 
responsibility for organizing the Committee hearings. Because 
of your bicameral and bipartisan cooperation, the Joint 
Economic Committee has emerged as a widely respected national 
forum for debating important national issues.
    Therefore, I wish to thank you, Chairman Casey, for your 
leadership in the 112th Congress, and also I want to join you 
in recognizing the retiring Members from this Committee: 
Senator Bingaman from New Mexico, Representative Hinchey from 
New York, and Senator Jim Webb from Virginia.
    In Federalist 70, our first Secretary of the Treasury, 
Alexander Hamilton observed, ``Energy in the executive is a 
leading character in the definition of good government.'' In a 
divided government, the President--the President--must lead and 
must not abdicate his or her responsibility.
    President Obama has the responsibility to propose a real, 
bipartisan plan to avert the fiscal cliff that can in fact pass 
both the House and the Senate. Drawing from the recommendations 
from the Simpson-Bowles Commission, the President could propose 
a plan that not only averts the so-called fiscal cliff but also 
helps us avert the yawning fiscal abyss by reforming Social 
Security, Medicare, Medicaid, and let us not overlook the 
looming Affordable Care Act. If President Obama were to offer 
such a plan, Republicans would likely act favorably.
    Going over the cliff in fact is unnecessary. Yet, as 
Kimberley Strassel observed in The Wall Street Journal, ``The 
President is boxing in the Republicans--offering them a deal 
they cannot accept, a deal that they cannot even be seen as 
treating seriously.''
    First, the President has repeatedly called for a 
``balanced'' solution involving both more revenue and less 
spending. But what is intuitively obvious to the most casual 
observer is this plan is not balanced.
    The fiscal cliff involves nearly $4 of anticipated revenue 
from higher taxes for every $1 of spending cuts. Yet, the 
President wants even more revenue and fewer spending cuts than 
if we in fact fell off the cliff. His plan includes a new round 
of stimulus spending. A new round of stimulus spending? You've 
got to be kidding me.
    What the President's plan lacks is any reform in our 
entitlement system. The unrestrained growth in entitlement 
spending is driving federal spending, driving the budget 
deficits, and driving the debt even higher as a percentage of 
our Gross Domestic Product.
    The unfunded liabilities of the United States Government 
are estimated to be as high as $128 trillion. Even if we 
confiscate all of the income in excess of $1 million, we cannot 
pay for the entitlement commitments that the Federal Government 
has made. We have made promises to ourselves that we simply 
cannot keep.
    Without some sensible entitlement reform, our credit rating 
will likely be downgraded again, and we are well on the road to 
becoming a country that none of us would recognize.
    Secondly, fiscal consolidation plans such as the 
President's, which were heavily weighted toward higher taxes, 
fail to achieve their government budget deficit and debt 
reduction goals.
    Dr. Hassett has examined fiscal consolidations in 21 other 
developed countries. On average, unsuccessful plans were 
composed of 53 percent revenue increases and 47 percent 
spending cuts, while successful plans were composed of 15 
percent revenue increases and 85 percent spending cuts.
    Moreover, the higher revenues in successful plans were 
generally drawn from non-tax sources such as asset sales and 
adjusted fees for government services.
    Thirdly, the President argues that if the 2001 tax 
reductions for the middle class are extended, raising marginal 
tax rates on the top 2 percent will not harm the economy 
because it won't affect consumption expenditures.
    However, Drs. Robert Carroll and Gerald Prante of Ernst and 
Young analyzed the combination of the expiration of the 2001 
tax reductions for the top 2 percent and the expansion of the 
Medicare tax and its extension to capital income.
    Under the President's preferred tax policy, the top rate 
will go from 35 percent to 40.9 percent on ordinary income; 
from 15 percent to 44.7 percent on dividends; and from 15 
percent to almost 25 percent on capital gains.
    The long-term consequences of President Obama's preferred 
tax policies will have a profound negative effect. Output will 
fall, capital stock will be smaller, employment will fall by 
about 700,000 jobs, and real after-tax wages would fall by 
almost 2 percent. Fewer jobs and lower wages resulting from 
higher taxes harm the middle class.
    The Statistics of Income data from the Internal Revenue 
Service reveal three important facts about the income and tax 
payments of high-income earners.
    The income and tax payments of the wealthy raise much 
faster than the income and tax payments on everyone else during 
economic booms, but they also fall much faster during economic 
busts.
    The wealthy earn and report more income when income tax 
rates are low than when they are high. Adjusting for the 
business cycle and stock prices, higher effective tax rates on 
the wealthy will actually generate only about 10 to 20 percent 
of the revenue anticipated on a static basis.
    There are better ways to increase federal revenue than 
hiking tax rates. Congress could enact a pro-growth tax reform 
that lowers rates while eliminating or limiting special 
interest tax deductions, credits, or exclusions.
    The President could open more federal lands and offshore 
areas for energy exploration. And his Administration could take 
a more balanced approach to new regulations.
    Economic growth can help solve our fiscal problems. If the 
economy had grown by 16.8 percent--as it had averaged in other 
post-war recoveries--instead of the 7.4 percent that occurred, 
and revenues had returned to the 18.2 percent of GDP that they 
were in the third quarter of 2007, the Treasury could have 
collected an additional $650 billion in fiscal year 2012, and 
the federal budget deficit would have fallen from more than 
$1.1 trillion to $436 billion--still bad, but remarkably better 
than where we find ourselves today.
    Republicans stand ready to work with President Obama for a 
truly balanced bipartisan solution. So far, we haven't seen 
evidence of that.
    Let's temper our fears by creating a long-term solution 
that does not burden individuals and gives businesses the 
optimism that going forward they will again invest in the 
American economy and our economy can grow for all our citizens.
    With that, I look forward to the testimony of today's 
witnesses and I yield back my time.
    Chairman Casey. Dr. Burgess, thanks very much.
    I want to introduce our two witnesses right now, Dr. Mark 
Zandi. Dr. Zandi is the Chief Economist of Moody's Analytics. 
His research includes macro economics, financial markets and 
public policy. He is an influential source of economic analysis 
for policymakers, businesses, and journalists. Recently he 
published a report assessing the challenges of approaching the 
fiscal cliff and the most effective ways to achieve long-term 
fiscal stability. Dr. Zandi received his Ph.D. at the 
University of Pennsylvania. That will be a recurring theme in 
these introductions.
    [Laughter.]
    And he received his B.S. from the Wharton School at the 
University of Pennsylvania.
    Dr. Zandi, thank you for being here.
    Dr. Kevin Hassett is the Director of Economic Policy 
Studies and a Senior Fellow at the American Enterprise 
Institute. He holds a Ph.D. in Economics from the University of 
Pennsylvania. His research areas include the U.S. economy, tax 
policy, and the stock market. Previously Dr. Hassett was a 
senior economist at the Board of Governors of the Federal 
Reserve System, a professor at the Graduate School of Business 
of Columbia University, and a policy consultant to the Treasury 
Department during the George H.W. Bush and Bill Clinton 
Administrations.
    Dr. Hassett, we're grateful you are here. And since you 
both went to Penn, I am sure you are going to agree on 
everything today.
    But I will turn to Dr. Zandi first.

   STATEMENT OF DR. MARK M. ZANDI, CHIEF ECONOMIST, MOODY'S 
                  ANALYTICS, PHILADELPHIA, PA

    Dr. Zandi. Thank you, Senator. I want to thank you and Dr. 
Burgess and the rest of the Committee for the opportunity here. 
It is really an honor to be here with Kevin, a good friend of 
mine.
    Let me say that these remarks are my views and not those 
of--they don't represent the views of Moody's Corporation. They 
are my own personal views.
    Lawmakers have to quickly resolve three issues:
    First is the fiscal cliff, scaling back the cliff so that 
it's manageable.
    Second, raising the Treasury debt ceiling, which as you 
know is becoming an issue fairly soon.
    And third, achieving long-term fiscal sustainability. That 
is, deficit reduction, tax revenue increases, spending cuts 
that allow the Nation's debt-to-GDP ratio to stabilize by the 
end of the decade.
    Those three things need to be done now.
    In terms of the fiscal cliff, by my calculation if policy 
is unchanged and we go over the cliff and there's no change 
after that, the hit to GDP in 2013 will be 3\1/2\ percentage 
points. So the economy is growing 2 percentage points. If you 
subtract 3\1/2\, that is a severe recession. And I think the 
CBO and other modelers like myself are probably under-
estimating how severe it would be because confidence is very, 
very weak and I think businesses and consumers, investors, 
would pull back, and it is unclear how the Federal Reserve 
would respond to this. So we need to scale back the cliff.
    I think at the very minimum, the cliff needs to be scaled 
back so that it is only a hit to GDP of 1\1/2\ percentage 
points, at most. That in my view is the fiscal speed limit. If 
you have cuts, tax increases that have more of a drag than 
that, then it becomes counterproductive in that the economy 
will weaken and the budget situation will deteriorate.
    We are seeing the limits of fiscal drag in Europe 
currently, and they are pulling back on some of their fiscal 
drag.
    I would argue that we should smooth in the fiscal drag even 
more. I would make policy changes so that next year the hit to 
GDP is half the speed limit, something like 7/10ths, 6 to 7/
10ths of a percent of GDP. That would be consistent with 
extending the current Emergency UI program and some form of the 
Payroll Tax Holiday.
    In terms of the debt ceiling, that at minimum needs to be 
increased until the other side of the election, and it would be 
nice to extend it past the next Presidential election, and it 
would be even nicer than that to get rid of it altogether. I 
think it is an anachronistic law that is a problem. It creates 
a great deal of uncertainty and angst. As we can see, you can 
do a lot of damage to the economy.
    There are a lot of reasonable proposals that are being 
considered to eliminate the debt ceiling, and I think they 
should be carefully considered.
    But this is--at the very minimum, we should push this to 
the other side of the election. We do not want to address the 
debt ceiling on a regular basis. It is doing a lot of damage to 
confidence.
