[Senate Hearing 112-985]
[From the U.S. Government Publishing Office]
S. Hrg. 112-985
GENERAL HEARINGS
=======================================================================
HEARINGS
before the
COMMITTEE ON THE BUDGET
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
MARCH 15, 2011--THE REPORT OF THE BIPARTISAN POLICY
CENTER'S DEBT REDUCTION TASK FORCE
MARCH 16, 2011--MODERNIZING PERFORMANCE:
USING THE NEW FRAMEWORK
SEPTEMBER 15, 2011--POLICY PRESCRIPTIONS FOR THE ECONOMY
SEPTEMBER 20, 2011--PROMOTING JOB CREATION IN THE
UNITED STATES
OCTOBER 4, 2011--IMPROVING THE BUDGET PROCESS: STRATEGIES
FOR MORE EFFECTIVE CONGRESSIONAL BUDGETING
OCTOBER 12, 2011--IMPROVING THE CONGRESSIONAL
BUDGET PROCESS
NOVEMBER 15, 2011--ECONOMIC EFFECTS OF FISCAL
POLICY CHOICES
NOVEMBER 16, 2011--IMPROVING REGULATORY PERFORMANCE:
LESSONS FROM THE UNITED KINGDOM
__________
Printed for the use of the Committee on the Budget
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______
U.S. GOVERNMENT PUBLISHING OFFICE
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COMMITTEE ON THE BUDGET
KENT CONRAD, North Dakota, Chairman
PATTY MURRAY, Washington JEFF SESSIONS, Alabama
RON WYDEN, Oregon CHARLES E. GRASSLEY, Iowa
BILL NELSON, Florida MICHAEL ENZI, Wyoming
DEBBIE STABENOW, Michigan MIKE CRAPO, Idaho
BENJAMIN L. CARDIN, Maryland JOHN ENSIGN, Nevada
BERNARD SANDERS, Vermont JOHN CORNYN, Texas
SHELDON WHITEHOUSE, Rhode Island LINDSEY O. GRAHAM, South Carolina
MARK R. WARNER, Virginia JOHN THUNE, South Dakota
JEFF MERKLEY, Oregon ROB PORTMAN, Ohio
MARK BEGICH, Alaska PAT TOOMEY, Pennsylvania
CHRISTOPHER A. COONS, Delaware RON JOHNSON, Wisconsin
Mary Ann Naylor, Majority Staff Director
Marcus Peacock, Minority Staff Director
----------
COMMITTEE ON THE BUDGET
KENT CONRAD, North Dakota, Chairman
PATTY MURRAY, Washington JEFF SESSIONS, Alabama
RON WYDEN, Oregon CHARLES E. GRASSLEY, Iowa
BILL NELSON, Florida MICHAEL ENZI, Wyoming
DEBBIE STABENOW, Michigan MIKE CRAPO, Idaho
BENJAMIN L. CARDIN, Maryland JOHN CORNYN, Texas
BERNARD SANDERS, Vermont LINDSEY O. GRAHAM, South Carolina
SHELDON WHITEHOUSE, Rhode Island JOHN THUNE, South Dakota
MARK R. WARNER, Virginia ROB PORTMAN, Ohio
JEFF MERKLEY, Oregon PAT TOOMEY, Pennsylvania
MARK BEGICH, Alaska RON JOHNSON, Wisconsin
CHRISTOPHER A. COONS, Delaware KELLY AYOTE, New Hampshire *
Mary Ann Naylor, Majority Staff Director
Marcus Peacock, Minority Staff Director
* On May 11, 2011 (S. Res. 179) Senator John Ensign was replaced
with Senator Kelly Ayotte.
C O N T E N T S
----------
HEARINGS
Page
March 15, 2011--The Report of the Bipartisan Policy Center's Debt
Reduction Task Force........................................... 1
September 15, 2011--Policy Prescriptions for the Economy......... 127
September 20, 2011--Promoting Job Creation in the United States.. 221
October 4, 2011--Improving the Budget Process: Strategies for
More Effective Congressional Budgeting......................... 273
October 12, 2011--Improving the Congressional Budget Process..... 365
November 15, 2011--Economic Effects of Fiscal Policy Choices..... 427
TASK FORCE HEARINGS
March 16, 2011--Modernizing Performance: Using the New Framework. 57
November 16, 2011--Improving Regulatory Performance: Lessons
Learned from the United Kingdom................................ 517
STATEMENTS BY COMMITTEE MEMBERS
Chairman Conrad.................................. 1,127,221,273,365,427
Ranking Member Sessions.......................... 4,130,223,280,368,429
Senator Warner ..................................................57,517
Senator Johnson ................................................... 520
WITNESSES
Honorable Pete V. Domenici, Co-Chair, Bipartisan Policy Center's
Debt Reduction Task Force...................................... 6
Honorable Alice Rivlin, Ph.D., Co-Chair, Bipartisan Policy
Center's Debt Reduction Task Force............................. 31
Honorable Gene L. Dodaro, Comptroller General, U.S. Government
Accountability Office.......................................... 61
John Podesta, President and Chief Executive Officer, Center for
American Progress.............................................. 93
Robert Shea, Principal, Grant Thornton, LLP...................... 100
Mark Zandi, Ph.D., Chief Economist, Moody's Analytics............ 132
Chad Stone, Ph.D., Chief Economist, Center on Budget and Policy
Priorities..................................................... 149
Kevin A. Hassett, Ph.D., Senior Fellow and Director, American
Enterprise Institute for Public Policy Research................ 161
Honorable Alice M. Rivlin, Ph.D., Director, Greater Washington
Research, The Brookings Institution............................ 227
Harry J. Holzer, Ph.D., Professor of Public Policy, Georgetown
University..................................................... 234
J.D. Foster, Ph.D., Norman B. Ture Senior Fellow in the Economics
of Fiscal Policy, The Heritage Foundation...................... 241
Maya MacGuineas, President, Committee for a Responsible Federal
Budget......................................................... 282
David B. Kendall, Senior Fellow for Health and Fiscal Policy,
Third Way...................................................... 292
Donald F. Kettl, Dean, School of Public Policy, University of
Maryland....................................................... 299
G. William Hoagland, Former Staff Director, U.S. Senate Committee
on the Budget.................................................. 329
Martin Paone, Former Democratic Secretary, U.S. Senate, and
Executive Vice President, Prime Policy Group................... 340
Eric Ueland, Former Chief of Staff, U.S. Senate Majority Leader
Bill Frist..................................................... 349
Louis Fisher, Ph.D., Scholar in Residence, The Constitution
Project........................................................ 369
Philip G. Joyce, Ph.D., Professor of Management, Finance, and
Leadership, School of Public Policy, University of Maryland.... 384
Paul L. Posner, Ph.D., Director, Centers on the Public Service,
Department of Public and International Affairs, George Mason
University..................................................... 397
Douglas W. Elmendorf, Ph.D., Director, Congressional Budget
Office......................................................... 433
Graham Turnock, Chief Executive, Better Regulation Executive,
United Kingdom's Department for Business Innovation and Skills,
accompanied by Johannes Wolff, Assistant Director, Better
Regulation Executive, United Kingdom's Department for Business
Innovation and Skills.......................................... 522
Michael Greenstone, 3M Professor of Environmental Economics,
Department of Economics, Massachusetts Institute of Technology. 539
Jitinder Kohli, Senior Fellow, Center for American Progress...... 550
QUESTIONS AND ANSWERS
Questions and Answers *.............................119,207,270,363,425
* Questions and statements to the record may be found on file
with the Committee.
THE REPORT OF THE BIPARTISAN POLICY CENTER'S DEBT REDUCTION TASK FORCE
----------
TUESDAY, MARCH 15, 2011
Committee on the Budget,
U.S. Senate,
Washington, DC.
The Committee met, pursuant to notice, at 10:02 a.m., in
Room SD-608, Dirksen Senate Office Building, Hon. Kent Conrad,
Chairman of the Committee, presiding.
Present: Senators Conrad, Wyden, Cardin, Whitehouse,
Warner, Begich, Coons, Sessions, Enzi, Thune, and Johnson.
Staff Present: Mary Ann Naylor, Majority Staff Director;
and Marcus Peacock, Minority Staff Director.
OPENING STATEMENT OF CHAIRMAN CONRAD
Chairman Conrad. The hearing will come to order. Welcome to
the Senate Budget Committee.
Before we begin today, I would like to take just a moment
to send our thoughts and prayers to the people of Japan during
the crisis that they are confronting. And I would ask that we
observe a moment of silence in respect to those who have been
lost and those who are suffering there.
[Moment of silence.]
Chairman Conrad. Thank you for that. Now we will proceed
with the hearing.
In this hearing today, I want to particularly welcome our
two very distinguished witnesses: Senator Pete Domenici and Dr.
Alice Rivlin. They served as co-chairs of the Bipartisan Policy
Center's Debt Reduction Task Force. Our hearing today focuses
on the task force's debt reduction proposal, titled ``Restoring
America's Future,'' which was issued in November. Both of our
witnesses are very well known to this Committee. Senator
Domenici served on the Budget Committee for 34 years, almost
unimaginable, was Chairman or Ranking Member for 22 of those
years. I served with him during many of those years, and I can
tell you, Senator Domenici was a leader and somebody that we
all had respect for in the way he conducted this Committee and
the passion that he brought to the subject. Those years of
service are Committee records, and I venture to say they will
not be equaled. So, Pete, welcome back. It is good to have you
here.
Dr. Rivlin is also a giant in the budget world. She was
founding Director of the Congressional Budget Office, served as
the Director of the Office of Management and Budget in the
Clinton administration, held the position of Vice Chair of the
Federal Reserve. In addition to co-chairing the Bipartisan
Policy Center's Debt Reduction Task Force, Dr. Rivlin also
served with me as a member of the President's Fiscal
Commission, so she did double duty. And I can attest personally
to the tremendous contribution she made to that effort. So, Dr.
Rivlin, welcome back. She has been before this panel many
times.
I believe our Nation is in peril. We are hurtling towards a
fiscal cliff. We are borrowing about 40 cents of every dollar
that we spend. Deficits have exceeded a trillion dollars for 3
years in a row. That is a trillion--not a million, not a
billion, a trillion dollars. People tell me people have a hard
time distinguishing million, billion, and trillion. Well, a
trillion dollars is a thousand billion dollars. That is a
staggering amount of money. So here we are. And the long-term
outlook is even worse. We are clearly on an unsustainable
course.
Before I go further, I want to also recognize Bill
Hoagland, the former Staff Director of this Committee. Bill
also served on the debt reduction effort that was led by Pete
Domenici and Alice Rivlin. Bill was deeply respected by every
member on this Committee during the time he served as Staff
Director, both Republicans and Democrats. We may have differed
on specifics. One thing you knew is Bill Hoagland was
interested in what was good for the country.
Let me go to the slides, and for those who watch Budget
hearings, I am repeating some of these things because I think
it is so important to repeat them. The Chairman of the Joint
Chiefs of Staff has said, ``Our national debt is our biggest
national security threat.''
Make no mistake, we are at a critical juncture. Spending is
at the highest level as a share of our economy in 60 years.
Revenue is at the lowest level as a share of our economy in 60
years. Gross debt as a share of the economy will reach 100
percent this year, well above the 90 percent threshold that
many economists regard as a danger zone.
Two of the Nation's leading economists, Carmen Reinhart and
Kenneth Rogoff, have just completed a book on this subject, and
they concluded, ``We examine the experience of 44 countries
spanning up to two centuries of data on central government
debt, inflation and growth. Our main finding is that across
both advanced countries and developing and emerging markets,
high debt to GDP levels, those above 90 percent, are associated
with notably lower growth outcomes.'' That is why all this
matters. When you reach a gross debt of 90 percent, your future
economic prospects are impaired, and impaired in a substantial
way.
So when people ask, well, what does it matter whether you
have got a debt of 90 or 100 or 120 percent of your gross
domestic product, what matters is what that means for the
future economic strength of the Nation. What that means is our
future economic opportunity is going to be reduced--fewer job
opportunities, fewer opportunities for all the American people,
and a fundamental threat to the national security of the
Nation. That is why this matters. So these debt figures are not
just numbers on a page. They are things that affect the lives
of real people.
And we are now dangerously indebted to foreign nations.
Here are the top ten foreign holders of U.S. debt. We now owe
China more than $1 trillion. I believe the only way we are
going to solve the Nation's long-term fiscal imbalances is by
enacting a comprehensive debt reduction plan. Frankly, we do
not have time to do this one piece of the puzzle at a time. We
have got to take this on comprehensively and put in place a
plan that gets real results, dramatic changes in our
circumstance over the next decade.
We need a package of the size and scope of the plans
proposed by the President's Fiscal Commission and the plan put
forward by the Bipartisan Policy Center. Although the plans
differed on some specific policies, both took a balanced
approach that included discretionary spending cuts, including
defense, entitlement changes, and fundamental tax reform that
simplifies the Tax Code, lowers rates, and raises revenue.
This chart shows the trajectory of debt under the various
debt reduction plans. Under CBO's alternative fiscal scenario,
which roughly corresponds to our current course, debt will rise
to 233 percent of GDP by 2040. That will never happen because
our lenders will never permit it to happen.
Under Chairman Ryan's road map proposal, debt--and this is
not gross debt now. This is publicly held debt. Publicly held
debt is substantially lower than gross debt. Under Chairman
Ryan's road map proposal, debt will continue climbing to 99
percent of GDP by 2040. And, again, that is publicly held debt.
Publicly held debt is roughly 70 percent at the end of this
year. So you can see under his plan debt will continue to rise
to nearly 100 percent of GDP by 2040 as measured by publicly
held standards. Under the Bipartisan Policy Center plan, debt
will fall to 54 percent of GDP. Again, this is publicly held
debt. And under the Commission proposal, debt will fall to
roughly 30 percent of GDP by 2040.
Chairman Ryan's road map proves the point that revenues, I
believe, have to be part of a plan to reduce the deficit and
debt; otherwise, the debt is too high. Under his plan gross
debt would be about 130 percent of GDP, well above where it is
today. The result is the plan increases the debt as a
percentage of GDP for the next 30 years, instead of bringing it
down like the other two plans.
Here is an overview of the Bipartisan Policy Center plan.
That is the plan that Senator Domenici and Director Rivlin were
the principal architects for. It lowers the deficit to 1.2
percent of GDP in 2015 before increasing slightly to 1.5
percent by 2020. It stabilizes the debt by 2013 and brings it
down to about 60 percent by 2020 and 54 percent by 2030. Again,
this is publicly held debt. It reforms Social Security,
ensuring that it remains sustainable and solvent for at least
75 years. It phases out the health tax exclusion, caps Medicare
and Medicaid growth, and creates a partial Medicare voucher. It
provides fundamental tax reform that broadens the tax base,
reduces rates, and dedicates revenues to reducing debt. It also
includes a value-added tax, and it freezes domestic
discretionary spending for 4 years and defense spending for 5
years.
This final chart compares the results in 2020 from the
Fiscal Commission plan, the Bipartisan Policy Center plan, and
the President's budget. It shows that the Fiscal Commission
plan and the Bipartisan Policy Center plan result in similar
outcomes for deficit, debt, spending, and revenues as a share
of the economy. Under an extension of the President's budget,
we would see considerably higher deficits and debt and a larger
disparity between spending and revenues in 2020. I look forward
to more closely examining the specific recommendations in the
Bipartisan Policy Center plan in today's hearing.
We will turn now to Senator Sessions for his opening
remarks, and then we will hear from Senator Domenici and
Director Rivlin. Again, I want to welcome you both. I am using
your old title, Dr. Rivlin, but, you know, that is a high honor
to have been Director, and I hope you will not mind.
Senator Sessions.
OPENING STATEMENT OF SENATOR SESSIONS
Senator Sessions. Thank you. Thank you, Mr. Chairman, and
you continue to lay out the challenges before us, and we
appreciate that.
Senator Domenici and Dr. Rivlin, it is a great pleasure to
have you here today before the Committee to get your insights
on the challenges confronting our Nation. The candor with which
you have addressed these challenges is refreshing.
As you know better than most, we are on an unsustainable
path. The question is not whether we are headed for a crisis
but whether we act in time to prevent it. I believe it was a
joint statement of Alan Simpson and Erskine Bowles that this is
the most predictable crisis the Nation has ever faced. And
after the disaster in Japan, I thought, well, had they known
this was going to happen, what steps would they have taken? And
I think you probably agree with the general consensus that we
are heading to a crisis, and there are some things we can do
now to make sure that we maximize our chance for prosperity
rather than austerity.
Already our crushing debt burden is being felt by millions
of Americans. It drags on our economy like an anchor, slowing
growth, investment, and----
Hon. Domenici. I have to be excused for a minute.
Chairman Conrad. No problem. You go ahead, Senator
Sessions.
Senator Sessions. We were told that a massive surge in
Federal spending would lead to recovery, but after three
straight $1 trillion-plus deficits, we have a smaller fraction
of Americans participating in the labor force today than at any
point in the last 25 years. Opening the floodgates of Federal
spending did not create a rising tide of prosperity, but it
certainly has added a great debt burden to our economy.
A much heralded study from economists Reinhart and Rogoff,
as you mentioned, Mr. Chairman, spells out the dangers
countries with debt-to-GDP ratios beyond 90 percent suffer
economically in terms of growth and in terms of shock, losing a
point or more of GDP growth each year, which is a very
significant drag on our economy. Many think that Japan's
economy, which has been stagnant, has been stagnant in large
part because of the huge debt that they are carrying. America's
debt-to-GDP has already crossed this threshold and will climb
to 100 percent by September 30th.
Secretary Geithner, our Treasury Secretary, testified
before our Committee, and he called the study of Rogoff and
Reinhart ``excellent'' and even cautioned it understates the
risk.
Given the danger, you would think that Congress would begin
to take action to confront this spending and debt danger.
Discretionary spending, however, has swelled 24 percent since
the President took office, and that does not include the
stimulus package. That is the baseline expenditure increases.
But our Democratic leaders and the President have opposed
further action that would curtail those spending levels. The
Republican proposal to cut $61 billion this year did, however,
earn more votes in the Democratic-controlled Senate than the
Democratic proposal to essentially ignore the problem with a
mere $4 billion reduction.
So we can disagree on specific cuts, but not on the need, I
think, for meaningful reduction, so I will continue to advocate
for the $60 billion reduction. I think that is a significant
reduction. Over 10 years it amounts to $860 billion in net
savings and is something not so significant that we cannot
achieve it.
Our long-term challenges remain, however, entitlement
reform. But for Congress to have any credibility on
entitlements, our first order of business, I think, must be to
deal with the Washington Government. I think we should reduce
our congressional budgets by 15 percent. I think that is well
doable. It is the kind of leadership and example setting that
we should set. These things do add up. The American people are
not prepared to have their Social Security or their Medicare
reduced as long as we are not willing to reduce any of our
spending in this city. And it is a convenient myth that
discretionary spending is insignificant, and it sort of
protects us from having to confront our own wasteful spending
and contain its growth. We can do that.
In your proposal, you recommend a $2.1 trillion
discretionary savings over 10 years, but you do not address any
reductions this year. I think we should do that again this
year. It puts us on a better path and sends the markets notice
that we are beginning to take real action, and I think the
crisis that we all see out there looming is probably closer
today than we anticipated even 6 months ago.
So I am much more optimistic about what we can achieve. I
am confident we can find significant savings now in the
discretionary budget and that doing so will reap lasting
benefits. The first of these benefits is restoring investor
confidence and helping create jobs and more investment in our
country.
Washington has promised many times to curb the deficit, but
mere promises will not be taken seriously unless they are
brought forth and paired with real, credible action. Another
crucial benefit is that any reductions we make now may have a
magnified impact over the decade, as I noted.
Perhaps the most important reason to quickly trim our
discretionary budget is the potential for a debt crisis. As I
mentioned, Mr. Bowles and Mr. Simpson talked in terms of 2
years or less that we could be facing a crisis. Alan Greenspan
used the phrase ``2 to 3 years'' we could have a crisis. The
world's leading bond investor, Pacific Investment Management
Company (PIMCO), has reduced its debt.
So we have been given a warning that the Japanese were not
given with this earthquake, and I think it is time to take
action. The time for delay is over.
So we have a critical opportunity to begin a new course,
and this Continuing Resolution (CR) that is before us now is
it. We would like to talk with both of you about the surging
entitlements that represent the largest portion of our budget
and get your insight into that. I have to tell you, I was
disappointed when OMB Director Lew and Secretary Geithner made
it pretty clear that the President does not support and in
effect, as I interpreted their testimony, would oppose Social
Security reform. So we have got to somehow work our way through
this idea that we cannot take any action on entitlements, and I
look forward to working with my colleagues to the end that will
bring our financial house in order, put us on a foundation that
will lead to prosperity and job growth.
Thank you.
Chairman Conrad. Thank you, Senator Sessions.
Now we will go to our witnesses. Senator Domenici, please
proceed. Then we will go to Dr. Rivlin.
STATEMENT OF THE HONORABLE PETE V. DOMENICI, CO-CHAIR,
BIPARTISAN POLICY CENTER'S DEBT REDUCTION TASK FORCE
Hon. Domenici. Mr. Chairman and Ranking Member Sessions,
fellow Senators that are here that are members of the
Committee, first I want to ask if my voice--is it all right?
Can you----
Chairman Conrad. Yes, we can hear you very well.
Hon. Domenici. All right. I am sorry that it has--maybe it
is just old age setting in, but something is wrong this
morning. It is not going too well.
First, I am very glad to see all of you. Those of you whom
I know, it is a pleasure to be back with you. To the new
Senators, it is truly a pleasure. We always had new Senators on
this Budget Committee, two or three most of the time, and you
would be surprised by the great commitment they had and the
kinds of success they brought to this Committee by their
efforts. And I hope you see that and have the pleasure of
taking some real steps as members of this Committee.
I am glad to be back. As you probably know, I have been
retired for just over 2 years, and strangely enough, I was
forbidden to come and lobby before you for the first 2 years.
They found that even though I would be here talking about our
country's problems, that was lobbying. So I stayed away for a
while and just handed in a few papers here and there as to what
we were doing, but I am very glad to be here now.
During the decade since the Federal Government last
balanced the budget, our country's fiscal responsibility has
taken a dramatic turn for the worse. ``Alarm bells should be
ringing very loud in Washington.'' That is a quote from fiscal
historian Niall Ferguson. I will repeat it. ``Alarm bells
should be ringing very loud in Washington.'' That is what
should be happening here.
We are testifying before the Committee today not just to
add our voices to the choir and the chorus that has been
warning you of this danger but, rather, we are here to
highlight our battle scars from budget fights of the past and
to illuminate a bipartisan path forward to address the looming
crisis facing our Nation. Countries around the world have seen
their bonds downgraded by credit rating crises. The agencies
that do this have downgraded some.
Thankfully, we have benefited from our standing as the
world's reserve currency, providing us with low interest rates
and stable credit status. Recent Treasury data seems to show,
however, that China is already slowing its acquisition of
American sovereign debt. Simply put, we do not know when our
time will come. We do not know when our time will come.
I am worried more about America's future today than at any
other time in my life. I served for 36 years, have been retired
for two. That means 38 years. And I repeat, I am more worried
about our future now than I have been at any time in my adult
life when I served here in the Senate.
The chart that you see boils it down to simple reality. If
we do not act soon, America will be on the path to ruin. They
should write the word ``ruin''--R-U-I-N--at the top of that
chart because economic catastrophe awaits us if we do not
dramatically alter the course of that line. It is a very simple
line, and, frankly, it is true. It happens. It is the path we
are on. It cannot be taken off that blackboard unless you have
a master plan for changing what causes that line to be what it
is.
Near the beginning of the next decade, American debt held
by the public will eclipse the size of our entire economy. Most
forecasters do not believe that we have anywhere near that long
before the market adjusts and demands significantly higher
interest rates for U.S. Treasuries, which at our level of
indebtedness could spark an uncontrollable downward spiral.
Fiscal crises have taken down nations in the past and will do
so in the future. The question is: Will America be the next
nation to fall victim to the fiscal follies? You have to answer
that, and I am sure that if you answer it in the affirmative,
you will consider yourself bound by some new and extraordinary
responsibility to do something for your country.
The debt is something that we do not see on a daily basis.
We do not think about it as we watch Sunday football games, as
we take our children to school. It is a silent killer, slowly
eating away at society's value, at those things which we value.
But if we continue to ignore it, then when the market
responds--and we know at some point it will--the time frame for
measured action will be past, and we will be forced into a
world of pain, and there is no doubt about it.
Unfortunately, President Obama has been largely absent from
this conversation. While his budget for next year does propose
restraint in domestic discretionary spending, he neglected to
lay out a vision for seriously dealing with our long-term debt
problem. Perhaps even more importantly, the President thus far
has failed to adequately emphasize to the American people the
scope of this massive looming problem that awaits them and
threatens to destroy much of what they hold dear.
I am here as a lifelong Republican, but a terribly
concerned American citizen is what brings me to this podium.
And I would say what I just said about our President, I would
say that if he were a Democrat--if he were a Republican, excuse
me. ``Mr. President, we need you to lead in this critical time
period.'' That is what I would say to the President. ``We need
you to say, `I'm not going to let this happen on Americans'
watch.' If and when you do, I am for standing behind you,
walking with you to solve this problem.''
The Bipartisan Policy Center Task Force that I co-chaired
with Dr. Alice Rivlin has already presented a solution to both
Democrats and Republicans, and Republicans and Democrats stand
proudly together behind this very clear, principled program.
Our task force is not liberal and not a conservative group. We
are 19 men and women, Americans. We are committed to addressing
our problem. We all agreed to sit down, discuss, negotiate, and
produce a plan.
These 19 people did hard work, committed themselves to
saving the country as they saw it, and the sum total of this
package that every single member feels they can support for the
good of our country. That is what it is.
Second, we came to the inescapable conclusion that neither
revenue increases nor spending cuts alone could extricate us
from this. But believe me, I would not be here before you today
with a package that includes new revenues if we could solve
this problem with reasonable reductions in expenditures. But I
have looked at the math and the arithmetic, and it is simply
not feasible. Others in our group would strongly have preferred
a much larger contribution from the revenue side. They
realized, however, that measured tax increases on the wealthy
Americans would barely make a dent in our problem.
Our third guiding principle was that everything must be on
the table. We need a comprehensive agreement. We witnessed in
our task force that members were reluctant to agree to policies
that they disliked unless they saw those on the other side
contributing and making sacrifices in other areas. Politically,
we all know that entitlements and revenues are hard to even
look at, but the sheer size of this debt requires that we leave
no stone unturned.
Last but not least, we saw the need for a long-term plan to
be enacted soon. Our debt has now built up overnight--excuse
me. It has not built up overnight, and it will not be fixed
overnight. But it must be fixed in a plan. It cannot be fixed
piecemeal. You can nibble away at the edges, but it cannot be
fixed piecemeal. It has to be fixed by a comprehensive plan.
And last but not least, we saw the need for this long-term
plan to be enacted soon. Our debt, was not built up overnight,
it cannot be fixed overnight. It is a long-term problem, and
the sheer magnitude requires that we resolve to enact a far-
reaching and persistent solution. Our creditors and the
American people are waiting to see a lasting change. We decided
to gradually phase in proposals because the economy is still
fragile. But we stressed the importance of enacting a plan as
soon as possible, a broad solution that would be the best
imaginable stimulus for our economy. It would spur growth and
help our economy continue to create jobs in the coming years.
I want to repeat that. A broad solution would be the best
imaginable stimulus for our economy. It would spur growth and
help our economy continue to create jobs in the coming years.
The plan we present to you today will reduce annual
deficits to manageable levels and will keep it there, stabilize
the debt below 60 percent of GDP within a decade. With medical
costs representing the heaviest driving force and forces behind
our deficit, Medicare comprising a large portion of the Federal
Government's health spending, the task force decided after much
deliberation on a premium support system. We looked at the
annual domestic and defense appropriated accounts. We must
realize that even if we were to entirely eliminate domestic
discretionary spending--let me repeat. If we were to entirely
eliminate domestic spending, that is, the appropriated
accounts, the United States would still face significant
deficits for as far as the eye can see. Cutting this section of
the budget produces some of the biggest pain for the littlest
gain, but its restraint must be part of the solution. No
question about it.
In addition, defense must no longer be sacrosanct,
particularly in light of Admiral Mullen's comments, which you
have emphasized here this morning. We can and we must find
efficiencies and savings while still maintaining our position
as the great global power.
Although Social Security will be discussed separately from
our debt problem, all our members, including Bill Novelli,
former CEO at the AARP, who served on our task force, agreed
that the program is in need of adjustments to ensure that it
remains strong for future generations. We have proposed a
package that would ensure its solvency for the next 75 years
and beyond. And if you are interested in a package that does
that without changing the age of retirement, we have one. It is
good enough to do that.
Addressing our debt problem gives our Nation a much needed
opportunity to review our arcane Tax Code and dramatically
overhaul it. That is interesting to note. With all the bad,
there is some good. If we do intend to put a package together,
the Tax Code stands out there as something to be taken on and
to be solved.
Our task force included tax experts. We were delighted to
have them. They asked us for extra time so they could produce a
plan, and they thought they could and they did. If you ever
want to see a great tax plan to get rid of the tax loopholes,
lower the threshold on income tax, have just two brackets--the
highest being 27, and lower the corporate to 27, and then
having two expenditures, one for the working poor and one for
children of poor families, you build those in. And then on top
of that you add a 6.5-percent debt reduction tax, and lo and
behold, you have a budget that will solve America's problems
without any doubt. It will reduce--when all is said and done,
we will cut $7 trillion out of our projected debt obligations
for the coming decade and have achieved an even balance between
spending cuts and revenue increases. That seems somewhat fair.
Mr. Chairman and Ranking Member and other Senators who have
been good enough to come to listen today, I am of the
impression, believe it or not, that this could be done this
year. If you and your colleagues have the will, a multi year
bipartisan budget plan can be adopted by means of the Budget
Impoundment and Enforcement Act or a massaged version of it. I
call on all of you to set partisan interests aside and put the
fiscal house of your Government in order.
Indiana Governor Mitch Daniels voiced this sentiment best
when he said--and I do not know why I chose him except I like
the way he is talking about this thing, so I chose one of the
candidates on my side of the aisle to quote. He said, and I
quote, ``I have no interest in standing in the wreckage of the
Republic and saying, 'I told you so' or 'You should have done
it my way.'' That is the end of the quotes.
I know well that compromise is not always pursued in this
body, nor need it always be. But I truly fear that if we do not
agree on a solution to this issue soon, the economic fate of
our great Republic may be sealed. We can restore America's
future, regain our prosperity, and continue to be the world's
leader of innovation and achievement only if we confront this
problem together as a Nation.
I will now turn to my extraordinary partner, Dr. Rivlin,
with whom I have been privileged to work during not only the
past year but also in previous decades on momentous budget
agreements. She will provide a more detailed explanation of
some of the components in our plan and other important matters.
[The prepared joint statement of Hon. Domenici and Hon.
Rivlin follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Conrad. Dr. Rivlin, welcome.
Hon. Domenici. Thank you, Senators.
Chairman Conrad. Thank you, Senator Domenici.
Dr. Rivlin.
STATEMENT OF THE HONORABLE ALICE RIVLIN, PH.D., CO-CHAIR,
BIPARTISAN POLICY CENTER'S DEBT REDUCTION TASK FORCE
Hon. Rivlin. Thank you, Mr. Chairman. I am delighted to be
here, and I want to commend you particularly for your
leadership on this issue over the years. The Simpson-Bowles
Commission, on which I was privileged to serve with you, would
not have happened if you and Senator Gregg had not taken the
initiative and kept pushing until it happened.
My good friend and co-chair of the Debt Reduction Task
Force, Senator Domenici, has done an excellent job of laying
out the scope of the debt crisis, as did you in your
introduction, facing America if we fail to curb the
unsustainable growth of this Nation's public debt. I agree with
everything he said, though he was a little more rough on the
President than I would be. [Laughter.]
Hon. Rivlin. The United States cannot go on borrowing at
projected rates. Future spending is driven by commitments made
to older people by both parties over the years. In the long
run, debt cannot be contained without slowing the growth of
health care spending nationally, reforming the incentives built
into Medicare and Medicaid, and putting Social Security on a
firm fiscal foundation for future retirees.
However, since retirement program reforms can only be made
slowly, we must also cap defense and non-defense discretionary
spending, restrain other mandatory programs, and restructure
the Tax Code to raise more revenue. All parts of the budget
must be part of the solution to this challenge.
Today I want to focus on the positive aspects of our
situation. The fact that the urgent necessity to reduce future
debt is also a major opportunity to make our Government operate
more fairly and effectively. For too long, we have added
spending programs, domestic and defense, that were intended to
further worthwhile objectives without examining whether the
money was effectively spent, whether program objectives
overlapped with each other, whether lower-priority spending
could be weeded out to make room for higher-priority
objectives.
The political obstacles to undoing the damage are
formidable because each spending program and each tax provision
has beneficiaries and defenders. But now we face the prospect
of debt crisis and economic disaster if we do not act, and this
prospect may provide the impetus and the political cover for
long overdue overhauls of both domestic and mandatory spending
as well as the Tax Code.
I will focus on three examples: using discretionary
spending caps to increase the effectiveness of federal
programs; reforming Medicare to slow cost growth and introduce
a controllable Medicare subsidy; and using the opportunity, as
Senator Domenici has emphasized, to reform the Tax Code to make
it simpler and more pro-growth while reducing rates to make
America more competitive.
On discretionary spending, our task force recommended zero
growth in nominal non-defense discretionary spending for 4
years--that is, a hard freeze--and growth in line with GDP
afterwards. This stringency is an opportunity to rethink
Federal activities and focus spending on the most effective and
highest-priority programs while eliminating and combining
others and making room for needed investments. Our task force
report provides an illustrative list of programs recommended
for cutting by recent administrations and others, and a recent
GAO publication details the remarkable overlap and duplication
among Federal programs with the same general objectives.
Similarly, our task force recommended freezing nominal
defense spending, excluding current war spending, which is
assumed to decline as the wars unwind, for 5 years followed by
a cap at GDP growth. We believe that the United States could
maintain an overwhelming force with capabilities sufficient for
any likely contingency within this constrained spending limit
if we were willing to make aggressive efforts to streamline the
force and emphasize efficiency.
Building on efficiencies recommended by Secretary Gates, we
suggest options for increasing effectiveness and saving money,
including a somewhat smaller active-duty force, eliminating
some major and minor hardware programs, reducing duplication in
intelligence, and imposing greater cost sharing on TRICARE.
As to Medicare reform, Medicare is still a largely fee for-
service system in which the Government is obligated to pay the
bills presented for specified services to eligible
beneficiaries. There are few incentives built into the system
for providers to deliver care efficiently or effectively, and
costs vary widely from one provider and area to another. And
the Government has no way to restrain the total costs of the
program. So there are major opportunities here.
The Affordable Care Act passed last year includes important
provisions aimed at improving health outcomes and reducing cost
growth. But the impact and timing of these efforts is still
uncertain. Therefore, our task force recommended several cost-
saving Medicare reforms in the short run, followed by a gradual
transition of Medicare to a premium support program which would
incent efficient delivery while controlling the rate of growth
of Medicare costs.
To do that, we propose that, beginning in 2018, Medicare
beneficiaries would have a choice of remaining in fee-for-
service Medicare or going to a Medicare exchange where they
could choose among alternative plans. The private health plans
would receive a lump sum payment, risk adjusted for age and
health status of the beneficiaries, and would not be able to
cherrypick among the beneficiaries. The growth in the subsidy
for both options would be limited to the growth of GDP plus 1
percent, which is lower than the rate at which Medicare has
been growing. Beneficiaries opting to remain in traditional
fee-for-service Medicare would pay higher premiums to cover the
difference.
We believe there are two reasons for shifting to the
premium support model for Medicare. One is that a total subsidy
would be controllable. That is a good reason. The other reason
is that competition on a well-managed Medicare exchange can be
expected to attract beneficiaries to health plans that organize
themselves to provide the most effective care at the lowest
price.
And, finally, fundamental tax reform, which may be the most
important. Even with aggressive spending reductions, as Senator
Domenici has emphasized, our task force concluded that
additional revenue would be needed to achieve debt
stabilization. We saw this as an opportunity to drastically
improve the Tax Code to make it far simpler and more favorable
to economic growth while preserving progressivity.
Senator Domenici has described this proposal, and I will
not go into the details here, although we could talk about it
later. But it is, I think, a really constructive tax plan which
deserves serious consideration.
And, finally, budget process reforms. Our task force plan
would put in place a series of reforms to enforce budget
savings and improve the budget process. We would specifically
bring back discretionary caps, a mechanism which worked very
well in the 1990s. The plan would bring back statutory PAYGO
without exceptions in order to prevent new tax cuts or new
entitlement spending from worsening the fiscal situation.
The plan also calls for converting the Federal budget
process from annual to biennial budgeting to provide more
certainty for Federal budget planners. And it would establish a
fiscal accountability commission that would meet every 5 years
to assess whether program growth is remaining within long-term
projections and, if not, would propose measures to restore
long-term sustainability.
I also want to underscore the conviction of the task force
that these debt reduction measures should be enacted in tandem
with targeted measures to strengthen our economic recovery. We
proposed a payroll tax holiday to emphasize that view, but in
the current context, I think it is important not to cut too
fast since the recovery is still fragile.
Our overall debt reduction plan is well balanced, as
displayed in the chart here. It draws the savings half from
spending cuts, 38 percent from cuts in tax expenditures, and
only 9 percent from net new revenues.
In closing, Mr. Chairman and Senator Sessions, I want to
underscore that the congressional budget process gives your
Committee the means at this critical moment in history to adopt
a comprehensive debt stabilization plan. If you have the
courage and the political will, the budget resolution and
budget reconciliation processes provide all the tools you need
to restore fiscal responsibility.
Thank you, Mr. Chairman, and we would be glad to answer
questions.
Chairman Conrad. Let me start where you ended because, you
know, it is true that a budget resolution can be a means for
laying out a plan. It has got, as you know, several serious
defects. Number one, we do not control policy. And so we can
lay out numbers that go as instructions to the appropriators
and to the Finance Committee, how much money to be raised, how
much money to be spent. We cannot tell them how to do it. So
that is especially difficult on the revenue side of the
equation because we can say to them, ``Raise more money,'' but
we cannot say to them, ``Reform the Tax Code in a way that
actually lowers rates.'' And so that creates a challenge.
The second problem with the budget resolution is typically
budget resolutions, as you know, are for only 5 years. The vast
majority of budget resolutions have been for 5 years. We really
need a 10-year plan. And while we are not limited to 5 years,
it has almost always been the case.
The third big problem is that the budget resolution never
goes to the President for his signature. The budget, as you
both well know, is purely a congressional document, and I
personally believe that without the President at the table, we
are not going to get a resolution to this problem. So it is an
imperfect way of taking on this problem.
I personally believe that what we need is a summit that
involves the President and the leadership of the House and the
Senate, Democrat and Republican, to come up with a plan that
will become law and will be signed by the President. Clearly,
he has got to be at the table to negotiate.
A couple of other things have been said here that I think I
need to respond to. There are some on this Committee who
believe that Troubled Asset Relief Program (TARP) and stimulus
had no value. I do not agree with that.
Hon. Domenici. That what?
Chairman Conrad. That stimulus and TARP had no value.
I do not agree with that. I believe, as Alan Blinder, the
former co-chair of the Federal Reserve, and Mark Zandi, the
head of Moody's, have concluded, that without those two we
would likely be in a depression today. I believe that. I
believe without the two, unemployment would not be 9 percent;
unemployment would be 15 percent. That is what their study
concluded. And I believe without the two, we would have 8
million more people unemployed in this country than we do
today.
TARP, of course, was begun under the previous President,
not under this President. I was in the room when his Secretary
of the Treasury, President Bush's Secretary of the Treasury,
and the Chairman of the Federal Reserve told the leadership of
Congress, Democrat and Republican, that if we did not act,
there would be a financial collapse within days. I will never
forget that as long as I live. And I believe the evidence they
provided to us was persuasive. So I believe those steps had to
be taken. Clearly, they added to debt in the short term. I have
always been a deficit hawk. I have always believed deficits
matter. And I believe it even more today.
So the problem that we confront is what do we do going
forward. All of the bipartisan commissions have concluded that
the best course is not to have sharp cuts right now, but to put
in place a plan right now that does profoundly change our
trajectory over the next 10 years. That is what the Fiscal
Commission on which I served concluded; that is the conclusion
of your commission. I think that is the right conclusion, that
it is not a matter of sharp cuts in only 12 percent of the
budget this year that are going to get us back on course. What
is required is a comprehensive plan that deals with
entitlements, that deals, yes, with domestic discretionary
spending, but also with defense spending. And I want to ask you
about that now.
In testimony before the Fiscal Commission, the testimony
was that 51 percent of all Federal employees today are at the
Department of Defense, and that does not count the contractors.
Dr. Rivlin, I do not know if you were in the room when these
defense analysts testified. But when I asked them, ``Well, how
many contractors are at the Department of Defense?'' their
testimony is, ``We cannot tell you.'' I asked them, ``Well, is
it a security matter?'' ``No, not a security matter. We really
do not know how many contractors there are.'' I said, ``Can you
give us a range?'' They said, ``One to 9 million is the
range.''
Now, I have supported my career--I have been on this
Committee 24 years. I have supported every penny requested by
every President for defense. Every penny. But after the
testimony that came before the Commission--and we also see what
the Secretary of Defense is doing now. He has talked about 50
percent of the expenditures of the Department of Defense are
overhead. Overhead costs.
You concluded, the President's Fiscal Commission concluded,
defense cannot be off the table. Could you tell us why you
concluded that?
Hon. Rivlin. Let me start with the last question. We
concluded, along with many members of our task force and
experts that we talked to (as well as the experts that we both
listened to at the Simpson-Bowles Commission) that there is a
lot of waste in the defense budget. Over the years, just like
in the domestic budget, we have accumulated a lot of programs,
a lot of weapons systems that often the Secretary of Defense
did not propose, but Congress wanted to perpetuate because they
caused a lot of jobs to be retained in the particular places.
There is a potential, as Secretary Gates has said himself, for
improving the efficiency with which the Defense Department
operates. He has proposed some of those reforms.
So we listened to all this and decided this was really
possible. We have a very large, effective defense
establishment, far greater than any other nation, and threats
change, but we believe that we can have a very effective and
strong defense if we pare back some of the waste and some of
the lower-priority spending.
Chairman Conrad. All right.
Hon. Domenici. Might I say, actually this task force
worried more about this issue than any other. We had outside
consultants come in and tell us and particularly show us how it
might be done, not that we were doing it but what the numbers
were, and our numbers were a fixed number. It is frozen to that
for the period of time prescribed, multi-year, and we asked
what would it look like in terms of manpower, the various big
ones, and obviously they said we have got to find ways to cut
personnel because personnel is a very expensive part of the
Federal defense budget. They showed us ways to save under their
proposals, and this group of very adult people, people like the
former president of Kellogg Corporation, former Secretary of
Commerce, who is not going to vote for something that is going
to destroy our defense. I was of the opinion that if we went
through all this trouble to save our country and we lost our
defense, we would be fools. So we ought to try to do both, save
our defense and save our country, and we think there is room.
These numbers will hurt for a while on defense, but if they
know, they can tell you more than anything else, if you tell
them positively what their goal is for 2 or 3 years, they are
the best at reaching it of any department in the Government. So
if you told them, here is the number and that is what the hard
freeze is, it is there for 4 years. They would just have to
live with it. I think they could.
Contrary-wise, if you cannot use them to get more savings--
here we have got to get domestic savings, but, look, we did
defense also--if we do not have that, we lose a real pitchfork
that helps us get others to go along with cuts in other parts
of the Government.
Chairman Conrad. Let me ask you this question, and then I
will turn it over to Senator Sessions. You know, we have people
who tell us, look, you should not touch revenue because this is
purely a spending problem, and I would be the first to say we
have got a spending problem because spending is, as a share of
GDP, the highest it has been in 60 years. On the other hand,
revenue is the lowest it has been in 60 years as a share of
GDP. That tells me we have got a problem on both sides of the
equation.
But what would you say to those who say, no, you cannot
touch the revenue side?
Hon. Domenici. Well, there is probably no one that went to
a task force such as this worried about the impact of trying to
achieve our goal on the future of our economy to make sure we
are not killing our vitality as we do this. And I am not
impressed with those who say they know absolutely positively
how much tax is enough for America and what is too much. You
can look at history, all right, and say, you know, it has never
been above 21 percent of GDP. But the truth of the matter is
you do not know what number is absolutely right. And we are
entering a period where we have an exceptionally large--because
of demographics--an exceptionally large group of Americans
entering the entitlement era for both Social Security and
Medicare. The graph is here now. We are getting that very big
build-up, and it appears to me, in order to take care of them
in a reasonable manner, you have got to change the program and
bring down the costs. But even then we cannot get by without
some revenue increase if we want to have less bonds being
floated out there to be purchased by other governments and
other people.
So that is where it is, and I do not remember our
percentages, but we are off the mark--if you stand firm on the
historical number of 19 to 21, we are off that by some but, I
am convinced, not enough to harm America's economy for the
future. That is how I did my thinking.
Chairman Conrad. All right. And let me ask you a final
question because some say do not touch revenue, others say,
well, do not touch entitlements. I tell you, I have heard loud
and clear from people who say do not touch entitlements. You
did. You reformed entitlements.
Hon. Domenici. You bet.
Chairman Conrad. What do you say to those who say do not
touch entitlements?
Hon. Domenici. Well, I will just give you a sentence.
She knows more about the details. I will just say you
cannot--it is impossible to take the largest portion of a
budget that is growing very, very rapidly and not address it in
some way to save revenue--to save expenditures, excuse me. How
can that be, that the largest component is left unscathed? That
is the starting point, and then you just have to look at it and
see can it be, and I think Alice says yes, it can be
restrained, and she will tell you how.
Chairman Conrad. Dr. Rivlin.
Hon. Rivlin. I think the answer to why you cannot do it
without taking entitlements on is simply, as you look ahead at
the projections, the entitlements, but particularly the medical
care entitlements, drive up spending faster than GDP can grow
and faster than revenues could possibly grow.
Hon. Domenici. Right.
Hon. Rivlin. If you do not slow the growth of entitlements,
then you have to raise taxes continuously. It is not just once.
You have to raise them continuously to keep up with the fact
that entitlement spending is on track to grow faster than the
GDP.
Now, how much can we restrain entitlements? We know that it
will be very difficult to slow the growth of Medicare enough so
that it does not drive out everything else. We must reform
Medicare to slow the growth. Like Senator Domenici, I am not
convinced that we can slow it enough to get back on a
sustainable track without more revenues. But that is the
dilemma. How much can we slow the growth of health care
entitlements and, to some extent, Social Security? Can we slow
it enough so that we can pay for it without revenue increases?
I do not think so.
Chairman Conrad. Senator Sessions.
Senator Sessions. Thank you, Mr. Chairman.
I would just say with regard to the stimulus, we have
somewhat of a disagreement. Gary Becker, a great Nobel Laureate
economist, warned that the package was not sufficiently
stimulative, it would not get the $1.5 billion kick for the $1
billion invested you would like to see. In fact, he predicted
it would be well below one, and that is what has happened. We
have got a tragedy of monumental proportions. Never has so much
been spent for so little in the history of the world, in my
opinion, and we are going to carry this $900 billion debt. At 4
percent interest, that is $36 billion a year in interest on
that for as long as we live until I am in the grave. And if the
interest goes up to 6 percent, which is the historic average--
and I am sure we are headed there--you are talking about $54
billion a year. We just did not get enough out of it, and it
was not a good idea.
Also, you know, they have accused Congress and now the
President of having deficit attention disorder, but let me ask
you all this question: The budget--representatives of Cabinet
Secretaries have been before this Committee in the last 2
weeks. Education proposes to have in the President's budget an
11-percent increase; Energy, 9.5; State Department, 10.5;
Transportation, a 62-percent increase; the lowest was Defense
at a 5-percent increase.
Do you think in this time of financial stress that next
year's budget should include, I will ask each of you, increases
that far above the inflation rate--what is inflation, 2
percent?--five-plus times the inflation rate.
Senator Domenici, should we do better?
Hon. Domenici. Absolutely. It is too much, far too much.
The point I am trying to make in my remarks, however, is if you
are going to have a fight over each one of those, it would be
far better if you had a fight with a plan that addressed all of
them and everything rather than somebody picking at one program
and saying, ``I got it. I got $10 billion more than they did.''
You have to have some leadership saying, ``We are not
interested in that kind of fight.''
Senator Sessions. You have been through those fights, and
you have got experience, and so has the Chairman.
I think you are right, Mr. Chairman. We do need to develop
a more comprehensive plan that considers all of this in total.
I have to say that.
I guess, Dr. Rivlin, you would agree this year, hopefully--
I think we will see a decline as the economy hopefully grows.
But we hit 25 percent of GDP is Federal spending equals that. I
will ask you two brief questions. Could we as a government use
the money we spend more effectively to help create growth and
jobs? And could we raise revenue that we are raising more
effectively so that we enhance the ability of growth and jobs
to be created?
Hon. Rivlin. Yes and yes. We could certainly spend more
effectively, and I have talked in my statement----
Senator Sessions. You did.
Hon. Rivlin [continuing]. About the importance of doing
that. And we could tax more effectively.
I do believe that we got something for the stimulus. Maybe
not enough. One could read Gary Becker's remarks as saying we
did not do it big enough. But we got the economy turned around
and growing again, and that was not obvious 2 years ago that
that would be achievable. It is not growing fast enough to
create enough jobs.
I also agree with the President that we need to make room
in the budget for investments in the future. One might not
agree with all of the particular ones he proposed. I am not a
huge enthusiast of doing high-speed rail right now. But the
idea that we must prune back what we have been doing in order
to make room for growth and for investments in future growth,
particularly in the skills of the labor force, it seems to me
is an important idea.
Hon. Domenici. Let me say on this, I agree but guardedly. I
am not convinced that we will make room for these expenditures.
I am fearful that we will add these things on top of other
expenditures and say we need these and will not be cutting
anything. I think you ought to cut the things that are not
investments, if you want to use that word--and it is a very
hard word to use because what is an investment to you is just a
plain expenditure to the next guy. But you certainly have to
make sure that you are making room for these innovative things
that are for the future by cutting other things. That is the
problem we always have. We cannot get the group that is
supposed to do the cutting, we cannot get them to cut things.
When you reduce, they just leave everything as is, and it all
gets reduced a little bit, and we keep the same package of
programs.
Senator Sessions. I agree. Government is not nearly as
effective as private business in making those tough choices; we
need to invest more here, we need to cut here. We tend to keep
what we have got and just spend more on the new program.
Senator Domenici, just practically, politically, you have
been in this body far longer than I and any member of this
Committee. The entitlement situation that we are confronting,
Secretary Geithner and Director Lew basically said in our
Committee that the President is not interested, he did not put
any entitlement reform in his budget. Some of our members think
it is sort of like riding down the entitlement trail through a
New Mexico gulch, and the President is sitting there with a
little ambush planned, and not only is not in favor of
entitlement reform but actually would oppose reforms that
happen.
Isn't that at least a legitimate concern that Republicans
who do favor confronting entitlements have, unless we can do so
in a bipartisan way, politically, just realpolitik?
Hon. Domenici. Well, Senator, I said in my remarks--and
thinking back on it, I fumbled it a little bit, but let me just
make it eminently clear. I think you have to proceed without
the President because the problem is so critical.
But the way to solve the problem involves the need for a
leader who is explaining the problem and leading the parade,
leading those who are trying to get there. And there can only
be one in the United States, and that is the President. And I
said it, I am sorry to say, that he is not leading. Here you
are having a meeting facing up to this issue, and you do not
know that you will have a President backing what you suggest in
a bipartisan--even if you do it bipartisan. So that is another
tough one to add to this problem that is tough without that.
So that is my feeling, and I believe the problem is so big
that you are going to have to try to solve it at the
congressional level, bipartisan, and you are going to have to
get mutuality of support without the President from each others
as Democrats and Republicans in the House and in the Senate. It
is the only way to do it. If the problem is as big as it is,
you have to do it.
Senator Sessions. Thank you, Pete, and I think both of you
share that. I see Senator Warner, he is working with Senator
Chambliss on an effort to confront these issues. I salute him
for that. Something could break there. The Chairman is willing
to discuss these issues. But the situation is more problematic,
I think, and I am not just trying to be political here. I am
just saying as a reality the President did not mention it in
his State of the Union, he did not mention it in his budget,
and it definitely puts us in a more difficult position.
Dr. Rivlin, if you wanted to----
Hon. Rivlin. Yes, I just wanted a minute for equal time
here. I agree that the President has to get into this game and
has to play a very important part in it. I think he does need
bipartisan cover. If he got out front in the State of the Union
or the budget, there was the risk that because he said it, the
Republicans would be against it.
So I have great hope for the bipartisan effort in this
body, led by Senators Warner and Chambliss and participated in
by the Chairman and others who have been leaders of bipartisan
efforts. I believe that effort can give the President the
bipartisan cover that he needs to jump into the pool, which he
absolutely has to do.
Senator Sessions. Well, sometimes Presidents have to lead
and should not always be seeking cover. But I think it is
possible. I think we are in a situation where we could make
something happen, and I hope so.
Chairman Conrad. I would just note parenthetically that on
the Fiscal Commission five of the six representatives of the
President voted for the recommendations. Five of the six
representatives of the Senate voted for the recommendations.
Five of the six representatives of the House, including all the
Republicans, voted against. So we have had one example on the
Fiscal Commission of Democrats and Republicans, five Democrats,
five Republicans, one Independent, going out and favoring a
plan. And I think the President looks at that and he says,
Gee----
Senator Sessions. Well, if he is coming, hope springs
eternal.
Chairman Conrad. Yes, we have got to do it. I agree with
Senator Domenici. This is such a threat to the country. We have
got to do it, and we have got to do it this year.
Senator Begich.
Senator Begich. Thank you very much, Mr. Chairman.
I have a few questions, but I guess I first want to ask
Senator Domenici--and thank you very much for your years of
service and all the work you have done.
Hon. Domenici. Thank you.
Senator Begich. Let me ask kind of a general question, kind
of two fronts. One, you know, we are in the midst of this 2-
week, 3-week continuing resolution.
Hon. Domenici. Yes.
Senator Begich. I call it kind of ``Groundhog Day.'' Every
couple weeks the same thing. Are we missing our opportunity--
because I am going to use your comments here, and it says,
``Contrary to recent rhetoric, policymakers cannot solve the
debt crisis simply by eliminating congressional earmarks or
foreign aid, which is part of the discretionary spending,'' so
forth, so on. Are we missing an opportunity to broaden this
discussion from just discretionary--because that is what we are
stuck in right now. You know, all we are doing is slicing away
at discretionary. But both of you in your testimony have said
you have got to do a broader picture. Do you think we are
missing an opportunity as we are sitting here right now in kind
of a tug of war?
Hon. Domenici. Well, Senator, I guess you would know, if
you served as long as I did, that you would have experienced
this same--whatever you----
Senator Begich. Groundhog Day.
Hon. Domenici. We had more than one Groundhog Day during my
time. We had to extend it 2 or 3 days just to--because there
was a real issue pending, and you were trying to get it
resolved. And when you got it resolved you were ready.
Senator Begich. Right, right.
Hon. Domenici. But that is not what is happening now, so it
is a little different Groundhog Day because it is not being
used because there is one problem to be solved and you need an
extension. There is, you know, a tsunami of a difference
between the two parties on what we ought to do. I do not think
you are missing anything because I do not think anybody--I do
not think both parties want to get the same thing done. So I do
not know what----
Senator Begich. We are too far apart.
Hon. Domenici. Too far apart. However, when it comes to the
extension of the debt, that is an opportunity to debate. It is
an opportunity to amend. It is an opportunity to offer a plan.
I do not know if people will be ready then. Clearly, one would
hope that the debt limit would be extended on the basis that it
is an American debt. It is no longer a Democrat or Republican
debt. It belongs to Americans. It has got to be solved by
Americans. I wish I were here to make the point, but I cannot
help you. That is the case. But that could be, if you had
enough time for Warner and his six people, five people, they
might put the plan on the debt limit. That has been used for
historic things. A huge procedural reform called Gramm-Rudman-
Hollings was passed on a debt limit bill.
Senator Begich. Right.
Hon. Domenici. It should not be, but that is the way it was
done. It looks to me that the Senate has the bipartisan
capacity to move ahead with a package. I do not see the same
thing in the House. But this is a strange thing, if you started
it in one and got it there, who knows what would happen if it
got over to the other House? It might be well received there,
too. That means, Senator Warner, that I am saying godspeed to
your bipartisan efforts. And I know how tough they are. You are
not missing an opportunity. There 5 an opportunity to think big
there. But the opportunities fail are there, too.
Senator Begich. Let me, if I can, I have a few more--kind
of a list of questions. In the appendix of your report, you
list--and it was just kind of an illustration, but the concept
was interesting. It was to increase fees charged by the
Commodity Futures Trading Commission as one example to kind of
pay for it. If you use it, you pay for it. Did you have a
consistent kind of philosophical debate in the task force?
Either of you could answer this. And in that question, I will
only tell you, as a former mayor, that we did a lot of that
where we said, look, if you are going to go for a zoning
change, why should the general taxpayers pay for that, that
benefits you personally or your business personally, you should
pay for it if you want it.
Did you have a general conversation--and either one of you
could answer this--in the broader sense of some of these types
of things? You know, why should I, if I do not do any trading
of commodities, pay for the fees that are charged by the
Commission to regulate that industry? A comment on that?
Hon. Rivlin. We did have a general conversation that there
was potential for raising fees in the manner you suggest. We
suggest a few other examples. One was the Pension Benefit
Guaranty Corporation (PBGC), the agency that takes care of the
private retirement plans that are in trouble, and a couple of
others.
The problem is that, unlike cities, though, the Federal
Government's budget is dominated by big spending programs, and
you do not get very far with the fees. But you have got to go
as far as you can.
Senator Begich. Let me, if I can, go to another comment,
switch topics here for a second: the tax reform that you all
laid out here, which I am a big believer in. You know, today is
Corporate Tax Day. For those who do not know that, today is
when corporations have to send in their tax forms. We had to do
a couple in our family today and make sure they were done. The
system is a nightmare. And I know Senator Wyden of this
Committee as well as some others--and I have supported it--are
trying to find a pathway. To reform to deal with the deficit
and the debt, how important is dealing with this tax reform
simultaneously to this effort? Is it as important or is it a
secondary kind of if we get to it, we get to it? Senator or
Doctor, whichever one.
Hon. Domenici. I will give you a quick answer, and Alice
can give you a more detailed one. It was important enough that
one of our chief spokesmen in favor of this program today was
not for it throughout our deliberations until we got to tax
reform, and he got to understand it as presented by two of the
members who were tax experts and presented it. He called it the
``sizzle.'' It was necessary for the package.
Senator Begich. Understood.
Hon. Domenici. And I think that is a good common word. In
answer to your question, it is the sizzle that will carry the
package in the minds of some people, especially the lowering of
the income tax rates and to get rid of the so-called--not
earmarks.
Senator Begich. Loopholes.
Hon. Domenici. Loopholes. I used the same word,
``loopholes.''
Senator Begich. Yes.
Hon. Domenici. So it is very important in our opinion to
getting a package through that you get the tax one part of it.
Senator Begich. Do you want to add to that?
Hon. Rivlin. I think it is essential that we reform the Tax
Code because, as I said earlier, even if we try very, very hard
to reform entitlements on the spending side, we are going to
need more revenue, and we cannot raise it effectively and
efficiently from this broken tax system. We need a better tax
system.
Senator Begich. And lastly, just more of a request for you,
and my time is up. But you had mentioned in your testimony--and
I am one of these that believe that we have got to deal with
the deficit, debt. Social Security is over here. That is a
different issue. That is sustainability and making sure it
lasts. There is a line, a dotted line not a solid line, but I
think--so my question--you had mentioned--you had a proposal in
here, but you also mentioned you had another idea or proposal--
I might have misheard you--that does not deal with the age
increase that you may have. I would be very interested in
seeing that. Did I mishear that? I do not want to----
Hon. Rivlin. Our proposal makes various long-term changes
in Social Security, both on the revenue side and on the benefit
side. The basic problem, as you know, has to do with people
living longer and taking their benefits over a longer period.
Senator Begich. Right. My mother would say that is good
news.
Hon. Rivlin. That is good news, but it is more expensive.
Senator Begich. Right.
Hon. Rivlin. So what do you do about it?
We looked at a couple of options. One is raising the
retirement age, and Simpson-Bowles did do that far in the
future.
Senator Begich. Right.
Hon. Rivlin. We opted for a different approach which is
equivalent. We opted for indexing the benefit to longevity,
which means that over time people get less benefits, but over
their longer period. And it is equivalent in the arithmetic,
but what it does is say for people who have very heavy,
difficult jobs, you do not have to keep working until 65 or 69
or whatever you raise it to. But if you do retire early, you
will get less. So it would, we think, encourage people to work
longer.
Senator Begich. Work longer.
Hon. Rivlin. It is a different way of solving the same
problem.
Senator Begich. Interesting. Thank you very much, Mr.
Chairman.
Chairman Conrad. Thank you, Senator.
Senator Johnson.
Senator Johnson. Thank you, Mr. Chairman.
Senator Domenici and Dr. Rivlin, I just got a promotion
here. First of all, let me say I share your concern. The fact
that this Nation is heading toward a fiscal train wreck, that
is the only reason I stepped up to the plate and ran for the
Senate. Otherwise, I would be perfectly content back in
Oshkosh, Wisconsin, running a plastics plant.
I also share your disappointment in terms of lack of
Presidential leadership here. I find it baffling. When you run
for President, you run to lead the Nation, and the fact that we
do not have that leadership is sorely disappointing.
I think the number one component to the solution here
really is economic growth, and I want to first concentrate a
little bit on that. I want to talk a little bit in terms of the
current CR.
From my standpoint, one of the ways you get economic growth
is to restore confidence. And the fact that we are still toying
around with funding this fiscal year's budget is just amazing
to me. The House has proposed a $61 billion cut to real
spending. I believe that would be a real confidence boost, and
I just kind of would like to get your comment on what is
happening currently between the House and the Senate. And would
you agree with me that if we just get a $61 billion cut passed,
that would increase confidence and let us move on and start
actually talking about the 2012 budget?
Hon. Domenici. Well, you are looking at me. You have not
said who you are sending the question to, but I will answer.
Senator Johnson. Both, I would like.
Hon. Domenici. I think you could read between the lines of
what I said in my testimony, and I believe confidence building
is an important aspect of how we get out of the turmoil of the
lack of economic growth. However, I regrettably do not think
the $60 billion has much to do with the 10-year plan that I
think we have to get done. Now, that is just my opinion. If you
can get $60 billion out of it, it is $60 billion you do not
have to get later. But in terms of confidence building, I think
it is not a winner. It is just getting out of a mess. And I
acknowledge that the way we are doing this is not very good
government, not very good business. We ought to surely be
ashamed and get out of it and get on with some better way to
solve the budget that is behind us.
People cannot understand. There is not a confidence
building because they do not know what we are talking about.
You see the news man talking about the $60 billion, people do
not know that it is not next year's budget. We have not gotten
to that yet. It is this year's budget. How do you get $60
billion out of this year's budget and call it confidence
building? It is just kind of doing something you have to do. So
I regret to tell you I do not agree. I wish I could.
Hon. Rivlin. I do not agree either. I think $61 billion is
too much to take out of a year that is half over, and that the
real confidence builder would be to get on with it, compromise
somehow. The solution has to be partisan. It has to be signed
by the President. So compromise and get past it and get on to
the real issues. The real confidence builder would be to solve
the long-run problem, putting in place a multi-year plan that
takes account of all of the parts of the budget that need to go
to getting us back on a fiscally responsible track.
Senator Johnson. Okay. In terms of your solutions, in terms
of getting economic growth, was a temporary payroll tax
holiday. My concern with any kind of temporary tax decrease
is--I think the history proves those are generally just saved,
versus a long-term solution. I would just kind of like your
comments on that.
Hon. Domenici. Well, let me say 2 months ago or 2 and \1/
2\, months ago or 3 months ago when we were discussing this,
this seemed like the best thing we could possibly advocate. I
only wish they would have done it 5 or 6 months ago, that is,
the tax holiday for payroll tax. I think that probably of all
the stimulus packages we have been thinking about, it probably
would have gotten us out of the doldrums and we would be
moving. It would add 1 or 2, maybe 2.5 percent, take that much
out of the unemployment.
I am quite sure that this is such an extraordinary
temporary tax that it would not continue on. We are suggesting
that the only reason we can do it in our package is because we
have a new tax to pay into the Social Security tax, or we could
not do it. In other words, we are certain that we are not
robbing the Social Security Trust Fund because in our new tax
we take the money out. If you cannot do that, then you should
not do this stimulus package because it should be paid for in
the next 5 or 6 years with taxes that have been imposed to pay
for it.
Hon. Rivlin. We thought it was the easiest and clearest
thing to do to get money into all working people's pockets
quickly and make sure that the recovery was sustainable.
I do not think that a full payroll tax holiday is very much
part of the conversation right now. The partial was put in the
agreement that you all passed in December. And I believe it is
helping, that people are getting a little more in their
paycheck and they are spending a little more, and that is good.
Senator Johnson. Okay. A number of times in your----
Hon. Domenici. Sir, could I interrupt?
Senator Johnson. Sure.
Hon. Domenici. I do not mean to take time away from him,
Mr. Chairman, with this comment. I really believe that what I
am doing is trying to build in you more and more each time I
talk to you the idea that Democrats and Republicans have to
decide that the next election is not as important as having an
America for the next election. And so they would agree to join
hands and solve an American debt problem and take it out from
the partisanship of the day. If Senators and Congressmen could
sign that kind of pledge, we would be on our way. If they
really did not care enough about getting elected--if they did
not care about getting re-elected and cared more about saving
the country, we would have a shot at this. We think our package
and the new tax that we added, you could ask the question,
Isn't that just an easy tax to put in there forever and even be
raised? I remind you we have not waived the filibuster rule. It
is still hard to pass a new tax in the United States Senate,
regardless of which one it is. And, therefore, we think our
holiday and our new tax adopted with the entitlement reforms
that are big would save the country, and actually with the tax
reform, it would be more progressive than the Tax Code we have
today, more progressive in terms of the rich and the poor and
who is taxed and quadrennials and all that stuff. It would be
better than what we have got today, this new one.
Senator Johnson. Mr. Chair, could I just ask one more
question?
Chairman Conrad. Sure.
Senator Johnson. Senator Domenici, you just hit on
progressivity, and I wanted to ask that question. In 2008,
according to the Tax Foundation, the top 1 percent paid 38
percent of the total income tax; the top 5 percent, almost 60
percent; the top 50 percent paid 97 percent of all income tax.
Isn't one of our problems in terms of generating revenue--and,
again, I like to generate revenue the old fashioned way--by
growing the economy. Isn't one of our problems that we have
actually narrowed the tax base? And I think one of the things
you are trying to do with the national sales tax is actually
broaden that. So I guess I am a little confused as to why a
number of times during your report you are taking credit or,
you know, enjoying the fact that you are increasing
progressivity. I do not see that as a positive.
Hon. Domenici. Alice, do you want to do that?
Hon. Rivlin. I do believe in a progressive income tax, but
I agree that we need a broad-based consumption tax as well.
That is why we put both in.
The way we reform the income tax is to broaden the base of
the income tax and lower the rates.
Hon. Domenici. Right.
Hon. Rivlin. Now, many liberals are allergic to that
because it sounds like lowering the rates is going to let rich
people off easily. But actually it does not, and that is the
reason we emphasize this. When you get rid of many of the
loopholes, the exclusions and deductions, those are taken
advantage of mainly by upper-income people. So that the way we
reform the Tax Code preserves the progressivity of the income
tax in order to offset the regressivity of the consumption tax.
And I think that is the right way to do it.
Hon. Domenici. Might I say, Senator, I told you when I
shook your hand up there that I have listened to you of late
and that I was very proud of what you had to say, and I think
do not let the cumbersome nature of this job get you down. Just
remember the big picture. That is what you were elected for.
And you have a good feel for what the big picture is, but the
institution will keep you from using it. You have got to find
ways to use it.
Excuse me for talking too much, but you cannot do anything
to me at this point. [Laughter.]
Chairman Conrad. Except bang the gavel.
Senator Whitehouse.
Senator Whitehouse. Thank you, Chairman.
Senator Domenici, it is very nice to have you back.
Hon. Domenici. Thank you.
Senator Whitehouse. I really enjoyed our time together. You
and Senator Warner were particularly kind to a new Senator of
the other party, and I have never forgotten it, and it was one
of my best early memories of the Senate.
Dr. Rivlin, thank you also for being here.
I worry that we are missing something very important on
health care, and I think when the accounting people get at it,
they get blinders on and want to see the things that they can
calculate. They want to see the things that OMB can score. And
I think that builds in a sort of professional bias that causes
people like you who are real leaders on this to understate an
opportunity that we have out there. And I just want to plead
with you to speak a little bit more about the health care
problem as you go around.
Let me just tell you, believe it or not, I actually agree
with Congressman Ryan, who said, ``If you want to be honest
with the fiscal problem and the debt, it really is a health
care problem. If you look at the future of our debt, primarily
it comes from our health care. We have to reform those if we
are going to get this debt crisis under control.''
And what I see is a health care system that is exploding in
costs and that is driving both the private and public sectors.
This is not a situation in which public health care cost is
exploding but the private sector is doing a good job at keeping
it under control. They are not. It is out of control because
the underlying system is out of control. And there are an array
of opportunities that are being pursued in different ways right
now: a better electronic health record so that there is better
information flow; improvement in quality so there are not so
many medical errors and so there are not so many, you know,
hospital-acquired infections and things like that that create
enormous cost in the system; figuring out what prevention
mechanisms actually save money so we can deploy them and get
the savings; figuring out how to improve our payment system so
that you are paying for results and not more procedures and
doctors do not get to run up their billing score by prescribing
more procedures; and, finally, getting rid of the colossal
amount of waste and overhead that is run, particularly in the
private insurance side.
You add all that up, and it is a really, really big
difference. It has been estimated by the President's Council on
Economic Advisers that it could be $700 billion a year. The New
England Health Care Institute says it is $850 billion. Bush's
Treasury Secretary O'Neill says it is $1 trillion. The Lewin
Group agrees that it is $1 trillion. Whatever it is--we do not
know--it is a really, really big number. The problem is because
it is a process of discovery and learning and invention and it
is an iterative and dynamic process that will take us into that
world, nobody can score it. I have had this discussion with the
OMB folks. I have had this discussion with the CBO folks. They
have sat where you have sat and they have said, yes, this is a
really big number, this is a really big opportunity, but
because of the nature of the beast we cannot score it. What we
can score is when you change the inputs to the existing system.
It is hard to score when you have to actually change the
system. But our system, our health care system, is crying out
for reform when at 18 percent of GDP we are getting worse
results than the vast majority of our economic competitors, and
they are spending at most 12 percent and less.
So I really urge you, even though it cannot be scored, even
though you cannot plug a number in, when you are out there
talking about this, please do not hesitate to talk about
delivery system reform. You have an important platform, and
this issue is being overlooked, and it is important. The
numbers are too big, and this is too much of a national
problem, not just a government spending problem, to get lost in
this equation.
Hon. Rivlin. I totally agree with you, and I think we are
saying that, but maybe not loud enough. And I am glad you are
saying it in the way that you are. I do think that the
Affordable Care Act has potential for tapping into some of
those savings, but also that we need to change the incentives
in Medicare. Medicare can lead, and needs to, and one way to do
that is to go to something like a premium support program. It
is not the only way, but changing current Medicare is
essential.
Hon. Domenici. Let me say, Senator, you said it all right,
I think, and I would agree with everything you said. I would
ask you, Is the fact that we are not scoring the kind of reform
you allude to causing us to do less of that reform?
Senator Whitehouse. Yes, I think the fact that it cannot be
scored takes it off the equation, really, when the people who
are not involved in health care but are involved in the budget
discussion sit down because they want to be able to say if you
do this, it saves X.
Hon. Domenici. Yes.
Senator Whitehouse. And so something that if you do it--you
do not know what it could save. It could save up to $1 trillion
a year for America's health care system. But because you cannot
put the number on it, you think, well, let us set that aside,
we will talk about other things. And as a result, I think we
are underinvesting, paying less attention. And that is a race
that we are in, and we really need to get after it. So I
appreciate that you both agree with me, and I thank you for
letting me push on that.
Let me change to a slightly different topic. In 1935, for
every dollar that an American individual contributed in
revenues to our country, an American corporation also
contributed a dollar. It was 1:1 back in 1935.
In 1948, it broke through to 2:1 so that the individual
Americans were paying twice as much to support our Government
as our corporations were.
In 1971, it broke through to 3:1, with three individual tax
dollars for every corporate tax dollar--or revenue dollar, I
should say.
In 1981, 4:1; and in 2009, it broke through to 6:1.
American individuals put in $6 of revenue to support their
country for every $1 of corporate revenue.
I guess my question is: That is a very significant shift of
tax and revenue responsibility away from our corporate
community and onto individual Americans. Is this inevitable as
we hit a globally competitive environment? Or is there a way to
make sure that our corporate community pays a share of this.
The 6:1 is pretty unfair, it seems to me, considering the size
and the role of corporations and the value that they get out of
the American economy. But are we stuck with it?
Hon. Domenici. Well, I personally do not see it to be any
significant negative about our system. That is just a question
of how you chose to levy the tax.
One way to look at it is that you have got a lot more
growth and money in the hands of individuals than you ever did
before, and so they pay a bigger share. Likewise, American
corporations no longer compete only here. They compete in the
world, and you cannot stick to some ideas that are looking at
an economy that must compete in a world, you cannot burden them
with ideas that did not even consider that. Those things were
not even in existence when they were put in.
So I think it is just an anomaly, not a fact that we should
be worried about. Our companies are not able to do what
companies have to do to grow and prosper now. I do not see--but
for some exceptional corporations with some exceptional
patents, nobody is making too much money. If anything, it is on
the individual side that too much money is being made, not on
the corporate side--or its richness.
Hon. Rivlin. I think we are stuck with it because we have
to compete in the world. But we could compete with a fairer,
simpler corporate tax. The arguments for broadening the base of
the corporate tax in order to bring the rate down are similar
to that of the individual income tax and I think very
persuasive.
Senator Whitehouse. Thank you.
Thank you, Chairman.
Chairman Conrad. Could I just wade in on two points that
you made? Because I think in terms of the big idea that you are
talking about on health care, you are exactly right. It is just
inescapable that that is the 600-pound gorilla in the room. It
is the health care accounts, not just Medicare but Medicaid.
All of the health care accounts are jumping and they are
jumping, CBO has told us, because health care expenditures are
growing societally, and we are spending far more on a GDP
basis, a share of the economy basis, than any other country.
And, frankly, we are not getting significantly better health
care outcomes than countries who are spending much less.
On the question of the tax burden, this is one thing that
helped persuade me that we need to go to more of a hybrid
system and have some consumption tax component because that is
impossible for people to evade. They cannot go offshore. They
cannot do these abusive tax shelters. If they consume, they
pay.
Senator Warner.
Senator Warner. Thank you, Mr. Chairman, and I want to
thank Dr. Rivlin and Senator Domenici for their work and your
kind comments, although I do need to make one correction. This
is actually the Conrad effort on deficit reduction that Warner
is just being a junior assister on.
But let me follow one of the things that Senator Whitehouse
just said, and I think you raise a great issue. But I think
just on the corporate rates the competition among States has
been, you know, who can cut the most in terms of attraction of
jobs. And I think we see kind of the--and I do not know where--
I would tend to agree with Dr. Rivlin. We may be kind of stuck
with it. But we are seeing the consequence of that kind of race
with what is playing out in Europe right now, where Ireland
built its economic attractiveness with one of the lowest
corporate rates around, basically 10 to 12 percent. They
attracted all this. They got overextended. They are now asking
the EU to bail them out, and there is a great tension, as I am
sure we have all followed, as the countries who are trying to
bail out Ireland are saying you have got to raise your
corporate rates back up. But huge, huge pushback, and I do
think it raises the question of how can we find some other way,
as the Chairman mentioned, to kind of get around the gaming of
the system.
I would also argue, while I think we do need rate reduction
at the corporate level and a flattening of those rates, I hear
many of my colleagues in the corporate world complain about our
35-percent rate. Any major international company that is paying
35 percent ought to fire their CFO since their effective rates
are much, much lower than that, and it is candidly small and
mid-sized businesses and retail firms that are the only ones
paying the full freight.
I have two quick questions I want to ask, and I
appreciate--I know I am the last one up, and I again thank the
Chairman for having this hearing.
One is that unlike Simpson-Bowles, you all, when you laid
out your plan, actually had less cuts in discretionary spending
than the Simpson-Bowles approach.
Hon. Domenici. Right.
Senator Warner. And it is ironic now that the whole debate
that is taking place up here in Congress is entirely focusing
not on any of the other parts of the pie but focusing on that
12 percent of domestic discretionary spending. It just seems to
me to be a zero sum game because while we can attack the
effectiveness of certain Government programs, certain of these
programs in domestic discretionary are actually where we get
leverage, where we have State share contributions, where we are
making investments to try to keep our country competitive. And
I would just like you to both make a quick comment on why less
of a meat axe to discretionary spending and more towards some
of the more mandatory programs.
Hon. Domenici. Go ahead.
Hon. Rivlin. We took what we thought was a quite aggressive
stance on discretionary spending, namely, a hard freeze of 4 or
5 years, and that gets you a lot. We did not think doing more
than that was sensible in the face of a fragile recovery. So we
did not do as deep a cut in discretionary spending. But I think
the tenor of this whole discussion is absolutely right. Let us
get off discretionary spending and get on to the things that
really matter if we are going to avoid this debt crisis, and
that is entitlements and taxes.
Hon. Domenici. Senator, I think I answered the question
heretofore, but if I did not, I will repeat it. I do not
believe the issue of saving the Republic from the debt--I do
not believe that the discretionary cuts being proposed have
much to do with that. As a matter of fact, we have less in the
appropriated reductions than the President's Commission did,
and if they chose to take more out of that, I would say that--
understand that ours was truly bipartisan. That is the best we
could get from--if you wanted all of them to do it, we had--
they were not running for office. They were bipartisan
Americans, and they had to vote for this. And so we are giving
you what push and strain of that kind of group yields, and it
does not give so much in this area because you do not--you run
into a lot of programs that cause you more problems than they
do good. And you can get to where you have to go without those,
especially if you take on the entitlements, as we did.
Senator Warner. One other thing that I wish--again, with
the benefit of not being on either commission, your commission
or the one that Senator Conrad served on, I wish both efforts,
with 20/20 hindsight, when they announced their findings had
broken their findings and did it under 2 days instead of a
single day so that you could have one day on deficit reduction
and one day on Social Security, because my understanding of
your goals--and I know Simpson-Bowles was actually to make sure
there was 75-year solvency with Social Security. And I think
there has been some confusion that the two were mixed together.
Again, that is just with Monday morning quarterbacking. I think
we need to continue to make the case, and I think both your
approach and what Simpson-Bowles did actually in terms of
having that 75-year solvency were very progressive goals in
terms of protecting that bottom quintile, plussing up folks,
plus 80, trying to raise the cap, potentially doing, you know,
some--I know you chose a different approach in terms of
longevity, but you have got to address the fact of longevity.
And some of this, again, is just math. Senator Whitehouse
pointed out the differential on corporate rates, but as we all
know, in 1960, 16 workers per one retiree, now it is down to 3.
I will close with this comment, since Senator Conrad and
I--and I know Senator Wyden has also been part of efforts
around tax reform and deficit reduction. Senator Domenici, this
is more directed towards you since you in your career had two
times that you were involved in this--once with a Republican
President back in 1990, once with a Democratic President back
in 1997. Do you have any advice for us in the trenches right
now on how we get this done?
Hon. Domenici. Oh, my. Well, no, I do not, not
specifically. But I tell you, you have to have very good people
helping you. Your staff has to be the very best caliber in this
area. You have to be searching for new ideas on how you put
this together because that is really the clue. If you took
midway between the President's group and ours and said let us
cut it in half, except on the entitlements, let us do
everything we said, and on the others let us split and let us
do it, we still would not know how to adopt it. Right? You
could sit down and have that, but what mechanism are we going
to use around here that has a chance of getting through? That
is what you have to spend your time on.
Rudman was done not by me, but by Rudman and Gramm.
They put the details together. It took them a long time,
and my staff tells me it is a very tedious thing. It is full of
details. They had a bunch of smart people putting it together.
It seems like we are knocking at that door right now and saying
how do we open the door to something like that for your group.
We said in our joint testimony, because her testimony is
mine and mine is hers, that we think you ought to use the
budget resolution. You answered, Mr. Chairman--and it answers
this question--by saying the budget resolution did not do the
job. I do not know if it does or not, but I would submit that
you ought to start--and I answer you--by taking a budget
resolution and reconciliation instructions and look at the
maximum that we have used them and see if you can find a way to
build it into a budget resolution or even a second budget
resolution later in the year--we have done two in a year--and
have it all implementation of a budget plan and maybe get
permission in the first one to get the second one done. Some
such thing.
But, look, the most important thing is that you keep your
optimism and your willingness to do this strong because this is
hard work. I mean, you have done corporate work. I have done
this work. And I do not take my hat off and say you did harder
work in the private sector than I did. I do not believe that. I
worked as hard as any human could on difficult matters for a
cheap rate. I was cheap compared to what you guys in the
private sector made. But I agreed to that, so I am not
complaining. I said okay. So did Nancy.
He knows her. With eight kids, that was not a great
decision. I was kind of a dummy. But, anyway, that is all I can
do on yours.
Senator Warner. Well, thank you.
Hon. Domenici. Get something from me that I am really with
you.
Senator Warner. Well, I appreciate it. And, you know, I
managed to eke out a living in cell phones, which ended up
being okay.
Hon. Domenici. That is all right.
Senator Warner. I would just simply say we appreciate both
your work, but we need your voices continuing to urge us, and I
want to again thank the Chairman. He has been fighting this
issue for a long, long time, and Senator Wyden has been
fighting this issue for a long time on the tax reform side, and
we are going to stay at it.
Chairman Conrad. We thank the Senator for his leadership.
He has been a terrific ally in trying to advance a more
sustainable fiscal outlook for the country.
I would say on the question of budget resolution, as
imperfect as it is--and it is imperfect, I know the Senator
would acknowledge, because we do not control the policy.
Hon. Domenici. That is true.
Chairman Conrad. It is very hard to convince people to put
more revenue in if it is not going to lower rates, I would say.
We do not control that. The second problem is the President is
no part of the budget resolution because it never goes to the
President.
But as imperfect as all that is, it may be our only shot.
Hon. Domenici. Might be.
Chairman Conrad. There are other negotiations underway that
Senator Warner is deeply involved in, as am I. Those may bear
fruit. But it may be the case that our best shot is through the
budget resolution, as imperfect as it is.
Senator Wyden.
Senator Wyden. Thank you, Mr. Chairman. I want to thank you
and Senator Warner. You all are doing a lot of heavy lifting,
and it is very appropriate that we have Dr. Rivlin and Senator
Domenici, two who continue to give this country extraordinarily
valuable service and two that I call on frequently, so I thank
you both.
I want to start with you, Dr. Rivlin, with respect to
reinventing Medicaid. You and I have talked about it, you know,
before. Social Security and Medicare get most of the discussion
with respect to the entitlements, but I have long felt that it
is urgently important to reinvent Medicaid.
And I have thought that the lodestar should be to say poor
people ought to have choices like Members of Congress. That is
essentially what I did in my legislation, the Healthy Americans
Act, with 15 United States Senators. I said I want poor people
to be able to choose from a menu of private plans and that they
ought to be able to have access to the same kinds of doctors
that Members of Congress have. I would really like to see us
have the day in this country where the poor family sits next to
a Congressperson's kid because to some extent Medicaid, if you
look at its history, has been kind of apartheid. I mean, it has
been a second tier kind of system. And I very much want to
change that, and I am going to keep at that throughout my time
in public service while I have the honor to represent Oregon in
the United States Senate.
Now, we have one opportunity to start that right now, and I
want to get your thoughts on it because I think it is very much
consistent with your thinking.
The President last week endorsed the proposal that Senator
Scott Brown and I have to speed up the chance for States to get
waivers. And in the process, he pointed out that through a
waiver a State could make it possible by way of starting to
reinvent Medicaid, a State could make it possible for the poor
in that State to start going to the exchanges and choosing from
a menu of private policies. The reason I like this is I have
always said that the marketplace changes on day one once people
can start firing an insurance company for giving lousy service.
So my thought is, just on this part of the Medicaid debate,
wouldn't it be very constructive as part of reinventing
Medicaid--just as part; not everything that needs to be done--
to start speeding up these opportunities for the poor now on
Medicaid to start going to the exchanges, where you would also
have a significant number of healthy people, as we hope down
the road--it is not going to be the case at the beginning, but
down the road be a group of healthy people, larger pools so
that the poor could have more bargaining power, more leverage
in a marketplace in the private sector, and could get more
value for the dollar. Wouldn't that be a constructive step?
Hon. Rivlin. I agree with the basic objective. I believe in
the exchanges in the Affordable Care Act. We need to get them
up and running. We do not have them yet except in
Massachusetts, so it is a work in progress. And then ultimately
we ought to transition Medicaid onto the exchanges. Maybe that
can be done by waiver, I am not sure of all the details, but
the objective I share.
Senator Wyden. Well, thank you. And the President has
already announced that that would be possible. And, in fact,
under what he approved a week ago, it would be possible for a
State with a one-stop application, one stop, to get a waiver to
design its own affordable care proposal and be able to get what
are, of course, known as the 1115 Medicare waivers. So we are
going to call on you. I know you have got a real interest in
reinventing Medicaid, and I am anxious to work with you. And to
me, this is a doable step, one we can start on now, and it is
very much consistent with where we ought to end up, which I do
not think we ought to rest until poor people in this country
have choices with respect to providers and systems much like
Members of Congress have. And you have done a lot of work in
this area.