    And most importantly, in terms of fiscal sustainability, by 
my calculation we need deficit reduction over the next 10 years 
of about $3 trillion. And to get there, I think a balanced 
approach would be $1.4 trillion in tax revenue, half of which 
would come through tax reform, half of which would come through 
higher tax rates; $1.2 trillion in cuts to programs--Medicare, 
Medicaid, Social Security, and other budget items; and that 
would leave you with approximately $400 billion in net interest 
savings.
    So if you do the arithmetic, $1.4 [trillion] plus $1.2 
[trillion] plus $400 billion gets to $3 trillion.
    I think it is appropriate to throw into the mix the 
spending cuts that were implemented as part of the Budget 
Control Act, the caps to discretionary spending which were 
worth about $1.1 trillion. And if you add it all up, if you go 
down the path I've just articulated, the spending cuts would 
be, to revenue, increases would be 2 to 1.
    I think that is appropriate, and I think that is very 
consistent with Simpson-Bowles. I think that is in the spirit 
of Simpson-Bowles and would be a good goal to achieve. And I 
think it is doable both from an economic perspective and a 
political perspective.
    Finally, let me say you've got to nail this down. 
Uncertainty is killing us. It is hurting business investment. 
You showed a very nice chart about that. It hasn't affected 
hiring and layoff decisions yet, but it will if we get into 
next year and we get into February and we haven't nailed this 
down. The economy and investors will bail and the economy will 
begin to struggle.
    But if you address this problem reasonably gracefully, I 
think the fundamentals of this economy are in very good shape. 
We have made a lot of progress since the Great Recession. And 
if we nail this down, we will be off and running and we will 
have created a lot of jobs and unemployment will be moving 
south in a very consistent way.
    Thank you.
    [The prepared statement of Dr. Mark M. Zandi appears in the 
Submissions for the Record on page 36.]
    Chairman Casey. Dr. Zandi, thanks so much.
    Dr. Hassett.

 STATEMENT OF DR. KEVIN HASSETT, SENIOR FELLOW AND DIRECTOR OF 
    ECONOMIC POLICY STUDIES, AMERICAN ENTERPRISE INSTITUTE, 
                         WASHINGTON, DC

    Dr. Hassett. Thank you, Mr. Chairman, and Members of the 
Committee. It is always a pleasure to appear before this 
Committee. I wish the rest of Washington could study the Joint 
Economic Committee. I think under your and Mr. Brady's 
leadership this has always been a very collegial place to 
testify, and I am not trying to preempt tough questions later 
on, but thank you. It is an honor to be here.
    My testimony is broken up really into two parts. In the 
first part I discuss the short-term consequences of going off 
the fiscal cliff. In that section of my testimony I concur with 
Mr. Zandi that if we were to go off the fiscal cliff with no 
policy changes, then the near-term negative economic 
consequences would be significant and would almost surely throw 
us into a recession.
    And then in the second part of my testimony, which I will 
focus on in my spoken remarks, I discuss the tradeoffs that we 
face, however, between sort of putting off the tough problems 
for tomorrow because we are worried about near-term effects.
    I think that the evidence of the long-term effects of high 
government debt and high government debt-to-GDP ratios is 
really now quite overwhelming. It began with an early analysis 
by Reinhart and Rogoff, two economists who analyzed the impact 
on economic growth of high debt levels. And subsequent work by 
economists at the IMF, Kumar and Woo, confirmed their findings 
that high levels of government debt lead to lower levels of 
growth.
    In fact, the paper that I like the best now because these 
literatures evolve and get more sophisticated, is a paper by 
Caner, Grennes and Koehler-Geib. And they identify actually a 
tipping point in gross debt-to-GDP ratios where if the gross 
debt-to-GDP gets above about 77 percent--and we're above that 
now--then it has a significant, very significant negative 
effect on economic growth.
    To put their results in perspective, in my testimony I do a 
simple calculation which provides some intuition for the 
result. If we were to, all else equal, run a deficit of 6 
percent of GDP for the next 10 years, then that would add to 
the debt-to-GDP ratio by about 60 percent--not quite, because 
GDP is growing--but then that increase would be enough at the 
end of the decade to reduce, according to these econometric 
estimates, to reduce the annual growth forecasts by about a 
whole percentage point a year.
    These long-run crowding-out effects are very, very 
significant.
    Now that growth story might be alarming, but the picture 
looks even worse if you think about the potential of financial 
calamity and the kind of risks that we're seeing actually 
become a reality in Europe. This year, much of Europe has been 
in turmoil because of the Greek debt crisis, but in many ways 
the sickest European nations are actually in better shape than 
us.
    While the U.S. debt may seem manageable to many who look at 
struggles in other countries and take consolation in our 
relative stability, the situation in the U.S. today when taken 
in the long run is actually farther from debt stability than 
many other developed countries.
    I cite in my testimony a recent study by the OECD that 
examined long-term projections for OECD countries' debt burdens 
and found that the U.S. needs a bigger fiscal adjustment than 
any of the European nations. I think that puts in perspective 
the urgency that we have to try to act.
    Given the previous research that has estimated the effect 
of higher debt-to-GDP ratios on economic growth, it is also 
possible to theorize about how a continuation of today's 
policies could hurt growth farther out into the future.
    I cite in my testimony a recent paper by Stanford's Michael 
Boskin who shows that if we don't act on this, then we 
basically are producing a fundamentally different America than 
the one that we're used to. Boskin's estimates, which again are 
based on this widely accepted literature, suggests that we're 
going to move into a world by say 2040 where economic growth in 
the U.S. is not what we normally expect to see each year; that 
there is so much crowding out of private activity by the 
government that we are in a world where you do not wake up each 
January and expect that we will have positive GDP growth that 
year.
    So that is how urgent it is to act.
    So then what should we do? In my testimony I cite another 
now large and burgeoning literature that looks at fiscal 
consolidations. Using my own study as an example, along with 
two colleagues I've written an analysis exploring policy mixes 
of successful and unsuccessful consolidations. And our metric 
of success is did they just achieve their own objectives of 
deficit reduction? Based on our analysis, we found that the 
fiscal consolidations that were very heavily weighted towards 
spending were much more likely to be successful than fiscal 
consolidations that were heavily weighted toward tax increases.
    We speculate, Mr. Chairman, in our study that this is 
because--that we find this result because the tax-heavy fiscal 
consolidations tend to not take the tough choices on 
entitlements, and because spending reductions are more real and 
more sure than tax revenue increases when you lift marginal tax 
rates.
    I know that it is very easy for an economist to discuss 
reforms that could put the U.S. back on a positive trajectory, 
and I think Mr. Zandi and I probably agree pretty much on the 
rough outline of what that would look like, and I know that the 
political challenge is a very, very heavy one, but I think if 
you look forward to the America that we are creating with this 
large and out-of-control deficit, then we all have to agree 
that the stakes could not possibly be higher.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Dr. Kevin Hassett appears in the 
Submissions for the Record on page 47.]
    Chairman Casey. Thanks so much, Dr. Hassett.
    I wanted to start with a comment about something we're 
probably not talking enough about in Washington, and I think it 
is a component part of what we have got to confront. Even as we 
are wrestling with trying to get an agreement on the fiscal 
cliff, we cannot lose sight of the urgent priority of making 
sure that we have job growth and--job creation, I should say, 
that leads to economic growth.
    Dr. Zandi, many of the components that you have outlined, 
and both of you have, that comprise, or are kind of under the 
broad description of fiscal cliff, whether it is the expiring 
tax cut provisions, the expiring payroll tax cut extension, and 
of course spending cuts as well, if you consider all of those, 
and more that you could add to that list, which of those--and 
you may have several--but which of those would you consider 
having the biggest bang for the buck in terms of economic 
impact of those that we're discussing here today, in terms of 
the impact that they will have?
    Dr. Zandi. Well I think, let's just take as given that we 
will extend the current tax rates for taxpayers that make less 
than $250,000 on a joint basis. I mean, I think that is given 
and that is absolutely necessary. And then we consider the 
panoply of other things that are happening when we get to 
January 1st, in terms of bang-for-the-buck, or dollar-for-
dollar, the Emergency Unemployment Insurance Program is very 
effective. It is small in the grand scheme of things. CBO is 
estimating that it would cost--if extended as currently 
configured for calendar year 2013, about $30-$35 billion.
    But the benefit to GDP, to economic activity, to job 
growth, to the unemployment rate would be measurably more than 
that. And I think the UI Program, the Emergency UI Program, is 
going to wind down on its own. It already is. At its peak, 
Emergency UI had 5.96 million people in the program. We are now 
down to 2 million, and it is falling 800,000, 900,000 per year. 
I would expect it to fall even more than that in the coming 
year, just because unemployment rates are falling, the decline 
in the economy, the job market is slowly improving, and also 
there are some limits to how much emergency UI you can collect.
    There are downsides to the program. There are disincentive 
effects. There's some really good work that's come out of the 
Federal Reserve documenting that. So it's not a slam-dunk 
positive, but on that it's a very significant positive, and I 
would consider that to be very significant.
    I think the payroll tax holiday has also been very 
effective. It has a very high bang-for-the-buck. It is kind of 
hidden. You know, people do not really recognize it. It is kind 
of a stealth tax cut. But it gets spent. And it is generally 
designed--it is designed a way that helps generally lower- and 
middle-income households.
    It is expensive, though. It is over $100 billion in 
calendar year 2013. So you might want to consider scaling that 
back. Right now it's a 2 percent holiday. You could go to 1 
percent. Or there are some good proposals to go back to--
remember ``Making Work Pay?'' That was a pretty good middle 
ground cost. It cost about half the current payroll tax 
holiday. And it was probably more effective in the sense that 
it is designed to help even more lower- and middle-income 
households, less than the payroll tax holiday. So I think that 
is also a very effective program.
    Chairman Casey. Dr. Hassett, do you have any comments on 
this question?
    Dr. Hassett. Yes. Thank you for asking me that, Mr. 
Chairman. I disagree with my distinguished friend on this.