Let me ask Senator Domenici a question about tax reform
because you and I have talked about this, and as you know,
Senator Gregg and I spent the better part of 2 years, week
after week after week coming up with a reform proposal. I
continue to talk with colleagues about it now. But Erskine
Bowles and Alan Simpson made a point last week when they were
here about an issue that I want to get your sense on it because
you have been our leader on this Committee since really I got
on it when I came to the Senate. And Erskine Bowles said that,
with respect to the deficit, you cannot just cut your way out
of it, you cannot just tax your way out of it; you also have to
grow. You have got to grow substantially. And one of the things
that attracted Senator Gregg and I to the tax reform issue is
in the 2 years after the 1986 reform bill was passed, where
Ronald Reagan and the Democrats got together, we created 6.3
million non-farm jobs. That is an amazing job production
record, 6.3 million non-farm jobs.
I want to get your thought with respect to tax reform, and
do you share this kind of principle of Alan Simpson and Erskine
Bowles that the third leg of this stool--you know, cutting, we
have got to generate some savings; and, you know, obviously
people are going to be talking about other issues. But the
third leg of the stool has got to be to grow and that growing
both from the standpoint of creating jobs to put people to work
and generating revenue has got to be part of the equation.
Hon. Domenici. No doubt about it. Our big statement that we
introduced and my statement that I read from to you both say
unequivocally that we have to broaden the base and get growth.
We have to have a growth-oriented tax structure. As much as we
can will it and see it, we ought to do it. And it also
acknowledges the other principle that we cannot grow our way
out of it singularly, that just growth will solve the problem.
But what we say is we need growth to mesh with the other things
that are going to happen so that we have jobs and prosperity.
So we not only want to do that--we not only believe that,
but we want to do that. Our proposal says let us simplify it,
make it easier. Let us broaden the base. Let us get rid of the
loopholes, which are not very efficient. Let people make more
of the decisions, and make the corporate tax more accommodating
toward growth. And then when we were short of revenue at the
end, instead of choosing something in the income tax side that
would be non growth, we chose a VAT-type sales tax added to the
end of it.
When you put it together, it turns out to be very growth
oriented, and at the same time, it turns out to be as
progressive, if not more progressive, than what we have got
today, provided you take care of the working poor in the manner
we do in our Tax Code and the children in households that are
poor.
Senator Wyden. I am going to not get into the VAT issue
this morning because, as you know, we had on the McCain vote, a
big vote in the Senate against it. And I think the point really
is you have put on the table both with respect to a balanced
program and, particularly just that last answer, you became in
my view another influential voice for saying that the
principles of 1986, where we said we are going to get rid of a
lot of these preferences, to hold down rates and keep
progressivity, are as sound today as they were in 1986. Of
course there are going to be debates. Chairman Conrad has noted
that he was interested in various approaches in the Deficit
Commission, and we had a vote on the McCain proposal here in
the Senate. But if the anchor of tax reform--and that is what
Judd Gregg and I agreed on--was going to be updating those
principles of 1986--we have had 15,000 additions to the Tax
Code. It comes to something like more than one for every
working day in the last 25 years. According to one analysis I
had, I mean, just think about what people are going through
now. It is the middle of March. How about if we give the
American people their springtime back and go with a simplified
Tax Code, as you are recommending, which, by the way--you can
never mention an intangible. I think people would feel much
more confident if they could actually get on top of being able
to fill out a tax return, which could have some benefits for
the economy as well.
So I am going to call on your two often, and I just so
appreciate the fact--and Senator Domenici touched on it in
terms of, you know, public service--that you will put in all
these long hours to get to folks in the Congress and for people
in this country thoughtful recommendations that can help drive
this debate. I thank you both.
Hon. Domenici. Thank you very much, Senator.
Chairman Conrad. I just want to thank Senator Wyden as
well. No individual has done more on health care reform and tax
reform than has Senator Wyden. Two of the most far reaching
proposals have come from him, and people that he partnered with
on the Republican side, on tax reform with Senator Gregg, who
used to be the Ranking Member here, my very close and dear
friend, and is really the model that the two of you laid out
that became the model for Simpson Bowles. We will not hang you
with the result because the result is somewhat different than
you propose, but it was really the work of the two of you that
formed the basis for what Simpson-Bowles concluded, and you
should be commended for it.
I want to thank the witnesses. We appreciate very much the
contribution you have made here, the contribution you have made
to the country over many, many years. Senator Domenici, 34
years on this Committee, 22 years as the Chairman or Ranking
Member, that I do not believe will be challenged by anybody in
history. And, Director Rivlin, to be head of OMB, head of CBO,
the deputy head of the Federal Reserve, that is a remarkable
record of public service. We deeply appreciate it, and we
appreciate the contribution you have made to the work of this
Committee.
Hon. Rivlin. Thank you, Mr. Chairman.
Hon. Domenici. Thank you, Mr. Chairman.
Chairman Conrad. The Committee will stand adjourned.
[Whereupon, at 12:05 p.m., the Committee was adjourned.]
MODERNIZING PERFORMANCE: USING THE NEW FRAMEWORK
----------
WEDNESDAY, MARCH 16, 2011
Committee on the Budget and the
Task Force on Government Performance,
U.S. Senate,
Washington, DC.
The Committee met, pursuant to notice, at 10:00 a.m., in
Room SD-608, Dirksen Senate Office Building, Hon. Mark R.
Warner, Chairman of the Task Force, and Hon. Kent Conrad,
Chairman of the Committee, presiding.
Present: Senators Warner, Conrad, Stabenow, Whitehouse,
Thune and Johnson.
Staff Present: John Righter, Amy Edwards, Mary Naylor,
Marcus Peacock, and Gregory McNeill.
OPENING STATEMENT OF CHAIRMAN WARNER
Chairman Warner. Good morning, and let me welcome you all
to a hearing on the Budget Committee's Task Force on Government
Performance. I am going to try to zip through my opening
comments because, as I have told Gene, unfortunately we have
scheduled two votes at 10:30, so we may have to adjourn for a
few minutes and then come back for our second panel.
This is the first hearing in the 112th Congress of the
bipartisan Task Force on Government Performance. I would like
to start by thanking Chairman Conrad for lending me the gavel
for this session and for his support of the Task Force. I would
also like to thank Ranking Member Sessions and Senators
Whitehouse, Cardin, Crapo, and Thune for their service as
members of the Task Force. And I know that we have joined this
morning as well by Senator Stabenow, and we do appreciate her
interest in some of our work.
We are going to be focusing on two things today: the recent
Government Accountability Office (GAO) study that Gene is going
to be talking about in a few moments, and also the Government
Performance Results Modernization Act, a new law that
significantly updates the statutory framework for Government
planning and performance reporting. I would like to call this--
I hope history will show that it is the biggest little law that
nobody has heard of in terms of its effect on a going-forward
basis, and I really want again to thank Senator Stabenow for
being here.
This law, the quick overview, really puts forward a new
approach to the critical challenges we face in the country in
terms of how we make sure that we get the most bang for the
buck from our Government. And since we are holding this hearing
in the Budget Committee hearing room and in the proud tradition
of Senator Conrad and Senator Stabenow, let no meeting get
started without a few charts and graphs. I thought it would be
appropriate just for those of you who are not here on a regular
basis to see why the challenge of getting the most
effectiveness from our tax dollars is so eminently important at
this moment.
So in the great tradition of Senator Conrad, the chart that
we have always seen, regardless of subject matter, if we cannot
get our act together, we are looking at deficits as far as the
eye can see. And those of us who have been involved and
grappling with this issue realize that, you know, $1-trillion-
a-year-plus deficits are not sustainable; $14 trillion in debt
is not sustainable. The fact that every day that we fail to act
on this issue that we add literally $4 billion a day, Senator
Stabenow, to our debt--$4 billion a day that at some point we
are going to have to pay back--means that we have to leave no
stone unturned.
So in light of the growing fiscal challenges--and that was
our current status. Revenue is at kind of an all-time low;
outlays at a total all-time high. Back in my old job as
Governor, we would call this a structural budget deficit. The
lines will never meet under our current approach, and that
again is a requirement of why we must act.
This is the challenge of this Task Force, and let me be
clear that trying to figure out how we save resources, how we
avoid duplication, is a part. It is not going to make those
lines meet in and of itself. It is not a single silver bullet.
This is going to take enormous action on a series of fronts.
But it is part of the challenge ahead of us.
So in light of the growing fiscal challenges, the Task
Force's work is to identify strategies to save taxpayer dollars
while also preserving important policy priorities. This is very
important. Our area is not so much looking at solely
elimination. It is looking at how we can maintain the key
delivery of services but perhaps through consolidation and
combination of services, something, again, that Senator
Stabenow is looking at within her Agriculture Committee.
Government duplication and reorganization is a hot topic
these days. The President has talked about it. GAO has talked
about it. And, you know, we are definitely working in Congress
to try and see if we can find some new solutions.
Senator Johnson, this is not such a hot subject matter that
you have to as a new member sit down at the kids' table. Come
on up here. [Laughter.]
Chairman Warner. I recall from my first 2 years sitting
literally in some of the rooms where they had to add an extra
table. Fortunately, from the Democratic side we have already
done some consolidation, and that kids' table has disappeared.
We get to be at the big dais. But as a former business guy like
myself, we welcome Senator Johnson. This should be a topic that
I know he will have great interest in as well.
The President recently appointed my good friend Jeff Zients
as the first Government Chief Performance Officer ever in an
administration, and he has been recently tasked with the effort
that the President outlined in his State of the Union to start
reorganization of the Federal Government. That is something
that is enormously challenging, and that will bring us to our
first witness in a few moments, but now we are going to go
ahead and go through these very quickly, and that is something
that Gene Dodaro is going to report in some detail, a recent,
very important report of the GAO that talked about the amount
of duplication that we see in the Federal Government. This is
something that we have all been familiar with. I know Senator
Stabenow has been familiar with it. I as a Governor always
looked at workforce training, but, again, a few examples: 82
programs across 10 Federal agencies that focus on teacher
quality; 56 programs across 20 agencies around financial
literacy; 80 programs across 8 agencies that support
transportation for disadvantaged persons. These are all
important policy goals. We ought to be able to do it with less
initiatives in a more consolidated effort. So that is what we
are hopefully going to hear about today.
We also want to talk, particularly as we get to the second
panel, about the Government Performance and Results Act (GPRA)
bill, and this is actions that we took, Senators Carper and
Akaka, on the Government Performance and Results Modernization
Act. Again, I hope it will be the biggest little bill that no
one has ever heard of in terms of real effect as we deal with
deficit reduction.
Again, this legislation looked at a number of goals that
have to be higher on our agenda. One of the things I think I
have already seen in my short tenure here, and I know Senator
Stabenow has talked about, and as a former business guy,
Senator Johnson is concerned about as well, when we give
agencies literally dozens and dozens of goals, they do not know
what is important. So until we can focus agencies down to a
manageable number, three to five goals, where we can then focus
our resources in a better way, we are never going to get there.
We as well need, as we look at this kind of duplication and
overlap, we need to make sure that we get out of our silos and
within a policy area, even if it comes under different
agencies, identify clear agency cross-cutting government-wide
goals.
Right now our reporting is on an annual basis. I cannot
think of a business that either one of us would run that would
only allow annual reporting if we had our shareholders and
stockholders, which are the taxpayers of America, not wanting
to hear on a more regular basis so that we as, in effect, the
board can act more quickly.
Within that, we have got to make sure that we identify
programs that actually support the goals, and then we have to
align this process with the congressional budget timetable.
Let us go ahead and go to the next set of goals, and this
is something that actually--this is the new stuff. This is the
stuff that actually I think will have enormous effect.
As we go into the deficits as far as the eye can see, as we
have to make dramatic cutbacks on spending, one of the areas--
and this is something that, quite frankly, even some in the
administration resisted, which is to say let us actually ask
agencies to identify those programs that are not working as
effectively. Rather than simply having this initiative reside
at OMB, why not ask the folks who are actually running programs
to identify their top-performing programs and their least
performing programs? This will become a very important tool,
again, as we work with GAO and we work with other efforts to
see how we can improve performance.
As well, then, everything has got to be about
accountability. We have got to hold our senior-level Government
officials accountable, and we actually through this legislation
create, in effect, a Chief Operating Officer and Chief
Performance Officer within each agency so that there is not
this kind of ``That is not my responsibility.'' Management and
accountability has not been always key priorities. We now have
a person that will be identified. This will not be requiring
new hires. It will be simply taking a member of the senior
management team and making sure that this type of reporting,
this type of identification, this type of operating oversight
will fall within somebody's specific purview so that, again, we
can hold them accountable.
This will allow us as Congress, I believe, to hold our
agencies more accountable, and so that we are not simply adding
new requirements--I mean, one of the things I recall as a
Governor is, you know, you ask more from your workforce,
particularly during tough times. But you cannot simply be
additive all the time. We have got to actually remove some
responsibilities so that we can really focus on what is
important. And we have at least started by what I think should
be the lowest hanging fruit. We are asking each agency to find
areas where we can eliminate, my hope is, up to 10 percent of
initial reporting requirements.
And then going to the next slide very quickly, this is
where we found somebody saying actually something good about
this bill, and you can read it on your own.
Now let us go ahead--and I want to thank staff who prepared
a much more in-depth opening statement that thanked many more
people than I have thanked so far this morning. Consider
yourselves all thanked, and I thank the staff.
Now let us get to the panel because as I indicated at the
outset, we have got two votes at 10:30, and I think you are
going to find both the first panel and the second panel very
interesting.
It is my pleasure to introduce our first witness on our
first panel: Gene Dodaro, the Comptroller General of the United
States at the Government Accountability Office. We are
fortunate to have Mr. Dodaro with us today to share his
recommendations on implementation of the new performance
framework, but to also share his views about how to address the
overlap and duplication from his recent report. I think many of
us have seen and heard about the GAO's recent report that
outlined with much greater specificity, I think it was over 280
different programs where we have duplication and overlap within
the Federal Government.
As Comptroller General, Mr. Dodaro oversees the development
of hundreds of reports each year that have led to billions of
dollars in taxpayer savings and improvements to a wide range of
Government programs and services. He has had a long career at
the GAO of over 30 years, holding key executive posts such as
Chief Operating Officer and heading the largest division in
accounting and information management, as we all know, the
valuable contributions that GAO makes here every day in
Congress and, in fact, a GAO fellow, Ben Licht, supported the
development of the performance legislation that we discuss
today and putting to work many of the recommendations that the
GAO has made over the years. And I want to thank Ben again for
his good work on the Performance Task Force last year. It made
me happy to have him re-detailed to us again if it would be to
your choosing.
So please join me in welcoming Mr. Dodaro. The floor is now
yours.
STATEMENT OF THE HONORABLE GENE L. DODARO, COMPTROLLER GENERAL
OF THE UNITED STATES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE
Hon. Dodaro. Thank you very much, Mr. Chairman. Good
morning to you, Senator Stabenow, Senator Johnson. I am pleased
to be here today to discuss opportunities presented through
implementation of the Government Performance and Results
Modernization Act to address issues both identified in our
overlap, duplication, and fragmentation report, but also in the
biannual report we issue listing for Congress high-risk areas
that are high risk due to fraud, waste, abuse, and
mismanagement, or in need of broad-based transformation.
There are five aspects of the Government Performance and
Results Modernization Act that I think are extremely important,
and I would like to highlight those today.
The first deals with adopting a more coordinated and
centralized approach on cross-cutting issues across Government
to achieve meaningful results. This area of emphasis is
extremely important because more and more problems require the
combined efforts and talents and expertise of multiple Federal
agencies to significantly address the problem. And it is also
important to deal with the overlap, duplication, and
fragmentation that we mention in our report.
Senator Warner, you highlighted three areas in our report
on financial literacy and the teacher quality area and
transportation for disadvantaged people. But there are other
areas in there--employment and training programs, and surface
transportation programs. We identified many areas, and these
are areas where programs have accumulated over time, some over
decades. And as a result, there is a real need to rationalize
these programs to set clear priorities. As you mentioned, what
is the Federal role? What are we trying to achieve? Greater
clarity is needed in all these areas that we have identified in
the overlap and duplication report, and the implementation of
this act could be helpful in that regard, although there are
some opportunities to act quickly. I would be happy to talk
about those in the Q&A session.
Secondly, the focus of the GPRA Modernization Act on the
management functions of Government, it highlights five for
attention: human resource, financial management, IT,
acquisition, and procurement among those. This is very
important. Many of these areas or aspects of these areas are on
our high-risk list, and achieving better results in Government
requires making additional strides in improving this management
infrastructure and attention to detail. And I am hopeful that
as OMB implements the requirements in each of these functional
areas, they also look at the need to have an integrated
approach to these management functions.
Over time, just like the Government Performance and Results
Act, there has been legislation focused on financial
management, information technology, human resources, and it has
had some salutary benefits and improvements, but we are a long
way from having the management infrastructure needed to
successfully tackle these problems and effectively implement
the GPRA Modernization Act. And there is a need for
integration. Human resources obviously is important to having
the right people in the acquisition workforce, IT, and
financial management. IT and financial management need to be
integrated effectively. So I am hopeful that there will be
plans put forward not only to improve each functional area on
its own but to have an integrated approach.
The third area is the emphasis on having better performance
information. This is critical and absolutely essential to
better inform decision-making. Senator Warner, as you point
out, in our report on overlap and duplication there are a
number of areas that we were not able to come up with precise
estimates, because the costs of these programs are not really
clear, either in implementation or administrative cost, but
also performance information is lacking, particularly in the
employment and training area and in the economic development
area. We do not really know what the outcomes of these programs
are producing and whether they are achieving meaningful
results. The same thing is true in food assistance. Eleven of
the 18 programs we looked at, we could not tell what the
effectiveness of those programs was because there was not
empirical data in that regard.
The last two areas I would mention together, and that is,
dedicated, sustained leadership--you mentioned the quarterly
reviews; this is absolutely imperative--and also engaging
Congress in an ongoing dialogue. I hope Congress is not only
reactive to outreach from the administration but proactive in
providing its views to the administration to help implement
these areas.
I would close by saying the two areas we were able to take
off the high-risk list this year were able to be taken off
because senior leadership in the administration focused on
them. There were good metrics to be used. They followed a
sustained process, and Congress held over a dozen congressional
hearings on each of the two high-risk areas. Those are the
ingredients for success along with having good data and having
a proper focus on the priorities.
I want to assure this Committee that GAO will continue to
remain focused on helping promote effective implementation of
the GPRA Modernization Act because it is absolutely essential,
and we look forward to working with the Congress and the
administration to make sure the act achieves its potential for
reduced costs and better performance for the American citizens.
So thank you very much for inviting me today, and I would
be happy to answer any questions.
[The prepared statement of Hon. Dodaro follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Warner. Well, thank you, Mr. Dodaro, and I
appreciate your testimony.
And I have to acknowledge, Senator Johnson, that I
committed a faux pas, which I was just reminded of here. Maybe
you did not realize as also a relatively new member. I was
supposed to go to you to see if you had opening comments at the
outset before I went to the witness. But in an effort to try to
make sure that--since this is a new Task Force, I have got a
whole series of questions, but I will go ahead and let you go
first, Senator Johnson, and then I will make sure that since we
have got Senator Stabenow here that she gets--we all get a bite
at the apple before the votes start. So I will defer my
questions for a few moments.
Senator Johnson. Well, thank you. Is it ``Mr. Chairman''?
Is that how I--I am really new at this, plus I did not realize
I was at the kids' table there. [Laughter.]
I thought the kids' table would be something separate.
Mr. Dodaro, thanks for coming here today. I come at this as
a new member, but also as somebody who has operated for the
last 31 years a manufacturing business. I would call it a small
to medium-sized business. And my experience in that business is
anytime I would compete against a larger company, it was
extremely easy to compete with a large company because of the
bureaucracy. A smaller company is far more lean, far more
efficient, far more effective. And I guess that is kind of how
I come at Government as well.
So I would just kind of like your comments as you are kind
of going through some of the solutions. My concern would be
additional layers of management. I have already had the
opportunity to talk to some other folks in agencies, and what
they are describing is what I see in larger corporations, too:
high levels of bureaucracy and so many different layers of
management that they simply are unable to function.
So I would just kind of like to get your comments on--you
know, we are facing a $1.65 trillion-a-year budget this year.
We are going to have to have cuts. Frequently in business, the
way you get more efficient and more effective is by coming in
and cutting budgets. So I just want to get your comments on
leaning down, downsizing agencies and having that be part of
the solution in terms of getting people effective and
efficient.
Hon. Dodaro. My views on management issues are number one,
accountability is not always fixed in individuals. I think this
legislation, the modernization legislation, and some other
initiatives recently by the administration on improper payments
is you have fixed accountability with the political leadership
of our Government and the way it is set up.
Now, there are opportunities to streamline the management
functions and the bureaucracies in the agencies, but my concern
has been, as I have seen this and been a student of Government
over several decades, that turnover among the political
leadership in the administration is a main limitation on
sustained efforts of the Federal Government to make
improvements. The average tenure of political appointees in the
executive branch is still about 2 years. So there is constant
turnover. There needs to be sustained attention over a period
of time to be able to do this. So I think the quarterly reviews
in the GPRA Modernization Act are an important tool to move
forward on this area.
There are always opportunities to streamline organizational
structures, but it has got to start with a clear purpose of
what the Federal Government wants to achieve. In a lot of these
areas, it is not really that clear where you have dozens of
programs trying to do similar things across multiple agencies.
So there needs to be leadership. There need to be
accountability. And I bet in your manufacturing operation you
had much better cost data and performance data to make informed
decisions than what is currently available in the Federal
Government right now. That needs to be fixed as well. You can
streamline all the management you want, but if you do not have
good information, whoever is left is not going to be able to
make good decisions.
Senator Johnson. That really leads to two points. To what
extent are Government agencies audited? What percent of
agencies actually go through an annual audit?
Hon. Dodaro. Yes. Right now all Federal departments and
agencies are required to have annual financial audits, but I
would make a couple points here.
Number one, the first requirements for Federal agencies to
prepare financial statements and have financial audits started
in 1996, so our government operated for many, many years
without the discipline of a financial audit, and that has
improved over time. Of the 24 largest departments and agencies,
20 were able to get a clean audit, an unqualified audit
opinion, this year but with some notable big exceptions: one,
the Department of Defense and, second, the Department of
Homeland Security.
So my main point is that the Federal Government was the
last sector of our economy to require audited financial
statements with the publicly traded companies coming during the
Depression. Even the Federal Government required State and
local governments to have financial audits in order to receive
Federal assistance in the 1970s. But it is a relatively new
development at the Federal level, and it is something where
greater progress needs to be made.
For 14 straight years, we have not been able to give an
opinion on the consolidated financial statements of the Federal
Government due to limitations at DOD and problems at Treasury
in reconciling transactions among the Federal Government.
Financial management needs to be a top priority of this
Congress and this administration to continue to make progress.
Senator Johnson. Let me just ask one more question. How
pervasive and how effective are mission statements within these
agencies really to find what the mission of a particular agency
or a sub-agency is within those?
Hon. Dodaro. Well, we have not systematically looked at
that. We have evaluated strategic plans. And I will go back. I
will provide something for the record there rather than
overgeneralize at this particular point. But what I would say
that in our recent report on overlap and duplication and
fragmentation, it is not always clear for the individual
programs what they are supposed to achieve. And I think this is
an issue that both the administration and the Congress need to
focus on when programs are created and reauthorized. It is not
always as clear as it needs to be.
Senator Johnson. Thanks.
Chairman Warner. Let me just quickly add a couple of points
before I turn to Senator Stabenow. You know, one of the purpose
of the GPRA bill was these agencies keep getting loaded up with
different priorities, oftentimes from Congress, and so if you
have got 50 priorities, you have no priorities. So part of the
goal of this legislation is to hone that down to three to five
goals so you have got a real mission statement, to look across
duplicative programs and try to have these similar goals
identified across these different programs that may be even in
different agencies even if they have got the same goal. If they
have got the same goal, you can look then in terms of how you
consolidate, point number one.
Point number two, there is going to be a chance on the kind
of middle management tier or even senior management tier with
the kind of wave of retirements we are going to have from the
baby-boom generation. We really ought to think how and maybe
put some pause on replacing some of those folks as we think
about efforts to consolidate. It is a lot easier to do that
with this wave of attrition coming than dramatic
reorganizations. And one of the questions--I am going to begin
to move to Senator Stabenow and Senator Whitehouse and reserve
my time for later--is with your study on duplication how we
could at least, as we initiate new programs, make sure that
Congress is aware with some kind of red flag before we initiate
something new. You know, it might be the greatest new food
safety program around or some member has got a great idea, but
we ought to know whether there are 13 other programs doing
exactly the same goal before we start something new. I do not
think we have that kind of in the normal process at this point.
Senator Stabenow.
Senator Stabenow. Well, thank you very much, Mr. Chairman,
and first I want to thank you for spending the time and the
focus and the leadership to bring us both not only to this
legislation but where we can go in terms of the implementation
of this, because I think this is extremely significant in the
long run for the Federal Government. We are at a time,
obviously because of the deficits, where it becomes
particularly concerning. But regardless of that, it really is a
moment in time to do a reset, I think, on the Federal
Government in terms of looking at where we are in terms of
technology, global economy, where we are going overall on being
more effective and efficient. And so I want to thank you for
that.
I have to say, though, when thinking about our capacity as
we have a board of directors of 435 people in the United States
House of Representatives and 100 Members in the United States
Senate and a White House, it is a little different challenge
than the private sector. Having been both in the public and the
private sector, it is certainly a different challenge on the
private sector side with a long-term CEO and a board setting
the agenda as opposed to our great democracy and all of our
strengths. But one of the challenges is, of course, bringing
everybody together on the same number of goals and following
through long term, which I think is a challenge.
My questions come more with my hat on now coming into this
session as the new Chair of the Agriculture, Nutrition, and
Forestry Committee, where we are going to be writing a farm
bill. I have challenged and encouraged not only members but the
agricultural community broadly, the United States Department of
Agriculture (USDA) broadly, to think in terms of principles not
programs. What do we want to achieve rather than just program
by program? And how can we do that more effectively and
efficiently given the challenge around dollars?
And I would also, just as a caveat to my colleagues, say
that the USDA and agriculture has already contributed $4
billion last year in savings to the deficit, so when we are
talking about cutting, we are already contributing to that.
But when we look overall at something which is actually
more manageable, our Committee works extremely well together.
It is not about partisanship. It is about what commodities you
grow in your State, and so we will develop a farm bill, and we
will work together.
But when we look at how we evaluate effectiveness of
programs and--for instance, one of our questions is actual
farm-based risk, what is most effective helping production
agriculture be able to have the tools they need to manage risk,
to be to have a farm safety net and so on. When we get into
that level, what would you suggest to us as we evaluate? I
mean, we can start with goals, and we will. We will be talking,
Senator Roberts and I working together very closely to focus on
what do we want to achieve. And we can look at duplication in a
broad sense in terms of numbers of programs.
Hon. Dodaro. Right.
Senator Stabenow. But what would you then suggest as we go
to the next step in terms of effectiveness of programs?
Hon. Dodaro. I would look at the clarity of the measures
and why the programs were initially created. And whether or not
some of the programs in the agriculture area that initially
started out as temporary programs have become a permanent
program. We point out one, the direct farm payments, in our
overlap, duplication, and fragmentation report. The program was
initially supposed to be terminated in 2002. It is still being
continued. There are few people who are receiving the
assistance.
And so I think looking at the original purposes of the
legislation--and this is true in places across the Government
other than agriculture----
Senator Stabenow. Sure.
Hon. Dodaro [continuing]. Where programs are put in, well
intended, intended to be temporary programs. Then they take on
a life of their own, and they are continued over time. So that
would be one area I would suggest you focus on originally, is
which of those programs were intended to be temporary and give
priority to reviewing those programs first.
Also, we have found in looking at some of the support
programs, particularly in crop insurance, that a lot of the
administrative costs have been high and excessive, and we have
made recommendations, some of which Congress has acted on and
others are still open. We would be happy to provide your
Committee with support on all of our findings in the
agriculture area which are not reflected in our current report.
Senator Stabenow. Thank you. I would like very much to
follow up with you, and I know the Committee would as well.
Thank you, Mr. Chairman.
Chairman Warner. Senator Thune.
Senator Thune. Thank you Mr. Chairman, and thank you for
being here.
I want to thank the Chairman and the Ranking Member for
holding this hearing today because I think it is an important
one to have. We have all suffered through and we have heard
from our constituents of the various troubles that
unfortunately our overly bureaucratic Government creates for
people who have to do business with it.
The GPRA Modernization Act is designed to inform us of weak
performance in these programs. It will help give us a picture
of what needs to be reformed, what needs smart investment, and
what needs to be completely cut. However, without any
congressional attention, this information will be useless.
So I propose the creation of a joint committee on deficit
reduction which will be tasked with processing information like
this and proposing cuts equal to 10 percent of the previous
year's deficit.
Now, cutting spending, obviously, is not going to solve all
of our problems, but it is unacceptable that we would waste any
money when we have got 40 cents out of every dollar that the
Federal Government spends today being borrowed. So as we make
these cuts, whether it is done by the committee that I propose
or through some other legislation, it is critical that we have
the valuable information about the effectiveness of programs
and act on that information to better manage our Government. So
I thank the Chairman and the Ranking Member and the witnesses
today for being here.
I would like to, if I could, ask a question regarding a
proposed deficit reduction committee to look at wasteful
spending on a biennial basis. The first question I have is: Do
you believe that Congress needs institutional reforms to
consider and act on performance reports like those required by
GPRA and from GAO and others? Are there things that need to be
done to make Congress more responsive to some of the
information that is produced by these various reports?
Hon. Dodaro. Well, in the past there have been various
commissions and special committees and things that have been
instituted that have proven to be effective in dealing with
some of these issues. So I think our problems right now are so
significant in terms of the unsustainable fiscal path that we
are on and the need to take action across the range of
opportunities that Congress should consider all options in
order to effectively deal with that situation, and also to
consider new rules on the budget. We have recommended that some
new rules be considered to make sure that there is discipline
in the budget process and that it gets implemented as intended
through the budget resolution process and the appropriation
bills of the various committees.
So I think there are opportunities to create new avenues,
and there are also opportunities to effectively implement what
currently exists.
Senator Thune. Okay. And just for purposes of sort of a
frame of reference, there was a committee back in the 1940s
when they were considering how to finance World War II, and
they were looking at tax increases that were suggested by a
Senator from Virginia named Harry Byrd. And Congress created
this Joint Committee on the Reduction of Non-Essential Federal
Expenditures, and that was sort of the template for what I am
proposing. That Committee was in existence for about 30 years
and did a lot of good in terms of winding down programs that
were no longer efficient and effective. And it strikes me at
least that we need something like that in Congress today that
will impose a discipline, that will put Congress in a
straitjacket, because Congress has not, in the past at least,
demonstrated the political will to make a lot of these hard
decisions.
And so this joint committee--which would be ten Democrats,
ten Republicans, ten House Members, ten Senators--would have to
produce every other year. And then, of course, I propose a
biennial budget, too, so there would be every budget cycle a
series of recommendations that would get expedited
consideration on the Senate floor and get a vote.
Hon. Dodaro. Senator, what I would say, in addition to what
I said earlier, is when these special entities would be
created, my suggestion would be to be very clear as to what the
jurisdiction is of those committees versus the existing
committees that are in place to avoid any confusion, and the
fact that the Congress would then be making an institutional
decision that would be in the framework of the current
committees going forward so that there is an ability to act on
whatever is done.
Senator Thune. Right, yes. And there would have to be--you
would have to have a way of getting expedited consideration on
the floor to ensure that there would be an up-and-down vote on
the committee's recommendations. Yes, if you get kind of bogged
down in the quagmire of all the other jurisdictions of the
committees, it would never work.
One other quick question, if I might. I see my time is
expiring. But your organization and others put out a number of
reports and findings on Government performance and results.
Could you outline a few suggestions that would make this
information not only easily accessible but more understandable
to the American people? One of the problems that I think we
have is Government is so big and to most people, I think, sort
of abstract that it is very hard for them to sometimes not only
access their Government but I think understand the language
that gets used in explaining a lot of this. And so sometimes I
do not think the American people have an appreciation for the
dimensions of the problem we face and what it is going to take
to deal with it.
So do you have any suggestions about how we could make the
information more accessible and more understandable to the
American people?
Hon. Dodaro. Definitely. I think that the provision in the
GPRA Modernization Act about publishing this information on a
website to make it available is good. We have watched and we
have observed the Recovery Act website, and the USAspending.gov
to try to put more information out in the public domain. Our
concern has been it needs to be reliable information that is
put out and complete information and understandable. So the
avenues of technology are there that can help better explain
this to the people, but there needs to be reliable information
that is posted and it needs to be complete and clear. And so we
have spent a lot of time on doing that. We try that with our
reports as well. And we are getting a lot of attention. This
overlap/duplication report we just put out on March 1st, we had
90,000 people who downloaded that report on the first week.
That is 3 times more than any other GAO report we ever put out
in history. So I think there is an appetite for that. We are
trying to do our part with our reports. The Government could do
better and make more use of available technologies to do that.
Senator Thune. Thank you. Those platforms I do think have
given people a portal to information that they never had
before. It has been very useful. I think people will have a lot
more access to it.
Thank you, Mr. Chairman.
Chairman Warner. Let me just add, I am going to go to
Senator Whitehouse. We have got about 8 minutes before the
vote. I am going to let him ask his questions, and then he will
gavel the hearing to a slight recess. I will go vote for both
and come back, and, Mr. Dodaro, I would like to still ask you a
couple questions.
As a former Governor, Senator Thune, I like the idea of a
biennial budget. I like it a lot better than our current
approach, which seems to be a biweekly budget. [Laughter.]
Chairman Warner. So, with that, Senator Whitehouse, do you
want to chair until you finish your questions, gavel into
recess? Then I will be back.
Senator Whitehouse. I will do that.
Chairman Warner. Mr. Dodaro, I really want to ask you a few
questions.
Hon. Dodaro. Okay.
Senator Whitehouse [presiding]. I have two questions, Mr.
Dodaro. Maybe we will get into others depending on how the time
goes. We had a member of the President's Cabinet come before us
a little while ago. I do not think I can be very specific
because it was in one of the classified sessions that we have.
But in the context of that meeting, the question of the amount
of reporting that the agency in question had to do came up, and
the Cabinet official indicated that they were going to take a
hard cut at all of this because, I think as those of us who
have been around even a little while have recognized, it is
very easy to pass a reporting requirement for some bureaucracy
that might even make some sense at the time, but 4 years go by,
6 years go by, 10 years go by, the issues is by the boards, and
yet somebody in that Department has to sit there and write that
darn report every year and do the research and have it sent up
here where nobody reads it and so forth. And I am wondering
what you feel about how big a burden stale and unnecessary
reporting requirements constitute for our Federal executive
branch and what means might be appropriate for stripping
through them, perhaps something like Senator Thune has
suggested, a review committee. I think we would probably have
to institutionalize it if we are going to make it a lasting
effect.
Hon. Dodaro. Yes, there are two things. One, the provisions
that are in the GPRA Modernization Act do require, I think,
after a period of time the identification of duplicative
reporting requirements and proposals to eliminate them. I think
a couple things are real important here. One----
Senator Whitehouse. I would go beyond duplicative. Some of
the information is just no longer of interest.
Hon. Dodaro. Well, that is what I was going to mention.
Number one, I think Congress has to be clear on what it needs.
Senator Whitehouse. Yes
Hon. Dodaro. I think there also has to be a look at why the
reporting requirements were put in in the first place. My
experience has been, having looked at things over several
decades now, typically it is because the executive branch was
not forthcoming or clear initially or give Congress due
information that could explain what they were trying to do. So
the reporting requirements get in place. You are exactly right.
It is a Catch-22 situation, and it goes on over a period of
time. And it in many cases may not be serving the real
purposes.
So I think clarity on the part of the Congress, candor, and
constructive and recent information from the executive branch
to the Congress could help heal a lot of these issues and be
done in a more efficient manner.
Senator Whitehouse. And would you agree that there is a
real opportunity cost to it, given fixed resources in
Government, that somebody who is busy writing an unnecessary
and a to-be-unread report could actually be addressing a matter
of real consequence for the country, but is trapped by the
legal requirement that they have to do this report?
Hon. Dodaro. Yes, I definitely think there are
opportunities there. I know in our own case we identified
mandates that the Congress had put on us that we do not think
are necessary for us to do work on anymore and write reports.
And we regularly come before the Congress and ask for those
mandates to be eliminated or to be at least reduced over time.
So I do think there are opportunities. You are on a good
topic.
Senator Whitehouse. Senator Johnson has gone off to vote,
but he comes to us from the private sector, and in the private
sector, if you run a business and you are able to achieve an
efficiency in your process or a reduced cost, the value of that
achievement goes straight to you. It goes 100 percent to you.
It goes to your bottom line. It goes to the shareholders who it
is your duty to represent. There is a very strong feedback loop
of positive reinforcement for that kind of behavior. That
positive feedback loop is less present in Government. In some
cases it is even a negative feedback loop because if you save
enough money, that just means your budget gets stripped by that
much in the next budget cycle.
I am wondering what you have seen either at the Federal or
State level by way of examples of programs or pilots that try
to create that kind of positive feedback loop for efficiencies
and savings for a Government bureaucracy so that they are
motivated to squeeze out those kinds of changes. In the past,
you know, the sort of apocryphal story is that rather than do
that, you know, the Park Service will propose to close the
Washington Monument and do the most unappealing possible thing
in order to defend its budget.
What are the mechanisms that you have seen that help turn
that dynamic more to match the private sector dynamic?
Hon. Dodaro. Well, I think, first of all, you are
completely right that the incentives are out of whack, if you
will, and there needs to be more incentives for agencies to be
able to do it. There have been some experiments in time in
Government using private sector models, like gain sharing, for
example. If there are productivity improvements, there is an
opportunity to reinvest some of it back, but----
Senator Whitehouse. If I could interrupt you, because I
have just been given the warning they are about to close the
vote.
Hon. Dodaro. Okay. will provide something for the record.
Senator Whitehouse. But if you could provide that in a
written response for the record.
Hon. Dodaro. I will.
Senator Whitehouse. And we will go into probably, let us
say, a 5- to 10-minute recess that will allow Senator Warner to
return and reconvene. So we are recessed for 5 minutes.
Hon. Dodaro. Thank you.
[Recess.]
Chairman Warner [presiding]. My apologies, but the audience
will be, I think, happy to know that in one more enormous
evidence of the bipartisan nature of the Senate, I think the
first vote was 99-1 or 98-1, and the second was going to be 99-
0, so you can see we just made major policy.
Let me come back to two questions, Mr. Dodaro, and, again,
thank you and thank you for staying around, and we will move,
after my questions, to the next panel unless--I think Chairman
Conrad may be coming as well.
The first question is: In your, I think, very good report
about duplication and when you look at also GPRA, is there a
way that we can put that early-warning signal out there as
Congress initiates new programs, new solutions, so that there
is some kind of indicator that goes on before we start this new
program, know how many that are already doing what appears to
be the same purpose or perhaps some balancing there that takes
place that does not seem to take place at this point?
Hon. Dodaro. There is definitely a need for that. I think
there has been some limitations on the ability to do that. For
example, there is really not a complete inventory of all
existing Federal programs that everybody, agrees on. So the
inventory that you would check would have to be complete and
reliable.
Number two, in a number of areas we found, there were
authorized purposes within a broader program that overlapped.
So you would have to check not only against individual programs
that would have similar goals, but against other programs whose
authorized uses might be duplicative of the creation of a new
program and need. But I definitely think it makes sense; it is
a prudent management practice that should be put in place. And
I think it could do the early warning that you suggest.
Chairman Warner. Where would that function lie? Where would
you suggest? Since certain programs may come out of one
authorizing committee. It might fall into an agency area that
actually has an overlap in another. Who should be that early-
warning system?
Hon. Dodaro. Well, I think it is logical for the Office of
Management and Budget (OMB) to play that role since they have a
large portfolio and the ability to look over and tap into the
entire executive branch function. And then there is obviously,
the Congressional Budget Office (CBO) as another function that
is part of the scoring process. And there have been people at
times who have asked that GAO play that role, but we really are
not in the business of creating the inventory in the first
place.
Chairman Warner. What about--one of the things back on your
overlap study, I recall this Committee last year tried to do an
effort to look at those programs that both the Bush
administration and the Obama administration, OMB had indicated
for program elimination. It seemed like that should be the
lowest hanging fruit. You know, unfortunately, while it got
some support, it did not come to pass, which brings us to the
point that, you know, every one of us elected officials love to
be there when we cut the ribbon to start something, no one
wants to be there necessarily when we close it down or
consolidate. Consequently, we really, if we are going to take
the good work that your organization did on overlap and
duplication, we have got to show some early wins.
You mentioned in your opening testimony that you had some
ideas about how we might proceed on some early wins.
Hon. Dodaro. Yes.
Chairman Warner. I would love you to share that with me.
Hon. Dodaro. Yes, very much so. There are a number of areas
that overlap that we have identified with areas that the
administration has made proposals on as well. For example, in
the teacher quality area, they made recommendations to
consolidate 38 programs into 11, and so I think that is an
opportunity, in the reauthorization of the education
legislation, to get that done early. In the employment and
training area, they have recommended a number of programs for
consolidation. That is another opportunity. Proposals for
surface transportation, for their reauthorization, include a
lot of consolidation of those programs, which we mentioned are
100 different programs instituted over a period of time. So I
think those are clearly there.
There is a provision that we point out about the Social
Security Administration in terms of having pension offset for
spouses of State and local employees that IRS could gather
information, and save funds through that information. The
estimates range from $2.4 billion to $2.9 billion that could be
saved over a 10-year period just by the Congress authorizing
IRS to put another line on a form that they already use. That
is easy money, and the administration is making that proposal,
and Congress would just have to act there.
In the Customs area, we found, due to temporary increase in
the fee, there is $640 million sitting at the Customs Service
in this account, and it is not clear how that money could be
used. It is there.
We mentioned the ethanol area in terms of the tax credit
overlap with the renewable fuel standard. There is an
opportunity there to take action. That tax credit last year was
estimated to cost $5.7 billion.
The military medical command is another area where I think
there are already proposals and cost estimates. Depending upon
how the military acts, you could save from $200 to over $400
million a year in that area.
I think the administration has already proposed to increase
the amount of contracts that are subject to competitive
bidding. If the Congress weighs in and emphasizes and tracks
that, that is another area. There is about 31 to 35 percent of
all contracts that have been let in recent years that have not
been competitive, and I think the Government is not getting the
full advantage of that competition.
So those would be my opening bid, Mr. Chairman.
Chairman Warner. Well, we would--let me state for at least
this member, and I am sure members on both sides of the aisle,
I look forward to working with you on seeing if we can move
those ideas into specific policy proposals that I think the
mood in the country and the mood in this Congress is to act on
those.
Let me ask one last question here. One of the things in
what we tried to do with the GPRA bill was recognize that in
these kind challenging deficit times, you have got to work
actually collaboratively with your workforce and invite their
ideas, recognize that we also need to not simply add burdens as
we add these quarterly reporting requirements, but actually see
if we can eliminate some of the burdens on the reporting, have
them get better focus in terms of priority goals.
One of the things that I can recall from my tenure as
Governor is when we looked at consolidation, there was always a
concern that all of the savings that might be accomplished
would be then taken away and then used for other programs or
other initiatives. Have you looked at all or thought at all
about the idea that some notion that if you were consolidating,
some of those savings could be reinvested back at least in the
policy goals or upgrading of technology or other tools to make
sure that you really get buy-in from the workforce on helping
you go through this process?
Hon. Dodaro. Yes, I think it is important to have the
proper incentives in place. I was talking with Senator
Whitehouse earlier when you stepped out about the incentives
not being in proper alignment to achieve those type of
objectives. I would like to go back and take a look at what we
have done. I cannot recall anything that we have done recently
on that very important point. I will provide you something for
the record. We can discuss it later. But do think it makes
sense.
Hon. Dodaro. But also we need to make sure in getting the
efficiencies that, we do not reinvest in something that is not
a higher priority. And I do think our problem is so big right
now and we are on such an unsustainable path that we have to be
prudent in making any reinvestments. And while it is an
incentive, I think it has to be balanced against the need that
we have right now to put things on a more prudent fiscal path.
Chairman Warner. I would concur with that. I do think there
may be some area, though, that--you may have a policy area
where there is a legitimate goal, and if your program is
getting folded in, at least some of those resources continue on
that policy goal even if the program is being eliminated.
Hon. Dodaro. Yes, but basically the incentives right now
are to spend the money.
Chairman Warner. Right.
Hon. Dodaro. Not to save the money.
Chairman Warner. Right.
Hon. Dodaro. And it is going to require cultural change,
and I think there has to be a resistance, to providing mixed
messages in order to change that culture.
Chairman Warner. Well, thank you. I want to again thank you
for your testimony here this morning. I want to thank you for
the good work you did on the report as well as your comments on
the GPRA bill. We look forward to working with you on moving
forward on the policy of some of the duplication elimination,
and we also look forward to continuing to work with you on the
implementation of GPRA. I think your work and the
implementation of GPRA fit very nicely together.
Senator Johnson, do you have any other questions for this
witness?
Senator Johnson. No.
Chairman Warner. We will move to the second panel.
Hon. Dodaro. Thank you very much, and we look forward to
working with you.
Chairman Warner. Yes, sir.
We will now move to our second panel, and, again, I
appreciate Senator Johnson coming back for this hearing, for
this second part of the hearing. We may have a new great
partner. This is an area where I find sometimes our colleagues
like to make high-flung statements about efficiency and
effectiveness, but very quickly their eyes glaze over as you
dig into management issues, and someone who has had the kind of
background that Senator Johnson brings, managing companies,
seeking out efficiencies, trying to make sure that an
organization is more productive, is a real asset in this body.
So I appreciate him coming back.
On the second panel, we are going to be hearing from two
good friends and two individuals who bring an enormous
expertise in this area around Government performance and
management: John Podesta and Robert Shea.
Mr. Podesta is currently president and CEO of the Center
for American Progress, which he founded in 2003. He served as
Chief of Staff to President Clinton. He co-chaired President
Obama's transition, and both John and his organization have
done an enormous amount of work in this space, and I welcome
his testimony and his appearance today.
We are also going to hear from Robert Shea, whom I have
also had the opportunity to work with and get his advice on
some of these issues through the development of GPRA. Mr. Shea
is a principal of the Global Public Sector Team at Grant
Thornton. He was previously the Associate Director for OMB
during the administration of George W. Bush. He managed OMB's
internal affairs and led President Bush's Performance
Improvement Initiative. Mr. Shea also administered the Program
Assessment Rating Tool and ExpectMore.gov and led interagency
collaborations in the area of food safety and implementation of
the Federal Funding, Accounting, and Transparency Act.
So, gentlemen, welcome, and we will start with John.
STATEMENT OF JOHN PODESTA, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, CENTER FOR AMERICAN PROGRESS
Mr. Podesta. Thank you, Mr. Chairman, and let me at the
outset thank you and Senator Johnson for digging into this, the
GPRA Modernization Act of 2010, probably not the most sexy
topic in the world, but it is really critical, I think----
Chairman Warner. I take some offense at that. [Laughter.]
Mr. Podesta. [continuing]. To increasing the productivity
of our Government and deal with the very serious challenges
that we have with respect to the deficit and the debt. Let me
begin there.
Like most of the members of this Committee, I have talked
myself blue in the face about the need to stabilize the debt in
the next few years and to begin to return to balance over the
long term. And while we may disagree to some extent about how
we went from record surpluses when I walked out of the White
House to record deficits when President Obama walked into the
White House, we certainly agree that it is time to make some
tough decisions, and those tough decisions ought to be smart
ones as well, particularly about where to cut spending so that
we continue to see the recovery strengthen in the short term
and lay the foundation for economic growth and job creation in
the long term while bringing down our long-term deficit. And
that I think is going to require smart decisions, and it is
going to require a scalpel rather than a meat axe. And that is
where performance comes in. We need to better measure return
and immediately cut programs and efforts that are ineffective,
that are redundant, that are low priority, as Mr. Dodaro
testified, and we should support efforts that are working well,
that boost American competitiveness, create jobs, and help us
reach our goals on critical priorities, particularly education,
innovation, health care, and energy transformation.
That is not just rhetoric. I think for us at the Center for
American Progress we have put forward a plan that put the
Federal budget into primary balance by 2015, making over $130
billion in spending cuts by that fiscal year. We are pleased
that President Obama is exploring and has directed the Office
of Management and Budget to work on consolidating related
Federal agencies to strengthen American competitiveness, to
increase exports, and deal with the disparate agencies dealing
with trade, something we recommended in December.
Enhancing Government effectiveness and improving
productivity is not always about cutting budgets, of course. It
is about getting better results for the public. For example, we
have recommended combining and streamlining overlapping and
duplicative programs, as the GAO also did in its recent report.
Our objective in such a strategic consolidation and time saves
money, but the point of streamlining for results, particularly
when the beneficiaries are the neediest Americans, is not only
to cut but to redirect savings to more effective uses.
I would like to just give you a couple of examples from our
work of where we think closer attention to performance and
productivity can have important results. To demonstrate how the
Government can use performance data to guide policy decisions,
we recently launched a ground-breaking website that provides
return on investment adjusted for demographics, data on
virtually every public school district in the country so you
can actually measure dollars in and performance out. We also
have targeted inefficient and ineffective tax expenditures. We
are releasing a report on it this this week identifying the
most wasteful corporate tax expenditures, what I would refer to
as ``tax earmarks'' really in the Tax Code. Boosting
productivity and cutting operational waste will yield still
more savings, particularly in areas such as information
technology, where we estimate we could save over $16 billion a
year. Improper Medicare payments and procurement, again, where
we have estimated that you could save nearly $400 billion over
10 years just by improving and using better business practices
in the way the Federal Government buys goods and services.
The GPRA Modernization Act, if implemented well, can help
on all these things--root out ineffective spending, cut
operational waste, improve results for the American people. My
written statement goes into some detail about implementing this
important law, but let me just highlight two things very
quickly.
One is if agencies do not get their goals right, nothing
else will work. You have made this point in your opening
statement, Mr. Chairman. No agency should set more than five
high-priority goals, and I would say that is probably too many
for most of the Federal agencies. One of those goals should
target operational savings and be assigned to the new Chief
Operating Officer who should have the decision making and
budget authority to achieve it. These goals should state in
clear, quantifiable terms what the agency will achieve for the
American people, how much money it will save by cutting waste
in procurement, information technology, and operations.
The new law's other important feature calls for these
cross-government goals. President Obama I think could use this
opportunity to communicate his administration's government-wide
priorities. Right now we have 128 government-wide top-level
priorities. That is way too many. He needs to get it down. I
think we have seen experiences in other countries, particularly
in the U.K., where you look at a series of clear, targeted
goals with clear direction from the top, it produced tremendous
results.
And then let me close by saying Mr. Shea and I have worked
together on this topic. This is clearly a bipartisan approach
and a bipartisan effort, and he along with my colleagues are
here, Reece Rushing and Jitinder Kohli, who direct our Doing
What Works project, I think are convinced that the Congress has
an important role in overseeing this. But the goal-setting
feature that I mentioned, particularly these high-level, cross-
cutting goals of the administration, are really critical, and I
urge the administration to move forward with that.
Thank you.
[The prepared statement of Mr. Podesta follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Warner. Thank you, Mr. Podesta.
Mr. Shea.
STATEMENT OF ROBERT SHEA, PRINCIPAL,
GRANT THORNTON, LLP
Mr. Shea. Thank you, Senator Warner, Senator Conrad,
Senator Johnson, for having us here today. I am delighted to
work with the Center for American Progress--on this topic.
[Laughter.]
I want to make sure some of my friends on the other side
are hearing that loud and clear.
I am proud to represent Grant Thornton, which is providing
expert performance management services to the public sector and
the Federal, State, and local governments. I applaud Congress
and the President for passing the Government Performance and
Results Modernization Act, which really enhances the tools we
have at our disposal to improve the Government's performance.
If we want to make genuine strides in this area of
performance improvement, Congress and the executive branch must
make use of all the performance data it is getting in its
decisionmaking. Agencies must view stakeholder consultation as
a genuine source of feedback. Perhaps most importantly,
Congress and the executive branch should appoint leaders who
understand the power of performance information and have
experience using it to transform organizations.
GPRA was a key milestone in the transition of Government
from one that measures activities or outputs to one that
measures outcomes and evaluates impact. We have come a long way
from satisfying ourselves with measuring things like number of
regulations issued or grants made, though we are not where we
should be. Despite progress, not enough of our time in
Government is focused on assessing whether goals are being
achieved and, if not, what to do about it. Congress and the
executive branch are focused more often on policy and politics
rather than on the sometimes--maybe always--tedious yet
important work of managing and monitoring program performance.
Using performance information in decisionmaking does not
come naturally to the Federal Government. As resources grow
scarcer, performance information should be used in the budget
process to ensure investments have the greatest impact. The
GPRA Modernization Act makes it clear that agencies are
responsible for using data to manage and report data in a
transparent manner for public consumption.
According to a 2007 survey by GAO, managers report that,
despite having more performance measures, the extent to which
managers use the information remains relatively unchanged after
about a decade of working on it. Having a meeting to discuss
progress is no guarantee that sufficient actions will be taken
to improve performance.
Agencies and their stakeholders, including Congress and
0MB, need a disciplined approach to ensure clear, concrete
improvement actions are identified and, further, that
individuals are held accountable for implementing them.
If Congress and the administration do not demonstrate this
commitment to understanding and using information, agencies
will continue to comply with the new requirements but miss the
constructive benefits of meaningful performance management
practices.
One of the widest gaps in the use of performance
information today is in the budget process. I cannot imagine a
better Committee than this one to take the lead on assessing
and improving the extent to which agencies, the President, and
Congress are using performance information to allocate scarce
resources. Areas where duplication exists present a great
opportunity to do this.
The executive branch shares a responsibility not only to
demand clear and useful performance information, but also to
ensure agencies are collaborating with their stakeholders and
each other to reduce redundancies, increase efficient delivery
of program outcomes, and improve their collective performance.
The President, as you know and as we have discussed, in his
State of the Union Address, mentioned the 12 different agencies
that deal with exports and the five that deal with housing
policy. As you also know, that complexity is just the tip of
the iceberg.
GAO's most recent report puts in sharp relief the magnitude
of duplication and overlap among Federal programs and agencies.
I am not optimistic that the fundamental reorganization of
Government the President eventually proposes will be
successful, but I think the GPRA Modernization Act presents a
promising framework for improving the coordination among like
programs. Provided Congress takes an active role ensuring these
provisions' implementation, these requirements can be powerful
incentives to improve coordination among duplicative programs.
A couple of other points. Although use of performance
information in day-to-day management is important, programs
sometimes require a more rigorous evaluation to ensure they are
having the intended impact. The Obama administration's
evaluation initiative promises to vastly expand the body of
evidence we have with which to judge what works and what does
not. Many programs, when subjected to rigorous evaluation
methodologies, will not live up to their promise. But without
such evidence, programs are implemented blindly without knowing
their intended impact.
Perhaps the most critical element in an organization's
success is leadership. Leaders who understand the difference
between what is urgent and what is important can keep
organizations from getting distracted and instead keep them
focused on implementing effective performance improvement
strategies.
Grant Thornton, in collaboration with the Partnership for
Public Service, is conducting a survey of performance
improvement officers. The views of these experienced leaders
will be an important input into what steps should be taken to
enhance the effectiveness of the Government's performance
management practices. The Obama administration and Congress
must ensure that those positions are filled with experienced
individuals who have managed organizations using data to drive
change and improvement.
Like the performance management initiatives before them,
the GPRA Modernization Act is an important milestone in our
never-ending quest to make Government more efficient and
effective. Assigning accountability for improved performance
and outlining transparency requirements can go a long way
toward improving program success. Without active, persistent
oversight from Congress and the executive branch, progress will
be sporadic and fleeting, if at all. And without strong and
experienced leaders, progress may really be limited, if not
impossible.
Thank you very much for inviting me today.
[The prepared statement of Mr. Shea follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Warner. Well, thank you both, gentlemen, and in
the theory of trying to be efficient I will only ask one
question because those who ask little get colleagues to come
back, and that one question would be: You both were involved in
initiatives for separate administrations. It seems to me from
the outside these are often initiatives that are announced with
great fanfare and then slowly taper off. With this new tool of
the GPRA Modernization Act, what are the two or three early
signs we should be most watchful for in terms of making sure
the administration actually implements this in a meaningful
way? And what should be the warning sign if they are not?
Either one of you.
Mr. Podesta. Well, again, I think this requires senior
management leadership, and I think that one of the most
important efforts that needs to take place is that those chief
operating officers take ownership and link budget authority to
program performance, and they take ownership of the goals of
the agency, that the number of goals be limited, and that they
be able to report back to you as to what their success is in
achieving those goals. And at the cross-cutting government-wide
level, again, I would urge the OMB team and the President to
limit the number of cross cutting goals. I mean, the President
has already thrown out a number of them, including doubling
exports in 5 years, getting back to number one in terms of
college graduation rates in this country. It should be a
limited number. They should be identifiable. Whether or not
there is one or many agencies working on them, he needs to have
people report back through OMB to him to ensure that we are on
track to achieve those.
The other one in my mind is being able to deliver results
on delivery reform under the health care law that is actually
going to do what I think the President promised, which you
worked so hard on, Mr. Chairman, to actually see delivery
reform produce identifiable results to reduce the costs of
health care and produce better results.
Mr. Shea. I think you should ask yourselves whether or not
you have got sufficient input into the way OMB and others are
going about implementing the bill to know whether or not it
meets your expectations. And I do think it will take a lot of
hard, tedious, repetitive, relentless focus to ensure that they
are getting it right--not perfect, but that they are right.
I agree with John that the question of senior leadership
focus is really important in the agencies and from OMB. Unless
somebody from the White House or senior OMB leadership is
taking this seriously and investing the time it takes to get it
right, it will not be successful. But you also need people with
experience using data to manage organizations. There is no
organization in the Government that could not stand a little
transformation. And the people who have got experience doing
that are who we need to look to lead these organizations,
which, you know, completely dwarf the complexity of the private
sector. So you ought to at least start with that kind of
capacity when you are looking to leaders to take on these
challenges.
Chairman Warner. I have got a couple more questions, but I
will hold on them and let Senator Johnson and Conrad.
Senator Johnson.
Senator Johnson. Thank you, Mr. Chairman.
Mr. Podesta and Mr. Shea, thanks for testifying here.
You started mentioning a little bit in terms of the private
sector. Isn't that to a certain extent the root cause of the
problem? Business has a profit motive for being efficient.
There is no motive in Government to be efficient. In fact, the
motive for Government is to grow. So I guess one of the points
I would make, I would just like to hear your comment on it. In
budget cutting, that does provide some motive for becoming more
efficient, and I guess I would start there, you know, actually
provide a motive by reducing people's budget to get efficient.
I would just like your comment.
Mr. Shea. Well, I mean, Government does not have the profit
motive, clearly. I would quibble with you a bit, with great
respect, that they do not have other incentives to deliver
efficiently and effectively. The public service mission is what
drives many people to serve in Government, and so long as we
can clearly articulate what outcome it is we are trying to
achieve, I think you can get an organization to be incented to
achieve that at the lowest possible cost.
Now, budget cutting, if you want to incent an agency, the
threat of a budget cut is a very powerful incentive if directed
correctly. Across-the-board cuts probably not the best way to
ensure we are investing our money for the most effective use.
But it nonetheless, can be marshaled to great effect.
Mr. Podesta. I agree with Mr. Shea in his comments, and I
think that the real question is how do you enhance the
productivity to deliver better results. And I think people in
public service are motivated to do that, to serve the mission
of their agencies. First, there needs to be clarity about what
that mission is at the agency level and the program level. And
then I think Senator Whitehouse in the earlier session with Mr.
Dodaro raised the question of whether rewards for actually
providing those efficiencies could not be built into the budget
process. I think that is something that ought to be at least
experimented with or explored.
The President in his budget has put forward some ideas
around using these so-called social impact bonds or pay-for
success bonds which have, again, been experimented with in
other jurisdictions, both here in the United States and
overseas, in which payment is based on actual performance in
the field, and if you enhance your performance, you get a
better payment. And I think those kinds of mechanisms that give
people the incentive to produce stronger results and link those
to agency performance are things that the Committee I think
could encourage and encourage the administration to do more of.
Senator Johnson. Generally, I like to seek out root causes.
Would another possible root cause be Congress and this
administration passing legislation that are thousands of pages
long and asking for additional rules to be written, legislating
through regulation? And to what extent does that make it pretty
difficult for agencies to become effective?
Mr. Podesta. Well, you know, Senator, I think that we live
in a very complex state and a complex state of regulation, and
I think that there is real value in trying to weed out
ineffective regulation, as there is value in trying to weed out
ineffective spending at a Federal governmental level.
But, you know, you can go too far. You can imagine--I think
that no one would look back at what happened in advance of the
financial crisis and say that we were overregulating. It seems
to me that the regulators took their eye off the ball. It led
to a tremendous recession in this country and pain that is
still going on in communities across the country.
So I think the same disciplines that need to be applied to
Federal spending ought to be applied in the regulatory mode,
which is to try to get more effectiveness, more productivity,
try to get the best results for the lowest cost to the private
sector.
Mr. Shea. I mean, the bottom line is yes. If you imagine
reading a law and then understanding that the bureaucracy is
going to take and interpret that law, the chances that what is
written and what comes out of the implementation process are
similar is almost by chance.
I will tout one of the products that the Center for
American Progress produced, which provides a list of questions
one should ask before creating a new program. The first thing
you need to remember is that there is no problem in America for
which we do not have a number of programs already in existence
focused on that problem. But the tool that the center developed
goes through a logical process of establishing the goals for
the program, whether or not it will duplicate existing
programs, whether the intervention identified in the new
program has evidence of effectiveness already in place so that
we have some expectation that it will produce results.
And I think it goes back to your point, Senator Warner,
about what process can we establish before creating programs to
ensure that they have a greater chance of success out of the
starting gate.
Senator Johnson. Thank you.
Mr. Shea. You are welcome.
Chairman Warner. I would, before moving to Senator Conrad,
just say I do think there is an opportunity for regulatory
reform, and we have been working on our regulatory PAYGO idea.
One of the things that has been amazing to me up here is the
number of times when you come out with a clear rule, oftentimes
industry then comes in with the idea of, well, under the guise
of innovation we need this exception or that exception to the
rule, and that is one of the things that ends up creating this
kind of bureaucratic nightmare.
Let me, before I turn over the questioning to Senator
Conrad, again publicly thank him for entrusting me with this
responsibility 2 years ago to look at this subject area. No one
in the Senate has been a clearer voice for Government
efficiency and the concerns around the deficit and the debt
than Kent Conrad, and I appreciate him giving us this chance,
and I look forward to his questions.
Chairman Conrad. Well, thank you, Senator Warner, and I
want to thank you for the leadership that you have demonstrated
and that this Subcommittee has demonstrated in exploring this
whole notion of how do we get the Government to perform better.
I think Senator Johnson asked some worthwhile questions, the
kind of questions I get when I go home and talk to people.
You know, Government is deeply challenged when it comes to
doing things in the most efficient way because the reality is
there are competing visions of what needs to be produced. And
those competing visions create conflicts, and where there is
conflict, there is additional complexity. And one of the jobs
we have--and I think increasingly it is going to fall to the
Budget Committee--is to help agencies separate the wheat from
the chaff and to cut through the haze that is out there and
determine what is the mission and how is it going to be
accomplished and by what metrics are we going to measure
whether or not the performance is what we expect.
You know, I used to be the tax commissioner of my State,
elected tax commissioner, and one year I convinced the
legislature to give me an additional $1 million to audit
companies that were doing business in the State of North
Dakota. $1 million does not sound like much money in this town,
but in North Dakota in our legislature, it was a lot of money.
And the commitment I made was that I believed I could raise $10
million with that $1 million. And I will tell you, they held me
to account. Every quarter I was called in for 2 years and had
to go through a detailed report of what I was doing with the
money and what results I was getting.
That rarely happens around here. One of the reasons it
rarely happens is the press of the business of the year that
you are in. And it is one reason I have been persuaded to now
support a biennial budgeting process so that we do budgets for
2 years--that is all we are doing, anyway. I mean, the only
time we have had a budget in an election year was the last time
I was able to get one in 2008. Other than that, we do not do
them in an election year.
So let us recognize the reality, do 2-year budgets in the
off year, spend the other year holding agencies to account.
What is it that you were given the money--and I like very much
the idea of tying budgets to performance. What is it that we
expect you to accomplish? What are the goals and what are the
metrics that we are going to apply to determine whether you are
getting results?
Now, you know, there are places where that is very
difficult to do, probably nowhere more difficult than the
Department of Defense. But I can tell you, after serving on the
President's Fiscal Commission and having the testimony that 51
percent of all Federal employees are at the Department of
Defense--and that does not count the contractors. And when I
asked them, ``How many contractors have you got?'' they said,
``We cannot tell you.'' And I thought, you know, maybe it is a
security matter. No. ``We just cannot tell you. We do not
know.'' I said, ``Well, give me a range?'' They told me 1 to 9
million. This is the testimony of the best defense analysts
that we have got 1 to 9 million contractors at the Department
of Defense, and they cannot tell you whether it is closer to 1
million or closer to 9 million.
I mean, Mr. Johnson, you are in the business world. I bet
you did not run your business and not know how many contractors
you had or what contracts you had outstanding or for what
amounts or what the purposes of those contracts were. And I do
not want to single out the Department of Defense because we
have got lots of other management areas. I go to the Department
of Education, and I am a very strong support of education. But
the duplication there is really daunting.
You know, is it possible that some of this duplication is
merited? Well, perhaps it is. But, you know, I will bet a lot
of money some of this duplication is absolutely wasted.
One of the questions I have always wanted time to explore
is we put money into a program to deliver certain results out
the other end. We spend very little time connecting the dots.
We put the money in. What comes out the other end? How much of
it actually gets out to the places where it is intended? How
much gets absorbed in the bureaucracy on the way?
One reason that I got very interested in this was during
the flood disasters in North Dakota we looked at what other
States had done, and what we found was States like to have the
money sent to them, and then they distribute it to the impacted
area. And one reason they like to do it is they take what they
call a haircut, and the haircut can be as much as 15 or 18
percent. Well, wait a minute. What sense does that make? When
we had our big disasters, we insisted the money go right to the
communities of need and not go through the State for their
haircut. And I think we saved a lot of Federal taxpayer dollars
by doing it.
Let me just go quickly to my question, and that is, what do
you see as the biggest targets of opportunity? Both of you are
deeply experienced in the Federal Government. Mr. Podesta, in
your experience what are the key targets of opportunity for
improvement in performance?
Mr. Podesta. Well, Senator, I think that you have
highlighted a couple of them. One is duplication and
elimination of duplication to try to put dollars to more
effective uses and increase the return that you get on the
investment.
I would say--and I will come back to it--I think that in
the arena of health care there is tremendous savings that still
can be done by changing delivery models, changing pricing
systems, paying for performance, if you will, and producing
better results at the end of the day by stopping hospital
readmissions, looking at the kinds of things that I think are
embedded in the new authorities that exist in the U.S.
Department of Health and Human Services (HHS).
Again, Medicare, Medicaid, that is where the money is now
in the Federal budget. That is where we are going up. So if we
cannot get higher levels of performance for the dollars being
spent there, the rest of what we are talking about is kind of
swamped. But I think there is probably no agency that cannot be
held to that discipline.
If I could, I would just put in one pitch for transparency.
I think to the extent that the model just simply is not the
Congress overseeing the Federal Government and its results that
it is producing for dollars, but the American public having the
capacity to oversee some of those results, we are going to be
better off. And I think the experiments with Recovery.gov, with
Data.gov, putting information out--I mentioned the website we
put up--in terms of return on investment for public education
dollars spent, both at the Federal and State level so that you
can go to two similar school districts in Wisconsin, one
spending $50 million more than the other and producing the same
results, and begin to ask the question, Well, why is that? And
I think empowering citizens with the tools to be their own, if
you will, GAO and Inspectors General to demand higher
performance will do what you saw in North Dakota, Senator,
which is that people will come in demanding quarterly results
or maybe annual results and higher performance out of all
levels of Government.
Mr. Shea. Senator, I agree with what John said. I am not
optimistic that you will be able to combine or reorganize the
Government to consolidate a lot of these duplicative areas. But
what you find is that often, though they have the same purpose,
they are working against each other. Food safety is a perfect
example where you have two agencies in the same plant, and when
an incident occurs, the agency that takes over depends on the
product causing the incident. They shut out the other agency so
they do not get the benefit of what that other agency is
learning to enhance food safety.
So the best opportunity, it would seem to me, is to ensure
that, though this duplication exists, these programs are
collaborating better to achieve a common outcome. And I am not
aware that is happening to a great degree in any of the areas
inventoried by GAO.
Chairman Conrad. And I would just say my vote for the
biggest target of opportunity would be Medicare. Ten percent of
beneficiaries use 50 percent of the money. Half the budget, 10
percent of the beneficiaries. And I have always been persuaded
that we ought to focus on that like a laser because what we
would find, I think, is tremendous duplication of testing,
tremendous overutilization of prescription drugs causing
adverse drug interaction as a result, causing hospitalization.
One of the biggest causes of hospitalization is adverse drug
interaction.
I think there is huge savings to be garnered there, and as
we go forward, I want to put a laser-like focus on that
statistic.
Mr. Podesta. Senator, you raised the Defense Department
also, and we have spent a lot of time and attention on the
procurement side and the system side of things that do not work
and ways to produce value for lower costs. But health care in
the DOD, as Secretary Gates testified yesterday, is an
increasing problem. It is now over 10 percent of the base
budget. It is in real--I know it is politically sensitive, but
it is in real need of reform, and we have thrown some ideas out
on how TRICARE could be reformed as well.
Mr. Shea. I am probably treading in an area you know a lot
more about than I do, but as you know, the Government makes
more than $125 billion annually in improper payments, so each
agency is working diligently to solve that problem. They all
have different methods for verifying the eligibility of their
recipients, and they all often establish their own sources of
data to verify that eligibility. We could do a better job of
creating a single or at least a set of common data elements
that agencies can use to verify eligibility, and then give them
access to sources of data that they should all have access to.
Chairman Warner. Thank you, Mr. Chairman.
I will just add one last question, and that is--and then we
will go to Senator Johnson if he has got a second round. A lot
of the things that were talked about in Medicare--and there are
good things and bad things in the Affordable Care Act. But in a
lot of these areas, we did not have the data before.
Eligibility is one area we have had some, but in terms of
health care outcomes, in terms of readmission rates, in terms
of data that exists, the marketplace has but we do not have, is
the payer, and that is one area that I think there would be
concurrence across the aisle that we need to drill down on.
I guess I would just like--staying in that back-office
operation area--to get your comment as well. The other piece of
this--and I think, John, you made a very good point. You know,
we have got to limit every agency down to--and maybe five is
even too many. We tried to put three to five goals, but key
goals, and one of those goals needs to be the operational
piece--your procurement, your HR, your technology. I think as
well we are going to have an opportunity with the retirement of
the baby-boom generation to rethink and perhaps collapse some
of these layers of management.
I would like to get from both of you any comments on how we
can do a better job of squeezing more productivity out of the
operational end. Let me just caveat on the front end, and then
I will listen to--this is easier said than done. We did it in
Virginia in terms of procurement and made great progress. We
did it in technology. It made a logical process, but, boy, oh,
boy, the implementation was a rough road. So if you have got
some guidance on the back office pieces, I would love to hear
it.
Mr. Podesta. Well, I would say, you know, again, we have
identified a couple places. One is in the procurement of goods
and services and, you know, we will provide the Committee with
our ideas on how one can consolidate that, use better business
practices, and save a good deal of money there.
The other one that I think we focused on is information
technology, and there is tremendous savings, I think, across
the platform of the Federal Government to go to cloud
computing, to be more effective in implementing systems. This
administration spent a good deal of attention on trying to look
at systems that were over budget and over time and tried to
eliminate those. Some of these procurement projects get
completely out of control. They are never cut off. The VA is
probably a pretty good example of a place that has kind of
gotten its act together on this.
But if you move towards--and I understand the needs for
data security, et cetera. If you move to a cloud computing
platform across the Government, you know, again, we estimated
you could save up to $16 billion a year just in the IT side of
the budget. And, you know, that is real money when you are
talking about the difference between--in this fiscal year
where, you know, Democrats and Republicans are in trying to
close that budget gap, $16 billion is a lot of money.
Mr. Shea. In each of these areas, procurement, human
capital, IT, financial management, we have got a body of laws
and regulations that have been established over time. Our firm
offers process improvement services, and if we did a process
improvement engagement, we would have to conclude that somebody
on crack designed the Government's management processes. So I
think it could stand a real fresh look at whether or not all of
these laws and regulations are absolutely necessary to do what
needs to be done and protect the taxpayer. I understand that a
lot of these have been established to ensure wrongdoing of the
past does not recur. But I do think each of these areas could
use a real spring cleaning.
Chairman Warner. Well, at least we now have the headline
for the hearing: ``Shea Calls Government on Crack.''
I would also add one other thing on the IT side as somebody
who has wrestled through this and had a background there. It is
easier to get Democrats and Republicans to agree than it is to
get IT guys to agree on a common platform.
Senator Johnson.
Senator Johnson. Just one final comment, and honestly, I
was going to also talk about the operational savings aspect in
terms of a goal. But I guess I would argue that rather than
just have that as a mission statement goal, the way you
actually squeeze operational savings out is you put budgetary
pressure on an agency. And, you know, cuts is certainly one way
of doing that. The way you budget also can help out. And I
guess I would like just a quick comment on zero-based budgeting
versus our what I think is a pretty wacky way of baseline
budgeting.
Mr. Shea. I think the principles of zero-based budgeting
ought to be brought to bear on the Federal Government; that is,
let us ensure that we have adequate justification for every
dollar we are spending. You know, I think the review is that
the GPRA Modernization Act provide a good basis for making that
judgment. How well are our programs working? And what can we
eliminate? What is worthy of additional investment? So, I mean,
I think that is an excellent base from which to start having
the conversation.
Mr. Podesta. I agree with that, Senator, and I would just
note that what we have now really is a budget process and a
performance process, and they have to be linked. No business
would budget without regard to what the outcomes and the
performance of that budget was likely to produce. No think tank
would do it. No consulting firm would do it. It just would not
happen. And yet that is essentially what we have. We have
budget decisions being made that are highly disconnected from
the performance that is the result of the GPRA Modernization
project, and I think that one of the key goals of the Chief
Operations Officer in these agencies, the Deputy Secretaries in
these agencies, is to link those efforts so that budget follows
performance and that people are rewarded for producing better
results.
Senator Johnson. I just want to say thank you, Mr. Podesta
and Mr. Shea and Mr. Chairman.
Chairman Warner. Thank you, Senator Johnson, and I really
appreciate your participation and active participation. I think
we have got another member of the management caucus here, and
let me thank you both. And let me just again close with where
we started.
I think this GPRA Modernization Act may be the smallest
little bill that nobody has heard of that could actually have
long-lasting effects as we grapple with the enormous challenges
around the deficit and will give us some of these tools. And I
would simply invite both of our witnesses today to stay on us
to make sure that this bill gets appropriately implemented and
that we from our oversight responsibility make sure that we
keep the administration's feet to the fire. They have talked
about a lot of good things. I think they have started some good
initiatives. But we have got to make sure they follow them
through.
With that, if there are no further questions, the hearing
will be closed.
[Whereupon, at 12:02 p.m., the Committee was adjourned.]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
POLICY PRESCRIPTIONS FOR THE ECONOMY
----------
THURSDAY, SEPTEMBER 15, 2011
Committee on the Budget,
U.S. Senate,
Washington, DC.
The Committee met, pursuant to notice, at 9:30 a.m., in
Room SD-608, Dirksen Senate Office Building, Hon. Kent Conrad,
Chairman of the Committee, presiding.
Present: Senators Conrad, Wyden, Nelson, Whitehouse,
Warner, Merkley, Begich, Coons, Sessions, Johnson, and Ayotte.
Staff Present: Mary Ann Naylor, Majority Staff Director;
and Marcus Peacock, Minority Staff Director.
OPENING STATEMENT OF CHAIRMAN CONRAD
Chairman Conrad. The hearing will come to order. I want to
welcome the witnesses today before the Senate Budget Committee.
This is really an outstanding group of economists, all of them
with high credibility and all of them people who have testified
before this Committee on many occasions, and we very much
appreciate your willingness to come back at this important
moment.
Today we will focus on the economy and additional steps
that could be taken to strengthen our economy. We are fortunate
to have three outstanding witnesses:
Dr. Mark Zandi, chief economist at Moody's Analytics. Dr.
Zandi has been very helpful to this Committee and has testified
here several times, as I mentioned before. We are grateful that
he could be here again today.
Dr. Chad Stone, chief economist at the Center on Budget and
Policy Priorities. Dr. Stone was the chief economist here at
the Budget Committee in 2001 and 2002. We are delighted to have
him back.
Dr. Kevin Hassett, the senior fellow and director of the
American Enterprise Institute for Public Policy Research. Dr.
Hassett last appeared before our Committee as a witness in
2006, and we are very pleased to have him back as well.
I want to begin by providing an overview of our economic
situation, at least from my perspective. It is important to
remember just a few years ago we were in the midst of a
financial crisis and severe recession, the worst recession
since the Great Depression. The Federal response to that crisis
I believe helped us pull back from the brink and helped put us
on the road to recovery. But that recovery has now slowed and
may be faltering, and we face a very real threat of slipping
back into recession. That is the fundamental reason for this
hearing. I believe it is imperative that we look at all of our
options going forward.
Let me just review what has happened to economic growth. In
the fourth quarter of 2008, the economy contracted at a rate of
8.9 percent. Positive economic growth returned in the third
quarter of 2009, and we now have had eight consecutive quarters
of growth, but growth has clearly slowed this year to only
four-tenths of 1 percent in the first quarter and 1 percent in
the second quarter.
Private sector job growth has followed a similar pattern.
In January of 2009, the economy was losing more than 800,000
private sector jobs a month. Private sector job growth returned
in March of 2010, and we have now had 18 consecutive months of
growth. However, in August we gained only 17,000 private sector
jobs, which is clearly far below what is needed. We have to do
better. And the unemployment rate remains stubbornly high. As
of August, the unemployment rate was 9.1 percent.
We know that some of the drag holding back recovery is
caused by the nature of the recession that preceded it.
Economists have found that, following recessions that were
caused by or accompanied by a severe financial crisis,
recoveries tend to be shallower and take much longer to recover
from.
Here is what two leading economists, Dr. Carmen Reinhart
and Dr. Vincent Reinhart, found in their research. They wrote,
and I quote: ``Real per capita GDP growth rates are
significantly lower during the decade following severe
financial crises. In the 10-year window following severe
financial crises, unemployment rates are significantly higher
than in the decade that preceded the crisis. The decade of
relative prosperity prior to the fall was importantly fueled by
an expansion in credit and rising leverage that spans about 10
years. It is followed by a lengthy period of retrenchment that
most often only begins after the crisis and lasts almost as
long as the credit surge.''
In other words, we could see an extended period of low
growth and relatively high unemployment due to the fact that we
are recovering from a severe financial crisis.
At the time forecasts were made that we would have an 8-
percent unemployment rate following this financial crisis. I
said at the time I did not believe that forecast, and I did not
believe it because it was based on a recovery from the previous
nine recessions. And this is not a recession or a downturn that
can be compared to the previous recoveries from the nine
earlier recessions. And why not? Because huge damage was done
to the financial sector, and I am pleased to see that the
research done by the two Reinharts really confirms that view,
that after a severe financial crisis the downturn is much
longer and more severe.
We also know the Federal response to the recession and
financial crisis--and I say this as my view--helped to pull the
economy back from the brink and made the recovery stronger than
it would have been without it. One of our witnesses here today,
Dr. Zandi, along with Dr. Alan Blinder, former Vice Chairman of
the Federal Reserve, completed a study last year that measured
the impact of Federal actions to shore up the economy,
including both the Fed's monetary policy actions and the fiscal
policy actions taken by Congress and the administration. Here
is a quote from that report: ``We find that its effects''--
talking about the Federal response to the downturn--``on real
GDP, jobs, and inflation are huge and probably averted what
could have been called `Great Depression 2.0.' When all is said
and done, the financial and fiscal policies will have cost
taxpayers a substantial sum, but not nearly as much as most had
feared and not nearly as much as if policymakers had not acted
at all. If the comprehensive policy responses saved the economy
from another depression, as we estimate, they were well worth
their cost.''
I would welcome any further comment from Dr. Zandi in his
testimony on this point.
This chart shows Dr. Zandi and Dr. Blinder's estimate of
the number of jobs we would have had without the Federal
response. It shows we would have had 8.1 million fewer jobs in
the second quarter of 2010 if we had not had the Federal
response. And by ``the Federal response,'' I am talking about
TARP, I am talking about stimulus, the combination of those
Federal responses.
We see a similar picture in the unemployment rate. If we
had not had the Federal response, the unemployment rate would
have been 15 percent, according to their analysis, in the
second quarter of 2010 and would have continued rising to 16.2
percent in the fourth quarter of 2010.
Looking forward, it is clear--again, I say this as my view.
The great thing about our country is we have diverse views, and
we will see them expressed here today no doubt. This is my
view: I believe we need a two-tracked approach which policies
geared to increase short-term economic growth and job creation,
coupled with policies to reduce long-term debt. I think many
know I have felt very strongly about the debt threat for many
years. Judd Gregg and I, when he was the Ranking Member,
proposed 5 years a commission to deal with the looming debt
threat. I believe that with every fiber in our being that this
debt threat constitutes a serious matter for the country going
forward, but I also recognize we are in a period of continuing
weakness, and the really tough steps that need to be taken need
to be carefully timed.
Here is what CBO Director Elmendorf said about such a two-
tracked approach in his testimony this week before the Select
Committee on Deficit Reduction, and I quote Dr. Elmendorf:
``There is no inherent contradiction between using fiscal
policy to support the economy today, while the unemployment
rate is high and many factories and offices are underused, and
imposing fiscal restraint several years from now, when output
and employment will probably be close to their potential. If
policymakers wanted to achieve both a short-term economic boost
and longer-term fiscal sustainability, the combination of
policies that would be most effective, according to our
analysis, would be changes in taxes and spending that would
widen the deficit today but narrow it later in the decade.'' I
believe Dr. Elmendorf has that right.
The Obama administration has now proposed legislation
designed to spur near-term growth and job creation. Here are
key provisions in the President's Jobs Act: one, it would cut
payroll taxes for employees and employers; two, it would
provide a tax cut for businesses to encourage growth and
hiring; three, it would provide for investments in
infrastructure, including roads, rail, airports, and schools;
it would provide funding for States to prevent layoffs of
teachers, police, firefighters; and it would help provide for
the long-term unemployed. That is to all be done in the context
of an overall plan to reduce deficits and debt over the next 10
years in a significant way.
I hope our witnesses will comment on the merits of these
proposals from their perspective and let us know if there are
other policies Congress should be considering.
With that, I will turn to my excellent Ranking Member,
Senator Sessions, for his opening remarks, and then we will
turn to our witnesses for their testimony. Senator Sessions.
OPENING STATEMENT OF SENATOR SESSIONS
Senator Sessions. Thank you, Mr. Chairman, for hosting the
hearing today, and thanks to Dr. Zandi, Dr. Stone, and Dr.
Hassett. We are delighted to have you join us, and I am sure we
will have a good discussion today.
I do wish that we had had a hearing sooner. It has been 182
days since our Committee has held any hearing and 869 days, I
hate to say, since the Democratic Senate has adopted a budget.
Majority Leader Reid said it would be foolish to adopt a budget
not too long ago. The fact that our Nation continues to operate
without a budget I think does lie at the heart of one of the
problems of our economic situation. America desperately needs
the confidence and predictability that only a concrete fiscal
plan can provide. The budget process I do not think is broken.
It has been abandoned.
And I think President Obama must share responsibility for
our failure. He consistently has refused to put forward a
serious long-term fiscal plan on paper that can withstand
scrutiny. Since taking office, the debt has surged nearly $5
trillion. During that time unemployment has remained above 8
percent every single month. Growth has now stagnated. We are
very concerned about the economy at this state, and some are
saying we have a 30- to even 50-percent chance of a double-dip
recession, and we certainly hope that does not occur.
So now in the grips of crisis, we are told the President
has a new plan to revive the economy. We received a proposal on
Monday, with no fiscal details, that just offers more of the
same. It calls for a sudden increase in the deficit, $450
billion, with a promise to pay for it at some later date
through higher tax increases. In other words, more spending,
more taxing, more borrowing, more debt.
President Obama still does not get it. I am convinced--and
this is my personal view--that the debt is already destroying
jobs right now; that the debt itself could be part of why we
are missing the projections of growth that so many have made.
And increasing the debt only digs us into a deeper hole, harder
to get out.
We may have raised our legal debt limit recently, but we
perhaps have breached our economic spending limit. America's
$14.5 trillion gross debt is now 100 percent of GDP. A
prominent study from the economists Rogoff and Reinhart that
you noted, praised by Secretary Geithner as an excellent study,
shows that when a Nation's gross debt reaches 90 percent of
GDP, it loses on average a percentage point or more in economic
growth each year.
So it would appear to me, in my personal view, that the
debt itself may be depressing growth right now, and this might
be one of the explanations for the disappointing performance in
recent weeks.
Keynesian elites in Washington continue to insist what
common sense denies. They tell us that even more spending and
more borrowing is the answer. But when you have reached 100
percent of GDP, to try this failed experiment yet again is to
put us at risk. We definitely need to be careful about this
prospect.
We have seen where this road leads. I am afraid it leads to
Greece. It leads to certain economic crises, as the Fiscal
Commission Chairmen Bowles and Simpson told us in this
Committee room. We are heading to the most predictable economic
crisis the Nation has ever faced. Why? Debt. They were talking
about our debt.
Why should we continue to trust, affectionately, as I call
them, ``masters of the universe''--maybe you three are part of
that group--who tell us that we can spend and borrow our way to
prosperity? Why don't we borrow twice as much? They have been
wrong, it looks like, from the beginning.
In 2009 the administration claimed that the stimulus would
prevent unemployment from rising above 8 percent. Mr. Chairman,
I think you were warned that that may not be accurate, but that
is what we were told by the official Government of the United
States, the President and his team. After the bill became law,
however, unemployment rose to 10 percent and remains at 9.1
percent today--a disappointing number by all accounts.
One of our witnesses today, Dr. Zandi, a very able witness,
in his testimony before the Committee about a year ago said,
``The next 6 to 12 months will be uncomfortable as the economy
struggles to gain traction, but a full-fledged expansion should
take hold by this time next year.'' So it is now ``this time
next year.'' That was last September, I believe, when you made
that comment.
In January of this year, CBO projected economic growth for
2011--in January of this year, our CBO said growth would be 3.1
percent for the year. In February 0MB, the President's Office
of Management and Budget, predicted growth would be 3.1
percent. Yet the economy experienced just four-tenths-of-1-
percent growth in the first quarter, following by only 1-
percent growth in the second quarter.
Indeed, Dr. Zandi, who has been one of the most prominent
of spending and borrowing stimulus advocates in the economy as
a way to boost the economy, and who has been a close adviser to
the Democratic Senate Majority, has seen his projections prove
to be dramatically inaccurate. His Moody's Analytics in January
of this year--in January of this year, Moody's Analytics
predicted we would have an astonishing 3.9-percent growth this
year, but this month had to drastically lower that estimate to
1.6 percent.
So forgive me if these grim numbers do not give me
confidence that the newly proposed stimulus plan will produce
the results promised. More spending, more borrowing, and more
taxing I am afraid is not the way forward. We need policies
that improve conditions for job creation, that do not add to
the debt.
We must produce more American energy, taking advantage of
our vast untapped energy reserves. Energy policy is not simply
a matter of national security. It is a matter of economic
security and growth. If the Government would simply permit
access to our own natural resources, we could have the kind of
growth they have in North Dakota, which is helped by energy
production. It would lead to the creation of millions of jobs
and billions of dollars in Federal revenues and reduce the
transfer of wealth that occurs when we purchase 60 percent of
our oil from abroad.
We should also agree to immediately eliminate all
regulations that have no real benefit but impose economic
costs. There are thousands of these. Unfortunately, the
administration has been going in the opposite direction. For
example, in fiscal year 2010, the administration issued 66
major rules, 74 percent higher than the average number under
Presidents Clinton and Bush.
Permanent structural reform of the Tax Code is another area
that could spur economic growth without adding to the debt.
Such reform will provide the economic certainty and
predictability that is needed. But the goal of tax reform must
be to increase opportunity for American workers and businesses,
not bail out Washington's big spenders by hammering the
American taxpayer.
In time of crisis, confusion, and fear, we should return to
basic core principles, the tried and true: pay your debts,
spend within your means, live according to a budget, remove the
barriers of an ineffective bureaucracy, allow the private
sector to flourish. If we take these steps, if we rely on the
good sense and wisdom of the American people, we will see
resurgence in growth, jobs, and opportunity.
There is no quick fix, no gimmick that will get us there.
The road ahead is not easy, but through diligence, hard work,
less welfare, more productivity, and common sense, we can put
this country on a sound, prosperous path to a better future for
Americans today and our children tomorrow.
I know that these reflect my views, but, you know, we are
just here 1 of 100, aren't we, Senator Conrad? And we do our
best. I respect your views and look forward to the discussion
we will have.
Chairman Conrad. Thank you. Thank you, Senator. We respect
your views as well, and we respect the views of these witnesses
and look forward to their sharing them with us.
Mr. Zandi, do you want to go first? Dr. Zandi.
STATEMENT OF MARK ZANDI, PH.D., CHIEF ECONOMIST, MOODY'S
ANALYTICS
Dr. Zandi. Sure. Thank you, Senator Conrad, Senator
Sessions, and the rest of the Committee, for the opportunity to
be here today. I do appreciate it.
The views I am expressing are my own, not those of the
Moody's Corporation, and you should know that I am not part of
the rating agency, so I have no direct impact on ratings.
I will make three points in my remarks. The first point is
the economy is struggling to avoid recession. This is most
obvious in the job market. You showed a nice chart with respect
to job growth.
At the beginning of the year, the economy was doing quite
well, creating over 200,000 jobs per month, and that is a
pretty healthy rate of growth, certainly enough to bring down
the rate of unemployment. More recently growth has slowed. As
you pointed out, in August we had no growth--private sector job
growth, but no growth after you consider the layoffs in the
Government sector, State and local.
I ascribe this to a number of reasons, the slowdown, and
you are right, Senator Sessions, I was more optimistic at the
beginning of the year, and I was wrong. The economy has slowed.
I did not expect it. And I ascribe that to a few reasons,
really just a series of unfortunate events.
First was the surge in energy prices. Four dollars for a
gallon of regular unleaded is pretty tough for Americans, and
that is what we were paying at the end of April, early May.
There were a lot of reasons for that, but I think one of the
key reasons was the unrest in the Middle East, which I do not
think you can predict.
Second, the Japanese earthquake. That was very debilitating
on manufacturing, and manufacturing has been a key source of
growth throughout this economic recovery. In fact, half of the
GDP growth in this recovery has been in manufacturing, and that
was significantly disrupted by the Japanese quake effects.
But, more importantly, I would ascribe the slowdown to what
I would consider some pretty egregious policy errors, both here
in the U.S. and in Europe. I think the debilitating debate over
the debt ceiling eviscerated confidence, and you can see that
in the first slide, if you bring that forward. The first slide
shows--there you go--two measures of confidence: one is the
consumer confidence, this is from the University of Michigan
survey; and the other is a measure of small business
confidence. And you can see both are indexed to equal 100 back
in 1986 to be consistent. You can see how hard confidence was
hit during the recession. Some recovery or revival in
confidence during the recovery, but it has been creamed in the
last couple of months. And the University of Michigan survey is
back to near record lows. Confidence is hammered.
European policy errors have also contributed. Obviously,
they are having a great deal of difficulty, and that is
reverberating back on us. The European Central Bank raised
interest rates. I think that was an error. More importantly is
the way the Europeans are handling the Greek debt crisis. That
has significantly undermined sentiment throughout Europe, and,
again, that is affecting our economy.
So households, businesses, and investors have lost faith,
and that is why we are where we are. I do agree that without
the policy efforts in early 2009--in late 2008 under the Bush
administration and in early 2009, the economy would be in a
measurably worse place today, but the policy mistakes in the
last couple of months have been debilitating.
This gets to my second point, and that is, to stabilize
confidence and avoid a recession, policymakers--Congress and
the administration--must act decisively and definitively, have
to do two things at the same time in the next few months. The
first is to follow through on the debt ceiling deal. We need
clear, definitive, long-term deficit reduction. Absolutely
necessary. I think that is key. But, secondly, at the same
time, we need to take some of the fiscal restraint that is
headed our way in 2012 off the table. I did not think that at
the beginning of the year. I was all about thinking that we
should focus on deficit reduction. We could digest the
restraint that was coming in 2012. But I do not think that now.
I think the economy is too weak to do that.
But, you know, I am encouraged by the debt ceiling process.
I think it is a substantive process. I think there is general
consensus that we need about $4 trillion in deficit reduction
over the next 10 years to get to fiscal sustainability. And if
you look at the next slide, you can see what would happen if we
do not follow through on the debt ceiling deal. This shows the
ratio of publicly traded Federal debt--not gross debt but
publicly traded Federal debt to GDP, and you can see where
history ends, and I am showing you a fair amount of history all
the way back to Alexander Hamilton, which, by the way, is not
an easy thing to do. You should appreciate the chart that took
a fair amount of work. And in the forecast, it is pretty
serious, and we do get above that 90-percent threshold that
Rogoff and Reinhart have pointed to as a serious threshold if
we do not make changes. So we need that deficit reduction,
about $4 trillion worth.
We have made some progress, $900 billion Congress agreed
to. I think that is laudable. I think the Super Committee has a
fighting chance at the $1.5 trillion which they have been
tasked to do. They absolutely need to do this. If they do not
do this and they do not do this in a way that is not upsetting
to people, we will go back into recession. I do not think this
can be punted down the road. It has got to be done in the next
few months because we will go into recession. Of course, if we
go into recession, our fiscal problems will get measurably
worse very, very quickly.
I also think that, you know, if you do the math, the
arithmetic, we need more deficit reduction, but I think that
can wait until after the election in the lead-up to the
expiration of the Bush tax cuts in 2013. And I would say I
think we need spending cuts, and the preponderance of the
deficit reduction should be spending cuts. But we also need tax
revenue increases, and that should come through closing of
loopholes and broadening the tax base so that we do not have to
raise marginal rates and even hopefully lower marginal rates
for corporations. I think that is something that we need to do
to improve competitiveness.
Finally, point number three is the point about coming
fiscal restraint. If policymakers do nothing, if you do
nothing, in 2012 Federal fiscal policy will subtract 1.7
percentage points from growth, and you can see that in the next
slide, which shows the contribution of growth from different
stimulus efforts. And you can see what will happen in 2012
without any additional help--1.7 percentage points. If you
throw in State and local government cuts, it gets to 2
percentage points. I do not think this economy can digest that.
I think the President's proposal is a good effort. I think
that if enacted in its totality and it is paid for--and I think
it should be paid for--it will add about 2 percentage points to
growth in 2012, fully offsetting the fiscal drag that is in
train, adding 1.9 million jobs and lowering the unemployment
rate by a percentage point. But, you know, there are a lot of
things in the package. The one thing that is absolutely
critical to do is to extend and expand the payroll tax holiday
for employees. That would reduce the fiscal drag in 2012 by
half, and I think that would help. That would be very helpful
to getting the economy through this period.
There are a couple of other longer-term things that are
very good in the package. We need to start thinking longer run.
The reforms to unemployment insurance, including work share,
are an excellent idea, very important to helping the German
economy through this period, and the infrastructure bank. It
will not mean any jobs next year or the year after, but that is
a good idea that deserves careful attention.
Let me end by saying that, you know, we need to start
thinking longer-run here. Your first goal needs to be the
immediate near term and making sure we do not go back into
recession. But we have got a long-term problem, and so we need
to start thinking about long-term economic policies, and at the
very top of the list, the thing that I would focus on that is
doable is corporate tax reform. We need that, and I would focus
on that right away.
Thank you.
[The prepared statement of Dr. Zandi follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Conrad. Thank you.
And now we will go to Dr. Stone. Chad, welcome back.
Why do you not proceed with your testimony, and then we
will go to Dr. Hassett, and then we will open it up to
questions.
STATEMENT OF CHAD STONE, PH.D., CHIEF ECONOMIST, CENTER ON
BUDGET AND POLICY PRIORITIES
Dr. Stone. Thank you. Chairman Conrad, Senator Sessions,
and other members of the committee, thank you for the
opportunity to testify today on Policy Prescriptions for the
Economy. I am also pleased to be here as a proud alumnus of the
Conrad Budget Team, as the Senator mentioned earlier.
I want to talk about, briefly, three major themes that are
in my written testimony more completely. The first is that
under current economic conditions, activities like those
proposed in the President's jobs package, and that Mark just
mentioned and that Senator Conrad's chart laid out, can provide
a boost to economic activity and move the needle on jobs.
Second, in the current economic environment, the
alternative view that is often expressed, that what we need is
immediate sharp reductions in government spending, and that
that is the best way to get the economy out of the doldrums,
that is not supported by the evidence. That will not work and
probably would make things worse.
And third, this is, as the Senator's quote from CBO
Director Elmendorf said and as other witnesses will say, I am
sure--have said and will say--we need to combine short term
efforts to get the economy out of the doldrums with longer-term
deficit reduction efforts, and in those deficit reduction
efforts, we need to have a package that is balanced, where
revenues are part of it, and also, especially in light of the
evidence that came out this week in the report from the Census
Bureau on income, poverty, and health insurance coverage, which
show several years of increasing bad numbers in that regard in
this weak economy, we need to be protective of low-income
households in the efforts that we make to reduce the budget
deficit.
So I am going to discuss our short-run challenge and our
long-run challenge in the context of a chart that is in my
testimony. My testimony has the right-hand panel of that chart.
This is a chart that shows CBO's estimate of potential GDP--
that is the blue line or the straight line--and what is
happening with actual GDP.
So pursuing the analogy in the title of this hearing,
prescriptions, I think it is vitally important that if we want
to come up with the right policy prescriptions for the economy,
we need to make the right diagnosis of what is wrong. Most
importantly, we want to distinguish between, on the one hand,
the effects of an acute disease that has laid us low in the
short term and that we are still struggling to recover from--
that is the 2007-2009 financial crisis and recession. That is
the huge drop in GDP below what the economy is capable of
producing, the opening up of huge excess unemployment and
economic slack in the economy. That is our acute problem, a
jobs deficit, an output deficit.
On the other hand, there is another problem, and that is
the reckless disregard for the long-term health of the economy
over the last decade that we have shown by abandoning, despite
the efforts of this committee, the fiscal discipline that
produced a balanced budget in the late 1990s and failing to
prepare for the stresses the retirement of the baby boom
generation will put on the budget. Those issues affect the blue
line, potential GDP, what our long-term capacity to produce
goods and services is.
So these are two distinct problems. The challenge is that
if we try to correct our long-term bad habits too quickly, we
will endanger our recovery from the acute illness. But if we
just go back to our old habits, we will leave ourselves open to
a number of problems that will weaken us in the future.
So enough of the health metaphor. I am a doctor, but not
that kind of doctor, so let us talk about the economics.
My prescription, which follows in the spirit of what CEO
Director Elmendorf said, and my testimony includes a similar
quote from Fed Chairman Bernanke, is that we can, in fact,
engage in activities to boost the economy in the short run and
engage in long-run deficit reduction. It is a question of
timing.
So the chart, as I said, shows that, from the red line, the
economy fell into a deep hole--the short run, acute problem--
fell into a deep hole in 2008-2009 relative to our potential.
Actions by the Fed, the Congress, and two administrations kept
things from being even worse, but we are really struggling to
recover. We have a long way to go to get back to potential.
What short-run policies do is move the red closer to the blue
line faster, fill in the jobs hole. There is a lot of economic
hardship associated with that gap. There are unemployed
workers, businesses that have failed, poor people who have a
much harder time finding a job.
So that is why I think that actions by the Fed--I am sorry.
That is why I think that policies that stimulate economic
growth, stimulate economic activity in the short run, like
those in the President's proposal, can move that red line. Dr.
Zandi's estimates suggest that they would.
In the late 1990s and in 2006 and early 2007, I would not
be recommending these kinds of policies. I am recommending them
now for the short term when there is a big gap. When the
economy is back to full employment, stimulus of this sort does
not work. It is merely offset by changes in Fed policy. But
when we are down, it does work.
The key to effective stimulus, whose goal is to put people
back to work and businesses back to full production, is to put
money into the hands of people who will spend it. That is why
policies like unemployment insurance and the payroll tax cut
will be effective in stimulating economic activity and job
creating. Policies to give businesses incentives to expand
their capacity to produce goods and services less effective
because they are already having trouble producing up to full
capacity.
With respect to the second argument, the alternative
argument that large cuts in government spending are the best
way to get the economy going, I am familiar with the work of
Harvard economist Alberto Alesina that people cite as
supporting this position. And I am also familiar with the
fairly substantial critique of that evidence that has been
developed more recently. The evidence shows that if you look at
those episodes, almost none--in fact, none of the successful
fiscal episodes that were associated with growth remaining
strong took place in a weak economy like the one we are
experiencing now. On the other side, almost all of the
unsuccessful episodes--I am sorry. Let me say that the right
way. If you are in a weak economy, that kind of short, sharp
fiscal adjustment is almost bound to fail. You will have to go
back on it because the economy will weaken.
Third, with respect to long-term deficit reduction, nothing
I am saying about the need for action now should deny the fact
that we need action for the long term, that we need a credible
deficit reduction plan to be put in place, put in place now but
to take effect down the road when the economy is stronger.
We at the Center on Budget and Policy Priorities have
developed a set of principles for that. We believe strongly
that such a policy needs to be balanced, that you cannot leave
revenues off the table. You can start out with the tax
expenditures and loopholes that Dr. Zandi mentioned, but to be
credible and to achieve long-term success, it has to be a
balanced package that includes revenues, ideally, a 50-50 mix.
And finally, to come back to a theme I had mentioned
earlier, and we are thinking about it a lot at the Center right
now, especially in light of the income and poverty numbers, is
that we should follow the recommendations of the Bipartisan
Budget Committee, the Bipartisan Deficit Commissions, and the
actions that we have taken in past efforts to reduce the budget
deficit, and that is to not impose a further burden on the
poorest people in our society, to protect the low-income
programs in our deficit reduction efforts.
Thank you.
[The prepared statement of Dr. Stone follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Conrad. Thank you.
Now, we will go to Dr. Hassett. Welcome. Please proceed.
STATEMENT OF KEVIN A. HASSETT, PH.D., SENIOR FELLOW AND
DIRECTOR, AMERICAN ENTERPRISE INSTITUTE FOR PUBLIC POLICY
RESEARCH
Dr. Hassett. Thank you, Chairman Conrad, Ranking Member
Sessions, other members of the committee. It is an honor and a
pleasure to be here again.
As you might have noticed, my testimony got a little out of
hand, 14 single-spaced pages, so I am not going to attempt to
read it but rather will try to get to the main points in as
brief amount of time as I can. And really, I think that there
are five things I would like to talk about and will do so
extemporaneously.
I think that the question that you asked in the letter
about why has growth been slow is something that we at the
American Enterprise Institute have been studying very hard,
even before the financial crisis, as you mentioned. You cited
Vincent Reinhart as Carmen Reinhart's husband and they have
been working together, as well, with Kenneth Rogoff on this,
and I think that the basic idea is not only that after a
financial crisis that you have slow growth for a good long
time, but as we at AEI have been digging into it more, we also
understand the forces that cause that to happen and one of them
is the debt-to-GDP factor that is mentioned that is also a
different set of work by Reinhart and Rogoff, but also has been
follows up by an excellent IMF study that I commend to you that
shows that when debt-to-GDP gets above a certain level, then
that really has a negative effect on growth. I think that,
really, you should reduce the CBO outlook over the next ten
years by maybe about half a percent to account for that effect.
But there are a couple of other important effects, too,
things that we are seeing ourselves now. One of them is that
because the crises tend to create deeper recessions that last
longer, then long-term unemployment starts to be a real issue.
When people separate from the workforce and then stay out for
more than six months or so, then it gets really, really hard
for them to be hired again. Imagine if a worker came to you and
asked to be hired and then had not had a job in two years. You
might wonder, what is wrong with this guy? That is a terrible
struggle for people, that more and more Americans, sadly, are
going through right now, and that in other countries people
have gone through that stress, as well.
And the final thing is that the rebuilding of the balance
sheet takes a good long time, that there are a lot of bad
assets, assets that are on books that maybe we are pretending
are worth more than they are when we are looking at our
financial institutions that take a long time to work out, and
until that happens, there is this uncertainty, this overhang
that causes a drag on the economy, especially the real estate
market right now. And so if you have got an underwater real
estate investment, maybe you have not sold it yet, but until
you do, you will not feel liquid and optimistic enough to move
forward.
And so I think that hearing that that is the experience, I
think that we can all agree, as you stipulated, Mr. Chairman,
in your opening statement, that this is what we are in for, is
a long, tough slog that looks a lot like the slogs that others
have had to go through. Indeed, back in 2009 in the stimulus
hearings in the House when I was testifying and saying this is
what I think is going to happen--it was consistent, I guess,
with your views at that time--then I was criticized as too
pessimistic, but I show you a chart in my testimony that shows
that actually what we thought would happen was better than what
actually happened. We are below----
Chairman Conrad. Can I just stop you on that point? You and
I had the same criticism directed at us----
Dr. Hassett. Right.
Chairman Conrad [continuing]. Because we were saying very
much the same thing at that time, that we are headed on an
unsustainable course. I know you were heavily criticized for
that, being overly pessimistic. I was, as well. I wish we had
been wrong.
Dr. Hassett. Yes. Well, we were wrong, but on the wrong
side. [Laughter.]
And the thing that I want to add, though, is that I think
that if we accept that view, then it argues very strongly
against the type of economic policies that we have adopted and
many of the proposals of the President, and I think you will
notice in my testimony that I played it absolutely straight. I
went through each of his major proposals, and some of them, I
like and I said so.
But the overarching observation that I think is absolutely
essential that policy makers grab right now, or grasp right
now, is that if we are in for a long slog out, then these
short-term Keynesian policies are exactly the wrong medicine,
and here is why. Mr. Zandi and I have been friends for a long
time and we have different ideas about what the multiplier is.
I think it is smaller. He thinks it is larger. But even if we
accept Dr. Zandi's multiplier, then there are three stages to a
Keynesian stimulus. There is the point when you put it in.
There is the point where you take it out. And then there is the
point where you pay for it.
Now, if you have a multiplier of two, then if we put in
$100 billion, then you get $200 billion. But when you take it
out, then you are taking out $100 billion and you lose $200
billion. You are kind of back where you started.
And so in a typical post-war recession that lasts 11 months
and has growth of six percent in the year after, then if we
could move a couple of percent of GDP growth from next year to
this year, you could really accomplish some good. You could
imagine that that would be a good thing to do. But notice that
you have to have the strong assumption at the outset that you
are timing the down well, too, because you know it is going to
be six percent growth next year so it is okay to lose a couple
percent growth when we withdraw the stimulus.
But then there is the third part, which is when we pay for
it. You have to raise taxes or maybe you issue debt forever or
something. But when you pay for it, that has a negative effect
on the economy, too.
And so the total effect over time--and you see that in the
CBO estimates of even these Keynesian things--in the long term,
the total effect is negative because there is an up and a down
that about cancel and then you pay for it and that is a
negative, and so on net it is a negative.
Now, what I assert, and I believe this absolutely, is that
if you are in a ten-year recovery of a financial crisis, then
you are absolutely guaranteed to have the negative stuff happen
when you cannot afford to take it. You are going to have a
hangover when you cannot afford it, and that is why we cannot
have another temporary stimulus right now.
But that does not mean that we should not act, and if you
look at the rest of my testimony, you will see that I think
there are two measures that, if adopted right now, could really
have a big positive effect on the trajectory of the United
States and an immediate one, as well.
The first thing I do is I reviewed the fiscal consolidation
literature, and I know I have spoken to Dr. Stone about that
literature before. He was my professor at Swarthmore. I think
we pretty much agree that there has been some excessive
optimism about what you get about this fiscal consolidation. I
discussed that in my testimony.
But the one thing that you do learn from the literature,
even the critics of Alesina, is that a successful consolidation
mostly comes from spending cuts, about 85 percent, on average,
as the chart shows in my testimony. And the other thing that we
learn from fiscal consolidation literature is that the growth
effects do not necessarily have to be negative. Indeed, if you
focus the fiscal consolidation on entitlement cuts, especially
long term entitlement cuts, then even the IMF study that is
very critical of Alesina finds that near-term growth effects
are positive. I mean, they are not glorious, but they are
positive, which means that you can have a fiscal consolidation
and not be concerned that the Keynesian effects are going to
crush you if you focus the consolidation on reforming
entitlements.
The second thing, and the last part of my testimony where I
go into what to do now, I review, again, some work that has got
a very bipartisan basis. Alan Auerbach, who is a very well
known Democratic economist and my dissertation advisor, and I
wrote a book on tax reform where we summarized the literature
and cited some work of Alan Krueger, who is about to be, or has
been the nominee for the CEA Chair, that showed that--they
surveyed economists and said, what do you get out of a
fundamental reform in terms of growth, and the median estimate
was about a percent a year for a good long time.
Auerbach and I conclude in our book that you get half a
percent to a percent a year over a decade of extra growth if
you would have a tax reform, fundamental tax reform. And if you
had a big corporate reform that included a cut in the corporate
rate, as was recommended by Dr. Zandi, you could get big
immediate effects of that because the corporate tax is so
intricately connected to equity values and so on.
So I think that it is clear how to go forward. We need to
really play it big now. We need to have a fiscal consolidation
and a fundamental tax reform that can immediately stimulate the
economy, but not with policies that give us a hangover two
years from now but rather with permanent fixes.
Thank you very much, Mr. Chairman.
[The prepared statement of Dr. Hassett follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Conrad. Very well. Thank you very much for your
testimony.
Let me--Dr. Zandi, you have just heard Dr. Hassett. He has
a somewhat different view. You know, it is interesting. There
is a commonality here. I think everybody agrees we have got to
have deficit and debt reduction over a ten-year period, that we
cannot allow the debt to continue to grow. I think we have got
commonality of view on that.
The difference that I hear is a question of timing. When do
you start to impose the fiscal discipline? I hear, Dr. Zandi
and Dr. Stone, you would put it off because of the weakness of
the economy now. Dr. Hassett has a different view, that we
should start right now. I do not want to misstate your view,
Dr. Hassett, so speak up if I am misstating it, but that is
what I have heard here.
On the other hand, everybody is saying there are things
that you can do that would be effective right now. Dr, Zandi,
you have said payroll tax relief ought to be high up on that
agenda. Dr. Hassett has talked about tax reform, a tax reform
agenda could provide an immediate boost.
So, Dr. Zandi, what of what Dr. Hassett has recommended
would you most strongly agree with and what would you most
strongly disagree with?
Dr. Zandi. And we are good friends. But I would--let me say
a couple of things. First, I am not arguing that we should not
have fiscal restraint now. I am just arguing it should not be
as large as we have in current policy. I mentioned 1.7
percentage points in 2012. I am not arguing turn that all the
way around and say add to growth. I am just saying, scale that
back a bit given the current state of the economy. That is all
I am saying. I think we should start now, just not to the
degree that we are anticipating.
And I agree almost entirely with what Kevin said in terms
of corporate tax reform. I know he is a large proponent of
workshare for unemployment insurance. His focus on long-term
fiscal issues, you know, I think it is very--I agree totally.
The one place I do not agree is that I do think providing
some additional relief in the near term, like extending the
payroll tax holiday for another year, would be very beneficial.
He is absolutely right that when you get into 2013 and 2014,
there is a payback. There is no free lunch. I am not arguing
that. But I do think the--I am much more optimistic about our
economy's fundamentals. I do not buy into the Rogoff-Reinhart
view that we are going to be stuck in a malaise for ten years.
That is a study based on experiences overseas in many periods
of time, not our experience today. The United States economy is
a very flexible one and we have righted a lot of the wrongs
that got us into this mess.
Corporate balance sheets, non-financial U.S. businesses,
have never, ever had as good a balance sheet as they have
today. Their debt service burden is as low as it has ever been.
The amount of cash they have on their balance sheet is as high
as it has ever been. By any metric, businesses are in great
shape.
The banking system has made significant progress, largely
because of the policy response. The best policy response was to
ask them to go through stress tests and raise a boatload of
capital, and TARP allowed them to do that because they were
backstopped by the Federal bailout fund, which, by the way, has
generated revenue for taxpayers. So the banking system in
aggregate is well capitalized and rock solid and can lend and
is lending. If you look at credit growth, it is growing.
Households have some more work to do, but just a statistic
to give you a sense of how much work they have done. Household
debt has fallen by $1.2 trillion since the peak. The peak was
precisely three years ago, August of 2008. That is a ten
percent reduction. So the debt service, the portion of income
that is going to servicing debt by households, is nearly a
record low and falling rapidly, and you can see it in the
credit statistics. If you look at delinquency rates on credit
cards, auto loans, consumer finance loans, pretty much across
the board, except for first mortgage, where we have still got
problems, and we can talk about that, it is back to pre-
recession levels.
So I do not believe the U.S. economy is in store for ten
years of going nowhere. We are not. So I do think we need to
get through the next 12 to 18 months. And on the other side of
that, I think our prospects are bright. But if we go back into
a recession now, then all these things that we are--all the
problems with the balance sheet that Rogoff and Reinhart are
worried about, that Kevin is worried about, we will just be
swamped by them. So we need--we should provide this additional
support to the economy in the near term.
Chairman Conrad. All right.
Dr. Stone, what have you heard here that you most strongly
agree with and most strongly disagree with?
Dr. Stone. Well, what I heard that I most strongly agree
with right now is, going to Dr. Zandi first, is that we do need
support for the economy right now to fill in some of that gap
between what we are producing and what we are capable of
producing.
And with respect to the payback part of the argument, what
payback means is that you do not permanently boost the recovery
path above what it would be, but you fill in some of the gap
right now when you really need it. And a couple of years from
now when the fiscal impulse is starting to phase out, the
economy is at a higher level of GDP.
CBO estimates that we will lose about $2.5 trillion of
output that we do not produce, jobs we do not have, income that
is not generated, before we get back to full employment. The
support that we provide now can offset some of that loss. The
loss from an output gap is lost forever and the human hardship
that goes with it is there forever.
What I--I do not disagree at all with the notion of
corporate tax reform and things like that as part of a longer-
term strategy to deal with our long-term growth prospects. I am
not sure that they are going to be very helpful in the short
run of supporting the economy.
And finally, just on the question of what the International
Monetary Fund says about this fiscal austerity, they just
produced a report, a summary of their findings. Their
conclusion--I mean, Kevin is right that the research shows that
spending-based deficit reduction across a wide variety of
situations in different countries at different times does tend
to produce smaller losses to the economy than tax-based deficit
reduction in those countries.
But under current U.S. economic conditions and under the
conditions in Europe right now, the IMF does not find that to
be true. What they say in their latest report is evidence from
data over the past 30 years shows that consolidation lowers
income in the short term with wage earners taking more of a hit
than others. It also raises unemployment, particularly long-
term unemployment. It does not distinguish between tax-based
and spending-based.
Chairman Conrad. Okay. I thank you for that. My time has
expired.
We are going to go to Senator Sessions and then we will----
Senator Sessions. Get Mr. Hassett to respond.
Chairman Conrad. Well, my--if you want to give me the
additional time, I would be happy to do that.
Senator Sessions. I guess he started it, right, so you gave
the others a chance to respond----
Chairman Conrad. Well, I ran out of time, and he is your
witness, so----
Senator Sessions. Okay. Thank you.
Dr. Zandi, you looked at the Rogoff-Reinhart study and to
be careful about the question of growth and public debt, and
their study was based on an empirical analysis of failed
states' sovereign debt problems that arose from increasing
debt, and it was a gross debt figure that they used. So we are
not at 90 percent. We are at 100 percent now in the United
States of gross debt, and I think it is dangerous, Dr. Stone
and Dr. Zandi, to say that somehow these circumstances do not
apply to us, because I recall the name of their book.
The name of their book was, This Time Is Different. And
what they meant by that title was that when nations got in
these fixes, they went into denial and always said, well, maybe
that applied to other countries, but it is different in our
country. And I am just afraid that we are at a point where our
debt, as we have been warned for a number of years, is putting
our economy at risk.
So, Dr. Hassett, I would like maybe to give you a chance to
respond to the previous comments that have been made, number
one, and number two, would you opine as to whether or not the
debt itself is placing the economy at risk now, the level that
we are at. I mean, I just do not think if--I think we have
gotten to the point where the debt is so high that we have got
to talk about it, Dr. Zandi. We cannot not debate your theory
that we need to borrow money, more money, as a part of a debt
limit or a new budget for next year or a spending level for
next year. It has just got to be part of the debate. And if our
economy is so fragile we cannot debate it, why is it so
fragile? I think it is the debt that has made it this fragile,
would be my--but, excuse me. Dr. Hassett, I would yield to you
for comments on these matters.
Dr. Hassett. Thank you, Senator Sessions, and for the
opportunity to respond to the responses to me. The one thing I
can say is that, on the debt question, so I will go to the last
one first, is that in addition to the Reinhart-Rogoff study,
there has been a kind of explosion of analysis in this area,
some of it extraordinarily sophisticated and interesting to
math geeks like myself who like what they call non-linear time
series models because it is a very challenging thing to
estimate.
But after looking through the literature, I am just really
convinced that there is a very powerful result there, that
enough different people have looked at it with different types
of models and so on, that we are in an absolute danger zone
where we can expect not a sudden collapse, but slower growth by
maybe a half a percent a year for a good long time if we do not
start moving back to where I know Chairman Conrad in the past
had proposals that would have taken us into the safety zone.
Senator Sessions. Well, could I----
Dr. Hassett. So we absolutely need to do something, yes.
Senator Sessions. The Rogoff-Reinhart study said one to two
percent growth when you reach that level, so----
Dr. Hassett. The question is just in terms of, like, how
big the result is. First, there are different estimates. But
also, it is, like, how far you are from the threshold and for
how long. And so if you are one-and-a half times GDP and the
threshold is 80 percent of GDP, then you are really far and you
will get a bigger growth effect than if you are just a smidgen
above 80 percent of GDP. And as debt grows, then this growth
effect gets worse and worse. And so if we do not fix the
problem, then, absolutely, we are talking one or two percent
growth off of where we are 15 years from now absent a fiscal
consolidation.
But on the near-term question, first, I absolutely--you
have to stipulate that if we were to cut the payroll tax for a
year, then GDP in that year would probably go up some. I do not
know how many jobs you would create because there is a lot of
labor hoarding going on. You would definitely get some GDP out
of the consumption of that.
But I think that the point of my testimony, and it is
something that I would urge every member of this committee and
every member of the Congress to think, is that I need to know
when I am doing one of these temporary stimuluses, or stimuli,
that not only that now is a good time to go up, but when I take
it off, that is a good time to go down.
And so if you are confident that Dr. Zandi is correct, so
he is absolutely, totally internally consistent in his analysis
because he does not really believe that the financial crisis is
the right guide and he thinks that the down is going to happen
in a period where we can afford the down, then if you are
willing to accept that view and ignore the history of financial
crisis, then you should be with the President on his stimulus
plan, that you would probably get more GDP this year.
But I am not willing to accept that, and I think that,
again, Dr. Zandi mentioned corporate tax reform. But I think
that we are in the boat right now where we are essentially
saying, sure, we offer U.S. corporations a chance to avoid U.S.
tax by moving their operations overseas, transferring their
intellectual property overseas, increasing their employment
overseas. If they do that, then they have perhaps one of the
lower tax rates on earth. If they do anything here in the U.S.,
like build a new plant that is going to create jobs, then we
charge them about the highest corporate tax on earth, the
second highest corporate tax on earth. That is a real deep
permanent obstruction to job creation here in the U.S.
And the idea that we can ignore that and that if we have a
one-year payroll tax, it is going to be great, is something
that we just need to reject and reject with emotion, because we
have to stop ignoring our big problems. So we are not going to
get job creation in the United States if we keep ignoring them.
And if we spend a lot of money, another $400, $500, $600
billion on these temporary stimuluses, then what is going to
happen is we will not have the money to fix the corporate tax
in a way where people will want to locate jobs here again, and
that is why I feel so strongly that we should not do it.
But I absolutely do not want you to think that I believe
that GDP will go down if we have, say, a payroll tax cut,
because I do not think that that is true, at least not for this
year.
Senator Sessions. Could I ask each of you if you can just--
yes or no would be good--do you agree that actions to increase
economic growth without increasing the debt would be a
preferable activity for the United States insofar as that is
achievable?
Dr. Zandi. Absolutely.
Senator Sessions. The three of you agree with that.
The second question: Do you agree that eliminating costly
regulations that can be shown not to produce beneficial results
would create--and that creating a more growth-oriented Tax Code
and producing more American energy would be good for the
economy?
Dr. Zandi. Absolutely.
Senator Sessions. All three agree with that?
If our Nation was able to substitute imported oil with
American production, would national income rise?
Dr. Zandi. Yes.
Senator Sessions. Well, I think those are some things that
we ought to be focusing on very intensely. The President has
not moved in those areas yet, although his recent speech
indicated he might be more open to it, and I would encourage
all of us to focus on those matters rather than primarily
focusing on more debt-enhancing proposals.
Dr. Zandi, the total debt package that the Committee is
asked to achieve is $2.4 trillion over 10. You favored $4
trillion over 10. And do you think that $2.4 trillion is simply
not enough?
Dr. Zandi. I do not think $2.4 trillion is enough, no. I
think we need--if you do the arithmetic, I think there is
general consensus that we need $4 trillion in 10-year deficit
reduction. That $2.4 trillion is not enough, no.
Senator Sessions. Thank you.
I am inclined to view that more is needed, but we have had
a lot of people say that $4 trillion is the bottom-line figure,
as you and your Debt Commission found. Thank you.
Chairman Conrad. I thank the Senator for asking that
question. I actually tried, I personally tried to convince the
Fiscal Commission to do $6 trillion because I wanted to balance
the budget in 10 years. And we could do it. I mean, I proposed
what I called ``the 6-percent solution.'' If you have 6 percent
more revenue than is forecasted over the next 10 years, not by
raising marginal rates--I agree entirely with Dr. Zandi. I
think Dr. Hassett probably agrees with this. I think Chad
probably does as well. Increasing marginal rates is not a good
idea, but tax reform is a good idea. If we raised revenue from
what was otherwise anticipated, 6 percent, cut expenditures
from what is baked in by 6 percent, we would get $6 trillion of
deficit and debt reduction over 10 years.
You know, somehow we have got it in our heads that this
requires some radical change. It is not. It is relatively
modest changes to where we are headed to get us back on track.
And I am very glad you asked that question.
Senator Sessions. You know, I would just observe to the
economists that we are a political institution. We cannot
always receive a phone call from an economist and change the
Tax Code tomorrow or reduce spending or increase spending on a
dime. And I think there is a fundamental opportunity right now
based on my reading of the American people that they will
accept serious reform of spending, and even if it is not the
precise exact time that it ought to occur economically based on
various opinions, I think we had better seize the opportunity
while we have a chance.
Chairman Conrad. Thanks, Senator.
Senator Begich, and then it will be Senator Nelson and
then--wait a minute. I have got here that Whitehouse was next.
Okay. Senator Begich and then Senator Ayotte next.
Senator Begich. Thank you very much, Mr. Chairman, and I
always find--and I know we have had at this meeting and others
economists. I always find it interesting to listen to
economists and their analysis of what could happen and what
will not happen. Three years from now we will have the same
discussion of what did happen and who was right and who was
wrong. And no one is going to be right 100 percent, no one is
going to be wrong 100 percent. That is what we will find in
this analysis here. So let me just do some kind of just basic
questions.
First, if I could ask all three of you a very short--I
think one of the problems is the inability--well, let me put it
another way. Even though Congress is viewed by the American
people--I think we are at a robust 13-percent popularity, and
maybe going the other direction. They still look toward
Congress to figure out what policies are going to be developed
to determine kind of where they are going, even though they may
not like us today. By us doing these kind of short-term skip-
and-hops, no real long term, doesn't that have some effect in
the economy? Does anyone--I mean, the uncertainty of our
inability to do anything here, we have no ability to think--
like, we are about to do a highway bill and an FAA bill for a
robust 6 months. That should give a lot of comfort to the
contracting community to go out and buy new equipment to get
ready, because in December--or February of next year, they will
find out if we are going to really do a road project bill. Give
me your thoughts on that. I would like you to keep them short
only because I have got several questions I want to----
Dr. Zandi. I concur with your view. I think there are some
immediate problems that need to be addressed, and that is the
economy's difficulty currently, the prospects for recession.
But I do think also that it is very key for policymakers to
look longer-run. We have got a lot of long term problems. And
by doing that, you provide more clarity, more certainty with
respect to policy, and that is very, very important to decision
making today. Businesses do not think about 6 months or 12
months. They think about 5 years; if they are an electric
utility, 30 years. So you need clarity and certainty.
Senator Begich. Dr. Stone.
Dr. Stone. Agreed. There are crises and you have to deal
with them, but you should have a long-term plan.
Senator Begich. Dr. Hassett.
Dr. Hassett. Thank you. The evidence is quite strong that
especially for big capital projects with long lives, this
uncertainty is very big. And that also provides something of a
marker for us as we think about the Fiscal Commission, because
if they sort of promise future cuts but we do not really know
if they are going to happen, then we will not do much to
accomplish--to reduce the uncertainty. But if they, you know,
have specific proposals and maybe adjustments to entitlements
and so on and they are really credible, then we could get a big
surge in business optimism. And businesses have so much cash
right now that if they get optimistic, we could really see a
lift-off.
Senator Begich. You just hit on my other piece. First let
me just say why I wanted you to answer this, because I know in
the political arena we live in here, you know, we will blame
the President for a variety of things because we do not want to
take our own responsibility. And the responsibility we have as
Congress is to actually do something, actually make some
decisions that are not going to be easy. A good example is the
highway bill, this FAA bill, which are thousands and thousands
of jobs that are sitting on the line. Because we differ over
one or two items, we are going to throw the whole thing out
because we think that is best for the political fight rather
than the economic issues. And why I am saying this is more of
speaking to the choir here because you agree, but also to the
people who are watching that we have a responsibility here as
Congress. It is not just the President. It is all of us that
actually have to do something. So I just want to put that on
the table.
But, second, Dr. Hassett, you said it and I am a believer
in this, and that is, if we are positive and we have a positive
attitude, a lot of things can happen. When we sit around--if
you came to work every day and your boss always said the sky is
falling, guess what? You will believe that, even though it may
be factual or not, it is irrelevant. At a certain point you are
not very comfortable working in that environment, and you feel
very bad about the situation.
We have a habit here--and the press accompanies us in this
effort--if it is negative, we are the first to speak out on it
and it gets the front headlines. When we talk about the
policies, like this last month--and I think it was third
consecutive month our trade deficit decreased, but it was this
big in the Washington Post I think, you know, on page 14 or
something, buried. I think that is positive. I think the 2
million jobs we have created over the last--when I say ``we,''
collectively in this economy, since 2009 is pretty good because
we are not in the negative spiral, which is what we were when I
came here. We were 500,000 jobs lost in a month. We are in a
positive. The market is up 70 percent since January 2009. There
is more cash in the banks of businesses all across this country
than ever--I do not want to say in history--in history. I will
take your word on it. This is significant, but we do not talk
about that. Or the bank bailout bill, which I was no big fan
of, but it has actually produced a positive revenue stream to
our country. They paid it back plus more.
The auto industry is at the highest--every single one is
showing profit since 1998 for the first time. I do not know. I
think that is good news. Maybe I am wrong, but that seems to be
good news.
But we tend to talk about the negative so that people fear
what is going to happen. So we have a responsibility to talk
about what is good, what is positive, what is going on in this
economy that can help people's attitude, because I believe in
two statistics that are important: consumer confidence and
retail sales. I know unemployment, GDP, and all that--when I go
back home and I mention GDP, people look at me like, ``What are
you talking about?'' When I say ``consumer confidence'' and
``retail sales,'' why? If the consumer is confident about the
economy and feels good about where we are going, they will
spend more money. When they spend more money, they spend it in
retail areas, which are the highest taxpayers in corporate
America because they do not get all the fancy breaks. They do
not get all the--I know this. We are in the retail business in
our family. They pay the highest rate. But they are also the
fastest to reinvest in equipment and employees.
So I just--I went on a little rant here because I get a
little frustrated when people--everything is bad news. Well,
you want to talk bad news? It is kind of like in the Snoopy
cartoon. Sooner or later the person who has the cloud over
their head, it is all bad. We have a choice to make here.
But here is one that--it is one of the President's
proposals, and I know at times Republicans have supported this
and Democrats. It has gone both ways, but it depends on the
political winds of the day. But the 6.2-percent payroll tax for
employers to receive from a retailer, a small retailer, maybe
they are making, you know, half a million, three-quarters of a
million gross income in a year. For a $30,000 employee to
receive that $1,800 benefit, they have got to sell probably
$75,000 or more worth of goods. I understand the employee's
standpoint because they will take that money and spend it. But
the employer, they are looking for business. If they have to
now figure out how to generated $75,000 worth of business to
get an $1,800 benefit, help me understand why that is a good
thing. And maybe you do not agree it is a good thing, but that
is one of the proposals. The employee part I am all--I think it
is a good--you know, more money in the employee's hands, the
faster they will spend it and use it to do whatever they want
to do.
Dr. Zandi. Sure. Do you want me to take a crack at it?
Okay. Well, I sympathize with your perspective. I think the
payroll holiday for employees is measurably more efficacious,
effective, because it goes to your point.
Senator Begich. They spend it.
Dr. Zandi. They spend it. The idea behind providing a
benefit to employers is it is good for small businesses. When
we talk about businesses--and I have been talking about their
balance sheet and all the cash--it is important to make a
distinction between small business and big business. The big
guys and the medium-sized companies, you know, companies that
employ over 200, 250 people--that would be kind of a good
demarcation--are doing very, very well, in large part because
they are globally oriented, they can manage their balance sheet
well.
Small businesses are struggling, and they have had trouble
getting credit, and they have cash flow issues. So the idea
here is that this would provide a boost to cash flow in the
immediate near future. But again, you know, as you can tell, I
am much more sympathetic--and on the margin it will be helpful.
To Kevin's point, it will be helpful. But I think it is much
more effective to focus on the employee side as opposed to the
employer side.
Senator Begich. Good. My time has expired, so if someone
wants to say yea or nay, then I can close there.
Dr. Hassett. I will talk until the Chairman cuts me off.
The one thing I want to say is do not forget--and it is also
the argument for the work-sharing proposal of the President.
This is one of the parts that I like. Underneath the sort of
net of, oh, 50,000 job creation is a typical monthly flow of
maybe 3.5 million jobs created and 3.4 million jobs destroyed
or something. That is about what those numbers are right now.
So there are people hiring right now all around the country. It
is just that the net is not what we would like it to be. And so
if we make it cheaper for employers to hire someone, then the
people who are hiring might hire a few extra people, and that
would be the motivation for that side of it.
Senator Begich. Thank you very much. There was your point
by the Chairman. You were buying the time. Very good.
[Laughter.]
Later on, tax reform, which I love.
Chairman Conrad. Senator Ayotte.
Senator Ayotte. Thank you, Mr. Chairman. and I want to say
this is my first meeting of the Budget Committee, and I am
hopeful that as we go forward into the new fiscal year that we
will get together as a Committee to put together a budget for
our country, because I think that is the responsibility that
this Committee has. And as we look forward to the next fiscal
year, I hope we have many more meetings and we make the
difficult choices that have to be made when you actually have
to sit down and put together a budget, a fiscal blueprint for
our country, like so many of our businesses have to do, and our
families.
I wanted to ask about--Dr. Zandi, you said there is no free
lunch, and I could not agree with you more. Can all of the
panelists comment on the impact of an increase in interest
rates? Because our historically low interest rates right now,
they cannot last forever. And, obviously, the Fed has made a
statement that they are going to keep rates low over--it was a
pretty significant statement that the Federal Reserve made in
terms of what it would do with interest rates, but this cannot
last forever.
One of the things I am concerned about is if we have even a
1-percent rise in interest rate, can you all describe for us
what will happen in terms of the costs that we have to pay to
service our debt? And the concern I have with it is we have a
hard time around here saying we even want to cut $60 billion.
Can you tell us what will happen when interest rates rise in
terms of what we owe and what we have to repay?
Dr. Hassett. Go in order.
Dr. Zandi. You want me to go? Go ahead.
Dr. Hassett. Larry Lindsey has done an analysis of this
which is pretty chilling and suggests that if interest rates
return to even a little bit towards normal, it could offset all
the work that we do.
In fact, you know, probably in this Committee room no one
has ever quite said these words before, but there is a very
good write-up of this at ESPN, because the Tuesday morning
quarterback for some reason, because he writes about whatever
is spent, five or six paragraphs on Lindsey's report, and so
you could Google that when you get back. But Larry Lindsey has
done this analysis quite precisely, and the numbers are
chilling.
Dr. Stone. Well, I will say something that might seem
counterintuitive, but actually if interest rates start to rise
a little bit from their very low levels right now, that is
probably a good sign because it probably means that the economy
is getting stronger. One of the main reasons why interest rates
are so low now is that the economy is so weak.
Now, it is also possible that we can have a bad situation
in which the debt problems do become such that interest rates
start to rise. That seems much less likely over the next few
years than the opposite, which is that the economy remains weak
and interest rates remain low.
Dr. Zandi. I think that the impact of rising interest rates
will be mitigated in part by the fact that many households are
locking in these low rates. So if you look at total household
debt outstanding, 85 percent, approximately, is fixed rate--
most of it fixed-rate mortgages. And in this refinancing
activity that is occurring now, very little is adjustable rate.
It is all fixed rate. Businesses are also very good and being
very aggressive about locking in these low rates.
The banking system is a little bit more at risk. They can
get mismatched pretty quickly. But this is the number one
concern at the OCC, FDIC, and regulators. They are trying to
manage that as potential risk.
In terms of the impact on the fiscal situation, that is an
issue. That will be a problem. But I would agree with Chad that
if rates are rising, that is probably a good sign that the
economy is improving and that we are generating more revenue
and the automatic stabilizers are coming in. But it is an issue
and one of the reasons to be concerned about taking on debt,
because there is an interest bill to pay in the future and
interest rates are not always going to be 2 percent on a 10-
year Treasury bond.
Dr. Hassett. Can I take a second----
Senator Ayotte. Yes, please, Dr. Hassett.
Dr. Hassett. Thank you. There are two ways the interest
rate could go up. One is all of a sudden we start growing like
hotcakes and everybody gets optimistic again, and then interest
rates will start to go up, too. But the other thing that could
happen is that people could decide that the United States is
going to be insolvent and they do not want to buy Treasurys
anymore, and then interest rates would go up. And how we should
think about the economic impact of the two things would depend
on which scenario we are in. And I think that we cannot be sure
that the sort of run against the U.S. is something that we
should discount completely.
Senator Ayotte. You also talked about--Dr. Zandi, I believe
you talked about it, as well as Dr. Hassett--our corporate rate
and the impact that has on decisions that the private sector
makes. As I understand it, U.S. companies are sitting on a
record $897 billion in cash, which is up 50 percent from 18
months ago. I would like you to comment on two things.
Mr. Zandi, you said at the top of your list was corporate
tax reform. Why wouldn't we undertake that now? And, second how
does repatriation fit in with corporate tax reform in terms of
bringing that money back here to the USA?
Dr. Zandi. I think you should do corporate tax reform right
now. I think there is no reason that you should not pursue
this, and I think there is a lot of common ground that we can
find and we can come up with good legislation to broaden the
tax base, generate enough revenue, hopefully to lower marginal
rates and even perhaps contribute to deficit reduction. I think
all those things can be done in the context of corporate tax
reform.
I do think repatriation should be part of corporate tax
reform. I think that one aspect of reform is changing to a
territorial system, and as part of that process, we should use
the cash sitting overseas as a mechanism for facilitating the
process to get reform, because as Senator Sessions pointed out,
this is politics and there is going to be a lot of vested
interests. Every loophole in the Tax Code has someone who is
willing to go to the mat for it, and we need some carrots to be
able to get everyone on board. So I think I would use that cash
in the context of the reform to make it all work in a political
sense.
I do not think--just as another point of interest, there is
some effort to bring the money home, allow for repatriation as
a stimulus to the economy, bring that cash over here, somehow
this would be beneficial to investment and hiring. I do not
think that would be particularly efficacious, going to the
point that cash is not a problem for these large multinational
corporations. They have plenty of cash, and I do not think that
is the constraint on their investment and hiring today.
Senator Ayotte. I come from a small business family. I have
been traveling around our State. I have asked all of our
businesses that I have been meeting in August, What is the
number one thing that we could do to help you and that you are
most concerned about in terms of hiring, expansion? Regulations
has been on the top of every single answer. In all of your
economic analyses, have you taken into account the costs,
direct and indirect, of regulatory policies from Washington on
the private sector?
Dr. Hassett. There are estimates of what the true cost of
Government is that include costs of regulation that are pretty
high. Afterwards I could communicate with you and send you some
studies. I forget the exact number, but it is something like $1
trillion a year, costs from excessive regulations.
Dr. Stone. On the question of regulation, that is always a
concern of small businesses, as are taxes. But I believe that
the surveys of small businesses show that the number one
concern for them right now is weak sales, and so I think we
need to do something about that as well.
Dr. Zandi. I just want you to know, I was a small business
owner. I started my own company. I grew it into a small
business of 125 employees, and I sold it to the Moody's
Corporation 5 years ago. So I have been an entrepreneur, a
small business owner. I have created jobs. And regulation is a
problem. Particularly what is the biggest problem is changing
regulation. I can live with, as a small business owner,
anything that you think is necessary, as long as I have clarity
with respect to what that is. Then I can plan and I can adjust.
It is when the regulatory environment is changing quickly that
it creates a lot of uncertainty. I cannot plan for that, and
that is a problem.
So I think regulatory burden is an issue. I think it needs
clearly to be addressed, but most importantly, we need clarity
and certainty with respect to the regulatory environment.
Senator Ayotte. Thank you very much.
Chairman Conrad. Thank you, Senator.
Senator Nelson.
Senator Nelson. Good morning, gentlemen. In the President's
jobs package, he is proposing that we limit the value of
itemizing deductions for upper-income taxpayers. And so I would
like to have your view what effect this would have on the
economy, and if you do not like that, tell me what might be
another way to do it.
Dr. Zandi. I think that this is a reasonable approach to
deficit reduction. In my view, we need $4 trillion, 10 year
deficit reduction. I think the preponderance of that should be
spending cuts. But I do think we need tax revenue as well,
additional tax revenue. And to generate that revenue, I think
we need to scale back the cost of the deductions and credits,
the so-called loopholes in the Tax Code. And the approach that
the President has proposed in limiting the ability of higher-
income households to use deductions and credits in the Tax Code
is a reasonable approach to that end. So I think that should be
part of the process, yes.
Dr. Stone. I agree. It is part of longer-term tax reform
and to pay for the stimulus. I believe the Bowles-Simpson
Commission recommended get rid of the loopholes and then have
Congress decide what ones they wanted to put back in. There is
a lot of money in tax deductions. There is a lot of political
support for those tax deductions. So it is not saying it is
easy, but it is a good approach.
Dr. Hassett. It is actually a clever way to broaden the
base. My concern, as I mentioned in my testimony, is that it
should be part of a comprehensive tax reform, not a one-off to
pay for a temporary stimulus. But I think that the basic idea
is a sound one because it kind of takes a lot of sacred cows
off the table collectively.
The one thing I would note is a lot of people have not
noticed that there are some above-the-line things in the
President's proposal like municipal bond interest and health
insurance that would see tax hikes as well, and so if we think
through the total economic impact of that in isolation, one
would want to account for, for example, the potential right now
that strapped municipalities might have a problem if they lost
the tax-favored status of their muni bonds.
Thank you.
Senator Nelson. Well, I am one member of this Committee
that agrees with the Chairman--and I thank him for all the work
that he did on the Gang of Six and before that Bowles-Simpson--
that this is a moment in time that we could get major tax
reform because with the discipline enforced through the process
of this Super Committee, and then with an up-or-down vote
required before Christmas by each House, we really could get
something done.
Now, the question is: How do you go about getting rid of
the loopholes? Do you take a percentage of the loopholes and
say, as the Chairman had suggested? He was saying 10, 15
percent if you eliminated $14 trillion of loopholes over 10
years, that is some real money. So round it, say, to $2
trillion over 10 years, take that money, pour it into the Tax
Code, simplify the Tax Code, lower the rates, that is real
reform. Or I want to try on you a suggestion of Martin
Feldstein the other day in our hearing in which he says, well,
do not touch the loopholes, the tax expenditures, but put a
certain percentage on each individual taxpayer of the total
amount that they could deduct. He was suggesting 2 percent, but
it could be 5 percent. A 2-percent deduction on each taxpayer
of the total amount of loopholes that they could utilize he
says would bring in $3 trillion over 10 years. What do you
think about that?
Dr. Zandi. I think that is a very clever and laudable
approach. I mean, he wrote a very nice paper, oh, almost a year
ago kind of going through the arithmetic and the math and it
was very compelling to me. So I think that is a reasonable
approach to this problem.
Dr. Stone. It is clever. Sometimes we economists get
criticized for our clever ideas, that they are too clever by
half, but it is a way to deal with the issue.
I would like to say something about tax reform, which is
tax reform is important. It is important for long-term growth.
But we are talking about deficit reduction and so we cannot
talk about tax reform that ignores the fact that it can be a
way of generating revenue, and we are going to need a lot of
revenue to reach $2, $4, $6 trillion of deficit reduction.
Senator Nelson. Well, let me point out on that, before I
get to you, Dr. Hassett, the Chairman pointed out that if you
took his idea of 15 percent of all of the $14 trillion of tax
deductions and you poured that into the tax code and you did it
on a revenue-neutral basis, so in other words the money that
you save, say it is $2 trillion, you are pouring it in over
here. You are reducing tax rates by $2 trillion.
What the Chairman points out, his staff, is that a simple
tax code simplified, getting rid of some of the inefficiencies
of the existing tax expenditures, that through growth over the
next decade, it actually earns you a new $1 trillion in tax
revenues. What do you think about that?
Dr. Hassett. Well, I will--since I was about to go anyway--
and I agree that this--if you just eliminated the tax
expenditures and then had across-the-board proportional rate
reductions, I think you would get the top rate down into the
low 20s. So that means that there is a lot of room.
Now, some things that we call loopholes are things that are
there for a sound economic reason. You do not want a small
business to be taxed on revenues. You want them taxed on
profits. That means you have to subtract some stuff, right. But
the basic principle is sound and I agree that if we did that,
then we would probably get a lot more revenue than Joint Tax
would credit us with.
Senator Nelson. Would Martin Feldstein's idea of a limit on
individual taxpayers--and I assume you could do that on
corporations, as well--would that create the circumstances by
which you would have growth and therefore new revenues from
growth over the next decade?
Dr. Zandi. Yes. Yes, I think that would be an approach that
would generate the kind of benefits that you are talking about.
Yes, I think that would be the case. I do think, though, that
we need to stick to that goal of $4 trillion and ten-year
deficit reduction. We have got to do that.
Dr. Stone. Yes, there will be some growth effects, but let
us not exaggerate or let us not be overly optimistic about how
big the effects we can get. That would be counting on things
that might not come and could short circuit the deficit
reduction we are trying for.
Senator Nelson. Thank you, Mr. Chairman.
Chairman Conrad. Thank you.
Senator Johnson.
Senator Johnson. Thank you, Mr. Chairman.
My background is in accounting. For the last 31 years, I
have been operating a manufacturing business, so that
background just naturally makes me search for root causes when
you have got a problem. So to me, the root cause, really, of
what ails us is the size, the scope, I mean, all the
regulations, all the intrusion of government into our lives,
and the cost of government.
I guess I want to first start out by just asking, right
now, our Federal Government is almost 25 percent of our GDP.
You add on State and local governments onto that and we are
about 40, 41 percent. I mean, European-style socialists, not
the countries, Norway is 40 percent, Greece is 47 percent,
France is 53 percent. European countries are kind of stuck with
about ten percent structural unemployment, much lower growth
rates than we experience. I just kind of want everybody to
comment on that basic premise. Dr. Zandi.
Dr. Zandi. Yes. I think the size of government is
inordinately high at this point. In part, it is because of the
very severe recession that we have gone through and the weak
recovery. But I think if you look at Federal Government
expenditures as a share of GDP, it is 25.5 percent. The long-
run average, meaning back to just after World War II, is 19.5
percent. You should be up or down relative to that given your
demographic structure and lots of other factors, but that kind
of gives you a sense of the magnitude of the problem, I would
concur.
Dr. Stone. Well, one reason that the spending-to-GDP is
high is because GDP is low, but nevertheless, spending is high.
But it is high historically. But I would urge members to look
at the testimony of CBO Director Elmendorf this week before the
Special Committee about the fact that the choices that you will
face of dealing with the deficits down the road are much more
complicated now because of changes in the economy and changes
in the demographics, that looking at historical spending ratios
is not something that we can easily go back to without really
cutting to the bone of programs that enjoy a lot of support and
do a lot of good.
Dr. Hassett. There is a big literature on long-term growth,
the determinants of it, that Robert Barro at Harvard is one of
the leaders of, and one of the more reliable results in that
literature is that if your government-to-GDP is high, then you
do not grow very much. And we understand the channels through
which that effect occurs. One is that a lot of growth often
comes from innovation and inventing cool things and government
does not do that, right. And the second thing is that when you
have a big government sector, then they bid up the wages for
everybody else and make businesses not competitive. Those are
the channels.
Senator Johnson. Yes. I was interested in your analysis of
the three states of Keynesian stimulus, and from my standpoint,
are we not just stuck in stage one? When you take a look at the
ten-year projections, we never--we never balance the budget. I
mean, all we are really talking about is the size of the
stimulus on a year-by-year basis. I mean, how do we ever get
out of this? We certainly do not get out of it by increasing
that stimulus this year by $450 billion, is that not true?
Dr. Hassett. That is right. We are kind of stuck in a
dependency cycle. After I wrote about this in the Wall Street
Journal a couple of months ago, someone sent me an email and
they mentioned that Keynes himself even wrote about this, that
you have to avoid being in a period where you just keep doing a
stimulus every year. And we are stuck in that and we need to
get out with a big permanent fix.
Senator Johnson. Dr. Zandi, you talked about long term,
where about 20 percent of the size of government really should
be GDP, but also long-term, regardless of the top marginal tax
rate, our revenue generation is about 18 percent. I mean, how
do we ever address that structural deficit without recognizing
the fact that, by and large, all we are going to be able to
extract out of our economy in terms of Federal taxation is
about 18 percent?
Dr. Zandi. I agree with your view. I think that we need to
close that structural deficit. This is what I worry about. I
think the economy is very close to going into recession. If we
go into recession, our fiscal problems are going to get
magnified many times over, and these numbers you are talking
about are going to get a lot worse very fast. So we need to
be--and you may not believe me. You may not buy into my view,
but we are----
Senator Johnson. Let me just----
Dr. Zandi. But I think we should work really hard at
avoiding it. So the debate--I do not disagree with you. I think
the discussion is what are we going to do to make sure we do
not go into recession now, because if we do, we have got a
boatload of problems.
Senator Johnson. Here is my problem with your prescription:
It is based on timing. And let us face it. Throughout economic
history, I do not believe government has proven to be
particularly effective at managing economies or being able to
precisely time them. I realize you are economists. I am not. I
am an accountant. I take a look at the----
Dr. Zandi. That is pretty close.
Senator Johnson. I take a look at government estimates. For
example, in the fiscal year 2009 budget, we estimated revenue
for 2010, 2011, and 2012 at $9.3 trillion. Right now, we are
looking at it being about $7 trillion. We were off by more than
30 percent. So I just do not see how we can fine-tune time, you
know, a $450 billion deficit, or stimulus. I think what we need
to do is go back to the root cause and start realizing that
regulations are a huge problem. The size of government is
simply too big and we need to start dialing that back. I mean,
does that not make sense as opposed to trying to think that we
are so smart that we can fine-tune these fiscal prescriptions?
Dr. Zandi. I am more--I would like to respond. Chad, sorry.
Dr. Stone. No, that is fine.
Dr. Zandi. I have more faith than you. I think we need for
you to do this. You have to get the timing right. And I do not
agree that everything that policy makers have done has been a
mistake. Yes, there are a lot of things that have been done.
Some of the things, I would not have done if I were king for
the day. But you take the totality of what the Bush
administration did, the Obama administration has done, what the
Federal Reserve has done, what the FDIC has done, it is really
quite impressive. We cannot----
Senator Johnson. All the government action----
Dr. Zandi. We cannot give up.
Senator Johnson. All the government actions that caused
that housing bubble, I mean, all we are doing is we are
reacting to the harm government caused. So that would be my
point. Let us take a look at government and first require of
government, do no harm. So you take a look at things that
currently the government is harming our economy--regulations,
taxes. I mean, does anybody really dispute that taxing the
economy does not do harm? Now, I realize we do have to have a
certain level of taxation, but it creates harm. Why would we
want to increase taxes, particularly in a time of economic
weakness? I just do not get that at all.
Dr. Zandi. I do not, either. No one is advocating that.
What I am saying----
Senator Johnson. We are asking for a balanced approach in
terms of a long-term, credible spending restraint plan, and
what I am saying is how about have our policy prescriptions
centered around economic growth so that we can get the size of
government down to 18 percent by growing our economy. Let us
work on the denominator rather than the numerator.
Dr. Stone. First, I was going to say something similar to
what Dr. Zandi said about the fact that we are not talking
about fine-tuning the economy right now. We are talking about
dealing with a major sluggish economic recovery and lots of
hardship and waste, and we can really benefit from proposals
like what the President had to prevent the further drag that
the withdrawal of existing actions would have----
Senator Johnson. A four----
Dr. Stone. We will disagree on that.
Senator Johnson. A $450 billion stimulus in a $14.5
trillion economy is fine tuning, and again, it has not worked
in the past. It obviously has not worked. Why would it work in
the future, other than to increase the debt, which is our
problem. Our debt-to-GDP ratio is simply unsustainable. So that
is--again, I just have my concerns.
Thank you, Mr. Chairman.
Chairman Conrad. Thanks, Senator.
Senator Whitehouse.
Senator Whitehouse. There are not many of them left because
time has gone by, but I think there are a considerable number
of people who would agree that government action in the Great
Depression through the Works Progress Administration and other
things was essential to America's survival. And while the
current recession that we are in is significantly less than the
Great Depression, so are the policy prescriptions that we are
talking about. We are really nibbling around the edges compared
to the kind of interventions that Franklin Roosevelt led that
got us through the Great Depression. So I just wanted to make
sure that that piece of our history was recognized in this
discussion.
What I hear more than anything else from people who are
watching this debate in Rhode Island, in my home State, are two
things. One is, I am willing to help. I am willing to help. But
if I am going to help, I want the feeling that we are in this
together. I do not really trust you guys in Washington to put
everybody in together. I worry that there are a favored few who
have strings that they can pull in Washington who are not going
to be asked to contribute and that offends the Rhode Island
sense of fairness and that causes a lot of suspicion to kind of
cloud around what we are doing.
The other thing that I hear is, for God's sake, get this
done for once and for all. Let us make the big decisions. Let
us move on to other things. I am tired of this being a constant
nickel and dime and we cannot move on to other issues.
So in the context of the first one, we want everybody to
pitch in on this, I am very concerned that you have the most
famous rich person in America, Warren Buffett, saying, hey, we
rich people are being coddled by the existing tax system. Now,
that was his word. You look at the IRS information and it tends
to confirm that. The 400 richest--I am sorry--the 400 highest-
income Americans, rounding at about a quarter-of-a-billion
dollars each in income in the last year that the IRS measured,
paid, on average, 18.2 percent in Federal taxes, which equates
to what in the Providence labor market the Bureau of Labor
Statistics says a truck driver makes. Probably everybody in
this room pays a higher rate than 18.2 percent. The previous
year, it was 16.7 percent.
If you look at pockets of wealth, like the Helmsley
Building, which is its own zip code and therefore you can drag
out IRS information from it by zip code, ditto. Very, very low.
It turns out that the janitors and the doormen and the cleaning
people in the Helmsley Building probably pay higher taxes than
the occupants of the Helmsley Building.
So we, in many respects, have an upside-down economy.
My colleagues often point out that the top one percent of
Americans pay, whatever it is, 30 percent of the income taxes,
but that tends to focus, A, only on income taxes, and it tends
to overlook the fact that they also take 25 percent of the
income every year and own more than 30 percent of the wealth.
So if you are just going on a flat tax rate based on wealth or
income, we are about there right now and it is a lot of the
kind of moderately-wealthy people who are rolling up those
taxes and at the high end the numbers drop to 18--like I said,
on average, 18.2 percent.
I know this is a little bit beyond the field of economics,
but our capacity to address this problem is, to a degree,
limited by public tolerance for what we can do. And it just
strikes me that if we are going to generate public tolerance to
make the big step that Rhode Islanders are looking for, to get
this solved, that it really is important that we take Warren
Buffett's advice and that there not be a situation in which
people making a quarter-of-a-billion dollars a year are paying
a tax rate that is lower than or equal to what a truck driver
pays, all taxes in.
So I would like your observation on that. Is there any
economic issue there or is that just kind of a cultural and
political issue that we need to address? Dr. Zandi, and then
Dr. Stone, and then Dr. Hassett.
Dr. Zandi. I am sympathetic with your characterization of
the skewing of the distribution of income and wealth.
That is how I would characterize what you said. You know,
if you look at the data, it is pretty clear that the share of
income, the share of wealth accruing to the upper groups has
risen pretty consistently over the past--since the early 1980s.
Senator Whitehouse. And in the last decade-plus, their
taxes have dropped considerably, enormously, in ways that no
other segment of society can match.
Dr. Zandi. And you are also right. Economists always have a
hard time talking about these issues because we do not focus on
questions, generally, of fairness, but questions of how the
economy is functioning. But I think you can make a case, or at
least it is something we should be worried about, that the
skewing of the distribution of income and wealth could, in
fact, because of political reasons and other reasons, affect
decisions, policy decisions, and thus the well-functioning of
the economy. I sympathize with this.
I think the--and, in fact, when we think about the $4
trillion deficit reduction, I think it is appropriate to
consider it through the prism of what it means for the
distribution of income and wealth. I think that is an
appropriate criteria to consider in that process.
I will say, though, that I do think that, with respect to
tax reform, that if you solely focus on let us reduce the
deductions and credits in the code, the loopholes, that you
accomplish so many things. You make the system fairer. Everyone
can buy into that. It is less complex. Therefore, they
understand it and, therefore, they do not think they are
getting ripped off. And it will ding the higher-income
households because they are the folks--me--who are deducting
mortgage interest and taking all these deductions and credits
in the code. So I think that is a reasonable approach that----
Senator Whitehouse. Well, let me jump in there on the
corporate tax code. My time is expiring, so let me jump to
this, and I will go over so I am not just hearing from one
person. I am going to ask Dr. Stone next.
CVS, a great Rhode Island corporation, headquarters in
Woonsocket, Rhode Island, you know, stores across the country,
provides a great service to Americans with low cost, high-
quality retail pharmaceuticals and drug store type stuff, pays
a solid 35 percent tax rate on its profits. Carnival Cruise
Line--I have got nothing against Carnival Cruise Line. Rhode
Islanders go on cruises. That is all fine. But I think their
last tax rate was 0.8 percent or something, compared to 35
percent. They paid about one fiftieth the tax rate of CVS.
General Electric had a negative tax rate. They actually got
money from the taxpayers on the billions of dollars that they
earned.
Dr. Stone, does it make any sense to have that kind of
discrepancy in the corporate tax code, and should we, if we are
moving towards a flat rate, be considering areas--and I would
contend that potentially green energy is one--where there is an
international competition to seize a controlling share, if you
will, of an emerging market and that we need to be
internationally competitive, and therefore, in that one
context, it might make sense to provide some tax support? Is
that a fair way to look at this question, or how would you look
at it?
Dr. Stone. Well, you are right about the disparities across
corporations because of the way the corporate tax code is
currently structured. We have high marginal tax rates and
everyone focuses on those, the 35 percent that CVS pays, but we
have lots and lots of ways that you reduce your average taxes,
and that is why we have a quite low average corporate tax rate,
and the idea of corporate tax reform is to broaden the base,
maybe bring the rates down, and from my standpoint, bring in
some revenue.
The reason we have corporate tax expenditures is we want to
encourage worthwhile activities, but we do not want it to show
up as government spending because somehow that is bad and the
tax code is good. It is the same thing.
So encouraging green technologies, good idea. Maybe the tax
code is the best way to do it. Maybe there are other ways.
Senator Whitehouse. Thank you, Chairman.
Chairman Conrad. Thank you.
Senator Wyden.
Senator Wyden. Thank you, Mr. Chairman. This has been an
excellent panel.
I want to talk about tax reform in a little bit of a
different way and I am going to do it largely because I think
this is a big moment for tax reform and something that I am
just thrilled to see us arrive at. I put in my first tax reform
bill with Rahm Emanuel, to give you an idea some of the
history, and then Senator Gregg and I spent two years, week
after week after week, producing the first bipartisan tax
reform bill. And then we have had the good fortune of having
Senator Coats and Senator Begich be part of it. So it is a
bipartisan kind of effort, and listening to all of you, you can
see some of the possibilities in terms of the benefits to the
country.
You look, for example, at the Bureau of Labor Statistics
figures. In the two years after the 1986 tax reform bill, the
country created 6.3 million new jobs. That speaks right exactly
to the point you have been talking about, Mr. Stone, and I
think very eloquently.
It addresses the predictability question that I think both
Mr. Hassett and Mr. Zandi have been talking about, because we
all understand that business is saying, my goodness, we cannot
possibly predict what is going to happen, and I think it is
clear that there is an opportunity to show our people that
there will be a certain sense of fairness from the changes and
the simplicity.
The big question, what I want to get into with you, is we
are really fighting the clock. We are fighting the clock
because we have got this super committee. It is a question of
how much tax reform they can do in the committee and then the
rest of it, for example, could be done by the Ways and Means
Committee and the Finance Committee, perhaps under a short kind
of time line. And that is why I continue to be so committed to
the 1986 model, is it is understandable. Basically, apropos of
this question we have been talking about, you are trading
preferences for cash to lower marginal rates while keeping
progressivity, essentially the model of 1986.
So let me begin my questioning with you, Mr. Hassett, and
you, Mr. Zandi. Would it be fair to say, given the time crunch
and the press of so many issues on the super committee, that it
would still make sense to use that 1986 model? By the way, I
think they are going to have trouble getting anything else
scored. Chairman Conrad is here and I think he will be
interested in this. It is going to be very hard to get any
other tax reform model actually scored. The Joint Committee on
Taxation spent months after months after months working with us
and now we have a scored bill. They have not even been able to
score the Bowles-Simpson model.
So I would like to kind of start with Mr. Hassett and Mr.
Zandi, that on the tax reform issue, would it not make sense--
we have done it before, Democrats, Ronald Reagan--to take the
1986 model as the template and then have the debate about the
rates and the additions and the like so at least we can get
started on this? Mr. Hassett.
Dr. Hassett. That is a great idea, Senator Wyden. In fact,
I think that I can say that one of the favorite proposals of
Republicans at dinner parties for the last decade has been the
``back to the future'' plan that starts with the 1986 tax code
and then starts adding things that we think that we added since
then that are good. It turns out that that list is pretty
small.
Senator Wyden. Okay. Mr. Zandi.
Dr. Zandi. Yes, I would concur. I think you are right about
the history. I mean, the tax reform, the 1986 tax reform was a
very significant achievement and did lay the foundation for
much better growth long run. I think that would be an
interesting--I had not thought about that until you mentioned
it, but I think that would be a good prototype for the current
debate.
Senator Wyden. Well, I appreciate that, because then you
can have a discussion about looking at the various options and
almost dial the rates in line with the information we have from
the Joint Committee on Taxation. For example, the Bowles-
Simpson rates are different than what I have had with Senator
Gregg and Senator Coats and Senator Begich. They go to 12-22-
29, largely on the personal rates. But we can provide, for
example, for the debate, the information so that if you adjust,
for example, the top rate by one percentage point, you will
know what it costs. Would that not make sense in terms of
trying to structure the debate? Do any of you want to comment
on that?
Dr. Hassett. Yes, it makes sense.
Senator Wyden. Okay. Mr. Hassett, I want to ask you a
question in terms of the business rates, because this is an
area where we spent an enormous amount of time and sort of took
as our kind of lodestar that we wanted to have competitive
rates for American business, competitive rates solve a lot of
problems. I mean, our corporate rate is 24, for example. That
is really the lowest on offer. You could adjust it one way or
the other, but it would be a competitive rate.
And my understanding from what you have said, you have been
concerned about this issue particularly as it relates to
domestic businesses, small businesses, and larger businesses
because you are concerned they are not getting fair treatment
relative to the multinationals. Now, I want all three of them
to get fair treatment, small businesses in the United States,
larger business in the United States, and I want our
multinationals to be competitive. But tell us your thoughts
with respect to this issue and, again, any sense you have about
eliminating preferences to drive down the rates.
Dr. Hassett. Thank you for the question, Senator. I think
that it is really important to emphasize a very
underappreciated fact about the corporate tax that I mentioned
in my testimony, but that right now, the average tax on foreign
income for U.S. multinationals is probably something like 17
percent, and so what that means is that if you have a company
like CVS that does not have access to the option to shift its
intellectual property offshore and then pay royalties to
foreign subsidiaries and so on, then they pay a much higher
tax.
If you were to just cut the U.S. corporate rate, say, all
the way to 17 percent, then the typical multinational with
activity abroad might even be indifferent, right, because they
are saying, well, that is about what I am paying on tax right
now anyway, but the U.S. worker would not, and that is the
important point, because then, all of a sudden, all these
people who have a really strong incentive to do the stuff
offshore and create the jobs over there would be creating the
jobs at home.
And so I think that within the corporate community, there
are going to be winners and losers as you construct a tax
reform. But the point is that the workers of America, the
people of America, they are going to be winners because we are
going to be encouraging people to have their activity at home
now.
Senator Wyden. What encourages me--I see the Chairman has
got his gavel in his hand--is you are a conservative, I think
you would say that by any kind of political perspective, and
you are advocating for red, white, and blue jobs and doing it
in a way that ensures that each of those businesses, the small
business, the domestic business, the multinational, be
competitive, and much again of the more complicated approaches
are going to be hard to do.
Senator Gregg and I--and I will wrap up with this, Mr.
Chairman--Senator Gregg and I probably spent a gazillion,
quadrillion hours--barely an exaggeration--looking at this
territorial issue, and I continue to be open to it. But as you
know, Mr. Hassett, it involves a whole host of issues, transfer
pricing, where you generate a sale over here, you book the
profit over there. You get the competitive rates which you are
talking about and you solve a lot of problems. Sheldon
Whitehouse could tell CVS they are going to be part of a tax
system where they get a competitive rate. The small businesses
and NFIB benefits, as well. You do not go through some of the
extraordinary complications of getting too territorial.
Mr. Chairman, another good hearing. I look forward to
working with you.
Chairman Conrad. Senator Wyden, thank you, and thank you
for the efforts that you and Senator Gregg made on fundamental
tax reform. Really, what the two of you did was the blueprint
for what was done in the Fiscal Commission and the Group of
Six. And I tell you, I personally believe that it would pay
huge dividends for this country.
We have a tax code that no one would write if you started
from scratch today. It is a monstrosity. I used to be a tax
administrator. I was the Tax Commissioner of my State. I was
Chairman of the Multi-State Tax Commission. In the Reagan
administration, I served on a commission on the taxation of
multinational corporations. I spent a lot of time negotiating
with Europeans and the Asians on tax policy internationally.
Our tax policy is absolutely a disaster, and it is a
special disaster now that we have to worry about our
competitive position in the world. This tax code was written at
a time we did not have to worry about our competitive position.
We were completely dominant. We no longer are. If you were
concerned about our competitive position, you would never write
a tax code like this one.
We ought to--I believe we ought to write a tax code that
encourages savings and investment. You have got to have savings
if you are going to have a pool of money for investment. You
have got to have investment if you are going to grow. Our
system does not encourage savings and investment, just the
opposite. And you ought to enhance the competitive position of
companies that are based here in this global competitive
environment. It is a sort of a no brainer.
And this is an opportunity. Senator Sessions said it. We
ought to seize this opportunity, and we ought not to delay tax
reform. There is absolutely no reason for delay, and you have
provided--you and Senator Gregg--really an outstanding
blueprint for it.
I would like to take just a minute to talk about how we got
in this mess from my perspective. Again, this is what I
believe. Looking back since 9/11 we have had a collection of
policies that created a stew, that created bubbles in housing
and emergency and commodities, and that stew was a loose fiscal
policy managed by the Fed--loose monetary policy managed by the
Fed, loose fiscal policy managed by Congress and the
administration, previous administration primarily, in my view,
responsible, because we had lots of money growth, very low
interest rates over a protracted period, at the very time we
had a loose fiscal policy, massive increases in deficits and
debt under the Bush administration, and with an overlay of
deregulation.
I hear some of my colleagues say let us have more tax cuts
and more deregulation. Really? That worked great. That is
exactly what was done during the Bush administration, and at
the end of the Bush administration, we were on the brink of
financial collapse. If that was such a brilliant strategy, how
is it that we were then on the brink of financial collapse?
Because that is where we were.
Now, I personally believe it is an overly loose monetary
policy, overly loose fiscal policy, and deregulation--or really
not deregulation. There was no regulation of derivatives--that
brought us to the brink of collapse. That does not mean we
should not reduce regulations in other places because, clearly,
we do have a regulatory burden. In many places it makes no
sense. I do not argue against that.
But the notion that all regulation is bad is part of the
reason we are in this mess. Hello. What was happening with AIG?
A little small unit takes unbelievable risks with derivatives
and puts us on the brink of financial failure. I will never
forget being called to a meeting in the Capitol, the leadership
of the House and the Senate, Republican and Democrat, and the
Secretary of the Treasury in the Bush administration and the
Chairman of the Federal Reserve saying to us they are taking
over AIG the next morning because if they did not, there would
be a financial collapse in 10 days. That was not the Secretary
of the Treasury in this administration. That was the Secretary
of the Treasury in the Bush administration, saying if they did
not take over AIG, where there was no regulation of
derivatives, that we would have a financial collapse.
So that is my own view of how we got in it, and how we get
out is, I believe, a combination of things. I do believe when
the economy is extraordinarily weak, the only one strong enough
to come in and provide additional aggregate demand is the
Federal Government. That is a Keynesian idea. I subscribe to
it. I believe it is correct, that you have got to have the
Government come in to provide a lift to aggregate demand;
otherwise, the spiral will only get worse. I believe the
policies adopted by, interestingly enough, the end of the Bush
administration, by the Bush administration, and then followed
by the Obama administration prevented a depression. I believe
that. I believe history will record that. Dr. Zandi, your
report suggests that.
I also believe that we are on an utterly unsustainable
course with debt, and it is imperative that we put together a
credible, serious, long-term debt reduction plan. So I have
found myself at odds with the right and the left. I think both
of them are not reacting to the reality of the moment that we
face now that requires changes in an awful lot of what we are
doing. And I believe that means fundamental tax reform to, yes,
in part raise additional revenue, but I also believe we have
got to cut spending, and I also believe we have got to reform
the entitlements.
You know, some of my friends on the left do not want to
reform entitlements. I do not think they are right. I think
what the trustees have told us is true. Those programs are
headed for insolvency if we fail to act. And I believe our
friends on the right that say you do not have another dime of
revenue are dead wrong. I believe they are both wrong. We not
only have the highest spending in 60 years as a share of GDP;
we have the lowest revenue in 60 years as a share of GDP. Both
are true. And it is no wonder we have got record deficits and
record debt.
And I also happen to agree--one place Senator Sessions and
I do agree, I believe the report of Rogoff and Reinhart. When
you get a debt of more than 90 percent of GDP, gross debt, you
have endangered and weakened your future economic prospects.
And I do not know, Senator Sessions, if it is 1 percent that is
in the Rogoff-Reinhart analysis or it is the half of 1 percent
Dr. Hassett is talking about. I think in a way we are talking
about two different things because they are talking about the
average from the 200 years of economic history, the 44
countries they examined. You are talking, I think, about our
specific circumstances. But in either case, we are talking
about a reduction in future economic growth, and it would be
wildly irresponsible for us not to respond. I think the
differences here lie more in timing than they do in a question
of what has to be done.
With that, I will recognize Senator Sessions--well, Senator
Merkley has returned, but I have taken some time here awaiting
your return. I would give Senator Sessions a chance to respond
now, or if we would want to wait until after Senator Merkley, I
would give him first up then.
Senator Sessions. Maybe I could just briefly, you know, I
do not oppose, as I said, any regulations, all regulations,
just those that are ineffective.
As to the housing bubble and the collapse financially that
we suffered, I remember distinctly supporting my colleague
Senator Shelby, who proposed, at the suggestion of President
Bush and Alan Greenspan, significant controls on Freddie and
Fannie, which were the core of the problem of the housing
bubble. It passed the Committee on a purely partisan vote when
he was Chairman, and a threatened filibuster killed it in the
Senate. I think that would have made a difference.
I do not think it is fair to say this side just opposes all
regulations and would respond on that. I would also note that
the hearing, I think, Mr. Chairman, has highlighted the
question, and you stated it again, and that is, Can we add
another $450 billion to the debt? And will that short-term
high--Bill Gross referred to it as a sugar high--that high that
will be paid for in the future with the hangover, is that the
right way to get us out of this situation? I just am losing
confidence that it is. I think Mr. Hassett is saying that if
this is going to be a slow, long progress out of a long
financial debt crisis, the pay-for is going to come long before
we are back in the kind of economy we want to see in America,
and it will hammer us in. And then I guess we will be--they
will tell us then, Mr. Hassett, Dr. Hassett, we need another
one.
So that is the real question we are wrestling with. I think
good people can disagree. Thank you for having this hearing and
the good discussion we have had.
Chairman Conrad. Yes, very good.
Senator Merkley.
Senator Merkley. Thank you, Mr. Chair, and thank you all
for bringing your analysis to this hearing room.
I wanted to raise an issue that I do not think has been
raised, which is essentially some of the practices in China,
specifically the pegged currency which operates as a tariff on
our products or a subsidy to Chinese products to us, both of
which decrease the strength of manufacturing in our Nation, but
also China's state banks subsidies, their financial repression
or interest rate control that result in a negative interest
rate that essentially transfers wealth in an informal tax from
the citizens to the businesses, and the subsidies combined with
loans and grants from the state banks that create very
favorable circumstances for building a business in China. So
these two things together comprise a substantial industrial
policy.
How should we in America view this in terms of the impact
on our economy? And what should we do in response?
Dr. Zandi, do you want to kick that off?
Dr. Zandi. Sure. Thank you for the question.
I think it is fair to say that the Chinese currency is
significantly undervalued vis-a-vis the U.S. dollar. I have
done a bit of work in this area and I have seen other work. I
think a rough estimate would be it is undervalued by 25, 30
percent, so it does put American manufacturers at a competitive
disadvantage.
The Chinese are allowing their currency to appreciate 5, 6,
7 percent per annum. Sometimes they slow it down, sometimes
they speed it up. But that is their plan, and they have
articulated that, and they are going to do that ad infinitum
into the future.
I think it would be desirable, preferable from our
perspective and their perspective, frankly, that they would
accelerate that process. It would be therapeutic for the global
economy if they did. And I think that policymakers should work
to that end.
I do not think, though, there are any legislative solutions
to that problem. I think they would be counterproductive. I
think that is something that should be left to discussions and
negotiations with the Chinese to try to convince them of this.
And I will say one thing about the Chinese policy that is
positive, and that is, we know exactly what they are going to
do, which is clarity and you can plan for it. So businesses are
plugging in 5, 6, 7 percent per annum ad infinitum into the
future, which is not a bad thing. So there is some upside to
that clarity. But I would not counsel any legislative action
with respect to how to address that.
With respect to the other aspects of Chinese policy, you
know, I think they are mostly on the margin. I do not know that
they make a big difference. I will, though, say a strong
Chinese economy now is vital to a strong global economy. If the
Chinese economy were to weaken at this point, it would raise
the odds that Europe would go into recession because Germany
relies very heavily on selling to China. And it would
jeopardize our own expansion.
So, you know, I understand what you are saying. I hear it.