    I think that Keynes himself wrote about the kind of place 
where we are right now, which is that you can get into a cycle 
of dependence on short-term measures, and that it can lead to a 
kind of a downward spiral as the national debt gets bigger and 
bigger because you keep trying to stimulate things with one-
year shots.
    I think that--and perhaps I could--I don't mean to ask Mr. 
Zandi a question, it's not my place, but I speculate that he 
might----
    Chairman Casey. You're not allowed to do that.
    [Laughter.]
    Dr. Hassett. No, I understand that. But I speculate that he 
might concur that the best possible thing we could do right now 
for unemployed Americans is fix our big problems; that if all 
of a sudden America's businesses had clarity about what the 
future would look like, people didn't fear radical changes to 
fiscal policy because they could see that we have a sustainable 
policy over the next 10 years, the sigh of relief rally from 
such a thing would dwarf anything you might get from tinkering 
with UI benefits or payroll taxes.
    Chairman Casey. I appreciate that. I am out of time, but I 
will try to come back to these issues in a moment.
    Dr. Burgess.
    Representative Burgess. Thank you, Mr. Chairman.
    Well, Dr. Hassett, it's an interesting proposition. Since 
you cannot ask the question, Dr. Zandi, let me pose Dr. 
Hassett's question to you.
    If the best thing that could be done is a long-term fix for 
our problems--in other words, to get out of this cycle of 
recurring difficulties that we are in--would you agree with Dr. 
Hassett on that?
    Dr. Zandi. Yeah, I think that in a sense that I agree that 
we do not want to get into a cycle of dependency; that we need 
to phase out the temporary supports that we have been providing 
to the economy. And in fact that is what we have been doing.
    If you go back to 2009, federal fiscal policy was a source 
of major fiscal stimulus, adding 2.5 percentage points by my 
calculation to GDP. By 2011, federal fiscal policy was neutral 
with respect to the economy. In this calendar year, 2012, it is 
going to subtract from growth .8 of 1 percent. So we have 
already gone from fiscal stimulus to fiscal drag. And all I am 
arguing is for calendar 2013 to smooth in the fiscal drag.
    Really, no one is talking about stimulus in the sense that 
the government is going to be providing a tailwind to the 
economy. All we are debating now is how much of a headwind it 
will be. So I think that we should smooth in that drag, and I 
think it would be easier for the economy to digest and in the 
longer run we will all be better for it.
    Representative Burgess. And since you are not allowed to 
ask Dr. Hassett a question, let me ask Dr. Hassett----
    Dr. Zandi. Is that like a committee rule, or----
    [Laughter.]
    Representative Burgess. It's Mr. Casey's rule.
    Chairman Casey. I don't think it's a rule; we're just 
trying to keep it to a minimum.
    [Laughter.]
    Representative Burgess. But, Dr. Hassett, let me ask you 
for your response to Dr. Zandi's observation on the cycle of 
dependency.
    Dr. Hassett. You know, I think that it is quite possible 
that that is where we are. And I think that----
    Representative Burgess. Can I just interject here? It feels 
that way to me, just as a simple country doctor and a 
legislator; it seems like we are in the cycle of dependency, 
and we deal with 2011 debt limit, and we dealt with the 
stimulus in 2009. It just seems like the same things with 
different labels keep coming to us over and over and over 
again. And quite frankly, I am having difficulty seeing the way 
out of this cycle. But I would be interested in your 
observations.
    Dr. Hassett. Thank you, Mr. Burgess. And in fact, the way I 
can think about this, I like to think about this, and I think 
at Moody's they have always been careful to put this complete 
perspective into their analysis that has even often been quite 
supportive of the stimulus, is that the way you can think about 
what happens if you're playing the Keynesian game, is that you, 
say, decide to spend a lot this year, or mail checks, 
helicopter checks to folks this year, that has some multiplier 
effects.
    So maybe if you spend 1 percent, you get 2 percent more GDP 
this year. But then when you take it away next year, then you 
are starting out with GDP growth of about 2 percent lower. The 
two effects are equal and opposite. You go up, and then you go 
back down.
    The hope is that you abate a calamity by going up. That 
would be the Keynesian hope. But the problem is that the 
Keynesian policy, really you have to look at all three acts. 
And the third act is when you pay for it.
    And so you go up. And then you go down. Those two effects 
are equal and opposite. And then there is a third phase where 
you pay for it, and that is a negative.
    And so if we look at sort of the 10-year full-cost of doing 
a Keynesian policy, it is a net negative. Because in the end it 
is going to cost something, either to pay the interest or to 
have the tax hikes to pay for it.
    You see that even in the long-run CBO analysis of these 
policies. And the problem is that we are now kind of in the 
hangover phase from these things.
    Representative Burgess. It feels like a hangover.
    Dr. Hassett. But I can say that there is a way out, and it 
is a very promising way out, which is that again if we just now 
recognize that we are out of the emergency period, and if we 
fix our big problems we can get over the hangover, then I think 
that we can find bipartisan agreement for moving the Nation 
ahead.
    Representative Burgess. Let me just ask you on the issue of 
fiscal consolidations that you brought up, and the President is 
proposing the 47 percent spending cuts and 53 percent revenue 
increases. You argue for 85 percent spending cuts, 15 percent 
revenue, not all of it from taxes.
    Why in the world would we even consider the President's 
plan under the scenario that you describe?
    Dr. Hassett. You could argue--the argument against our 
paper being a guide is that there are many smaller countries 
that maybe have to be more aggressive about spending because 
people who lend them money might head for the exits quicker.
    But the thing that I know is true is, if you want to base 
our consolidation on the things that succeeded in the past, 
then you would be 85 percent spending. And then I think that 
you could have quite a great deal of comfort that it would be 
successful, because I think the arguments that we might be able 
to handle having a little bit larger revenue share than that 
because we're such a big lump of a country. But if we copied 
the successful ones, then we should almost surely succeed. But 
if we err towards the half-and-half approach--and you can look 
in our paper, when it came out almost two years ago now, we 
said in the paper ex ante that the UK consolidation was going 
to fail because it had too much revenue.
    And as we're seeing now, like all the millionaires headed 
for the exits and so on, it's exactly the kind of thing that 
will happen here if we lean on taxes on the rich only.
    Representative Burgess. Thanks, Mr. Chairman. I will yield 
back.
    Chairman Casey. Dr. Burgess, thank you. Representative 
Maloney.
    Representative Maloney. Thank you.
    First I would like to congratulate the Chairman on his re-
election, and on the fine work that he has done as Chairman of 
this Committee; and to congratulate Mr. Brady on being selected 
as the Chair of this Committee in the next Congress.
    Both of our distinguished witnesses agree that what we 
really need to do is have a long-term solution. I would like to 
first ask Dr. Zandi how we achieve that? We are roughly $700 
billion apart between the President's proposal and Leader 
Boehner's proposal. How would you close that gap?
    First I would like you to outline briefly the President's 
proposal, briefly Speaker Boehner's proposal--I believe it's 
$700 billion--how would you close that in a bipartisan way so 
that we could get this behind us, get people employed, and move 
our economy forward?
    Dr. Zandi. O.K. Thank you, Congresswoman, for the 
opportunity to address this question.
    I apologize. There are going to be a few numbers, a fair 
number of numbers here.
    The President's tax proposal, tax revenue proposal, amounts 
to about $1.6 trillion over a 10-year period. And I apologize 
if I don't get the numbers exactly right.
    Representative Maloney. Yes, we understand. We want the 
broad picture.
    Dr. Zandi. Right. Of that $1.6 trillion, roughly $1 
trillion is from higher tax rates; roughly $600 billion is from 
tax--some form of tax reform. He's got his own proposal. There 
are a number of other different proposals that are all 
reasonably good proposals.
    Speaker Boehner's proposal on the revenue--first I will do 
the revenue side, and then I will go to the spending side. 
Speaker Boehner's proposal is roughly $800 billion in tax 
reform. So we're about $800 billion apart on taxes.
    My view is that we should roughly split the difference. I 
would propose $1.4 trillion in tax revenue; $700 billion would 
come through tax reform. And again we can discuss what that 
might look like. And $700 billion would come from higher tax 
rates.
    So the President would scale back his trillion dollar 
target for tax--revenue from tax rates to about $700 billion. 
We could talk about how we might do that.
    On the spending side, the President has proposed $600 
billion in spending cuts over the next 10 years. And of course 
this subtracting from the BCA spending cuts that are already in 
law.
    Of the $600 billion, $350 billion approximately is 
Medicare/Medicaid; $250 billion is Ag subsidies and other 
government programs.
    Speaker Boehner has come forward with some proposals, but 
it is unclear exactly how much it adds up to. I am not quite 
clear how much the spending cuts he has proposed.
    Let me just say this, though. I think the President's 
proposal is short. I think to get to where we need to go, my $3 
trillion target, fiscal sustainability, we need $1.2 trillion 
in spending cuts. And I do think we need to focus both on 
entitlements--now the President has put Social Security outside 
his plan. I think it is likely it should be part of the 
process, and we can do some things to reform Social Security. 
But at the end of the day, it has got to be almost double what 
he is proposing.
    Now one other point I would make. Because if you actually 
sit down and do the arithmetic on the spending cuts, 
particularly when you look at Medicare and Medicaid, when you 
kind of think through what we're going to do here, it is 
really, unless you are proposing big structural change in the 
programs, which I do not think that's on the table at the 
moment, it is difficult to get that six hundred--say go from 
$350 billion to $600 billion in Medicare and Medicaid cuts. It 
is really tough.
    So I think if you got to a run rate of about $600 billion 
in cuts by the 10th year of the plan, I think that is O.K. 
because again the bottom line is we want fiscal sustainability 
at the end of this 10-year horizon. If we do that, then 
investors are happy, rating agencies are happy, and we are off 
and running.
    Representative Maloney. My time is about to expire, but Dr. 
Hassett, I would like to hear your analysis of how far we are 
apart and how we could close that $700 billion gap.
    Dr. Hassett. Thank you. I think the way to think about the 
challenges that we have are tremendous, as a Nation, a 
tremendous opportunity to make sure that we hand off a thriving 
economy to our kids. And in my testimony I mentioned that if we 
were to run $600 billion deficits for the next 10 years, then 
at the end of 10 years the debt, just from that deficit, just 
the $600 billion a year over the next 10 years, would reduce 
our long-run GDP forecasts by about 1 percent per year forever.
    So that if we were to cut, with a fiscal consolidation, 
that $600 billion deficit to $300 billion, then we would be 
buying future generations about half a percent a year of GDP 
growth in the long run. If we had a bigger cut, we would be 
buying even more. If we have a smaller cut, we would be buying 
even less.
    And so in terms of how big of a cut can we make, can we 
afford to make, then I think it is really ultimately a question 
of what kind of world do we want to live in 10 years from now. 
If we want to live in a world that grows kind of the way Europe 
has been growing for the last few decades, then we should have 
a very small consolidation like the smaller consolidation 
proposed by the President.
    I think that we are going to have very unacceptable growth 
if we do that. And I think that if we want to have the kind of 
growth that I hope we would have, you would have a bigger 
consolidation than has even been proposed by Mr. Boehner.
    Representative Maloney. My time has expired. Thank you.
    Chairman Casey. Thank you, Representative Maloney. 
Representative Mulvaney.
    Representative Mulvaney. Thank you, Mr. Chairman.
    I want to come back to do something--focus on something 
that is probably more of interest to the economists in the room 
than the ordinary people.
    I share, Mr. Hassett, your enjoyment of these Committee 
meetings. I swear, though, I think we will put people to sleep 
if we do this more frequently.
    Let's talk about ratios. Because what I heard you lay out, 
Dr. Zandi, was your sort of ideal situation where we have a 
$1.4 trillion revenue increase, a $1.2 trillion spending 
reduction, and then you add an anticipated .4 trillion, $400 
billion interest savings, it gets you to roughly a $3 trillion 
deficit reduction over the course of the 10 years. That is a 
roughly 1.1 ratio. And then you went on to add the $1.2 
trillion that we have already saved as a result of the 
negotiations over last year's debt ceiling.
    I would suggest to you, by the way, that while that does 
get you to 2-to-1, that the $1.2 trillion from last year is 
already in the baseline. So the new number would really be 1-
to-1. But that is not my question.
    My question is, I want to go to what's actually being 
discussed now. And you started in response to Mrs. Maloney to 
lay out the President's offer. We looked at the President's 
offer today and we're trying to find any spending reductions at 
all.
    What we have found so far is what you mentioned accurately, 
the $1.6 trillion in tax increases. The stimulus spending. The 
extension of the Unemployment Insurance, which is an increase 
in spending. The extension of the payroll tax cut, which is 
really an increase. The delay in the sequester cuts, which 
would be a reduction in the spending reductions we're 
anticipating. And then no entitlement reform whatsoever.
    So I guess the question I have to ask you is: Does the 
President's current offer meet your own test of a 2-to-1 ratio? 
We can have a discussion later as to whether or not 2-to-1 is 
sufficient, but do you think that what the President has 
offered meets the 2-to-1 test?
    Dr. Zandi. No. It is short. He needs to come up with more 
spending cuts. He needs to come up with, roughly in my 
calculation, about $600 billion more in spending cuts over the 
next 10 years.
    I will say, though, in defense of the White House, I do 
think there are significant reforms in Medicare, Medicaid, 
agricultural subsidies, and other programs in the budget, at 
least what I looked at, and those are pretty difficult things 
to implement. I mean, it takes a lot of guts to propose those 
things. So I would not discount them. I think they are 
important.
    But to answer your question specifically, I think we need 
more spending cuts, yes, to get to my ideal.
    Representative Mulvaney. And I am looking now at your 
testimony from page 9. It says: ``Fourth, to achieve the 2-to-1 
ratio, policymakers need to reform entitlements.'' You go on to 
say that some of the suggestions that my party has offered may 
be too radical for you, but I appreciate the candor, by the 
way, on entitlements.
    One of the disappointing things to me is that I do see 
members of the other party, most notably Mr. Hoyer, say that 
entitlements were on the table. Although then I read the 
details and it said ``not now.'' They are on the table for 
later discussion.
    But I have been disappointed that all of the discussion 
seems to be focused on the revenue side, and not on the 
spending side. Most specifically, on the entitlement side.
    I want to move very quickly to the debt ceiling. There was 
something very interesting in your testimony that caught my 
attention that I was not familiar with in this form, which is 
your support for the initiative offered by Senator Rob Portman.
    When we talk about the debt ceiling, you say, and I'll read 
now:
    ``Separately, lawmakers could adopt a version of the so-
called dollar-for-dollar rule first proposed by Ohio Senator 
Rob Portman to address the 2011 debt ceiling. Under Portman's 
rule, policymakers would agree at the beginning of each fiscal 
year to cut spending equal to the amount the debt ceiling must 
be raised to cover that year's budget. The spending cuts would 
be phased in gradually over the following 10 years. Adopting 
some form of this rule would be a good safeguard in case 
Congress misses its deficit reduction targets.''
    I can tell you that, while I appreciate Senator Portman's 
input, that was actually I think the Speaker who was talking 
about exactly those types of same structure, which is a dollar 
of spending reduction for every dollar of debt increase.
    So my question to you, Dr. Zandi, is: Isn't this exactly 
what we did in the BCA that now everybody is trying to get out 
of? We had a dollar of spending reductions, 1.2 already in 
place, the other portion coming in the sequester, in exchange 
for the same amount of increase to the debt ceiling. Isn't that 
what we did? And if that is such a good idea, why are you and 
others now suggesting that it is not a good idea; we need to 
peel back, or at least delay the implementation of the 
sequester cuts?
    Dr. Zandi. Well let me say a few things.
    First, you have to put this in the broad context. So I 
think we need to get rid of the debt ceiling law. That is 
anachronistic. I think it is a problem and we need to get rid 
of it.
    But I do think, if we are going to do that, we need to have 
some new budget mechanisms to ensure that there is some 
discipline going forward. I suggest in the testimony readoption 
of full PAYGO. I think that is a reasonable thing to do.
    And I did also suggest that some version of the dollar-for-
dollar rule should be implemented, or at least considered, both 
on the spending side and on the tax revenue side. It doesn't 
have to be one-for-one. It could be 50 percent; some mechanism 
to make sure that there is some future fiscal discipline.
    But that is now going forward. I mean, my view is we need 
to nail down how we get to fiscal sustainability, the $3 
trillion that I propose. Get rid of the debt ceiling law as it 
is currently configured. And adopt some budget rule--and I am 
throwing that out as an idea--but we need some form of budget 
rule to make sure that there is some discipline going forward.
    Representative Mulvaney. Some structure.
    Dr. Zandi. Yes, some structure. Because the other thing, 
you can lay out a plan but it has to be a credible plan. I 
mean, it has got to convince everyone that we are going to 
stick to this plan.
    Representative Mulvaney. Thank you, Dr. Zandi. Thank you, 
Mr. Chairman.
    Chairman Casey. Thank you, Representative Mulvaney. Senator 
Bingaman.
    Senator Bingaman. Thank you all very much for being here. I 
appreciate the testimony.
    Dr. Hassett, Dr. Zandi has indicated that he thinks the 
debt limit crisis we had in August of 2011 was bad for the 
economy and bad for the country and we should avoid that in the 
future.
    Do you agree with that?
    Dr. Hassett. Thank you, sir. Yes, I think that the best 
estimate of this was done by a University of Chicago economist 
Steve Davis and co-authors where they have this very cool index 
of economic uncertainty. It is a new way of doing it. It is a 
very innovative paper.
    And they estimated that that debt-limit struggle probably 
subtracted about 1\1/2\ percent from GDP growth during that 
summer when it was happening because of the uncertainty and all 
of the sort of inactivity that was caused by high levels of 
uncertainty.
    And so I think that each time we go through that, we bear a 
negative short-run cost. But I would just like to add that if 
that is what it takes, though, to get spending under control, 
then we have to concede that in the long run there is a 
benefit, which is that we do not have these massive deficits 
that are crowding out long-run economic growth.
    And so in the fullness of time, whether a struggle like we 
had last summer was worth it would really depend on whether the 
deficit reduction buys space for private capital or not. If we 
have the spending cuts and deficits are lower, then we might 
have higher economic growth in the long run because we went 
through that struggle last year.
    Senator Bingaman. So you think--your position is that we 
should be ready to go through that struggle again, and in fact 
default on the national debt if necessary in order to enforce 
spending limits?
    Dr. Hassett. That is of course not my position, Senator. My 
position is not that we should ever default on the national 
debt. My position is that the politics of deficit reduction, as 
you all know better than me, are very, very difficult. And I am 
not a political expert. And if there is a mechanism out there, 
a thing that we have to do now and then that helps deficit 
reduction occur, then I am not so willing to stop that process 
for all of time.
    Senator Bingaman. But you are saying that defaulting on the 
national debt may be one of those things we have to do now and 
then.
    Dr. Hassett. No, it is not. No, sir. We did not default on 
the debt last summer.
    Senator Bingaman. We did not, and--but the threat is there 
again that we might here in January or February default on the 
debt. Is it your position that we should be willing to default 
on the debt if that is necessary in order to force spending 
cuts?
    Dr. Hassett. I would not be willing to default on the debt 
under any circumstance. I could add that if you look at the 
history of debt limit increases, which I have done, that there 
is a long history of especially parties out of power using that 
debt limit as a moment to extract concessions from the party in 
power. And so the history of debt limits, it's not obvious to 
me that if we had an academic seminar about the impact of the 
debt limit struggle on fiscal policy, that we would say that it 
was a negative. Because there are often times when having that 
extra little bit of power over the opposition is useful for 
either party, if they're in the opposition.
    Senator Bingaman. Well I can say that, at least in the 30 
years that I have been here in the Senate, I have never, until 
last--until August of 2011, I had not seen any serious effort, 
or any serious threat made by the leadership of Congress to 
refuse to give the Secretary of the Treasury the ability to 
borrow to meet the obligations Congress had already adopted.