You know, some of the things they are doing I do not like, but
I do not think that at this point it would be therapeutic to
add them, at least not in a legislative way.
Senator Merkley. I do find it interesting that when we took
a bipartisan delegation to China, we heard from American
companies two things: one is that they were competing with
folks who were getting huge subsidies from the state banks;
and, second, that they felt they needed to be in China because
of the markets; and, third, that they were given a huge amount
of control on how they could operate, ranging from a tractor
company being told that they needed to go big, go west, or get
out. That means they could not build tractors to compete with
Chinese tractors. They could not utilize the infrastructure in
the east. They had to go west. And if they did not like it, too
bad. And company after company talking about requirements for
joint venture structures where technology was stripped, control
was stripped, copyrights were stolen, et cetera. And it was
amazing to see, because companies in the past had been very
reluctant to talk about these negative aspects for fear of
getting kicked out, but to see American companies one after the
other sharing their horror stories made a big impression, I
think, on all of us who went there. And yet we are sitting here
saying no controls on Chinese companies, operate anywhere you
want, utilize the infrastructure anywhere you want. Certainly
this 25-percent, 30-percent devaluation impact is an effective
tariff.
We have quiet conversations. We have whispered in the ear
for a long time. Is it time for us to have a more--I know you
are saying no, but I think it is important for us to ask
ourselves: Is it time to have a more aggressive conversation
about a fair trading structure that does not take jobs out of
America? That is what I am wrestling with. Do others want to
comment?
Mr. Smith. Well, I agree with Mark that it is--and I agree
with your premise. It is a problem for American manufacturers.
There is no question about it. It is a policy that the Chinese
think works best for them. I think there are a lot of
underlying problems. The state banks are going to be a problem
for them. The fact that they are supporting their currency
means they have to find ways to control inflationary pressures.
There are a lot of pressures on them.
But they seem pretty committed to it, and I do not think we
can do much legislatively to change that unless it is aimed as
a negotiating strategy, and you generally do not want to use
legislation, actual legislation, as a negotiating strategy.
Dr. Hassett. The one thing I would like to add, Senator,
too, is that China's advantages are dissipating and that a lot
of activity--I know Mark has written about this--is moving to
other corners of Asia, and that I think heightens the
opportunity of the kind of reforms we have talked about today,
because when we look up and we see, you know, chip
manufacturers locating their foundries in Malaysia and, you
know, the foundry has almost no labor, one guy pushes ``Start''
in the morning and all these robots make the chips. But they
are taking these very capital intensive things and locating
them in places that are not in the United States. Well, that is
not because of China's currency, you know, and it is not
because of relative labor costs. It is because of other
fundamentals like the fact that we have such a terrible Tax
Code and they get a big tax advantage for being offshore. And
so I think that if we fix the United States, then the concerns
that you raise, which are legitimate ones, will be a lot less
relevant because people will really want to be home in the
United States again.
Thank you.
Senator Merkley. I want to switch to a second question, and
I guess there will be very little time for you to respond
because it is almost time. But in housing, we have an enormous
cloud of foreclosures hanging over our country, possibly
another 5 to 8 million by various estimates. We have huge debt
overhang for American families. A big piece of that is the debt
on their properties, including their second mortgages, third
mortgages. These two pieces, we have not seen movement of an
economy out of the ditch without housing being part of the
solution.
How do we make housing part of the solution?
Dr. Zandi. I know you have done a lot of really good work
in this area, and I support a lot of it. I think that there are
two things that could be done that would make a difference in
the very near future. First is I would not allow the conforming
loan limits that will expire in a couple weeks to expire. I
would extend the higher conforming loan limits. It is on the
margin. It really helps the Northeast and California, maybe
some areas in the Pacific Northwest, but, nonetheless,
everything is on the margin at this point.
The second and perhaps more efficacious effort would be to
stimulate more mortgage refinancing activity. I would do a few
things to juice up the HARP program. We have fixed mortgage
rates at a record low, 4 percent. The average coupon on a
Fannie-Freddie mortgage--the median coupon is 5.5 percent, so
half of mortgages are above 5.5 percent. These are clearly
mortgages that could be refinanced. You could lower these
folks' monthly payment overnight, and it would help provide
more cash to them. It would be stimulus to the economy, and it
would help reduce the odds of default.
It is not a slam-dunk. You know, you have investors that do
not get the interest income, but on net, I think that is a very
positive way to do it. Of course, that has to be--it is not
through legislation. You have to work through the FHFA because
this is on Fannie and Freddie.
Senator Merkley. I am out of time or, otherwise, I would
have you all chime in, but, Mr. Chair, thank you very much.
Chairman Conrad. Thank you, Senator, and I thank the
witnesses. We appreciate very much your participation in this
hearing today.
I would say to Senator Sessions, do you have any last word
that you would want to say?
Senator Sessions. Thank you, Mr. Chairman, for the hearing,
and I do believe that we are wrestling with this question. Do
we accept the President's proposal to increase spending,
increase debt, and raise taxes as an effort to assuage the
uneasy poor growth pattern that we are now seeing? I am afraid
the danger is more real than the benefit.
Chairman Conrad. All right. We appreciate that. Obviously,
I have a somewhat different view. My own judgment is in the
context of an overall plan to get deficit and debt down, I am
concerned about the risk of going into recession and how that
would actually add to our debt and deficit problem. So I think
it is worth taking aggressive steps now to try to avert a
recession.
But I also want to say for those who might be listening
that Senator Sessions and I will be working on a plan for
budget process reform. We have not reached a conclusion. We are
going to be holding hearings on this subject. I do believe that
this is a time that we could get something done that would be
very important for this institution and important for the
country to improve the budget process here. And I am going to
be leaving. I really do not want to leave this budget process
to whoever follows because this budget process is not working
the way it should. The one thing we can agree on is that.
I also think we can agree on some of the fixes. Going to a
2-year budget process I think would be a significant
improvement. And we have also got to talk about some other
issues as well, but that will be the subject of another
hearing.
Again, I just want to close by thanking so much the
witnesses, Dr. Zandi, Dr. Stone, Dr. Hassett. You have all
contributed to the work of this Committee, and we appreciate
it.
[Whereupon, at 11:52 a.m., the Committee was adjourned.]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
PROMOTING JOB CREATION IN THE
UNITED STATES
----------
TUESDAY, SEPTEMBER 20, 2011
Committee on the Budget,
U.S. Senate,
Washington, DC.
The Committee met, pursuant to notice, at 9:32 a.m., in
Room SD-608, Dirksen Senate Office Building, Hon. Kent Conrad,
Chairman of the Committee, presiding.
Present: Senators Conrad, Wyden, Nelson, Whitehouse,
Warner, Merkley, Begich, Sessions, and Ayotte.
Staff Present: Mary Ann Naylor, Majority Staff Director;
and Marcus Peacock, Minority Staff Director.
OPENING STATEMENT OF CHAIRMAN CONRAD
Chairman Conrad. The hearing will come to order.
I want to welcome everyone to the Senate Budget Committee
today. Today we will again focus on the economy and additional
steps that can be taken to strengthen the recovery and to
create jobs.
We are fortunate to have three distinguished witnesses here
today.
Dr. Alice Rivlin, of course, is well known to this
Committee and has testified here many times. She currently
serves as director of Greater Washington Research at the
Brookings Institution as well as co-chair of the Bipartisan
Policy Center's Debt Reduction Task Force. She was the founding
Director of the Congressional Budget Office, served as Director
of the Office of Management and Budget in the Clinton
administration and held the position of Vice Chair of the
Federal Reserve. She also served with me last year as a member
of the President's Fiscal Commission. I can attest to the
extraordinary contribution she made there. Dr. Rivlin is truly
a giant in the budget world. We are delighted that she can be
with us today.
Dr. Harry Holzer is Professor of Public Policy at
Georgetown University. Dr. Holzer served as the Chief Economist
at the Labor Department during the Clinton administration. We
are delighted that you could be here as well.
And Dr. J.D. Foster is a senior fellow in the economics of
fiscal policy at the Heritage Foundation. Dr. Foster served as
Assistant Director for Economic Policy at the Office of
Management and Budget during the George W. Bush administration,
and I understand he will be here shortly.
Thank you all. We look forward to your testimony.
I would like to just begin by putting things in
perspective, and I want to begin with a brief overview of the
economic situation as I see it.
It is important to remember what has happened to the
economy. In January of 2009, the economy was losing more than
800,000 private sector jobs a month. Private sector jobs growth
returned in March of 2010, and we have now had 18 consecutive
months of growth. However, in August we gained only 17,000
private sector jobs, which is clearly not enough. We face a
very real threat of going back into recession. That is why I
believe we need to take steps to generate near-term economic
growth and jobs while we simultaneously address the long-term
debt threat.
The unemployment rate remains far too high. As of August,
the unemployment rate was 9.1 percent, and long-term
unemployment is up sharply. In August long-term unemployment,
those unemployed for 27 weeks or longer, was 3.9 percent. That
is up dramatically from the 0.8 percent average over the period
from 1948 to 2007.
The median duration of unemployment is also up sharply,
climbing to almost 22 weeks in August. We know that some of the
drag holding back the recovery is caused by the nature of the
recession that preceded it. Economists have found that
following recessions that were caused by or accompanied by a
severe financial crisis, the recoveries tend to be shallower
and take much longer. Two leading economists, the two
Reinharts--Dr. Carmen Reinhart and Dr. Vincent Reinhart--found
in their research, and I quote: ``Real per capita GDP growth
rates are significantly lower during the decade following
severe financial crises. . . . In the 10-year window following
severe financial crises, unemployment rates are significantly
higher than in the decade that preceded the crisis.''
``The decade of relative prosperity prior to the fall was
importantly fueled by an expansion of credit and rising
leverage that spans about 10 years; it is followed by a lengthy
period of retrenchment that most often only begins after the
crisis and lasts almost as long as the credit surge.''
We also know the Federal response to the recession and
financial crisis helped to pull the economy back from the brink
and made the recovery stronger than it would have been without
it.
One of our witnesses last week, Dr. Mark Zandi, along with
Dr. Alan Blinder, a former Vice Chairman of the Federal
Reserve, completed a study last year that measured the impact
of Federal actions to shore up the economy, including both the
Fed's monetary policy actions and the fiscal actions taken by
the Congress and the administration. Here is a quote from their
report:
``We find that its effects''--``it'' being the Federal
response--``on real GDP, jobs, and inflation are huge and
probably averted what could have been called `Great Depression
2.0.' When all is said and done, the financial and fiscal
policies will have cost taxpayers a substantial sum, but not
nearly as much as most had feared and not nearly as much as if
policymakers had not acted at all. If the comprehensive policy
responses saved the economy from another depression, as we
estimate, they were well worth their cost.''
This chart, the next chart, shows Dr. Zandi and Dr.
Blinder's estimate of the number of jobs we would have had
without the Federal response. It shows we would have 8 million
fewer jobs in the second quarter of 2010 if we had not had the
Federal response.
We see a similar picture in the unemployment rate. If we
had not had the Federal response, the unemployment rate would
have been 15 percent in the second quarter of 2010 and would
have continued rising to 16.2 percent in the fourth quarter of
2010--this, again, according to Zandi and Blinder.
In addition to helping create jobs, it is also worth noting
the importance of the 2009 Recovery Act in strengthening the
Nation's social safety net. According to an analysis of Census
Bureau data, unemployment benefits kept 3.2 million people out
of poverty in 2010. Medicaid and CHIP expansions ensured half a
million fewer children were uninsured in 2010 than in 2007.
SNAP, formerly known as food stamps, kept 3.9 million people
out of poverty in 2010. And the earned income tax credit kept
5.4 million people out of poverty in 2010.
I hope our witnesses can comment on the importance of these
programs and their impact on the recovery.
With that, we will turn to Senator Sessions for his opening
remarks, and then we will turn to our witnesses for their
testimony.
OPENING STATEMENT OF SENATOR SESSIONS
Senator Sessions. Thank you, Chairman Conrad, for holding
this hearing. I think it is helpful for us to meet and continue
to discuss these issues, although we are not working on a
budget, unfortunately.
And thank you, Dr. Rivlin, for all you have done for your
country and for being with us again today, and thank you, Dr.
Holzer and Dr. Foster, for joining us to share your insights.
I know Dr. Zandi is a good man and he insisted that we have
a stimulus plan and demanded that we have one, and we got one
and it did not do what he predicted, and now he says if it had
not passed, it would all have been a disaster. I am not unaware
of the fact that Dr. Zandi, as capable as he is, in January of
this year predicted we would have 3.9-percent economic growth
this year, and the first quarter came in at 0.4 and the second
quarter at 1.0 and now his prediction has dropped to 1.6, a
stunning reversal of his prediction.
So I guess I would just say, Mr. Chairman, that when you
are running up unprecedented debt, it is easy to say we borrow
and spend and it is going to create growth, but it did not
create much growth, that is for sure--not as much as Dr. Zandi
and others predicted.
But there is one thing we can agree on, I think: that we
are suffering from unacceptably and persistently high
unemployment. Millions are unable to find jobs. Millions are
unable to find jobs on a full-time basis, that are now working
part-time. Our economy has experienced anemic growth this year
and unexpectedly high unemployment this year. America's gross
debt is rising to dangerous new levels.
I do, however, have a confident feeling about our future. I
believe that if we meet the challenges of our current crisis,
we will struggle, but we will rise from it with a renewed
vibrancy and strength. No workforce on Earth is more skilled,
more productive, or dynamic than the American workforce. No
business community is more effective. No nation can compete
with the men and women that make up this economy. That is as
true today as it ever was, and there are some indications that
if we do things right, we may take back our production of
manufacturing that America has lost in past years.
America's private sector is just waiting to grow and
expand, but unwise Government policy continues to stand in the
way. Unpredictable Federal intervention is fostering a climate
of fear and uncertainty. Businesses are threatened with a
constant slew of new taxes and regulations, and America's gross
debt, now 100 percent of GDP, hangs over the economy like a
dark gray cloud.
A prominent study praised by Secretary Geithner indicates
that our debt at the debt level today already costs us growth
and jobs. We need policies that create a better environment for
job creation and ones that do not add to the debt. That means
more American energy production, the elimination of harmful and
costly regulations and growth-oriented tax reform.
All three Committee witnesses last week, Democrat and
Republican, agree with the wisdom of those ideas. Since taking
office, President Obama has surged our gross Federal debt
nearly $5 trillion in 3 years. Non-defense discretionary
spending spiked 24 percent during the first 2 years of his
Presidency, and his February budget called for further dramatic
increases in discretionary spending next year, increases,
double digit.
For instance, he has requested a 13-percent increase in
education spending following an almost 70-percent increase in
total education spending since taking office.
The President routinely talks about the need to make
Government investments--i.e., spending--but he forgets to
mention just how much we have already spent. Yesterday he made
his fourth attempt this year to offer a credible fiscal vision,
but I was disappointed to see he again failed to present the
honest budget plan America deserves and our economy needs.
The White House says that the President's plan achieves
$3.2 trillion in deficit reduction. The actual deficit
reduction is only $1.4 trillion, less than half of what the
White House states. Note this is $1.4 trillion in deficit
reduction, not spending reduction, even the 1.4 that is
achieved. This has become the pattern. The President
understates the depth of our fiscal danger and overstates the
impact of his plans.
Consider the astounding disparity between the levels of
taxation claimed versus those actually contained in the
proposal. The White House asserts $2 in cuts for every $1 in
tax hikes. The true figure is nowhere close to that. The
President's plan is compromised of tax hikes alone. In reality,
there is not a single penny of net spending that is cut.
Yesterday the President said this: ``I am proposing real
serious cuts in spending. When you include the $1 trillion in
cuts that I have already signed into law, these would be among
the biggest cuts in spending in our history.''
In reality, under the President's plan the net change in
spending is an increase. In fact, the President's plan is to
keep spending more. Part of this is a result of the President's
new stimulus jobs program. But there are three additional
accounting tricks that the White House used to get these
inflated figures.
First, war funding. The plan shows $1.1 trillion in savings
from putting a cap on war costs, but those costs are going to
decrease as the war effort unwinds whether or not there are
caps in place. They do not represent actual spending cuts from
what we project or a new policy to achieve future savings. The
President's proposed caps simply manipulate baseline concepts
to show the savings as a policy choice, which inflates the
spending cuts in the President's plans. Congress rightly
rejected this accounting process as part of the deficit
reduction during our recent debate.
The doc fix. The administration's baseline also assumes a
Medicare doc fix, which is the payment for our physicians, an
increase in spending of $293 billion over 10 years compared to
the current baseline. This gimmick accounts for the higher
spending as a given rather than as a policy choice that needs
to be offset. Without this gimmick, the President's health care
savings of $320 billion becomes a health care savings of only
$27 billion.
Interest savings. The President counts as savings the net
interest reductions that result from his proposed tax hikes,
counts that as a spending cut. When you are in a crisis, you
must deal honestly with the American people. A President, more
than anyone, has to have credibility with the American people.
You must present the facts with credible solutions.
Americans are good, decent, hard-working people who will
accept a difficult course of action on honest terms, but the
White House is trying to be clever at the expense of being
credible. The debt is destroying jobs today, and if we are
going to restore confidence and growth, credibility is one
asset we cannot afford to borrow against.
America deserves an honest, fact-based approach to our
economic challenges, one that controls Washington spending and
grows the private sector. I hope today's hearing will move us
in that direction.
Thank you, Mr. Chairman, for leading us and calling us
together and this good panel of witnesses.
Chairman Conrad. Thank you, Senator Sessions.
Obviously, we do not have complete agreement on this panel.
[Laughter.]
You know, we certainly disagree as to how we got here. I do
not think the current administration created this problem. They
inherited it. They inherited an economy that was on the brink
of financial collapse, and we were brought to the brink of
collapse by the set of policies that I see being repeated by
our friends on the opposite side. Those are the same nostrums
they offered before that brought us to the brink of financial
collapse:
Do not have regulation on the big financial institutions.
That is what led to the collapse of the financial sector.
Do not regulate derivatives. We saw what happened. AIG,
biggest insurance company in the world, failed, had to be taken
over during the Bush administration.
And the debt skyrocketed as a result of those failed
policies. If tax cuts that disproportionately benefit the
wealthy were the answer, we would have had a booming economy at
the end of the Bush administration. Instead, we were on the
brink of financial collapse. I was in the room when the
Secretary of the Treasury in the Bush administration came to
tell the leadership of Congress, Republican and Democrat, that
if they did not take over AIG the next morning, there would be
a financial collapse within days. Barack Obama was not the
President. George W. Bush was the President.
So the place we do agree is we have a debt threat that must
be confronted. It must be confronted. This is the place we do
agree. And we have got to find a way to come together to both
deal with the short-term crisis we confront in terms of one in
every six Americans being unemployed or underemployed and the
harsh reality that we have a debt that is too high, that is
growing too fast, and must be dealt with.
So that is where we are.
Senator Sessions. Mr. Chairman.
Chairman Conrad. Senator Sessions.
Senator Sessions. There is much truth in what you say. I
remember you hammering President Bush with your charts week
after week on the floor for overspending while, in effect, our
Democratic colleagues were simultaneously criticizing the
Republicans for not spending enough. But we did put our country
at risk, and decisions were not correct over a period of years,
including the Democratic blocking of President Bush's request
to have more regulations of Freddie and Fannie. Had that been
done earlier on, we may not have had anything like the serious
problem we have. So the regulations were proposed by Senator
Shelby, my colleague, passed out of the Committee on a party-
line vote, but blocked on the floor.
But that is all--you are correct. We have got to now focus
on the future. And I just would say to you I believe my
statement was hard this morning, but I believe it was correct
in holding the President accountable for presenting now a
fourth plan that does not seriously address our problem. It is
essentially a plan to raise taxes on a weak economy, and as Dr.
Hassett said previously in our previous hearing, it would
take--we may be going a long time without very slow growth, and
these costs of spending now to borrow will come to roost before
our economy has come back. And that is a dangerous path.
So thank you for having this hearing, and I appreciate your
leadership.
Senator Wyden. Mr. Chairman.
Chairman Conrad. Senator Wyden.
Senator Wyden. Could I take under 1 minute? Because the
Finance Committee is going to a markup, but I just wanted to
offer one quick thought because I think it can help bring us
together.
Chairman Conrad. Yes.
Senator Wyden. And Mr. Foster is here, and he is with the
Heritage Association. Mr. Foster, I am not sure you are aware,
but Heritage scored our tax reform bill, the legislation I have
had with Senator Gregg and now with Senator Coats. Here are the
numbers: Heritage said that bill would create 2.3 million more
jobs per year, increase disposable income by $4,100 per year
for a family of four, raise foreign investment in the United
States by $292 billion a year on average, and boost real GDP by
an average of $298 billion per year.
I only offer this up because I have listened to this kind
of discussion. We have a chance for bipartisanship here.
Senator Warner in particular and Senator Chambliss have done
some very good work. Ms. Rivlin has done some very good work. I
am going to try to get back, Mr. Chairman. I just wanted to
bring that up because I continue to believe that we can come
together, particularly around growth-oriented tax reform, and
do it in a bipartisan way.
Thank you for this courtesy, and I apologize to my
colleagues for imposing.
Senator Sessions. Mr. Chairman, Senator Wyden has truly
worked hard on a complex piece of legislation that has the
potential for bipartisan support and does have some very fine
parts of it. I congratulate you, Senator Wyden, for trying to
come up with some ideas that can make this country better.
Chairman Conrad. Well, I thank Senator Sessions for that
observation. I would add my voice. Actually, this effort, as
Senator Sessions knows, started with Senator Gregg, who was the
Ranking Republican on this Committee. He and Senator Wyden
worked together in a very collaborative and intense effort to
look at the Tax Code, which is a monstrosity by anyone's
definition. And we appreciate the work.
Let us go to the witnesses. Alice Rivlin really needs no
introduction before this Committee. Welcome. Please proceed.
STATEMENT OF THE HONORABLE ALICE M. RIVLIN, PH.D., DIRECTOR,
GREATER WASHINGTON RESEARCH, THE BROOKINGS INSTITUTION
Hon. Rivlin. Thank you, Mr. Chairman, Senator Sessions, and
members of the Committee. I am delighted to be back here, and I
want to reinforce what has been said, that there is a chance
for bipartisan cooperation now, and I hope the Congress seizes
it.
This is a critical moment for this Committee to focus on
employment and job creation and for the Congress to take
action. The future of the United States as a prosperous economy
and as a world power depends on getting people back to work in
productive jobs. Unless employment accelerates sufficiently to
keep up with the natural increase in the labor force and
gradually absorb the unemployed and the hidden labor force of
discouraged and part-time workers, we are doomed to stagnation
and eroding standards of living.
This fate is not necessary. We have jobs that need to be
done in both the public and the private sectors and millions of
people who want to do them. It would be unbelievably stupid to
allow capacity to sit idle--workers skills to atrophy and
workplaces to become museums of out of-date technology--for
lack of imagination and political will.
However, policies to accelerate job growth and prevent a
double-dip recession must be part of a simultaneous strategy to
stabilize the projected increases in national debt and return
the Federal budget to a fiscally responsible path. Rather than
conflicting, these two sets of policies complement and
reinforce each other. The faster we get people back to work,
the easier it will be to move toward a sustainable budget. If
the recovery stalls and unemployment rises again, prospects for
stabilizing the debt will deteriorate rapidly. It will be worth
some temporary increase in the near-term deficit to avoid
getting into another downward spiral of falling jobs, sales,
investment, and confidence. At the same time, the faster we can
put a firm plan in place to reduce looming future deficits--by
reforming entitlements and the Tax Code to enhance incentives
for growth--the more sustainable the recovery will be. We
cannot afford to wait until the economy recovers before acting
to rein in future deficits. These deficits reflect the oncoming
tsunami of retirees combined with rising health care costs.
They cannot be blamed on President Obama or President Bush. The
sooner we put fixes in place--either on the spending or on the
tax side--the less disruptive these changes will have to be.
If we continue postponing actions to stabilize the debt, we
undermine the confidence at home and abroad in the ability of
our political system to face problems and solve them. We risk a
spike in interest rates and even a sovereign debt crisis that
could permanently damage the power and prosperity of the United
States.
No one should underestimate the difficulty of crafting
policies that will effectively create jobs in the peculiarly
daunting economic circumstances that we face. It will take the
best efforts of the public and private sectors working together
plus cooperation and compromise across party and ideological
lines--which is hard to achieve in the current polarized
political atmosphere.
The recession is deeper and more intractable than most
economists--including those in the Obama administration,
including Mark Zandi, and almost all the other economists I
know--realized at the time that employment and incomes were
plummeting in 2008 and 2009. Recessions precipitated by
financial crises tend to be deep and long, as scholars like the
Reinharts have shown, but this one is likely to be especially
hard to pull out of quickly. It was precipitated by an
uncontrolled and, I believe, immoral frenzy of overleveraged
trading in complex derivatives based on unrealistic
expectations of continued value increases in the very assets
that American households depend on most--their homes. After the
plunge in those overinflated values, we should not be surprised
that confidence is low and consumers and the businesses that
depend on them are deeply frightened of being overextended.
The large stimulus package enacted in early 2009 helped
keep the economy from sliding into an even deeper recession. I
do not know whether the Zandi-Blinder numbers are exactly
right, but we surely would have had millions more people out of
work if we had not done something. Together with aggressive
monetary policy, the stimulus helped reverse the downward
spiral of falling demand and layoffs. The Congressional Budget
Office and many other analysts have clearly shown that the
economy performed substantially better than it likely would
have in the absence of the fast and aggressive administration
and congressional action. That growth, though positive, has
been modest and unemployment remains high is evidence of the
depth and intractable nature of the recession, not that the
stimulus did not work.
But the events of the last year have shown that more action
is needed. Just as the direct impact of the stimulus began
running out, additional negative forces hit the economy--the
rising energy prices, the effects of the Japanese nuclear
disaster, slowing growth in the rest of the world, and
worrisome disarray in Europe. The President is absolutely
right, I believe, to propose a new package of tax cut
extensions with incentives to boost employment, help for the
long-term unemployed, and infrastructure investment. This
package was carefully designed to incorporate many policies
that appeal to both parties. It includes a proposal to redesign
unemployment compensation to facilitate getting workers into
jobs. I believe this Congress should take the proposal
seriously, but incorporate it into a longer-run deficit plan,
as the President suggests.
Any action to create jobs right now, whether through
spending or tax cuts--will increase the deficit and add to the
debt. But we can afford to do this if the immediate actions are
part of a legislative package that stabilizes the debt by
reforming and simplifying the personal and corporate Tax Codes,
reducing the rate of growth of Medicare and Medicaid, and
putting Social Security on a firm foundation. Variations of
such a ``grand bargain'' were recommended by the Simpson-Bowles
Commission and the Domenici-Rivlin Task Force. Indeed, any
serious bipartisan group seeking to stabilize the debt is
forced by the arithmetic of the situation to a similar
solution. The President's speech yesterday voiced his clear
commitment to the double strategy of creating jobs and reining
in future deficits.
The new Joint Select Committee, which I think of as Conrad-
Gregg come to real life, has the power to go beyond its initial
mandate and make the grand bargain a legislative reality. The
best thing that could happen to prospects for American growth
and jobs--both long and short run--would be for this Committee
with the strong support of the President and congressional
leadership to ``go big'' and use their extraordinary powers to
put into law an immediate job creation program incorporated
into a grand bargain to stabilize the debt.
Mr. Chairman, you and your former colleague, Senator Judd
Gregg, and many others worked tirelessly to get the Congress
and the President to this point. I earnestly hope the Select
Committee will prove able to finish the job.
Thank you.
[The prepared statement of Hon. Rivlin follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Conrad. Thank you, Dr. Rivlin.
Dr. Holzer.
STATEMENT OF HARRY J. HOLZER, PH.D., PROFESSOR OF PUBLIC
POLICY, GEORGETOWN UNIVERSITY
Dr. Holzer. Thank you. Good morning, Chairman Conrad,
Senator Sessions, and Senator Warner. I would like to make
several points this morning about the unemployment rate and
also about the U.S. labor market situation over the next
several years, and I would like to make five broad points, if I
may.
Point number one, as we all know, the Great Recession has
created very high unemployment that will persist for several
years to come and will have lasting negative impacts on
millions of workers, even after the economy recovers. As
Senator Conrad pointed out, over 40 percent of the unemployed
already suffer lengthy spells of unemployment, 6 months or
longer, which will make it harder for them to re-enter the job
market and find jobs when job creation actually picks up. And
low earnings will scar millions of young workers for years to
come, even when the labor market recovers.
But, point number two, even before the recession began,
most American workers suffered from stagnant earnings growth
and very high earnings inequality. During the full economic
cycle of 2000 to 2007, median earnings stagnated or declined
for most groups of American workers. Many of those hit hardest
during the downturn, like less-educated men, were actually
faring quite badly even before the recess began because of
declining real earnings. Disadvantaged workers more broadly
suffer not only from high unemployment but also from low wages
and limited labor market activity, even when the economy is
strong. Among many other problems, the education and skill
levels of many of these workers have failed to keep pace with
the rising demand for skills in good-paying jobs in our
economy.
Point number three, policy efforts to improve labor market
outcomes for American workers should focus both on creating
jobs and reducing unemployment caused by the recession in the
near term, as well as on improving the skills and earnings of
American workers over the long term. To create more jobs and
reduce unemployment, I support many of the provisions of the
American Jobs Act, including reduced payroll taxes for workers,
targeted payroll tax cuts for employers who are expanding
payrolls, and additional spending on infrastructure, school
construction, and layoff prevention of State and local
government employees.
Personally, I would prefer the tax cuts for employers to be
more generous than those proposed by the Obama administration,
but at the same time much more targeted on employers whose
payrolls are actually expanding, because this would improve
incentives to expand hiring and limit the windfall for
employers who do not change their behavior and pocket the tax
cuts anyway.
But at the same time, we also need to take actions to
improve the education and workforce preparation of American
workers so that they are more able to fill good-paying jobs,
and that leads me to my fourth point.
To improve worker skills, we need to develop more effective
education and workforce systems, better targeted towards
growing and high-paying sectors of the U.S. economy. Earnings
supplements for disadvantaged and dislocated workers who are
actually taking low-wage jobs could also be expanded while the
unemployment insurance system could be more closely tied to
skill-building efforts.
If I could just take a minute to elaborate on those
proposals, the current workforce system, funded by the
Workforce Investment Act, appears to generate employment
services and job training quite cost-effectively, but it has
been starved for funds for many years and should not be further
reduced in the context of budget-cutting efforts. But we also
need to better integrate career services and occupational
training in our high schools and in our colleges, and to make
both sets of institutions more responsive to the demand side of
the labor market. For high schools, this means generating high-
quality career and technical education--not as a substitute for
higher education but as another means of preparing students for
higher education and the labor market. Career Academies have
demonstrated the value of such education, especially for at-
risk young men.
Turning to American colleges, most students who attend
community colleges never complete any educational credential,
which I define either as an occupational certificate or an
associate's degree; and when they do, the credentials they do
get too often are not in fields that are well rewarded in the
labor market. So career counseling and other support services
need to be improved at these schools, and remedial education
needs to be better integrated with actual occupational
training. The colleges themselves should face stronger
incentives, in the form of per capita funding from their
States, to expand curricula and instructional capacity in areas
where labor demand is strong and growing, and that is often not
the case right now.
Rigorous evaluation shows that sectoral training, in which
young or adult workers are prepared for specific sectors of the
economy and in which employers are actively engaged, can
provide strong earnings improvements for the disadvantaged
while meeting employer needs for skilled workers. These
programs can and should be especially supportive of employers
who take the high road and provide good-paying jobs for less-
educated workers. Dislocated workers, including the long-term
unemployed, can also derive substantial benefit from technical
training targeted towards growing fields of the economy.
Now, I believe all of this could be supported by a new
competitive grants program provided to the States that more
actively integrate their education and workforce systems and
make them more responsive to the labor market, and especially
the needs of good-paying employers, along the lines I have
described. This program should actively reward States for
building on their efforts to date and leveraging many other
sources of funding. But any new funding should not become yet
another excuse to cut back funding for existing WIA programs.
For disadvantaged workers or dislocated workers who do not
benefit from training, supplements to their low earnings could
be expanded. These would include the earned income tax credit,
which right now benefits adults without children too little, or
also wage insurance for the dislocated who have taken lower-
wage jobs than the ones they held before. And I believe a
variety of reforms in the unemployment insurance system might
encourage more employers and more training to be provided to
these workers.
Finally, my last point, which actually deals with the
budget issue, all of these measures could be undertaken with
modest new Federal expenditures over time. They are not
inconsistent with sensible efforts to limit our budget deficits
over the long run, which should primarily focus on raising
Federal tax revenues below its historically low level right now
and reducing spending on entitlement programs, especially for
future retirees. That is where I think the bulk of the long-
term savings on the budget side should be made.
So thank you. I will stop there and look forward to our
question-and-answer session.
[The prepared statement of Dr. Holzer follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Conrad. Excellent testimony. Thank you very much.
Dr. Foster.
STATEMENT OF J.D. FOSTER, PH.D., NORMAN B. TURE SENIOR FELLOW
IN THE ECONOMICS OF FISCAL POLICY, THE HERITAGE FOUNDATION
Dr. Foster. Chairman Conrad, Ranking Member Sessions, thank
you for the opportunity to testify today. My name is J.D.
Foster. I am a senior fellow at The Heritage Foundation. The
views I express are my own and should not be construed as
representing any official position of The Heritage Foundation.
The risks to the economy today are great, and so our focus
on jobs and economic growth is critical. Two years after the
end of the Great Recession, as the economy should be
accelerating, economic growth and job growth have ground to a
halt.
Mr. Chairman, as you noted, when a recession is
fundamentally involved with financial markets and they are
troubled, they are the epicenter of the recession, you are
going to have a very troubled recovery. Absolutely correct. But
you will have recovery. Two years on, we should be in
recovery--not flat-lining, not heading toward a double dip,
possibly. So while financial markets may explain the early
troubles of the recovery, I do not believe they provide much of
an explanation for today.
Speculation, argumentation, theorizing, and models are now
irrelevant on this simple point. The data before us agree on
the underlying message from the President's recent jobs speech.
They all attest to the simple, incontrovertible fact that the
President's stimulus policies have failed utterly and
completely. I take no pleasure in pointing out this fact, nor
in the fact that we predicted the policy failure 2 years ago. I
would much rather have been wrong and for millions of my fellow
citizens to be gainfully employed in all those jobs the
President promised to create.
To understand what policies might be helpful today and
which harmful, it is important to assess why the economy is not
recovering. The fundamentals of our economy remain sound. The
natural productive tendencies of America's workers, investors,
and entrepreneurs remain undiminished. The economy is poised to
grow. Why, then, does it hold back?
There are, of course, the unusual head winds, such as the
follow-on effects of Japan's devastating earthquake and
tsunami. But the economy faces and overcomes such head winds
even in the best of times. Head winds there are, to be sure,
but they are not an explanation of the economy's lethargy.
The economy suffers from two categories of troubles. The
first are structural, which today primarily reflect a housing
sector still in deep disequilibrium in many areas of the
country. There is very little substantively that Government can
do to return housing markets to normal, and heaven knows
Congress and the President have tried just about everything.
And that is part of the problem. Government's well-intentioned
meddling has delayed and distorted the essential requirement
for normalization of the housing markets--price discovery. On
balance, these policies have set back the housing recovery by
months, perhaps a year or more, and there is an important
lesson there.
The second category of trouble is what might be termed
``environmental''--not the natural environment but the economic
environment. Most relevant for our discussion today is
alternatively a shortage of confidence or an excess of bad
uncertainty.
Those who could make the decisions and take the actions
that would grow the economy lack the confidence to do so. Even
today, the economy abounds in opportunities for growth. But
turning potential into reality requires action, and action
requires confidence--confidence in the future, confidence in
the specific effects in Government policy, and confidence that
Government can properly carry out its basic functions, like
agreeing to a budget. America suffers a confidence shortage,
and Washington is overwhelmingly the cause.
Confidence, in turn, is lacking because of an excess of
uncertainty: uncertainty about the future, but also uncertainty
about the effects of Government policies--tax, regulatory,
monetary, trade. Uncertainty is natural, of course. The future
is always uncertain. But there is good uncertainty and bad
uncertainty, much as there is good cholesterol and bad
cholesterol. Good uncertainty, for example, presents
opportunities for profit. Bad uncertainty arises largely when
investors and entrepreneurs have very real questions about the
consequences of Government policy.
Tax policy provides a good example of bad uncertainty. The
President's repeated insistence on raising taxes on high-income
workers and investors slows the economy without the policy even
being enacted. It does so by raising the uncertainty about the
tax consequences of various actions. It does not stop all such
actions, but it stops some, and therein lies the difference
between growth and stagnation.
The President's insistence is a two-fer in terms of bad
uncertainty. The specific is that taxpayers do not know what
their tax liability will be. The general is that suggesting
raising taxes on anyone in the face of high and possibly rising
unemployment suggests a gross lack of understanding about how
an economy works. That is a source of bad uncertainty that
afflicts the entire economy, not just those threatened with
higher taxes. In this environment, Congress need not enact bad
policy to weaken the economy. Threats suffice.
The Federal Government should adopt a very simple guiding
principle for deciding what to do next. That principle is: Do
less harm. Do less harm. There is very little in terms of
concrete actions Government can do at this stage that would
help, and a great deal of intended help that would harm, either
by raising the deficit to no good effect or by creating more
uncertainty and slowing the economy's natural healing process.
Do less harm means getting spending under control and thereby
cutting the budget deficit. Americans are worried about
spending and the deficit. That worry by itself is debilitating.
Do less harm means policymakers should stop threatening
higher taxes. We can have debates about who should pay what and
how much when we are at full employment. In the meantime, this
threat is holding us back.
Do less harm means stop the onslaught of new regulations.
The recent pullback of the EPA's ozone regulation was a good
example. Even the threat of new regulations creates bad
uncertainty for those affected, freezing them in place. Again,
we can work through these regulations when Americans are back
to work.
Do less harm means policymakers should stop meddling with
the economy. There is almost no limit to the harm Washington
can do to the economy in its efforts to do something for the
economy. The patient is in recovery--a difficult recovery, to
be sure, but in recovery--slowed by the incessant proddings and
procedures of Washington's policy doctors. The patient does not
need another procedure or a new nostrum. Let it heal. Do less
harm.
Let me talk briefly about one philosophy that has been
driving a lot of our policy, the model of Keynesian demand
management. This is a perfect example of a policy that fails do
less harm. The philosophy is very simple. The economy is
underperforming; demand is too low; the Government budget
deficit is a component of demand, so just raise it. It is an
equation. How can it be wrong? Raise Government deficit
spending and the economy should recover.
The reason this fails is the economy is a little more
complicated than a simple equation. The model that it is based
on ignores something else in the economy, a process called
``financial intermediation,'' basic function of financial
markets.
The problem is that when Government runs more deficit
spending, it has to borrow the money. When it borrows the
money, that money is not available to the private sector to
use. So you have not increased total demand. All you have done
is shifted around.
Now, advocates for this policy will say, ah, yes, but there
is so much saving and people are not doing anything with it;
corporations are sitting on the money. Well, yes, they are, but
that is not at issue. They do not put it in vaults. They do not
stuff it in mattresses. They make it available to the financial
system, which then intermediates it to those who need it.
This Keynesian stimulus cannot work. It is fiscal alchemy,
and it is adding to the head winds in the economy. This is a
perfect example of a policy that fails do less harm.
Thank you, Mr. Chairman.
[The prepared statement of Dr. Foster follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Conrad. Thank you.
We are going to go to Senator Warner for the first round of
questioning because he has got other obligations, as do--I
would say to our witnesses, this is a morning in which other
committees on which Budget Committee members serve have
markups, and so you are going to see Senators come and go to
accommodate that. I know Senator Warner has other obligations
as well, as does Senator Sessions.
Senator Warner.
Senator Warner. Thank you, Mr. Chairman. Thank you for that
courtesy, and I would like to thank the panel. A couple of
quick questions.
One, while we have a diversity of views on the panel, I
think in a traditional approach we would normally say in
periods of enormous recession that the two major tools that a
national government has are monetary policy and fiscal
stimulus. And we can gauge how effective they have both been,
but we basically use both of those bullets. And I am curious.
One thing I have not heard any of the witnesses quantify, and
from across the spectrum, is, as someone who like the Chairman
and others has been working on and feels very strongly about
deficit reduction and debt reduction, the added cost to the
debt of a stagnant economy. Have we been able to equate per
point of increased unemployment what that translates into in
terms of lost tax revenue, additional mandatory Government
spending in terms of unemployment insurance, Medicaid, other
Government support programs, so that while, you know, some
would advocate immediate cuts regardless of effect, if we bump
up an extra point or two of unemployment, what direct effect
does that have on the current deficit?
Hon. Rivlin. Well, higher unemployment and less growth
clearly cuts into tax revenue and adds to costs in programs
like unemployment compensation. The CBO and others have done
that calculation. I do not have the numbers at my fingertips,
but they are not hard to find.
Senator Warner. Does anybody have that number just as a
kind off-their-head ballpark number?
Dr. Holzer. I do not have the exact number, but I do know
that people have looked at the growth of the debt over time,
attribute a good part of that growth not to the specific policy
choices we have made since 2008 but, in fact, to the recession
and automatic declines in tax revenues and automatic increases
in spending programs that do not reflect any choices that we
have made, but that has added likely several billion dollars--
trillion dollars, I am sorry, to the current level of debt. And
that likely could swamp--if the economy double dips, that could
swamp any other efforts made by the super committee to trim the
deficits by further reducing tax revenues and raising spending.
Senator Warner. Dr. Foster.
Dr. Foster. Yes, Senator. This is one of those rare moments
when we are all in agreement, which is rather pleasant. To add
to what Dr. Rivlin said, there is a chapter in the Analytical
Perspectives of the President's Budget--it has been in there
for many years--in which there is a table. I believe it is
Chapter 3, perhaps Table 3.11, which goes through a budget
sensitivity analysis, and you can see in there various
divergences of economic performance from the President's
economic assumptions and the consequences for revenues and
outlays over 10 years. So while I do not have the numbers, I
can tell you at least where you might be able to find them.
Senator Warner. It all makes logical sense. It would be
nice, though, to be able to have that as kind of one of our
normal talking points that per point of unemployment growth or
per half-point of lack of GDP growth, how that adds to the
deficit.
I guess, Dr. Foster, there are two things. I understand
your perspective and your concern about kind of the ``do no
harm'' theory. Would that ``do no harm'' theory in terms of the
revenue side also apply to the immediate Government spending
side? Would not immediate cuts at this moment in time with the
verge of a double dip in front of us also fall into that
category of harming the economy?
Dr. Foster. In general, I do not believe so, Senator,
because I believe that the Government spending which is being
funded by borrowing is simply moving demand around in our
economy. It is crowding out, in the old expression, certain
other spendings.
Now, if you quickly switch from a form of spending where
the economy has productive capacity built up to deal with that
spending, like defense spending, where we have defense
contractors who are geared up to produce certain weapons
systems, if suddenly you cut them off obviously that is going
to require transition costs to the economy. But, otherwise, no,
I do not believe reducing the spending would be harmful, in
fact, there is so much concern about the deficit and debt that
that is one of the factors eroding confidence or building up
bad uncertainty in the economy, and it is what is holding us
back. So not only would we not suffer a downside to such a
policy, but there would be an actual gain to the economy by
reducing the uncertainty.
Senator Warner. But are you saying that transformation in
terms of cutting defense spending might be bad, but cutting
State support of infrastructure or teachers or others would not
be bad or would not have any ill effect?
Dr. Foster. No. The point I am trying to make is some would
have transitory effects that would be harmful and others would
not. Defense is a simple example because you have often large
investments to produce a new aircraft, for example. It is
fairly easy to understand that there would be transition costs
from cutting that back.
There are others as well where you have the private economy
that is geared for a customer--the Federal Government. If the
Federal Government suddenly cuts off that customer, there is
going to be a transition cost. But purchase of goods and
services is a relatively small portion of Federal spending.
There is an awful lot of other Federal spending that would not
be subject to that limitation.
Senator Warner. So purchase of goods and services, cutting
off would be bad, but cutting off direct employment would not
be?
Dr. Foster. That would not have that transitional effect.
That is correct.
Senator Warner. One of the other things I was questioning
is, you know, I concur with your point that capital that is
sitting on the sidelines, you know, does not simply sit in a
vault. It is invested. But I would question in terms of
particularly with record-low interest rates and a lack of
willingness to invest that there are more productive uses of
this corporate capital than investing in T-bills in terms of
generating job growth, generating investment, taking greater
risk with larger rewards. You know, I am not sure I would
fully----
Dr. Foster. Oh, there is no doubt that there would be more
productive areas, and I am sure corporate America would love to
deploy its vast resources of cash sitting on the sidelines more
productively. They lack the opportunity to do so right now with
the current economic environment. It gets back to we have a
poorly performing economy and a very uncertain future, and so
they are sitting on the sidelines.
That is not to say that you are going to get a better
outcome simply because Government puts its hands on it and
decides to spend it itself.
Senator Warner. Let me just ask one--I will take one last
question since the Chairman was kind enough to give me the
time, and I would love to hear Dr. Rivlin and Dr. Holzer
comment.
I generally agree with some of your prescriptions. The one
thing that I am cautious about is it seems like most of even
what the President has proposed, there are very few things that
are going to give as immediate a short-term burst. I completely
concur with you, Dr. Holzer, on some of the training
initiatives, but I constantly see so much of what we try to do
up here as well intentioned, the lag time to where it actually
has an effect on immediate job growth or spurs really takes
much longer than I would like, but both, please--and again, my
thanks to the Chairman.
Hon. Rivlin. Well, just a brief comment. I believe what is
holding back investment is not crowding out by the Federal
borrowing but lack of demand, and possibly some uncertainty,
but lack of demand is the basic problem. If you do not think
you can sell your product, you are not going to make more of
it. And the way to increase demand in the short run is to get
money into people's pockets who will spend it. That is the
argument for extending and increasing the payroll tax cut. It
goes to wage earners all over the country. They will not spend
all of it because they are trying to repair their balance
sheets, but they will spend some of it, and that is a way to
get demand up.
Dr. Holzer. I think that there are efforts along the lines
of the American Jobs Act, which may not generate jobs tomorrow,
but we are looking at the rest of this decade, potentially,
just having very stagnant growth, insufficient demand. I think
a lot of those proposals--for instance, the payroll tax cut
targeted towards employers--and, again, I would target it much
more on employers expanding payroll. I think that could
actually raise hiring, even at this level of demand, relatively
quickly--not enormously but in a cost effective way.
I think some of the spending proposals like preventing the
layoff of more State and local employees--that has put a huge
drag on the economy and on the employment growth numbers, and I
think that could occur relatively quickly as well. So I think
within a reasonable time frame many of these policies could be
effective, and also cost-effective.
I want to take issue with my colleagues' analysis.
This notion that Government spending has a one-for-one
crowding-out effect on private spending, especially in really
severe recessions, is not a new idea. This has been debated for
70, 80 years by my profession. I think most economists in this
kind of economy would not subscribe to that point of view. Most
economists would not read the evidence as supporting that point
of view. And, indeed, many conservative economists, Republican
economists, like my former teacher, Martin Feldstein, and also
economists like Greg Mankiw, do not subscribe to that point of
view. So I think we should put those opinions in perspective as
very much a minority viewpoint within our profession.
Senator Warner. Thank you.
Chairman Conrad. Senator Whitehouse.
Senator Whitehouse. Thank you very much, Mr. Chairman.
As some of you who have been here before, I take a very
keen interest in the burden that our health care system lays on
our economy. The President's Council of Economic Advisers says
you could take $700 billion a year in cost out of the health
care system without harming anybody's quality of care. The
Lewin Group, which is pretty well regarded in this area, and
George Bush's Treasury Secretary, Secretary O'Neill, who knows
a fair amount about this from his work in the Pittsburgh
Regional Health Initiative, and as the CEO of Alcoa, they both
have agreed that it is actually $1 trillion a year that you
could take out of our health care costs. That would have
significant effect on reducing the cost of Medicare, Medicaid,
TRICARE.
The other day Secretary Gates said that his budget is
``being eaten alive'' by health care costs. It would have, I
think, a very significant lift on American exports, which now
carry a huge health care cost in their pricing, which our
European competitors and some other foreign competitors dodge
by having a national health care system and a tax system that
exports dodge because they are not picked up in the VAT tax
method. And that creates a huge differential, a huge
competitive burden on an American export product compared to a
competitive product exported into the same international
market.
And so it is frustrating to me when we have a panel of
experts who talk about our economy and nobody talks about
health care. And when we have had this discussion before, what
everybody has said is, well, that may be true, but because of
the nature of the reforms that are required to begin to unload
those excess costs, the 18 percent versus 12 percent of GDP
differential that we carry as a load in our health care
economy, because the nature of the reforms is something that
is, to use a word that only would matter in Washington,
``unscorable,'' we are not going to look at that.
That was true of Bowles-Simpson. I believe that was also
true of Domenici-Rivlin. It strikes me that that is a fairly
big piece of this equation, and I understand that it does not
lend itself to economic analysis as an input, and it is
impossible to score because it is a process of innovation and
learning and trial and error and experimentation. But, clearly,
there is a huge gain to be made just from the difference
between where we are as a country and where all of our
competitors are. And as I said, there is bipartisan agreement
on that subject.
So I guess I just--you know, I keep sending up a flare
whenever we do one of these hearings, saying, for God's sake,
can we please consider health care costs, and particularly
delivery system reform, which is the way you deal with health
care costs without harming some individual who is depending on
a particular benefit. So I would love to hear your reaction to
that thought, Ms. Rivlin, Dr. Holzer, and Dr. Foster.
Hon. Rivlin. Thank you. As you know, Senator Whitehouse, I
agree with you that the rising health care costs are a huge
part of the problem. I talk about this almost every day--not
always in 8 minutes. But it is clear that it is the major
health care programs that are driving the future budget
deficits, and that we, compared to our competitors or to other
advanced countries, spend a lot more on health care per
patient, per anything. Now, that is partly----
Senator Whitehouse. For relatively crummy outcomes.
Hon. Rivlin. With relatively crummy outcomes. That is all
right.
Now, with respect to what to do about it, I think the
problem is not just that we know what to do but it is not
scorable, but lots of things that look promising, such as many
of the pilot programs and experiments with different payment
systems and so forth that are included in the Affordable Care
Act, have not shown clearly that they deliver lower costs and
better quality.
Now, the way we handled that in the Domenici-Rivlin plan
was we did propose a major restructuring of Medicare, known as
``premium support,'' which is a defined contribution plan
coupled with competition on exchanges among health plans. This
is not vouchers. And we think that gets better outcomes in the
long run from the competition among the health plans, but the
scorability is in the defined contribution that you can say
that unless health care costs come down--well, in any case, the
Federal Government will be--its contribution will be defined by
the Congress. And once you do that, it is perfectly scorable.
Now, it does not mean you can never change it. Congress
could change it anytime they wanted to. But I do think there is
an advantage in getting Medicare onto a defined budget that you
vote on and you know what it is.
Senator Whitehouse. We are down below 2 minutes, Dr.
Holzer. I apologize to you and Dr. Foster.
Dr. Holzer. Well, I will just say very briefly, in terms of
how these things impact on the labor market, not only do the
high health care costs impose a cost on employers, which makes
it harder for them to hire more workers, but one of the ways
they deal with that is to take it out of workers' paychecks.
Senator Whitehouse. Salaries, yes.
Dr. Holzer. Ultimately, workers bear most of those costs.
And, indeed, I think as much as one-half of productivity growth
in the previous decade might have been eaten up by rising
health care costs in the U.S. It is one of the major reasons
why very high productivity growth did not show up in the
paychecks of American workers. So I agree with you. It is an
enormous problem affecting many dimensions of these issues.
My sense--and I defer to Alice Rivlin who knows much more
about this than I do, but I saw a lot of promising efforts to
reduce health care costs during the debate on the President's
health care package that politically seemed very unpalatable,
things like rethinking the very favorable tax treatment, at
least putting some caps on that favorable tax treatment of
health benefits. And I think we are going to have to return--we
might have to sort of face some much harder choices in the
future if we want to get those costs under control.
Senator Whitehouse. Dr. Foster.
Dr. Foster. Yes, this is another one of those happy moments
when we are in basic agreement. There is no question that the
rising health care costs are taking the biggest bite out of
workers' paychecks, and they need the cash, and that is a
fundamental problem.
We also have a plan similar to what Dr. Rivlin described as
a premium support model. We think that is ultimately the way to
go, and it is really a very incremental approach to Medicare
reform. It basically says a lot of the things that are
currently done in Medicare are simply done incompletely, and we
need to make them more of a complete model based on premium
support.
Senator Whitehouse. Thank you, Chairman. My time has
expired.
Chairman Conrad. Thank you, Senator.
I am going to take my time now, and then we will go to
Senator Begich next.
Let me just say, earlier we had a couple of references to
the economist Mark Zandi, who testified before this Committee
at our last hearing, and I just want to say, first of all, I
think it is important to know his background. He was adviser to
the McCain campaign in the last election, and I think he made
clear at the last hearing his forecast was off, as were many
economists', because we have had a series of events which he
described in some detail last week, which I think in fairness
we ought to remind people of:
First of all, the disturbances in the Middle East that had
a dramatic effect on oil prices. Oil prices went up. That meant
gasoline prices went up. All heating fuels went up. That
operated like putting a tax on the American economy and the
global economy. So that had an effect on slowing things down.
Second, we had the tsunami and the resulting nuclear
disaster in Japan. That had an effect on global demand. That
had an effect on manufacturing.
Then on top of that, we had the European debt crisis. We
read about that every day. Greece, Ireland, Spain, Portugal,
increasingly Italy, that has had an impact on confidence. And
without confidence, as I think all of you have said at various
times in your testimony, businesses that are sitting on $1
trillion in cash are reluctant to invest.
A final point I would make is: What kind of downturn are we
having here? In part, I believe it is a balance sheet
recession--that is, because financial firms had to rebuild
their balance sheets, they have had to pull back from extending
credit. I hear about this almost every day I am home from small
businesses in terms of securing credit. And that is what the
Reinharts found in their study.
And I would say to you, Dr. Foster, you say 2 years is
enough for a recovery, that is not what they found. They looked
at 200 years of economic history, 44 countries. What they found
is it takes 8 to 10 years to recover, not 2 years--8 to 10
years. And we are 2 years into this. So we are in a very
different situation than a garden variety recession.
When you have what is in part a balance sheet recession,
you have weak aggregate demand. Where you have got weak
aggregate demand, where is it going to come from? If the
Federal Government does not put in its oar, there is no other
place big enough to give lift. That is my own belief.
I also believe that whatever is done to give lift has got
to be in the context of a plan that is credible and serious to
get our debt under control, because the Reinharts also found
once you get to gross debt of more than 90 percent of GDP, your
future economic prospects are reduced. So we are in a very
tough situation, and it is a complicated situation.
Dr. Rivlin, let me just ask you, do you believe that it
would be harmful to at this point have dramatic cuts in Federal
spending?
Hon. Rivlin. I do.
Chairman Conrad. And why?
Hon. Rivlin. Because it cuts into demand. You lay off
people from the Federal workforce or from the State workforces
that are supported in part by Federal grants. You cut back on
payments going directly to people as in unemployment
compensation or food stamps or the other safety net programs.
Now, nobody is going to cut those first, but some of the
extensions end. So people have less money to spend, and they do
not spend it, and the recession gets worse.
I believe that is why the first package, the stimulus
package, prevented a worse, deeper recession, although it was
not perhaps perfectly designed to do that.
Chairman Conrad. Dr. Holzer, what do you believe?
Dr. Holzer. I agree. I think that large and immediate cuts
in spending would have harmful effects. Certain kinds of
spending are more stimulative than others. It is quite
interesting to me that we have delayed in extending
unemployment insurance. We know--and, again, unemployment
insurance in a very healthy economy could convince workers not
to take jobs, but in this kind of economy with 9 percent
unemployment, it is very hard to make that case. And the money
seems to have a very powerful stimulative effect. The same for
food stamps and other things.
I find it really puzzling that some economists will say,
well, even any talk of tax increases anywhere at any time has
this terrible depressive effect, but cutting spending right now
is perfectly fine. That flies in the face of everything I have
ever learned about macroeconomics. Spending increases and
cutting taxes really have relatively similar effects in most
macroeconomic models. To say that one is terrible and one is
fine just does not make any sense and I think flies in the face
of most of the evidence we have. Immediate cuts in spending of
the kinds talked about would have depressive effects on the
economy.
Chairman Conrad. Dr. Foster.
Dr. Foster. Yes, thank you, Senator. I think what you see
here is two very different concepts of how the economy works.
This is not ideology. This is not partisanship. We have
different views on how an economy works. I do not believe in
alchemy. I believe when you start with lead, you end up with
lead, and you do not end up with gold. When Government
increases its spending and increases its borrowing, the money
had to come from someplace. It is not like the Fed which
actually can print dollars. The Treasury does not print
dollars. The Treasury borrows money, and it had to come from
someplace. And when it comes from someplace, it is not there
anymore. It is not there, and we do not know who would have
used the funds. Maybe it would have been consumers buying cars,
maybe somebody buying a house. Maybe the trade deficit would
have been lower because we did not have to import as much
capital from abroad. We will never know where the money came
from, but we know it came from somewhere.
So we cannot just wave a wand and create purchasing power
by running budget deficits. It is not a question, as I said, of
ideology or partisanship. It is a very different conception of
how an economy works.
Chairman Conrad. I think that is fair. And it is healthy
for us to discuss these differences. It is amazing if some of
my colleagues want to suppress these debates. I do not think
they should be suppressed. I think it is critically important
we have these debates and have these discussions. I think it is
entirely healthy.
Senator Sessions.
Senator Sessions. I do, too, and thank you for allowing us
to do so. We had some good hearings on policy early last year,
and I think these are helpful today.
I was supposed to have floor time. I got there and Senator
Alexander was talking, and he had decided not to participate in
leadership but be an active Senator, and he did raise the
question about fierce debate and noted the canings in history
and the fights in history and duels in the Senate. So he said
we need together to work accomplish common goals, but good
debate is healthy.
Dr. Foster, I remember before the first stimulus package
passed reading from Nobel Prize Laureate Gary Becker, who had
written an op-ed in the Wall Street Journal saying this was not
going to work. He predicted it would not work. You predicted it
would not work.
You sort of touched on it, but essentially when you borrow
money to spend money, that money comes from somewhere, and I
believe you have just summed up the problem. That has a
negative impact also.
Now, our Chairman mentioned the Rogoff-Reinhart study that
said gross debt reaches 90 percent of GDP; then you have
consequences. Actually, I have used the figure 1 percent growth
is lost. I think their study actually said 1- to 2-percent
growth would be lost.
Perhaps it is coincidence, but we hit 90 percent of GDP in
the early part of this year, January, and immediately we are
not having the growth that people projected. OMB and CBO
projected growth this year to be 3.1 percent, and it is not
going to be close to that. It is going to be about a point or
two below that.
Dr. Zandi, I teased him a little bit yesterday. He
predicted 3.9 percent. Now Moody Analytics, his firm, is
predicting for the year 1.6 percent. I have my doubts we are
going to reach that. So 1.6 percent is about 2 percent below
what he predicted.
Do you think it is possible, I will ask all three of you,
that the unexpected fall in growth projections from blue chip
economists and the Government and Dr. Zandi, do you think that
could be because we have already reached this debt limit that
empirical studies indicated would cause a decline in growth?
Dr. Rivlin, do you want to start, if you have an opinion?
Hon. Rivlin. I do have an opinion. I think it is an
interesting but totally irrelevant coincidence, and the reason
I think that is the Rogoff-Reinhart study--which is a
fascinating piece of work, as you know, but it looks at
averages over all kinds of different countries over several
hundred years, and it certainly does not indicate that all
countries are the same. And the United States--unfortunately,
in my opinion--has a very strong ability to borrow money
cheaply. We have abused that fortunate fact by borrowing too
much money cheaply for a long time.
But you look at a country like Greece right now, or even
Italy or Spain, they are in trouble because they cannot borrow
more money except at very high interest rates, and that is
killing them.
That is not happening to us. I do not see any mechanism
that is causing us at some particular size of debt to face a
market reaction. That does not mean we should go on increasing
the debt forever. I think that is very deleterious. But this
coincidence I think is just that.
Senator Sessions. Well, thank you. So you see it as
different maybe this time.
Hon. Rivlin. Well, it is different for the United States
because the world thinks that we are the safest place to put
their money, and I hope we never disabuse them of that.
Senator Sessions. I think you are correct. That is an
advantage we have.
Dr. Holzer, do you have any connection between the
unexpectedly low growth and the study?
Dr. Holzer. No, I do not think hitting the 90-percent
figure--and I do not think my reading----
Senator Sessions. It is 100 percent now. It is 100 percent
of gross----
Dr. Holzer. I understand. But having read that book--and it
is a fine study--I do not think Reinhart and Rogoff intended
for us to believe that there is a magic line, a cliff, and that
as soon as we cross that line we are in free fall. This is a
rough estimate of the point at which these difficulties start
to grow on average over many, many economies and many periods
of time. Nothing in their analysis suggests that you cross this
line and terrible things start to happen.
We all agree that we have a major long-term debt problem,
and there is no dispute about that on this panel. But I would
not--and I see no evidence that the capital markets are
reacting in ways right now that are leading--that because you
crossed that line, that is leading to slower growth. I think
what has happened and other parts of Reinhart and Rogoff simply
say that when the financial bubble bursts, you have de-
leveraging. In most sectors of the economy, that de-leveraging
limits demand. They predicted a very, very slow recovery from
this. I think what we are seeing is in line with exactly what
they predicted, not to mention all these other deleterious
effects in the last year. I think the events of Europe have
contributed very importantly, and I think, of course, a lot of
the turmoil here in Washington, D.C., I think has contributed
to a lot of the uncertainty and the unwillingness of employers
to step forward and do more hiring as well.
Senator Sessions. Dr. Foster.
Dr. Foster. Yes, sir. There are certainly head winds in the
economy: the rise in the oil prices, the tsunami and so forth.
No forecaster worth his salt puts out a forecast assuming no
head winds. Head winds happen all the time. A strong economy
overcomes them. One of those head winds could be the 90
percent, but not in a manner that the study suggested. As Dr.
Rivlin pointed out, the study suggested that you cross this
threshold, which is approximate, and you are going to get
interest rate effects, and we are not seeing that to date. That
is not the mechanism on which there is an effect. But there is
an effect, and that effect is on bad uncertainty.
The American people are worried. Now, we may think they
should be worried. We may think they should not be worried.
They are worried, and that worry is bad uncertainty. It is a
bad uncertainty that is draining the confidence, draining the
vitality out of our economy. So it does matter, but not for the
reasons that the Rogoff study suggests.
Senator Sessions. Well, you raise the point. Let us take
the first stimulus. The money has been spent. Correct?
Dr. Foster. Pretty much all of it.
Senator Sessions. And whatever stimulus we got is gone now.
What are permanent costs of that $825 billion expenditure right
now?
Dr. Foster. Well, you are going to--there is the carrying
cost, the service cost from the interest, so that is certainly
quantifiable. And then there is the relatively unquantifiable,
which is the impediment that this bad uncertainty creates in
making the decisions that would result in a stronger economy.
Senator Sessions. Thank you.
Chairman Conrad. Thank you, Senator.
Senator Begich.
Senator Begich. Mr. Chairman, thank you very much. I
actually want to follow the Ranking Member's line there, and
then I have a couple other questions around housing and
overall.
You know, what are the permanent results? Let me describe--
I mean, because if this was a municipal government, the
stimulus, the $300 billion or so, a little shy of that $300
billion was in for capital improvements, you would debt finance
them like any other local government, like I did as mayor. We
would build a road. The money would be spent. That is correct.
You are absolutely right. But here is the result. Now there is
a road. Economic development occurs around that.
I will give you an example on the stimulus money. I am glad
we are getting into more robust debate because I agree with the
Ranking Member. The money is gone, it is spent. But here is the
result. I can tell you from Alaska. I cannot tell you from
Alabama or other States, but I can tell you from Alaska. We
built a hospital. It is going to be completed in Nome, Alaska.
It is going to employ 170 additional people, provide quality
health care, making it a more livable community in the area of
Alaska which will have growth.
It built some roads, which will mean new economic
development around those roads, which is a private sector
investment, which means more tax revenue, which means more
money being generated, which means more bills being paid, more
taxes being paid, and so forth and so on.
Ketchikan, we are invested into helping a shipyard which
now just landed a $150 million construction of a new ship. Or
in Ketchikan, senior housing that will provide housing which is
paid for by the individuals who live there, which generates a
revenue stream.
The way the Federal Government does the budget is the
goofiest thing I have ever seen, and I am hopeful, as the
Chairman and the Ranking Member have talked about reforming it,
we should have two types: a capital budget and an operating
budget. Because you do borrow for capital. The private sector
does it, the public sector does it. The Federal Government, it
is just a convoluted mess. You should not borrow for
operational, but nothing wrong with borrowing for capital
investment, and Recovery money was predominantly that.
Then there was about $300 billion which was tax money we
took from people, but we gave it back--so it is their money--
through a payroll deduction. We gave it back to them.
So, Mr. Foster, I am trying to--so there is no permanent
value for investing in those kinds of infrastructure
investments when you use Recovery money? I mean, we would call
that a capital budget. Help me understand what--I do not get
that.
Dr. Foster. Senator, in my written testimony, which I did
not put in my 8 minutes of reading, I pointed out that I was
not commenting on what the appropriate level of infrastructure
spending is. From what you say it sounds like Alaska may have
had the only shovel-ready projects in America, and I would be
glad----
Senator Begich. Well, let me pause you there, let me pause
you, because people when they say ``only'' and ``no jobs
created,'' that is an opinion. It is not based on fact.
Dr. Foster. No, sir, I would say it is based on a simple
statement of logic. You spent the money. You created the
infrastructure. Jobs were created while they were building the
infrastructure. No doubt about it. You can take a camera crew
to any of those locations you described and show people
working. You can definitely show that those jobs were there.
What you know is you had to borrow the money. Now, when you
borrowed the money, that money was not available to be used
elsewhere by somebody for some thing.
Now, I may not be able to take a camera crew to show you
the jobs that were destroyed in the process----
Senator Begich. But let me ask----
Dr. Foster [continuing]. But I know they were there.
Senator Begich. But let me ask you: If you borrowed that
money, in theory--I am not an economist. No disrespect to
economists. I am a person who has been in the business world
since the age of 14, so I deal with reality. So if you have so
much money available and you are saying so much is taken out by
that kind of borrowing, in effect then what would happen is
rates would go up to start controlling the expenditure because
obviously if I am--I will give you an example of a small
business person. If I have a product and it is selling off my
shelves like crazy, I am going to increase the price to the
customer until I hit a certain point. But actually interest
rates went the other way. They flattened. So it did not do what
you said. What it did do was certain banks do not loan money;
they hold it because they can do other things with it that they
are not getting out to the economy. So your argument really
does not hold up because interest rates actually flattened and
are at the lowest levels in decades, because if the money was
less, the interest rates would go up. Am I confused there?
Dr. Foster. Senator, the argument does hold up. The problem
is one of the things about interest rates is there are a great
many influences on interest rates. And right now the dominant
influence on our interest rates--and I do not mean just today
but 2010, 2009--in fact, going back into the 2000s were other
forces at play. For example, China's large build-up of foreign
exchange reserves is putting downward pressure on interest
rates. That has been a factor for a long time. Right now we
have the euro crisis----
Senator Begich. Right, but let me----
Dr. Foster [continuing]. Where people have noted that money
is flooding into this country driving down our interest rates.
So the interest rate effect is not a sign of what I said not
being true.
Senator Begich. Right, but cheap money for business is good
money if they are expanding. So that has not been a problem. It
has been a problem of the people who control the faucets
opening the dial a little bit. I am telling you from reality,
not from a study and research and all that. I am talking about
a person who has actually had to go through this, who still
goes through this. My wife runs retail stores and has to raise
capital for a very high risk enterprise in a retail business in
an economy that is fragile. So I do not buy your argument. All
I wanted to do is make sure I understood what you were saying.
Let me move on to housing, because this to me is a big
issue. There is a piece of legislation pending that is a
bipartisan piece of legislation. I do not understand why we do
not do this, and that is, a couple of us advocate--as a matter
of fact, my colleague here--who is not here right now, but
Senator Merkley and I advocated this 2 years ago. And now you
have 2 years of a bad economy. It has improved, but it is still
rough out there. But you have some people who have been paying
on these loans, their mortgages, for 2 solid years, not missing
a payment. They have negative equity. Banks have no incentive
to refinance them--not one incentive. Because why? They are
paying. Why would they change them out and give them a lower
rate? Unless they are big customer and they just want to keep
their business. But if you are an average working class, it is
tough.
So why not just say to these folks: Here is what we are
going to do. For you that have been paying for the last 2
years--I am using this as a hypothetical, but I think this is
fair. You have survived the last 2 years. You have been paying
your payments. You have negative equity. You have 7 percent or
above, or whatever the loan rate might be. We want to give you
an ability to refinance at the market rate, which is about
4.125, 4.25. And the Federal Reserve will buy those papers from
the banks, so there is no worry about the market trying to
figure out if they are going to buy them or to. Just we will do
it, because if they default, they will come back to us anyway.
Let me start from here and then go down. Your comments on
that? Plus it will put an enormous amount of money into the
economy. Go ahead.
Hon. Rivlin. I agree with that. It would lower the monthly
payments of those families. You cannot do it for everybody.
Senator Begich. No.
Hon. Rivlin. But where you have evidence of having made the
payments and they are underwater--but you may have to have a
limit on how much they are underwater. But I think enabling
them to refinance is a very good thing to do. I am not sure I
would have the Federal Reserve buy the paper. You have got
Fannie and Freddie still there.
Senator Begich. Yes, hanging on by a threat. But that is
fine. Fannie Mae, Freddie Mac. They will tell us we have no
control over them despite the fact the Federal Government owns
90 percent of them. But----
Hon. Rivlin. Well, whatever, you need----
Senator Begich. But some mechanism.
Hon. Rivlin [continuing]. Some institution to buy them.
Senator Begich. But you agree with that concept.
Hon. Rivlin. I do.
Dr. Holzer. It is hard for me to comment on the specific
proposal because it is a little outside my area of expertise. I
would say this: It is clear that housing is an enormous drag on
this economy in its current form, and all efforts to date to
improve it have been hugely insufficient, I think, to deal with
the level of problem we have and to stabilize that market. And
if we do not stabilize that market, that will be one more major
drag on the economy for many years to come. So I welcome
proposals along the lines of what you suggest. I think at a
general level they do make sense, and it is a much needed area
to make more effort than we have to date.
Senator Begich. Mr. Foster? Then my time is up.
Dr. Foster. Senator, I think that is fundamentally correct.
It is perplexing that people who have been making their
payments on time for an extended basis cannot refinance their
mortgages. Now, what the best mechanism--I share Dr. Rivlin's
concern. Maybe the Fed is not the best way to do this. There
may be a simple regulatory adjustment. But why people who have
proven that they are able to make the payments should not be
allowed to make smaller payments is----
Senator Begich. So you agree with that concept.
Dr. Foster. Yes, sir.
Senator Begich. I like it. I left my questioning with three
people agreeing on something that I think has potential--two
with a qualifier because--I think that is a great--I better
stop while I am ahead. [Laughter.]
Chairman Conrad. That is really good when you get all three
agreeing.
Senator Ayotte.
Senator Ayotte. Thank you, Mr. Chairman. I appreciate all
of you coming to testify before the Committee today.
Dr. Rivlin, I wanted to ask you about reforms to
entitlement programs, specifically Medicare. As I understand
it, in a November 2010 proposal in which you did some work with
Congressman Paul Ryan, there was a recommendation in that
proposal that we raise the Medicare eligibility age
incrementally by 2 months per year to the age of 67. And I
wanted to get your views. One of the concerns I have is that as
we look at where the rising health care costs, where
entitlement spending is going, we need to make some responsible
decisions in ways that protect those programs around here to
make sure that they are preserved for those that are relying on
it, particularly with the recent Medicare trustees report that
came out saying that essentially it goes belly up in 2024.
I wanted to get your view whether you think that we should
still gradually raise the retirement age, what other thoughts
you have for reforming Medicare to make it more sustainable for
future generations.
Hon. Rivlin. The work that I did with Congressman Ryan
focused on seeing--we never had a completed proposal, but
seeing if we could get a bipartisan proposal on premium
support. And I had forgotten that he had raising the age in
there. That was not part of what he and I were working on. But
I do believe that a version of premium support, particularly
the one that I worked out with Senator Domenici in our task
force--which is actually different from what Ryan was talking
about. Anyway, I think that is a very good approach to the
future control of costs in Medicare.
Raising the age, possible over a long period. It does not
save a lot of money because those young seniors between 65 and
67 are not terribly expensive. It is people my age that are
more expensive. And most of them are not working and do not
have coverage. So you might then transfer those costs to the
exchanges under the Affordable Care Act as they get set up, but
that is not an advantage to the Federal Government. So I am a
little skeptical of raising the age, although it certainly
ought to be in the mix of things considered.
Senator Ayotte. Do you believe we fundamentally need to
reform what we are doing with respect to Medicare in order to
preserve it?
Hon. Rivlin. Yes, I do. And I think there are several
fundamental reforms possible, but the one that I have come out
in favor of and which is a very bipartisan idea is a version of
premium support.
Senator Ayotte. Do you think we can get there to preserve
Medicare just through provider cuts?
Hon. Rivlin. No.
Senator Ayotte. Does anyone else on the panel want to
comment on that?
Dr. Foster. Dr. Rivlin is exactly right. In fact, we are
providing Medicare right out of existence where people, when
they are my age start to think about where you might retire to,
you have to start thinking about whether or not if you move
your doctor is going to see you. Doctor availability is a
serious issue in this country because we keep pushing these
provider cuts. We are killing a program we need with provider
cuts. We have to start shifting the structure of the program to
make it affordable in the manner I think essentially what Dr.
Rivlin was describing.
Senator Ayotte. I appreciate your answers on that.
I wanted to also ask about the concept of tax reform.
Dr. Rivlin, you participated in the President's Fiscal
Commission, as did my predecessor, Senator Gregg, whom I have
great respect for.
Hon. Rivlin. Me, too.
Senator Ayotte. The Fiscal Commission recommended, as did,
I believe, the Chairman of this Committee, in its proposal tax
reform that would simplify the Tax Code and lower rates in
terms of how we would reform the Tax Code. Do you still believe
that that is the best way to go forward on tax reform?
Hon. Rivlin. I do. I think that we have an enormous
opportunity because there is bipartisan support for this idea--
and there has been for a long time--to reform the Tax Code
quite drastically to get rid of almost all of the special
provisions or transform them in a way that is more pro-growth
and that we can lower the rates and raise more money. And I
believe we do need more money, and that a tax reform is a path
to doing that.
Senator Ayotte. Do you believe tax reform should be--I
would also obviously like the other panelists to comment on
this, but if we do tax reform in that manner, that we can
actually help in terms of when we look at our economy
competitiveness, in terms of using our Tax Code as a way to
help our economy?
Hon. Rivlin. Well, I believe that simplifying the Tax Code
and lowering the rates and getting rid of a lot of the special
provisions that cause distortions in the economy is a good
thing, yes.
Dr. Holzer. I agree that broad-based--that kind of
comprehensive tax reform of lowering rates and closing
loopholes is a good thing and should be a big part of this
discussion. But, again, I would add two important caveats to
that. Number one, like Alice Rivlin, I think it is important to
use this as a mechanism to raise revenue. Given the crisis in
debt that we all agree on, to have a revenue-neutral tax reform
effort to me makes no sense at all. It is an opportunity for
raising more revenue, and we need to take advantage of that
opportunity.
And, secondly, I think it is possible to make the tax
system even more progressive than it is right now by employing
those mechanisms. Enormous--tens of billions of dollars
currently go into tax expenditures to ver high income Americans
that provide no positive benefit to the economy and exacerbate
the very income inequality--we have incredible levels of income
inequality that this country has not seen since the gilded age
that is unmatched anywhere in the industrial world. A lot of it
has grown within the last few decades in a way that is not
reflective of any productive activity in the economy. This kind
of tax reform I think would be yet another possible mechanism
of addressing that. So I favor that kind of broad-based
comprehensive tax reform, but subject to those two provisions
that have been used to raise revenue and improve progressivity
at the same time.
Dr. Foster. Be very clear. When you use the concept of tax
reform and you are suggesting it be used as a way of raising
revenue except from the economic growth you gain thereby, it is
a fraud. Tax reform means revenue-neutral tax reform. We can
have two debates. Let us have a better tax system. Let us have
more revenue. Two debates, keep them separate, or you will do
neither.
Now, I do not mind having the tax increase part, but I
would like to have the tax reform part, because as Dr. Rivlin
suggested, that is something that would be very important for
the economy. But it is not even in the context of tax reform
just about lower rates. You also have to correct the tax base.
It is not just the rate but what you tax.
So when we talk about getting rid of all of the tax
expenditures and broadening the base, you are heading down the
wrong road. You are going to create a benefit from lower rates
and exacerbate new problems by just eliminating everything that
you have defined 50 years ago as a tax expenditure. The concept
should be a neutral tax base, so you eliminate the distortion
because you properly define them and then a lower rate.
Thank you.
Senator Ayotte. Thank you, Doctor.
Chairman Conrad. Thank you, Senator.
Senator Nelson.
Senator Nelson. Dr. Foster, you can start with the concept
of a neutral base tax reform, but then if you get additional
revenue other than growth--and I want to ask you all about the
growth and the scoring of it--you could do a tax reform that
you get new revenue, and it could be used to a very salutary
purpose, which is deficit reduction. It does not mean it has to
go to spending. It can go to deficit reduction.
So let me ask you all, one of the problems on the question
of is revenue neutral, do we have a problem on scoring with CBO
as to whether or not it is going to be revenue neutral? In
other words, each of the three of you talked about what Senator
Ayotte asked, that simplifying the Tax Code, lowering the rates
because you have gotten rid of a lot of preferences, will cause
economic growth. Economic growth is going to produce new tax
revenue. Do we have a way of scoring that new tax revenue as a
result of growth?
Hon. Rivlin. I think you have to be careful about big
claims about how fast the economy would grow if you lower the
rates. I believe that it would, and I believe that the
simplification would help. But once you get into making claims
that this particular thing is going to grow the economy like
gangbusters, then somebody else, like my colleague Mr. Holzer,
might say, but if you improve the skills of the American public
dramatically, of workers, isn't that going to contribute to
growth? So I think you have to be a little conservative about
these claims.
I do believe that we would get additional growth, but I
also believe we need additional revenue because we cannot
absorb this tsunami of retirees and the higher health care
costs, even if we are successful in reducing the rate of
growth, without some more revenue, or we will close down the
whole rest of the Government.
Dr. Holzer. Just one footnote. I agree with all that, but
the Federal Government revenues, Federal revenues as a
percentage of GDP I believe are at their lowest levels since
about 1950. We keep hearing this political rhetoric about awful
taxes, and there is no question, there are ways of structuring
a tax system that would be probably more beneficial to economic
growth, and I think if all three of us were designing its axis,
then we would probably move somewhat more in that direction,
although I still believe in tax progressivity. But in a world
where the Federal Government is now taking in less than 15
percent of GDP in tax revenue relative to the burdens of
spending that we are committed to as the baby boomers retire,
to me it makes no sense not to talk about revenue enhancement,
and it is impossible to think about really seriously dealing
with this deficit without being serious about revenue
enhancement.
Dr. Foster. Well, of course, we are at about 14.5 or 15
percent of GDP because of the recession, and then Congress
continues to pass additional tax relief, like the payroll tax
relief. If you look at the CBO projections further out, you end
up much close to the traditional 18, 18.5 percent of GDP as a
revenue. So the current measure of revenues is no indicator of
whether we need additional revenues, whatever one thinks about
additional revenues.
And, Senator, to answer your question directly, we do not
really have the capacity credibly right now in the Federal
Government, either at the Joint Tax Committee or the
Congressional Budget Office, to do a credible dynamic analysis.
They are working on that, have been doing so for a great many
years, with little progress. But we do not really have that.
Dr. Rivlin is exactly right. We have got to be careful with
these claims about what the different tax reform proposals
would do for the economy. I think we would all agree that
sensible reform would produce a stronger economy that would
generate additional revenues that could be used for deficit
reduction. But we do not currently have that ability. We are
developing that ability very rapidly at the Heritage Foundation
in our Center for Data Analysis. But even there this is an art
form we are learning how to develop, how to work. It is not
some software that you can go down to Kmart and pull off the
shelf.
Senator Nelson. Well, we are engaged in a political moment
in time that we have the opportunity for tax reform.
And if we do not grab it, then we have lost years in the
opportunity to do something significant. What I am trying to
understand from you experts is what is the consequence, the
beneficial consequence of simplifying the Tax Code and getting
rid of a lot of those preferences.
Now, as a practical matter, you are not going to get rid of
all the preferences because too many of them are ingrained in
what is considered fair and reasonable, such as mortgage
interest, such as charitable deductions. But maybe there is a
limit to that, and there are a bunch of other tax preferences
that we have seen that have grown up over the years because
people have had the ability to get to the decisionmakers to get
their particular tax itch scratched.
And I want to see us take this opportunity, and this super
committee is the opportunity.
I want to just ask one technical question, Dr. Rivlin. You
said that your task force with Senator Pete Domenici had come
up for some version of premium support. Can you define that for
us with regard to Medicare?
Hon. Rivlin. Yes. The version that we support would say the
following: Seniors after a certain date would get a choice
whether they stay in ordinary fee-for-service Medicare or
whether they go to a new exchange on which they could choose a
plan, and there would be competition among health plans, and
the health plan would be compensated by Medicare in a risk-
adjusted way. This is not a voucher where you go out and shop
around, but the health plan would be compensated.
But--and this is where the scoring comes in--the original
amount of the subsidy for Medicare would be the same whether
you stay in fee-for-service or go to the exchange, but it would
increase only at a defined rate. The rate we chose was GDP plus
1 percent. Now, that is a little lower than the current
increase. One would hope that the competition on the exchange
brought the cost down within that. If it did not, then whether
you were in the exchange or in the fee-for-service system, you
would have to pay an additional premium. It could be a means-
tested premium, but it would be a premium. And if the Congress
decided that was shifting too much cost to the beneficiaries--
and you might worry about that--then you could change the
formula. But that is how it would work.
Senator Nelson. Mr. Chairman, do you remember when we were
doing the health care bill how critics were saying that the
world was going to come to an end when we were taking on
Medicare HMOs, Medicare Advantage? Did you hear CMS'
announcement last week that nationally the premiums for
Medicare Advantage as a result of the reforms that we did in
the health care bill have gone down 4 percent?
Chairman Conrad. Yes, I did see that.
Senator Nelson. And the enrollment has gone up 10 percent.
Now, let me just a little coda. You know what it is in
Florida? The premiums have gone down 26 percent and the
enrollment has gone up 20 percent in the State with the largest
number of enrollees in Medicare Advantage.
Chairman Conrad. And the predictions were that it was going
to be just the opposite, that we were going to kill the
program. Instead, the program has thrived. So much for all the
expertise within the Beltway.
Senator Sessions, any last-minute observation?
Senator Sessions. Well, thank you, Mr. Chairman.
Senator Begich made a reference to the stimulus bill and
the roads that are built. I was very disappointed how little
infrastructure was in the bill. Roads and bridges specifically
were 3 percent. And I do agree that while we can dispute
whether you get a real growth from a stimulus road-building
program, you cannot dispute that when it is over, you actually
have a road and bridge that you can use, and that is
beneficial; whereas, most of the money that we spend in this
program were one-time expenditures that did not.
I also would note that CBO scored that stimulus package
over 10 years as having a net negative to the economy. They
scored it as being positive before it passed, as being positive
in the short run and negative over 10 years. I am afraid we
have had what positive we have had, and I think now we are
beginning to draw on the negative.
In response to a question from me last week, Dr. Zandi
responded, ``I do not think $2.4 trillion is enough,'' talking
about the cuts that the Committee of 12 is charged with
achieving. He goes on to say, ``I think we need--if you do the
arithmetic, I think there is a general consensus we need $4
trillion in a 10-year deficit reduction. That $2.4 trillion is
not enough, no.''
Would you agree? I will ask you three if you could be
brief. Would you agree with that?
Hon. Rivlin. I would definitely agree with that. I think
that the consensus in Simpson-Bowles and in the Domenici-Rivlin
group and others that have looked at this problem, if you are
going to stabilize the debt, you need $4 to $5 trillion in
savings over the next 10 years, and it is going to be more----
Senator Sessions. That is what you call for in your
Commission that you and Senator Domenici chaired.
Hon. Rivlin. Yes. Now, it gets into some baseline problems,
but that is the basic story.
Senator Sessions. Dr. Holzer.
Dr. Holzer. I tend to agree that 2.4 is probably too little
and that it needs to be in that $3 to $4 trillion range. And,
of course, there are many ways of measuring, many different
baselines that can be used, and we want to have more honest
baselines. We have a caveat I would add, though. Once again,
deficit reduction in the short term could be harmful to growth,
depending on how it is done, and could further reduce revenues
coming in and require more automatic expenditures. So it is
important to balance the overall number with a backloading of a
lot of the provisions.
We are going to be facing slow economic growth perhaps for
much of the rest of the decade, so even--we have to trade off
and balance off the serious debt reduction we need, but doing
it in a way and in a manner with timing that does not put an
undue burden on the economy over the next handful of years.
Senator Sessions. Dr. Foster, I would ask you to respond to
that question, and then with regard to the idea of another
stimulus, you spend $400 billion or so. That digs the debt hole
deeper, and we have got to raise that money before we even get
back to the level that we are now at in terms of the projected
debt situation. Would you comment?
Dr. Foster. Yes, sir. Basically it is a simple enough
matter. You have to stabilize your debt as a share of GDP at
some point and then from that point forward. So in a sense, as
the President suggested, it is a matter of math.
Of course, this is not the math exactly he was referring
to.
And you do not have to get there all at once. The Congress
just passed one bill with $900 billion or so of progress.
You can do it in a series of steps, but they do need to be
short-term steps; that is, one following quickly upon the
other.
Senator Sessions. You think that the $2.4 trillion is not
enough?
Dr. Foster. I think eventually you are going to need
something closer to $4 or $5 trillion, especially if we are
sliding into a recession again or into a period of very, very
slow growth. We are then not going to be getting the revenues
that were expected, the deficit is going to be that much
larger, and the hole we have to dig out of is that much deeper.