    And so I thought that was a new experience for us. It 
certainly was for me to see that happen.
    Dr. Zandi, you have said you think we just ought to repeal 
this law that tries to set a debt limit and concentrate more on 
taxing and spending policies that cause us to raise the debt, 
as I understand it?
    Dr. Zandi. Absolutely. I think it is just a really bad law, 
a bad way to conduct policy, and it's a big problem. I mean, we 
could see that in July and August of 2011. It was a mess, and 
it really undermined our economy. S&P downgraded the debt. And 
it really had an impact, dollars and cents. It means CBO is 
estimating the interest costs--it's costing us money because 
we've gone down this path.
    And, it's pretty clear that this is not going to get any 
better going forward. It's just going to get--the brinkmanship 
is just going to get worse. So this is a really bad way of 
doing things. We need to get rid of this.
    Now having said that, we need budget rules. We need to be 
able to figure out a way to try to be credible in terms of what 
we are saying about future tax and spending policy, but this 
approach, the debt ceiling approach, is just the wrong way of 
doing it.
    Senator Bingaman. Thank you, Mr. Chairman.
    Chairman Casey. Thanks, Senator Bingaman.
    Senator Coats.
    Senator Coats. Thank you.
    I want to just pursue that question a little bit, because 
this was on my mind also. My experience is that the political 
system, and the political animal finds it awfully difficult to 
say no to constituents, with re-election in mind, or just the 
natural human tendency to want to please people rather than not 
disappoint them.
    I had the privilege of having dinner with Christine 
Lagarde, the head of the IMF, and I asked her the question 
about the reforms taking place in Europe. And I asked her the 
question, ``Would any of these reforms be taking place without 
Europe being in fiscal crisis mode?''
    Her answer was, ``Absolutely not.'' She said, unless the 
revolver is at the temple of the politician, with the finger on 
the trigger, they are not capable of summoning the collective 
will to take the necessary steps to tell the people that they 
represent that they have to take some steps to resolve the 
problem, and it will cause some disappointment and some pain in 
order to do so.
    And my experience in the years that I have had involved in 
politics is exactly that. We never would have gotten the BCA, 
whether you think that was enough or not enough, in August of 
2011, in my opinion, without the threat of defaulting on our 
debt.
    And to think that we could put a structure in place today 
that perhaps we would all be comfortable with in terms of 
solving our long-term problem, and be assured that 10 years 
from now the Congress would not have modified that dozens of 
times to the responsive constituents who are banging on the 
door saying, ``This is too much pain; we can't sustain this in 
the long run.'' We can hardly sustain a policy for months 
around here, let alone 10 years.
    And so if we really want to fix our long-term situation 
that's been described, I think there is a consensus that 
without that long-term fix and a credible fix we can't get from 
here to there, relative to where we want our debt-to-GDP ratio 
to be to provide that kind of growth and what we want to hand 
off to future generations.
    We have to factor in a big factor of the political system 
here and the way politicians think and react, and the history 
of that. And we need leverages in order to address that.
    I am really not asking for a response, because you have 
already responded to that, and I think stated your positions. I 
just wanted to add my two cents' worth in terms of why I think 
it is so important that we had those leverage points.
    Now maybe there are other ways of doing this, but my 
experience is the next Congress, or even the current Congress 
can undo that in a pretty big hurry, as the constituents line 
up outside our doors.
    Thank you, Mr. Chairman.
    Dr. Zandi. Can I just, in response?
    Senator Coats. Yes.
    Dr. Zandi. Because you make some good points. I would say, 
though, it is a mistake to put your revolver to your head on a 
regular basis. In the case of Europe, this is hopefully a once-
in-five-generation event that we are going through now, and 
they nailed this thing down.
    We do not want to do this on a regular basis, and that is 
what we are setting ourselves up for with the current law. And 
that is going to be a problem for our economy. Business people 
are not going to engage unless they have clarity with respect 
to this thing.
    The other thing I would say is, I have more faith in you 
than apparently you have in this institution. At the end of the 
day, you do the right thing. If you look at the history of this 
body, it ultimately comes up with roughly the right answer. And 
we have not done it with the debt ceiling since the beginning 
of our country. So I think we are very capable of doing it, and 
we can do it without this kind of an anachronistic law.
    Senator Coats. Well I would just respond by saying we have 
been talking about dealing with our cascading debt and deficit 
for decades, and I would say we have been far short of doing 
the right thing that has put us in the position to look for a 
healthy fiscal future.
    Chairman Casey. Thank you, Senator Coats.
    Senator Klobuchar.
    Senator Klobuchar. Thank you very much, Mr. Chairman. I 
would just add, Dr. Zandi, that I agree that we usually do the 
right thing. But what did Winston Churchill say? ``After we try 
everything else.''
    And I think that time has come. And I actually see this 
obviously as a scary time in that we need to protect our still-
fragile economy. But I also see it as an incredible opportunity 
to move forward to give the people of this country and the 
markets faith to invest and to really take what is now a time 
of relative stability, but move it forward if we can get this 
right.
    And so my first question is just based on, you know, your 
predictions that we need to get this done. What do you think 
the time frame is before we see a negative reaction from the 
markets and a possibility of further downgrades from the credit 
rating agencies?
    Dr. Zandi. First let me say, I am obviously not part of the 
rating agencies so I have no particular inside information. I 
read what they say, and so this is my interpretation of the 
perspective coming from the rating agencies.
    Obviously there is a lot of uncertainty here. I don't know 
for sure but this is my guess based on experience. And I do 
think that people outside the Beltway have a lot more faith in 
you than you do. There will not be a reaction, a negative 
reaction, because we can even go into next year. And by the 
way, I would counsel not coming up--I would not come up with a 
deal unless it is a really good deal, before the end of the 
year. I would take it into next year if that means you are 
going to get a better deal, a deal to solve the three fiscal 
issues that I brought up.
    Senator Klobuchar. So what you are saying is a deal that 
really does not mean much probably would not help us?
    Dr. Zandi. It would not be helpful. And if you read what 
the rating agencies say, to avoid a downgrade of the U.S. 
Treasury debt we need something that is pretty close to fiscal 
sustainability. You have to get to my $3 trillion.
    Senator Klobuchar. You have to show that you're talking----
    Dr. Zandi. Yes, because, if you read what they say, they 
say that if we fall short of that we've got a problem.
    Senator Klobuchar. O.K. You brought up Social Security. Do 
you see that as, and I think there is some general agreement we 
should do some reforms to make it more solvent, do you see that 
as the money going back into Social Security if we were to 
embark on that, set up a commission, do it separately? I think 
there is a lot of talk about, O.K., we should do that. But the 
funds should go back into Social Security to keep it solvent.
    Dr. Zandi. Yes, I think that is a perfectly reasonable way 
to do it.
    Senator Klobuchar. O.K. My colleague, Senator Coburn, said 
yesterday that in the near term he would rather see rates go up 
for the wealthiest Americans versus an approach that would 
simply close some of the deductions and loopholes that are 
available because he believes it gives us a greater long-term 
change to reform the tax code.
    Do you agree with his assessment? And then also, do you 
think this is a wise course? We have all talked about that we 
have to have these spending cuts in that $2.2 trillion we're 
talking about, plus we can get $700 billion which I support by 
simply going back to the Clinton levels over $250,000.
    Do you agree with his assessment?
    Dr. Zandi. I'm not sure I exactly got it right.
    Senator Klobuchar. His assessment was that we have to look 
at tax rates. That we should look at raising tax rates on the 
wealthiest, instead of just saying we should look at deductions 
and loopholes.
    Dr. Zandi. Oh, I think we need to do both. To get to my 
$1.4 trillion, if you're going down my path, we need both. 
There is no way to get to that number with tax reform alone, if 
you consider that we are not going to take away charitable 
deductions, and if your goal is not to raise taxes from lower- 
and middle-income households. If it's the folks that are at the 
top bracket, the $250,000 plus, then there is no way to do the 
arithmetic.
    There are a lot of good ways of doing reform, a lot of good 
proposals, but there is no good way of doing it to raise that 
kind of revenue. So we need to do both. We need tax reform, and 
we need higher tax rates on upper income households.
    Senator Klobuchar. And it would seem to me that you could 
do the tax rates at the end of this year, because then you 
could make the kind of deal that you want; and then do some of 
the closing of the loopholes and subsidies. And I would hope, 
as a state that has some incredibly strong businesses that 
support doing this, you could bring the corporate tax rate down 
and work on the debt in part by closing these loopholes and 
subsidies.
    Dr. Zandi. Yes. I don't think tax reform is complicated, 
and entitlement reform is even more complicated. I'm not 
arguing that you nail those down. I'm just saying nail down the 
framework, and then go to work and try to figure this out 
precisely.
    In terms of corporate tax reform, I think that is 
absolutely necessary. But I think the goal there would be to 
make that revenue neutral, if you can, because you want to 
bring down those corporate rates so that we can become more 
competitive.
    Senator Klobuchar. And, Dr. Hassett, what did you think of 
Senator Coburn's assessment? You know that he's worked very 
hard on this and wants dearly to reduce the debt, like so many 
people at this table.
    Dr. Hassett. Yes, I disagree with--I have a great deal of 
respect, of course, for the Senator, but in this I disagree. I 
think that the fact is that we have so many tax expenditures, 
both in the corporate and income tax side, that accomplish very 
little in terms of economic efficiency, that precisely now with 
unemployment still unacceptably high, and manufacturing jobs 
fleeing overseas, we need to seek ways to make ourselves a 
friendly place for investment, for capital, for small 
businesses.
    I am very concerned, for example, that I've seen that the 
President continues to say that 97 percent of small businesses 
would not be affected by the top rate. But it is a very, very 
misleading statistic because anyone who has any profit from a 
sale on eBay would put it on their Schedule C and we're calling 
them a small business. But the fact is that real businesses 
that employ people, we are looking at more than half the income 
is in that bracket. And I think it is just a bad time to be 
keeping all of the tax candy, the tax expenditures, and lifting 
taxes on the few people who are actually creating jobs in this 
economy. And so I kind of very strongly disagree.
    Senator Klobuchar. Yes, I just heard different things from 
some of our businesses that want this major, big term deal, and 
they are willing to make some sacrifices as long as we really 
are on the right path. Because they see that as their own long-
term viability if we go that way.
    But thank you to both of you. I appreciate it.
    Chairman Casey. Thank you, Senator Klobuchar. My colleague 
from Pennsylvania, Senator Toomey.
    Senator Toomey. Thank you to my colleague from 
Pennsylvania, Senator Casey, and thanks for convening this 
hearing.
    First I would like Dr. Hassett to see if you agree with the 
way I am looking at the President's proposal, the most recent 
proposal, that had some specifics in other areas. It was very 
unclear exactly what he is getting at, but I think it is clear 
that there is a headline tax increase that he wants of $1.6 
trillion. And I think what the Administration would describe as 
$600 billion in spending reductions.
    But when you drill down, it looks to me like there is much 
less even than that in spending restraint. For instance, it 
looks like $200 billion of what they put under the $600 billion 
heading is in fact revenue--fees and various other forms of 
revenue. That is not spending restraint at all.
    There is a deferral of the sequestration. I'm not sure it 
is clear how long that deferral is meant to be, but if it is 
for one year, that is $100 billion. And I would think it is 
intended to be at least that.
    Then there is additional stimulus spending, and various 
other forms of spending, the doc fix and other things that add 
up to at least $100 billion. So that is $400 billion, anyway, 
that you should legitimately I think deduct from the headline 
$600 billion if you wanted to arrive at what might be a 
legitimate spending restraint.
    So then if you go back and say, well, O.K., it is $1.6 
trillion in new revenue, they certainly want that. And maybe we 
have got $200 billion in spending restraint. Is it fair to say 
that this is about an 8-to-1 ratio?
    Dr. Hassett. That is about right.
    Senator Toomey. Where revenue, tax increases are eight 
times the spending restraint?
    Dr. Hassett. That's right, even in the specific proposal. 
But it's sort of part of--there's some recidivism here in the 
sense that I think that the spending reductions have 
systematically been overstated in recent years by the 
President, and often double-counting the Iraq War savings and 
things like that.
    Senator Toomey. Yes.
    Dr. Hassett. But it appears to me that there's a heck of a 
lot of tax increase and almost no spending reductions.
    Senator Toomey. And in fact, you know, spending programs 
that you launch, they surely happen. That money gets spent. 
Promises of future savings? Much less so. And so when the 
President talks about new stimulus spending, if he had his way 
I'm quite sure that would happen.
    I am not sure the savings would materialize at all. What I 
am suggesting is, in reality the President's proposal is almost 
entirely new taxes and virtually nothing--that is specific, 
anyway--on the spending restraint.
    And your research suggests, if I understood it correctly, 
that the most successful forms of consolidation are those in 
which the ratio is almost the reciprocal of that.
    Dr. Hassett. Exactly.
    Senator Toomey. Is that right?
    Dr. Hassett. Yes. In fact, I can say with absolute 
certainty that a consolidation that has the shape that the 
President has proposed would fail.
    The way to think about it is this, too. That in the economy 
that we have now, with the highest corporate tax in the 
developed world, very high individual income tax rates that are 
going up, and taxes on dividends maybe skyrocketing almost to 
45 percent, in that kind of a world it's impossible to envision 
generating the kind of healthy economic growth that would ever 
make us willing to have the spending cuts that we promised to 
do two years from now.
    Senator Toomey. Which----
    Dr. Hassett. Two years from now, GDP growth will be 1\1/2\ 
percent, and we will be saying, oh, we can't afford to cut 
government spending because it will throw us into recession.
    Senator Toomey. Right. So that kind of brings me to the 
next issue I would like to discuss.
    To get to the President's tax increase package that he is 
looking for, he is calling--well he has been very clear about 
this--calling for higher marginal tax rates. And in addition, a 
reduction in the value of deductions and other expenditures.
    Higher taxes on capital gains. Higher taxes on dividends. 
The way I count this up, if you include the PEASE limitation, 
the top marginal tax rates for some would be between 41 and 45 
percent. And that is just the federal level. We have states of 
course that have varying income tax rates from zero to double-
digit levels, meaning that some Americans would be paying more 
than half of their income. Their marginal income tax rate would 
exceed 50 percent.
    If the President got all the tax increases that he wants in 
this form that he has asked for, is it likely that that could 
precipitate a recession?
    Dr. Hassett. It is not only likely, it would certainly do 
so. In fact, the dividend tax increase alone is positively 
cataclysmic. If we go from a 15 percent dividend tax to an 
almost 45 percent, once you are all in with the phase-out of 
itemized deductions and so on, then--I mean, that is 
ridiculously bad news for equity markets. And it is something 
we saw on the other side.
    There is a very large academic literature, including a few 
papers that I have written as well, that looked at how firms 
responded to the dividend tax reductions, and there is a lot of 
positive movement in things like equity prices. And so I think 
that as a package, you know--and I guess there is a question of 
how negotiations work, and maybe you want to start negotiation 
with an extreme position, but I just cannot imagine anyone 
looking at that proposal and arguing that it would throw us 
into a recession.
    Senator Toomey. You know, there is another approach that 
you can take in negotiations, and in my experience it has been 
a more successful one.
    Rather than taking an extreme that is very harmful and that 
you know the other side cannot accept, what you do is you 
actually look for areas where the other side could meet you 
halfway. And you say, for instance, if because of the political 
imperative that has been created here, if revenue has to be 
part of this--I don't think that that's economically or 
fiscally necessary or optimal--but if it is politically 
necessary, should it not at least be generated in a way that 
does the least economic harm?
    And in your view, would you do less economic damage by 
generating revenue through reducing the value of expenditures 
than raising marginal rates?
    Dr. Hassett. Yes. And if you phase it in far in advance. 
So, for example, changing my Social Security benefits when I 
retire now, but doing so absolutely credibly, then you would 
have a positive growth effect right now from a commitment to a 
spending cut because you would give clarity to all the people 
that are worried about the future of America.
    Senator Toomey. I see my time has expired. Thanks, Mr. 
Chairman.
    Chairman Casey. Thank you, Senator Toomey. Representative 
Cummings.
    Representative Cummings. Good morning.
    Dr. Zandi. Good morning, sir.
    Representative Cummings. Mr. Zandi, health care inflation 
is a significant driver of Medicare's escalating costs. What do 
you think should be done administratively to control that 
inflation?
    I heard what you said about Medicare. It seems that no 
matter what you do you have still got this inflation going on, 
and it is a major factor. I would like to have your thoughts on 
that.
    Dr. Zandi. That is a really big question. Let me say a few 
things, or a couple of things.
    One is that health care inflation actually in the last 
couple of years has slowed quite sharply. It has been about 
3\1/2\ percent per annum over the past two years, which is 
really a very positive development, some of the slowest growth 
in health care costs in decades.
    Now some of that probably is due to the weak economy, which 
means less demand for health care services, but some of it 
likely is due to Affordable Care Act----
    Representative Cummings. I was hoping you would say that.
    Dr. Zandi. Yes. And I think there is growing evidence of 
that. We do not know for sure. We need more data points.
    Representative Cummings. But it's happening.
    Dr. Zandi. I think so. The second thing I would say is, 
there are some positive experiments in the Affordable Care Act 
that I think could reap benefit.
    For example, the exchanges, the insurance exchanges should 
introduce competition and hopefully that will keep health care 
cost growth down.
    There is the IPAB, the Independent Payment Advisory Board. 
We will have to see how that works out, but there is some 
possibility that that could be a big plus, too. And I am most 
encouraged about the Cadillac tax. This is a tax on gold-plated 
health insurance policies for folks like me. So I get a very 
good health care package from Moody's. So if I get sick, or if 
my family gets sick, I am unfettered in terms of my health care 
consumption. But with that tax, it is going to make it more 
costly and therefore I am going to start shopping for health 
care. And that I think will create more transparency with 
respect to pricing, and hopefully get the growth in health care 
cost down.
    So my point is, we do not really know what is going to work 
but there are some really interesting new programs that have 
been implemented by the Affordable Care Act that has 
significant potential, and we should see how those work out 
before we I think engage in some very significant structural 
changes to the Medicare or Medicaid programs like a voucher 
program or a premium support.
    You know, we may have to go down that path at some point, 
but it is much too premature in my view to do that. We should 
see how these developments work. They have some potential.
    Representative Cummings. Following up on Senator 
Klobuchar's question, you wrote, and I quote: ``If temporarily 
going over the cliff is necessary to achieving a good 
agreement, then lawmakers should not hesitate to do so.'' End 
of quote.
    How long do you think we could stay over the cliff without 
doing significant damage to the economy?
    Dr. Zandi. I think you could go into early February. By 
early February, if it looks like you are not coming to a deal 
and the market, the investors begin to discount the likelihood 
that you are not coming to a deal, then you will see stock 
prices decline, the bond market will react. Consumer, business 
confidence would begin to erode. By mid-February you would be 
doing a lot of damage. And by the end of February of course 
then the debt ceiling--you can't navigate around the debt 
ceiling and really bad things will happen.
    So I think you have got about a month. Now a lot does 
depend on whether the Treasury will, and is permitted, to 
freeze withholding schedules. I am going under the assumption 
that they can and they will do that. If they can't, then the 
damage will mount faster. You won't have as much time.
    Representative Cummings. One of the things I have been 
saying is, a bad deal--a bad deal--well, no deal is better than 
a bad deal. And, you know, going back to--I'm just curious 
about, you know, given your findings, do you believe that the 
tax cuts say for the first $250,000 in income should be 
extended immediately, as the President has stated?
    And let me ask the second part. And is there any reason 
that the renewal of these tax cuts should be tied to tax cuts 
for the wealthiest in our Nation?