Chairman Conrad. Thank you, Senator.
Let me just say, I was part of the Fiscal Commission.
Senator Gregg and I had pushed that starting 5 years ago
because we saw that we were headed for a debt threat
overhanging this economy that had to be faced up to.
We agreed that everything had to be on the table. We agreed
that we need fundamental entitlement reform. To my colleagues
on the left who resist that, I would just say I do not know any
way around it. The harsh reality is if you look at the
demographics, if you look at our budget, we are going to have
to deal with the entitlement side of the ledger. That is the
biggest part of the Federal budget. It did not used to be. It
used to be about a third of Federal spending. Now it is 60
percent, and growing. And the demographics are as clear as they
can be.
So to those friends of mine on the left who say, no, no,
you cannot, you got it all wrong, we do not have to touch that,
really? The trustees say we are headed for insolvency.
And to my friends on the right who say you do not have to
touch revenue, really? Revenue is the lowest it has been in 60
years as a share of national income. That is where it is. It is
the lowest it has been. Spending is the highest it has been. To
me it is very clear you have got to work on both sides of this
equation.
And to those who say that is a job killer, that is not what
the evidence shows. It just is not.
Let me just put this up. This is a look at different top
marginal rates and what economic growth has been. At the end
here is a top marginal rate, 28 to 31 percent.
Economic growth during those periods, average employment
growth has averaged 1.1 percent. Where we are now, top rate of
35 percent, virtually no employment growth; 38.6, which is what
we had, the previous top rate was half of 1 percent.
When we had a top marginal rate of 39.6 percent, employment
growth averaged 2.4 percent. When we had a top marginal rate of
50 percent, employment growth averaged 2.1 percent, and on up
from there.
So, you know, this idea that the top marginal rate is a
jobs killer, there is no evidence in the real world, in the
real economy, that that is true. There is no evidence that that
is true.
So I do not know. We are in a very stale debate around here
between the two parties, to me. Very stale. And it is not going
to solve the problem to be stuck with a stale, tired, phony
debate. At some point we have got to get real, and getting real
means both sides need to get off their fixed position. And the
faster it happens, the better.
I thank the witnesses for participating today, and we will
stand in adjournment.
[Whereupon, at 11:30 a.m., the Committee was adjourned.]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
IMPROVING THE BUDGET PROCESS: STRATEGIES FOR MORE EFFECTIVE
CONGRESSIONAL BUDGETING
----------
TUESDAY, OCTOBER 4, 2011
Committee on the Budget,
U.S. Senate,
Washington, DC.
The Committee met, pursuant to notice, at 9:30 a.m., in
Room SD-608, Dirksen Senate Office Building, Hon. Kent Conrad,
Chairman of the Committee, presiding.
Present: Senators Conrad, Wyden, Nelson, Cardin,
Whitehouse, Begich, Coons, Sessions, Enzi, Thune, Johnson, and
Ayotte.
Staff Present: Mary Ann Naylor, Majority Staff Director;
and Marcus Peacock, Minority Staff Director.
OPENING STATEMENT OF CHAIRMAN CONRAD
Chairman Conrad. The hearing will come to order.
I want to welcome everyone to the Budget Committee today.
Today's hearing is titled ``Improving the Budget Process:
Strategies for More Effective Congressional Budgeting.'' We are
going to specifically consider biennial budgeting and proposals
to reform the ``vote-a-rama'' process.
We have two outstanding panels of witnesses today. Our
first panel, which will focus primarily on biennial budgeting,
includes:
Maya MacGuineas, president of the Committee for a
Responsible Federal Budget. Welcome, Maya. Always good to have
you before the Committee.
David Kendall, senior fellow for health and fiscal policy
at Third Way. Good to have you here, Mr. Kendall.
And Donald Kettl, dean of the University of Maryland School
of Public Policy. Thank you so much for participating as well.
Our second panel, which will focus primarily on the vote-a-
rama process, includes: Bill Hoagland, the former Republican
Staff Director of the Senate Budget Committee; Marty Paone, the
former Democratic Secretary of the Senate; and Eric Ueland, the
former Chief of Staff to Senate Majority Leader Bill Frist.
Another distinguished panel, and we appreciate very much the
willingness of all of you to participate.
We are holding this hearing because I believe the current
budget process is broken. It has become increasingly difficult
to pass budget resolutions in election years, and year after
year we face continuing resolutions, omnibus bills,
supplementals, and, increasingly, threats of shutting down the
Government. At the same time, we have far too little oversight
of Federal agencies and programs. If there is a place where the
Ranking Member and I are in complete agreement, it is that this
budget process needs to be reformed and that this Committee
needs to play a lead role in oversight. And when you are doing
a budget every year, you really do not have the time to do the
oversight that is desperately needed.
Biennial budgeting will not solve all of our problems, but
it could help. I now believe the positive attributes of moving
to a biennial budget, including more oversight in the non-
budget years, certainly outweigh the possible negative
considerations.
This is how biennial budgeting would work. Would you put up
the slide? In odd-numbered years, the President would submit a
2-year budget, and Congress would pass a 2-year budget
resolution and enact 2-year appropriations bills. In even-
numbered years, Congress would focus on authorizations and
oversight.
Now, here are some of the arguments for biennial budgeting.
One, Congress has effectively moved to biennial budgeting
already. In fact, since 1998 budgets have been passed in only 2
election years: 2000, when Senator Domenici was the Chairman of
this Committee, and 2008, when I was Chairman.
Second, biennial budgeting would allow Congress to spend
more time on oversight. This would result in more
accountability from the executive branch, ensuring that scarce
Federal resources are being used efficiently and effectively.
It would also reduce the use of continuing resolutions and
omnibus bills, and it would allow for better long-term planning
by Federal agencies and programs. Could you imagine running one
of these agencies and you are on a continuing resolution for 3
months, for 4 months, for 6 months? This is no way to run an
enterprise of any size.
There are those who argue against biennial budgeting, and
we ought to very directly acknowledge their criticisms. They
believe: one, it would reduce the ability to respond to
changing economic and geopolitical conditions; two, it could
result in more supplemental funding, especially in the second
year; and, three, oversight through the appropriations process
could be diminished.
You know, I used to be in the camp of favoring an annual
budget. I did so on the basis that I do not know of any
institution of any size that does not do an annual budget. But
the hard reality is we are not doing annual budgets. We just
are not. We have only done two in the last 13 years.
So, look, let us face up to the reality. In these even-
numbered years, election years, let us focus on oversight
during that period and have done the budget the year prior for
2 years.
Also, I want to ask for unanimous consent at this point to
enter into the record a letter from Senators Shaheen and
Isakson, a Democrat and a Republican, to the Joint Select
Committee on Deficit Reduction expressing their support for
moving to a biennial budget. They have done a lot of work on
this. It is good work. I certainly want to commend them
publicly for the efforts that they have made.
[The information follows:]
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Chairman Conrad. As I mentioned, our second panel will
focus primarily on reforming the vote-a-rama process. It is
important to remember why we have a vote-a-rama. Under the
Congressional Budget Act, the budget resolution and
reconciliation bills are given special fast-track treatment
that limits debate: 50 hours for a budget resolution, 20 hours
for a reconciliation bill, and both measures can be passed with
only 51 votes. It is a rare use of majority rule in the Senate.
It means these measures cannot be filibustered.
As a way to protect the rights of the minority, the Budget
Act allows an unlimited number of amendments to be filed even
after all time has expired on the resolution or reconciliation
bill. So as frustrating as the vote-a-rama may be for Senators,
the ability to offer unlimited amendments is meant to safeguard
minority rights in the absence of the right to filibuster.
The problem is what that has developed into in reality. It
has really gotten out of control. And, frankly, one impediment
to getting a budget resolution done is leadership does not want
to go through vote-a-rama. And they are supported by many of
our colleagues who say, you know, that is a spectacle to have
vote-a-rama when Senators are voting seriatim without time for
debate.
In fact, typically, we, by unanimous consent, agree for 2
minutes on an amendment, 1 minute a side, on serious matters.
So I have had Senators say to me they were not certain what
they were voting on when they voted in vote-a rama. That is not
the way the Senate should conduct its business.
Vote-a-rama results in back-to-back votes in the Senate
which sometimes drag on for several days, very long hours.
Senators become tired, some cranky--I will not name any names--
and even confused, because you are voting so quickly with so
little consideration. It allows little time to review and
debate the many amendments that are offered, and the process
has become in some ways a spectacle and results in few
substantive changes to the budget, but I think really
embarrasses the institution. This is not the way I think our
Founding Fathers thought the Senate would act, dealing with
very consequential measures with, at most, 2 to 5 minutes of
discussion evenly divided. The fact is if you did not get
consent, you would not have any time. You would just vote. No
debate.
I think it is clear--it is certainly clear to this
Senator--that the process needs to be reformed. I believe we
can improve it while still protecting the rights of Senators.
And I have been in the minority, I have been in the majority,
and I know the tide changes around here, and it will change
again in unpredictable ways. I think we have got to write this
with the view that either one of us may be in the majority or
the minority. So we have got to be very conscious of minority
rights. But we have also got to be conscious of a system that
is functional, not dysfunctional.
One concern with the current vote-a-rama process is it is
increasingly being used on issues completely unrelated to the
budget. Here are some of the amendments filed during the fiscal
year 2010 budget resolution debate: prohibit legislation
restricting second amendment rights; prohibit the transfer of
detainees at Guantanamo Bay to the United States; require drug
testing of Temporary Assistance for Needy Families; require
Amtrak to allow passengers to check firearms in their baggage;
prohibit climate change legislation from regulating methane
emissions from biological processes associated with livestock
production.
Well, whatever the merit of those individual matters, I
think we can agree the budget resolution is probably not the
place to resolve those matters. The budget resolution should be
to resolve budget matters.
The number of amendments offered to budget resolutions has
generally been rising. In fact, according to the Congressional
Research Service, 2007, 2008, and 2009 were among the top 5
years with the most amendments offered, and the percentage of
votes taken on amendments offered after all time has expired
has been rising. This means that Senators are increasingly
taking votes on amendments that were given very little time for
debate.
For example, in 2003, we had 50 votes, 80 percent of which
were on amendments that were given no time for debate. You
know, that does not make much sense. No time for debate.
Here are some potential ways we could reform the vote a-
rama process.
We could create filing deadlines for first and second
degree amendments. This would prevent amendments from being
filed after all time has expired and hopefully allow more time
for debate.
We could increase the number of amendments debated prior to
vote-a-rama by reducing the time allotted to each amendment.
Again, this would hopefully encourage more substantive debate
on amendments.
We could limit the number of amendments during vote-a rama
itself.
We could establish a brief layover period to review
amendments.
And we could allow the yielding back of time only by
unanimous consent. This will help protect a Senator's right to
continue debate on amendments in light of the other changes we
might make that would limit amendments being offered.
The vote-a-rama process we have now I believe demeans the
Senate as an institution. While reform is likely to involve
changes to the process, these changes can be carefully
constructed and are a necessary tradeoff if we want to bring
more order to the process and improve the Senate's ability to
consider the budget resolution and reconciliation bills in a
thoughtful and thorough manner. Whatever we do, we do have to
protect minority rights.
The fast-track procedures of the Congressional Budget Act
are unique and place limitations on debate that are uncommon in
the Senate. I have been in the minority, and I appreciate that
the right to offer amendments allows the minority to raise
substantive issues. But, frankly, you know, we have gone beyond
that. We really have. We have almost gotten to the point where
vote-a-rama has become an abusive exercise for all Senators.
And, interestingly enough, it is really a relative handful on
both sides who tend to abuse the process. It has become well
known to the Chairman and Ranking Member who the Senators are
that are going to insist on amendments even when amendments
virtually identical to theirs have already been considered and
voted on. We have had times where we have had almost the
identical amendment offered three or four times. Really. I
mean, how many times do we have to vote to establish a record?
With that, we will now turn to Senator Sessions for his
opening remarks, and then we will hear from our first panel of
witnesses.
OPENING STATEMENT OF SENATOR SESSIONS
Senator Sessions. Thank you, Mr. Chairman, and I look
forward to the good panel and to working with you to reform and
strengthen the budget process.
One of the most important reforms we can achieve is the
adoption of a biennial 2-year budget. I have long supported
such legislation. I worked with Senator Domenici a number of
years ago. He also supported it. But we never really confronted
the issue and brought it up and had a full debate about it. So
I thank you for your leadership in working in that regard.
This may be just the year to get it done. I think there is
a lot of frustration and a lot of desire for improvement, and I
think we could have a bipartisan agreement, and with your
leadership, we maybe can get it done.
Before I begin the discussion on that particular issue
today, I would like to give a little context. Many have said
the congressional budget process is broken. In my view,
however, it is not that the budget rules will not work but,
rather, Congress has refused to follow the rules. Despite a
legal statutory requirement that we do so, for 2 consecutive
years the Senate has simply refused to adopt the budget
resolution. It has been 884 days. We are not passing
appropriations bills. We are funding the Government with stop-
gap measures or cramming all our spending bills into one big
omnibus spending bill, and this is no way to run a budget or
run an efficient Government.
Federal spending has reached nearly $4 trillion a year, and
almost half of that is borrowed, over 40 percent. Yet the myth
persists in Washington that we can manage this mammoth budget
through last-minute deals struck in closed door meetings,
rushed to a vote under a threat of panic and Government
shutdown. But we cannot and we should not operate our Nation's
finances in this way, especially not during this time of fiscal
and economic crisis that is very real, that is systemic, and I
believe in a financial sense has never been greater. There is
no time in our history when we can look a decade out and can
see a more difficult debt financial situation than we can see
today. Our constitutional system was designed and Americans
deserve an honest budget, publicly produced, with amendments
offered and Senators voting.
Now, I know leaders do not like their troops to vote. They
might have to cast tough votes. But part of the process in the
Senate has always been that you have to have votes. So
producing a budget is one of our most fundamental duties, and
in these difficult times we should be rededicating ourselves to
that commitment and in no way setting it aside.
Now is the time to strengthen the budget process, not
abandon it. The Super Committee of 12 that has some of our
finest members in it in a few months is expected to perform the
duties of the entire Congress. Earlier this year, I offered a
measure to make it more difficult for Congress to skirt its
budget responsibilities. It would raise the threshold a bit to
60 for passing an appropriations bill before a budget has been
passed. Common sense says you pass a budget, set what your
spending limits are before you start spending money.
So I believe this is a needed reform. A 2-year budget can
help. The Senate should not spend the taxpayer's dollar without
a plan. The budget should go through the regular order. Only a
simple majority is required, and it should be subject to
extensive amendment and debate. And we can talk about how we do
that, but there is a growing frustration on the minority side
that amendments are being blocked through the process of
filling the tree to an unprecedented degree, and we are lacking
the kind of debate on the normal processes of the Senate, and
there will be more resistance, I think, to tightening up the
budget amendment process for that reason.
But I strongly believe we can improve the existing system
by switching to a 2-year budget cycle. This approach will make
it easier to save money and perform oversight. Under the
current system, an executive agency is having to begin work on
a budget for next fiscal year before the current budget has
even been adopted or approved. Additionally, by switching to a
2-year plan, it will be easier for agencies to reduce waste and
I do believe plan. Our Government agencies are challenges. I
think they can plan better if they have more confidence in the
future of what the funding will be.
I think the greatest advantage offered by a 2-year budget
cycle is enhanced oversight, as you said, Mr. Chairman. As it
is, I believe the Committee does have a duty to perform careful
oversight of the executive branch, but we must search through
the Federal Government for waste, inefficiency, and overreach.
We simply have to. But the adoption of a 2-year budget provides
a chance to make this duty more explicit and to significantly
increase the Committee's oversight authorities. We owe the
taxpayers nothing less. In order to balance our budget, we are
going to need to conduct an exhaustive search for savings. A
biennial budget offers the opportunity to increase the time and
resources dedicated to that task.
But the process of reform will achieve little if we do not
rethink and address the underlying problem: the ideology of big
Government. As long as Washington operates on the idea that the
Federal Government is the first place to fix every problem that
arises, then our budget will tend always to be too large, too
hard to manage, and too heavy a burden on the economy. Members
owe the American people more than just a strengthened budget
process. They owe a strengthened commitment to the principles
of limited Government and individual responsibility.
So we have got tough challenges ahead, but if we face them
honestly and in keeping with our values, there is no doubt that
our Nation will thrive and prosper. I think you have got a good
panel, Mr. Chairman. It is exciting to think that it could be
in maybe even months we could have a better budget process, and
I look forward to working with you on it.
Chairman Conrad. This is our chance. I really believe it.
We have an opportunity here to do something that has not been
done since the creation of the Budget Act, and working
together, I think we have an opportunity to really do something
that would be important--important for the country, important
for the Senate, important for this Committee, important for our
colleagues in the Senate--because we have to rebuild a budget
process that really works.
With that----
Senator Sessions. Mr. Chairman, a budget, properly
considered, really is a vision for the future. It ought not to
be just thrown together every year rush-rush. It ought to be
given some thought, and I think through the oversight process
in the off year, we maybe will be prepared better to envision a
2-year spending plan that is really more appropriate for our
country.
Chairman Conrad. And I tell you, I think one thing we could
accomplish here is to make agencies more accountable. Make them
more accountable. When they are provided the dollars in a
budget, to have them come back in the second year and explain
what are they producing, what is coming out the other end, what
is actually getting out to our constituency, how much is being
burned up in the bureaucracy, I think our constituents would be
very interested in that, and I think we could do a real
service.
We will go to Maya MacGuineas, thank you, Maya, president
of the Committee for a Responsible Federal Budget. We will ask
each of the witnesses to testify in turn, and then we will open
it up for questions. Welcome.
STATEMENT OF MAYA MACGUINEAS, PRESIDENT, COMMITTEE FOR A
RESPONSIBLE FEDERAL BUDGET
Ms. MacGuineas. Great. Thank you. Thank you, Mr. Chairman
and members of the Committee, for the opportunity to testify,
and it is always a privilege to appear before this Committee.
I share the belief that I think many of you have, that in
many ways our budget process is broken. There are many reforms
that we could and should make to improve it, and yet none of
these changes will replace the hard choices that need to be
made to fix our dangerous fiscal situation. And in order to do
that, we need to change our spending and our tax policies, and
the sooner we get a plan in place to do that, the better off we
will be.
The Committee for a Responsible Federal Budget and the
Peterson-Pew Commission on which I served have made a number of
recommendations to change the budget process. A number of these
include: setting a medium-term debt target and corresponding
debt and savings targets to create a glide path to get there;
using broad-based budget triggers with no programmatic
exemptions to ensure that the targets are met; following the
enactment of a deficit reduction plan to stabilize the debt,
using additional triggers and caps on both spending and tax
expenditure to make sure that any plan stays on track;
requiring the President to issue annual progress reports on the
effects of all new legislation and progress towards longer-term
fiscal goals; presenting budget allocations compared to the
previous year's levels as well as other baselines; reforming
the way for which emergencies are budgeted; and increasing the
level of scrutiny and oversight on tax expenditures as well as
other spending in the budget.
Today I have been asked to focus the bulk of my remarks on
biennial budgeting, which the Committee for a Responsible
Federal Budget has long supported. And I will also touch upon
an extension of the idea, which is multi-year budgeting.
Under biennial budgeting, the country would shift from a 1-
year budget cycle to a 2-year budget cycle, and this would free
up considerable time to devote to better oversight of current
programs.
Senator Conrad, I think you gave sort of the perfect
overview of the advantages and disadvantages of biennial
budgeting, and I think it is hard for anybody to argue against
the need for better oversight. One of the greatest challenges
that we have a Nation going forward, I think, given our fiscal
realities, is how are we going to do more and do it better in
an era of constrained fiscal resources, which is something we
are going to face for a number of years, if not decades.
Improved oversight is going to be a key to meeting this
challenge, and I think we all know waste, fraud, and abuse is
never going to be the answer to the fiscal woes that we face,
but there is absolutely no excuse for not ferreting out every
single dollar of waste, fraud, and abuse that we can find in
the budget, as well as improving the performance of all the
programs, tax, and spending that we have.
So currently we actually collect a considerable amount of
data on the performance and effectiveness of various Government
programs. However, we do not do a particularly good job of
integrating those findings into the budget process and using
these metrics to help inform what choices we make in an era of
allocating resources with constrained resources.
More time to better integrate these findings would lead to
better budget choices. There is no question about that. I would
also add that now with the 10-year caps that were part of the
Budget Control Act, much of the work of the annual budget
exercise has already been done, again, freeing up more time for
this needed oversight.
So there are number of ways in a second year in a biennial
budget system that you could use the time for additional
further evaluation and oversight, also priority setting and
deeper studies in certain budget areas, so I will delve into
just a couple of those.
One possibility would be to create a budget concepts
commission. Such a commission would look into a number of
issues, including better accounting, particularly for long term
spending programs, fiscal exposures, insurance programs, and
programs that are intended to be pre-funded; improving the
construction and use of budget baselines; capital budgeting and
dynamic scoring issues; looking at tax expenditures, which are
becoming an increasingly important part of the way we budget;
accounting for private securities; leasing and public-private
partnerships; and trust funds. So there is clearly a whole host
of issues that we need a new budget concepts commission to look
at, something we have not had in decades. And as the nature of
budgeting continues to evolve, a free-standing budget concepts
commission would be immensely beneficial in improving
accounting, transparency, and performance.
A second possibility is to spend more time setting and
ranking national priorities. Senator Sessions, you were sort of
talking about the ``big think'' of where we are headed,
analyzing the linkage between the programs and tax and spending
programs that we have and how they match up with those
priorities. This practice is referred to in some nations as
portfolio budgeting, and in many ways it makes the practice of
budgeting more purposeful as well as transparent and focused.
Related to this would be using the off years to engage in
broader strategic planning for the Nation. Currently not only
is there no fiscal road map for the country; there is no
broader strategic path. And efforts to identify short-, medium-
, and long-term goals, threats and opportunities, and changes
in the political and economic landscape would guide
policymakers as they take a step back from the nuts and bolts
aspects of crafting a national budget and think about a bigger
framework for where we want to head as a Nation.
Finally, we might consider producing topical reports
regarding the fiscal health of the country. Australia, for
instance, issues its Intergenerational Report every 5 years,
which assesses the implications of current policies over a
longer time horizon and looks at changes in things like
demographics. A deeper dive into topics such as the
interconnectedness between Federal, State, and local budgets or
fiscal exposures due to contingent liabilities and implicit
budget commitments would be immensely useful in identifying,
and hopefully avoiding, future budgetary challenges and crises.
So I think we should also consider multi-year budgeting.
Right now I think we all know that the country needs a fiscal
plan to get us to a sustainable debt level. Such a plan will
probably need to span an entire decade, and ideally we would
put such a plan in place immediately and allow many of the
changes to phase in more gradually.
In order to be credible, there has to be a real commitment
to staying on track for the duration of the plan, and one of
the purposes of putting a plan in place, of course, is to
reassure credit markets and rating agencies and provide
families and businesses with much more stability--the stability
that they need to plan and invest and help grow the economy.
And in order to be effective, there must be the presumption
that the plan will remain in effect until the objectives are
actually achieved.
So my final point will be this: Regardless of the budget
process improvements that we make, the single most important
change we can do to change the fiscal health of our Nation is
put in place a package of policy changes sufficient to
stabilize the debt at a manageable level and put it on a
downward trajectory relative to the economy. The Joint Select
Committee on Deficit Reduction has a remarkable opportunity--
remarkable opportunity--to put in place reforms that will help
set the country on an improved fiscal path. The $1.5 trillion
in savings they are trying to achieve would be a significant
improvement, though not actually enough to stabilize the debt,
and we believe the Joint Select Committee should work to focus
on the largest problems in the budget--particularly entitlement
spending on health care and retirement, and the Tax Code--and
attempt to come up with larger savings in order to put the debt
back on a sustainable path.
So budget process reforms will be helpful in encouraging
these policy reforms, and they are critical in making sure that
they stick. However, the heavy lift will come from making the
actual decisions about what spending to cut what revenues to
increase, how to ensure that these changes are conducive to
economic growth, and how to protect the many core principles
and values on both sides of the political aisle that come into
play as part of the Federal budget. We should not delay in
making any of these changes.
Thank you once again for the opportunity to testify and to
the many members of the Committee for all of your leadership on
these critical issues, and I look forward to the discussion.
[The prepared statement of Ms. MacGuineas follows:]
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Chairman Conrad. Thank you. We appreciate that.
And I will go to Mr. Kendall next, a Senior Fellow at Third
Way. Welcome.
Senator Sessions. Mr. Chairman, as you do that, I see my
colleague, Senator Enzi here, whom I count a longtime member.
He has also offered legislation for a two-year budget. You made
reference earlier that legislation is pending. He has got a
very thoughtful plan that I know we will consider as we go
forward.
Chairman Conrad. He does and he has done very good work and
we appreciate his suggestions. As we have worked to develop a
proposal, we have looked very closely at Senator Enzi's work,
as well.
Mr. Kendall, welcome and please proceed.
STATEMENT OF DAVID KENDALL, SENIOR FELLOW FOR HEALTH AND FISCAL
POLICY, THIRD WAY
Mr. Kendall. Thank you, Mr. Chairman. I appreciate the
opportunity to testify this morning. I represent Third Way,
which is a think tank that creates and advances moderate
policies, and we applaud your efforts, Mr. Chairman and the
rest of this committee, for working to reduce the deficit and
the debt. We also welcome this opportunity to figure out how to
change the budget process in order to prevent problems like we
have been dealing with for the last several years.
The father of the modern industrial movement, Edwards
Deming, once said a good system--I mean, a bad system will beat
a good person every time. Members of both political parties,
despite their differences, want to put their Federal fiscal
house in order and give taxpayers good value for their dollars.
But the budget process itself often gets in the way of that
common goal.
A biennial budget can give members of Congress
opportunities to be good stewards of tax dollars. Every year,
Congress faces annual budget appropriations and battles over
how to spend taxpayers' money. These fights leave little time
to contemplate how to save money and use it more effectively.
Unlike the annual budget process, which Congress rarely
completes on time, a biennial budget would allow Congress to
devote a second year to planning, oversight, streamlining
government services.
A biennial budget has had many champions over the years,
including Senator Enzi. In this Congress, Senators Johnny
Isakson and Jeanne Shaheen have introduced bipartisan
legislation cosponsored by several members of this committee.
Let me suggest perhaps, as Senator Sessions did, that the
time for this biennial budget has finally arrived. Let me
address three questions: How would it work, how can it help,
and what needs to be done to implement a biennial budget.
As, Mr. Chairman, you have very clearly explained, a
biennial budget would be devoted in the first year to enacting
a two-year budget. The second session would focus on oversight
of government programs, more authorizing legislation, and
adjusting the budget laws for changing conditions or unforeseen
events.
A two-year budget would give Congress and executive
agencies a chance to develop and implement a policy with more
predictability and accountability. A shift to a longer-term
plan would bring government in line with well established
business practices that have been used in the private sector
for decades. A biennial budget would also increase the
predictability and stability for State and local governments,
which rely on Federal funding and regularly enter into fiscal
compacts with the Federal Government.
Some might argue that a biennial budget would leave
Congress vulnerable to faulty assumptions about baselines or
economic factors. It is true that a budget is only as good as
its underlying predictions. But problems with predictions do
not grow exponentially with longer budget periods. With a
biennial budget, the prediction problem would increase only by
the number of the years in the budget. According to a Harvard
Law School analysis, the CBO's baseline predictions were off by
an average of about 4.23 percent of total outlays for one year
out and about nine percent for two years out during the period
from 1995 to 2006. If a second year budget adjustments were
necessary in any given year, then they could be made with far
less difficulty than the repetition of the entire budget
process.
In the second year of a two-year budget cycle, it would be
critical to have a formal structure agreed upon and in place to
ensure that needed adjustments do not simply redo all the
appropriations. For example, Oregon State's legislature
recently modified its biennial budget to include a plan for
significant revisions in the second year of its budget year,
and specifically it held back a portion of its spending as a
reserve fund in case the economic downturn proved worse than
predicted.
State legislatures with biennial budgets sometimes delegate
limited authority to the executive branch to deal with any
necessary changes during the off-budget years, but they do not
relinquish control over their spending just because the budget
is set every two years.
So how can a biennial budget help? By any number of
measures, the budget process is not working. From 1975 to 2000,
Congress met its statutory deadline for passing annual budget
resolutions only five times. Over the last decade, Congress has
failed two-thirds of the time to pass budget resolutions in
both years of its two-year term.
For appropriations since 1996, Congress has been late an
average of 86 days after the start of a fiscal year, according
to the Congressional research, and as my colleague Maya
MacGuineas's organization recently pointed out, in the fiscal
year that just ended, we used eight Continuing Resolutions.
This reminds me of Albert Einstein's quote. Insanity is
doing the same thing over and over again and expecting
different results. Instead of trying something different,
Congress has let the process get worse.
The threat of indiscriminate across-the-board cuts is now
very real. The Budget Control Act of 2011 subjects
discretionary spending to across-the-board cuts if the Joint
Select Committee on Deficit Reduction, the Super Committee,
fails to achieve its minimum $1.2 trillion in deficit
reduction. There may be no other way to force action, but
across-the-board cuts would be the opposite of effective
budgeting, should those cuts occur.
A two-year budget cycle would give more time to air out
more complicated issues, improve programs, and crack down on
waste. It is a natural fit in an era when every fiscal decision
is going to be fraught with budgetary consequences. Biennial
budgeting is not a cure-all for the problems in the budget
process, but making they budget process consistently
transparent and accountable will reduce the risk of political
breakdowns.
So how would this biennial budget be implemented? The
Isakson-Shaheen bill is a good place to start for implementing
legislation. It sets a calendar for each two year budget cycle,
makes necessary changes to the 1974 Budget Act, and adapts the
administration's budgeting and Congress's appropriations
process to a two-year cycle. In addition, each committee will
have to establish a new pattern of hearings and activities
during the second year of its budget cycle.
No committee's pattern would change more than the
Appropriation Committees. Today, the Appropriations Committees'
process is a full-year job. It leaves the Appropriations
Committees with little time to make sure the money is well
spent, a task for which they are surely well qualified because
they know where the money has been going. Their new activities
could include hearings about program results, site visits to
Federal programs and offices--when was the last time that
anybody that you know of in Congress actually visited a Federal
agency--and then reports on these findings. These activities
would also prepare them for making new decisions about the best
use of Federal funds in the upcoming year.
Authorizing committees should and would continue to conduct
vigorous oversight, and under a biennial budget they would have
more time to do just that.
The Budget Committees would also have to define a new role
for themselves. They could increase accountability and
transparency in budgeting by dividing time and attention to
several areas: The construction and use of budget baselines;
the differing assumptions between the CBO and the 0MB; the
effect of Federal budget on the nation's economy; and the
disclosure of budgetary information to the public through a
taxpayer receipt or other ideas. Some of these tasks could be
defined in statute to ensure they are addressed.
My last quote is from General George Patton. He once said,
you are never beaten until you admit it. You know, we hear a
lot today about how the budget process is broken and we hear
too little about it being fixed. Congress now has an
opportunity to fight for a better budget process and I look
forward to having a discussion with you about how to do that.
Thank you.
[The prepared statement of Mr. Kendall follows:]
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Chairman Conrad. Thank you very much.
Dr. Kettl.
STATEMENT OF DONALD F. KETTL, DEAN, SCHOOL OF PUBLIC POLICY,
UNIVERSITY OF MARYLAND
Mr. Kettl. Mr. Chairman, thank you so much for this
opportunity to appear before you this morning to talk about
this issue of biennial budgeting not only as a strategy to try
to fix a process that, as you noted at the beginning, is
broken, but to take advantage of what is unquestionably an
historic opportunity. We get a shot maybe once in a generation
to be able to take a careful look at what it is that we do, and
there is nothing more important in government than to try to
focus on the two basic questions we are dealing with today:
What is it that government should do, and how well is
government doing it. A biennial budget process would provide an
opportunity in alternating years to look at exactly those two
questions.
In addition to that is a point that we need to make, as
well. That is, the harder it gets to be to focus on these
fundamental questions about what we want to spend money on, the
more important it is to be focusing on the questions of
performance and how well government actually works.
There are a couple central arguments that lie at the core
of this. The first is that less and less in the Federal budget
is subject to an annual change in any event, so that an annual
budgetary process is falling increasingly out of sync with the
realities of budgetary decision making. And the other point is
that growing economic and fiscal challenges have increased our
need to look more than one year down the road, past incremental
changes and to the long-term fundamental and strategic
questions that face the country.
So let me try to look at three questions in particular that
really frame the basic questions of biennial budgeting. First,
the question of annual review of budgetary spending to begin
with.
The simple fact is that less and less of the Federal budget
is subject to discretionary spending to begin with. In 1971,
close to the last time that we took a careful look at the
budget process, 58 percent of the entire Federal budget was
discretionary. Today, it is about 39 percent. So we have gone
from about 60 percent to about a third that is subject to
annual appropriations, and on top of that, very little of what
it is that we appropriate annually can be changed annually in
any event because, for example, the Pentagon, we are multi-year
contracts. In many domestic programs, like air traffic control,
we have large fixed costs that we do not want to change and
would not be able to change in very rapid basis in any event.
It is increasingly clear that we need to focus much more
fundamentally on long-term strategy and not short-term
financing, and that the focus increasingly on trying to pass
annual appropriations is drawing us further and further away
from the questions we most need to focus on, and a biennial
budget would provide an opportunity for a longer-term view on
the basic issues that we need most to try to address.
Second point, that has to do with balancing budget review
with a performance review. It is well known, and we all
understand, that processes alone, by themselves, cannot force
action, and in particular, they cannot force attention to
performance. But a commitment to biennial budgeting would put
Congress on record as an institution on the importance of
looking on a regular basis at how well government works and to
provide an opportunity and the time for a systematic review of
government's performance. It would also create public
expectations and public opportunities for participation in
those basic questions about what it is that government does and
how well it does it.
Look simply at some of the basic facts of government's day-
to-day operations. In the Pentagon, there is something like $2
to $3 billion worth of transactions that occur every day, and
ensuring that that money is being spent well requires a careful
and regular review.
Recent surveys have shown that improper fee-for-service
operations in the Medicare program are costing the Federal
Government $24 billion a year, and estimates of fraud, waste,
and abuse in the Medicare program range even higher. It is
certainly not the case that anybody wants to allow that to
happen, but attacking those problems and wringing out those
difficulties will require a careful and systematic look at
Medicare's operations.
We have recently become reacquainted yet again with the
difficulties we have in our food safety programs, but a careful
look at how it is that food safety operates reveals that
responsibility is shared with the U.S. Department of
Agriculture, the Food and Drug Administration, Marine
Fisheries, Customs and Border Protection, the Federal Trade
Commission, and other agencies, as well, and we are not going
to be able to provide to Americans the quality and safety of
food that they expect and demand without a careful attention to
what it is that government does.
Just a few months ago, the Government Accountability Office
released a report of opportunities to reduce duplication in
Federal Government and Federal Government agencies and
programs, but careful attention to that is unlikely to happen
without providing the time to ensure a careful review. And, on
top of that, if we are just looking for a single place to
start, the Government Accountability Office has provided a list
of 30 high-risk programs that are especially susceptible to
waste and mismanagement, and only by a careful review of those
programs are we likely to be able to provide the opportunities
that we need to ensure that, in fact, those problems are taken
care of.
This is, as Senator Sessions pointed out, an opportunity
for accountability, and most importantly, an understanding that
the future and future performance really rests on the ability
to be able to link performance to the budget if we are, in the
end, to achieve the results that we want and deserve to give
Americans.
The third point that I want to make is the importance of
taking a longer time horizon to view the important questions
that lie before us, and in particular, to ensure that the
executive branch is provided the ammunition that it needs to be
able to ensure that it manages its programs as well as it
could. More predictability in Federal funding, not necessarily
more money, but more predictability in the money that executive
branch agencies are given will provide opportunities for more
long-range planning. It will create opportunities for more
efficiencies in hiring workers and in buying supplies. It will
cut in half the annual use it or lose it process that so often
afflicts the ways in which government agencies have to operate.
So if we consider those three issues, that the annual
budget process is becoming increasingly out of sync with the
realities of Federal spending, that we have an obligation to
citizens to provide more opportunity for oversight about the
way in which Federal programs operate, and that a biennial
budget process would increase efficiencies in the executive
branch, we have, I think, a very strong case for the biennial
budget.
The process is increasingly troubled, and both Mr.
Chairman, as you have pointed out, and our witnesses today have
explored, as well, we have had a harder and harder time getting
the budget passed on time. But more importantly, we have had a
harder time getting the budget to focus on the questions that
are of fundamental importance. We now have an opportunity to
focus Congress's attention on the right issues at the right
time and the right ways. Those fundamental decisions require a
longer-term view on what we do and how we do it, and focusing
on how much to spend is not in itself enough, because if we
focus only on that side, we will miss the opportunity to ensure
we get our money's worth for what it is that we do want to
spend. This is, in short, an opportunity to take the budget
decisions and couple them with important oversight questions
that we face and provide an answer to this historic
opportunity, this once-in-a-generation chance to try to advance
the way in which we deal with these fundamental questions for
all Americans.
So, Mr. Chairman, I thank you very much for this
opportunity to participate and look forward to our discussion.
[The prepared statement of Mr. Kettl follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Conrad. Really good. I appreciate very much the
testimony of this panel.
Let me just say, we are going to do five-minute rounds
because we have a second panel today, and I will adhere to it
myself.
Let us start with the fundamentals. We are borrowing 40
cents of every dollar we spend. Revenue is the lowest it has
been as a share of the national income in 60 years. Spending is
the highest it has been in 60 years as a share of our national
income. We have got a problem.
And, Dr. Kettl, I like very much your formulation with
respect to focusing on the things that really require our
attention. Increasingly, domestic discretionary spending is
consuming a smaller and smaller share of the budget. Mandatory
programs--Social Security, Medicare, and the rest--mandatory
programs are growing dramatically as a share of the budget, and
the annual budget process here is almost exclusively focused on
the smaller part of the budget.
What is wrong here? We are not putting our time where the
dollars are. And, of course, this is a change that has occurred
gradually over time, and so it is not surprising that we have a
process that really is focused on what used to be, not on what
is.
If we are to focus on what is, I think it would become
abundantly clear that our problem, our challenge is on the
mandatory side of the ledger--Social Security, Medicare. We can
see it just as clearly as can be. We had hearing after hearing
in this committee going at those fundamental questions. What
are we going to do about Social Security? What are we going to
do about Medicare? We know we are on an unsustainable course.
The demographics do not lie. The number of people who are
eligible for these programs is going to double over time and we
have not made the fundamental changes necessary to meet those
new realities. That takes time. It takes focus. And we need to
give this committee a chance to do that.
Let me go to the second point, and that is the oversight,
because I think we have got pretty strong consensus--I cannot
speak for everybody here, but I think we have got very strong
consensus going to two years. I think the question that we have
to resolve is what do we do with that second year? How do we
structure the oversight? And I would be interested in any
recommendations that members of this panel have with respect to
the oversight component. How would we manage that second year?
And I would ask each of you, in turn, for your observations on
what we do that second year. Maya, we can start with you.
Ms. MacGuineas. Okay, Senator. I will start by saying I
just could not agree with you more on where the focus needs to
be in the budget, of course, that the fact that we spend so
much time every year with these knock-down, drag out fights,
and if the American public understood what a small share of the
budget we are discussing while the part that is out of control
is sort of going without that necessary oversight, I think they
would be shocked. We need to turn that on its head and we need
to focus on where the problems are.
In terms of the second year, I do think there is always
more room for more metrics, more cost-benefit analysis, more
oversight, collecting the data. But I think the most important
place is to think about how you actually integrate what we
already have into the budget process, and I think that this
exercise of putting out national priorities, ranking national
priorities--and this is an exercise that other countries go
through in a much more rigorous way than we do. They actually
kind of map out, okay, in health, what are our primary
objectives? Is it longer life expectancy? Is it improving
quality per dollar? However you describe that, and then mapping
all your health care problems and--your programs, excuse me,
and see how they lead into that priority, as you have stated
it, and how effective they are and where the overlap and
redundancies are.
And you can almost see a visual of kind of taking our
Federal budget and remapping what the different parts of it are
doing, and a critical piece of this is bringing in tax
expenditures. That is like the shadow budget that gets no
oversight. Nobody pays attention to the $1.3 trillion in
spending going through the tax code and what is working and
what is not and what is being done. If you just look at
housing, for instance, our housing policy is all in the tax
code. It is not on the spending side.
So breaking these apart by topic, ordering our priorities,
and then seeing what is working and what is not, I think, would
be a new way to turn this on its head and use those oversight
metrics for a greater purpose.
Chairman Conrad. Good thoughts.
Mr. Kendall.
Mr. Kendall. Let me agree with everything that Maya has
said and add just one, which is a careful examination of
baseline budgeting. I think that there is a lot of confusion in
the budget debate over projections for the baselines. We have
competing groups doing competing baselines. We have CBO doing a
great job of producing both a current law baseline and a
projected alternative baseline. But there is little discussion
about what our baseline is.
And so in the off year, especially for the Budget
Committee, that would be an ideal topic to really fully flesh
out and figure out what should be the assumptions about a
realistic baseline.
Chairman Conrad. I am glad you mentioned that, because I
think this is one of the places that there is more tomfoolery
going on around here than in any other place. There are more
bodies buried in these different baselines than in any other
place and it absolutely is used to fool people and I have seen
it consistently.
Dr. Kettl.
Mr. Kettl. Senator, I could not agree more with what I have
heard, and let me just tick off maybe five very quick things
that could be the focus of hearings and investigation.
The first is that every administration for the last 25
years has had its own management plan, its own performance
efforts, and a careful and systematic look asking the
administration, regardless of party, to explore and justify
what it is that it is doing, explain what it is that it is
doing and how it works is an opportunity.
Second is the Government Performance and Results Act
requires all Federal agencies to define their goals and to
produce performance targets, and a careful look at how well
that is working is an opportunity for the committee's work.
The third is that there are some high-value targets that
are out there. There, for example, have been substantial
efforts made in the Medicare program to improve the purchase of
durable equipment, or put differently, to ensure that as we
provide wheelchairs for senior citizens, we do not pay more
than we should, and there has been great success there. And
examining what it is that is working and where the
opportunities are for getting cost savings is something that we
can identify.
The fourth point is that people do not live in government
agencies. They do not live in government programs. They live in
their communities and what they want is those programs to work
where it is that they live. And thinking about the way in which
different government programs and cross-cutting factions come
together in individual communities and work or do not work,
looking at government from the bottom up as well as from the
top down, is an opportunity.
And then, finally, a careful and systematic look at what it
is that is working so that occasionally, at least, we can
identify practices that offer the most promise provides
opportunities, as well, for moving the ball forward in
addition, I think.
Chairman Conrad. All right. Thank you.
Senator Sessions.
Senator Sessions. Thank you, Mr. Chairman.
We certainly face challenges, and every step we can take
that will make our situation better, we should take, and you
are on something, I think, that is a good step in the right
direction.
You know, we talk about entitlements. We often think
primarily of Social Security and Medicare, but there are other
entitlements as part of that 60 percent, for example, Medicaid
and Earned Income Tax Credit, Food Stamps. We looked at the
numbers as we were seeing what the automatic reductions would
be if the Committee of 12 did not reach an agreement. It would
call for about a 20 percent cut in Defense, 15 to 20. Defense
has had an 84 percent increase over the last decade in baseline
budgeting, which is significant, but Food Stamps has had a 300
percent increase. Medicaid has had a 113 percent. Those are
totally protected in this sequester. Neither one of those would
have any reduction in spending if the committee does not reach
an agreement.
So, somehow, we need to be more thoughtful about what we
are doing here, and I just would point out that the President
proposes for next year a 13 percent increase in the Department
of Education, 9.5 percent in the Energy Department, and 10.5
percent in the State Department. So there are savings to be
made in the non-entitlement programs that could be made.
Mr. Kettl, you made note that other countries are using
two-year budgeting. I was with Senator Kyl and we were in
Israel and they have gone to a two-year budgeting process. He
was telling me their Finance Minister recently told him that
that change was a tremendously significant part of their
successful negotiation of this recessionary period we are in.
Have you had a chance to hear about what they have done?
Mr. Kettl. Senator, I have not had a chance to look at
Israel, but I have just come back from a series of trips to the
United Kingdom, Australia, New Zealand, and even China, and in
each of those cases, the governments are spending much more
time, first, focusing on the bottom line. What is it that
really matters and which balls do they most want to move?
The second is what kind of metrics are they using to try to
identify the performance of their programs? They are having a
serious conversation with themselves and with their citizens
about where they want to go and how they will know whether or
not they have gotten there. Even in New Zealand, where they are
struggling with trying to recover from the earthquake in
Christchurch, they have a fundamental strategy of ensuring that
government is woven together so that as they rebuild the
community, they do not use scarce resources and programs that
do not work.
It is a fundamental understanding that is happening around
the world that increasingly, as resources get tighter, that we
not only have to figure out what we want to do, but ensure that
every nickel that we spend is spent in a way that produces
productivity and results and performance, and it is one of the
things that, as you travel around the world, is inescapable.
The focus on government performance has become one of the truly
universal pieces of globalization on the governmental side of
the equation and it is a place where we have substantial
opportunities in this country to catch up.
Senator Sessions. I agree. You know, our government is a
part of the productivity of America. It is a real part of it.
And to the extent to which we make it more productive, leaner
and efficient and produce more per taxpayer dollar, we have
made America a stronger place. It is just no doubt about it.
Ms. MacGuineas, have you had any insight into other
countries or States that have had a positive result from two-
year budgeting?
Ms. MacGuineas. Yes. All the case studies that we have
looked at in the past, and as I said, we have been supporting
biannual budgeting for many, many years, have always been--I
think Senator Conrad's kind of pros and cons of it really
mapped it out. So it makes sense for so many reasons in terms
of the stability that it adds, the extra time for oversight
that it adds.
Some of the disadvantages are that it is harder to know
exactly what will happen in the second year, so you build in
the right amount of flexibility to make alterations as you need
to while also making sure that those do not become loopholes by
throwing too many things in supplemental packages.
So I think what you see from looking at other countries and
the States--and it is no surprise that so many former Governors
who come to the Senate are big fans of biennial budgeting--is
that the pros, I think, clearly outweigh the cons and the cons
have some very easy ways to address the shortcomings of the
biennial budgeting.
Just on one point about your triggers, or your sequesters,
I think it makes so much sense that the sequester we have now
is imperfect in that you either want a default that is good
policy, if Congress does not do this there is a good policy
that is in place to take it, or that is really, really bad
policy. But what we did is we kind of put this hybrid in where
it is terrible policy to have across-the-board security cuts or
other cuts, but we have exempted programs for the poor in the
way that make it kind of less painful, and it is just--it is
not the most effective trigger. And we have recommended
something that would be across the board on all programs so
that Congress would clearly not want to let it happen and force
Congress to make the proactive decisions about how really to
more thoughtfully make the fiscal changes we need to make with
the threat of sequester pushing, making the extra pressure
there.
Senator Sessions. Thank you for you and your group's active
participation in these important issues. You have been a very
valuable contributor.
Thank you, Mr. Chairman. My time is up.
Chairman Conrad. Thank you, and I just want to say, you
know, every time I drive into the garage--I guess it is one of
my pet peeves--and I see all these Federal vehicles, it gets me
upset. And I wonder: Who is driving all these vehicles? How can
it be that we have got all these vehicles? And, you know, in
the Commission, we took a big swack at that, and in our Group
of Six, we said cut this 20 percent. I am not sure we could not
cut it 50 percent and not have an adverse impact. But these are
the kinds of things, you know, a level of detail that you could
get into in a second year that is really needed.
Senator Begich.
Senator Begich. Thank you very much, Mr. Chairman. I would
just add, Ms. MacGuineas, also say as a former mayor, mayors
believe in 2-year budgeting a lot more, I would say, than
Governors at times because of their legislative sessions. But I
would say this: Mr. Chairman, I am not sure whether there is
disagreement on a 2-year budget, so, you know, of course, I am
going to ask about how the process would work. I would love to
see a bill attached to some appropriation bill that we move
forward in some form to just not have the debate, just get on
with the show. But your issue that you just brought up on
vehicles, I will tell you, the city of Anchorage, we went to 2-
year budgeting when I was mayor, and many issues we spent the
second year evaluating and reviewing. As a matter of fact,
vehicles was one of them. We actually converted our vehicle
program into a vehicle rental program that agencies would rent
from within, and you would be amazed how quickly they suddenly
realized that maybe they did not need that vehicle anymore
because it cost them per day, per month, per year to utilize,
and it was not just another vehicle laying around. We cut our
vehicle utilization by almost a third in a city of 270,000 at
that point. Real money was saved.
We also compared it to the private sector rental rate for
the same vehicle, so our rental agency within had to be
competitive. If not, the deck would change rapidly. So it does
create the second year a lot more analysis and review and
debate and discussion, which I think is important.
So I hope even in this cycle that we take--I cosponsored
the Isakson and Shaheen bill. I am happy to look at any 2-year
bill, and how we use the mechanism of the Senate to get it done
rather than talking about it. But the real question to this
panel: In every government except the Federal Government, we
have an operating budget and a capital budget. One is partially
debt financed in cash; one is straight cash, operating straight
cash, utilization of operation dollars.
It is a huge leap for this place here to even think about
it, but it seems that, for one, the public understands that a
lot more because they deal with it. When they vote for property
taxes or do not vote for property taxes, when they support an
operating budget in their local communities or school
expansion, people understand that. They have no clue how this
place operates let alone, I think, many of the people who work
within this environment understand how it operates.
Give me your thoughts on an operating budget versus a
capital budget, and capital or longer term, you know, those can
be 5- to 10-year plans where operating can be a 2-year but
still incorporate in your 2-year budget. And maybe not take the
big piece, but maybe sample it with a couple agencies and say,
okay, you are going to go onto a 2-year operating and capital
budget presentation to the budget process. Give me your
thoughts on that.
Ms. MacGuineas. Well, I will tell you, in principle, I
think there is absolutely no arguing against it. There are
things that make sense to borrow for and things that do not
make sense to borrow for.
Senator Begich. Right.
Ms. MacGuineas. And differentiating between those two would
lead us to much more sound policies. I remember a number of
years ago I tried to look through the budget and see how much
was consumption and how much was investment, and I think I came
up with about 84 versus 16, depending on how you would look at
those things.
Senator Begich. Right.
Ms. MacGuineas. And that should be turned on its head. What
we want to do is create the incentive to change our budget from
a spending-oriented, consumption-oriented budget to an
investment-oriented budget.
I am, however, incredibly worried about doing it in
practice in that it is sort of like dynamic scoring, that we
know that different policies do have--tax policies have
different effects on the economy. But I am not sure we have the
tools to rigorously and honestly differentiate them and say
what would promote growth and what would not. So the concern
about capital budgeting has always been: Do you start pulling
more things? You know, this farm subsidy is actually an
investment. More consumption-oriented things go there.
Senator Begich. Let me define it how local governments
define it and how State governments define it. I build this
building; it is capital budget. I pay for the staff; it is
operating budget. Tax incentives are operational to the
operation of the government. It is not a capital investment.
Now, some would argue if you give an energy credit, is that a
capital investment? I am talking about it in its purity as done
on the State level and the local level.
Ms. MacGuineas. And I think that answers sort of the first
concern, which is if you can define it rigorously, that
improves the way it works much more.
Senator Begich. Good.
Ms. MacGuineas. The only other concern I have is right now
our borrowing is so massive, we actually need to focus on how
we borrow less, not how we borrow for different things. So I
almost feel like this would have been an ideal change to make
in a time of more fiscal sanity where now the focus has to be
on how to borrow less and to shift what we are investing in. So
I do share the objective.
Senator Begich. Okay.
Mr. Kendall. Senator. I think that is an excellent
question, and I think it is something we constantly would want
to develop as you go along, because one of the things that
drives our economy is the investments by the Federal Government
in research, in new technology, and, you know, infrastructure.
So we have to figure out--I think it would actual help if we
had more confidence in our ability to do capital budgets, even
if we did not call them that, to sort out the debt problems,
because right now, just cutting back on the debt looks like we
are just going to cut back on economic growth.
So what I would suggest, as you just did, is let us take
some agencies that are willing to step forward, that need long-
term planning. The Defense Department would be a great example.
Senator Begich. Transportation
Mr. Kendall. Transportation, exactly, and infrastructure
banks, that kind of activity, would be great ways of testing
out that concept. And then also, as Maya suggested, having a
budget concepts commission, using that to develop a capital
budget, because we know that debt financed investments in our
country's future are key to economic growth.
Mr. Kettl. Senator, you have really identified the crucial
problem here because if individuals and agency managers are
allowed to express things in terms of investment, everyone is
an investment. We invest in our people. We invest in our
staplers. We invest in our paper. Everything is an investment.
Then if that becomes an excuse for capital long-term borrowing,
then you lose complete control over things, which is about
where we are now.
There are two concepts that I think make a great deal of
sense. One is precisely what you suggested, at least on a pilot
basis, of identifying items that have a long, useful physical
life, and then identifying a way to try to put our borrowing
patterns against that. What State and local governments do is
they do not borrow for 150 years for a bridge that will last
20. They do not borrow for 50 years for a fire truck that will
last 10. They find a way to try to match up their revenue
streams and the borrowing to match the useful life of the goods
and services that they are buying, and that makes a tremendous
amount of sense.
But connected with that has to be a second piece, which is
a simple conversation with ourselves and with the American
people about what is the result of what it is we spend our
money on, that we have to be able to couple how much we are
spending with what it is that we are getting for what we are
spending. And a two-part process, being able to sync up the-
revenue streams with expenditures, and then a frank
conversation about what is the value of what we are doing, what
results do we get for the money that we spend, is something
that the American citizens expect, I think.
Senator Begich. Thank you very much.
Thank you, Mr. Chairman.
Chairman Conrad. Thank you, Senator.
Senator Johnson.
Senator Johnson. First of all, thank you, Mr. Chairman, for
holding this hearing. This is incredibly important, and I think
one thing I am encouraged by is I do not think you have much
argument, within this room at least, and I would think within
the Senate, of actually reforming this budgetary process.
As a manufacturer and accountant myself, I realize that if
you have a broken process or something out of control, you are
going to have a very bad product, and we have been having a
very bad product here. So I would encourage you to let us move
forward with this quickly, let us get this actually passed by
the Senate. We need to restore some confidence in Congress and
the American people, and this would be one way we could
actually do it because this is important. We are bankrupting
our country.
I want to agree with Senator Sessions that the root cause
of the problem really is that we have a $3.6 trillion a year
entity here. And to Senator Begich's point, it is impossible to
get your arms around this thing. And one of the reasons it is
impossible is we do not have audited statements. If there is a
balance sheet for the Federal Government, I have not seen it.
We have unfunded liabilities that we are not accounting for, to
your point, Ms. MacGuineas, about better accounting. This is a
mess, and we do need to reform it.
But I think one of the things that we are all talking
about, biennial budgeting makes sense. There is just not a
whole lot of argument, so we need to move forward on it.
But I would propose some other reforms I would like to get
some comment on: zero-based budgeting versus baseline. It is
shocking that my calculation is it is about 30 percent of the
budget, about $1 trillion, $50 billion--forget the overseas
contingent--is subject to appropriations. Everything else is on
automatic pilot. I do not think we would be in this position if
we were appropriating all the entitlements, all the mandatory
spending, and actually tweaking the programs like businesses
have to do with health care. You know, every year you have to
maybe increase your deductibles to make it affordable. So I
think that is important.
I think we should bring on every part of the budget on the
budget to be evaluated, to be appropriated, and as long as we
are talking about entitlements, how making sure that they are
solvent for 75 years, instilling that type of discipline?
So let me actually start asking a question here. In terms
of biennial budgeting, is there a State model--let us not
reinvent the wheel here. Is there already a law on the books
somewhere that works really well that has taken into
consideration the cons and corrected for those things? Anybody
who knows.
Mr. Kendall. Most States started off with biennial budgets
because they met every other year. And, in fact, what has
happened over the years is that as some States have gotten
bigger, they have actually gone to annual budgets. So what you
see at the State level is lots of back and forth, and so there
is no--and it partly is due to political circumstances; partly
it is due to the changing nature of the relationship between
the legislature and the Governor. So there is no perfect model
out there. I think that the Isakson-Shaheen bill covers a lot
of territory. I think that is the one that we could point to.
But certainly a lot of States like Arizona have recently
adopted biennial budgeting, and Oregon. Those are the two
States that come to my mind.
Senator Johnson. Okay. Let me ask a question in terms of
the year you would actually implement the budget. I think the
Isakson-Shaheen budget actually passed the budget the first
year of a Congress. I would make the suggestion, being a new
kid on the block here, I would actually rather do the oversight
the first year as a new Member of Congress so you can actually
learn the process and then budget in the second year of a
Congress. I just kind of want your thoughts on that. Dr. Kettl.
Mr. Kettl. Senator, one of the things that I will say is
that budget decisions are always best made from the base of
knowledge of how well things are working. It is in part a
process of planning looking forward, but it is also a way of
trying to look at what it is that has happened and to try to
make sure that we make the investments in those things going
forward that are most likely to work. So to that measure,
budgeting is in part looking in the rearview mirror and in part
looking down the road with the headlights. And it has got to be
balanced, especially for new members coming in. As you point
out, having some sense of what it is that we are actually
trying to do, how well we are actually doing it, and what
implications that has for the spending we have for the future
makes a lot of sense for figuring out how to move forward.
Senator Johnson. Ms. MacGuineas.
Ms. MacGuineas. I was just going to say yes, yes, and yes
to all of your ideas, so I think it makes an awful lot of sense
to get familiar with the performance of the various programs
before you engage in the first year of budgeting.
To your two other ideas, not in biennial budgeting, I mean,
budgeting from the bottom up makes a tremendous amount of sense
because we have so many things--we see this all the time--that
become entrenched and are just the status quo, and that is why
they remain in the budget rather than having to justify them
over and over again. And as in my remarks I mentioned, I think
we--and we recommended in our Peterson Pew commission--you
really do want to compare your annual spending and allocations
to where you were last year, perhaps as well as other
baselines. So I think it is very important to understand what a
current services baseline would be, sort of how much to get the
same amount would cost in the budget.
But, yes, a cut needs to be able to be a cut right now, and
right now, with the way we budget, when you are increasing
spending, it gets called a cut, and that is very confusing for
people who are trying to understand. Or when we are talking
about how much do we need to save to stabilize the debt. The
number you normally hear is $4 trillion. That is right,
depending on what it is compared to. Given all the baselines
that are out there, that could be give or take trillions.
And then just to your final point, in terms of bringing
everything on budget and mandatory spending, a number of us
through various fiscal seminars have looked at different ways
to add more discipline to the mandatory part of the budget and
put in kind of longer-term caps that would help us put a budget
in place for these programs, review whether it is on track, and
certainly the standard of sustainable solvency is something
that should be applied to any program where it can be, in
particular Social Security.
Senator Johnson. Mr. Chairman, if I may, because this is to
your point about multiple baselines, that is an incredibly
frustrating on my part. There is no unified set of numbers. I
do not have a clue what number we are really looking at.
Just a quick question. How do you unify that? And what
should be the agency to unify that in?
Mr. Kendall. That is a big question, but let me just offer
one short thought. The CBO now creates an alternate baseline
which they project is the most likely political scenario. That
is full of political assumptions. That should be tested with
you all here. I think that is where we should have--because the
current law baseline, which assumes that the tax cuts are going
to expire, is not a realistic assumption. That is not a
realistic baseline budgeting process. So we have to have a
political discussion about what the baseline is, and, in fact,
I think the discussion of the baseline then becomes a
discussion of what the budget is. And I think that is what is
missing in this debate right now.
Senator Johnson. Thank you, Mr. Chairman.
Chairman Conrad. Senator Enzi.
Senator Enzi. Thank you, Mr. Chairman. As the other
accountant, this is about as exciting as legislation gets.
[Laughter.]
This is probably better than watching ESPN. Somebody
mentioned a number of times what States are doing this biennial
budgeting, and, of course, I am from Wyoming, and there have
been several years that Wyoming is the only State that had a
budget surplus, and at the moment they are one of six that have
a budget surplus, and they do biennial budgeting.
I want to thank the panel. It has been extremely
enlightening already. Ms. MacGuineas, I liked your call for
better accounting. The interconnect with the Federal, State,
and local, that is something we never do. Multi-year planning
and by objective and that stays in effect until the objective
is reached.
Mr. Kendall, you wondered about actually visiting agencies.
I have done that. I like to do process audits and see how they
operate. When I was running, I said we really ought to ask all
the agencies who their customer is and what they think they are
doing and how we would know if they got it done. Now, I have
had to change that last one because no agency ever figures on
being done because that means they would lose their job. But I
got back here and was pleasantly surprised to find that we have
a Government Performance and Results Act, which means all the
agencies are supposed to be doing that already. Unfortunately,
nobody is evaluating it. Well, occasionally a President will
say, you know, these are agencies that failed their Government
Results and Performance Act by their own evaluation, and so we
ought to eliminate them. But we never do.
So I get real excited when we talk about, as Dr. Kettl
did--and everybody, actually--capital budgeting. Mayor Begich--
and we are both mayors and have that distinction between the
capital budget and operating budget. He mentioned a specific
example on vehicles and matching revenue streams. I have tried
to get a capital budgeting bill through before, and Senator
Corzine was actually on a commission before he became a Senator
for doing capital budgeting. I think it is absolutely essential
that we split those out. And, Dr. Kettl, I loved your comment
that people live at the local level. They really do not live in
Washington.
I have a proposal for a biennial budgeting bill, and the
reason that I developed this proposal was there seems to be a
lot of concern by the appropriators, and even by the budgeters,
about what kind of publicity we will get in the off year. So I
split the appropriations process into two parts. When you are
dealing with trillions of dollars, you ought to have more time
to spend on the actual spending than what we have been doing.
When we are trying to do trillions, it is really hard to even
concentrate on a billion dollars. But when people start doing
amendments that deal with a million dollars, people get pretty
disgusted because of the time that it takes and the amount of
time that there is to do all 12 budgets every year.
So I broke it into two parts, with defense being done every
year but then the other two sections being done so that the
first year after the election you handle the more difficult
issues, and the second year you handle the ones that are a
little easier because you do not want to get into politics,
particularly not into Presidential politics. But that would
allow us to get more details.
One of my first frustrations was with Yellowstone Park.
They were always running out of money in August, and I could
not figure out why. So I asked to see their budget. Their
budget was one line in the Federal budget. It was $18.7
million, 155 employees. And so I wanted a little more detail on
that, and there is no more detail on that. You cannot even get
a list of what expenditures they have made in the past to see
what they are spending their money on.
So even if you have an intense interest in a particular
agency, there is no time to really do it. And so I think that
the agencies would have the same level of exposure if they did
half of it each year and oversight on the other half during
that same year. I think that would allow us to get into more
details and would actually force people to have more details.
But the big thing that people comment on is will the agencies
be able to plan for 2 years. I certainly hope so. They
certainly cannot do much planning when we have a massive
appropriations, omnibus appropriations bill. But there is a
suggestion that there would be numerous supplemental bills. Do
you think that would be the problem with a biennial budget, any
of the proposals of biennial budgets out there? Anybody.
Mr. Kendall. Yes, you have to find a way to sort of control
that impulse. You have to allow for changing circumstances. No
budget predictions are going to be perfect. So having some
money set aside as a possible contingency fund would be really
helpful. Having more funds that are designed for disaster
relief, then have them specifically laid out can help with
that. Having clear rules about what constitutes supplemental--
we have tightened up those rules in the Budget Control Act for
emergency spending. So those kinds of things. I think you just
have to define a set of rules and then see what works.
What I think is the worst thing to do is to start a new
budget process and then kind of wait another 20 years to
reinvest it, because that is what--we need to fine-tune this a
lot more as we go along.
Senator Enzi. Yes. Well, my time has expired, and I
apologize for--but I do think it would lead for better
planning, and I have always contended that, since we know there
is $7 billion worth of disasters every year, that probably
ought to be a part of the process.
Chairman Conrad. Thanks, Senator.
Senator Whitehouse.
Senator Whitehouse. Mr. Chairman, I will not use all of my
time. I just want to thank you and the Ranking Member for
hosting this important hearing. I think the idea that Senator
Enzi has mentioned of a capital budget is a very important
idea. The way things work around here now, something is either
an important investment or wasteful spending, depending on your
point of view about the merits of the underlying program. It
would be great if there was some method for actually making a
formal determination of what really qualified as an investment
and what really was just spending, and I think a capital budget
would allow us to do that. I know it is complicated, but I want
to put myself on record in support of it, and I would be glad
to work with any and all to try to come up with a mechanism
that allows us to have a capital budget. States certainly do,
municipalities certainly do, companies do. Even American
families do. And I think it would make sense for us to.
I also want to align myself with all the witnesses and
Senators who have spoken in favor of moving to a multi-year
budgeting process. Trying to do it year by year has simply
proven unsuccessful, and there is no greater sign of the
deficiencies in that process than the undistinguished spectacle
that we call vote-a-rama. It is an undistinguished name for an
undistinguished spectacle and adds nothing to the process of
serious budget development.
The last thing I will mention is that it is a mechanically
difficult thing to deal with, but over and over again we face
issues where you can take an existing governmental mechanism or
program and you can cut it. And by cutting it you can easily
get the number at the end of the day of what the savings are
going to be. Very often you can also take that program and
reform it and make it more efficient. There can be enormous
amounts of money lost in the sort of Rube Goldberg circuitry of
various programs. And we really do not have a device for trying
to anticipate what those savings are or benchmark them in some
way. So that means whenever we get into budget trouble, we face
a huge built-in institutional bias for cutting the benefit that
the American public enjoys without seriously addressing the
burdensome system that bedevils them. And the bias that that
creates I think is a very unfortunate one because it leads us
away from the hard work of trying to make a system run more
efficiently and work better, and steers us towards the easy
path of taking something away from Americans that they have
often paid for, are very often entitled to, and we have
conceded over the years or believed over the years is a good
idea for them to have. And that discussion is one that I think
our budget process does very little to improve, and as the
Chairman knows, because he has heard me give this speech 9
million times now, the health care system is the ultimate
example of a system where over and over again we have had
witnesses before us at hearings who have over and over again
focused on the cuts side of it and never been able to focus
seriously on the delivery system reform piece. And they have
said to this Committee, ``Well, the reason we do not do that is
because you cannot score it. If you could score it, we would go
there.''
And so what is somewhere between a $700 billion a year and
$1 trillion a year savings for this country falls off the
discussion, and it is probably the most important discussion we
could be having, and yet it falls right off the table because
it does not have a mechanism for scorability. And I think that
creates a very, very significant public policy error and
oversight, and I would love to find a way to try to work on
that, too. That is a thornier one than just a capital budget or
multi-year budgeting, though.
So I appreciate what the Chairman and the Ranking Member
have done to try to call us together on this, and I will close
with those thoughts. And thank you very much.
Chairman Conrad. That is an important point. You have made
it repeatedly, and you have made it well. And I personally
believe it.
One thing that could be done in that second year would be a
focus on issues like that one. If you are looking around for
opportunities to save money for the United States, there is
probably no bigger treasure trove than that one. And you need
time. You need time to delve into it.
Senator Ayotte.
Senator Ayotte. Thank you, Mr. Chairman. I want to thank
the witnesses for being here today and the Chairman for holding
this hearing.
I first of all want to ascribe myself with the comments of
Senator Johnson. I fully agree that we need a biennial budget
process, zero-based budgeting, and we should be coming up with
solvency for entitlement programs for the next 75 years.
I have a question for Ms. MacGuineas. With respect to the
Super Committee and the goal that has been set of $1.5
trillion, is that sufficient to stabilize our debt over the
next 10 years?
Ms. MacGuineas. Thank you for asking that question because
I think the work of the Super Committee is so incredibly
important, and it is such an incredible opportunity to make
real progress on these tremendous challenges. And while
obviously saving $1.5 trillion would be a very large amount of
savings, I think there is no question that it falls short of
what we actually need to do in order to stabilize the debt.
So we have had a lot of people, a lot of outside groups, a
lot of outside institutions, from the Fed to the IMF to others,
who have, one, found that our debt levels are already harming
our economy, so when we are thinking about how to generate
economic growth, not only is how we fix the budget incredibly
important on the tax and public investment side, but making
sure to bring those debt levels down quickly while also
allowing the economy to continue to recover is incredibly
important in doing so. And we have also had a number of outside
commissions that have looked at the magnitude of the savings
that are necessary probably to be the bare minimum, which is to
bring the debt back down into the range of 60 to 70 percent of
GDP within a decade and then closer to historical levels, which
are below 40 percent.
Chairman Conrad. Could I just stop you on that point and
make the point?
Ms. MacGuineas. Yes.
Chairman Conrad. You are talking there about publicly held
debt.
Ms. MacGuineas. Yes, right. You have had testimony about
two different types of debt.
Chairman Conrad. I do not want people who are listening
here to be confused. Publicly held debt is about 30 percentage
points lower than our gross debt. So when she is talking 60
percent publicly held debt, that translates into about 90
percent gross debt.
Ms. MacGuineas. That is right, and a lot of the economic
studies have looked at the gross debt, so then you have
translate it into the publicly held debt.
But what we do know from these different studies about what
savings it would take is that we are from a realistic baseline
talking about something which is probably at a minimum $4
trillion in savings. And I think the key there is that it is
something that is that big that allows us to get to a
sustainable or closer to a sustainable debt level, but also
allows us to tackle those critical pieces of the budget which
you just brought up, in fact, the entitlement programs as well
as the big tax expenditure piece of the budget.
So in no way to take away from the challenges of saving
$1.5 trillion, which is real money and an important step
forward, but we know we have to go bigger than that to fix the
problem, and I think when you have a problem that is sitting
there that has such detrimental consequences if we do not, we
should do everything to save as much as possible.
Senator Ayotte. Thank you. I just want to be clear.
I firmly believe that we need to do much more and we need
to set a much bigger goal if we want to stabilize our debt. And
I very much appreciate the point that you made in terms of the
impact on our economy with the growth of our debt and it hurts
our economic growth as well. And we all know that Americans are
very concerned, rightly so, with our economic growth and
wanting to have jobs right now. So I really appreciate your
testimony.
I wanted to also ask you, you said something, Ms.
MacGuineas, that struck me, which is you said that while we can
enact budget reforms, you said, ``None will replace the hard
decisions that we need to make to change our fiscal
situation.'' And what that struck me in hearing that is that,
you know, it has been over 2 years since the Senate has passed
a budget. If you look over the last five out of seven election
cycles, we have produced no budget resolution. And so while we
can change to a biennial budget process, if Congress does not
do its job--you know, I am wondering if we do not pass a
budget, if we are not willing to make the hard calls, it really
does not matter how we reform this process. And so I have just
been wondering maybe we should have a sequestration on our own
pay if we do not pass a budget. Any thoughts you have there I
would appreciate it, because I think you would all agree that
no matter what changes we make, if we do not follow through,
then we will not put our country on a fiscally responsible path
and have a fiscal path and road map going forward. Would you
all agree with me on that?
[Witnesses nod.]
Thank you.
Ms. MacGuineas. Yes.
Senator Ayotte. One final question. We have talked about
States that have a biennial budget process. New Hampshire has
one. In fact, we are going to be a State that has a surplus
this year. I wanted to say without looking at the issue of a
balanced budget, because almost every State in this country has
a balanced budget requirement, legal requirement, I think all
except one, and New Hampshire does as well. If we continue to
grossly exceed--the amount of expenditures grossly exceeds
revenue coming in, does it really matter in terms of what kind
of budgeting process we have? Or are we going to continue to
dig ourselves into a hole that we continue to add to the $14
trillion in debt?
Ms. MacGuineas. One of the things on this Peterson-Pew
Commission that we contemplated was what position to take vis-
a-vis the balanced budget, and I think one of the scary
realities is just how far away we are from a situation where we
could balance the budget. So we sort of removed ourselves from
the current massive deficit situation and thought, once we get
back into a sustainable position, what would you ideally want?
And basically we concluded and recommended that balancing the
budget over the business cycle is the right objective so that
you allow yourself some flexibility either through building up
surpluses and drawing them down, down, down during downturns.
And one idea we came up with was that every President should
offer a budget that balances over that 8-year term, which
basically reflects the business cycle. So it would not be as
stringent as the States where you have to balance on the annual
basis, though, of course, because of capital budgets there is
more flexibility. But to put in place that sense that if you
are going to borrow a little bit at one point, you have to
offset that at another point so that over time balance is your
objective. I wish we were closer to that today than we
currently are. What is frustrating is that past fiscal efforts
we have been going towards balance, and now are trying to
stabilize the debt at a level that is arguably still too high.
We are so far off from that mark, it is very frightening,
really.
Senator Ayotte. Thank you.
Chairman Conrad. I thank you.
Senator Wyden.
Senator Wyden. Thank you, Mr. Chairman.
Ms. MacGuineas, let me start with you. You all have done
some very good work on both spending and taxes, and I want to
talk with you, before we get to some of the process issues,
about the opportunity in the Super Committee to get a
bipartisan agreement on the issue of revenue. I think if you do
that, a lot of opportunities open up for the kind of big
initiative you all are looking for.
Today, when you mention the word ``revenue,'' a number of
Republicans are certainly going to say, ``This is Democrats
trying to raise taxes.'' And then when Democrats hear that,
they will say, ``Well, this is Republicans in effect just
sidling up to folks who are particularly well off.'' And my
sense is that you can get beyond this polarized argument today
on revenue by looking at tax reform, because if you have
growth-oriented tax reform, you can generate revenue in the
private sector. That will appeal to Republicans. It helped us
create 6.3 million new jobs in the 2 years after the 1986 bill.
But it will also appeal to Democrats because you have a chance
to go after these tax expenditures, broaden the base, and
increase progressivity, increase fairness in the code.
Do you share that view that this is an opportunity to bring
both sides together in the Congress and the Super Committee
around revenue if we take a look at this kind of growth-
oriented tax reform?
Ms. MacGuineas. Thank you for the question, Senator, and
thank you for your leadership on putting out tax reform ideas
which are really tremendous and have moved the whole discussion
forward.
I absolutely do. I am in no way so politically naive as to
say sort of this whole issue of revenues is going to be no
problem, we know how to resolve it. But the advantage here is
that we are starting with a tax system that is absolutely so
awful and there are so many ways to overhaul it and improve it.
And, you know, I am an ``eat your spinach'' kind of Pain Caucus
person. I do not sell easy solutions very often. But actually
because the tax system is in such disarray, we have a
remarkable opportunity where we can have pro-growth tax
reform--and I am not, you know, ``you cannot cut taxes and grow
your way out of the problem.'' I do not sell that kind of stuff
at all. But we can reform the Tax Code by clearing out so many
of these tax expenditures, lowering rates, generating growth,
that it will contribute to one of the truisms about fixing the
situation, which is revenues will have to be part of the
solution. But they do not have to be part of the solution by
hiking tax rates. We are at a point where we can do this--by
the way, the same kind of model we did in 1986 and that you
have put out there and that the Bowles-Simpson plan has put out
there. But by broadening the base tremendously, which improves
the efficiency because these $1.3 trillion in tax breaks
misallocate resources more often than not, lower rates, which
is pro-growth, and create significant revenues that can help
close the fiscal gap.
So I do think--and you are hearing all sorts of arguments
right now, well, we do not have time to get tax reform done.
Well, we have a great starting place with work that you have
done, with work that we have seen from Bowles-Simpson. We do
have time to make tremendous progress with work that the Gang
of Six has done on how to put together different steps to get
to the tax reform we would need. And we know that we can put
revenue targets, distributional targets, rate targets, and come
up with a superior tax plan to what we have now which would
solve the different priorities that both progressives and
conservatives have that they can all be met in some ways with
tax reform. So it is quite an opportunity.
Senator Wyden. Let me ask you about one other question that
goes to the process issue, and I think you and I touched on it
a long time ago, but more people are starting to come back to
it. That is, when we get real tax reform, what kind of
processes could be put in place to keep from the backsliding
that took place after the 1986 bill? It seemed after 1986
practically as soon as the ink was dry on the 1986 bill,
everybody came back and started larding it up with all the
preferences and the goodies of one sort or another.
Now, no current Congress can ever permanently bind a future
Congress, so you cannot lock something in a box and just say it
is never going to be touched. But there have to be some ways to
at least make it tougher to unravel tax reform, to basically
have a process, for example, where you could require some votes
to unravel it or something of that nature.
Have you all taken a look at that? And what would be your
thoughts? I just have a few more seconds. We can discuss it
another time. But what would be your thoughts on trying as part
of the tax reform this time to prevent the backsliding that
took place right after 1986?
Ms. MacGuineas. Yes, it is a great question, and you so
often hear Members of Congress talking about how much they
support tax reform, and then in the next breath recommending 12
new tax expenditures, because they are so fun, right? They are
a tax cut that gets you something you want. Who can resist it?
So the incentive to backslide is huge there.
We have actually a whole paper that recommends different
ways to reform tax expenditures and keep those on track, but
just one of the big ideas is tax expenditures should be treated
more like spending and subject to all the budget process rules,
and PAYGO for tax expenditures. Once you put in place the
reform for tax expenditures, you should have basically a PAYGO
where you have limited yourself to whatever you have kept in
place, and that for any new one you put in there, you would
have to offset it with other tax reforms.
So there are many processes, again, never place, you know,
policy choices, but that can help keep that reform on track for
a longer time than if you were to just put it in place and let
it unravel, as it inevitably otherwise would.
Senator Wyden. My time has expired, but I thank you and
your colleagues for your good work.
Chairman Conrad. Senator Thune.
Senator Thune. Thank you, Mr. Chairman, and thank you all
for your testimony this morning. I am glad to hear the
consensus forming around biennial budgeting. I think that is a
reform that is long overdue around here, and I hope that--to
get away from a budget process that does not work, we need to
change it. And I think that the quicker we do that, the better
off we are all going to be--most importantly, the American
taxpayer.
I am interested in knowing, in addition to a biennial
budget, I have got a budget reform bill that has been kicking
around here for a while that also calls for a joint budget
resolution rather than a concurrent budget resolution where you
would have buy-in from the administration more on the front end
that hopefully would involve consultation with the executive
branch of the Government, too. And I am wondering what your
thoughts are on that and whether you believe that the
administration and Congress ought to work, be forced to work
more closely on a joint budget resolution and perhaps then
would Congress have less flexibility to violate the budget
resolution, a joint budget resolution once it is passed. Mr.
Kettl, if you want to start off.
Mr. Kettl. Senator, the idea of trying to find some way of
making sure that the administration and the Congress get on the
same page is an important goal. The reason why we have the
process that we have now was a reaction to Watergate back in
1974, where Congress, in an effort to try to assert itself,
feeling that the administration had, in fact, usurped too much
of the legislative function in the budget process, created the
process that we have now.
There are two concerns. One is that there is a risk of
slipping back in that direction given the fact that the
administration has so many strong cards to play in the budget
process. That is, can Congress really establish and maintain
its independent voice in the budget process? And the second is
Congress' need to come up with its own voice on what it is that
the budgetary process ought to be.
Clearly we need to do a far better job of bringing the
administration and Congress together on the same page
ultimately in the budget process. I would have some concerns
about slipping back into some of the same kinds of processes
that got us to the point where Congress created the Budget Act
in 1974 to begin with.
Senator Thune. Mr. Kendall.
Mr. Kendall. I remember as a young staffer on the House
side learning about the budget resolution and the President
does not sign it? What? It did not make any sense. But I think
the only way to evaluate whether you should have the President
sign the budget resolution is whether it is going to make it
harder or easier to get a budget deal. We have had so much
trouble getting a budget deal that the question is whether that
would make it easier or harder. And I do not think it is
obvious which way because, on the one hand, making it even
harder may just kind of help get all the tensions up front and
deal with it up front. On the other hand, making it harder--you
know, it might make it easier, you know, for other games to be
played. And so it is not clear to me that there is sort of a
win-win on that one. But it is certainly something that should
be on the table, absolutely, and I would love to hear everyone
else's comments, too.
Ms. MacGuineas. Again, because we have done a couple
process commissions, that is something that we have looked at
and we have come out supporting, thinking it would make it more
difficult in some ways to get the budget done, but it would
make the budget so much more meaningful. And also because I
have had the chance to comment on your bill when I followed you
on a panel once, I think there are so many good ideas in the
bill that you have put forth.
The one thought that I recall having is that bringing tax
expenditures into some of your ideas, you have sunset
commissions and other things. I mean, these tax expenditures
are Government spending through the Tax Code, and subjecting
them to a lot of the rigor and sort of thoughtful different
processes that you have recommended in your work I think would
be useful. But on specifically the joint budget resolution, we
are on record as having supported it even though it would be
tough.
Senator Thune. Well, I do not disagree that it would be
tough. It just seems from an enforceability standpoint and to
have the buy-in of the administration earlier on in the
process, that once you get that--you know, right now the
President submits his budget. It is always declared dead on
arrival in Congress.
Ms. MacGuineas. Right
Senator Thune. Congress writes its own thing. And I think
it would bind the Government of the country and inform a strong
responsibility to the American people to actually do something
if everybody had an ownership in it. Anyway, that is sort of my
view. I just think right now we have got this bifurcated system
which just does not work, frankly.
Ms. MacGuineas. Agreed.
Senator Thune. You know, we have got a fiscal year--we have
not passed any appropriation bills. We have got agencies that
are preparing budgets without knowing what their funding is
going to be. Just sort of a yes or no, and maybe a little bit
of context to it, if you want to add it, but would a budget
request from the executive branch be better informed if it were
done on a biennial basis, do you think? Mr. Kettl.
Mr. Kettl. Senator, I do not think there is any doubt that
the situation would be better. One of our biggest problems
right now is that executive branch agencies are in a continual
state of Never Never Land on the budget. They are, in fact,
putting new budget proposals together without knowing what last
year's budget even is going to be, and a set of continuing
budget resolutions is only creating more inefficiency in
executive operations. And an opportunity for at least a little
bit more advanced planning and an opportunity to be able to
make more efficient decisions in the longer haul would vastly
improve the efficiency of the executive branch operations. In
fact, for whatever advantage there may be, which I think are
substantial, having a biennial budget from Congress' point of
view, it is worth doing for the sake of improving efficiency in
the executive branch for that alone.
Senator Thune. Okay. Thank you. My time has expired, Mr.
Chairman. Thank you.
Chairman Conrad. I thank the Senator.
Senator Cardin. And let me just say that this will be the
last questioning opportunity with this panel because we have a
second panel and we need to get to that because we are heading
into kind of time crunch land.
Senator Cardin will be the last to question this panel.
Senator Cardin. Thank you; Mr. Chairman, and thank you for
this hearing. I was listening to Senator Thune, and I was
thinking back to the days that I chaired a committee with
Congressman Nussle in the House looking at budget reform. We
did not get very far. We had the attention of our leadership
that set this committee up, but that is about as much attention
as we got.
But turning the budget resolution into law was one of the
issues we looked at, and we gave very serious consideration to
it. We tried to get it done. We could not get the internal
support within Congress because of the jurisdictional concerns
of committees, which is a blood sport here, as I think many of
you know, and that would also create that issue. But it is
interesting. I think we have moved to that in a way. When you
look at when we have had our most orderly budget deliberations,
it has been after some type of a summit where the House,
Senate, and President got together on some budget agreement,
and most recently on the debt ceiling crisis where we were able
to get a law passed that in a way codified some of the
responsibilities of a budget agreement.
It is also interesting to point out that it has been
reported that one of the options that the Joint Committee is
looking at is to legislate a budget, have it signed off by the
President, and instructing the committees to do certain work
similar to what a budget resolution would require.
So it seems to me that we have de facto moved in that
direction at times, and to try to now make that the budget
policy of our country makes a great deal of sense, because it
is not just getting the President to buy in at an earlier
stage. I do not see it so much as the problems we had during
Watergate where the President was usurping power. The problem
we have now is that Congress by default does not really exert
itself. We do not really have an orderly process. In the end we
have to sort of move together to try to come up with something,
and the administration could be pretty powerful in that regard
under our current rules.
So if you have an orderly process where you have to come to
agreement, the House and the Senate and the President, and if
there are consequences for that failure--for example, there
could be an expedited process after that where only emergency
legislation can be considered until the budget resolution, in
fact, is made part of law, which, again, would be in the early
stages of a legislative year, it avoids the type of problems we
have had over the last several decades. We have not had many
years where we have had an orderly process on the budget.
So I am not sure I quite understand your point about, your
concern about the executive power, and I would like you to
comment--and maybe I should ask the second panel this. How do
you overcome the institutional problems between a Budget
Committee and the Appropriations Committee and the authorizing
committees? How do you overcome that if we were to turn a
budget resolution into a document that had the full force and
effect of law?
Mr. Kettl. Senator, in the questions that you raise, there
is a whole set of very important, extremely fundamental
questions. The first has to do with Congress' basic
prerogatives and what Congress' essential role ought to be. And
the point on Watergate had to do in part with executive
encroachment, but also a belief by Congress at the time that it
was important for Congress to have and exercise a separate and
essential fundamental voice.
There is no doubt that we have to use that no matter what
to get to agreement with the executive branch, but the second
concern is that many of the large summits where we have had
leaders and the President locked in a room and not let them out
until they come to some kind of agreement has been in the
context of a crisis. And the worry would be that it might take
a crisis to be able to make that happen on a regular predictive
basis, and I am not sure we would want to have to try to count
on recurring crises to be able to make that, in fact, occur.
Senator Cardin. But we created those crises.
Mr. Kettl. And some of them----
Senator Cardin. They were not external. Quite frankly, they
were internal.
Mr. Kettl. I think that is absolutely right.
Senator Cardin. Yes.
Mr. Kettl. The question is whether or not process can
overcome what are essentially differences in political judgment
on this. The fundamental question, I think, is the one that you
raised, which is, in the long run, is this going to make it
easier or harder to get the budget deal done? And I am not sure
as a matter of fundamental principle, other than Congress'
careful look at its prerogatives and the role that it wishes to
play in the process, that other than that the most important
thing is what is the most sensible way to get from where we are
to a regular process of producing a predictable budgetary plan
and----
Senator Cardin. But now we operate under CRs. That
certainly is not the way we should be doing it. We go deep into
the fiscal year before we resolve our issues. If we had a
requirement to enact a budget law by a certain date with
consequences, then it seems to me you confront the--if it is
going to be a crisis that we create, again, we do it at an
earlier stage in the process rather than doing it and holding
Government workers and recipients of Government services
hostages.