    Dr. Zandi. I think this has to be done as a package. I do 
not think you can break this apart, because it is just going to 
create brinkmanship, angst; and I think that nailing down the 
tax code, nailing down the spending cuts, nailing down the debt 
ceiling, and nailing down long-term fiscal sustainability, what 
we're going to do over the longer run, you have to do this all 
at once.
    That is a good deal, and that is the only deal that I think 
works.
    Representative Cummings. You think that can be done by the 
end of the year?
    Dr. Zandi. No. I'm skeptical. But I do think it can be done 
before--early next year, before it does significant economic 
damage.
    Representative Cummings. I see my time----
    Dr. Zandi. I am hopeful that you can. I am an economist. 
I'm playing a political observer, but my guess is we will 
probably have to go into next year to see that happen.
    Representative Cummings. Thank you very much.
    Chairman Casey. Thank you, Representative Cummings.
    Vice Chairman Brady.
    Vice Chairman Brady. Well, Mr. Chairman, first I apologize 
for being late. But I want to thank you for your leadership of 
the Joint Economic Committee. You have been a terrific leader 
and have been tremendous to work with. I really appreciate your 
approach and just how you handle yourself and this Committee. 
So thank you, very much, for your years of work on this 
Committee. Thank you. Appreciate it.
    I think there is a bit of a consensus in the sense that it 
is irresponsible to voluntarily go off this cliff, but it would 
be equally irresponsible to come to a solution that does not 
address the key issues facing us both in authentic spending 
discipline, in fixing this broken tax code, and in dealing with 
our biggest challenges in Social Security and Medicare.
    And so I want to ask two quick questions, one of Dr. 
Hassett and one of Dr. Zandi.
    To you, Dr. Hassett, you know obviously economic growth 
works. Just an average recovery in this recession would have 
cut the deficit from $1.1 trillion to $430 billion. So more 
than half is just getting the economy going and returning to 
the pre-2008 levels.
    What is missing today? We know consumer spending is above 
what it was before the recession. We know government spending 
is above what it was before the recession. Business investments 
in buildings, equipment, software, that area that actually 
drives job creation, is what continues to lag.
    In your view, do you think raising taxes on the two 
marginal rates, as well as capital gains and dividends, does 
that encourage more business investment in the economy?
    Dr. Hassett. No. And I think the threat of those increases 
is a very big, significant negative.
    Mr. Brady, one of the things that economists use when they 
teach graduate classes in tax is something called The Handbook 
of Public Economics. And probably you [turning to Dr. Zandi] at 
some point had to study that too, Mark. I know I did. And in 
one of the later editions, there is a chapter on how taxes 
affect business capital spending that was co-authored by myself 
and Glen Hubbard of Columbia University.
    We go into very, very gory detail about how negative this 
can be, but the fact is that dividend taxes, capital gains 
taxes, statutory tax rates, have a big effect on investment 
through the user-cost-of-capital. If the dividend tax is going 
to go up, then there are a lot of firms that are going to be 
hurt significantly by that, and they today would be paring back 
their capital spending in anticipation of higher taxes in the 
future.
    Businesses look to the future when they decide what they 
are going to do, and right now there are a heck of a lot of 
businesses that think that their taxes are going to be higher, 
and they are therefore appropriately now investing. And so you 
absolutely see it in the investment data. It is one of the 
reasons why this recovery has been so slow, is that businesses 
have a lot of cash and are not making a lot of investment.
    Vice Chairman Brady. Well do you think--so your point is 
this does not help the economy? In fact, it hurts the economy?
    Dr. Hassett. That's right. And in fact you could go back 
and look at the writings of even Keynes himself who I think 
would have quite vehemently opposed President Obama's stimulus 
approach; that Keynes was a business-cycle scholar who 
identified very early on that business cycles, recessions, and 
recoveries tend to be driven by investment because consumers 
are pretty steady, but investment can be really wildly 
fluctuating. It can go way down and way up.
    And so Keynes's view of sort of the problem of 
stabilization policy was to try to stabilize investment, and 
not to really focus on consumption. And I think that one reason 
why we have had such a disappointing recovery is that we have 
not really addressed the fundamental reason why investment is 
so weak, which is that we are really an unattractive place for 
investors to invest right now.
    Vice Chairman Brady. Right. Well, one of our questions the 
Republicans are often asked is why don't you just accept the 
higher tax rates? Because it would be politically very 
convenient. And the answer is: It does not solve the economy; 
it hurts it. It does not solve the deficit; I think it is eight 
days of federal spending. It is not a serious deficit proposal.
    Dr. Zandi, I have often disagreed with you on some of your 
analysis of stimulus and other issues, but I think you are 
right in that the credit rating agencies are looking for a plan 
that ultimately lowers that debt-to-GDP ratio. I don't think 
there is a magic number, but I do think the focus on our 
biggest drivers going forward--Social Security and Medicare--
and are we acting to find a sustainable path forward on them, 
will be more important than in fact a number on discretionary 
spending or tax cuts themselves.
    Do you think the President's plan adequately--that is on 
the table today--adequately addresses the sustainability of 
Medicare and Social Security?
    Dr. Zandi. I think he needs to go further. I don't think 
it's enough. I believe the proposals he has put forward are 
good ones. I think they are hard proposals to make because they 
are substantive. But to achieve fiscal sustainability in the 
context of $3 trillion in 10-year deficit reduction, I do think 
we need to do more.
    Vice Chairman Brady. Looking at the Republican plan and the 
President's proposal, do you see any common ground in 
addressing those two important programs?
    Dr. Zandi. I do. I think the common ground is that we are 
all looking at roughly the same proposals. The CBO has scored a 
number of different approaches to addressing Medicare and 
Medicaid. And I also think there is now general agreement that 
in the context of the current discussion we are not going to 
make any major structural changes to these programs. We are not 
going to block grant Medicaid. We are not going to voucher or 
premium-support Medicare.
    So in that, I think we can all roughly agree to that. So in 
this context it becomes dollars and cents and really doing the 
hard arithmetic. And actually, Congressman Brady, when you look 
at, actually sit down and do the arithmetic and look at these 
proposals, it is really very hard. This is not going to be 
easy. And so I would suggest that in this quest for more reform 
to Medicare and Medicaid, that if we can say by the 10th year 
of the budget horizon we are on the right path, then I think 
that is O.K. Maybe we shouldn't because entitlement reform 
shouldn't be done in a 10-year horizon.
    Vice Chairman Brady. Your point is, the number is not the 
10-year point; it is whether we have solved the problem over 
the long term.
    Dr. Zandi. Yes. Because entitlement reform is tough, and 
you cannot do it in 10 years, right? Because this is a long-
term problem. So really we should be thinking about this in a 
20- to 30-year horizon.
    Of course CBO's scoring makes it incredibly difficult, but 
we don't want to make that CBO structure--force us to make 
wrong decisions about these programs.
    Vice Chairman Brady. I agree.
    Chairman, thank you very much.
    Chairman Casey. Vice Chairman Brady, thank you. Senator 
Lee.
    Senator Lee. Thank you very much.
    I would like to take a step back for a minute and step in a 
slightly different direction from the fiscal cliff and talk 
more about the long-term and medium-term economic realities 
that we face.
    Mr. Zandi, in your written testimony to this Committee you 
warned against kicking the can down the road indefinitely 
because of the adverse effect that might have on the economy, 
the medium- and long-term impact that it might have. And I 
thought your analysis was definitely something that we need to 
pay attention to on this point.
    As you observed that any failure to make progress in this 
area now could signal that we've got bigger troubles ahead. And 
as you pointed out, the Moody's Analytics' model that you use 
breaks down in about 2028. And the reason it does that is 
because at that point the interest on our ballooning national 
debt will start to swamp and cripple our economy, thwarting our 
ability to fund everything from defense to entitlements, and 
everything in between, and we will be left without much 
recourse.
    I mean, at that moment I'm not sure there is a tax increase 
on the planet that could suddenly fix that. I'm not sure we can 
print money fast enough to fix that. And if we did, we would go 
the way of Argentina and other countries that have tried that. 
And that does not ever end except in blood and tears.
    So I tend to think of this medium- and long-term risk as 
the fiscal avalanche. The cliff is something we are approaching 
now. We can see where it is. Based on our current location, our 
direction, and our velocity we know when we are going to hit 
the cliff, if we're going to hit it.
    But the avalanche is different. I come from a mountainous 
state where avalanches happen all the time. The only thing you 
know about avalanches is you know when the conditions are 
present when they might occur. You know when the snowpack has 
built up to the point when it could happen. You don't know 
exactly when it is going to happen; you just know it is coming. 
And you try to deal with the risk of it. But once it hits you, 
the avalanche becomes completely impossible to control.
    Do you agree with this characterization about the 
avalanche? And could you sort of elaborate to us about that 
kind of threat?
    Dr. Zandi. Would you mind if I steal that from you?
    Senator Lee. Oh, I'd be happy for you to.
    Dr. Zandi. I will give you credit.
    Senator Lee. That would be great. It's not copyrighted.
    Dr. Zandi. I love that imagery and the metaphor I think is 
right. I do think that that is why what you are doing right now 
is so important. I really think this is a once-in-a-generation 
opportunity for you to nail these things down, and we are not 
that far apart. I really don't think we are.
    So if you are able to put us on a credible path to fiscal 
sustainability, roughly get to my $3 trillion, do it in a 
roughly balanced way, I think we are golden, I really do. And 
we are going to avoid that avalanche. But if we don't do that, 
if we kind of kick the can down the road, then ultimately I 
think it means that we're never really going to do it until we 
are forced by that avalanche to do it.
    Senator Lee. How soon would we need to do that in order to 
avoid the conditions that would lead to the avalanche? How soon 
would we need to get to balance?
    Dr. Zandi. I don't know the answer to that, but I do know, 
and that's why I put it into the testimony, my model breaks 
down--of course it's going to happen long before that point.
    Senator Lee. Right. We're not going to get anywhere close 
to 2020 without it happening.
    Dr. Zandi. No, no.
    Senator Lee. In fact, it could happen within the next four, 
five, six years, certainly the next ten years, couldn't it, if 
yield rates start to jump?