Mr. Kettl. It is clear that where we are now is a series of
procedural crises in addition to the fiscal one that is
undermining confidence in the process. And let me just say I
would be enthusiastically in favor of anything that would get
us back on a more regular track, that would ensure that, in
fact, the policymakers in Washington could talk to Americans
about getting the work done and getting it done in a reasonable
fashion.
Senator Cardin. Thank you.
Chairman Conrad. We are going to go to the second panel
now. I just want to say before colleagues depart, Senator
Begich has made a suggestion to me that I think has merit. I
think we need to meet in kind of a pre-markup, members of this
Committee. We have got an opportunity to do a letter by October
14th to the special committee as a Committee with respect to
recommendations that we might make. I think before this week
concludes--I have not had a chance to talk to Senator Sessions
about this, but I think before this week concludes, we really
need to get together as a Committee and discuss is there an
opportunity here to move forward together and have a consensus
proposal that we send to the special committee. And I do not
think we can wait. If we do not have something this week, it is
not going to get drafted, not going to get considered.
So I would just put members on notice that perhaps on
Thursday we have a meeting, and I would do it just as the
Committee, and see if there are some fundamentals that we could
agree on.
With that, I want to thank this panel and indicate we
deeply appreciate the contributions you have made.
We will go now to the second panel. We thank them very much
for being here: Bill Hoagland, the former Republican Staff
Director of the Senate Budget Committee; Marty Paone, the
former Democratic Secretary of the Senate; and Eric Deland,
former Chief of Staff to Senate Majority Leader Bill Frist. We
could not have a more distinguished panel, one more experienced
in budgeteering than this one, completely bipartisan.
We have focused so far on the question of moving to
biennial budgeting, but we also have a fundamental need, I
believe, to reform the vote-a-rama process because in dealing
with these issues with leadership, frankly, one of the reasons
you do not get to a budget resolution, leadership does not want
to go through vote-a-rama. That is just--and members do not
want to go through vote-a-rama, because it has just become so
disconnected from a process that people can respect.
Mr. Hoagland, welcome back to this Committee. You served
here as Staff Director under Senator Domenici for many years,
and succeeding Republican Chairmen. You are highly respected by
the members of this Committee and by members of this body. We
welcome you back.
STATEMENT OF G. WILLIAM HOAGLAND, FORMER STAFF DIRECTOR, U.S.
SENATE COMMITTEE ON THE BUDGET
Mr. Hoagland. Thank you, Mr. Chairman, Senator Sessions,
members of the Committee. Thank you for inviting me back. The
only other time I was asked to testify before this Committee
was on this very same subject in 2009, and I believe Senator
Whitehouse and you were the only two here, so if you wish to
leave, I am pretty much going to say the same thing I said 2
years ago.
And I also feel a little bit out of place here with the two
real ex-Senate floor experts in Marty and Eric, but I will try
to summarize real quickly my testimony and ask that the full
statement be entered in the record.
There were three issues then, 2 years ago, that continue
today, and that is, vote-a-rama has and always will create a
great deal of angst and frustration and exhaustion for
Committee and floor staff. But I think this is an inconvenience
that is acceptable to the staff as our responsibility to you as
floor managers to help bring the resolution to completion. And
despite the frustration and the practice over the many years,
budget resolutions and reconciliation bills always do come to a
conclusion.
Second, though, and probably infinitely more important
today is the feeling that the procedure has helped contribute
to the diminished public respect for this institution over the
years. The public watching on C-SPAN does not understand the
intricacies of the Senate rules, but they do understand
confusion, frustration, and seemingly endless votes on measures
that have not been debated fully. And, worse, I am afraid, the
spectacle of this process has bolstered opponents of the
congressional budget process and provided the fodder to them to
argue for the elimination of the process rather than what we
should be doing as reforming the process.
Third and critically--and you mentioned this in your
opening statement--the rights of the minority have to be
protected. The budget resolution and reconciliation bill are
the only Senate vehicles with a guaranteed right for any
Senator to offer an amendment and receive a vote. Rightly or
wrongly, vote-a-rama does ensure that not only the minority but
any Senator can offer amendments. Otherwise, it would be
possible for the majority to continuously yield time off the
resolution and other procedures and basically block out the
minority.
This is a debate and a delicate balancing act required here
between not just the issue of accommodating individual Senators
but also to accommodate the Senate itself.
In my 2009 when I testified before you, I tried to go
through the history on this process. In the interest of time I
will not do that again here, except to once again note that
when this budget resolution bill or the Congressional Budget
Act was reported by the Senate Committee on Governmental
Operations in 1973, they allocated 100 hours to the
consideration of a budget resolution. And today, after a little
closer examination of what else was going on in the Senate at
that time, I now think that may have also informed the drafters
of the Budget Act at that time.
Cloture became more frequent in the 1970s, but Senator
James Allen perfected the ``post-cloture filibuster'' that did
not limit the number of amendments that could be filed, read,
voted on, thus resulting in no limit on time consumed. So we
really have the first real form of vote-a-rama on a clotured
bill, and it was Senator Byrd who successfully proposed
changing Rule XXII at that time in 1979 to control that post-
cloture filibuster by setting an overall 100-hour time limit
for consideration of amendments post cloture and a filing of
amendments in a first and second degree order. And that same
100-hour time limit set by the drafters of the Budget Act 6
years earlier but maybe because the Senator Allen's post-
cloture filibuster had not fully developed at that time, maybe
the drafters of the Budget Act did not distinguish between
debate time and full consideration time.
I conclude today, as I did 2 years ago, that the
legislative history never envisioned vote-a-rama simply because
it was assumed that there would be sufficient time and adequate
time available for the full consideration. I realize that
arguing additional time for a resolution or a reconciliation
bill runs counter to the current demands placed on Senators and
any Majority Leader trying to run the floor schedule. So what
is the alternative?
Since the late 1990s proposals to find a procedure allowing
for greater transparency of amendments offered within time
constraints has been the direction we have gone.
I point out to you that in 1997, with Republicans in the
majority, the Senate did adopt by a vote of 92-8 an amendment
offered by Senator Byrd that modified debate on reconciliation
bills. It increased the statutory time for consideration, set a
time period for the filing of first and second degree
amendments, and added in the statute Senate Rule XXII language
that brought to a close all action on reconciliation bills
after 30 hours.
Mr. Chairman, you and Senator Sessions voted in support of
the Byrd amendment as did former Chairmen Hollings, Domenici,
Nickles, and Gregg and former Ranking Member Senator
Lautenberg. And every member of the Senate at that time that
serves now on the Senate Budget Committee today voted for that
amendment--Senators Grassley, Murray, Enzi, and Wyden.
Unfortunately----
Senator Sessions. Again, what was the effect of that?
Mr. Hoagland. It was to take the reconciliation bill, which
I think at that time was 25 hours or 20 hours at that time, and
move it up to 30 hours. It then required that there be a filing
of first degree and second degree amendments within that 30-
hour time frame, and it put in place that shut-off of full
consideration done after 30 hours. You are finished. No vote-a-
rama.
Senator Sessions. But if you filed your amendment, you got
your vote?
Mr. Hoagland. You got your vote within--yes. If you filed
it within the time frames that Senator Byrd had specified. It
was dropped in conference. It was on the 1997 reconciliation
bill, the Balanced Budget Act.
So what is to be done today? I think the Senate needs to
rethink, first of all, what its goals are in having a budget
resolution and in considering a budget resolution. If the
Senate wants to limit all time for consideration, there is one
simple accomplishment that can be accomplished through
imposition of a post-cloture type rule.
Alternatively, if the purpose of the budget resolution is
to provide an opportunity for the Senate to engage in a more
orderly debate surrounding fiscal policy while protecting the
rights of the minority, then, I think, Mr. Chairman, the things
that you have outlined at the outset are the same kinds of
things that I would argue today. I would require one minimum
layover of a resolution. Just in fairness, I would also suggest
that that rule also maybe be applied here within the Committee
so that if the majority--if the Chairman or the Ranking Member
have a caucus proposal, that that be laid over one day before
the Committee considers it; require unanimous consent on
yielding back of time; if 50 hours is the statutory time limit,
limit to two amendments per Senator and require that they
alternate, as I think we do today; and adopt a statute that has
a clear definition of germaneness that would prohibit the
consideration of Sense of the Senate amendments. I thought this
had been resolved, but I understand the practice continues
today through the Senate Parliamentarian's office rulings. I do
not criticize the Parliamentarian's office. I just simply think
that they need a find-tuned definition of germaneness, and it
is not really their responsibility to have that kind of power.
I would also expand--and you may find this not comfortable.
I would expand the definition of this to eliminate deficit-
neutral reserve funds which have, I think, proliferated in part
as a way around the germaneness test. And I guess I would once
again argue to do away with Function 920 in the reported budget
resolution, or if they are technically needed, allow for the
reporting of a budget resolution with the function but make it
out of order on the floor to offer amendments that touch
Function 920.
And, finally, I believe that while increased vote-a-rama
activity is a function of many variables, one of those
variables is whether the resolution is considered in even-
numbered years or odd-numbered years. Too many times I was
aware of amendments drafted on both sides of the aisle to stoke
political press releases, some I probably had a hand in, and it
was understood that the political campaigns considered budget
resolutions the mother lode of opportunities for political ads.
I have no foolproof suggestions on how to deal with the
``gotcha'' amendments, unless it would be to establish a
biennial budget and appropriation process with the budget
resolution considered in the odd-numbered year.
Thank you for the opportunity to return to the Committee
and testify before you this morning. Thank you.
[The prepared statement of Mr. Hoagland follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Conrad. Thank you for your really excellent
counsel.
Marty Paone, welcome.
STATEMENT OF MARTIN PAONE, FORMER DEMOCRATIC SECRETARY, U.S.
SENATE, AND EXECUTIVE VICE PRESIDENT, PRIME POLICY GROUP
Mr. Paone. Thank you. Mr. Chairman, Senator Sessions, and
members of the Committee, I am honored to be appearing here
with Bill Hoagland and Eric Deland discussing the Senate's
Budget floor procedures.
I understand that today you would like to discuss the
procedure for the disposition of amendments to budget related
vehicles known as the ``vote-a-rama.'' It is a process which
elicits universal reactions of groans and derision from those
who have had to endure it.
When the Congressional Budget and Impoundment Control Act
of 1974 was enacted, it established the much-needed linkage
between the Government's spending and revenue activities. It
created the House and Senate Budget Committees and established
the procedures for the consideration of budget resolutions. As
you know, it now limits debate time for the consideration of a
budget to 50 hours; for a possible second budget resolution
there is a 15-hour limit, and for reconciliation it is a 20-
hour time limit.
These limits for debate on the budget vehicles include, as
the statute says, ``all amendments thereto and debatable
motions,'' et cetera. It was crafted at a time when the Senate
was a far different place than it is today. It is my belief
that the authors of this act may well have considered their
debate limitation as sufficient enough to bring about an
orderly end to the budget's consideration.
They did not have the example, as Bill mentioned, of
finality as embodied in cloture's Rule XXII because it did not
yet exist. At that time there existed a huge loophole in the
cloture rule since it did not count the time spent on quorum
calls, the reading of amendments, and the voting on amendments.
In those days cloture only provided for a limit of 1 hour for
debate per Senator. There was no overall cap. Senators would
file literally hundreds of amendments to carry on a post-
cloture filibuster. The natural gas filibuster in 1977 went a
painful 13 days after cloture was invoked. It helped enable
Senator Byrd in 1979 to convince the Senate to adopt rules
changes which brought much-needed finality to the cloture
process. Except for later lowering the time from 100 to 30
hours, the 1979 reforms reflect the cloture process that exists
today.
While the authors of the Budget Act may have thought they
had established an orderly procedure for floor consideration,
it did not take long for smart Senators and staff to realize
the loophole the act afforded them. In June of 1981, there was
a series of 15 votes on that year's reconciliation bill, and
that was followed the next year in May of 1982 with a series of
17 votes on the budget resolution. The template was set for
future vote-a-ramas.
Technically, those amendment votes, at the conclusion of
the debate time, are supposed to occur with no debate, but in
return for an agreement to reduce the time on the votes to 10
minutes, there evolved the permission for either 2 minutes or 1
minute, depending on the year, for debate prior to the vote.
This came about because one year we refused to agree to reduce
the time for the votes without that limited debate time, the
logic being that without the short explanatory time prior to
the vote, Senators would need the full vote time to educate
their colleagues as to the merits of their amendment.
Repeated votes on never before seen or filed amendments,
with practically no debate, does a disservice to the Senate's
stature as a deliberative body. Any type of reform is going to
limit Senators' current rights to amend; this effects the
minority to a greater extent since it is the majority that
writes the budget. Any such reform should take this into
account and lean towards the minority's ability to amend.
Having said that, it should be remembered that the Budget
Act was intentionally written so that the majority could
express its will without fear of filibuster. Its authors
specifically wrote in these debate limitations in order to deny
the minority the ability to derail difficult fiscal decisions.
Since the impact of reconciliation spending and/or revenue
bills can cut across the geographic and economic spectrum, the
authors naturally expected that the opposition could well be
bipartisan in nature.
There are many suggested solutions to this problem.
Senators Byrd and Specter, my fellow panelists Bill and Eric,
former parliamentarian Bob Dove, and others have all suggested
worthwhile changes. Some that I think are most useful include
the following:
Require the resolution or bill to be available for 48 hours
prior to beginning its consideration;
No yielding back of time without unanimous consent;
Increasing the time for a reconciliation bill to 50 hours
to mirror the budget;
End the amendment process when the debate time has elapsed
similar to the current cloture requirement but with the
exception of not counting the time consumed by roll call votes.
Not counting vote time would ensure the consideration of more
amendments;
Reducing the time on amendments to 1 hour for first degrees
and 30 minutes on second degrees;
Limit the yielding of time from the resolution or bill
during the consideration of an amendment to no more than 30
minutes per side for first degree amendments and 15 minutes per
side for second degree amendments;
Permit the minority to offer the first three first degree
amendments, thereafter alternating of first degree amendments
per side; should one side not have an amendment ready to offer,
it revert back to the other side at the expiration of 30
minutes of resolution or bill time. To ensure further minority
protection, I would also alternated second degree amendments;
Require the filing of amendments, first degree amendments
by the 15th hour of consideration and second degree amendments
by the 25th hour;
Limit the managers' opening statements to 90 minutes each
and specify that the opening 4 hours for debate on economic
goals and policies does not bar the offering of amendments.
Some have suggested only modifying the vote-a-rama by
establishing a set number of amendments per side. If that is
combined with the filing stipulation, that might be a way to
proceed. But then the leadership on both sides will have the
unenviable task of deciding who gets to be included in that
limited list. This would not be my preferred way to go.
Much has changed in the Senate since the Budget Act was
enacted: cell phones, the Internet, 24-hour cable news,
BlackBerrys, computer tablets, et cetera. No longer do you have
a Senate where new members learn from their colleagues the
location of the best neighborhoods in which to live and raise
their children. Senators getting to know each other by
attending their children's school activities, by commuting
together and spending weekends together at backyard barbecues
are but echoes of a distant Camelot. The partisan divides are
sharper now, so any reform will be difficult. But if it is
attempted, it should be viewed by the majority through the lens
of the minority, since eventually they too will have to live
with the outcome.
If it is not possible to reform this vote-a-rama, it may be
possible to limit its attractiveness.
One of the changes in the Senate that contributes to the
desire by members from both sides of the aisle to participate
in vote-a-ramas is the lack of a day-to-day open amendment
process. To me one of the true beauties of the Senate lies in
its lack of germaneness restrictions in the amending process.
If you are not trying to add a tax amendment to a Senate bill,
or dealing with an appropriations bill, or a statutorily
established vehicle like the budget resolution or a trade
agreement, there are no limits to the ability to amend. You
could start out the day on a farm bill and finish it debating
the Middle East peace process.
Over the last 30 years there has been increasing pressure
brought to bear on the leaders of both parties to protect their
members from having to cast difficult votes. As a result the
amendment process has been scaled back to the point where a
bill considered without the amendment tree being filled is a
rarity. This is resented by those denied the ability to offer
amendments, and not just by those in the minority.
So when a budget resolution or reconciliation bill comes
along, even though it has a built-in germaneness restriction,
members are eager to take advantage of this opportunity.
Returning to a more open amendment process with all the
possible nasty political votes is a better alternative.
Difficult political amendment votes are not new. There have
always been some on both sides of the aisle who have been eager
to offer them. But while you cannot legislate good behavior, an
open amendment process will be more productive and will relieve
some of the pent-up pressure so that when a budget vehicle is
considered the vote-a-rama will lose some of its
attractiveness.
Thank you again for the privilege of appearing before you
today.
[The prepared statement of Mr. Paone follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Conrad. Thank you. Really excellent testimony.
We will go to Mr. Ueland next. Thank you so much for being
here. Please proceed.
STATEMENT OF ERIC UELAND, FORMER CHIEF OF STAFF,
U.S. SENATE MAJORITY LEADER BILL FRIST
Mr. Ueland. Thank you very much, Mr. Chairman, Senator
Sessions. Thank you both for the invitation to speak briefly
and answer questions on vote-a-rama, the Senate's practice of
expedited voting at the end of budget resolution consideration.
As a former senior member of the Senate used to advise his
colleagues, ``Be bold, be brief, and be gone.'' I will be
careful about the first one, but I will try to live up to the
second one so you all can live out the third one here this
morning.
I have thought a lot about the criticisms of expedited
voting, as well as some of the ideas for changes that I have
heard over the years and read in previous testimony. This
triggered just a few questions which frame my testimony this
morning.
First, do the proposed changes affect the ability of
Senators to act on their responsibilities or risk curtailing if
not eliminating senatorial rights? Senators do reflect many
different roles, and multiple influences guide a Senator as she
decides how to vote. Both the resolution and amendments offered
to the resolution reflect any of the multiple roles that
Senators hold, and clearly one of a Senator's roles is
political. But as former Republican Leader Trent Lott used to
say, ``Good policy is good politics.'' Taking steps that could
appear to restrict Senators from offering amendments just
because of concerns over their political nature seems to go too
far.
Further, over the past decades, Congress has passed
multiple laws which restrict or eliminate Senators' rights to
amend, just like the Budget Act. But at least under the act, a
Senator can seek a vote. This supermajority requirement does
crowd minority rights, but is more than Senators are allowed in
other procedural circumstances. To the extent that reforms to
expedited voting could erode the rights of any minority under
the checks and balances included in the act, that runs the risk
of another law which makes the Senate look more like the House,
which no one enjoys.
A second question this morning: Is there value to the
current system? I think yes. Watching different leadership
teams manage ever more complicated resolutions, they repeatedly
run up against the reality that there just is not enough debate
time to handle all the topics covered by the resolution. Within
debatable time, a majority often wants to cure, modify,
amplify, or highlight key matters through debates and votes.
Conversely, a minority often has more amendments than it
can handle during its debate time. The expedited voting process
creates appropriate options for leaders and Senators to
cooperate on what to emphasize and when.
Third, what are some implications of any new process? Some
changes about expedited voting could include: a filing
deadline; shortening the allowed debate time for amendments; or
even limiting the number of amendments a member could file or
offer. A few implications for those ideas come to mind.
For example, while there is value in Senators having the
chance to see all the amendments before voting begins, it is
also possible a filing deadline could lock Senators being able
to address new matter added to the resolution by amendments on
the list or take care of a matter deleted from the resolution
by amendments on the list.
On a practical matter for the Committee itself, a majority
needs the ability to send to the House all that can pass legal
parliamentary muster in the Senate once a conference report or
privileged message returns. Due to this, in the end the finite
list might end up not being so finite, after all.
In cloakrooms and on staff benches, some have talked about
limiting the amendments a Senator could offer to a resolution.
But preventing Senators from offering expedited voting here may
just export their amendments and votes to other bills and other
weeks throughout the year.
Since this is the Budget Committee, I have focused just on
the resolution itself, but the act also covers many essential
elements of reconciliation. Just one reconciliation bill can
create, delete, expand, shrink, or alter trillions of dollars
of Federal expenditures and taxes. Reconciliation debate time
is so short and its rules are equally as complex as those
around the budget resolution itself, that making it harder to
amend reconciliation should require a lot of additional
thinking by the Committee before any statutory changes are
made.
Finally this morning, are there other ways to handle the
concerns of Senators? The current expedited voting process is
the distilled essence of the Senate at work. Hard efforts,
blending multiple Senator interests, always ends expedited
voting. If there continue to be complaints about the expedited
voting process, I would recommend using a cooperative model to
review reform ideas, similar to what was successfully done on
holds, before any statutory changes are made. In that vein,
there are many things that the Committee could try before
turning to changes in the statute.
For example, a majority could right now simply create more
time for review of the Committee mark before Committee action
begins and allow much more time between the reporting out of
the resolution and commencing action out on the Senate floor.
This could allow for a clearer understanding of the
resolution's contents and reduce the pressure to act and
counteract which plays out during markups and out on the floor
during consideration.
In the intervening period between reporting and starting
action, an annual presentation by Committee counsels and the
Senate Parliamentarian to all offices about the laws and
precedents surrounding the budget could better serve to inform
Senators of how the act works. This, too, could bring more and
new order to the process.
As well, in addition to Bill and Marty, I would strongly
recommend that by unanimous consent at least there be more
debate time allowed on the resolution and on any reconciliation
bills it orders. Since expedited voting adds appreciable time
to considering budget bills, being realistic and accommodating
that time during resolution consideration may help ease, if not
eliminate, expedited voting without ever changing the law.
These types of changes, and others discussed this morning,
which can be taken in cooperation between majority and
minority, seem to me to be a reasonable starting point of work
between the Chairman, the Ranking Member, and the two
leaderships on the issue of expedited voting.
Thank you, Mr. Chairman, and all of us would be happy to
answer any questions that you and Senators might have.
[The prepared statement of Mr. Ueland follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Conrad. Well, thank you. Very thoughtful, Mr.
Ueland. Very thoughtful. This has really been an excellent
panel, and you have given us lots of food for thought.
I would just say to you that around here sometimes there is
a moment in time to get things done. I have been on this
Committee for 25 years. I started way down at the end. And
these last 2 years have been the most frustrating of all
because we need a budget process; we need a budget debate. And
this Committee kind of got big-footed this year by special
negotiations going on at a much higher level; that is, the
leadership of the House and the Senate, Republican and
Democrat, joined in negotiations with first the Vice President,
then the President himself, and I was told repeatedly, ``Do not
go forward with a budget resolution because we might need to
use reconciliation to implement whatever agreement we make. And
it would not make a whole lot of sense for you to run a
resolution through the Committee and 3 weeks later you would be
in here with a leadership agreement that needed to use
reconciliation provisions for implementation.''
And so we have wound up in this unusual situation where we
did not have a budget resolution go through the normal process.
I would say to my colleagues we do now have a budget in place
in the sense that a deeming resolution has been adopted in the
Budget Control Act. It establishes the budget for the next 2
years. We know what the budget is going to be for the next 2
years. It is in law. And we have 10 years of spending caps in
law. It is done. And this special committee has been given, in
essence, the kind of power that you would have in a
reconciliation process to deal with entitlements and revenue.
They can come up with a proposal and come back, no ability to
filibuster. That is a mirror of the reconciliation process.
But, look, I do not think it is in the long-term interest
of the institution to function this way. This Committee has got
to have meaning, and this process has got to have meaning, and
for it to have meaning, there has got to be an opportunity to
act.
I can tell you, trying to convince the leadership to go to
a budget resolution process, especially with vote-a-rama, where
Senators in many cases literally are not sure what they are
voting on--and this is--I mean, it is the case. I have been
through it 25 times, and it has gotten worse and worse and
worse. You have got more and more votes after all time is
expired with literally no debate time.
Now, that does not bring respect to this institution. I
mean, the proof is in the pudding. We are not doing budget
resolutions through the normal process. The place where I might
agree with some of my colleagues, we got a budget in place. We
got a budget in place through the Budget Control Act. But it is
a very frustrating way to have proceeded. We did not have, I
think, the kind of debate in this committee, the kind of debate
on the floor, that our colleagues deserve and that the nation
needs.
So, Mr. Ueland, I have enormous respect for you, but the
notion that we do not do--make a change here leaves me pretty
cold, because this, to me, is not working, and I have been here
25 years. I have been in the majority. I have been in the
minority. I am acutely aware that that can change. But, boy, I
tell you, I am strongly in the camp of moving to a biennial
budget and doing something to reform this vote-a-rama process.
Senator Sessions, I have kind of used my time with these
observations. I go to Senator Sessions out of respect for your
time.
Senator Sessions. Well, thank you. The vote-a-rama is a
frustrating thing, and this is a grim period, I will
acknowledge, although there are people in our leadership that
are very uneasy about eroding one more right of the minority, I
have got to tell you.
But, look, the votes are not quite so horrible. If you look
at 2001, there were 15 roll call votes. Two-thousand two, I do
not see, 2003, 20.04, 15, 2005, 17--no, there are more than
that. Two-thousand-four was 38 and 25 and 20 and 16 and 44 was
the last one--no, the time before last, 27. So these are
significant, but it is not as if it is--with the little debate
time, it is not as if it is destroying the whole ability of the
Senate to get through the budget process and get a final
passage. It is just not. So I just push back on that.
The reason Senator Reid said it is foolish to have a budget
this year and put a kibosh on it, I do not believe, was the
vote-a-rama. I believe it was because the President's budget
was so irresponsible it could not get any votes when eventually
it was brought up without debate, basically, and voted on, and
it would have put his majority in the difficult spot of having
to produce a budget, and it would have had to be scored and
people had to know how much it is going to reduce the deficit,
how close it comes to balancing the budget. The House had
produced a tough budget that I think was historic and worthy of
respect, and so they chose to punt, and I do not believe it was
vote-a-rama.
So I do not know if we do a two-year budget. I am not sure
we are going to be much better off when we face those kind of
circumstances than we do.
I thank all of you for your comments. I do not slam the
door on reforming and having an open mind about vote-a-rama. If
we can make this better, I am willing to talk with you about
it, Senator Conrad. I know if it could help the process in some
way, I would be worthy of it.
I guess my thought is, what do we do about going forward
with a budget, I mean, appropriations process without a budget,
or what do you do to enhance the certainty that we pass a
budget at the time we pass it? It should be relatively early,
would you guys not agree? You have been through the process,
Bill, and the appropriations and all. The Appropriations
Committee needs to know what its allocations are soon, just as
a matter of policy.
Mr. Hoagland. And I would just simply say that since you
have passed the Budget Control Act, you have set the 302(a)s
practically for the next ten years. So at least the
appropriation process has their guidelines, because the
committee, though we talk about moving the appropriations from
one subcommittee to another, you do not have that authority.
All you have the authority to do is to set the 302(a). So the
focus back here now is on entitlements and revenues. This is
the committee to focus on it.
Senator Sessions. Mr. Ueland, do you have a comment on
that?
Mr. Ueland. Well, I think Bill is absolutely correct. In
terms of the previous conversation on vote-a-rama, in case I
was not clear, Mr. Chairman, attempting to make a very explicit
dividing line between statutory changes too early and ideas
building on the cooperation already in existence between the
majority and minority about things that, under your control,
you have the ability to take action on which could influence
the end of the process vote-a-rama by addressing some of these
other issues at the beginning and the middle of budget writing,
budget mark-up, and budget action out on the floor.
Chairman Conrad. Let me just say, you know, we have got
some colleagues who--on both side--to me kind of abuse the
process. I mean, I have seen it. I could write a list. Bill,
you and I could sit down and we could agree on a list. We would
have 80 percent agreement. We know what is going to happen.
There has got to be a better way. I just think it is demeaning
to the Senate to have people voting and they do not know what
they are voting on. There has been maybe two minutes of debate
on very fundamental things. That is not good. That is not good.
Senator Sessions. I understand that, but one of the big,
big things is that the Senate is a unique institution. It has
the opportunity to play, I think, a big role in the long-term
challenges facing America. People sort of look to us as the
saucer that cools, and we have got the entitlement programs
that I know you are willing to talk about, Mr. Chairman, and
Bill mentioned this committee needs to confront. I am, too.
But if you talk to people who have been real experts in the
Senate over the years, we are reaching a point where it is
becoming more like the House, and this Committee of 12 and the
process on that was, in a way, a diminishment of Senatorial
traditions. We have got a situation in which one very respected
historian on the Senate said, when you fill the tree as often
as we are filling the tree today, eliminating the ability of
the minority to offer amendments, you have really altered the
Senate. The Senate can fight back, I think. Members of the
Senate could fight back, but we have not done that effectively,
to end that process.
But in that sense, it comes down, Mr. Chairman, to the
leaders. They pick their committees and they send down their
message and then you do not get any amendments and it does
diminish the individual Senators' little power----
Chairman Conrad. Yes.
Senator Sessions [continuing]. That he thought he had when
he got elected to this body.
Chairman Conrad. Yes.
Senator Sessions. So I do think we need to think about
that. I see Mr. Hoagland had a further comment. I would yield.
Thank you for this good panel.
Chairman Conrad. Thank you.
Senator Begich, did you have a question?
Senator Begich. Mr. Chairman, just a comment. First, I want
to again thank the panel here and the panel before, and I agree
that this was a very good meeting. I hope it whetted our
appetite enough, and I like your idea of moving forward on,
potentially, Thursday.
I guess as a new member, I recognize--I subjected myself to
the vote-a-rama. It is the process of--a democratic process
that we are going to be voting on things that we may not like.
The real issue is how really germane they are to the budget,
and I think that is--we can narrow that down, because there is
no other body I have served in or worked in or have worked
around that you can bring in an amendment that has no relation
to anything that is on the floor or any relevance to anything
on the floor and bring it up because you are frustrated because
your bill did not get heard or whatever it might be.
I think, to me, if we can narrow in on--because I do think
that the format of the budget process vote-a-rama, honestly, I
do not mind if there are 100 amendments. We are elected to
vote. We have got to take tough votes. We are one of a hundred
out of 308 million people in this country that are fortunate
and honored to be in this body, so we are going to take tough
votes. That is life in the big city, and six years later, you
live or die by those votes. But they should be relevant to the
issue we are on, and I think both sides have taken advantage of
those.
And the other piece that I think is another is this crazy
quorum call allocation of time. You know, when I first came
here, I thought, well, that is going to count toward--and it
does not. And so there is no debate. I mean, let us be real
about this. Some of us might rush off, go speak for five
minutes and leave the floor. No one is in the chamber. This is
the one thing I always get from Alaskans that visit me after
they have gone. I have given them, you know, we all have these
tickets we can give. They can go view, and then they come back
and say, well, when does the debate start? And I say, well, you
are watching it. There was one person.
So I think in a lot of the cases, the areas that I would
focus on the vote-a-rama issue is tighten up the germane issue.
I agree on the Sense of the Senate. Those are just political
statements that people put into campaign commercials later.
Limit those. Quorum call, allocation of time.
And then if members cannot get their act together and give
an amendment that is 24-hour notice, then they should never be
offered anywhere, because--totally irresponsible. I mean, we
are one of a hundred out of 308 million people. In theory, we
are responsible people. If we cannot think of an amendment on a
budget until three minutes before you are debating, or are
going to vote on the budget, you are totally irresponsible and
the public deserves better. So I think there should be a time
limit on amendment submittals, that if you do not have it in by
this date, too bad. I do not even care if it is the Golden
Goose amendment that is going to be a great thing for all of
us.
There is a process people have to respect for the proper
debate and discussion to occur in this body, because I think,
Senator Sessions, you are right. We are kind of the cooling
sauce at times. But you cannot cool things when you suddenly
have 50 amendments three minutes before you vote. That is
irresponsible.
So those are the things that I would hone in, as a new
member who experienced this kind of vote-a-rama, how do we make
sure. And then if you are not responsible enough to review it
over the 24 hours, then maybe you should not be in the Senate.
I will leave it at that.
Chairman Conrad. Senator Whitehouse.
Senator Whitehouse. I would concur with what Senator Begich
just said. I think you need to combine the two, because the
germaneness requirement is meaningless unless there is a real
pre-filing requirement so people have a chance to look at it.
The Chairman has observed that in the vote-a-rama process,
very often, Senators do not know what they are voting on. It is
actually worse than that. Some of the bills that come up say
that their title concerns something and the content of the bill
is completely different. So it is very misleading in that
sense, and you do not have time to plow through it, and because
you do not have a chance to see it coming--they can be filed
literally on the floor during vote-a-rama--there is no chance
for any kind of review. So something comes up suddenly, poof,
it is the, I do not know, In Favor of Mom and Apple Pie
amendment, and everybody is for Mom and apple pie, and then,
pow, you find out that down in the text of it later on was
something completely unrelated to Mom, completely unrelated to
apple pie, basically there was a submarine buried in that that
nobody saw.
So that kind of behavior, I think, would get discouraged if
there was a combination of a germaneness requirement and a pre-
filing requirement, and I think, as Senator Begich said, if you
cannot figure out what your amendment is going to be 48 hours
before vote-a-rama or whatever the time frame is, shame on you.
So I think that is something that we could be expected to live
with.
The other thought, which is a little bit more contrary to
traditional Senate procedure, would be during the vote-a-rama,
you could have not just aye votes and nay votes, but you could
have an aye vote, you could have a nay vote, and you could have
a ``this is just too silly to vote on'' vote, and if a whole
lot of Senators checked off column three, you would not want to
be the sponsor of that amendment, and that would provide a
little peer pressure to have the amendments--because we know
when we go down there to vote, there are a lot of times when
people look at each other and say, you know, this is just too
damn silly to vote on, but there is no way you can express that
if your choices are aye and nay, and passing does not have any
meaning. So you might want to think about a third column that
says, ``too darn silly to be worth my vote'' and see if that
would work.
Chairman Conrad. You could probably make a statement----
Senator Whitehouse. You would have to make it more
Senatorial, but----
[Laughter.]
Chairman Conrad. Bill.
Mr. Hoagland. Mr. Chairman, would you permit me a personal
comment before we end here?
Chairman Conrad. Yes.
Mr. Hoagland. I may never have another opportunity to say
this in public. I will never forget the first hearing you
attended, and I was sitting there where Mary was, behind
Senator Domenici, when you came to the Senate, and you were way
down here where Senator Begich was. And you made a statement
that ``I will not run for office again unless the budget was
balanced,'' and I sat there and said, oh boy, he may regret
that.
Well, we eventually got to a balanced budget, then we lost
it, but I have never regretted that you will have continued to
serve this committee and this country for the many years you
have. So thank you.
Chairman Conrad. Thank you, Mr. Hoagland. You know, I came
to the end of that first term. We had not balanced the budget.
I announced I would not run again. For five months, I thought I
was out of here. My staff was leaving. And then the other
Senator died and I was nominated to run in a special election.
Senator Dorgan, who was in the House of Representatives, ran
for my seat, so I ran to fill out the two years remaining on my
colleague's seat who passed away, and it is something I never
regretted doing, announcing I would not run again, because I
had made that pledge, if the deficit were not reduced, I would
not. And people, a lot of people thought that it was very
strange because the polls showed I could win handily even if I
had chosen to run for my seat again.
You know, the night before I announced I would not, I
thought to myself, I just do not want to be another guy that
made a promise and did not keep it. So for those months, I was
really thinking I was leaving this place and making provisions
for my records to go to the university and all the things that
you do when you think you are leaving, and then I will never
forget the fateful call I received that Senator Burdick had
passed away. And they did a poll back home and two-thirds of
the Republicans thought I should run again. [Laughter.]
So it made me the answer to the trivia question, because I
am the only Senator in history that served in both seats from
the same State in the same day. So if you are ever asked that
question, you now know the answer. [Laughter.]
I thank you all very much.
[Whereupon, at 12:15 p.m., the committee was adjourned.]
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
IMPROVING THE CONGRESSIONAL
BUDGET PROCESS
----------
WEDNESDAY, OCTOBER 12, 2011
Committee on the Budget,
U.S. Senate,
Washington, DC.
The Committee met, pursuant to notice, at 9:33 a.m., in
Room SD-608, Dirksen Senate Office Building, Hon. Kent Conrad,
Chairman of the Committee, presiding.
Present: Senators Conrad, Cardin, Whitehouse, Warner,
Merkley, Coons, Sessions, and Thune.
Staff Present: Mary Ann Naylor, Majority Staff Director;
and Marcus Peacock, Minority Staff Director.
OPENING STATEMENT OF CHAIRMAN CONRAD
Chairman Conrad. The hearing will come to order.
I want to welcome everyone to the Senate Budget Committee
today. As we discussed in our Committee meeting last week,
Senator Sessions and I are working to write a joint letter to
be submitted to the Joint Select Committee on Deficit Reduction
with recommendations from our Committee on reforming certain
aspects of the budget process. Our letter will focus on areas
where there is broad consensus within the Committee.
Today's hearing follows up on certain issues members raised
last week. In particular, today we will consider whether the
administration should be involved in the budget resolution. I
think this will come as a surprise to most Americans who may be
listening that they are not, but the fact is the budget
resolution is entirely a congressional proceeding. The
President does not sign it. While he does submit a budget to
us, he does not have a role in passing a budget resolution in
the Congress.
Today's hearing follows up on those issues as well as
talking about options for encouraging congressional action on
budget resolutions because I think one of the great
frustrations of this Committee--and we have seen this
repeatedly, especially in election years, is budget resolutions
are not being passed.
We have three knowledgeable witnesses with us today: Dr.
Louis Fisher, a scholar in residence at The Constitution
Project; Dr. Philip Joyce, professor of management, finance,
and leadership at the University of Maryland School of Public
Policy; and Dr. Paul Posner, the director of the Centers on the
Public Service at George Mason University's Department of
Public and International Affairs. Welcome to you all. These are
really three excellent witnesses on the subjects we have before
us.
I want to begin just by briefly highlighting how a joint
budget resolution might work, and I want to acknowledge the
work of our colleague Senator Thune, who has presented his own
proposal that was well thought through, I thought, and
carefully done.
First, Congress would pass a joint budget resolution which
the President would then sign. The joint budget resolution
would become a statute with the force of law. It would no
longer be a congressional-only budget framework.
Here are some of the options for what could happen if the
President and Congress failed to reach agreement on a joint
budget resolution. We could add expedited procedures for a
concurrent resolution, a congressional-only resolution, if the
President vetoes the joint resolution.
And we could provide for an automatic continuing resolution
if appropriations bills are not enacted before the beginning of
the fiscal year.
Here are some of the arguments for moving to a joint budget
resolution: Number one, it would encourage an up front,
comprehensive agreement on budget issues. Two, it would bring
the President to the negotiating table earlier in the process,
and this may help provide clarity to the process and decrease
brinksmanship later in the year. And it could strengthen budget
enforcement with the addition of statutory provisions.
But there are also arguments on the other side against
moving to a joint budget resolution, and we have certainly
heard them, especially in this last week as we have considered
our recommendations.
One, it would create a new fast-track vehicle for making
substantive statutory changes. This means it would be possible
to enact statutory budget enforcement changes with only a
majority vote. For example, the sequesters that we just
established in the Budget Control Act could be turned off with
a simple majority vote. I must say I had not personally thought
of that, but that is something we need to consider. A line-item
veto could be enacted with a simple majority vote.
Second, requiring the President to agree on the budget
would also increase the likelihood of delays in the budget and
appropriations process. It is hard enough to reach agreement
between the Senate and the House. In fact, in recent years it
has proved impossible. Adding the President to the mix might
make it that much harder and that much more likely there would
be no agreement at all.
Third, moving to a joint budget resolution would also shift
some power to the executive branch. It would undermine the
congressional independence and limit Congress' power of the
purse, which was really, as I go back to the history, how we
got into this to begin with. It was part of the 1974 reforms.
Senator Sessions. Do you remember that?
Chairman Conrad. No, I do not. But I have gone back, and we
have researched this. What was the rationale? What was the
argument that was advanced? Because, you know, it is
counterintuitive that you do it the way we do it. I mean,
frankly, as somebody that comes from an executive branch of
government before I served here, what Senator Thune is
proposing appeals to me as sort of a common sensical way to
proceed with the budget.
So I think there are strong arguments on both sides of
this, and today's hearings will also consider measures we could
adopt to encourage Congress to pass a budget, additional tools
that could be given to strengthen the need to do a budget in
these chambers.
We could strengthen the Budget Committees by increasing
their membership to include members of the Democratic and
Republican leadership as well as Committee Chairs. The original
idea of the Budget Committee is that the Chairs of the Finance
Committee and the Appropriations Committee would serve here.
And for many years, that was the case. You will recall Senator
Byrd served here. Before that, the Chairman of the Finance
Committee served here. And it was really designed to be made up
of the Chairs of the key Committees. Now we have gotten away
from that over the years, to the detriment, I think, of writing
budgets.
We could strengthen the right of Senators to proceed to and
debate a budget resolution if the Budget Committee or the
Senate fails to act. This I find particularly appealing because
I have found in arguments or discussions with leadership when
you point out if the Budget Committee fails to act, any member
can bring a budget to the floor. Right?
If we do not act by April 15th, any Senator can bring a
budget to the floor.
The problem is you still face procedural hurdles, and the
deference given to the Majority Leader really has precluded,
even though a budget is filed, from having a motion to proceed.
And that I think is something we really need to think carefully
about.
If the Budget Committee fails to act, any Senator can file
a budget, go to the floor and file a budget. The key then is:
How do you get it before the body? You still face a motion to
proceed. And I think we have to discuss how we could strengthen
that right of a Senator, if the Budget Committee fails to act,
to get a budget considered by our colleagues.
As we have already discussed, we could reform the vote a-
rama process to encourage more substantive floor debate. We
could create a 60-vote point of order against appropriations
spending and revenue bills until a budget resolution is
enacted. Senator Cardin has put together, I think, a very
constructive proposal to require other business basically to
stop until a budget resolution is produced. And we could
establish an automatic trigger with spending and tax
expenditure reductions as a consequence for not enacting a
budget resolution.
Let me just say, after hundreds of hours of negotiations
with Republicans and Democrats on possible triggers, I do not
think that has much prospect. I have spent hundreds of hours on
possible triggers, and I have not been able to find a place
where both sides could agree.
So we would like to hear our witnesses' views on these
possible incentives and welcome any additional ideas in this
area. With that, we will turn to Senator Sessions for his
opening remarks. Then we will go to the witnesses, and we will
then turn to our colleagues for their questions and comments.
Senator Sessions?
OPENING STATEMENT OF SENATOR SESSIONS
Senator Sessions. Thank you, Chairman Conrad. That was a
good overview and some very astute observations about the
choices and difficulties we face.
I do believe we need to strengthen the budget process, and
I do believe we can do that, and perhaps there is a rare
opportunity at this point in our history to get it done.
I also believe, and have for some time, that a 2-year
budget would be better for the country, and I have felt equally
important is a 2-year appropriations process. It just makes
sense to me that with the difficulties we have in getting
appropriations and getting budgets passed, you could do it for
2 years, and the agencies and departments of Government could
operate more efficiently. They could be more effective and give
more time for oversight for the rest of the Government, and
hopefully we could reach an accord on some of these issues.
But I certainly am willing to listen to those who have
different views about it because things are not always as they
appear around here. Good intentions do not always play out as
you expect them to in the years to come as people redefine and
figure out ways to advance their agendas based on language in a
bill in a way that they never anticipated.
So I am disappointed that we have not had a budget now in
over 2 years. We do need a process that makes that impossible
or very difficult. I propose the 60-vote point of order. I am
not sure that is the only way or maybe even the best way to
ensure the budget process moves forward. You made some good
suggestions that I think are worth considering, but I have
proposed that you should not appropriate money until a budget
is in place and that any Senator could object by raising a
point of order, which is now 50 votes, to raise to 60 votes
until a budget is passed.
With regard to the President's participation in the
statutory process and the President's signature or veto, I am
in a show-me position. I would like to see someone convince me
that that is the best. I do have a sense that it would provide
a powerful presence throughout the entire process, always
looking at the President's veto and objections, that it might
dominate the diffuse Members of Congress and make it harder to
either get a budget, number one, or to increase unnecessarily
the President's position. We tend to focus on that often by
what we see in today's short-term political world. We need to
look at it in the long-term world. Is that the right and better
process? Senator Thune has given a lot of thought to it,
Senator Cardin has, and I am open to hearing about that and to
thinking through the constitutional ideas about it.
So I think we all ought to be accountable. I think we
should do our business in public. Even the Senate Committee of
12 basically will not tell us what they are talking about. It
is really a secret what they are doing. We have had secret
meetings all year. I truly believe the Republic would have been
better off had we just had a long series of debates and votes
so we figured out where we are, where the votes are, and then
after you have given your best effort to advance your agenda
and it is clear to your supporters that you have done all you
can do and you cannot win, then sometimes it provides a better
opportunity for a compromise than to think we are going to
compromise over here and bring it out without a debate on the
floor.
So thank you, Mr. Chairman, for having the hearing. I look
forward to these good witnesses, and I do hope we will work
hard to see if we can accomplish something in the next few
weeks.
Chairman Conrad. I thank the Senator, and I thank the
Ranking Member and his staff for the collegial effort that we
have had underway. It is how this place, I believe, ought to
work, and we have got differences of opinion, but we have been
able to work in a very constructive way, and I want to thank
the Ranking Member for that.
Senator Sessions. And could I just say, every time I think
I am firmly convinced of something in this process, and you
hear somebody make a good argument on the other side, you
realize these are not easy answers. So I look forward to the
hearing.
Chairman Conrad. I do, too.
We will turn now to the witnesses, really an outstanding
set of witnesses. We will start with Dr. Fisher, scholar in
residence at The Constitution Project and somebody who has had
a lifetime of experience wrestling with these issues. Welcome,
Dr. Fisher, and please proceed.
STATEMENT OF LOUIS FISHER, PH.D., SCHOLAR IN RESIDENCE, THE
CONSTITUTION PROJECT
Dr. Fisher. Thank you, Mr. Chairman, Ranking Member
Sessions. My attitude about budget reform comes from, as you
suggest, my involvement. I came to Congress in 1970. I had done
work in the impoundment area, so I was with the Senate
Judiciary Committee for several years, and I was very positive
about that. I thought President Nixon had abused the process by
refusing to spend appropriated funds. I think Congress had to
do something to defend itself. And there are many other parts
of the Budget Act of 1974 I worked on. I was very happy to see
the Congressional Budget Office created to give Congress
independent access to its own numbers and projections.
I did not like then and I still do not like now what
Congress did in the 1974 act in centralizing its system and
trying to be very comprehensive. I know Congress has to have
all the pieces together to look at the budget in full. That is
very, very important. What I did not like is that President
Nixon and members of the Nixon administration attacked Congress
and blamed Congress for the deficit. At that time they were
about $25 billion a year. And, in fact, if you look at the
record, there is no basis to complain about Congress or its
procedures. But that is what President Nixon did, and that is
what people did, saying that Congress is irresponsible because
it has a fragmented system.
And, in fact, if you look at the years that Nixon was
there, Congress cut his appropriations by $30 billion and did
add some back-door spending by $30 billion. So if you look at
Congress, no matter how fragmented it was, it was responsible
on the aggregates. It did not add to deficits. Where the
deficits were coming from was the lack of responsibility on the
part of Presidents in submitting budgets to Congress that were
in deficit and not taking care of them where they should. And
that is my principal point today, that I think if Presidents
submit a responsible, credible budget, Congress through any
system it has can work well. If a President does not do that, I
do not think any budget process in Congress or any reform is
going to make a difference. And I do not know why, in all the
hearings I listen to, all the attention is on the failures of
Congress, and no one seems to look at where the budget gets
started.
So that is going to be my point, and if you look at what
happened in 1921, we did not have a Presidential budget until
the Budget Accounting Act, and there were deficits coming
along. Certainly with World War I you could understand, and it
was decided--and I think this is correct--that the only person
in the country who can get the budget off on the right start is
the President. Therefore, the 1921 act put on the President the
personal, non-delegable duty to get the budget off on the right
start on aggregates. Then Congress basically would live within
those aggregates and then change the priorities any way it
wants to by a simple majority vote. That is the constitutional
authority of Congress. So that was the institutional deal, and
it worked very well over the years.
I will say that in 1921 there were people who wanted to
subordinate Congress to the President; that is, no member could
increase an amount unless they got permission from the
Secretary of the Treasury or unless you got a two-thirds
majority or unless, unless. And Congress says, no, you send up
the budget, that is an executive budget, and when it gets here,
it becomes a legislative budget, and we will do as we like, any
changes that we want to make. So Congress protected its
constitutional powers.
What went wrong? President Nixon publicly condemned
Congress. He ridiculed Members of Congress for their ``hoary
and traditional procedure,'' permitting action on different
spending programs ``as if they were unrelated and independent
actions.'' I have already told you that that was an
irresponsible statement from the President, that Congress was
responsible on the aggregates. There is no question about that.
Unfortunately, Congress itself picked up that theme, and
there was a congressional reform committee that concluded also
that, as they say, the fault was the decentralized nature of
Congress and the failure to arrive at congressional budget
decisions on an overall basis. That was false.
Congress at that time had these scorekeeping reports, so
every time any element of Congress did anything to the
President's budget, it was picked up by the scorekeeping
reports, and you could tell whether Congress was above budget
or below budget. So there was accountability. It was not a
chaotic process at all.
Now, you get the Budget Act in, and everyone seemed to like
it at that time. Anything that was centralized or coordinated
seemed to be good things, and no one knew exactly where that
was going to turn out. So let me tell you what happened with
the new process in 1974.
The deficit in 1981, when President Reagan came into
office, was $1 trillion, so it is above 14 and still climbing.
So something went wrong, and I think what went wrong is the
lack of Presidential leadership in presenting a responsible
budget. And if you get off to a good start there, you are in
good shape.
The problem is that if you have multiple budgets--when you
had one budget, everyone knew it was above budget or below. It
was very simple. If you have the President's budget and then a
House budget and a Senate budget and so forth, it gets
confusing. And someone can say this bill is below budget. It
might be above the President's budget, but it is below the
budget resolution. So you start getting cloudiness and lack of
accountability and not fixing responsibility on the President.
There is a problem that once the budget resolution was
adopted, instead of in the past committees trying to come under
the President's budget to show savings, now there is pressure
under the budget resolution for committees to come up to the
budget resolution, and the Appropriations Committees were under
that pressure. So that was a difficulty.
It was very interesting in the Reagan years when deficits
exploded--and I will explain why is that Congress, by the mid-
1980s, even though they had this new process that was supposed
to allow them to be coordinated, they could not handle
deficits. They went from the $25 billion a year under Nixon to
around $200 billion a year under Reagan, and that is when you
got into Gramm-Rudman, which was a catastrophe. Then you went
into Gramm-Rudman II, a catastrophe. And what happened? And I
think what happened was in 1981, although the budget resolution
was supposed to be an instrument of Congress to strengthen
Congress, as you know President Reagan got control of the
budget resolution and used it to advance Presidential White
House objectives, particularly a military build-up and a few
cuts on defense and tax cuts, and then deficits exploded.
David Stockman in his book--he was the OMB Director--said
that Congress had to be reduced to a ministerial arm of the
White House. Congress did not fight back during that time.
So those are my points. You have already mentioned--I will
close with that--the difficulties that you pointed to on the
board of a joint budget resolution. I would just add to some of
the things you have there. Some people in the House worry that
lack of germaneness in the Senate that, as you suggested, if a
joint budget resolution is going through, people are going to
be tempted to put on something that could not pass otherwise.
And House Members are concerned about that, that they would
find non-germane things put on in the Senate side, and
Presidential power would be increased.
I will stop with that. Thank you very much.
[The prepared statement of Dr. Fisher follows:]
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Chairman Conrad. Thank you.
Dr. Joyce is the professor of management, finance, and
leadership at the University of Maryland School of Public
Policy. Good to have you here.
STATEMENT OF PHILIP G. JOYCE, PH.D., PROFESSOR OF MANAGEMENT,
FINANCE, AND LEADERSHIP, SCHOOL OF PUBLIC POLICY, UNIVERSITY OF
MARYLAND
Dr. Joyce. Thank you. I am happy to be here, Chairman
Conrad, Ranking Member Sessions. I am happy to be here to talk
about ways that the budget process could be made more
effective. I want to say I am heavily influenced in these views
by having spent 5 years at CBO in the early 1990s when my
mission in life was following various ideas that Members of
Congress had for reforming the budget process, and I used to
say there were as many ideas as there were Members of Congress.
And I think it is useful to spend some time thinking about the
implications of those reform ideas.
I also developed over that time a deep respect for the
Senate Budget Committee and your colleagues on the House Budget
Committee, who I think have a very difficult job, which is
trying to take what Dr. Fisher correctly points out is a sort
of decentralized process and try to centralize it in some way.
I will not go into, because Dr. Fisher did a very good job
of it, the reasons for the 1974 Budget Act. I think you are all
well aware of that. I will say that actual experience with the
1974 Budget Act has been a little more checkered than the
Framers might have hoped, and I think there are three problems
that stand out, none of which are a revelation to this
Committee.
First, the Congress has fallen into a pattern where the
budget resolution is viewed as optional. There have been six
times in the last 14 years--and I am including this year--that
there has been no budget resolution at all. That is 40 percent
of the time.
Second, while during the 1990s the budget resolution was
used to promote fiscal discipline, in a few notable cases since
2001 it has been used more often to make deficits larger.
And, third, even when the budget resolution was used to
impose fiscal discipline through the reconciliation process,
this was often followed by committees trying to undo those
actions later on.
No institutional or process change is going to get us out
of the mess that we are in right now. That is going to require
hard policy choices to increase revenue and decrease spending.
Process changes, though, might facilitate a more functional
congressional budget process once we get past this point, and
it is within this context that I think the proposed change to
convert the budget resolution into a joint resolution should be
considered.
In considering the pros and cons of this change, I would
like to focus on three possible effects: one of them is on
institutional power and relationships; the second is on the
timeliness and efficiency of the process; and the third is on
fiscal discipline.
In terms of institutional power and relationships,
proponents of the change argue that a joint budget resolution
would facilitate agreement between the President and the
Congress early in the budget process. I am concerned that
requiring the budget resolution to have the President's
signature tilts the balance of power too far toward the
President. The Budget Act of 1974 made the Congress a more
equal player in the budget process. The Congress is not an
equal player if the President can propose his budget and then
subsequently veto the budget resolution if it is not consistent
with his own budget. My advice would be that advocates of more
Presidential power--not only in this case but in other cases
like the line-item veto--are wise to contemplate the
implications of that power being exercised not by an executive
they agree with, but by an executive whose policies they
strongly oppose.
In terms of timeliness and efficiency, I think the real
question is whether a joint resolution makes adoption of the
budget resolution more likely to occur and more likely to occur
in a timely manner. My bottom line is I do not think so. In
years in which the President and the Congress are inclined to
agree with each other on the outlines of the budget, I do not
think requiring the President's formal approval is going to
change much.
During periods of unified Government--and unified
Government is what we have had during 8 of the 37 years since
1975--a joint budget resolution I think would be unlikely to
influence timeliness of the budget process one way or another.
Alternatively, though, if the President and the Congress do
not agree even on the broad outlines of policy--and I think
that typically would describe a period of divided Government--
the requirement for a joint budget resolution might stop the
budget process dead in its tracks. A joint budget resolution
simply front-loads conflicts, increasing chances that the
budget resolution is going to be either delayed or precluded.
This is a problem we already have, and I think it would be made
worse by requiring a joint resolution.
Now, I do think the likelihood of failure could be
addressed, at least in part, by some kind of fallback provision
like the ones that the Chairman had outlined earlier.
What about fiscal discipline? Well, I think I agree with
Dr. Fisher that one lesson that has emerged out of the last 37
years of congressional budgets is that Presidents tend to drive
budgetary agendas. A further lesson is that the Congress is
unlikely to lead if inflicting budgetary pain is involved. This
seems to suggest to me that if a President cared about fiscal
discipline, a joint budget resolution would make it easier for
the President to get Congress to go along with him. On the
other hand, though, if a President or a Congress desired
policies that would not reduce deficits but expand them, having
a joint budget resolution would also make that easier.
For example, the discretionary spending caps that were just
enacted as part of the Budget Control Act could not be changed
by a concurrent resolution on the budget, but could be changed
by a joint budget resolution. And there would also be great
pressure to change other laws as part of the budget resolution,
particularly if the budget resolution was seen as must-pass
legislation.
I have some additional observations in my testimony about
likely effectiveness of other proposed changes, that is,
changes that might support or promote enactment of the budget
resolution. I will not cover them in any detail now in the
interest of time. I am happy to answer questions about them.
I would like to note, though, that one suggested reform
would change the membership of the Budget Committees to reflect
the leadership of the Congress by putting Chairs and Ranking
Members of other committees on the Budget Committees, and this
is a proposal that goes back at least as far as a proposal by
Senator Kassebaum in the late 1980s to create something that
she called a ``Committee on National Priorities,'' which really
would serve the same function that the Budget Committee has
been serving.
The justifying argument for this is that if the
congressional leadership had more incentive to make the budget
resolution meaningful, it might enhance its likelihood of
passage and it would be more likely that other committees would
follow it since those committees would have representation on
the Budget Committees.
In addition to membership changes, there are other changes
you might consider, other sanctions and other incentives that
might make it more likely that budget resolutions would pass
and be followed.
In conclusion, I once heard a colleague observe, in
response to a question about the messiness of the Federal
budget process, that, ``Monarchy budgeting is easy.'' If it
worked well, the process encouraged by a joint budget
resolution would improve fiscal discipline and the timeliness
of the process. I am concerned, however, that more frequently
it would not work well and that the relatively limited
advantages would come with too large a cost in terms of
enhancing Presidential power. So it seems to me to be more
fruitful to determine what other incentives of the kind that
the Chairman had talked about in his opening statement might
promote more effective functioning of the concurrent resolution
process that you already have.
Thank you very much.
[The prepared statement of Dr. Joyce follows:]
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Chairman Conrad. Thank you.
Dr. Posner is next. Dr. Posner is director of the Centers
on the Public Service at George Mason University's Department
of Public and International Affairs. Thank you so much for
being here, and give your testimony and then we will open it to
questions.
STATEMENT OF PAUL L. POSNER, PH.D., DIRECTOR, CENTERS ON THE
PUBLIC SERVICE, DEPARTMENT OF PUBLIC AND INTERNATIONAL AFFAIRS,
GEORGE MASON UNIVERSITY
Dr. Posner. Thank you, Mr. Chairman, Mr. Sessions, and
other members of the Committee here.
I am drawing on my 14 years leading GAO's work on the
Federal budget, which dealt with a lot of these issues,
monitoring the Budget Act and other issues for this Committee
and others, as well as a survivor of the New York City budget
crisis, serving in the Budget Office in the mid 1970s there,
which still burns lessons that you have learned in your mind
forevermore, I think, about how to deal with fiscal stress.
I was asked to kind of comment on the implications of the
congressional budget process for timeliness and lateness in
funding. There is no question, as Phil said, that there have
been significant delays most recently in the adoption of budget
resolutions or failure to adopt budget resolutions. There is
also a kind of persistent late appropriations and continuing
resolutions which have hamstrung Government effectiveness. GAO
did a report several years ago which kind of documented this,
looking at the agencies and looking at the impact that
continuing resolutions have and that funding uncertainties have
on agency effectiveness and efficiency. And they found some
things here: the average length of the CR in the past several
years is 3 months; that the CRs cause massive delays in
contracts and grants; significant rework and administrative
costs; postponement of hiring and other needed work to repair
and rehabilitate facilities, raising eventual costs in the
future. And there is no question that the congressional budget
process in general, not just the Budget Act but the
appropriations and the like, have caused significant
inefficiencies in Government operations. So this is an
important issue that we need to deal with, if for that only, as
well as more broadly addressing our budget challenges.
I think the question is: Can process reforms deal with
this? And I am a political scientist, and I study kind of the
history of politics and policy in the country and in the
Congress, and I would note that, you know, I think the thing
that is driving a lot of these problems is beyond a process
fix. A lot of these problems are really driven by a more
polarized and contentious political process. I do not need to
tell you that we have had a massive realignment of the parties,
that the middle is less represented than other sectors of the
electorate. We have 24/7 media coverage. We have constant
vigilance by interest groups.
It is difficult to make budget choices in a fish bowl. It
is much more difficult to make the kind of budget choices we
face today in a fish bowl, particularly as budget positions by
members are increasingly monitored minute by minute by outside
groups.
It is also difficult to budget for less. We have seen
States that ordinarily put budgets in on time come late
periodically in the past several years as they wrestle with
hard choices and the like.
So there is no question that, you know, we need to do
something here. In the old days before all of the budget
process occurred and when our politics was more centrist and
more consensual, why we did it informally through the
appropriations process, broad agreement on priorities and the
need to kind of keep the lid on the Treasury. These days we do
not have that informal agreement, so we need rules to kind of
fortify ourselves. But at the same time, rules are more
difficult because of this more contentious kind of process.
Process cannot repeal politics. Gramm-Rudman taught that.
We need to be careful about what we expect process to do. It
cannot substitute for political will. It can back and reinforce
political will, but we should not ask heroic things from
process. Washington's landscape is littered with disillusioned
reforms that have fizzled out, much to the chagrin of people
who were very enthusiastic.
Now, when I look at the process reforms that might bear on
late funding and delays, you know, the first is some kind of
way to incent Congress to act on budget resolutions in a more
timely way.
I think this problem of the failure to act is partly a
symptom of our politics. It is, frankly, partly a symbol of the
fact that the budgeting is partly an exercise of the whole and
the parts. You know, we as Americans have one set of beliefs
about the whole. We want to cut deficits. We have a totally
different set of beliefs about the parts. Do not cut my program
and do not raise taxes. I think that same kind of duality and
ambivalence is present in the Congress, too.
The question is, I think what has happened in the budget
resolution is we have kind of a misalignment between the whole
and the parts. In recent years the Budget Committee and
Congress has adopted spending ceilings, for example, that are
symbolically appealing but unrealistic and difficult, if not
impossible, to be digested by appropriators and other
committees. And I think it is the fact that this Committee has
not aligned itself with other committees, has not worked in
that kind of collaboration, that has made budget resolutions
more difficult to swallow and more difficult to get out in the
first place. So I think part of the problem rests possibly
with, you know, the kind of targets that we set. Now, that
partly has been taken care of by the Budget Control Act over
the next 10 years.
I think a higher point of order on appropriations bills, a
60-vote point of order, could possibly help. I do not think it
is going to prevent polarization, which I think is the part
that drags this whole process down. But it could possibly at
the margin make some difference.
But I think the bottom line is I think most members feel
they can get by without a budget resolution. They cannot get by
without appropriations. That is the driver of behavior. So I am
not sure even a 60-vote point of order is necessarily going to
reverse that logic and those constraints.
The second issue I want to talk about is joint budget
resolutions. Again, that has often been offered as a way to cut
through this, streamline the budget process, expedite action,
and prevent gridlock. I will not say anything more about it. I
think we know what that is. I think the joint budget resolution
is a high-reward but high-risk proposition. When the President
wants to get together, even if he is of the other party, like
we had in the Andrews Air Force Base Summit in 1990, why, it
can really cut through a lot of stuff and bring parties
together more expeditiously. It can certainly make whatever
agreements are put down in a resolution, give it the force of
law. It can force other Committees to come to the table. It can
bring not peace and light but real effective agreement to this
process, and that is certainly something you do not want to
give up. It is worth striving for.
But as has been said before, it really does not eliminate
conflict. It moves it around. It takes the gridlock of the fall
and moves it to the spring. And I fear that it makes the
President--invites the President into a congressional process
and enables him, if he wants to undermine the congressional
policies, enables him to completely hamstring Congress' ability
to even enact appropriations in the first place.
So I am fearful that that obviously shifts the balance of
power and may prevent Congress from getting its work done as
well.
I like the idea of a backup concurrent resolution triggered
by something that would make sense.
I think we have to remember one thing about the
Congressional Budget Act. The Congressional Budget Act was not
a deficit reduction act. It was a rebalancing of power act. It
was in response to the impoundment of funds by President Nixon,
``the imperial Presidency,'' as it was called then. This was
Congress' effort to reclaim power and reclaim the high position
in the appropriation and budgeting of the Nation's resources.
And that is something we should not tamper with lightly,
obviously.
I want to make one more point. I think we are in a kind of
almost inflection point in budgeting. We are facing not only
the deficits of $1.2 trillion today, but unlike most
recessions, even when we eventually pull out of this one, we
are not going to see the light at the end of the tunnel. We are
going to see the tsunami of the demographics and health care
cost crisis facing us square in the face. We are looking at
deficits that GAO, OMB, and CBO all project to be in the range
of 20 percent of GDP if we do not do anything.
I think what we have learned from, you know, my experience
in New York, New York City and other Nations that we have
studies is that to deal with these kinds of policy deficits and
deep divisions requires a more centralized budget process. I am
not sure whether this one is up to the task, and I think we
need to really think through, clearly we are going to be facing
some of the most difficult choices. Many, many different third
rails, not just Social Security, are going to pass through this
Committee. And I think the question is: Can we rethink the
budget process so that it is up to the task of dealing with
these really hard choices?
One of the things that I talk about in the testimony is the
idea that not only the budget process--we want the budget
process to solve the broad fiscal problems, but we want it to
set priorities for the Nation. I think right now those
priorities are not set anywhere. We have kind of diverging
forums to consider tax expenditures and spending and other
programs in highly fragmented ways, which is why GAO reported
the tremendous fragmentation in Government. We have 82 teacher
training programs, we have 17 food safety programs, and this is
partly because of the fragmented structure here.
Worse, I think we have inconsistent policies. We try to
bail people out and help prevent the damage from floods. On the
other hand, we incent people to locate on the ocean with flood
insurance. We do not look at the conflicts within our own
policies. And I think what we need as a budget process--I think
that is part of the budget process, to kind of bring together
the committees and the leaders in this Congress to rationalize
policy and do what I call ``portfolio review,'' looking at the
performance of what we are getting, the relative performance of
the different programs all trying to achieve the same thing. I
call it a ``performance resolution.'' Whatever it is, I think
we need to really think about performance as we think about
reviewing these claims.
I think the Budget Committee is uniquely positioned of any
committee in this Congress to do this job. You already look at
budget functions. They are kind of a natural way to express the
missions of the nation. Subfunctions may be even better.
Something needs to be done, I think, to bring this body
together around these urgent problems.
Thank you.
[The prepared statement of Dr. Posner follows:]
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Chairman Conrad. Thank you. I thank all the witnesses.
Let me ask you a series of questions, and I would ask you,
because of the limits of time here, if you would try to keep
your answers as short as you can because I have a series of
things I would like to get to.
First of all, the question of a joint resolution, and I
would like your direct recommendation. Do you believe this
should be a document that the President ultimately has to sign?
Or should we keep with the current practice that it is a
congressional document? Dr. Fisher?
Dr. Fisher. Yes, I think the risks of a joint budget
resolution are too great. I think you would lose your
independence. I am very much on separation of powers and checks
and balances and representative Government.
I think we have seen particularly since World War II a huge
increase in Presidential power. There are many reasons for
that. And with that increase in power in the Presidency to me
have come colossal mistakes by not just executive overreaching
but incompetence. So I do not want to see Congress weakened in
any way.
Chairman Conrad. The Presidents, by the way, would like to
meet with you right after the hearing. [Laughter.]
Dr. Fisher. I know. I have got a dinner engagement at the
White House.
Chairman Conrad. Okay.
Dr. Fisher. I think it is very odd, the attitude. People
are very realistic about Congress, generally critical. I think
maybe we idealize the Supreme Court too much. But we vastly
idealize the Presidency. The President is someone with the
national interest in mind, surrounded by very competent
advisers. You know, just a complete separation between the
President as it is and the way the President--if the President
is this strong, he should be sending up a responsible budget.
No one holds the President accountable.
Chairman Conrad. Dr. Joyce.
Dr. Joyce. I do not think you should change the budget
process to make it a joint resolution, and I think, as I
suggested in my testimony, that it would only help at the
margin during those cases when the Congress and the President
already are inclined to agree, and it would make things worse
in cases where they are not inclined to agree.
Chairman Conrad. Dr. Posner.
Dr. Posner. I agree with Phil and Lou on that, absolutely.
Chairman Conrad. Okay. Let me go to the second question
just quickly. The second part of this hearing is a question of
how do we provide incentives for Congress to actually take up a
budget resolution? One of the ideas I mentioned in my opening
was strengthening the right of Senators to proceed to and
debate a budget resolution if the Budget Committee or the
Senate fails to act. What is your reaction to trying to
strengthen the right of a Senator to proceed--the right of
Senators to proceed to a budget if the Budget Committee fails
to act? Dr. Fisher.
Dr. Fisher. I think you have to protect your--as Ron said,
the key parts, appropriation bills and other things that have
to go on. And if the budget resolution is not ready, I think
the other parts of Congress have to proceed.
Chairman Conrad. Okay. Dr. Joyce.
Dr. Joyce. I think anything that you can do to create
incentives to have a budget resolution adopted is worth doing.
And I think that it would put pressure on the Budget
Committees. If the Budget Committees did not feel like they had
complete control of whether there is a budget resolution or
not, but thought that other Senators might actually in a sense
take over their role, that to me would create greater
incentives for the Budget Committee to want to complete its
work. And it strikes me, while I have not thought about it a
lot, as a good idea.
Chairman Conrad. Dr. Posner.
Dr. Posner. I think it could have the same effect that a
discharge petition has, say, in the House, where the threat of
losing jurisdiction and control can really focus the mind of
the committees and maybe produce more action than you otherwise
would.
Chairman Conrad. Okay. Let me go to the second major
proposal, which is to create a 60-vote point of order against
appropriations or perhaps revenue bills or perhaps all
legislation until a budget resolution is enacted. Dr. Fisher,
you have kind of already answered that. You do not particularly
like that idea, I take from your previous answer.
Dr. Fisher. That is correct.
Chairman Conrad. Dr. Joyce.
Dr. Joyce. I am more sympathetic to the idea, and, again, I
think that if we are going to say that the budget resolution is
where the budget policy for the Congress is being made, then
the idea that you can sort of proceed to do things that involve
taxing people and spending money outside of the context of that
budget resolution without making it difficult for people to do
that strikes me as not a good idea. And so it is not just in
the Senate where you could have a 60-vote point of order, but
in the House, I believe it is true that if a budget resolution
has not been adopted by May 15th, then appropriations bills can
be considered in the House. So I would think you would want to
look at both of those things. You know, you are thinking about
the Senate, quite reasonably. But I think there is also a House
part of this.
Chairman Conrad. Component, yes.
Dr. Posner.
Dr. Posner. I think that in principle, you know, the whole
point of the Budget Act is to set the plan in motion first and
then have the individual actions follow. And the extent to
which there is leakage is a problem.
I think there are some real implementation questions. For
example, would that 60-vote point of order hold against a CR as
opposed to just appropriations? And if it does, then you really
escalate the potential for a possible shutdown. Do you, in
fact, through the back door in effect create a 60-vote
requirement for appropriations bills through this process by
enabling members to hold up an appropriation absent the 60
votes?
I think the other question is sometimes these points of
order are effective in achieving their goals, and sometimes
they just raise the price of an agreement. You know, given the
necessity of passing appropriations, whether the need to gain
the support of those other votes, whether that would increase
spending, kind of counterintuitively, or other actions remains
to be seen.
But I think in principle it is a good idea to have some
kind of sanction of shame or other kinds if things do not work,
but, on the other hand, there are some unintended consequences
we have to pay attention to.
Chairman Conrad. You know, the thing I have been struggling
with is I have been on this Committee 25 years; I have been
Chairman, I have been Ranking Member. You know, the hard
reality is if you are in leadership, it is not all that
attractive to take up a budget resolution and go through vote-
a-rama. I would just tell you, our colleagues do not look
forward to the prospect of going through vote-a-rama. It has
become an object of derision. That is the fact of the matter.
And, you know, you have got other committee chairmen who
have never particularly liked the existence of the Budget
Committee. Let us also be frank about that. I mean, if you are
an appropriator, the Budget Committee is not a real attractive
inconvenience. And if you are the Finance Committee, you know,
same thing. You are not very eager to have the Budget Committee
telling you what your limits are. And I will tell you, they all
can go to leadership.
So I am convinced, unless we provide some additional
incentive or disincentive around a budget resolution--I mean,
we can see what is happening. You go back to 2000. Only one
time have we done a budget in an election year. I was Chairman
of the Committee then. I remember how hard it was. And the way
I persuaded the leadership to do it----
Senator Sessions. Presidential election year?
Chairman Conrad. In a Presidential election year. The way I
persuaded them to do it was to tell them if we do not, any
member can go to the floor with a budget resolution. That was
the thing that convinced them to go ahead. So that is the thing
that I think we should seriously think about strengthening.
With that, I have exceeded my time. Senator Sessions.
Senator Sessions. Well, thank you. To me the budget power
is only one, really, which is it sets how much money we can
spend. That is the fundamental power that we have, and we have
arranged it so that it can be passed with a simple majority,
not a super majority, and created some power to make sure that
it could be carried out once adopted. That is a good thing.
I have heard it argued that when the appropriators did not
have a budget to try to get around, they were more anxious
themselves to contain their own spending. You know, we have
heard that argument before, and there may be something to it.
With regard to the leadership, I would go a little bit
deeper into what I think the concern is. If we had unleased a
national discussion, a lot of votes and a lot of amendments and
a lot of discussion on the financial future of America all
year, leaders on both sides would have somewhat lost control.
The process would have been more between the Senators and the
American people and who is winning the battle for the hearts
and minds of the American people. But when you take it off the
center stage, then the leaders have more control of it. I love
them all, but that is, I think, a thing that was in their mind.
I do not think it is so much that you go through the vote-
a-rama, although that is an irritant and votes can be tough for
your members and leaders want to keep their members from
casting tough votes. We understand that. But I really think it
is a deeper deal. Democrats interpreted their huge victories
when Republicans went from 55 Senators to 40 in two cycles as
an affirmation of their vision of Government. The last
election, Republicans interpreted their shellacking, big
victory as an affirmation of their form of Government. So we
have got two groups of people with some different views about
what we ought to do in America about spending, taxes, and the
size of Government. We just do.
And so I guess it has sort of fallen on us that we have not
been able--that debate has kind of hit us here, and I am not
sure where we will go from it. These odd CRs and debt ceiling
agreements and all represent congressional effort to do
something, and not all bad. We are not spending more now. We
are spending a little less, at least over the next decade. And
so it is not as if we are totally rejecting the American
people's views that we need to get our house in order, in my
view.
We talked about the point of order there. Dr. Posner, one
thing that I have thought was fundamental to our biennial
budget colleagues is biennial appropriations. And one thing a
member of the Appropriations Committee told me several years
ago when I was promoting this, ``Well, that is great. I am for
biennial budgeting, but I am not for biennial appropriations.''
Well, I thought biennial appropriations is exactly what we
need. Just imagine the immensity of the Defense Department and
how much confidence they would have if they had a 2-year plan
that was pretty firmly done.
But you had some doubts about that. Would you express those
to us?
Dr. Posner. Well, I think you can distinguish between
biennial budgeting and biennial appropriations. I think it is
conceivable that you could have a biennial budget resolution,
particularly in years when there is no reason to change the
overall top-level fiscal policy, and still have annual
appropriations.
I think that the question about biennial budgeting, you
know, is one I know that you focused on last week, and it is
perennially a focus here. I guess I think that certainly some
of the States have it, mostly the smaller States. I think the
purported advantages of biennial budgeting are dependent on
having a clean 2-year cycle. If you have to revisit your budget
every year, then you are just creating the same amount of work
that you did before.
I also kind of think that, you know, while it certainly
could lead to more oversight--and we have seen some State
legislatures, Arizona in recent years, that have actually done
that, Texas to some extent. I think the real oversight that
takes place--and I have got an old-fashioned view about this--
takes place in the Appropriations Committee when you actually
appropriate money. That is where the incentive is to really
monitor and oversee and control what the agencies are doing
when you are getting their budget. It is a telephone book, as
you know, that is replete with detailed information on workload
and location and regional performance and this and that. That
is when you really have the members' attention. And I worry for
the quality of oversight, I worry for congressional control,
not having that being done every year, frankly.
So I think that there could be a case to be made for
biennial budget resolutions, but I do not think the case is as
strong for biennial appropriations, and I certainly think in a
Government as complex as ours, which is so sensitive to the
economy--we are not as insulated from the economy as some State
governments are--I think we will be constantly changing it
anyway. So I do not think we are going to get the advantages
that we would otherwise.
Senator Sessions. Well, Dr. Joyce, I will let you comment
on that. Of course, the theory is that we would do more
oversight in the off years, and certainly the Budget Committee
could. But Dr. Posner raises a good thought. What are your
comments? My time is running down.
Dr. Posner. Well, just real quickly, I think I agree
completely that--I find myself in the position of agreeing with
all of the good things that biennial budgeting is supposed to
bring, but being very skeptical that they will happen. And I
think the two things that biennial budgeting is supposed to
bring is less time on budgeting and more time for oversight,
and I think the less time on budgeting part really is tied up
in the appropriations process. And I think particularly in the
House where appropriations is an exclusive assignment, then,
you know, you have to ask your the question: Are those House
appropriators going to take every other year off from
budgeting? And I think they are probably not.
On oversight, I think that the reasons that more detailed
oversight, the kind of performance-based oversight that people
are looking for is not done does not have to do with time as
much as it has to do with there is not incentive to do that
kind of oversight. That is hard work, looking into programs
from the ground up. And I think the reason it is not done is
because Members of Congress do not sort of see the payoff from
doing it.
Senator Sessions. Dr. Fisher, do you want to comment? My
time is up. Go ahead.
Dr. Fisher. A quick comment on 2-year appropriations.
Agencies now have a hard time estimating 1 year out for the
next year, and they have to do some padding. So I think the
agencies would do a lot of padding for 2 years, and then
Congress would have a tough choice. One is to be very
conservative on your funding for 2 years, in which case you
would have to do supplementals the next year--that would be a
headache--or to give too much, which is wasteful. I am sure you
would have to give agencies much more discretion on
transferring funds from one account to another or reprogramming
within an account.
So I think the difficulty of estimating, particularly at
the national level, makes 2-year budgeting not practical.
Senator Sessions. Two-year budgeting and appropriations?
Dr. Fisher. Pardon?
Senator Sessions. Both 2-year budgeting and 2-year
appropriations?
Dr. Fisher. I think 2-year appropriations would not be
practical. I think it would bring a lot of headaches. I
certainly have reservations about biennial budgeting as well.
Chairman Conrad. Let me just say I have been on this
Committee 25 years. If there is anything that is clear, it is
that we are not going to be doing budgets in Presidential or in
election years. So people do not want to do a biennial budget,
we would not do any budget, because that is where we would be.
At some point we have got to deal with reality around here.
Senator Warner.
Senator Warner. Thank you, Mr. Chairman. I really
appreciate you and the Ranking Member holding this hearing, and
I appreciate the panel's comments. You have surprised me a
little bit. You raised some good questions, but I still
absolutely believe the notion of biennial budgeting makes
sense.
I am biased as a Governor from a State that had that
process, and we had an ability on the off year to have
appropriations amendments that grew and grew and grew, and it
ended up being a mini process. But still there was at least a
framework, and the lack of predictability and the lack of
incentives we have, I actually think a 2-year budgeting process
and a 2-year appropriations process, in the off year having
appropriation amendments would, with appropriate guidelines,
cut back on the kind of end-of-year finagling that many
agencies do at this point, would not exacerbate it. But you
raise some interesting points.
I was also surprised to hear--Senator Thune was out for
most of this. I found when we had kind of a more private
conversation, I made mention of the fact that it was not until
I was on the Budget Committee as a relatively new Member of the
Senate that I realized the budget that we do here was not
signed by the President or did not have any kind of effect in
law. And, again, the reluctance of all three of you to embrace
that approach when it seems, again, that the overwhelming
majority of States have that kind of gubernatorial role in the
budget, I would like you to comment on that.
I was also curious to see, other than Dr. Joyce, the
relative pushback on the ideas the Chairman had about
incentives and/or penalties that if we did not get a budget
done by a certain moment in time, these other thing would kick
in--again, seeming to say that the status quo was an
acceptable--or at least better than some of the other options.
I do not accept that.
I would say one of the things that Dr. Posner has raised,
and I believe Dr. Joyce raised as well, and I think is
something that this Committee has a unique ability to do is to
do this performance and metrics review. It is tough work. The
Chairman, at the suggestion of Senator Whitehouse, had given me
and a group an ability to dig into some of this, and passed a
little piece of legislation last year, the GPRA Modernization
Act, that actually required agencies for the first time ever to
limit the number of their policy goals so they do not have
this, you know, you have too many goals, you do not have any
priorities. Actually for the first time ever, it makes
requirements for agencies to not only focus on their best-
performing projects but also their least-performing programs,
which is a cut line that no agency would like to make, but I
think is important information we ought to have. And if it is
not the Budget Committee, I do not know where we are going to
be able to get a look at the kind of duplication of programs
that cut across appropriation lines. We all cite the same 82
teacher training programs, you know, 90-odd worker training
programs, 17 food safety programs. And regardless of which side
of the aisle, we know those are important functions, but there
is no incentive in place right now or no place to see how do we
evaluate these particularly across agency or Committee
jurisdiction lines. The Budget Committee has got to be the
place.
This is much too long a comment from me and not enough of a
question. I guess my question will be: Any other comment on the
biennial versus the current process on both budgeting and
appropriations? And since so many States have had a fairly
effective way to do it, the notion of not involving the
President in the process, which you are uniformly against,
again, I do not think there are very many States at all that I
am aware of that do not have a gubernatorial involvement either
at the front end or the back end of the budgeting process. And
why has that worked relatively well for States and not worked
so well at the national level?
Then, again, since I have talked so long and used up most
of my time, any further comments on how we could incent us to
get it aligned right, to spend the time on performance, to
spend the time on metrics, and to spend the time on this cross-
cutting analysis and getting out of silos. So I guess we will
do it in line.
Dr. Fisher. I do not think the States are a good place for
Congress to look for advice. You can do it, but States had
biennial budgeting because they met every other year, in
Congress from 1789 on, every year, every year, every year. So
there are also things at the national level that just do not
exist on the State level.
I do want to make--oh, yes, they have gone back and forth
on this. But I want to make a point about the President getting
involved in a budget resolution, a joint budget resolution. I
am very concerned that it would cut down on the participation
of Members of Congress. Who would negotiate the joint budget
resolution? I think you would have a handful of people--and the
frustration at Andrews where you have to slip notes in, can you
look at this note and help me out? I mean, that is pathetic for
a body like Congress. So I am afraid it would go in that
direction.
Dr. Joyce. On the States, in the first place I think that
there is a lot of variation among the States. There are States
that are characterized, rightly, as having very strong
legislatures like the Congress is a strong legislative body.
There are other States that have relatively weak legislatures.
Part of that is dependent on, for example, the extent of the
veto power that the Governor has, you know, whether it is a
line-item veto, a reduction veto, or whatever.
But I think the other thing is that the States--and you can
try to take this on, if you would like to, at the national
level, but the States are not nearly as fragmented in the way
they deal with the budget as the Congress is. You know, the
States often will have an Appropriations Committee that deals
with all spending, not have a lot of spending that is under the
jurisdiction of other committees, as is true here. Or they may
even have a single Budget Committee that deals with both the
tax and spending side of the budget.
So at the State level, the Governor proposes the budget.
The Governor may have a lot of power in terms of vetoing what
comes out of the legislature. But then the question to me is:
What does the legislature do in that sort of intermediate step?
And can it deal with the whole budget? That is the real
function of the Budget Committee here. The reason there is a
Budget Committee is because there are not any other committees
in the Congress that can look at the whole budget.
Dr. Posner. If I could just say a couple things. I think
one of the reasons why biennial works in the States and not at
the Federal level is we have a unique role to be the stewards
of the economy, and the States do not. And that means that
particularly in volatile times, but even in--you know, our
fiscal responsibilities continue much more intensely and much
more regularly than States may. So I think that is something we
have not talked about yet, but I think that is important.
I think, generally speaking, Governors are stronger than
Presidents. Legislatures in States are comparatively weaker in
budgeting. For example, one of the things that makes biennial
budgets work, as you say, is State agencies have the ability to
adjust. Governors can impound money. The legislatures sometimes
can convene interim committees to act on behalf of the whole
legislature. There is a lot more flexibility that we would not
do here. Our Congress is much more fulsome and proactive, and I
think it makes it more difficult to see biennial budgeting
working in that sense.
I think one of the main reasons why I think about biennial
budget resolutions is precisely what you said, and that task
force that you led I think was a great example of this: the
potential of this Committee in the off year to do the kind of
focused oversight of those portfolios that just is not done and
is desperately needed. I think that is a role that this
Committee could play, and this Committee could really do that
in the biennium, in the off year. So in that sense, I think if
we can kind of move in that direction, that would be a real
positive advance.
Senator Warner. Thank you, Mr. Chairman.
Chairman Conrad. Senator Thune.
Senator Thune. Thank you, Mr. Chairman. I thank you and the
Ranking Member for holding this hearing. I think it is an
important subject, and I think the special committee gives us
probably the best opportunity that we have to do something in
the area of budget reform that we are going to get. And that is
why I think this is--we have got to seize this opportunity.
Now, I want to summarize what your arguments have been in
opposition to a joint resolution that would have to be signed
by the President. One is that the Executive could slow down the
budget process, create unnecessary delays by, you know, being
resistive to whatever Congress is trying to do there; secondly,
that it would violate the checks and balances, the separation
of powers, give too much power to the Executive. Is that a fair
characterization of what your basic arguments are in opposition
to that idea?
Dr. Joyce. I would only add one, which is that I am
concerned that actually you might end up with less fiscal
discipline as opposed to more, because if you involve--if you
made the budget resolution a statute, then there are all kinds
of things that could be changed by statute. Some of those
things might be things that would offer more fiscal discipline,
but it could be just as likely that the President and the
Congress would agree on things that could relax fiscal
discipline.
Senator Thune. But there are limitations in the current
Budget Act, which this would not change, about what can be put
into the budget. Section 301 defines what would be put into a
budget. So if the concern is that Congress might put more in
there to load up a budget resolution or the Executive might
negotiate with Congress for something along those lines, it
strikes me that that would not, as the current budget statute
would be applied, be permissible.
Dr. Joyce. Well, I do not know whether that would be true
or not. I mean, there are all kinds of examples of legislation,
appropriations bills being one example, where all kinds of
things end up in appropriations bills----
Senator Thune. But those are appropriations bills. We are
talking about a budget resolution here. The budget resolution
is pretty prescriptive about what can and cannot be included in
that. And this does not change the basic nature of the budget
resolution. All it simply says is that at some point in the
process you ought to have some buy-in from the Executive.
And I would simply say, I mean, delay the process as
opposed to not doing a budget, you know, give the President
more power to increase deficits, as if we do not have a $1.5
trillion deficit today. I understand all the theoretical
arguments about checks and balances and about separation of
powers. But we have a crisis, and that crisis is we cannot get
people around here to agree on how we are going to solve the
major problem facing this country, and that is the fact that we
have year over year $1.3, $1.4 trillion deficits; we have a
debt to GDP of 1:1; we have deficits to GDP at 10 percent.
Historic levels. You would have to go back to the end of World
War II to find this. And we cannot do anything about it because
we are paralyzed here.
We have this goofy process that includes vote-a-rama where
everybody comes in and, you know, we have these votes, we do
not debate. They are mainly messaging amendments. This is a
broken, dysfunctional process. And what I hear you saying is we
do not like what you are proposing to do to change it, but I do
not hear anybody saying here is what we have to do to fix what
is a broken dysfunctional process.
Let me ask this: If you had a backup--let us say, for
example, that the process failed, that the President vetoed the
budget resolution. If you had a backup that would allow for a
concurrent resolution or an automatic CR or something that
would put some pressure on this process to get something done,
wouldn't that help address the concern about us not being able
to pass one? I mean, I am really struggling with the
distinction here between the theoretical and the real. I mean,
we are dealing with the real right now, and the real is not
working. Dr. Posner.
Dr. Posner. I would feel much better about having that
backup. I think you would have to kind of have a trigger point
when that backup would trigger in. I am a little concerned if
you combine that with the 60-vote point of order against moving
appropriations, that, you know, we would be waiting around to
see if the Hail Mary works, and meanwhile the regular block-
and-tackling work of Government--appropriations and other
things--will get stalled in the process. And I think we have to
find a way for Congress to do its work. And, yes, we want the
big Andrews Air Force Base Summit. I do not think they happen
more than once in a generation. But we want to have those big-
level agreements. I am totally in agreement with you. The
question is: How do you do it? And how do you do it in a way
that does not jeopardize other things? I think that is really
the question.
I do agree that the concurrent resolution backup, if it
could be done in a timely way, might help the process go
forward here. But----
Senator Thune. Well, I mean, I just look at today. We have
not moved a single appropriations bill across the Senate floor.
We are going to take one up this week, I hope, but we do not
have one signed into law. In the last 34 years, there have been
four times--four times--where we have passed the appropriations
bills on time. I mean, I do not see where delaying the budget
resolution by involving the Executive is going to do anything
to delay a process that is already delayed.
Look at this. Last year we passed eight continuing
resolutions. We did not finally get a budget until earlier this
year for fiscal year 2009, which started on October 1 of last
year. In 2010, we passed three CRs. In 2009, we did the omnibus
in March the following year, when the fiscal year had begun the
preceding year. In 2008, we did four CRs. And we end up at this
back d up at the end of the day, and that is not a way to run a
country.
Now, I understand democracy is imperfect, and we are never
going to get it ideal around here, and it is not going to run--
everything is not going to be beautiful and perfectly timed.
But we have a broken, dysfunctional process, and to me, I am
suggesting if--maybe this is not the way to correct it or to
fix it, but it strikes me, at least, that on those occasions
when we have been able to get a budget, it has often been when
we have had some sort of summit where the Executive gets
involved, and we sit down together and say this is what we are
going to do. And at least it binds us to do something around
here. Yes?
Dr. Fisher. I think all three of us agree with you, the
critical state we are in, the dysfunctional budget process. My
concern has been everyone keeps looking at Congress, and I
think you are not going to get out of this until the United
States understands that the President has an absolute duty to
get it off on the right start. A lot of Presidents says, ``I
want a balanced budget.'' Well, send one up. You have got the
authority to do that.
So what do we need? We need leadership from the top.
And if you get that, then your process here will work.
Senator Thune. But the President submits a budget, and it
does not matter which President it is. In the time that I have
been here, the President submits the budget and Congress
declares it dead on arrival. I mean, it is like that does not
mean anything, we are going to write our own budget.
So you never have that buy-in. There is never that sense of
ownership. And I think the American people believe, wrongly,
that the President is involved.
I have talked to colleagues on this panel, and you heard
Senator Warner talk, and I talked to one on our side. He said,
``I never realized until I got on this Committee that the
President does not sign the budget resolution.'' I think there
is an assumption--I mean, the President signs appropriations
bills, and at the end, when we get into these big omnibuses at
the end of the year, if the President wants to, he can hold the
process hostage because he ultimately has the veto pen, and he
can force us to come back here. I find the whole idea that
involving the Executive earlier on in the process is somehow
violating this notion of checks and balances and separation of
powers to be completely out of touch with reality, with where
we are today. And I understand when that was developed. In 1974
there were some things going on in the country where we needed
that independence, and Congress was trying to assert a little
bit more of its authority.
But this is a crisis, and we are paralyzed here, and I
think the American people recognize that. I think it is very
tough if you are an agency of Government to have any
predictability when you are not going to get a budget until--
you have got a CR that may be at last year's level, may be at
whatever the Appropriations Committee marked, but, you know, we
are going to do this until this date, and then we will try and
get a budget, and then next year maybe we will get a final
resolution to this. This is just--it does not work.
And so I appreciate your observations. I wish you were more
supportive of what I am trying to do here. And maybe there is a
better way of doing this, but I am not seeing it.
Dr. Fisher. Just one quick point. The reason budgets come
up dead on arrival is because they come up irresponsibly drawn,
where the President does not take any responsibility. They are
unrealistic. Once Presidents did and that was the expectation,
they would not be dead on arrival. You would accept the
aggregates, and you would change the priorities as you like.
But we have not had responsible Presidents for a long time.
Senator Thune. Dr. Posner.
Dr. Posner. If I could just add to that, I think you are
putting a lot of your hopes with the President. I think a lot
of our expectations should be to strengthen this Committee,
this body. I was part of the Peterson-Pew Commission, a
consultant with them, and they came out with a good Back to
Black report where we said this Committee should become a
leadership Committee, where the leaders of all the committees
should get together and work this out. You know, whether it is
every year or every other year, I think that is where a lot of
the change, frankly, could be productive here.
Senator Thune. And I do not disagree with that. We are
vested with the power of the purse, and that is something,
obviously, we have failed in our responsibility here, too. But
all I am saying is I think there is a way that can work that is
superior to what we are doing today that would get more teeth
into this thing and a joint resolution.
My time has expired. Thank you, Mr. Chairman.
Chairman Conrad. You know, I did not want to cut it off
because this is a very constructive conversation, I think. And
I tell you, as I say, I have been here 25 years. This just
cannot keep going the way it is. This is not good. It is not
good for the country. It is not good for this institution. It
is not working. So the status quo, anybody who argues to me the
status quo ought to be what we continue to do, I am not for it.
This is not the way we should function. And we should, I think,
create a circumstance in which the incentive is so powerful for
this Committee to produce a resolution and that that resolution
gets to the floor, and if it does not, that an individual
member can bring a resolution to the floor.
Senator Whitehouse.
Senator Whitehouse. Thank you, Chairman.
Senator Thune just made two points that I want to agree
with and emphasize. One is that there are huge battles going
on--the Ranking Member made this point as well--huge
disagreements right now, philosophical, political disagreements
in Washington. The House just tried to pass a budget, voted on
a budget that gets rid of Medicare in 10 years. To some of us,
that just seems unimaginable, grotesque. But that is how far
apart different people are.
And so when you have that, you are going to have the budget
process and, frankly, in the Senate virtually everything else
become a proxy war for that larger battle. We just tried to
pass a bipartisan China currency bill, and we finally got to
it, but we had to resort to extraordinary procedural mechanisms
or at least a new procedural mechanism to avoid an unending
array of completely non-germane ``gotcha'' amendments that had
to be called up.
So, I mean, when a bipartisan bill that ends up passing--
what was it--68 votes, you know, everything is a proxy war for
that larger fight.
So I agree with you that that creates a problem for this
budget process, but Senator Thune is also right that that does
not mean that the process is not dysfunctional. The fact that
perhaps now it has been overwhelmed by the ideological war in
this town does not mean that it is not dysfunctional on its
own. And I really think we need to fix it.
I could not agree more that vote-a-rama is a disgraceful
legislative exercise, has earned the derision about it that the
Chairman has referred to, and there have to be ways of, as
Senator Thune said, eliminating some of these sort of
preposterous, no-relation-to-the-budget, messaging amendments.
At least have notice ``what the hell'' everything is that is up
for amendment. I mean, if you are going to come up with a nutty
amendment, you can come up with it just as easy 4 days before
or 3 days before as you can on the day in question, and then at
least everybody knows that when they read the title of the bill
and it gets called up, the text of the bill might actually
correlate or not correlate with the title of the bill. And you
have a chance to sort of ward off some of the worst stuff.
It is tough to define germaneness around here, particularly
when you drop a number in and suddenly it appears to be germane
to the budget. But we should be trying to find a way so that
stuff that has nothing to do with the budget, fine, have those
fights, have them on another vehicle. The budget process is too
important. Everything has become captive to the proxy wars and
the messaging battles.
You know, even if we just focus on something as narrow as
trying to make vote-a-rama less degrading a legislative
exercise, it is a start. But I really think that--I would
disagree with all of you. I think that there is more of a role
for, as you said, Dr. Fisher, executive leadership. I do not
see how you can see we need more executive leadership around
here but not support it with any process changes. This is a
process town. And if the White House does not have to be
engaged, then they are not going to be. And I do not buy your
assertion that because the budgets that come up are
irresponsible that does not mean the President should have a
role. Every Governor in every State games their budget, and
they strip out of it all the stuff that they know that the
legislature is going to put back in anyway so it gives them
room to bring in a lower budget, and everybody knows it is fun
and games and that it is phony to that extent. And then you go
through the process of working your way through to an ultimate
budget.
But the fact that there is phoniness in executive budgets
at the State and the national level to me is no argument at all
against trying to improve the role of the executive branch in
our process so that they are more bought into it and there is a
little bit more reality and heft to it.
Right now, as you say, the President's budget often comes
up as a ridiculous charade. Then we go through our ridiculous
charade, which culminates in the ridiculous charade of vote-a-
rama. And, you know, you kind of wait for the grownup moment to
come, and I just cannot help but believe that more engagement
between the branches would be better for creating those adult
moments than less.
And, again, I will echo what Senator Thune said. The status
quo is not acceptable, so if you do not think that our
proposals are good, help us out. Give us some other ones.
I thank the Chairman and I thank the Ranking Member.
Chairman Conrad. Thanks Senator Whitehouse. You know, so
many of your observations I think are just dead on.
I have been here 25--I started out on this Committee at the
end of the table, and I am going to be leaving here next year.
I want to leave this a better, more functional operation. And
this is not working. It just is not working. I do not know what
could be more clear. And unless we create more incentives for
the process to work, then I think we have got a very serious
challenge.
So I think we have had two very good hearings, and we have
had lots of good discussions with the members of the Committee.
I am going to be checking with the special committee to find
out what is the drop-dead deadline. We have been given a
deadline of the 14th. I talked to the Ranking Member about
this. I am not sure that is the actual drop-dead date, but it
may be. And we are exchanging drafts between us. We have not
reached a conclusion. We are listening. We are listening to our
colleagues. We are listening at these hearings. And I can tell
you, this has been, I think, a very, very good hearing. I may
not agree with you individually or collectively on your
recommendations, but I will tell you one thing, you have
certainly provided a lot of food for thought, and it is good
thought. It is based on lifetimes of experience, and I think
you made some very, very important points here today for the
Committee.
Senator Sessions.
Senator Sessions. Thank you very much, Mr. Chairman.
I thought the meeting you called recently where we all sat
around and were free to talk in a less structured way was very
good. My interpretation of it was that all of our members
favored a 2-year budget. And I believe they included within
that 2 years appropriations.
We know that some of the appropriators may not agree with
that, but I do not believe all disagree, because when I was
working with Pete Domenici, he was an appropriator and on the
Committee. I discovered--I ran the numbers. We had half of the
Republican--more than half of the Republican members of the
Appropriations Committee supported it. That included 2-year
appropriations.
Okay, so then we have got the vote-a-rama problem. We are
having a dispute over minority rights that blew up the other
week, and that has caused a lot of tension. I think we will
work through that. Senator Reid has indicated he wants to
listen. He called me and just wanted to talk about it. So I
think maybe we can get past that, and then we will have to deal
with how we want to--what rights you want to provide the
minority to offer amendments and how that could be altered. The
Chairman has made some good suggestions in that regard.
So I hope, Mr. Chairman, that we could reach an accord and
get something out of here. Ultimately the 12 will have to
evaluate whatever we recommend. They have already gotten
recommendations concerning a biennial budget from others who
offered legislation. So we might as well give our best judgment
as to how it ought to be executed, if at all.
I thank each of you for your testimony, and our problem at
this point in history is exacerbated by a fairly honest,
respectable disagreement about the nature of the Republic of
which we are a part.
Thank you.
Chairman Conrad. The Senator, as always, is clear, and I
think he has been very constructive in this discussion we have
been having. I would propose to him at this point, I think what
we should do is see if we can agree on a draft and then either
reconvene the members of the Committee or circulate the draft
for comment or perhaps some combination thereof. We can talk
about that, but that is my thinking at the moment, that the
Ranking Member and I should see if we can agree on a draft that
we then circulate to the members, and then we either have a
follow-up meeting to give them a chance to express themselves,
or at the very least give them a chance to respond in writing.
But I am kind of leaning toward having another meeting if we
have the time given this deadline that we have been given.
Again, I want to thank the witnesses. We appreciate your
testimony very much. The Committee will stand down.
[Whereupon, at 11:04 a.m., the Committee was adjourned.]
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
ECONOMIC EFFECTS OF FISCAL
POLICY CHOICES
----------
TUESDAY, NOVEMBER 15, 2011
Committee on the Budget,
U.S. Senate,
Washington, DC.
The Committee met, pursuant to notice, at 10:01 a.m., in
Room SD-608, Dirksen Senate Office Building, Hon. Kent Conrad,
Chairman of the Committee, presiding.
Present: Senators Conrad, Wyden, Nelson, Whitehouse,
Merkley, Begich, Coons, Sessions, Crapo, Thune, and Johnson.
Staff Present: Mary Ann Naylor, Majority Staff Director;
and Marcus Peacock, Minority Staff Director.
OPENING STATEMENT OF CHAIRMAN CONRAD
Chairman Conrad. The hearing will come to order.
I want to welcome everyone to the Senate Budget Committee
today, particularly our witness, Congressional Budget Office
Director Douglas Elmendorf. Thank you very much for being here.
Thank you for your good work.
In today's hearing we will again focus on the economy and
steps that can be taken to strengthen the recovery and create
jobs. Last year, at my request the Congressional Budget Office
completed an analysis of the so-called bang for the buck
achieved by different fiscal policy proposals. CBO has now
updated that work, so we thought it would be useful to have
Director Elmendorf here today to report on his agency's latest
conclusions. I am hopeful that Congress will consider CBO's
analysis in developing any near-term economic growth measures
that might be passed before the end of the year.
I would like to begin by briefly reviewing the economic
situation now confronting the Nation. It is clear that the
economic recovery that we are now experiencing is not what it
should be or what we would like it to be. Here are some of the
factors, I believe, that are holding back the economy.
Unemployment remains stubbornly high. The housing crisis that
helped spark the downturn is continuing. We have weak consumer
confidence and weak consumer demand. Personal debt is still
near record levels. Businesses and consumers still face
tightened borrowing standards. State and local budget cutbacks
are continuing to create a drag on job and economic growth. And
our debt is also a challenge to future economic growth.
Among these factors, the continuing housing crisis is
particularly notable. If we look back at the seven previous
recoveries, we can see that a surging housing market was a
driving force behind the return to economic growth. Housing
starts rose dramatically in every one of those recoveries. But
in this recovery, housing starts have remained low and continue
to be.
We know that some of the drag holding back the recovery is
caused by the nature of the recession that preceded it.
Economists have found that, following recessions caused by or
accompanied by a severe financial crisis, recoveries tend to be
shallower and take much longer. Two leading economists, Dr.
Carmen Reinhart and Dr. Vincent Reinhart, found in their
research, and I quote from their findings:
``Real per capita GDP growth rates are significantly lower
during the decade following severe financial crises. . . . In
the 10-year window following severe financial crises,
unemployment rates are significantly higher than in the decade
that preceded the crisis. The decade of relative prosperity
prior to the fall was importantly fueled by an expansion in
credit and rising leverage that spans about 10 years; it is
followed by a lengthy period of retrenchment that most often
only begins after the crisis and lasts almost as long as the
credit surge.''
In other words, we could see a period of low growth and
relatively high unemployment for some time because we are
recovering from a severe financial crisis, the most severe
since the Great Depression.
If we look at private sector job growth, we see it has
improved dramatically from where we were in the recession. In
January of 2009, the economy lost more than 800,000 private
sector jobs in 1 month. Private sector job growth returned in
March of 2010, and we have now had 20 consecutive quarters of
growth--or 20 consecutive months of growth. However, clearly we
have to do better. We need considerably more job growth in
order to fuel a stronger recovery. The unemployment rate
remains far too high. As of October, the unemployment rate was
still hovering at 9 percent.
Although the recovery is not as strong as we would like, it
is important to recognize our economic situation would be much
worse if we had not had the Federal response to the recession
and the financial crisis, including both the Fed's monetary
policy action and the fiscal policy actions taken by Congress
and the administration. That Federal response, I believe,
pulled the economy back from the brink and likely prevented us
from slipping into a depression. And it may not have been
slipping into a depression. We may have gone head first into a
depression.
Two other leading economists--Dr. Mark Zandi, who was an
advisor to the McCain Presidential campaign, and Dr. Alan
Blinder, former Vice Chairman of the Federal Reserve--completed
a study last year that measured the impact of Federal actions
on shoring up the economy. Here is a key quote from their
report:
``We find that its effects on real GDP, jobs, and inflation
are huge and probably averted what could have been called
Depression 2.0. When all is said and done, the financial and
fiscal policies will have cost taxpayers a substantial sum, but
not nearly as much as most had feared and not nearly as much as
if policymakers had not acted at all. If the comprehensive
policy responses saved the economy from another depression, as
we estimate, they were well worth their cost.''
This next chart shows Dr. Zandi and Dr. Blinder's estimate
of the number of jobs we would have had without the Federal
response. It shows that we would have had 8.1 million fewer
jobs in the second quarter of 2010 if we had not had the
Federal response. We see a similar picture in the unemployment
rate. According to Dr. Zandi and Dr. Blinder's findings, if we
had not had the Federal response, the unemployment rate would
have been 15 percent in the second quarter of 2010 and would
have continued rising to 16.2 percent in the fourth quarter of
2010.
Looking forward, it is clear there are further steps that
can be taken to help shore up the recovery in the near term.
CBO's analysis looks at some of these steps and determines
which would provide the greatest bang for the buck in spurring
economic growth and job creation. Here are CBO's key findings:
On the upper end of the scale, it shows that policies like
extending unemployment insurance and an employer payroll tax
cut give you a higher impact on GDP for each dollar spent.
On the bottom end of the scale, CBO once again found that
extending the Bush era tax cuts provide a much lower impact on
GDP for each dollar spent.
It also found that a repatriation tax holiday provides very
little bang for the buck.
I look forward to hearing more about these findings from
Director Elmendorf.
To be clear, there is nothing contradictory about pursuing
near-term economic growth measures at the same time we pursue
long-term debt reduction. We can and we must do both. We need
to a give a near-term boost to the recovery while
simultaneously putting in place policies that will bring down
deficit and debt over the long term. The deficit reduction can
be phased in after the recovery is on a stronger footing, but
it should be enacted into law now.
I want to be very clear about this. On every group that I
have served, whether it is the Fiscal Commission or the Group
of Six, we adopted that basic strategy, that it is clear we
must put into law now a long-term deficit reduction plan. I
believe that would provide a significant boost in confidence in
the markets as people see the Government finally putting its
fiscal house in order.
With that, we will now turn to Senator Sessions for his
opening remarks.
OPENING STATEMENT OF SENATOR SESSIONS
Senator Sessions. Thank you, Mr. Chairman, and thank you,
Director Elmendorf. We respect the work that you do, and we
rely on it, but I am not unaware, just re-reading recently Alan
Greenspan's testimony before this Committee, quoting CBO
numbers in 2001, projecting 30 years of surpluses and that we
would pay down the entire debt of the United States of America,
and he wondered what to do with the surplus. So we have been
wrong before. You predicted 3.1 percent growth this year. It is
going to come in at probably half that. Dr. Zandi predicted 3.9
percent growth this year. Now they revise that, I think Moody's
Analytics, to 1.6 percent.
I do not agree, Mr. Chairman, that there is no
contradiction between borrowing and taxing to spend today and
the problems that have gotten this country into the fix we are
in. As I see it, we are in a long-term financial difficulty as
a result of debt: We have excessive debt throughout the system.
The Government has assumed huge amounts of private debt. And I
agree, we have got a 10-year, or more maybe, deleveraging
process to go through, and we are just not going to see the
growth that we would like to see until that is through.
So I would oppose adding more debt. I think nothing could
be more simpler, nothing could be more basic. And under the
plan that the President has proposed, $450 billion in borrowing
and spending in the near term, plus a $450 billion tax
increase, I do not believe that that is going to be a 10-year
benefit to the economy. And I would be delighted to hear your
view of it, Mr. Elmendorf. And I do appreciate the fact that
you predicted, when we passed the first $800 billion stimulus
package, you predicated that in the short run there would be
some benefit, but over 10 years you predicted there would be a
net negative, because there is a reality of debt out there that
just cannot be wished away. All of that was borrowed. All of
that added to our debt. And I am sure you would agree that
after the 10 years, since we paid none of that, we will have
paid none of that down, that it will continue to be a drag on
the economy for decades to come, long after the short-term
sugar high we may have achieved as a result of it.
So I am very concerned about where we are going. I am
concerned, Mr. Chairman, about the Committee of 12. Mr. Zandi
told us just a few weeks ago we had to have $4 trillion in
reduced deficit. Four trillion, he said, at an absolute
minimum, as has every other witness, as you have said. And I am
not aware that they are moving toward that kind of agreement.
We are still in denial, it seems to me. So if we have learned
nothing else from the financial crisis in 2008, it is that
prosperity cannot be built on a foundation of debt. Excessive
debt, public and private, provided the air that pumped into the
economy that resulted in the burst bubble. Surely we know debt
is not the solution, not more debt. And if there is a second
lesson we should have learned, it is a healthy skepticism for
Washington elites. Many of the same people who fell asleep at
the switch before the housing bubble, did not see it coming,
are not urging us to create more debt in the Government, a
Government bubble. I call them, affectionately sometimes,
``Masters of the Universe.'' They are quick to make confident
predictions and even quicker to explain why the failure of
their last prediction should not count against the one they are
just making today. They say mammoth stimulus failed because it
was not big enough, or that the explosion in regulation helped
the economy. We need more regulation, they say. Advocates for
more stimulus frequently cite CBO's economic models, but CBO
projected a long-term negative growth.
In 2009, CBO stated in your report--and it certainly
appears that you have been correct--``The increased debt will
tend to reduce the stock of productive capital. In economic
parlance, the debt will crowd out private investment.'' CBO's
projections were that--your projections also are that reducing
the deficit by $2 trillion would eventually boost economic
growth by 0.5 to 1.4 percent, so that is a good sign. That
tells us what we need to be doing, which is reducing debt.
So we need a long-term plan. In a time of crisis, confusion
and fear, we should return to basic core principles, the tried
and true: Pay your debts, spend within your means, and instead
of asking the taxpayers for a bailout, Washington must end the
dishonest accounting and waste and abuse that we have in our
country.
What we need is a middle-class agenda. That means creating
jobs through the private sector, producing more American
energy, making the Government lean and productive, confronting
our dangerously rising debt, adopting a globally competitive
Tax Code, upholding the rule of law and trade, commerce, and
immigration, and, finally, delivering the good people of this
country the honest and responsible budget they deserve and have
not had in over 900 days.
Thank you, Mr. Chairman.
Chairman Conrad. Thank you.
Two quick things I would say. We may have a disagreement
about the short term, but we have an agreement about the long
term. The debt is the threat. It would be, I think, a huge
boost for this country, I think it would be a boost globally if
the Special Committee came back with a 10-year plan that
reduced the deficits in the range of $4 trillion. I tried to
convince the Fiscal Commission to do $6 trillion over 10 years.
We could have balanced the budget with that size of a deficit
adjustment and debt adjustment. And it is not that hard to do.
You know, I think some people think this is so hard to do it is
impossible.
Senator Sessions. It is not impossible.
Chairman Conrad. I showed our colleagues one plan that I
did that if you added 6 percent to the revenue that we project
now and reduced expenditures 6 percent, you would save $6
trillion over 10 years. I call that the 6-percent solution.
Now, we could have a debate and we can have a discussion
about what the mix should be, revenue and spending. Maybe some
people want to do it all spending; maybe some people want to do
it all revenue. Maybe some people want to do it 2:1 or 3:1,
spending to revenue. To me, the real issue is: How do we find a
way to come together to get the job done? It is a serious
obligation.
Let me just say on the question of not having a budget, we
passed the Budget Control Act. The Budget Control Act provides
a budget for this year and next. We may not like it, but that
is the law. It is the law of the land. The Budget Control Act
passed, signed by the President. It lays out the budget for
this year and next year. And it provided for this Special
Committee that is, in effect, the reconciliation process, clear
and simple.
So we have got a budget. We may not particularly like it or
particularly agree with it, but we have got one. And we got it
in the Budget Control Act.
Senator Sessions. Mr. Chairman?
Chairman Conrad. Yes, sir.
Senator Sessions. Just to follow up on part of what you
were saying, you quoted, I believe, Rogoff and Reinhart about
this being----
Chairman Conrad. Reinhart and Reinhart.
Senator Sessions. Reinhart and Reinhart.
Chairman Conrad. The other is a different one.
Senator Sessions. This being a financial crisis takes a
longer term. I think that is a little bit of a misconception to
most hearers. They think financial crisis means a bank crisis.
But, really, it means a debt financial crisis. In other words,
people at the time this bubble burst were saving nothing in the
United States. We were actually drawing down our savings, which
is really unprecedented in our history. So individuals had
great personal debt. The Government is now running for the
third consecutive year trillion-dollar debts, and we have taken
over huge mortgage problems and liabilities from banks and
assumed that on the public sector. So it is a simple thing. You
either default on your debt, which has immediate short term
painful ramifications, or you somehow carry the debt over a
longer period of time and try to pay it off and reduce it. And
the problem is that when you do that, it is a depressant on the
economy. Money is being spent not to consume, buy, or purchase,
but money is being consumed to pay down debt--or pay interest
on the debt. We are not close to paying down the debt as of
today.
So I guess I acknowledge and I think we all need to
understand that we are going to be in a long-term effort to
move ourselves out of this deleveraging period, and the first
thing you should do is not add more to the debt and acknowledge
it is going to be a tough period of time. Then we need to do
everything possible that helps working Americans be successful
by creating a climate for long-term growth.
We can all disagree--and we will agree on a lot of how to
do that, but that is where I am on it. I think that is where
most of the American people are. And I look forward to hearing
Mr. Elmendorf. Thank you.
Chairman Conrad. Let me just say with respect to the
Reinhart study, when they are talking about financial crisis,
they are talking about not only the circumstance of individual
States but also damage to the financial institutions, including
private sector institutions. When you have that kind of
dramatic break in the financial markets and damage to the
balance sheets of the major lending institutions, that has an
effect on credit going forward.
So what they found is that when you have an explosion of
credit, as we did before this downturn, in part fueled by
Federal Reserve policy, interest rates kept abnormally low for
an extended period, fiscal policy, very loose fiscal policy
under the control of Congress and the administration--we were
running massive deficits even then. That combination, I
believe, coupled with a lack of regulation of derivatives and
the explosion of AIG did enormous damage to the financial
structures, both private and public, and exploded debt, both
public and private. And the result is you have got financial
institutions with impaired balance sheets, which means they
cannot extend credit in the same way they normally would. And
that is what they find in their study.
First you have a credit bubble, usually 10 years in
duration, and then you have a recovery about the same period of
time. So, you know, we have cooked a real stew. We have cooked
a real stew.
Senator Sessions. You are right, and I guess I will--I
think we both can join together and say this is not going to be
an easy fix. There is no quick fix out there. And how we handle
it, we will all have to work together and do what is best for
the country. I just believe that the quick-fix days are over,
and as one of our witnesses said not long ago, you get the
stimulus benefit from spending today, and it is maybe a year or
two benefit. But if you are in a period of a decade working
your way out of this economic difficulty, then the hit hits you
before the 10 years is up, before you are out of the recovery.
So that is why I do not think we can any longer continue to
short-term sugar high stimulus spend and create more debt,
because it is simply going to catch us before the 10 years is
up. And we need to have an honest long-term plan. The President
needs to be far more honest with the American people about how
difficult this is, and do it in a long-term view, not a short-
term view.
Thank you.
Chairman Conrad. The place you and I agree--we clearly have
a disagreement short term. The place we have agreement is
longer term, and somehow collectively we have got to find a way
to be successful here in changing course. When we are borrowing
40 cents of every dollar, revenue the lowest it has been in 60
years, spending the highest it has been in 60 years, certainly
I think we can agree we have got a serious problem, and we have
got a collective responsibility to dig out of it.
Director Elmendorf, I apologize for this early discussion,
but I think it is important to have. Please proceed with your
testimony, and then we will go to questions.
STATEMENT OF DOUGLAS W. ELMENDORF, PH.D., DIRECTOR,
CONGRESSIONAL BUDGET OFFICE
Mr. Elmendorf. Thank you, Chairman Conrad and Senator
Sessions and to all the members of the Committee. I appreciate
the invitation to testify today about the outlook for the
economy and policy options for increasing output and employment
during the next few years.
As you know, the U.S. economy has struggled to recover from
the deep recession. Although total output started to expand
more than 2 years ago, the pace of the recovery has been very
slow compared with the average recovery since World War II, and
the economy remains in a severe slump.
We expect that, under current law, growth and output will
remain slow, and as a result, job gains will be limited,
leaving the unemployment rate close to 9 percent through the
end of 2012.
Given CBO's outlook for the economy, which is similar to
that of many private forecasters, a large portion of the
economic and human costs of this downturn remain ahead of us.
We think the economy is only about halfway through the
cumulative shortfall in output relative to the potential level
that could be achieved if our labor and capital were more fully
employed. The costs of that shortfall are immense in total, and
they fall disproportionately on people who lose their jobs, who
are displaced from their homes, or who own businesses that
fail.
Concerns about the weak economic recovery have prompted the
consideration of fiscal policy actions to spur economic growth
and increase employment during the next few years. CBO assessed
the cost-effectiveness in boosting the economy of a variety of
possible changes in tax and spending policies.
Figure 1 from the testimony, reproduced on the back of a
single piece of paper in front of you, summarizes our findings.
The figure shows the estimated impact on years of full-time
equivalent employment in 2012 and 2013 per million dollars of
budgetary cost.
To be sure, this measure of cost-effectiveness is only one
of the criteria that might be applied in evaluating policies.
Other criteria are discussed in the written testimony. For each
policy, we show a range of estimates reflecting the uncertainty
that accompanies any analysis of this sort.
The policies that we estimate would have the largest
effects on employment in 2012 and 2013 per dollar of budgetary
cost are policies that would be targeted toward people who
would be most likely to spend the additional income, such as
increasing age of the unemployed shown in the top bar in the
figure, or providing additional refundable tax credits for
lower- and middle-income households, the next bar down, or
policies that would reduce the incremental cost to businesses
of adding employees, such as reducing employers' payroll taxes,
which is the top bar in the second bank, or reducing employers'
payroll taxes only for firms that are increasing their payroll,
which is the bar below that.
The policies that we estimate would have the smallest
effects on employment in 2012 and 2013 per dollar of budgetary
cost are policies that would affect businesses' cash flow, but
would have little impact on their incremental incentives to
hire or invest. Examples include reducing taxes on business
income and reducing taxes on repatriated foreign earnings,
shown in the bottom two bars in the middle bank.
Despite the near-term economic benefits that would arise
from reductions in taxes and increases in Government spending,
such actions would add to the already large projected budget
deficits. Unless offsetting actions were taken to reverse the
accumulation of additional debt, the Nation's future output and
income would be lower than they otherwise would have been. If
policymakers wanted to boost the economy in the near term while
also achieving long-term fiscal sustainability, a combination
of policies would be needed, namely, changes in taxes and
spending that would widen the deficit now but reduce it later
in the decade.
Such an approach would work best if the future policy
changes were sufficiently specific and widely supported so that
households, businesses, and participants in financial markets
believe that the future fiscal restraint would truly take
effect.
Lawmakers could also influence economic growth and
employment during the next few years by changing policies apart
from taxation and Government spending. For example, legislation
could modify existing or proposed regulations, alter the
Government's role in a particular sector of the economy, or
change trade relationships with other countries. The near-term
economic impact of such changes would depend on how the
affected businesses' investment and hiring decisions,
households' purchasing power and wealth, and, importantly,
expectations and uncertainty about future Government policies
and economic conditions.
CBO considered some potential changes in policies related
to energy and the environment, the financial and health care
sectors, and international trade. But there are few analytic
tools for estimating the near-term effects on overall economic
activity of such changes, so we did not attempt to quantify the
effects of those potential changes with any precision.
In our judgment, however, the effects of the specific
changes in regulatory policies or other policies apart from
fiscal policies that we considered probably would be too small
or would affect the economy too slowly to make an important
difference in overall output or employment during the next 2
years.
I should emphasize that the policy changes of this sort
that we examined are illustrative rather than exhaustive. Many
other changes which might have larger or smaller economic
effects are possible.
Moreover, our analysis does not address other critical
considerations in evaluating such policy changes, including the
long-term effects on the economy, on people's health, and on
the environment.
Thank you. I am happy to try to answer any questions you
have.
[The prepared statement of Mr. Elmendorf follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Conrad. Thank you for your testimony. Thank you
for your work.
Let us go back to the conversation Senator Sessions and I
were having as we began this hearing, because I think it is an
important conversation, it is an important debate. In many
ways, the biggest regret I have this year is that we did not
have this fuller discussion and this fuller debate, because the
country needs it and I think this body needs it. And so let us
go back to that conversation we were having.
Senator Sessions and I began this hearing by agreeing on
the danger of our longer-term debt situation. I have said many
times to my colleagues that the debt is the threat long term.
Do you see danger in our long-term debt situation? And if so,
what form does that danger take?
Mr. Elmendorf. As you know, Mr. Chairman, under current
policies, U.S. fiscal policy is on an unsustainable path.
Federal debt is already very high relative to our total output
compared with our historical experience, and it is on a path
under current policies to continue to rise, and that cannot go
on indefinitely.
The costs of that are manifold, partly that rising debt
crowds out private capital investment and reduces future output
and incomes. Also, that extra debt needs to be serviced. We
need to pay interest on it, and that crowds out future
Government spending or forces increases in future taxes.
The run-up in debt also means that policymakers have less
flexibility in responding to unexpected developments,
international crises or crises at home. And beyond all that
there is an increasing risk as debt rises of a fiscal crisis in
which investors will lose confidence in our Government's
ability to manage its finances, and thereby the Government will
lose the ability to borrow at affordable rates.
When that sort of crisis might hit we cannot predict. It
depends not just on the level of debt at a point in time, but
on expectations, and expectations not just under sort of
current law or current policies, but also a sense of the
ability of the political system to confront the Nation's fiscal
challenges and make deliberate choices to try to stay out of
danger.
Chairman Conrad. Well, I think you said that very well, and
I agree with that. Senator Sessions, I will not speak for him,
but he has made clear how serious he believes this debt threat
is.
So how could it be that there would be any benefit from
fiscal measures taken now that would increase our debt?
Mr. Elmendorf. I recognize that it may seem like a paradox
that rising levels of debt are bad for the economy in the long
run but, nonetheless, if used in certain ways, as we are
talking about in our testimony, could be good for the economy
in the short run. But it is not really a paradox. It simply
recognizes that the nature of the economic challenge that we
face as a country is somewhat different over the next few years
than it is over the medium run or long run. Over the medium run
or long run, economists in general agree that the restraint on
our output and our incomes is the capital stock, it is the
quantity and quality of our labor force, it is the level of
technology and the way we bring these inputs together in
businesses.
But in the short term, again, most economists agree the
constraint on our output and incomes today and next year and
the year after that is principally in the weak demand for goods
and services. We have the factories and equipment to produce
more. We have people who would like to work to produce more.
And the reason they are not fully employed is a lack of demand
for goods and services.
So in the short term, what can strengthen the economy in
our analysis and the analysis, I think, of a broad consensus of
economists, what can strengthen the economy is cuts in taxes or
increases in spending because those can either spur public
demand for goods and services or through lower taxes spur
private demand for goods and services. And that can help in the
short term. But in the medium term and long term, surely enough
that would be counterproductive. And even if one does this in
the short term and gets a short-term boost, unless one offsets
that extra accumulation of debt, then one will be a little
worse off in the long run than otherwise.
There are various complicating forces around that. It
matters what you spend money on today, publicly or privately.
It matters how you address the long-term fiscal challenge, of
course. But as a general rule, the extra amount of debt that
would be accumulated under policies of the sort that we have
analyzed here would be bad for the economy in the near term and
long term even though it would provide a boost to output and
employment in the short term. And it is not really a paradox.
It really just reflects the nature of the economic challenge,
which is different at different points in time.
Chairman Conrad. All right. I thank you for that
explanation.
Let me go to some of the specifics of what is in your study
because I think it is very important to understand that. Let me
just say I noticed there is a difference between what is in
this study and the previous study in that, as I understand it,
this is looking at a 2-year effect, the previous study was
looking at a 5-year effect. Is that correct?
Mr. Elmendorf. The previous study looked at a 1-year, 2-
year, and 5-year horizon.
Chairman Conrad. Okay.
Mr. Elmendorf. We focused in this case on the 2-year
horizon.
Chairman Conrad. When you looked at 5-year, infrastructure
was much higher up on the list in terms of bang for the buck.
Mr. Elmendorf. Yes.
Chairman Conrad. Here, when you are looking at a shorter
time horizon, infrastructure drops down, and these other more
short-term measures--increasing aid to the unemployed,
providing refundable tax credits to lower- and middle-income
households, reducing employees' payroll taxes, subsidizing the
interest rate on certain mortgages that are refinanced--those
things move up in relative position.
Let me just make clear my own bias. I tried very hard when
we were doing stimulus to have more infrastructure. I argued
strenuously for a package of $200 billion of infrastructure,
largely focused on transportation. The argument made then
against it was from analysis that we are seeing here, that is,
it takes longer to get infrastructure spending into the
bloodstream. My argument was that after a fiscal crisis you are
going to have a downturn that lasts longer; therefore, having
something that hits later, not a bad thing, maybe a good thing.
I wish that view had prevailed then because we are in a longer-
term period of weakness.
So tell me about infrastructure. Why in your analysis, when
you shift from a 5-year focus to a 2-year focus, does
infrastructure drop down in terms of bang for the buck?
Mr. Elmendorf. You have it just right, Mr. Chairman, that
if we had shown here the 5-year effects, infrastructure would
have looked relatively better for just the reason you say,
which is that that money takes some time to get out the door.
And certain projects, as we know, can happen fairly quickly--
repaving of roads can be done fairly quickly--but more
substantial projects generally take years to complete, and the
money basically is spent over the course of those sets of
years.
Chairman Conrad. Could I just ask you this question? Do you
know how long it took to build the Pentagon?
Mr. Elmendorf. They did that very rapidly. That was an
unusual experience under unusual circumstances, as you know,
Mr. Chairman.
Chairman Conrad. You know, that is the argument I made in
this circumstance. We were in an unusual circumstance in 2009,
and the answer to the question is it took 9 months to build the
Pentagon. Nine months. Now we seem to think we cannot do
things, and in part, we have done it to ourselves. I can tell
you, in my State we are having an energy boom of incredible
proportion. We are now the fourth largest oil producer in the
Nation, and we are headed for second or third. And I will tell
you what: We have a need for thousands of people to work in
North Dakota right now. We need thousands of people to work
there. Why aren't they there? Because they do not have a place
to live.
I just was in Williston, North Dakota, in the heart of the
oil boom. I had a school administrator tell me she has 14
children who come to school there every day who are living in
their parents' vehicles. They do not have a place to live.
Senator Nelson. What is your unemployment?
Chairman Conrad. Our unemployment is the lowest in the
Nation. It is less than 2.5 percent.
We have a need for thousands of people to work. We need to
build roads. It takes over 1,000 truckloads, some tell me 2,000
truckloads to do one well. And our roads are clogged. People
are dying on our roads. And these are two lane roads right
through the heart of oil country. We need to build roads. That
could employ thousands of people. My God, let us get to it. And
this idea that we cannot do anything, we cannot get the money
out the door--I know in normal times we cannot get the money
out the door. When do we go to a serious footing of let us get
it done?
You know, I believe deeply in my State, if somebody would
help us get some of the things that we normally would do in
normal order of business, we would get out of the way, we could
get a lot done. I will let you respond. I have used my time.
Then we will go to Senator Sessions.
Mr. Elmendorf. I think you are right, Senator, that it
depends crucially on what else you get out of the way. Projects
will generally require bidding. There are reviews of various
sorts for environmental purposes and others, and that is part
of why I think it does take longer today to complete large
projects than it did when they built the Pentagon.
You are also right, though, that under our forecast and the
forecast of most private sector people, and quite consistent
with the evidence from Reinhart and Reinhart you cited, we
expect there to be a shortfall in demand for goods and services
and still excess numbers of unemployed people well beyond the 2
years that we focused on in these particular calculations.
We had the unemployment rate coming back down to close to 5
percent only by 2017, I think, in our August forecast, which is
6 years from now. So there can be justification. It depends, of
course, on the priorities of you and other Members of Congress.
But there can be a macroeconomic justification for continuing
to have that sort of impetus to spending out for an entire 5-
year period.
Chairman Conrad. Senator Sessions.
Senator Sessions. Thank you. Well, with regard to this
chart that you provided to us, it is important to note it is
just 2012 and 2013, and, for example, on infrastructure
improvement, it would not be complete then, so you would have
some productivity gains in the out-years, correct?
Mr. Elmendorf. Yes, that is right.
Senator Sessions. In one sense, this is a misleading thing
because you tend to favor immediate expenditure items like
reducing payroll taxes or unemployment insurance. That money
goes out immediately. So this chart has some misleading
characteristics to it if you are looking at a longer period of
time. Is that correct?
Mr. Elmendorf. Well, the question you ask does influence
the answer that we can provide for you, Senator. I think the
primary difference between what this chart looks like and what
a chart over 5 years would look like is the one that the
Chairman pointed out; the infrastructure spending would move
up. If one looks back at our table from the report last
January, most of the other items have roughly the same ranking
of cost-effectiveness over the 5 year span as over the 2-year
span.
Senator Sessions. One thing that is really important, I
think, is that you note in your report on page 25, as a result
of your ongoing review and relevant research, CBO has reduced
the lower end of its range of estimates, the short-term,
effects of changes in fiscal policy on output and employment,
while leaving the upper ranges unchanged.
So basically your experience perhaps with the first
stimulus made you less optimistic about how large the short-
term benefit would be from borrowing and spending today.
Mr. Elmendorf. It is not so much our experience with the
Recovery Act, Senator, as the review of the literature and the
evolution of the economics literature. There is some new
research based on the experience of the past few years, but
most of the research on which we and others are drawing----
Senator Sessions. All right. Okay. Whatever you--some of
that research is probably based on the stimulus, I would hope,
which did not achieve the goals that we hoped for, in my
opinion. But, you know, I was in Evergreen, Alabama, and an
African American stood up at the town hall meeting and said,
``As my granddaddy always said, you cannot borrow your way out
of debt.'' We are in deep debt today, and we are making
proposals to fix our debt crisis by borrowing more money.
Now, the President's proposal did call for a tax increase
to pay for this $450 billion increase, did it not?
Mr. Elmendorf. We did not study the economic effects
carefully, but, yes, you are right about that, Senator.
Senator Sessions. And an increase in taxes has some
negative effects on the GDP growth, does it not?
Mr. Elmendorf. Yes, although the amount, of course, depends
on the nature of the tax increase, and as I said, we did not
study the economic effects of the President's proposal.
Senator Sessions. And with regard to your letter to Senator
Gregg that the 10-year stimulus package would have a net
negative on growth over 10 years, I recall asking Secretary
Geithner about that, and he seemed to be surprised, did not
think how it was possible you could spend $800 billion and not
have improvement over 10 years. But do you still adhere to the
view that there would be a modest GDP reduction as a result of
the stimulus package that did pass?
Mr. Elmendorf. What our letter said, Senator, was that the
effects on the level of GDP at the end of the 10-year window
would be negative. GDP would----
Senator Sessions. So there would not be as much GDP growth
at the end of the window as there would have been without the
bill passing.
Mr. Elmendorf. Let me be clear. Our estimate of the
cumulative growth in GDP over the 10 years from that
legislation was positive. What we said was that there would be
a big boost to the level of GDP in the first 3 or 4 years, and
then that--relative to what would have happened to GDP without
that law, then the effect on GDP would go back down below zero.
So the level of GDP--I am sorry. The level of GDP would be a
little lower at the end. So I am sorry. So the--let me be more
careful. The level of GDP is a little lower at the end. That is
a net negative effect on the growth of GDP----
Senator Sessions. And in the next 10 years, since you are
carrying that debt and paying interest on it and the stimulus
value is long since gone, it would be a continual negative of
some effect on----
Mr. Elmendorf. Yes, it would represent a drag on the level
of GDP beyond that if no other actions were taken. That is
right.
Senator Sessions. You noted the effectiveness of deficit
reduction. You released a report earlier this year, ``The
Macroeconomic Budgetary Effects of an Illustrative Policy for
Reducing the Budget Deficit,'' and it concluded that a set of
policies that would reduce the deficit by $2 trillion over the
next 10 years would increase long-term economic growth by as
much as 1.4 percent. Is that still your view?
Mr. Elmendorf. Yes, it is. Again, it would raise the level
of GNP at the end of the decade by something between 0.6 and
1.4 percent.
Senator Sessions. And I guess it is axiomatic that in the
abstract lower debt helps an economy be more vibrant and would
improve GDP.
Mr. Elmendorf. Yes, that is right, Senator.
Senator Sessions. One of the things that the United States
has worldwide is our currency is a reserve currency throughout
most of the world. Is that an advantage for our economy?
Mr. Elmendorf. Absolutely. Yes, Senator.
Senator Sessions. Well, I just looked at this week's
Barron's headline. I do not know if you have seen it. ``The
world's next reserve currency,'' and on the cover of Barron's
is the Chinese yuan. And it says, ``By 2020''--that is not too
far off--``expect China's yuan to be widely used alongside the
weakening euro and dollar in international trade as a store of
value.'' Would you agree that that is not a positive
development for the United States economy?
Mr. Elmendorf. Yes, I would not make predictions about how
quickly the U.S. dollar might be supplanted as the reserve
currency, but certainly if the U.S. dollar were supplanted as a
reserve currency, that would be costly for our economy.
Senator Sessions. And part of that is a concern of our
debt, and our trade deficits, but specifically as to our debt,
the American debt is a factor in the worldwide concern over the
United States dollar as a reserve currency, is it not?
Mr. Elmendorf. Yes, absolutely.
Senator Sessions. And fixing that would help strengthen our
currency, reducing our debt would improve the viability of the
United States dollar as a reserve currency.
Mr. Elmendorf. Yes, Senator.
Senator Sessions. Would you share--basically, Senator
Conrad suggested this, and I think it is good--some of the
things that benefit the United States economy as a result of
the dollar being a reserve currency?
Mr. Elmendorf. Well, one thing that we have seen very
clearly in the last few years is that in moments of great worry
by investors around the world about the safety of different
investments, they come to the United States with their money,
viewing us as a safe haven.
Additionally, a lot of transactions are conducted in
dollars, and that demand for our financial assets helps to keep
the United States financial system at the center of the global
financial system even when our own financial system is
struggling, as it has in the past few years. And as you said,
that is one--we risk losing that advantage if we allow our debt
to continue to rise relative to GDP.
Senator Sessions. And we have the ability to print more
dollars within a limited range before adverse impacts occur.
But if that goes too far, that, too, could be a part of the
devaluing of the currency and the loss of confidence in it, is
it not?
Mr. Elmendorf. Yes. If our inflation rate returned to the
levels it was at in the beginning of the 1980s, for example,
that would also weaken the dollar's role in international
financial transactions.
Senator Sessions. Thank you.
Chairman Conrad. Thank you, and I thank Senator Sessions
for asking that. I think it was very important we get that on
the record, the role of America's reserve currency, as a
reserve currency, the importance of it.
Senator Begich.
Senator Begich. Thank you very much, Mr. Chairman, and I
want to--I appreciate the debate you guys had a little bit
earlier before we started the hearing, actually, and I thought
it was interesting listening. But I guess I will, first of all,
make a couple of statements, and then I will have some specific
questions.
We can argue the recovery bill added debt. So did the two
wars added debt. So did the unpaid tax program for millionaires
and billionaires added debt, unpaid for. We are paying for it
now. We will pay for it forever, it seems, at the rate we are
going. So, I mean, I like debating history, but that is
irrelevant to where we need to get going here.
I appreciate the debate, but where we are today is we have
an economy that, you know, we could argue if that recovery bill
did not happen, would we have more unemployment? Would we
have--you know, every month, we can argue if the number is
strong enough. But since I have been here, in 2009, when I got
sworn in a month and a half later, we have had positive job
increase every single month. Now, it could be varied. Some was
very small. Some was significant. But we could argue that
without that short-term recovery bill, that number could have
gone the reverse. We do not know that. That is the great
mystery of the work you have to do as an economist and as
someone who works with all these numbers. But the fact is I
could predict that before, you know, in 2008, we were averaging
in the last quarter 500,000, 600,000 jobs lost a month. A
month. Now we are at least in a positive territory. We would
argue that 9 percent is a rate we do not want, which I agree,
but it is actually somewhat stagnant right now, which is a good
sign. It is stabilizing. Now, we could argue 9 percent is not
something we want to stabilize on, but the fact is it is not
going this way as it was doing as we were moving through 2009
and the beginning of 2010. It was just going click, click,
click. Now it has stabilized.
We have certain segments--again, we could argue if this
worked or not, but I would argue the automobile industry was
the walking dead 2 years ago--or driving dead. And today the
American auto industry is thriving. As a matter of fact, the
Wall Street Journal had a great article. The headline was,
``Automobile industry imports jobs from China.'' That is a
reversal. We have more activity. They are the strongest company
since 1998, profiting.
So we can argue the theory which could have happened,
should have happened, whatever, but the fact is here we are.
Unemployment is more stabilized. GDP is not where we want it to
be. The auto industry as one great manufacturing industry of
this country is moving up, selling more vehicles. We have
importation of jobs from China.
I can tell you in the seafood industry, which is important
to Alaska, some of the processing that has been going on in
China is moving back to the United States. Because as the
middle class grows in China, what happens? Wage rates go up.
Fuel costs are high. It is better to do it here.
So you can look at pieces and draw your own conclusions,
but we are where we are. We have got to get the unemployment
rate down. We have got to get consumer confidence higher.
Let me take off on the issue. I agree with the Chairman in
regards to--of course, he hit my issue: energy. His State is
now recognizing, I think, in a robust way the power of energy
and the development of energy. You mention actually in your
testimony fuel costs have a direct impact to consumers, but
also development of domestic supplies, as you just heard, have
not only an effect on the jobs in the oil patch States, but a
ripple effect as you build roads and infrastructure in schools
and hospitals and facilities that service this industry. And I
guess I would love if you could just add a little bit to your
comments around energy.
I agree. I mean, the Pentagon was built in 9 months.
Disneyland in California was built in 1 year, a whole city,
when you think about it. Can we do this? I will tell you, when
I was mayor of Anchorage, we built a $100-plus million
convention center in about 24 months from the date of the
idea--not drawn up, but the date of the idea--to completion,
which involved bonding, voter approval, and construction,
design, bid, everything. So anything is possible if we want to
do it.
Tell me some thoughts on the energy sector and what we can
be doing. Obviously, I am biased. I think we should be opening
ANWR and NPRA and Chukchi Sea and Beaufort Sea. These are
hundreds of thousands of opportunities of jobs throughout this
country over the long term. Give me your thoughts there, if you
could. I did not mean to go on there, but I got a little--you
know, we spend a lot of time talking about what could have
happened, should have happened. We are where we are. Democrats
and Republicans are to blame on both sides, past Presidents,
current one, everyone. It is now time to get busy and get some
stuff done around this place. That is what the American people
are saying to me every day. That is what Alaskans are saying to
me every day, and energy is one of those great opportunities
from two-fold--and if I could just say one more piece, from an
economic security but from a national security, we have
enormous resources spent overseas to protect oil flow when we
could be spending it here in this country building our economy
up.
Mr. Elmendorf. Senator, our focus in this testimony was on
the short term, on the next few years, and the points we note
about efforts the Federal Government might make to encourage
investment in energy is that those effects are likely to not
have a big impact on the overall economy in the next few years,
partly because--and I think you mentioned this in a way in
talking about your experience before coming to the Senate--
State and local officials have a very important role to play in
deciding energy facilities in what companies are able to do. So
the Federal Government can open up certain areas that are now
closed, but it cannot just easily sweep away all the other
factors that affect the pace of energy expiration. That is part
of it.
Secondly, even if a decision were made and all the
approvals were granted to begin drilling in a certain spot
right now, that takes some time to happen. So at the moment
most of the rigs that are designed to drill, for example, in
deep waters offshore are committed to be somewhere in the near
term. And if more space was opened up for further exploration
and drilling, then over time, of course, that would lead to
more drilling in those places, but not, we think, of a
magnitude in the next few years to affect the overall economy.
That is not to say those things are good or bad to do.
There are lots of other factors that can weigh in that
decision, as you mentioned. But the focus here was really just
on the short-term impact on the overall economy.
Senator Begich. Right, but I would argue with you that just
the idea of development--I will tell you, in the 2 years since
I have been here, there has been at least some renewed interest
in the Arctic, just that alone, a couple of industries have
hired well over several hundred employees just to start the
analysis of what is possible, or Shell, who just is in the
process of finishing a ship that was being constructed in the
last year and a half, I mean, it is built in Louisiana, it is
being shipped, now it is in Seattle ports. These are hundreds
and hundreds of jobs, well-paying jobs. And so I would argue
how we define short term, we have to be careful that it is--do
we want, for example, energy production to be happening? Yes.
But 3 years ago, North Dakota, I mean, you know, I will tell
you, my mother would drive from Minnesota to Carson City,
Nevada, where she lived. She would go through North Dakota, no
problem finding a place to stay, a hotel. She went through
there this summer. No such luck. She had to keep driving. Now,
she is in her 70s, and driving late at night is not the best
thing a son would like to have her do. But I will tell you, in
2\1/2\ years the short-term development in that State as an
example--so I would just--and I did not mean to get on my
energy rant, but maybe, Mr. Chairman, we could--I just think
that energy, both non-renewable and renewable, is an incredible
short-term and long-term opportunity that we have
underestimated in this country, and we continue to spend
billions with countries that hate us in order to get energy
supplies to this country. It makes no sense to me. So maybe as
a budgetary discussion--I will tell you, Chukchi Sea, Beaufort
Sea, ANWR, these are just the Federal treasury reaping the
benefits of development in the hundreds of billions of dollars.
Hundreds of billions of dollars that is idle.
I guess hopefully maybe we will have a broader discussion.
I did not mean to rant on energy, but the Chairman triggered
me, because we do not want to be number three in energy
production. North Dakota is about to take us over here. We are
working to be number one.
Let me end there.
Chairman Conrad. Let me just say I agree entirely with the
Senator. Maybe it would be useful in this Committee to have an
energy hearing because it has got huge budget implications.
Huge.
Senator Begich. Absolutely.
Chairman Conrad. Senator Johnson.
Senator Johnson. Thank you, Mr. Chairman. I have got to hop
in on the energy bandwagon here. This is not a mystery to me
why we are not creating jobs and why are our economy is not
growing. As a business person, I was actually making those
investment decisions for 31 years. You take a look at our
regulatory environment. You want an answer why we cannot build
the Pentagon in 9 months? Because of all the regulations. Try
to build something in this country. Do you think we could do
the Hoover Dam again? Why did President Obama kick the can down
the road on the Keystone XL pipeline? Why aren't we drilling in
ANWR? Government regulation. We are killing ourselves. We are
doing it to ourselves.
So I guess when I take a look at your testimony, with all
due respect, I could not disagree more with your conclusions.
My own experience, again, in making those investments
decisions, if you allow business owners to keep more money,
they will invest it. Recent history in terms of short-term
stimulus, isn't it true that basically what happened with a lot
of those stimulus dollars is consumers, because of their fear,
basically just deleveraged? They did not really stimulate the
economy. Isn't that by and large correct?
Mr. Elmendorf. We expected that some of that money would be
saved. It is hard to know in retrospect exactly what happened
in that episode because we cannot track those particular
dollars through particular households.
Senator Johnson. But we can see that we already did a
payroll tax holiday. We have extended unemployment benefits.
And it has not worked. All we have done is we have incurred an
additional $4 trillion worth of debt, another $1 trillion
coming on board this year. And what is really preventing
businesses from investing is the fear that, you know, the end
result of all the debt and deficits--I mean, when Government
spends more money than it has, we know as business people that
eventually Government is going to take--they are going to tax
you more or they are going to create inflation, and that is why
the business community is simply not investing. Don't you
basically agree with that conclusion?
Mr. Elmendorf. Senator, we believe and have written and I
write in this testimony that uncertainty about future
Government policies, future tax and spending policies, future
regulatory policies are a factor that is restraining
businesses' decisions to invest and hire and households'
decisions to spend. But we do not think that is the principal
factor.
For example, surveys of small business people done by the
National Federation of Independent Business shows that the main
difference in the obstacles that businesses report themselves
facing today relative to a few years ago is a weakness in
demand for their products.
Senator Johnson. Because everybody is afraid of a European
contagion, that the exact same thing is going to happen in the
United States as is happening in Greece and Italy. They are
afraid of that. Again, what I want to concentrate on is the
debt and deficit, and I want to talk about the real risks that
I do not think we are really acknowledging now in this country.
Let us first start out by not achieving the growth targets
the CBO estimates, and I have no idea how you come up with your
estimates. I am assuming in this analysis you used similar
estimates that said we were going to grow at 3.1 percent this
year, and we are not going to achieve that growth. I think your
estimate is for every 0.1 percent reduction in growth, we add
$310 billion to the 10-year----
Mr. Elmendorf. That sounds right, Senator.
Senator Johnson. So if it is only 1 percent less, that is
$3.1 trillion in additional deficits over 10 years, correct?
Mr. Elmendorf. Yes.
Senator Johnson. I have seen other studies. If we only grow
at 2.5 percent in the next 10 years, that will add $5 trillion
to our debt and deficit. That is a significant risk, correct?
Mr. Elmendorf. Oh, yes, no doubt. And you can see in the
pictures we showed today, we have very wide bands in our
estimates for each of these policies because we recognize the
uncertainty of the analysis that we are doing.
Senator Johnson. Not a whole lot of people are talking
about that very significant risk. Why is that? Are we just
afraid to acknowledge it because all we are doing--all we are
doing in the Super Committee is trying to come up with $1.2
trillion in the reduction in the rate of growth and spending.
Mr. Elmendorf. I guess, Senator, from my perspective,
people are talking about that risk. They have not reached
agreement in the Super Committee, as far as I know, and the
Congress has not enacted some legislation to reduce deficits by
more than was done in the Budget Control Act over the summer.
My sense, actually, is that people are talking about it a
lot, but that agreement on how to address it remains elusive.
Senator Johnson. Well, people are certainly fearing it.
Let me go to another area of significant risk, and this is
exactly going into CBO projections, which I just think are
totally wrong when it comes to the health care act. According
to CBO, only 3.6 million people were estimated to lose their
employer-sponsored care and get dumped in the exchanges. How
did you ever come up with 3.6 million people? What economic
model came up with that number?
Mr. Elmendorf. Our model takes account of incentives facing
households and businesses to get insurance coverage through
various possible avenues, and other people who built models of
the health insurance market have actually reached rather
similar conclusions to ours about the effects of the health
legislation. That includes the actuaries at CMS, researchers at
the Urban Institute, at RAND, and other places. And it does
surprise many people that we do not show a larger loss of
employer-sponsored insurance coverage.
I think it is worth remembering here that most people now
receive and will continue to receive a significant subsidy to
buy health insurance through their employer through the Tax
Code, and for most----
Senator Johnson. Let me just stop you. Have you seen your
predecessor Douglas Holtz-Eakin's decision matrix which just
proves conclusively that economically it is in the employers'
and the employees' best interest for 35 million people to get
dumped off their employer-sponsored care and get put in the
exchanges? Have you seen that study?
Mr. Elmendorf. We have seen his analysis, but we reach a
very different conclusion. And as I was saying, for most
workers they would get no or smaller subsidies through the new
insurance exchanges than they receive through the Tax Code.
They do not have an incentive to go to the exchanges.
Senator Johnson. His analysis would have increased our
deficit in the first 10 years by over half a trillion dollars,
in the second 10 years $1.4 trillion. When I saw that decision
matrix, as somebody who has bought health insurance for 31
years, I called him up and I said, you know, ``Doug, this is a
pretty good analysis, but you are still wrong.'' Let me run
through what the real decision factor is going to be as an
employer and, again, somebody who has been buying health care
for years.
According to CBO, in 2016 the average cost of family
coverage will be $15,000, which, by the way, is $2,100 more
expensive than it would have been had we not passed the health
care law. Let us put that aside. Fifteen thousand dollars. So
an employer now is going to be taking a look at, well, I could
pay $15,000 or I could pay a $2,000 penalty, and with the
health care act I am no longer throwing my employees to the
wolves. I am making them eligible for very large subsidies.
In the case of somebody making $64,000 a year--which is, by
the way, $13,000 more than the median income--that is a $10,000
subsidy. Now, the fact of the matter is we have had the
McKinsey study that showed 50 percent of employers that are
informed are planning on dropping coverage very shortly after
this health care act takes effect. When that happens, if that
is half, 180 million people get their insurance through their
employer-sponsored care. Half of them would be 90 million
people at about a $4,000 subsidy. That costs us close to over
$400 billion a year as opposed to the $95 billion. Isn't that
pretty accurate?
Mr. Elmendorf. So, Senator, you are right that employers
who put their workers into the insurance exchanges would not be
throwing them to the wolves in the same sense they would be
without such exchanges in place. Nonetheless, their employees
would then be forgoing a very large tax subsidy, and a majority
of people, of workers, who would have employer-sponsored health
insurance without that law would be eligible for no subsidy
through the insurance exchanges, and they get a substantial
subsidy through the Tax Code. So there is no reason for the
firm to put them into the exchange. That is against the
interests of the workers.
Senator Johnson. No, but it is in the interest of the
employer. Again, the decision is $15,000 or pay $2,000 and make
my employee eligible for a $10,000 subsidy. And, again, the
surveys show employers that are informed, 50 percent right now
are saying they are going to drop coverage. How can you
continue to deny that and, by the way, as a result totally
understate what our true risk and debt and deficit are going
out 10 years? I mean, we are really misleading the American
people on this factor.
Mr. Elmendorf. I have to disagree with you, Senator. I do
not think we are misleading the American people. There is a
great deal of uncertainty around our estimates, and we have
said that every time we have talked about them, I think. But it
is not true that for most workers they are eligible for
substantial subsidies through the insurance exchanges in the
legislation.
Senator Johnson. Your own CBO spread sheets show that the
average cost of the subsidy in 2021 will be $7,000. Of those
3.6 million people, the average subsidy----
Mr. Elmendorf. For people who are eligible for subsidies,
yes.
Senator Johnson [continuing]. Will be $7,000. But, again,
the eligibility--well, we can go----
Mr. Elmendorf. Those who are eligible----
Senator Johnson. I am past my time.
Mr. Elmendorf [continuing]. Are a minority of workers. And
we have read that survey. We have read other surveys that have
reached different conclusions.
For what it is worth, when CBO estimated the effects of
adding the prescription drug benefit to Medicare a number of
years ago, we had to make an assessment about how many
employers would stop providing drug coverage to their retirees
and have their retirees only get drug coverage through
Medicare. And shortly after we did the estimate, there were
surveys in which a lot more employers said they would drop
coverage than we had estimated. But, in fact, at the end of the
day, fewer employers dropped coverage than CBO estimated. So
surveys----
Senator Johnson. So just my final question----
Mr. Elmendorf [continuing]. Are not always----
Senator Johnson. I understand, but in light of these
surveys that say 50 percent, that is 90 million people, 50
percent. And you are going to stick to your 3.6 million
estimate? You think that is a good estimate?
Mr. Elmendorf. Senator, we are always evaluating our
estimates and taking on board new information. In fact, we
talked today already about revisions that we made to our
estimates of the effects of the sort of fiscal policies we are
talking about today. So we are not averse to changing our
estimates when there is new evidence, and if there is new
evidence that we find compelling, then we will make a change--
--
Senator Johnson. Okay. I would ask you to review that
evidence, and I am sorry, Mr. Chairman.
Chairman Conrad. No, I think it was a valuable exchange,
and we need it. The country needs it. We have got to be--it is
important to have this debate.
Senator Whitehouse.
Senator Whitehouse. Thank you, Chairman.
Mr. Elmendorf, welcome.
Mr. Elmendorf. Senator.
Senator Whitehouse. If the debt of our country is so
important--and I think it is pretty widely believed around the
Senate that it is--and if that debt which is so important can
be reduced from two sides--it can be reduced by spending less
and it can be reduced by a revenue increase--if that is the
fact that the debt is so important and you can reduce it either
with increased revenues or with spending reductions, in that
environment why is it so important that the highest-income
Americans pay lower actual tax rates than regular working
Americans actually pay? And to illustrate the point that the
highest-income Americans pay lower actual tax rates than
regular working Americans pay, I look at the IRS data for the
top 400 income earners who earned over quarter of a billion
dollars each and paid, I want to say, an 18.2 percent all-in
Federal tax rate, and for Rhode Island at least, that equates
to where a regular taxpayer hits about forty-some-thousand
dollars in income, what a truck driver in Rhode Island makes.
So you have got the tax rate increases as your income increases
to a point, and you cross through that 18.2-percent barrier and
you hit about $40,000, which is, as I said, what a truck
driver's Bureau of Labor Statistics average pay is in Rhode
Island. And then you go out to the far end where people made
over a quarter of a billion dollars, and they are paying the
same 18 percent. Why is that so important to our economic
prosperity that we have this Tax Code in which super-high end
income earners are paying such low tax rates?
Mr. Elmendorf. Senator, you ask the question as if I had
said it was so important, so just to be clear, I do not think I
have said the things that you are asking me to justify.
Senator Whitehouse. Maybe there is a rhetorical cast to my
question.
Mr. Elmendorf. Perhaps. On the factual matter, I would say
that by our estimate the average Federal tax rate, so all
Federal taxes--income, payroll, corporate profits tax and so
on--as a share of household income rises as one moves up the
income distribution, and----
Senator Whitehouse. To a point.
Mr. Elmendorf [continuing]. In tables that we report every
year or so, we go up to the top 1 percent, and we estimate the
top 1 percent has a higher average tax rate than the top 5
percent, which is higher than the top 10 percent and so on.
Whether it is higher enough for your preferences I cannot
judge. Economists think, with I think substantial evidence,
that tax rates affect people's behavior and that higher tax
rates on work come from labor and come from capital affect how
much people work and save. So in setting tax rates, there are
multiple objectives usually that policymakers are trying to
balance and put different weights on.
Senator Whitehouse. So is the IRS information wrong that
shows that the 400 highest income earners paid only 18.2
percent in the most recent year, and the year before that that
was most recently calculated, it was only 16.7 percent, which
equates to a hospital orderly in Rhode Island? If you look at
the famous Helmsley Building, which is big enough to be its own
zip code--the IRS also reports by zip code--they were at 14.7
percent overall, and their doormen and their janitors paid
higher tax rates. How does that square with your figures? Those
are actual IRS reported dollar numbers.
Mr. Elmendorf. I have not looked at that. I am confident
that they are reporting accurately what they are reporting, so
I presume there is some difference in what concept they are
reporting relative to the concept that we are reporting.
It is true the last numbers we have released are for 2007,
and I know from folks who have looked at their data that the
incomes at the top have changed over the last few years. So
maybe that is part of what changes tax rates in the past few
years.
It is also possible that the IRS is looking only at certain
taxes. Maybe that is just income taxes, and we are looking at
the broader measure of taxes.
I do not know, Senator, but I am happy to have us look into
that for you and see if we can explain the differences for you.
Senator Whitehouse. Well, here is what interests me. We
just went through a fairly considerable exercise here in the
Senate trying to pass jobs legislation. We had the President's
original jobs bill, and that was filibustered. And then we went
through different elements of it, and until the veterans piece,
they have all been filibustered. This was jobs legislation that
would create real jobs. It was paid for. It was paid for so it
would not add to the debt in any way. It was paid for in a way
that required an additional contribution from Americans who
were making more than $1 million a year but only on the income
over $1 million a year that they were making. And over that
point, it got filibustered.
Is there an economic rationale for stopping those jobs
bills in order to protect the over $1 million income of over $1
million income earners? Does that work through CBO formulas to
be a win for the economy when you have protected that income
from taxation and cost the American economy the jobs that would
have been created?
Mr. Elmendorf. We did not analyze the economic effects of
those bills, so I cannot be sure. My guess is that if we did
analyze it, we would find that those bills would spur output
and employment in the next few years because the stimulative
effects of the additional spending would probably outweigh in
our estimates the negative effects of the higher tax rates over
the next few years, over the longer term, than the disincentive
effects of higher tax rates would tend to--and the additional
debt would tend to be a drag on the economy. And then one could
weigh that off against the short-term economic gains. One can
weigh that off against distributional objectives that one has
in the longer run and so on.
Senator Whitehouse. Let me close by observing, Mr.
Chairman, that there has been a certain amount of criticism of
the Reinvestment Act here for only having stopped the
employment crash that President Obama inherited without having
recovered from it. And I would say that clearly it would be
better if we could have recovered from it more rapidly, but it
is important, I think, that we stopped that jobs crash. I think
we were at 700,000 to 800,000 jobs being eliminated every month
in the middle of the jobs crash when the President took office.
And just to bring it home to Rhode Island, for the 11,000
families that had a member getting a paycheck because of the
Reinvestment Act, for the 11,000 families who had that paycheck
and for the coffee shop and the grocery store and the toy store
and the mechanic that they were all able to go and pay for
goods and services from, we were actually glad that that
Reinvestment Act took place. And I think those 11,000 families
would feel that they had one heck of a worse time without it,
and so would the communities around them who would not have
received the benefit of their income as they went around and
spent it in the way that people do.
Rhode Island is not a big State, and 11,000 folks with a
job instead of being on the unemployment line, 11,000 families
that got a paycheck instead of not, that is pretty real, and I
think that we should not underestimate that.
Thank you.
Chairman Conrad. Well stated.
Senator Wyden.
Senator Wyden. Thank you, Mr. Chairman, and I commend you,
Mr. Chairman, for a good hearing and an important one,
particularly timely because of the Super Committee, and that is
what I want to ask you about, Dr. Elmendorf, because,
fortunately, in the Super Committee, one of the issues that is
very much in play is the prospects of pro-growth tax reform.
You and I have talked about it before, but I want to walk you
through a different aspect of it because it goes right to the
heart of this debate about stimulus, and particularly stimulus
right now.
As you know, over the last 5 years I have had the chance to
work with two colleagues on the other side of the aisle who
would certainly call themselves conservatives--former Senator
Gregg and Senator Coats--and Senator Begich. Two Democrats and
two Republicans have worked on this for the last 5 years. And I
want to talk about the stimulative effect of what would happen
if tax reform was enacted certainly in 2013. In other words,
there is discussion about the timing of 2012 and 2013, but let
us talk about, say, 2013.
Under the legislation that I put together, a bipartisan
effort, if you are a couple that makes $50,000 a year, $60,000
a year, $70,000 a year, you would get permanent tax relief--
permanent tax relief--of $3,000 to $4,000 a year, the typical
person, and that comes about largely because what we do is we
triple the standard deduction for those families. So the couple
now gets about $10,000, and it would triple to $30,000. So what
that means for a couple making $60,000 or $70,000 a year, it in
effect puts half their income off limits from taxation.
My sense is that that would be, based on your analysis at
page 26 of the report, fiscal policy options for assisting
households would be a pretty good stimulus for the economy if
that was to be enacted so it applied in 2013. Do you want to
walk me through that? Because it certainly ties to other things
that you have said in the past in terms of business decisions
with respect to investment and hiring depending on the demand
for their products, and greater demand and production leads to
more investment and hiring. That is sort of Economics 101. And
it seems to me there would be significant stimulative effect in
cutting income taxes permanently for those folks in those kinds
of income brackets, $50,000, $60,000. And we would also do it
for people making $30,000, $35,000 as well who would get
significantly more tax refund in that legislation. But why
don't you give me your assessment of the stimulative effects
here?
Mr. Elmendorf. As you know, Senator, we have not attempted
to analyze the many economic effects that would arise from a
comprehensive tax reform of the sort that you have developed.
But you are right that reductions in taxes for households,
especially if they were viewed as permanent reductions, would
tend to spur spending by those households. Though further down
the income distribution or the less wealth, less assets held by
households, the more likely that extra income is to be spent.
That is why we expect that increases in aid to the unemployed
would have a particularly large bang for the buck. But for
other households as well, additional income would tend to raise
their spending.
Of course, we would have to keep track of all the aspects
of your proposal to know how that would net out. But I think
the channel you describe is certainly one that would take
effect.
Senator Wyden. Well, I appreciate that, and I think it is a
fair comment. Part of the reason that I asked it--and you are
absolutely right. When you look at comprehensive tax reform,
you have to look at all the pieces of the puzzle. This is
something that has not gotten much discussion in the overall
debate about tax reform. Part of it, I guess, would be my fault
because I probably ought to be mentioning it more often every
time this topic comes up. But it has not been, you know,
particularly controversial. But I do hope, particularly in
light of your answer and what you say in outlining the options
there on page 26, that people see this as an opportunity for
real stimulus that would not raise the deficit, number one, but
would generate more revenue, which, as you know, is something
that your companion organization, Joint Tax, found with the
legislation that I authored with Senator Gregg and Senator
Coats.
Any sense of what families making $50,000, $60,000, $70,000
would do in terms of their purchases if their taxes were cut in
the vicinity of what I am talking about, 50 percent? I mean, my
sense is they would go out and make those kinds of consumer
purchases, consumer durables that had a big economic
multiplier. So let us have you analyze this in terms of the
area you have looked at, which is largely the lower-income
brackets, a bit lower than I am talking about, say, $30,000,
$35,000. But doesn't evidence show that they go out and make
purchases in areas like consumer durables that have a pretty
good multiplier?
Mr. Elmendorf. Well, I think, Senator, that their interest
in doing large-scale purchases depends importantly on their
expectations going forward. So your statement that under your
proposal these would be permanent features would certainly
amplify the effects on their large-scale purchases of the sort
that you are describing. And, in general, as we have said a
number of times and many members of the Committee have said,
the uncertainty about what will happen to U.S. fiscal policy,
what taxes people will face, what Government programs or
benefits might be cut in deficit reduction efforts is a
component of the uncertainty that is facing households and
firms and deterring their spending. In our assessment, in most
people's assessment, the larger source of uncertainty people
face is their future incomes before tax, the demand for a
firm's products and so on. But the uncertainty about Government
policies is important, and the extent to which that can be
resolved through any actions of the Congress or reduced
uncertainty through actions of the Congress, that would be, we
think, a good thing for the economy.
Senator Wyden. I am glad you mentioned that with respect to
the judgment of individuals because I think individuals, much
like businesses, are in the general mode of being cautious.
They do not know what is going to happen, and they look at yet
another proposal that is temporary in nature. I have had people
come up to me and say, ``Ron, these temporary ideas, what is
going to happen is when you all are done with your temporary
ideas, everybody will just go back to fighting.'' And then they
see the economy not building a sustained recovery.
So I think the points that you have made today need to ring
loudly in this debate about tax reform, and I appreciate your
going through this with me, because I think the chance as part
of permanent tax reform to, in effect, put off limits from
taxation 50 percent of what households make, whether they are
making $30,000, $40,000, $50,000, $60,000, $70,000, is a chance
to really change behavior in the marketplace because people
will see it is not just another temporary proposition. So I
think this is very helpful, and I am going to try to get your
message to the Super Committee, and with your answers try to
highlight this as we go into these last days debating the
opportunity for the Super Committee to pass pro-growth tax
reform that could kick in with exactly the kind of timetable
that you identify in your important report.
Thank you, Mr. Chairman.
Chairman Conrad. I want to thank the Senator from Oregon. I
want to just say publicly that the Senator from Oregon is one
of the most constructive members on this Committee and in the
body, and I appreciate the really extraordinary amount of work
that the Senator has put out on the major controversies and
challenges facing the country, whether it is tax policy,
whether it is health care policy, whether it is trade policy.
It really is quite extraordinary that the Senator who does not
have the staff of a Chairman of a Committee has put out very
significant plans in a bipartisan way that are really well
thought through. I just want to say that the Senator deserves
all of our commendation for producing really solid work and big
amounts of it.
Senator Wyden. You are very kind. Thanks.
Chairman Conrad. Senator Merkley.
Senator Merkley. Thank you very much, Mr. Chair, and thank
you, Mr. Elmendorf.
I appreciate the work here to analyze the strategies for
increasing economic growth and employment. I was looking
through to see if there was any specific analysis addressing
energy-saving retrofits. I do not believe that it is there. I
have a memory of a previous CBO product which looked at various
strategies for creating jobs, and my memory is that energy-
saving retrofits was at the top of the list, and if I recall
right, the analysis went like this: There is not a long time
lag that you have for major infrastructure, that the
construction industry is flat on its back and ready to be put
back to work, that the labor cannot be outsourced so the
dollars accrue here in the United States, that virtually all
the materials that are necessary for energy-saving retrofits
are manufactured in the U.S., so there is extraordinarily low
leakage. And I thought all this was analysis that was behind
CBO's analysis of this piece of the puzzle.
I did not see that in here. Maybe I am misremembering that
CBO had looked at that as a job creation strategy and ranked it
very high. Maybe it was some other think tank's proposal. But
has CBO looked at that issue?
Mr. Elmendorf. I am sorry, Senator. I do not remember our
having written about that, but I might be mistaken, and we can
check to be sure. The factors you have described are important
factors in this sort of analysis. Whether the workers are
available who need jobs, who can do this sort of work, the
extent to which certain sorts of products are imported or not
can matter. So the factors you describe sound like part of a
serious economic analysis of the sort that we do, but I do not
remember that particular piece, I am afraid.
Senator Merkley. Okay. Thank you. And if CBO has not
analyzed that, I might request, in whatever fashion is
necessary, that CBO take a look at that because certainly we
are looking for specific strategies that maximize the bang for
the buck in terms of job creation, and I would certainly like
to know if that is a strong, cost-effective strategy.
Let me go on to a macroeconomic concern that I have. This
is less about things that we can do in the next year or the
year after than it is about trends over the last decade and
what possibly might happen over the next decade.
What I see happening in Oregon manufacturing is a
tremendous amount of jobs going overseas. A piece of this is
that, whereas we envisioned that China coming into the WTO
would create an opportunity to increase our manufacturing to
sell products to a rising middle-class in China, we did not
fully anticipate how aggressive China would be in subsidizing
their own manufacturing for export that would compete strongly
and in some cases undermine American manufacturing, ranging
from the pegged currency to the direct grants and subsidized
loans to the subsidized utilities, subsidized land, and so
forth.
So we have a tremendous number of facilities that have shut
down in Oregon and across the country over the last 10 years.
It is about 50,000 factories. Combine that with another trend,
which is the enhancement in computer-controlled robots, if you
will, for building things. I was fascinated to go to a shop
that makes knives in Oregon, and in some cases you have people
feeding the blades into a machine and flipping them over and
re-feeding them. In other cases, you have a mechanical arm
bolted to the floor, a computerized arm that is picking up the
blade, grinding it in a whole bunch of different ways, dropping
it into another bucket, no human involved at all. And as that
technology becomes cheaper, it poses a fundamental question,
which is: When you have machines that simply increase
productivity by a factor of, say, 5, 10 percent and gradual
changes, well, then, wages went up. In the post-World War II we
experienced this. But when machines start to completely replace
the worker, it fundamentally changes whether or not there are
jobs that create a living-wage opportunity for American
families. So combining the loss of jobs to China and the loss
of jobs to not just enhancements to productivity but full
replacement of workers poses some fundamental challenges to us
in how we have living-wage jobs.
So I wanted to throw that out there and see if--I realize
you were doing kind of a more short-term look, but how this
might feed into that longer-term concern.
Mr. Elmendorf. Senator, as you said, in general automation
has raised productivity in a way that has greatly enhanced most
Americans' standard of living. But it is also true, as you
note, that certain sorts of changes can change the distribution
of the output in a way that may take it away from some people
and give it to others, essentially. And, in fact, the leading
explanation that economists offer for the widening of the
distribution of wages and incomes through much of the income
distribution over the past several decades is shifts in
technology that have benefitted certain sorts of people and
disadvantaged others. There may be separate explanations for
the rise in inequality at the very top of the distribution.
But those sort of long-term trends pose a very large
challenge for public policy. If you are interested in ensuring
that the distribution of the economic pie happens in a certain
way, if you are interested in assuring that certain people can
make a living even if certain skills they have are no longer
demanded by businesses, that is a very difficult problem to
address. In addition to the work we do on short-term economic
issues, we have work underway trying to address long-term
economic challenges as well. Economists talk about education
and training. The U.S. spends a rather small share of its GDP
on retraining workers relative to many countries in Europe, for
example. At the same time, evidence on the effectiveness of
particular training programs suggests that not all of them work
very well, so it is not a magic bullet. And I do not think
that--I certainly do not have--I do not think that the analytic
community has a magic bullet to offer you, but that is not to
diminish the significance of the trends that you are
describing. I think they are significant. And as I say, we have
talked about doing more work in education and training, and
that is one direction that one could proceed.
Also, of course, one can change tax policy in ways to raise
money from certain people or not from others, as you and your
colleagues saw fit to do. So there are various levers, but I do
not think they are straightforward.
Senator Merkley. I have 18 seconds. I would love to see us
help working families purchase homes now when the prices are
low and when interest rates are at historic lows, helping to
absorb this huge surplus of housing we have and to empower a
new generation of homeowners. Any thoughts in 1 second? Oops,
out of time. But if you are----
Chairman Conrad. We have been giving everybody some
additional time, Senator Merkley, so we can--we have been
giving everybody a couple of minutes over the time.
Senator Merkley. Thank you, Mr. Chair. Then I would love to
hear your thoughts.
Mr. Elmendorf. You raise another very simple,
straightforward issue for me, Senator. In the housing boom,
some people ended up being able to borrow money to buy houses
that they could not sustain ownership of, that they could not
sustain payments on their mortgages. Some of that is because of
economic problems and the loss of jobs and loss of income and
so on that ensued. But some of that, most analysts think, was
just an excessive exuberance in buying houses and borrowing
money that was just too much of a stretch for some people.
So I think there is a widespread view that the standards
for who will be able to borrow how much money against a house
will be tougher going forward than they were during the boom
years. At the moment they seem to be tougher even than they
were in some years before the boom, and analysts worry about
that. And the administration's efforts to work with Fannie Mae
and Freddie Mac is partly to try to ensure that the standards
on mortgage lending are not higher now than they were in what
looks like a reasonably stable period before the boom.
Beyond that, as you know, the Tax Code provides a
considerable incentive for people by subsidizing mortgage
interest. Now, there are other policies that you and your
colleagues could consider to help homeowners in general or to
help potential homeowners in a more targeted way.
Senator Merkley. So I will be real quick in my response to
allow my colleague to get into his questions, but I do think
that I would emphasize less the exuberance factor than the
predatory factor. When ordinary working families went to their
originator and the originator was being paid undisclosed
bonuses or kickbacks to steer them into subprime loans, that
was a big problem. When the originator was filling out the loan
amount and, if you will, the loan was a liar loan, that was a
problem. When there was a prepayment penalty that the homeowner
certainly did not understand because they were trusting the
mortgage originator, that meant they could not get out of this
predatory loan once they had signed into it without paying a
huge share of the value of the house--a pound of flesh, if you
will--that was a huge problem.
We have ended all those practices. They should not have
been allowed in the first place. But I am concerned we are
throwing the baby out with the bath water. I would put much of
the bubble attributable to the low-cost teaser rates that
started in 2003. You can almost track the growth in those loans
with the growth of the bubble. And so we do spend about $100
billion a year on interest subsidies. Very little of that goes
to working families--very little--indeed, because the standard
deduction is higher than the interest cost of an ordinary
family buying a home.
So my argument is, in addition to that, shouldn't we be
doing matching downpayment grants to enable folks to seize this
opportunity, working families to seize this opportunity, whose
income does still enable them to buy a house at these lower
levels and these lower interest rates rather than having these
homes sit empty? My argument would be--and I would love to get
additional CBO analysis of it--that that little bit of money,
$2 to $3 billion compared to the $100 billion we are spending
on mortgage deduction, would be a very valuable investment with
a huge set of factors that are reinforcing to our economy in
terms of the education of the children, graduation rates from
high school, the reduced likelihood of being on public
assistance, future in life and so forth. There is a whole
series of externalities that come into play with homeowner
ship.
Mr. Elmendorf. I understand the issue, Senator, and we
can--I do not think we have analyzed the policy thus far, but
we can talk about whether we think we have the tools to do so.
Senator Merkley. Thank you.
Chairman Conrad. Very thoughtful questions, Senator
Merkley. That was good.
Senator Coons.
Senator Coons. Thank you, Mr. Chairman. Thank you, Director
Elmendorf. I am sorry to have missed your testimony earlier. I
was at an Energy Committee hearing, and I look forward to
reading it in full.