    Dr. Zandi. Yeah. Here's the thing. The problem is that if 
we don't address this and we kick the can, we are going to be 
stuck in this slow growth netherworld going forward. And most 
importantly, we are going to get nailed by something.
    I don't know what it is but something bad is going to 
happen. And when that bad thing happens, that is going to be 
the thing that sets off that avalanche. Right? So----
    Senator Lee. You mean like a credit downgrade, for example?
    Dr. Zandi. No, no. It's going to be, something that we're 
not even contemplating that happens in the world to oil prices, 
to other geopolitical--or even to our own economy. It's just we 
don't know what that will be, but it will happen, and we will 
have set ourselves up for that avalanche because we did not get 
our fundamentals in the right place.
    That is why it is so important to get this right right now.
    Senator Lee. What about a credit downgrade? If that were to 
happen, doesn't that call into question all kinds of things 
like, you know, money market funds and other types of 
investment funds are chartered to invest only in a certain 
grade of funds. And if all of a sudden U.S. Treasuries were 
downgraded, would that not have a pretty significant effect on 
where we are relative to the avalanche?
    Dr. Zandi. Right. So if there's downgrade to Treasury debt, 
this will likely trigger other downgrades. Anything that is 
backstopped by the government will be downgraded. Fannie Mae, 
Freddie Mac debt, Federal Home Loan Bank debt, SIFI banks, too-
big-to-fail banks, they're still implicitly backstopped. 
They'll get downgraded. You know, it's the JPMorgan and Citi's 
of the world. State and local government debt will get 
downgraded.
    And you are right. Money managers have in their 
relationships with their clients agreements not to invest in 
bonds that have ratings below a certain grade, and they will 
divest themselves because of the downgrades. And this will 
cause problems in the credit markets.
    Now the credit markets will ultimately adjust because the 
reality of what's happened to the value of these bonds has not 
changed, right? The economics have not changed for Fannie Mae 
and Freddie Mac. So you will see hedge funds, and private 
equity firms, and other players come in. But that is a process, 
and it will take time. In between now and then, it will create 
a great deal of turmoil.
    But the most important thing is not what the credit rating 
agencies do or say; it is what this means. It means that we do 
not have the political will to nail this thing down--and we 
won't until we are forced by that avalanche. And people will 
recognize that, and we will go nowhere.
    Senator Lee. So what you're saying is, if we want to 
preserve entitlements, get us to balance. If you want to 
preserve our ability to fund national defense, get us to 
balance.
    Dr. Zandi. Get us to sustainability.
    Senator Lee. O.K. Thank you, Mr. Chairman. My time has 
expired.
    Chairman Casey. Senator Lee, thank you very much. I just 
have maybe one more question. I know we could be here awhile if 
we had the time, but I am grateful for the patience of our 
witnesses and the testimony.
    I was looking at the testimony of Dr. Hassett, and on page 
8--it gets into this question of the balance, the question of 
how you do the balance between cuts and revenue. And in the 
second full paragraph he says:
    ``Using a range of different methodologies, we find that 
the average unsuccessful fiscal consolidation relied upon 53 
percent tax increases and 47 percent spending cuts, while a 
typical successful consolidation consisted of 85 percent 
expenditure cuts.'' So 85-15.
    Dr. Zandi, I wanted to get your sense of that, whether you 
agree with that 85-15. And if not, why not? And what do you 
think is a--what would your approach be, if you can articulate 
it by way of a number?
    Dr. Zandi. I think--I respect Kevin's work a lot, but I 
think that number varies considerably depending on the country, 
and it depends on where the economy is in the business cycle. 
It also depends on where the Federal Reserve is with respect to 
monetary policy.
    I mean it is one thing if interest rates are 4 or 5 percent 
and they can lower rates in the context of consolidation. It is 
another thing if we are at zero, which is where we are today.
    And there has been a lot of really good work revolving 
around these issues in trying to get good benchmarks for fiscal 
consolidation. In fact, there's a really great paper that came 
out of the IMF in just the last couple of days on this issue, 
and it makes a very strong case that, first, there was this 
fiscal speed limit. You can't have too much fiscal 
consolidation too quickly; otherwise, it becomes 
counterproductive in terms of your fiscal situation. You can 
see that in Europe.
    And the other is that this balance between tax and spending 
in the context of the U.S., and particularly when the economy 
is weak and the Federal Reserve is at zero, the spending 
multipliers, when you cut spending they are very, very large, 
much larger than was previously thought.
    So I don't buy into Kevin's 85-15. I think in the context 
of where we are today, that is not--I would think that is not 
right. That is not what we are observing today.
    Now having said that, I would do something like I proposed, 
a 2-to-1 kind of ratio. If you do that, I think that is 
balanced. I think that gets us to a reasonably good place. I 
think that gets us to fiscal sustainability in avoiding that 
avalanche. It is still more spending than a tax, but it is more 
balanced.
    The last thing I would say, to a point that Senator Toomey 
made, because we're talking about taxes and spending, and this 
is a really important point, tax reform is spending cuts. There 
is no difference if I give you a mortgage interest deduction or 
I cut you a check. No difference. You can treat it as a tax, or 
you can treat it as spending.
    From an economic perspective, they are one and the same 
thing. So when we do tax reform, you know from an economic 
perspective that is a spending cut. That is a spending cut.
    Chairman Casey. I don't have any more questions, unless the 
Vice Chairman does, or Representative Maloney.
    Vice Chairman Brady. Thirty seconds?
    Chairman Casey. Sure.
    Vice Chairman Brady. I will be very brief.
    I think concerning Dr. Hassett's work and looking at our 
global competitors who find themselves in significant fiscal 
financial crises, as we did, showed, if I recall, more than 20 
times in 9 different countries, countries both cut what they 
owed in their spending and grew the economy at the same time.
    They did that because their cuts were large, credible, and 
politically difficult to reverse. In other words, they were 
real and they were believable. What that did was create the 
confidence to make investments to grow an economy and it was 
proven over, and over, and over again.
    I actually think that is the model for this fiscal cliff 
discussion: Making both the cuts and the reforms that are real, 
and credible, and politically difficult to reverse because that 
is the only signal we can send. I think the right signal to 
send to investors that we are serious about getting our 
financial house in order. I hope that we do that.
    And again, Mr. Chairman, thank you again. This is your last 
Committee meeting and you will be missed. Thank you, again.
    Chairman Casey. Thank you, Vice Chairman Brady, soon-to-be-
Chairman. Representative Maloney, you had something?
    Representative Maloney. Yes. Going back to the analogy of 
the avalanche, when we had the subprime crisis there was no 
warning. Just one day it just, the avalanche came, a total loss 
of confidence and a total really fall in the market.
    And likewise we could have the same type of avalanche come 
tomorrow. There's no more confidence. No one buys our debt. 
They want to sell it, and we would have increased interest 
rates and huge economic problems.
    We have two things in front of us. Not only the fiscal 
slope, but also the debt ceiling that Treasury estimates at the 
end--we have until February for the debt ceiling. So they are 
very close together.
    In solving it, would it be better to put the debt ceiling 
in the package with the fiscal slope for a comprehensive 
solution? Or would it be better to do them separately? Dr. 
Zandi.
    Dr. Zandi. My view is they should be done together; that 
this will not work if we try to break this thing apart. We need 
to scale back the cliff. We need to raise or eliminate the debt 
ceiling, and we need to achieve fiscal sustainability. This 
needs to be a package, and it has to be done relatively, you 
know, very soon.
    Representative Maloney. And Dr. Hassett.
    Dr. Hassett. I agree with Mr. Zandi.
    Representative Maloney. Great.
    Dr. Hassett. Thank you.
    Representative Maloney. I want to thank both of you for 
your testimony, and really thank the Chairman for his 
outstanding leadership on the Committee.
    Chairman Casey. Representative Maloney, thank you very 
much. I appreciate your good work and your leadership, as well.
    Dr. Zandi, Dr. Hassett, thank you for your testimony. I 
think we made it a 90-minute meeting, or pretty close to that. 
That is pretty good.
    I want to make a couple of final comments. First of all I 
want to thank both of our witnesses again for their testimony. 
And by the way, without objection both the full text of your 
opening statements will be in the record of this hearing.
    We are grateful because I think it is clear to most 
Americans we do have a substantial challenge with regard to the 
cliff. We know that if we do not take the right steps that it 
could jeopardize our economic recovery. And we cannot afford to 
lose ground on the gains we have made the last couple of years.
    I am confident though we can get this done, that the 
Congress of the United States can come together and 
successfully reach the compromise that we need that puts us on 
a path to fiscal sustainability while protecting middle income 
families.
    I mentioned before this is my last hearing, and Vice 
Chairman Brady mentioned it a couple of times. I have really 
enjoyed this work as Chairman and also as a member of the 
Committee the last six years, and am looking forward to more 
work on this Committee as well.
    But our work on job creation, deficit reduction, 
manufacturing issues that we raised, and other issues has been 
informed by the perspective of many of our Nation's top 
economists, two of them with us today, and from other leaders 
in the business community and the nonprofit sector.
    So we are grateful for those insights as we seek to get 
answers. I mentioned at the outset the great working 
relationship I have had with Vice Chairman Brady. I am grateful 
for his work and the work of both parties on this Committee.
    I would also like to recognize three retiring Members. Dr. 
Burgess mentioned them at the beginning, but I wanted to 
mention them again:
    Senator Bingaman, who was here with us earlier, has served 
on the Joint Economic Committee continuously from 1987 forward, 
25 years of service on the Committee. Congressman Hinchey from 
New York served from 1996 to 1998 and then from 2005 to the 
present. And third, Senator Webb serving since 2007. They will 
all be retiring from Congress at the end of the year, and I 
would like to thank them for their contributions and wish them 
luck in the next chapter of their life.
    The record for all here, the record will remain open for 
five business days for any member of the Committee who wishes 
to submit a statement or additional questions.
    If there is nothing further, we are adjourned. Thank you.
    [Whereupon, at 11:12 a.m., Thursday, December 6, 2012, the 
Committee hearing was adjourned.]

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