I would like to start, if I could, on a topic that we have
discussed on the Energy Committee a number of times. In May,
Chairman Bingaman and I sent the Congressional Budget Office,
sent you, a letter requesting further insight into how CBO
views and scores two different instruments: one, energy savings
purchase contracts, ESPCs, with which I have some experience
from my years in the private sector where I helped manage and
implement those, and in the public sector where at the county
level we helped utilize those to finance energy efficiency
investments at the county government level that I was
responsible for; and then, second, longer-term power purchase
agreements for Federal installations or facilities as a way to
manage some of the long-term costs of deploying a new energy
technology, something I think both OMB and the Department of
Defense are looking at more closely.
I did get a response, my staff got a response, in July to
the first question, so I want to thank you for that, and as I
understand it, the CBO continues to view ESPCs as something
that have a mandatory expense because, when entered--and OMB,
among others, view it as budget neutral, because in the long
term contractually it saves the Government money. So this may
be an example of something that scores but does not cost, and I
would welcome any comment you might have on that.
Then, second, I am still awaiting a response on the power
purchase agreements and would welcome any sort of insight you
can offer today on that. More than anything, I just wanted to
signal a persistent enthusiasm for working with you, it being
November, the letter having gone in May, I understand there are
many, many other pressing concerns, but I happen to be in a
State where we are proceeding apace with deployment of a number
of technologies where that might be of some interest or
relevance for us, and it is something the Chairman and I have
talked about.
Mr. Elmendorf. So, Senator, I am very sorry that we did not
respond to that earlier letter of yours completely. I confess
that I did not realize it was an outstanding request, but I
will be sure when I go back that we are working on it, and I am
sorry that it seems to have fallen through the cracks from our
point of view. But we will check and see where that is, what
happened.
On the energy saving purchase contracts, I remember knowing
a fair bit about this when we returned that letter to you and
less about it at the moment. I think there are a couple of
issues here. One is how much money is the Government saving on
balance, which depends a lot on how the contracts are written.
And then the second is the issue you raised, which is how the
estimates work. And I think the issue you are referring to is
that the contracts themselves count as a cost. The savings can
be realized by the Government later to the extent that
appropriations actions reduce the funding going to agencies to
purchase power. And for longstanding budgetary rules, those
things are kept track of separately, but we try in our
estimates--there are other cases where this sort of diversion,
sort of the pieces, comes up, and we try where we can to offer
an assessment of what the savings would be but recognizing that
they are reported in somewhat different places. For example,
the PAYGO law refers to mandatory spending, not to
discretionary appropriations in the same way. So that is not
something that we directly control. It is a feature of the
overall architecture of the budget from the Congress' point of
view. But we try to provide information on different pieces so
people can see the whole picture, and I think we tried to do
that in this letter to you about energy savings purchase
contracts, but, again, I am sorry. I do not remember the
details of it.
Senator Coons. As someone who is in my first year as a
Senator relatively new to Federal budgeting rules, I am trying
to sort of keep my eye on places where there are, from a
broader view, real opportunities for savings but where for
budget scoring reasons we do not pursue them. And so if I have
in these two instances identified something where I could
contribute a more detailed conversation about that, I would be
grateful to learn more about it. I am convinced that long-term
PPAs have an opportunity to improve both the purchase price for
Federal entities of energy and the deployment of new
technologies.
Two more questions today, if I might, given time
limitations. First, I was struck on the range of cumulative
effects of policy options that you laid out today that
repatriation scored particularly low, that your analysis in
reducing the tax rate on repatriated income showed a very
negligible gain in cumulative output. I wondered if a
repatriation policy were more tightly articulated with
mandatory either hiring policies or infrastructure investment,
would you predict any greater impact on the economy or would
you continue to score it really at the far low end of
potentially beneficial undertakings?
Mr. Elmendorf. If the policy could be written in a way that
it created additional incentive for firms to hire or to invest,
then it would have a higher cost-effectiveness performance.
What I have not thought about is the extent to which that is
feasible to do. So these are the companies that have a lot of
earnings overseas and do not get repatriated tend, as we say in
our testimony, to have also a lot of assets here in the United
States. So they are not in general constrained by not having
those funds available, and they can also turn to capital
markets in most cases. And they are probably doing some higher
investing anyway, so how one would construct the law to link
the lower rate on tax repatriation to incremental investment or
hiring I am not sure, and we could think about it, and also
probably even better would be to talk to our colleagues on the
staff of the Joint Committee on Taxation who have much more
experience than we do in that sort of issue.
But the reason it gets a low--turns out to have such a low
performance by this measure is we think basically the companies
would bring the money back, but it does not change their
decision whether to hire an extra worker or do an extra piece
of investment. If that link could really be forged in a
reliable way, that would make the policy more effective.
Senator Coons. There is a bill, which I believe has been
introduced, cosponsored by Senators Hagan and McCain, that
attempts to do just that, which I have so far not supported in
part out of skepticism or concern about that mechanism and its
effectiveness. There is another effort underway to use the
repatriated increased tax revenue to the treasury as a way to
front-load financing an infrastructure bank, something else I
have been looking at. My core concern is: Is there any way,
given the fungibility of corporate earnings and profits, to
demonstrate in a reasonable way that those repatriated profits
are, in fact, deployed meaningfully, which I think is sort of
the core criticism of the previous opportunity?
I would appreciate it, if you would not mind--you may have
already covered this in some detail--just a quick reference to
what you might see as the three most likely to be effective
economy-strengthening fiscal policy measures that you think
could command bipartisan support.
Mr. Elmendorf. Senator, I am about the 10,000th most
politically knowledgeable person within 5 miles of this
building, so I am not the person you want to ask about what is
politically viable. All we can do is to offer our analysis of
what we think is more or less effective by this measure. And as
we have talked about in the written testimony, there are
various measures, various criteria by which you and your
colleagues can evaluate these policies. But I cannot really
apply a filter of political viability for you.
Senator Coons. Then let me ask, if I could, a final
question on that, recognizing the difficulty of trying to
identify things that could potentially compel bipartisan
support. Earlier today Senator Rubio and I announced the
introduction of a bill. One of the many features of it is
extending expensing provisions for investment costs for small
businesses. That also scores, you know, on a very broad range.
I may have missed this previous testimony. Is part of the
concern about its range of effectiveness the duration or the
length or predictability of the period for an extension? In
other words, a 1- or 2-year extension of the current
accelerated either expensing or depreciation provisions being
less effective than a longer-term extension?
Mr. Elmendorf. It certainly comes--I guess I would
emphasize first on the uncertainty, the state of the business
cycle and the low rate of utilization of existing capacity. And
lowering the cost of investment we think would spur some
investment, but how much might be limited by the fact that
businesses have capital in hand they are not now using. But it
is hard to know how much difference that makes, and analyses of
past variations in this sort of provision of the Tax Code have
reached some different varying conclusions about how effective
the policy has been.
I think this is a case--a sort of policy where short term
can actually be better than long term. For many things, one
looks to a permanent change in policy as more effective at
altering behavior. But in this case, if businesses view this as
truly a temporary measure, a sort of sale on buying investment
goods for a limited period, that could spur more reaction in
the same sense in which a store that has low prices just for
this weekend might get people in the door this weekend.
So in that sense, the temporary nature of it can help to
accelerate the business investment spending. People who might
have thought of doing things next year would do it this year if
this provision were in effect. That is complicated by the fact
that we have many times in the past, certainly over the last
decade, had provisions like this on a number of occasions, so
it is less of a--I think probably viewed less as a one-time
thing and more as part of the ever revolving nature of our Tax
Code. It also makes it harder for us to judge how businesses
will assess its temporariness or permanentness and, thus, how
much effect it would have on their investment spending.
So I think the uncertainty we have is not easily
addressable through particular changes in the provisions. It
just reflects the difficulty of judging how businesses would
respond under these circumstances to any sort of proposal like
this.
Senator Coons. Thank you. Thank you for your testimony.
Thank you, Mr. Chairman.
Chairman Conrad. Thank you. Excellent questions. Thank you
for your answers, Director Elmendorf.
Just on repatriation, I want to say there is not much of a
mystery, I do not believe, because we have done it, and we can
now go back and look at what happened. It is very, very clear
what happened. The 15 companies that were the biggest
repatriators were pharmaceutical, tobacco, technology, and soda
companies. Those corporations that accounted for more than half
of all the earnings repatriated reduced their U.S. workforce by
21,000 jobs after the tax break that was predicated on them
creating more jobs in this economy. What they did do--they did
not hire people. They laid off people. What they did do is
accelerated stock buy-backs. They increased executive pay 30
percent a year between 2004 and 2006. And, interestingly
enough, they accumulated offshore funds at a faster rate than
before the tax break.
So I would just say to my colleagues who are kind of
intrigued with this idea, corporations that use offshore tax
havens get the largest benefit. After the 2004 tax break, a
substantial share of the repatriated funds came from tax
havens. Boy, is that a surprise.
I tell you, if we get in the habit of repeating these
repatriation gimmicks every few years, what incentive does that
provide companies? About as clear as it can be, that is a huge
incentive to take jobs overseas. Take jobs overseas, safe and
secure in the knowledge that Congress will answer the siren
song to allow these repatriation holidays, bring the money back
at a fraction of the normal tax rate--they are talking as low
as 5 percent, 5.25 percent, instead of the statutory rate of 35
percent--and that they will be able to convince Congress, if
you would just allow us to do this, it would be one time, only
maybe we will do it again in just a few years, and we are going
to bring this money back at a fraction of the normal tax rate
just in time to lay off some more people and increase executive
pay and have some more stock buybacks. My goodness. I mean,
fool me once--fool me once, fool me twice, fool me three times.
You know, at some point shame on us for buying the siren song.
But, you know, of all the things I have seen--and, by the
way, we talk about being worried about the deficit. The Joint
Committee on Taxation said it will cost the treasury $79
billion over 10 years. So it adds to the deficit, adds to the
debt. The companies that repatriate are very concentrated in
tax have countries, and they bring the money back and lay off
people. There is a brilliant scheme. Add to the debt, have
further job loss, create an additional incentive for companies
to move jobs overseas to they can set themselves up for the
next repatriation holiday in which they come back here at a
fraction of the normal tax rate. My goodness. I hope we do not
fall for that one again.
I thank the Director.
Mr. Elmendorf. Thank you, Mr. Chairman.
[Whereupon, at 12:00 noon, the Committee was adjourned.]
IMPROVING REGULATORY PERFORMANCE: LESSONS FROM THE UNITED KINGDOM
----------
WEDNESDAY, NOVEMBER 16, 2011
Committee on the Budget and the
Task Force on Government Performance,
U.S. Senate,
Washington, DC.
The Committee met, pursuant to notice, at 2:31 p.m., in
Room SD-608, Dirksen Senate Office Building, Hon. Mark Warner,
Chairman of the Task Force, presiding.
Present: Senators Warner, Whitehouse, Thune, Sessions, and
Johnson.
Staff Present: John Righter, Amy Edwards, Ron Storhaug, and
Gregory McNeill.
OPENING STATEMENT OF SENATOR WARNER
Senator Warner. Good afternoon, and I would like to welcome
you to a hearing of the Budget Committee's Task Force on
Government Performance. Our subject today is ``Improving
Regulatory Performance: Lessons from the United Kingdom.''
Before I get started, I want to thank my Chairman, Chairman
Conrad, and Ranking Member Sessions for giving me the
opportunity to put together this informal working group over
the last couple of years, looking at how we can find some
additional efficiencies inside of the Federal Government. Today
we are going to be focusing on the regulatory burden, and I am
particularly happy that my good friend Senator Ron Johnson is
here as well. As Senator Sessions said, this is kind of unusual
to have two former business guys chairing a hearing like this.
Senator Sessions. You have got a lawyer looking at you.
Senator Warner. We have a lawyer looking at us. We will not
hold that completely against you, but I think there are a great
number of lessons that we can learn from the U.K. We will have
two sessions today: one from U.K. governmental representatives
and then from both business and other folks in the U.K. as
well.
As I mentioned, we are very pleased to have two
representatives from the British Government as well as two
other experts here to share their views on what we in the
United States can learn from the British experience to improve
our regulatory performance.
This Task Force first discussed regulations at our last
hearing when we focused on the implementation of the Government
Performance and Results Modernization Act that we enacted last
year. Again, I want to thank Senator Sessions for letting that
legislation get through at the end of the day, and I think we
are yet to see all the benefits because we have got to make
sure we see from our Government agencies both top-performing
programs that we have asked in this legislation for the first
time ever for least-performing programs, which is, as we all
know in Government, a challenge sometimes to identify. That
important legislation for the first time included regulatory
actions in the agency planning and prioritization process.
As with Government programs, regulations should be
monitored and measured to ensure that goals and outcomes are
being met. Regulations should be reviewed periodically to
ensure that they are still relevant and serving their intended
purposes.
Let us start with some of the facts. Regulations are in the
headlines every day, with concerns from businesses in
particular about the increases in the regulatory burden. I
cannot meet a business anywhere in Virginia and I am sure
Senator Johnson cannot in Wisconsin or Senator Sessions in
Alabama that does not speak about the increased cost on every
business of our regulatory environment.
One of the things I wanted to do was to see whether this
was a brand-new phenomenon that has happened just recently or
whether this is the culmination of historic trends. So over the
past year, we have done some research to figure out what is
behind these concerns and what we can do to try to put a new
balance in place to protect the public interest without overly
burdening businesses and the economy.
First, I started by reviewing regulatory trends over time
and have we actually seen a huge increase in regulations over
the last couple years. And while the perception is that is
absolutely the case, at least the data that I have seen does
not demonstrate it.
The first chart is actually showing the last 2 years of
President Bush and the first 2 years of President Obama's term.
According to the GAO, during the last 2 full years of the Bush
administration, from January 2007 to January 2009, Federal
agencies published 168 major rules. Comparatively, in the first
2 full years of the Obama administration, Federal agencies
published 175 major rules. That is not much of a difference.
Now, my colleagues will obviously point out there are a lot
of new rules perhaps in the pipeline around financial system
and health care, but at least looking at data on data, it has
not been as dramatic an increase as some might think.
The next chart shows the number of all final rules from
across Government from 1997 to 2010. As you review this trend,
you can see ups and downs. This is the actual number of final
rules by calendar year, peaking in the late 1990s and actually
kind of falling below 3,500 in the last few years. And while
both of these charts show that there has not been a dramatic
increase in regulations, clearly if we are looking at on
average between 3,000 and 4,000 new rules a year, what you have
got here is the case of an enormous accumulation of rules and
regulations that, quite honestly, we have not--at least in my
short time here in the Senate, I do not think we do a very good
job of ever going back and culling out what kind of rules and
regulations have outlived their time. In fact, we actually do
not really know the true costs of regulations on our businesses
and the economy.
The cumulative annual costs of U.S. regulatory burden is
uncertain. Estimates range from $44 to $62 billion from OMB,
but that is maybe a little bit on the low side, and $1.75
trillion from the SBA. That is an enormous difference. If you
are talking about $50 billion in annual costs to $1.75
trillion, we have got to do a better job of evaluating what
truly is the regulatory burden cost on our economy.
After reviewing our regulatory processes over the past
year, I think there are some areas clearly that could be
improved.
First, we have got to review existing regulations
periodically to remove outdated rules or rules that could be
updated to make it easier for businesses to comply. Once added,
a regulation is rarely removed or altered. As a matter of fact,
I think it was President Reagan who said that the hardest thing
to kill is a Government program. What may be even harder than
that is a regulation that, once it is ensconced, and, frankly--
I think back to my time as Governor--inside agencies, you are
actually rewarded with more staff and more personnel if you add
more regulations, and there is no incentive to go back and do
the hard work of culling out what has outlived its time.
Second, we need to incentivize agencies to reduce
regulatory burden while balancing needed public safeguards.
Currently several laws already require agencies to review
existing regulations periodically, but these reviews in
actuality do not happen very often.
Next, we need to improve the integrity of the cost/benefit
analysis that agencies produce. We should have some independent
review of agencies' findings. I know we are going to be joined
in a little while by my colleague Senator Whitehouse, who has
introduced legislation this year that calls for more integrity
in the agency analysis. And I think this is an important area
if we are going to look at regulatory reform, writ large.
And lastly, I think we need to measure the performance of
regulations to support ongoing reviews, just like we do with
programs. Now, some would argue that we actually do not even do
that on a programmatic basis, but we clearly do not do it on a
regulatory basis. So I have been working on legislation for
over a year to address these concerns that would create a
regulatory PAYGO mechanism to incentivize retrospective review
of regulations, to make room for higher-priority regulations.
My proposals will include reforms that are similar to some
of the policies established in the United Kingdom, and I look
forward to hearing from our witnesses and to see what has
worked in the U.K. and what has not. And, again, both Mr.
Turnock and Mr. Wolff I have had the opportunity to meet with
in the past, and I really appreciate them coming back.
Today's witnesses are going to share ideas for us to
consider for reforming our process in the United States, and
over the past few years, the U.K. has undertaken some
substantial reforms to improve their regulatory processes.
On our first panel, we will hear from Mr. Graham Turnock.
Mr. Turnock is Chief Executive of the Better Regulation
Executive--is Chief Executive of the Better Regulation
Executive? Is that the appropriate title? That sounds pretty
fancy. He is the Chief Executive of the Better Regulation
Executive since March 2011. In that time he has overseen the
introduction of the new One-in, One-out, which I have morphed
into regulatory PAYGO, stealing completely from our British
friends, this new One-in, One-out policy on regulations and the
publication of the first two statements of new regulation. I
look forward to Mr. Turnock explaining this.
Members of his team have also been the driving force behind
the Red Tape Challenge, a new rolling program to review the
stock of U.K. regulation. Previously, he served in the British
Department of Treasury and the Department of Trade and
Industry, where he was responsible for negotiations with the
European Union on a variety of issues.
I would also like to welcome Mr. Johannes Wolff. Mr. Wolff
will be available to take questions after Mr. Turnock's
statement. Mr. Wolff is the Assistant Director of the
regulatory framework's team of Better Regulation Executive. In
this role he has led on a variety of projects to develop
innovative proposals such as regulatory budgets. Mr. Wolff is
currently the lead on the One-in, One-out policy.
With that, I will turn to Senator Johnson and Senator
Sessions for any opening statements, and then we will get to
our witnesses.
OPENING STATEMENT OF SENATOR JOHNSON
Senator Johnson. Thank you, Mr. Chairman. I would like to
also thank Senator Conrad for setting up this task force. It is
a very important subject. And I would like to thank Senator
Sessions, too, for giving up his seat here to give me the head
table here.
This is an extremely important subject. I would also like
to thank the witnesses for appearing. We are in a pretty dire
fiscal situation. I do not have to go over too many numbers. I
think today or tomorrow we will probably hit the $15 trillion
debt mark. During this administration we will probably add $4
to $5 trillion to our Nation's debt. Our debt will have grown
by about 50 percent. And I think from my standpoint--and,
hopefully, Senator Warner, you would agree here--that the
number one solution in terms of addressing this fiscal
situation is economic growth.
As a businessperson, as businesspeople, when you take a
look at what it is going to take to achieve economic growth,
you have to first of all understand that we are operating in a
global economic environment; and it is not whether we have a
choice. We do not have the luxury to choose to compete. We
simply have to compete. And I think when global investors take
a look at the United States, they ask themselves basically
three questions on any investment.
First of all, where is growth occurring? Right now it is
certainly not in the United States. We are getting growth in
China, India, places south of the border in South America. So I
guess you would have to consider that strike one.
Then I think any business, any investor would take a look
at what is the tax burden. I believe when Japan lowers its tax
rate, the United States will have the highest corporate tax
rate in the world at 35 percent. I would call that strike two.
Then the third question any business investor would ask is:
What is the regulatory environment like? And when you take a
look at the regulatory environment in the United States, I
would argue it is probably one of the most onerous in the
world. That would be strike three.
There are a number of different ways of measuring it, and,
Senator Warner, as you pointed out, there is pretty large
variation in terms of the dollar amounts. But let me just give
you a couple metrics that indicate how big a problem we have
got.
If you take a look at the Federal Register, the size of the
Federal Register--and I realize this is not a perfect
indicator, but back in the FDR administration, the total pages
of the Federal Register numbered 80,000. During the Nixon
administration, the total pages had grown to 500,000. And
currently we are at 3 million.
In just the last 11 years, we have added 41,808 rules and
regulations, and we have only developed a cost estimate on 105
of those, 0.25 percent. And I think that may be the disparity
in terms of the annual regulatory cost of $20 to $40 billion
versus the SBA's estimate at $1.75 trillion.
Now, that is a jaw-dropping number. I think one of the
components of that is just the cost complying with our Tax
Code. But just for the sake of discussion, let us say it is
actually $1.75 trillion. The magnitude of that number is
amazing. It is a larger number that all but eight economies in
the world. It is 12 percent the size of our economy. And that
potentially is the size, the cost of the regulatory burden we
are putting on our businesses, our job creators, each and every
year.
So this is an extremely important topic. It is something we
absolutely need to address. Certainly I commend you in terms of
having this task force and your work in this effort. I would
love to work with you on this PAYGO system because this sounds
like a really good idea.
There are currently 12 bills here in the Senate dealing
with regulatory reform. One of them is mine. I have a
regulation moratorium, which I think would be a good idea to
give us a little breathing space, the REINS Act, make sure that
some of these larger, more significant regulations come before
Congress for approval before they are enacted. There are 18
bills in the House.
So, again, I would love to work with you on something like
this, and I am definitely looking forward to hearing the
testimony from the witnesses. Thank you.
Senator Warner. Senator Sessions.
OPENING STATEMENT OF SENATOR SESSIONS
Senator Sessions. No, thank you. Go ahead. I look forward
to hearing from the witnesses. Thank you, Mr. Chairman, for
having the hearing and for your good work on these and other
efforts to make our Government more efficient.
Senator Warner. Thank you, sir.
Mr. Turnock.
STATEMENT OF GRAHAM TURNOCK, CHIEF EXECUTIVE, BETTER REGULATION
EXECUTIVE, UNITED KINGDOM'S DEPARTMENT FOR BUSINESS INNOVATION
AND SKILLS, ACCOMPANIED BY JOHANNES WOLFF, ASSISTANT DIRECTOR,
BETTER REGULATION EXECUTIVE, UNITED KINGDOM'S DEPARTMENT FOR
BUSINESS INNOVATION AND SKILLS
Mr. Turnock. Well, good afternoon, members of the
Committee, Mr. Chairman, and thank you for giving us this
opportunity to testify before this Committee.
As you have introduced me, I will not introduce myself
again. I would just like to say that the Better Regulation
Executive is part of the Department for Business, Innovation,
and Skills, which is clearly focused on growth in the U.K. as
its number one priority, and sees regulation as a critical
component of growth.
I would just like to say a few introductory remarks about
the role of the BRE and about the Government's policies on
better regulation, of which One-in, One-out is the flagship
policy.
The BRE's role is essentially to set the framework of the
U.K. Government's regulatory reform agenda. Reducing
unnecessary regulation and cutting red tape is one of its core
priorities, as I have said, and Prime Minister Cameron's stated
aim is for his Government to be, and I quote, ``the first in
modern history to leave office having reduced the overall
burden of regulation.''
Although the U.K. has performed consistently well in the
indicators captured by Doing Business--and the Chairman just
teased me a little bit about the fact that we dropped to
seventh in the world ranking recently--the country's overall
rank was in the top 10 of the Doing Business Report in 2011.
The new Government believes there is more that can be done to
relieve business from burdensome regulation.
The Government has taken a number of steps since coming to
power in 2010, and these have included: One-in, One-out; the
Red Tape Challenge; Tackling EU legislation, which is an
important component of the legislation that business and the
U.K. must face; and Regulatory Enforcement.
So if I can cover those briefly in turn, in relation to
One-in, One-out, we have introduced the One-in, One-out rule,
which focuses on the flow of regulation. One-in, One-out
requires Government departments to assess the net cost to
business of complying with any proposed regulation, and this is
termed as an ``IN''. These calculations are validated by an
independent advisory committee which we established at the end
of 2009. This is called the Regulatory Policy Committee, or
RPC, and it is charged with providing independent challenge on
the evidence and analysis, presented in Impact Assessments,
supporting new regulatory proposals. The Committee comprises of
six experts on regulation from different backgrounds and
scrutinizes Impact Assessments for those proposals from
departments. If the Committee provides a negative opinion, or
Red, then the proposal is not allowed to proceed.
So to inform business of upcoming regulation and to show
progress against One-in, One-out, we publish the Statement of
New Regulation. This is published twice a year, and the focus
is on domestic regulation, providing an overview of total INs,
OUTs, and Zero cost measures. The first Statement of
Regulation, or SNR, was published in April of this year and we
recently published the second SNR in September. So far we have
seen a significant increase in the number of deregulatory
measures, with a majority of departments being able to live
within the One-in, One-out rule.
If I can just summarize the position between January and
December of 2011, in volume terms we saw 19 INs, or net
regulatory proposals; 33 OUTs; and 37 measures which were Zero
cost. And I think one additional fact which is useful to add to
that is that the number of OUTs increased from 8 in the first 6
months to 25 in the second 6 months; whereas, the number of INs
remained roughly constant.
In terms of costs, the INs totaled 338 million, whereas the
OUTs totaled 3.4 billion, although I should emphasize that
there is a very significant single component in that 3.4
billion number which relates to a regulation which changes the
way in which pensions are calculated, and that we expect a
balancing regulatory proposal from the same department to
largely cancel out that OUT in due course.
So turning to the moratorium on micro businesses, on the
1st of April 2011 the Government also introduced a 3-year
moratorium on new domestic regulation affecting micro
businesses. These are businesses that have fewer than 10
employees and they account for 50 percent of total employment,
as well as genuine start-ups. The exemption is designed to give
them breathing space, in the way that Mr. Johnson described,
from the constant flow of new domestic regulations and
requirements leaving them to get on with doing business.
Any breaches of the moratorium--in exceptional
circumstances and only supported by a compelling argument--will
require Cabinet-level approval and sign-off by the Economic
Affairs Committee, which is chaired by the Chancellor of the
Exchequer.
A few words about the Red Tape Challenge. On the 7th of
April, we also launched an initiative to scrutinize the stock
of regulations. The Red Tape Challenge is a comprehensive
thematic review of all regulations affecting business,
voluntary organizations, and individuals which aims to identify
regulations that could be removed, simplified, or done in a
different way. We will publish all regulations in scope of the
program on a public website, which is
www.redtapechallenge.cabinetoffice.gov.uk, for those who are
interested, and we invite the business community and the public
to provide practical suggestions for improvement. The process
presumes that, if there are no good reasons for retaining them,
burdensome regulations will be removed from the statute book.
The purpose of this exercise is to open government up to
the public, allowing them to comment on a wide range of
regulations which affect them. And to this end, we run a 3-
week-long sector campaign so business only needs to respond
during those sectors which affect them. So far we have received
over 26,000 comments, and 12 themes have been in the spotlight.
Following the completion of the first two themes on Retail and
Hospitality, Food and Drink, we have announced plans to remove
or simplify 220 of the 378 regulations reviewed.
Finally, just a couple of words on both tackling EU
legislation and transforming the regulatory environment. We are
also taking steps to reduce the cost to U.K. business from EU
legislation. For a start, the One-in, One-out rule reviews any
instances of ``gold plating.'' If proposals go beyond the
minimum required by the EU legislation, this would count as an
IN under the One-in, One-out rule.
This complements our work on engaging earlier in the
Brussels policy process, taking strong cross-government
negotiating lines, and working to end the so-called gold
plating of EU legislation.
Transforming the regulatory Enforcement: Reforming the way
in which regulations are enforced is as important as reducing
the flow and stock of regulations. We are working, therefore,
with regulators to end the tick-box approach to regulation,
seeking out the best way of securing effective compliance
without creating unintended consequences. Business groups have
given us the clear message that they want to see a culture
change amongst regulators, with a greater understanding of how
business actually operates and a more consistent approach to
enforcement so that compliant businesses do not lose out at the
expense of rogue businesses.
We have already started to reform some of the most
disproportionate enforcement systems and have commissioned a
number of independent external reviews to examine specific
areas in detail. An example of this is Lord Young's review of
how health and safety law is implemented and on ways for
Government, regulators, and business to reduce heavy-handed
enforcement of regulation in the agriculture and food-
processing sectors.
In conclusion, tackling the regulatory burden is at the top
of the Government's agenda. The system we have introduced is
designed to free the potential of U.K. business to concentrate
on growing their business, creating jobs, and driving forward
our economic recovery.
In essence, our work is about ensuring policymakers think
more creatively about whether the traditional ``command and
control'' approaches to regulation--and many of its sometimes
unintended consequences--is the most effective way to achieve
desired policy outcomes. Against the backdrop of a rapidly
changing global economy, we are asking colleagues whether a
combination of various non-regulatory policy instruments can be
more effective in achieving a particular policy objective at
lower cost and with lower levels of coercion.
Thank you.
[The prepared statement of Mr. Turnock follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Senator Warner. Thank you, Mr. Turnock.
Let me just again--I have spent more time than my
colleagues with this. Could you take a moment and re-explain a
little bit the concept between One-in and One-out? Because my
sense had been at one point that this was--as a new regulation
was proposed and the benefits--and I want to come to the
benefits piece of this. I would like you to explain that as
well because every regulation is supposed to have some benefits
as well as costs.
If it nets out on the cost side, it counts on the IN
category, and that dollar then has to be matched against
something that comes out on the OUT category. Is that trued up
on an annual basis, on a multi-year basis? And how did you get
that right? How did you get that balancing right?
Mr. Turnock. Yes, just to go through a little bit more of
the actual mechanics of the process, if I am a department
seeking to introduce a new regulation, then I have to calculate
the impact of that regulation, and that is done in a document
that we call an Impact Assessment, which is published at the
time that we go out to consultation on the document. So that is
a bit like your notice and comment process.
That document does two things. It calculates the global
benefits and costs of a regulation, which would always expect
to be positive. But it also calculates a metric which is
specific to One-in, One-out, which is the net direct impact on
business. So what that looks at is the direct costs to
businesses affected by the regulation and then any offsetting
direct benefits to businesses of those regulations.
Now, the reason we are doing this is because we are
applying an affordability to business test on all regulation.
The reason for that is relatively simply that effectively most
regulation is net beneficial to sectors other than business at
a net cost to business. So it is a form of, you could say,
taxation on business. But to date, there has been no budget for
that taxation. So, effectively, One-in, One-out is a form of
regulatory budgeting, but we are setting the budget at zero so
that any new net cost to business has to be balanced out by a
net saving to business. So returning----
Senator Warner. And then--I am sorry.
Mr. Turnock. So returning to the process.
Senator Warner. And then when do you have to true this up?
Because you said you had 33 OUTs, a certain number of INs.
Mr. Turnock. Exactly. So the theory is that whenever a
department comes forward with a new regulation, it has to say
at the same time where it is finding the savings to true that
up from. So it might say we are bringing in a regulation that
increases the reporting requirements on businesses in a
particular sector, and we are reducing the reporting
requirements on another sector.
Senator Warner. And is that done within that one agency?
You cannot transfer it from health care over here to aviation
over here? It is done within a specific agency, correct?
Mr. Turnock. In the first instance, all agencies are
expected to balance up or true up themselves. There is
provision if an agency can make a demonstrably good case that
it cannot balance up itself for balancing across Government,
but we have not got to that point yet because we are expecting
all agencies to manage to balance up themselves at this stage.
But the methodology sets that out as a possibility.
So the agency has to come forward to a ministerial
committee and convince that committee that it has got plans in
place or in development that will enable it to balance the
impact to the regulation that it is bringing in.
However, there is a secondary check on the process, which
is these 6-month statements of new regulation. So we have a
system where we seek to bring as much new regulation in as
possible on a common commencement date so that business know
when in the year the regulatory system will change, and that is
roughly at the beginning of April and the beginning of
September.
So this provides a final opportunity for us to look across
Government at each agency and say: ``Now that we know which
regulations you are actually going to bring into force in April
or October, we want to check that you are still in balance. We
thought you were in balance, because when you came to us
earlier in the year you promised that you were going to bring
in this deregulatory measure to balance out this regulatory
measure. Now that we have got to the last point of which the
regulations are now going to go live, we want to check that you
are delivering on that promise.''
The ministerial committee that reviews the position at that
point is empowered to stop agencies statement from going ahead
with regulation at that point.
Senator Warner. I want to make sure my colleagues get a
chance. Two points that I found interesting. One is that your
RPC ends up becoming that more neutral arbiter--correct?--of
what the cost and benefit is. One of the challenges, I think,
that we have in our Government is that you do not know who to
trust in terms of what the costs and benefits are. You have an
industry that might have a cost way up here. You might have a
public interest group that says the benefit is way up here.
There is no neutral arbiter.
One of the things that we have looked at--and I am not sure
this would be the right approach because one of my concerns
with the REINS Act is putting Congress in more things actually
scares me.
Senator Johnson. Me, too.
Senator Warner. But, you know, the notion of whether a CBO
might be able to have--or some other entity independent of an
administration might be that independent arbiter, because you
do have to have a measure of both the costs and benefits.
I will leave for the second round the question, though,
that there were--they did not start with this the whole
Government. They had a series of exclusions. If you could touch
on that briefly, and then we will go to Senator Johnson and
Senator Sessions.
Mr. Turnock. Certainly we have listed comprehensively the
exclusions to the One-in, One-out, and there are 15 of them.
Some of them are really just for the avoidance of doubt, so for
example, fees and charges which are set out in regulations or
statutory instruments, which simply enable agencies to recover
the costs of certain services, are excluded.
We are also really interested in influencing the behavior
of government departments. So where there is effectively no
real choice in bringing in a new regulation, we do not include
that in the One-in, One-out methodology. So that covers, for
example, situations such as civil emergencies and contingencies
where emergency legislation needs to be brought in. An example
might be, although this is probably covered by European
legislation, foot and mouth, for example. Animal health would
be an emergency situation.
We are also not including situations where a judicial
process may have ended up changing the way in which a
regulation is imposed because, again, that is out of the
control of the agency.
One of the biggest areas of exclusion is European community
policy, because again, that is decided in Brussels and it is a
case then of transposing that legislation into domestic
regulations. However, we do make one key caveat to that, which
is that if the agency goes further than is required by that
Brussels legislation, then that scores against that One-in,
One-out category.
And then a final big area of exclusion is tax and financial
stability. Tax, because we have set up a separate process under
an Office of Tax Simplification on Financial Stability because
that is an area which has as we see global significance at the
moment and where we believe that there needs to be net increase
in regulation realistically to address systemic financial
failure.
Senator Warner. I guess I would like to call on my
colleagues, but just, they did, as we get into the second
panel, this has been an ongoing process. They have started to
phase in this approach rather than trying to take the whole
government at once in terms of changing the regulatory
framework? They did phase it in and I think they have got some
very interesting results. Senator Johnson.
Senator Johnson. Well, Senator Warner, I share your same
concern about getting Congress involved in more things. But I
also am concerned about setting up a new agency. So let us talk
a little bit about this RPC. How large is it? You said there
are six experts on the panel. Has this bureaucracy grown?
Mr. Turnock. Actually, I think, overall, the introduction
of the One-in, One-out rule has enabled us to reduce the total
number of people doing this in the center. We had getting on
for 100 people in the Better Regulation Executive around about
a year ago, so we are probably the equivalent of OIRA in the
U.K.
And because we did not have this kind of leverage over
departments to get them to do a better job of regulation, we
were involved in very detailed discussions on a range of
policies really trying to sort of balance out the natural
tendency to regulate more.
With the establishment of this new regulatory policy
committee which has 12 members of the secretariat, we have
managed to reduce the total numbers from around about 100 to
60. So 12 people have gone into this new secretariat, and the
core Better Regulation Executive is down to below 50 people
now.
Senator Johnson. So this did not set up a new agency. It
actually took an agency and it has actually shrunk it?
Mr. Turnock. Yes, that is right.
Senator Johnson. Yikes. Good job. Are there any limits in
terms of what regulations they are taking a look at, or is
every new rule and regulation having to go through the same
process?
Mr. Turnock. We have not set any low or dual eligible
minimis thresholds at this stage. One reason is that we really
want to get a culture change in the regulatory agencies and
departments. And so we think that it is important that every
rule goes through the same process and is subject to scrutiny.
But obviously, by its nature, the big ticket items will get
greater focus because they are going to have a bigger impact on
each department's balance, so they will get a greater focus
from departmental officials. They would probably get the same
focus from the secretariat and the RPC because they are looking
at the quality of the analysis. But I would guess when it comes
to our scrutiny from an overall perspective, we give greater
scrutiny to the bigger measures as well.
Senator Johnson. You mentioned cultural change. That is
actually one of my questions. I will hop right to it. You
mentioned that the outs went from 8 to 25. Are you starting to
see a culture change? Are people in the regulatory agencies
actually now starting to focus or are they possibly
incentivized for finding regulations that they can eliminate?
Mr. Turnock. Well, I think we are seeing more effort to
find regulatory outs and that has been helped by the red tag
challenge which has been led at a very senior level within the
government and the civil service with a lot of encouragement to
civil servants to just push the margins out a little bit and
put the choices up to ministers rather than what we kind of are
concerned may have happened in the past, that at relatively
junior operational levels, decisions actually end up getting
made which are quite risk averse and then they become
cumulative within the system.
So we are seeing, I think, the beginnings of a culture
change where civil servants see it as a badge of honor that
they have reviewed an area and been able to deregulate and
reduce costs on business. We are also seeing, I think, much
less immediate assumption that regulation is the best way to
address policy problems simply because departments are finding
it much harder to get new regulations through the system.
So they are incentivized to look at alternatives to
regulation. But we are only about, well, 9 to 12 months through
the process, so I think any culture change process needs quite
a bit longer than that to take full root.
Senator Johnson. Have you considered or are you paying any
rewards or incentives for coming up with these ideas?
Mr. Turnock. Yes, absolutely. I mean, in the U.K.--I do not
know about here--we tend to do things in a relatively low key
way, but we have something that we call the Civil Service
Awards which are sponsored by the Cabinet Secretary, and we
have introduced the category which is for a better regulation
approach. And we had an alternative to regulation around the
responsibility deal in the health sector that won that.
And also--well, actually, I should say they were short-
listed. The final awards have not been announced yet. And also,
we have a short-listed member of one of our change agent teams
within one of the agencies who has been nominated for the Civil
Service Leadership Award, which we are really excited about.
Senator Johnson. So it is a competition type of award as
opposed to you bring us a good regulation and you get 1 percent
or that type of thing?
Mr. Turnock. Yes. I think that was sort of talked about in
a fairly humorous way, but in practice, monetary compensation
is not really an option in a big way at the moment.
Senator Johnson. Okay. I understand that. Have you
considered, you know, one-for-one is great. Have you considered
going to maybe two-to-one, three-to-one? Would that be possibly
something in the future?
Mr. Turnock. It is definitely something that you could do
within the system, so the system is set up to allow a change in
the exchange rate. It is something that ministers might want to
consider if they felt that actually the first fruits of the
process were very encouraging and that they wanted to drive the
system harder to look for more deregulatory measures. At this
stage, they are not asking us to do it, but they may wish to
consider those options.
Senator Johnson. Okay, thank you.
Senator Warner. Senator Sessions.
Senator Sessions. Thank you very much. I appreciate your
insight, and the U.K. frequently leads the United States in
reforms, and so I am inclined to believe reform and regulation
is important and we thank you for your leadership and sharing
your insight.
Part of the American economy is the Government itself.
There are regulations within the Government that require
governmental employees to do things that have no reach outside
the Government, but become established over years that have no
real value and actually cost efficiency. Does your plan deal
with any of that, to allow the agencies themselves to eliminate
rules that need to be eliminated?
Mr. Wolff. Technically we have processes in place where we
could do that, so I think the process allows us to change the
currency, as Mr. Turnock said. We only capture business costs
right now, so we do not actually look at any burden that is
placed on the public sector. But it is conceivable that the
system could be changed to look at that as well.
Senator Sessions. I was a Federal prosecutor and had an
office up to 50 people, but Federal regulations sometimes made
it difficult for me to do my job and provided little benefit.
Also, we required, over the years, a huge number of reports to
the Defense Department. Every time something came up--and they
would do this every year for decades long after the value of
those reports were necessary, so sometimes Congress is directly
responsible for the problem.
Mr. Turnock, one of your goals, maybe your number one goal,
is to help your economic sector be more productive and more
competitive. Are you confident that eliminating regulations
that lack value helps reduce costs, save money, and make your
businesses more competitive?
Mr. Turnock. Well, I think absolutely. If we are removing
regulations which have gone past their ``sell-by date,'' such
that they are no longer really delivering any benefit but are
still imposing costs, or if we can reform regulations so that
they can achieve the same benefit but at lower cost, then we
must be doing the economy some good.
Now, obviously, there are always second and third effects
and there is quite a large industry of consultants that has
built up around some of the regulatory regimes, but I think it
would be reasonable to say that if we are removing
fundamentally unproductive activity from the economy, then the
overall benefit must be positive.
Senator Sessions. And if a company made widgets and
regulations were imposed on that manufacturer, the number--and
employees were now necessary for the widget company to comply
with the regulations, if the regulation is of no benefit or
limited benefit, that employment really should not be counted,
should it, as a benefit to the economy, and the consultants
that sometimes help companies reach those goals.
Mr. Turnock. I think if you want to, you can make analyses
that suggest that a regulation or a particular regulation is
good for jobs, but I think we would start from the presumption
that actually what we want is strong growth in the economy. We
want high value jobs so we want businesses that could invest in
the skills in their employees.
We want a government which has a good tax take because the
economy is doing well and therefore could invest in skills and
education and universities. Therefore, what we want is a
regulatory environment which encourages growth and that is
generally considered to be a regulatory environment that does
not impose unnecessary costs and which does not create
significant uncertainty for business when it is thinking about
either taking on people as additional employees or significant
investments. So I think that would be the general philosophy of
the government in relation to how better regulations support
jobs.
Senator Sessions. In an economic sense, a fundamental
principle needs to be understood, I believe, and that is there
is not difference in an economic sense between the Government
taxing the American people and going and changing the way an
energy, electricity-generating plant is operated than passing a
law that requires that company to do the same thing, is it?
Mr. Turnock. I think you are right. I mean, I think one of
the problems with regulation is that it is a bit of a free
good, so budgetary expenditure is very difficult to obtain. It
requires the support of the legislature and it is always
limited, and in the past, regulatory measures have been at the
cost often of business, but also others, and they have not been
budgeted, so One-in, One-out is effectively a way of budgeting
and limiting those costs and forcing a more active trade off
between different policy instruments.
Senator Sessions. I think sometimes we in Congress want to
do something that we would like to accomplish. We do not want
to tax our constituents to pay for it, so we just pass a law to
make someone else do it and it does not score. It is not a
cost, but it is a cost to the economy if it is not a smart
requirement, if it is a burdensome requirement.
I would just note that we do have a disagreement around
here. Just a couple of days ago, our friend and colleague,
Senator Reid, the Democratic leader, said this: My Republican
friends have yet to produce a single shred of evidence that the
regulations they hate so much do the broad economic harms they
claim. That is because there is not any. I guess he means there
is not any harm. But Republicans are not relying on evidence as
they propagate the myth of job-killing regulation, they are
relying on repetition.
While I do think there are good regulations and bad
regulations and we need to honestly evaluate what is productive
and beneficial and honestly eliminate those that are not, and I
certainly think there is evidence to show and will continue to
come forth to show that we have many regulations that are not
beneficial, but are actually costly and return no value or
little value.
Thank you for your leadership, Mr. Chairman, and you are
doing the hard work, the detail work that will be necessary for
legislation to move forward that could actually begin to
improve our situation.
Senator Warner. Thank you, Senator Sessions. Let me just--
and I know that spirits in our sessions have said that. I mean,
nobody wants to climb on an airplane that has not been
inspected or eat a food product that is unsafe. So there has to
be a benefit side on some of this.
One of the things that I thought was interesting in some of
my previous conversations was--correct me if I am wrong--that a
lot of the value of this process did not really come on
straight the ins and the outs, but the sense that the agency
would have to, if they had an in, pay for it with an out, meant
that as they devise the in or as they devise the regulation,
that was in their mind set.
So if there is a way they could get 85 percent of the
benefit for 20 percent of the cost versus 95 percent of the
benefit for 100 percent of the cost, that there would be that
weighing. You do not want to do it in a way that jeopardizes
public interest, but that internal calculus inside the agency
was something that took effect that is hard to sometimes
quantify. Do you want to comment on that, Mr. Turnock?
Mr. Turnock. Yes, I think that is absolutely right. What we
want is a full analysis of the options at an early stage, which
takes into account the cost on business, and as you say, this
has the merit of internalizing that cost by making it much more
transparent to the agency, and therefore, it should drive the
agency to think about options that reduce the cost on business.
You are right, at the margin, that might mean a small
sacrifice of some of the benefits, but one has to take both the
costs and the benefits into account and give it, in your
example, the cost-benefit ratio would be much better in the 85/
20 example than the 95/100 percent example.
Now, obviously, traditional cost-benefit analysis ought to
point to that as the right conclusion anyway, but we think that
One-in, One-out is an additional, very helpful pressure in the
right direction.
Senator Sessions. Just to follow, and I do think that
regulations pass sometimes to identify a specific problem, but
it applies to far more industries than have that problem and
they are required to follow a regulation that is really no
benefit, although it may benefit if it is targeted to a more
narrow focus there.
But I guess that would score in your process, too. You
would still have the advantage of reducing the cost by
targeting just the area that needs the regulation.
Mr. Turnock. Yes. Although I should emphasize that in all
of this, we are really looking for agencies, also, to look at
non-regulatory approaches through, perhaps, industry schemes,
voluntary arrangements, and pairing consumers, various other
approaches which do not require regulation which places a large
cost and compliance burden on businesses which are already
doing the right thing, just to catch a small minority of
businesses that we want to bring in line somehow. So I think
there is a fundamental desire to try and move away from
regulatory approaches where possible.
Senator Warner. I have just got one other quick question.
One of the things that you sometimes hear, and I do believe
there is clearly value in regulations where you have got to
have them appropriate and the benefit side, as we mentioned
earlier, that is looked at a little bit of the RPC, but this is
more focused on the business.
One of the critiques we hear at times is that businesses
will point out that there is lots of regulatory burdens, but
then when they are actually asked to identify specifically what
are those old rules or regulations that are outdated, at least
in this country, the lists that have come forward have been
rather meek.
It sounds like in your Red Tape analysis, by kind of
pushing the edge on this, it may not mean elimination of some
of these rules and regulations, but it might mean less
reporting or it might be cleaner reporting or more efficient
reporting. Could you speak to that for a moment?
Mr. Turnock. I think sometimes if you just phrase the
question, Do you want to get rid of it or do you want to keep
it, you have polarized the debate perhaps a little bit too
much. There will be different views amongst different
businesses in a sector. Some businesses might find a regulation
less burdensome and they might be attracted to some of the
benefits that they receive from it and others might not be.
So I think some of the time we have the same issue that you
have with business representative groups. They find it
difficult to find a consensus amongst their members and
therefore, they are somewhat reluctant to point out specific
regulations that they would like to see removed even where
objectively were all the analysis done, it would be beneficial
to business to remove those regulations.
The desire for consensus is a strong factor in preservation
of the status quo. So that definitely is an issue, but we have
made some good progress with business groups recently on
pinpointing and guiding them towards the areas that we would
like their views on, and I think Red Tape Challenge has been a
useful factor.
Senator Warner. I would love to see--you said you have
looked at hospitality and food services. To some level of
specificity, it would just be interesting. Senator Johnson, do
you have anything?
Senator Johnson. Sure. I would just like to get some basic
pieces of information. You saw the charts that we were using up
here that we were displaying. We are issuing three to four
thousand rules and regulations each year. Do you have a similar
metric in the U.K.?
Mr. Wolff. I think it is difficult to really get on top of
some of the metrics. I think we do see around 2,000, 3,000,
4,000 pieces of legislation coming through, but then
identifying which ones are relevant for our agenda in the sense
that there are a number of small items like road closure
orders, for example, and they are a regulation technically, but
they do not really have much of an impact.
So in terms of the regulations that we consider have a
major impact on business, we are talking about roughly 80 to
100 or 120 annually, which is roughly what we can cut through
under the One-in, One-out rule. So it is, depending on how you
define the burden and who is being captured, you really need to
be careful about how that is all looking. So, you know, there
are just different ways of measuring it, number of regulation
pages, costs, volume, et cetera.
Senator Johnson. Sure. Do you have any estimate? Has there
been a study conducted that lays out the estimated cost of
annual compliance in the U.K. with a regulation?
Mr. Wolff. We did have an essentially baseline measurement
exercise about administrative burdens in the mid-2000s. When it
came to the One-in, One-out rule, we decided that another
baseline measurement was not necessary, essentially because the
One-in, One-out does not require one. For every new pound you
bring in, you take a pound out. There have been various
estimates, private sector, the British Chamber of Commerce for
example has undertaken an estimate of the cumulative burden.
One-in, One-out is designed to really cap it.
Senator Johnson. What was that cumulative burden?
Mr. Wolff. We are in the several billions. It varied and
there were different reasons why we kind of--we are on board
with the number. But what One-in, One-out was trying to do, or
it does do, it really caps the additional burden of corning in
and it really brings the numbers out into the open. And trying
to get on top of the cumulative burden, you could say, Well, we
want to reduce it by 25 percent. But going out and trying to
really calculate that all seems like a huge undertaking which
One-in, One-out does not require.
Senator Johnson. Let me just ask just the general
perception of the British business people, you know, the
European businesses in terms of the regulatory burden here in
the United States. I mean, when your businesses look at the
U.S., is it an attractive place for business investment?
Mr. Turnock. Well, I am not sure I am really the best
person to try and answer that question, but I would just point
to the fact that you do very well in the LEAP [phonetic] tables
that we were just discussing earlier. So it cannot be that bad.
But equally, I am sure there is room for all of us to do
better.
Senator Johnson. In the U.K., do your businesses have
governmental affairs offices? Do they have compliance,
regulatory compliance officers for the businesses? Is that
pretty common?
Mr. Turnock. Yes, I would say that is pretty common. I
mean, certainly the bigger businesses would have that kind of
unit. Non-compliance could be very expensive for them if they
had to close down facilities, for example, in a sense, some of
the problems of smaller businesses that cannot afford to have
that kind of unit or that dedicated expertise on the staff.
Senator Johnson. Okay. Well, appreciate that. I have to
leave here quickly, but I just got handed two pieces of
information. First of all, the Treasury just announced that we
hit $15 trillion in debt, gross debt. That is not exactly a
banner statistic.
Senator Warner. All the more reason for Simpson-Bowles Gang
of Six.
Senator Johnson. I guess to show a little evidence that
maybe regulations do cost businesses something, a recent survey
by Wells Fargo of small businesses said that 22 percent
responded that the number one problem facing them was complying
with government regulations. So I guess that just refutes what
your leader was saying on the floor the other day.
But with that, again, thank you very much for holding this
hearing and thank you. This was very informative. This is
something that I would like to work with you on. This is a
really good idea. Thank you.
Senator Warner. Thank you, Senator Johnson. Mr. Turnock,
Mr. Wolff, thank you very, very much. I know a long voyage. I
appreciate you coming over.
We now are going to have a second panel and we very much
invite you to--I do not know what your schedule allows, but
would love to have you stay if you can. But thank you both,
gentlemen.
I would now like to go ahead and welcome our witnesses for
our second panel. We have two distinguished experts to share
their perspectives about what the U.S. could learn from British
lessons on regulatory reform. Today we will hear from Dr.
Michael Greenstone and Mr. Jitinder Kohli.
Dr. Michael Greenstone is the 3M Professor of Environmental
Economics in the Department of Economics at MIT and he is on
the MIT Energy Initiatives Energy Council and on MIT's
Environmental Research Council.
In addition, he is a Senior Fellow at the Brookings
Institute and a research associate at the National Bureau of
Economic Research. Dr. Greenstone has also served as the Chief
Economist for President Obama's Council on Economic Advisors
for the first year of his Administration.
We will also hear from someone I have had the opportunity
to get to know over the last year plus, Jitinder Kohli. He is a
Senior Fellow at the Center for American Progress where his
work focused on government efficiency, regulatory reform, and
economic issues.
Prior to joining CAP, he spent 15 years in British
government between 2005 and 2009. He was the first Chief
Executive of the Better Regulation Executive where he was
responsible for regulatory reform for the U.K.
He has also had a major program to reduce the
administrative burden of regulations by 25 percent over five
years and to change the culture of regulators so they focused
on efforts on areas of greater risk. Thank you both for being
here and we will begin with Dr. Greenstone and then Mr. Kohli.
STATEMENT OF MICHAEL GREENSTONE, 3M PROFESSOR OF ENVIRONMENTAL
ECONOMICS, DEPARTMENT OF ECONOMICS, MASSACHUSETTS INSTITUTE OF
TECHNOLOGY
Mr. Greenstone. Thank you, Chairman Warner and members of
the Task Force on Government Performance, for inviting me to
speak today. I appreciate the opportunity to speak to you today
about the Government's system of regulatory review. It is
essential that our regulatory structure protects the well-being
of our citizens without imposing unnecessary costs on American
businesses and society as a whole.
But in making decisions about regulations, public officials
must choose which areas of our lives merit Government rules as
well as how stringent those rules should be. And so I thought I
would talk a little bit about an example, a classic example,
the Clean Air Act, which is a piece of regulation--legislation
that has produced regulations that have a series of benefits
and costs.
Before its passage in 1970, there were few constraints on
businesses that emitted pollution as a byproduct of their
operations, and the result was predictable. There was very poor
air quality. As one example, it was common for white-collar
workers in Gary, Indiana, to bring an extra shirt to work
because the first one would be dirty from the air and unfit for
wear by the middle of the day. But even more importantly, some
of my research, as well as research by others, has found that
the polluted air led to elevated mortality rates that reduced
the life spans of the American people. And, obviously, no
business sets out to cause these impacts, but in trying to
maximize their profits, it was not in their interest to install
expensive pollution abatement equipment when their competitors
did not have to do that. So as a result, they did not act to
adequately reduce emissions.
At the same time, the Clean Air Act's regulations cause
firms to alter their production processes in ways that raise
their costs. Drawing on some of my other research, I found that
an important set of rules that are embedded in the Clean Air
Act or as a consequence of the Clean Air Act have raised
polluting industries' production costs by about 2.5 percent.
The result of that is that their profits are lower, the prices
for the goods they sell are higher, and the prices for the
consumers are higher. It has even led some of those firms to
scale back their operations and reduce employment, and I should
emphasize reduce employment in those industries.
Ultimately, the number of jobs in the economy is largely
unaffected by regulations, but one should not ignore that the
workers who lose their jobs in particular industries often face
prolonged periods of unemployment and re-employment at lower
wages.
So the challenge for regulators is to set rules with
benefits that exceed their costs. This seems incredibly basic,
but a weakness in our regulatory system is that we do not
generally have the information necessary to make these
judgments, and this is because the approach that we have
generally used to regulation is to evaluate those regulations'
likely benefits and their likely costs before they are enacted.
However, this is the very point when we know the absolute least
because they have never been enacted before. And so the
weakness is that once a regulation is implemented, it often
goes on the books and can stay their for years, even decades,
without ever finding out did it work the way we thought it
would.
President Obama's recent regulatory reform proposal,
spelled out in Executive Order 13563, is an important step in
the right direction.
In the remainder of my testimony, I am going to try to
identify some ways to extend this reform so that our regulatory
system consistently produces rules with benefits that exceed
costs.
With respect to Executive Order 13563, I think there are
three reforms that build on that that could make our regulatory
system more effective.
The first is I recommend institutionalizing the
retrospective review of economically significant rules in a
public way so that these reviews are automatic. In the case of
rules that are currently in force, this would mean publicly
committing to a retrospective analysis within a pre-specified
time period. This might be 5 years; it could be 10 years. It
kind of depends. It would depend on the length--it would depend
on the particulars of the rule and the results of any previous
reviews.
In the case of new rules, the implementing agency would be
required to announce a timetable for review with a maximum
allowable amount of time, say 5 or 10 years. Obviously, shorter
time periods would be preferable.
In addition, the agency would be required to pre-specify
where they expect the benefits and the costs to emerge so that
the terms of the subsequent review would be known in advance.
The agency would also be required to identify how several years
later these benefits and costs would be measured; this might
include specifying the types of data and other information that
it anticipates being necessary for review.
The second way to extend the President's Executive order in
a meaningful way is that agencies should commit to undertaking
new rulemakings when the results from these retrospective
reviews differ from the results they had predicted before the
regulation went into force. And as with the retrospective
analysis, there should be a time limit for conducting these new
rulemakings.
The third extension would be I think we really need a
triggering mechanism to ensure that retrospective evaluations
occur and, when appropriate, for new rulemakings to be
undertaken within the prescribed time periods. One approach
would be for agencies to announce publicly and post on the Web
the deadline for a rule's review and reconsideration. A
stronger and probably likely preferable approach would be for
judicial action to compel reviews and rulemaking in the cases
when an agency has failed to comply with a review timeline or
to act upon its results.
There are at least two difficulties with the approach that
I have just outlined. Many agencies do not have the staff,
expertise, or the resources necessary to undertake these
reviews. Further, the process of self-evaluation is challenging
for all organizations as it requires them to be completely
objective about the work they have been engaging in. Indeed,
history is especially unkind to organizations that fail to get
outside reviews.
My recommendation, therefore, is to establish a new,
independent body for regulatory review. This body could be
housed within the legislative branch, and it could be modeled
after the Congressional Budget Office or even become a division
within the existing CBO.
As you know, before the CBO was established, only the
President had a ready source of budgetary and economic data and
analysis. Congress was forced to largely rely on the Office of
Management and Budget for this sort of information. And the
CBO's invention was an important step in leveling that playing
field. The result has been several improvements, and those
improvements in the budgeting process have largely been a
direct result of the CBO's independence. The budgetary analyses
and proposals of all legislators and executive agencies are now
created to a higher standard, knowing that they must ultimately
stand up to scrutiny by the non-partisan CBO.
This system of budgetary review and economic analysis could
be a model for a reorganization of regulatory review. Like the
CBO, this new organization would reside in the legislative
branch, and it would be founded on non-partisanship and
independence. The organization would be charged with conducting
independent regulatory impact evaluations.
Such an organization would directly strengthen our
regulatory system. Agency analyses would benefit from the
scrutiny that they would ultimately receive from this new,
independent organization. Further, the results of the
retrospective reviews would become part of the agencies'
automatic assessments of their regulations that I described
above. And I believe that this type of rigorous, independent
review would build confidence within the business community and
a better sense of transparency for the public.
Of course, the creation of such a body would require
resources, which are difficult to come by in our current fiscal
environment, your important work on the Gang of Six
notwithstanding. However, I think it is extraordinarily likely
that such an office would pay for itself many times over. To
put this in context, the current CBO budget is less than $50
million annually. My best estimate is that the new budget for
such an organization would be less, perhaps substantially less.
When one contrasts that with the amount of money that
regulations--the costs of regulations imposed on the economy,
it begins to look like a good deal. Although it is difficult,
as you mentioned, to determine the total cost of regulations
imposed on our economy, it seems safe to conclude that they can
be measured in the hundreds of billions of dollars annually.
By creating a body that can undertake rigorous analysis
about the costs and benefits of regulation--both before the
regulations go into place and afterwards--policymakers will
have better tools for protecting those regulations with great
benefits for our society, reforming those regulations that
impose unnecessary costs, and potentially culling those that no
longer serve their purpose.
To summarize, I propose two key reforms: number one,
institutionalize a process by which agencies automatically
undertake retrospective reviews of regulations and initiate a
new rulemaking when the results from the retrospective analysis
differ from the expected benefits and costs before the
regulation is implemented; number two, create a new,
independent body for rigorous, objective regulatory review that
is modeled on the Congressional Budget Office.
We live in a rapidly changing economy and need a regulatory
review structure that evolves to meet the new and different
needs of our society. The reforms that I have outlined here
will allow our regulatory system to consistently produce rules
with benefits that exceed costs, and that would be good for our
well-being and good for the American economy.
Thank you once again for inviting me to participate, and I
will gladly respond to any questions.
[The prepared statement of Mr. Greenstone follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Senator Warner. Thank you, Dr. Greenstone. I am looking
forward to asking you whether the One-in, Out-out or regulatory
PAYGO approach might be a component of that.
Mr. Kohli, since we have been joined by Mr. Thune, if you
could also take a moment, and since you were involved in some
of the--very involved before joining CAP and the British
regulatory reform process, maybe a couple of comments as well
to bring Senator Thune up to do on our previous panel as well.
Thank you.
STATEMENT OF JITINDER KOHLI, SENIOR FELLOW, CENTER FOR AMERICAN
PROGRESS
Mr. Kohli. Mr. Chairman and members of the Task Force. I am
pleased to be here to talk about the U.K. experience with
regulatory performance. I am going to focus on the period
between 2005 and 2009, which is when I was the chief executive
of the Better Regulation Executive, effectively the lead
official in the British Government for regulatory reform.
I think to take a moment to talk about context first, the
context in the U.K. is similar to many other European
countries? We have broad consensus that regulation plays an
important role in protecting workers and consumers. We even
have agreement that regulation is essential to tackle emerging
challenges such as climate change. But against that, British
businesses often claim that there is too much regulation and
that regulations often feel like mere bureaucracy.
Meanwhile, groups such as environmentalists, consumer
groups, and trade unions reasoned that new regulations are
essential to provide better protection against new and old
risks to society.
In 2005, the British Government launched a new initiative
to reform regulation, and the starting point was a belief that
it is possible to build a system of ``better regulation.'' The
idea was the government's role was to find ways to
simultaneously maximize regulatory protection while minimizing
unnecessary regulatory burden. For example, if a regulatory
agency was able to focus inspection resources on those
businesses that posed the greatest risk, it might be able to
reduce the overall cost to business and improve regulatory
outcomes at the same time.
I think there are five key takeaways from the British
experience.
First, many who work in government know that what gets
measured gets done. Even though British politicians have made
numerous statements in the past that they were committed to
reducing the regulatory burden, they never measured regulatory
costs. In 2005, the Government promised to do precisely that.
It promised that it was going to reduce the annual
administrative costs of regulation by 3.5 billion pounds. Just
to put those numbers in context, the U.K. GDP is about 7 times
smaller than the U.S., so that is equivalent to around $40
billion. The target covered costs such as form filling,
inspections, providing information, and recordkeeping, but not
the direct costs of providing protections such as purchasing
safety equipment for workers.
Each agency had to look hard at the regulations they were
currently administering and find ways to make them easier for
business. In total, there were more than 300 different measures
taken across around 20 agencies. Each year every agency
published a progress report setting out how much they had saved
business, and independent panels, including business
representatives, validated the claimed savings.
For the first time, Government agencies faced real
incentives to look at existing regulations and how they could
be improved, and this was a real change. Political debate
typically is focused on new regulations, whether they should be
brought in or whether they should not. And often the energies
of officials is in the same place.
A second takeaway is that regulations need to be sensitive
to the needs of small business. Small business told government
they believed in the purpose of most regulations. They did not
want to harm their workers or their consumers. But they
struggled to work out what the law required them to do.
Many hired consultants to help them work out what to do,
but these consultants made money by exaggerating the real
requirements. It was striking how poor government guidance
was--long, complex documents written in legal rather than plain
English and covered in disclaimers. So the government issued a
code of practice on what good guidance looked like, and
regulators worked to make their guidance and websites as
accessible as possible.
Third, regulators need to be accountable as well.
Regulators spent considerable time checking that businesses
were complying with laws to protect the environment or
safeguard worker safety. But no one checks on regulators to see
that regulators are doing all they can to minimize burdens
while maintaining protections.
The government set out eight principles for good
regulation, such as no inspection should take place without a
reason, and then reviewed regulatory agencies against these
principles. Review teams included senior staff from other
regulators along with independent experts, and they published
reports describing how each regulator was performing and
recommendations for improvement.
A fourth takeaway is the government needs to better solicit
input from business and citizens on where to focus its energy
when seeking to improve existing regulation. For example,
business complained about delays and inconsistencies in the
U.K.'s land-use planning system--approvals that needed to be
sought before new construction projects can commence.
International surveys also demonstrated that this was a
relative weakness for the U.K. So the government conducted a
major review working with business and local government to see
what improvements could be made to that process.
Another example, business and trade unions were unhappy
that a law that had been intended to reduce the number of
employment disputes that went to court had actually had the
opposite effect. Government agencies worked with trade unions
and business to come up with a better way forward. In each case
government was clear that protecting the public was essential,
but if there was a more effective and less frustrating way to
do so, it should be adopted.
A final takeaway from the U.K., government needs a strong
institution charged with improving regulation. What we were
trying to do in the U.K. was an enormous change of focus across
dozens of regulatory bodies. To succeed, we needed a strong
group of people in government charged with driving the reform
forward. We looked far and wide for the best people. At one
point we had a dozen nationalities in the unit. We were always
looking for ways to improve and constantly sought the advice of
business, consumer groups, trade unions, regulators, the
legislature, and colleagues in other countries.
The U.K. initiatives over this period were effective. The
target to reduce administrative burdens by 3.5 billion was met.
And there was a noticeable improvement in the perception of
regulation. By 2010, 47 percent of businesses said that
understanding what they needed to do to comply with regulations
was easy--10 percent higher than in 2007. That is not high
enough, but certainly an improvement. The OECD reported in 2010
that progress in Britain was ground-breaking by international
standards.
The new government that took office in Britain--and you
have already heard about what they have been doing from Graham
and Johannes--has built on the reforms instituted by the last
government.
In concluding, I want to underline that international
comparisons are difficult in this area. Not only is the
institutional context different, the United Kingdom has a
parliamentary system of government, the United States does not.
But we also have a different regulatory culture with broad,
bipartisan acceptance in the U.K. of the importance of
regulation to safeguard the public at large and even to tackle
issues such as climate change.
I will leave it to others to determine the extent to which
the U.K. experience are lessons for the United States.
Thank you so much.
[The prepared statement of Mr. Kohli follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Senator Warner. Thank you, gentlemen. I will just ask a
brief question or two and make sure my colleagues get a chance,
and then I will come back to you.
Dr. Greenstone, I want you to speak again a bit about your
retrospective process, and, Mr. Kohli, I would like you as
well. One of the concerns or one of the things as I have dove
into this is, you know, there are not the appropriate
incentives to go back and clean out regulations that have
outlived their time, usefulness. And while I know both of you
have some concerns about the One-in, One-out or my regulatory
PAYGO approach, I would be curious on both of your comments on
the One-in, One-out that was described by the first panel,
doesn't that really get--doesn't that align the incentives
right at least to make sure that retrospective review is done
in an appropriate manner? And, secondly, one of the things that
the last panel brought up is that the British have set up
something called the RPC, which is kind of an independent
entity that helps do the cost/benefit analysis, that too often
we see here in this country an analysis done where industry
will say the regulation costs a gazillion, and the public
interest group will say the benefit is five gazillion, and we
are then left with kind of one-off stories.
So I would love your comments on that, both of you.
Mr. Greenstone. Thank you, Senator, for the opportunity to
speak to this. There is a lot of appeal to the One-in and One-
out. I think, as you highlighted, a big part of that appeal is
that, you know, it focuses a really bright light on the cost of
regulation, and that is one that I think agencies and
regulators may not always take into account properly.
I think its potential weakness is that it is just focusing
on one side of the coin.
Senator Warner. You have got to have the benefit of the
side in there at some point.
Mr. Greenstone. Yes. And at some point, I think without--
and as I understand the One-in and One-out in Britain, it is
entirely focused on the cost side. And, you know, what that
rises the possibility of is suppose we wanted to reduce the
costs of our regulatory system. Well, probably the first thing
we would do is repeal the Clean Air Act because it has got to
be the most expensive set of regulations on the economy. And
the downside, of course, is that we would lose all the benefits
that that produces. You know, people live much longer and
healthier lives than they did before the Clean Air Act.
So, you know, my own view is that I would prefer a policy
that shook up the system and got people to focus on the
benefits, finding regulations where the benefits exceed the
costs, not just identifying ones that have costs. And as I
tried to say in my testimony, I think a very good way forward
for that is to institute a system of automatic retrospective
reviews. Currently, the system, it does not operate like any
business that you have ever heard of.
Let me use an analogy. The way it works, an analogy would
be you think about hiring someone, you get their resume, you
call their references, you hire them, put them at a desk, let
them do their thing for years and years and years, never find
out if they did a good job. So no business would ever operate
like that. And what I think we need currently or what I think
the system needs is an automatic kind of job performance
evaluation for the regulations to assess without the benefits
and the costs.
Then the second part of that, which also you alluded to, is
right now you have a lot of people shouting at each other about
the costs are high and the benefits are great, and those are
all people who kind of have skin in the game one way or
another. And I think what the system would really benefit from
is a kind of independent, dispassionate voice on that, and we
do not really have that right now.
Mr. Kohli. I think one of the issues we found in the U.K.
was that agencies did not put enough resources into thinking
about how to improve existing regulation. Sometimes that was,
you know, something as mundane as the form being badly designed
and hard for someone to make sense of. And just redesigning the
form or enabling the process could potentially save business
money and save frustration and irritation.
So what we were trying to do through the admin burden
process was really about giving people in agencies an incentive
to look to find simplifications, look to find simplifications,
look to find better ways of doing things without reducing the
protections that regulation provided. And so I think that is a
very, very important thing to do. Finding ways to incentivize
people to make existing regulations work better is absolutely
essential.
I think there are key differences between the U.S. and the
U.K. in terms of the applicable of One-in, One-out. You know,
one difference is the U.S. has separation of powers enshrined
in the Constitution and we do not in the U.K. So the idea of
our legislature coming up with ideas which then the executive
branch has to implement just does not mean anything in the U.K.
context. Actually, you get to be the government of the day by
controlling the legislature, and so when the government of the
day in the U.K. says we can take these regulations out, they
can be fairly sure that the legislature is going to follow
suit. And that is a very, very big difference between the U.S.
and the U.K., so that would have an impact.
In terms of independent scrutiny, I was in the Better
Regulation job when we made the decision to set up the
Regulatory Policy Committee, and one of the reasons we did that
was because we felt that while the quality of impact assessment
in the U.K. has increased significantly and, therefore, we were
much more confident about the quality of our estimation of
costs and benefits, we still felt that there was a risk that
agencies could just have got it slightly wrong or, worse, there
could be a perception that agencies were coming up with cost/
benefit numbers that were more in their favor than the reality.
So even if the reality was not so different, you know, the
perception could be the agencies were not quite in the right
place.
And so having the Regulatory Policy Committee tell us when
the numbers were not right felt to us like a good thing to do,
which is why we set up--as a precursor to the RPC--we set up a
panel that did the same process but for administrative burden
savings. So we had that in place for admin burdens, but we did
not have it in place with for cost-benefit analyses through the
impact assessment process.
Senator Warner. Senator Thune.
Senator Thune. Thank you, Mr. Chairman, for holding the
hearing. Thank you for being here today, and as you have
correctly observed, there are differences between your system
and ours, and it makes it, I think, much easier in the U.K. to
be able to rein in regulations that perhaps are not conducive
to any public purpose and also have a cost that really puts a
burden on your economy.
In our country, you know, obviously, we have got the checks
and balances, as you mentioned, but we also have a regulatory
regime that I think has gotten significantly bigger over time
and spins out lots and lots of regulations. And I think
everybody here would argue that we need regulation, smart
regulation obviously where public health and safety are
concerned, but sometimes around here we confuse quantity with
quality and think that more is better. And more is not always
better. And I think what we are finding, at least what I hear
from the job creators and the small businesses in the country
today, is that perhaps one if the biggest obstacles that they
face when it comes to creating jobs is just this excessive
regulation that drives up the cost of doing business in this
country.
I guess I am curious, given the fact that regulatory
agencies in the United States are independent of Congress, and
even though regulations are supposed to implement laws passed
by Congress, there is great latitude that is exercised by the
regulator when it comes to achieving a law's intent, and that
interpretive power I think grows over time as laws become older
and their authors and supporters leave the public arena. And if
a regulation goes beyond the scope of what Congress intended
under the Congressional Review Act of 1996, Congress has only
60 days to disapprove the rule before it takes effect. So there
is a real limited time frame there in which Congress can be
heard on this.
So, you know, once the regulatory process begins, the
congressional role becomes very much a reactionary one and a
somewhat secondary position.
So I guess what I would like to ask perhaps both of you to
react to, and, Mr. Greenstone, one of the things that many of
us have advocated and talked about here is a biennial budget
process where Congress would budget and appropriate funds in
odd-numbered years and use even-numbered years to do more
oversight, more regulation. And I guess--could you see this
Committee having a role in terms of doing regulatory review as
part of an off-year performance review process?
Mr. Greenstone. Thank you for the question, Senator. I
think--so I think you have hit upon some important points which
is there really is a sense out there that it is difficult for
businesses due to the regulations they face, and what I would
like to add to that is, it is made all the more difficult for
legislators and policy makers, that we never find out which
regulations are providing benefits and which ones are providing
costs.
And so, I think any system that shines more sunshine on the
process and allowed the identification of the ones that were
working and the ones that were not working so well, potentially
with this Committee's involvement, would be an improvement.
So really the only two principles I think are important are
finding out what works and what does not and making sure we
find it out from independent sources, and just as the One-in,
One-out is aimed to put some pressure on the system, I think
sunshine could put pressure on the system. So I think you are
correct about that.
Senator Thune. Do you think Congress ought to have a more
proactive role when it comes to maybe even approving
regulations? In other words, instead of the current disapproval
process where Congress has to take a vote on a resolution of
disapproval to prevent a regulation from taking effect, should
Congress have to have more of a role when it comes to
approving, particularly major regulations, perhaps before they
take effect?
Mr. Greenstone. I think that is probably speaking out
beyond my expertise. I think it seems to me there should be
some pluses, which is that there be a further check on the
system, and then I think there is some minuses. I know that all
of you are pulled in many directions already and it seems like
it would take on the risk of having to pass legislation, re-
pass legislation every single time there was a new rule. So I
am not the best person to judge that.
Senator Thune. Mr. Kohli, could you just react to the idea,
the notion that Congress, through its annual budgeting process,
by going to a biannual budget in which we appropriate funds in
odd-numbered years and even-numbered years could do more
oversight when it comes to agencies and some of these what we
perceive, at least I perceive, to be regulatory excesses and
how that might--I know you have a very different system which
creates lots of different opportunities to do this, but we
would have to create some sort of mechanism here that would
allow for that.
Mr. Kohli. Well, I think the thing to remember about
regulation is that it is incredibly hard. You know, that is an
obvious point at one level, but actually if you think of what a
regulation is, somebody has the idea that they want to achieve
a change in behavior in society at large by changing the law of
the land, and they hope that by changing the letter of the law,
that society behavioral change will result.
Now, with all the best will in the world, that will
sometimes not go in the way people would intend and I
absolutely agree with the points that Michael was making
earlier. And anything that shines light on that process and
looks to see whether those regulations are having the effects
they originally intended or whether there are ways to have
those effects in a less costly manner, or whether there is a
need for more regulation in that space in order to achieve the
effects that actually people agree on, you know, those kind of
reviews would be a good thing.
Now, how those reviews are conducted is beyond my
expertise, but certainly in the U.K., we were of the view that
there is not enough scrutiny of legislation or regulations that
have been on the books for a long time and there is a lot of
scrutiny of regulations that people are considering bringing in
now.
Senator Thune. Thank you, Mr. Chairman. My time expired.
Thank you very much.
Senator Warner. Thank you, Senator Thune. I do not agree
with you completely on that two-year budget cycle. I get a
little concerned, as a former business guy, with the needs for
predictability of reinserting Congress in another way on all of
the regulations. I do think Dr. Greenstone's notion of an
independent entity that could help us make that assessment and
I am very concerned that none of the retrospective efforts we
have had so far have worked, and one of the reasons why I am so
intrigued with the One-in, One-out approach. Senator
Whitehouse.
Senator Whitehouse. Just to respond to Senator Thune on the
two-year cycle, I think we may be better biting off the two-
year budget piece rather than trying to fight through the
budget and the appropriations piece because that could be the
bridge too far and I would rather at least get the partway that
we can rather than take on a fight that will make it perhaps a
vain effort.
So I assume the two of you are both familiar with the
concept of regulatory capture? Yes, okay. My worry is that
first of all, regulatory capture has intellectual foundations
that go back a hundred years. Nobel Prize winning economists
write about it. Administrative law textbooks write about it. It
has virtually bomb-proof academic support and background.
And yet, once you get into the world of regulatory capture,
of politics and of government, we tend to do nothing about it
and nobody takes much interest. So that is sort of a baseline
problem. You add to that that I think Washington is at a
particular low point in terms of both intellectual honesty and
corporate power, perhaps not unrelatedly, by the way, and that
the problem that underlies regulatory capture could create a
problem of what I would call deregulatory capture, which is,
how do you protect your deregulatory efforts from--how do you
keep them on the up-and-up?
How do you keep them legitimately focused on truly
obsolete, unnecessary, wasteful regulations, truly on the
better mousetrap, rather than have suddenly the polluting
industry decide, Ah-health, we are done with the Clean Air Act
now.
I mean, we hear a lot in this body about regulatory reform.
When you pull the curtain, it is gut the Clean Air Act. It is
not regulatory reform. We hear about balancing the budget and
you pull back the curtain and it is kill Medicare. It is not
really balancing the budget.
And so, the danger of overreach in this area and the danger
of special interests like the health insurance industry that
would like to take over Medicare, and the polluting industries
that would like to have the Clean Air Act gutted so that they
can save a dollar and cost the rest of us $30 in well-being and
other savings, I do not see how you--tell me how you firewall
out of your deregulatory process the same forces of corporate
power and intellectual dishonesty that drives regulatory
capture in so many other areas.
We saw it with the BP-Halliburton oil spill in MMS. We saw
it with the investment banks telling the SEC that it was okay
to go to 30 times leverage. We see it with the mining accidents
and the Mine, Health, and Safety Administration being gone and
only doing what the big mining companies will let them do.
So I really, really worry that when that is your baseline
and now you add the deregulatory component to it, that just
becomes something that those same special interests want to
take over and pretty soon your regulatory reform effort has
turned into gutting the Clean Air Act and killing Medicare.
Mr. Greenstone. Well, Senator Whitehouse, I know you have--
thank you for that question and I know you have sponsored some
important legislation in this area. I think it is----
Senator Whitehouse. You may be the only person in
Washington who knows that other than myself, so thank you.
Senator Warner. I gave you the shout-out in my opening
statement about your----
Senator Whitehouse. Oh, good. This is more publicity than
that has received so far, and I mean in a town that could not
be less interested in regulatory capture other than trying to
accomplish it.
Mr. Greenstone. Well, we have got a crackerjack staff at
the Hamilton Project and we have got a nice write-up on your
legislation.
I think what I would just add to the important points you
are making is that in the current approach where we never find
out what regulations do, that leaves a vacuum, and in that
vacuum people who have vested interests, be they corporations
that pollute or environmental groups or whoever it is, can step
into that and there is no referee to say, What you are saying
does not square with the data, it does not square, there is no
evidence for that.
Senator Whitehouse. So you need an IG or a GAO or a CBO or
a neutral, fair, constant score keeper and referee?
Mr. Greenstone. Actually there are two features. One, you
have to accept that what you should do is go back and find out
what the regulations did. As Senator Warner said a couple
minutes ago, we have had a very haphazard and weak commitment
to doing that. So the first step is agree that you are going to
do that and that you will use the evidence to change the system
going forward.
The second is, as you said, you need a neutral score
keeper. My own personal view is something like the CBO or given
CBO duties like that could help. I am sure there are other ways
to achieve the same thing. The British system sounds intriguing
to me as well. But the main thing, I think, is you need actual
information and then that information has to be unbiased.
Senator Whitehouse. Even in that case, I would argue that
does not cure the capture problem. I mean, when you look at OMB
as sort of an example of somebody that is supposed to be above
the fray and to give honest information, if I am not mistaken,
it was OMB that refused to open the Clean Air Act email that
would have triggered the process of allowing that regulation to
go forward in the Bush Administration. So clearly, somebody had
said, Do not open that email and that stops the process, and
that is hardly the hallmark of a neutral body.
So I think I accept your notion that there needs to be a
referee, but all that does is narrow my worry to how do you
keep the referee honest. Mr. Kohli.
Mr. Kohli. Well, first of all I want to agree with the
points that Dr. Greenstone made in terms of the need of a
neutral arbitrator. I think just reflecting back on the U.K.
experience, we were very clear it was about building a better
mousetrap. This was not an experience of removing protections.
We did not want to do that.
Both Tony Blair and Gordon Brown, who were the two
political leaders of our process in the U.K., made that
extremely clear both publicly and privately, that this had to
be about better regulation, and there surely were ways of
getting existing regulations and making them work better such
that outcomes were maintained or potentially even improved.
And that was a challenge. People had to think in a
different way about that issue because it was not a
conventional way of thinking. Too often people thought this was
about whether you have the regulation and whether you can get
rid of it or freshen it, and I would see sometimes it was not
about that.
Sometimes it was about things as boring and mundane as--you
know, I am thinking back to an example. We had a new law that
we brought into the U.K. where licensed premises had to seek--
had to seek consent. So if you were going to serve alcohol on
the premises, then you had to seek consent.
And somebody somewhere in the system had decided that
everybody who had a licensed premise had to submit a plan of
the building in which they proposed to serve alcohol. Now,
this, at one level, they felt like a reasonable idea, but
actually it hit every hotel cinibar. And the rules were that
the plan had to be done at a particular scale which the
government official had decided was the right scale.
And the person was not trying to do the wrong thing. You
know, they were not being malicious. It was not anything like
that. It was just--it was almost accidental. But in some cases,
that led to significant costs and costs that could have been
avoided.
And there were examples the other way. There were certain
examples where the effect of the current regime were that the
costs were lower than they should have been and protections
were lower than they needed to be, and this was about trying to
find that balance, trying to improve the quality of regulation.
And that was hard.
But I feel that that was the task ministers gave us and
that was the task that we felt we were responsible for
delivering for them.
Senator Whitehouse. So the consistent message from the
political establishment was what really made that possible?
Mr. Kohli. Yeah. In the U.K. at that time, it was very
clear this was a better regulation agenda and that was the
language that we were meant to be using and that was the
language we were using.
Senator Whitehouse. That is also the language the special
interests would use. They are not going to come in red, and
tooth and claw and say, Here we are to make things unhealthier
for Americans because it is better for our bottom line. They
will always mask what they are trying to accomplish.
Mr. Kohli. But they might say deregulation. Ministers at
the time were clear, that is not what they were interested in.
They were interested in improving regulations--taking the
regulatory stock and seeing if you could make it work better,
alongside bringing in new regulations to tackle new issues.
Climate change, which was a new issue that we were seeking
to tackle in the U.K., where we had bipartisan agreement in the
U.K. that we wanted to be the most ambitious country in the
world in terms of tackling climate change, we were bringing in
lots of new regulations in that space. But for each of them,
the point that Dr. Greenstone made, applied.
They were hard and coming back to review to see whether
they actually worked was important, because what was our
objective on climate change? It was to reduce carbon emissions,
not to bring in regulations, and you can be sure that some of
the regulations we were designing were going to reduce carbon
emissions more than we expected and some of them were going to
reduce carbon emissions less than we expected.
And actually going back and looking at the stock of
regulation three, five years hence and revising it so it worked
better was very, very important.
Senator Whitehouse. Makes me long for that type of a
discussion. I do not think we can even have a discussion about
whether climate change is happening in this particular country
right now, notwithstanding that 98 percent of climate
scientists all agree there is--it sort of proves my point that
you have got a special interest behind this stuff, you have got
intellectual dishonesty, and suddenly you get a real problem on
your hands. So I salute you for having kept it out of that
morass. But I think it is a real challenge.
Senator Warner. I know you feel strongly on this, but let
me just respond. I mean, I concur with what Senator Whitehouse
said. There is that potential of capture. I would also argue
that there can be capture on the other side as well when we say
every new project in America is going to take seven to eight
years to do an EIS statement even if the project is going to
bring advanced rail or do enormous things that have other
benefits that do not get focused into our current regulatory
environment.
I think it again comes back to Dr. Greenstone's position,
that you do need some independent arbiter here and CBO, by Lord
knows, is not perfect and we have both had our concerns with
their scoring processes on health care reform and others, but
there is--it does not change each time the keys to the White
House change.
Senator Whitehouse. Yeah.
Senator Warner. Because we are caught in this conundrum
right now where we see saying regulatory burdens at $50 billion
a year, others saying $1.76 trillion. Folks use that wide
discrepancy in such a large way that there is no appears to be
fair balancing. I very much feel, and I have had some
conversations with others that say, you know, as you look at
the approach I have looked at or the regulatory payload, you
have got to make sure you do factor in the benefit side of the
equation. I get that.
But the notion, to go back to my first slide, since 1997,
on average, 3,000 to 4,500 new regulations a year under D's and
R's, actually many times more under Republican administrations.
Yet, very little of that--I would be curious over the 40,000
that have been implemented in the last decade, how many of
those regulations have ever been actually eliminated, refined,
reduced away, as Mr. Kohli said that they did in the U.K. that
might then change at least the perception out there that we
have burdened on.
And some of our colleagues thinking this burden only just
started in the last 24 months, this enormous, enormous cost on
doing business. We have got to find a way to sort through this.
Senator Whitehouse. The Administrative Conference was an
organization that existed for quite some time and I think its
intended purpose was to have a kind of advisory role in this
area. It was put out of business, I believe, maybe seven or
eight years ago and it has just been reconstituted. Do either
of you have any thoughts about the Administrative Conference?
Are you familiar with it?
Mr. Kohli. Yeah, I have met with them and I think that the
work they do and the work they could do in this area could add
enormous value because, you know, they are exactly the kind of
body that does not have the risk of regulatory capture and it
is a deliberative body that looks for better ways to achieve
the kind of outcomes that society has decided it wants. So I
have enormous respect for their work in its very early days,
because as you say, they have just been reconstituted, but they
could potentially have a significant impact in this space, yes.
Senator Whitehouse. Great. Okay.
Senator Warner. Last word, Dr. Greenstone?
Mr. Greenstone. I am not familiar with the Administrative
Conference.
Senator Warner. Well, let me thank the witnesses, as well
as my colleagues, for their participation. For the information
of Senators and staff, because of the late start of today's
hearing, the time for Subcommittee additional statements or
questions for the record will be extended until noon tomorrow.
With that, the hearing is adjourned.
[Whereupon, at 4:16 p.m., the hearing was adjourned.]
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