[Joint House and Senate Hearing, 113 Congress]
[From the U.S. Government Publishing Office]



                                                         S. Hrg. 113-11
 
        FLIRTING WITH DISASTER: SOLVING THE FEDERAL DEBT CRISIS

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

                                HEARING

                               before the

                        JOINT ECONOMIC COMMITTEE

                     CONGRESS OF THE UNITED STATES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 14, 2013

                               __________

          Printed for the use of the Joint Economic Committee





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                        JOINT ECONOMIC COMMITTEE

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

HOUSE OF REPRESENTATIVES             SENATE
Kevin Brady, Texas, Chairman         Amy Klobuchar, Minnesota, Vice 
John Campbell, California                Chair
Sean P. Duffy, Wisconsin             Robert P. Casey, Jr., Pennsylvania
Justin Amash, Michigan               Mark R. Warner, Virginia
Erik Paulsen, Minnesota              Bernard Sanders, Vermont
Richard L. Hanna, New York           Christopher Murphy, Connecticut
Carolyn B. Maloney, New York         Martin Heinrich, New Mexico
Loretta Sanchez, California          Dan Coats, Indiana
Elijah E. Cummings, Maryland         Mike Lee, Utah
John Delaney, Maryland               Roger F. Wicker, Mississippi
                                     Pat Toomey, Pennsylvania

                 Robert P. O'Quinn, Executive Director
              Gail Cohen, Acting Democratic Staff Director



                            C O N T E N T S

                              ----------                              

                     Opening Statements of Members

Hon. Kevin Brady, Chairman, a U.S. Representative from Texas.....     1
Hon. Dan Coats, a U.S. Senator from Indiana......................     1
Hon. Amy Klobuchar, Vice Chair, a U.S. Senator from Minnesota....     2

                               Witnesses

Hon. Judd Gregg, former Chairman of the U.S. Senate Budget 
  Committee, Rye Beach, NH.......................................     5
Hon. Alice Rivlin, Senior Fellow, Brookings Institution, 
  Washington, DC.................................................     8
Hon. Doug Holtz-Eakin, President, Action Forum, Washington, DC...     9
Dr. Simon Johnson, Ronald A. Kurtz Professor of Entrepreneurship, 
  Sloan School of Management, Massachusetts Institute of 
  Technology, Senior Fellow, Peterson Institute for International 
  Economics, Cambridge, MA and Washington, DC....................    11

                       Submissions for the Record

Prepared statement of Senator Coats..............................    36
Chart titled ``Total Federal Revenues and Outlays''..............    38
Chart titled ``Long-Term Spending vs. Revenue Outlook''..........    39
Chart titled ``Fiscal Consolidations''...........................    40
Prepared statement of Hon. Judd Gregg............................    41
Prepared statement of Hon. Alice Rivlin..........................    47
Prepared statement of Hon. Doug Holtz-Eakin......................    65
Prepared statement of Dr. Simon Johnson..........................    76
Article titled ``Windows of Opportunity Closing'' by Judd Gregg 
  submitted by Representative Erik Paulsen.......................    83


        FLIRTING WITH DISASTER: SOLVING THE FEDERAL DEBT CRISIS

                              ----------                              


                        THURSDAY, MARCH 14, 2013

             Congress of the United States,
                          Joint Economic Committee,
                                                    Washington, DC.
    The committee met, pursuant to call, at 9:59 a.m. in Room 
G-50 of the Dirksen Senate Office Building, the Honorable Kevin 
Brady, Chairman, presiding.
    Representatives present: Brady, Campbell, Amash, Paulsen, 
Cummings, and Delaney.
    Senators present: Klobuchar, Murphy, and Coats.
    Staff present: Corey Astill, Gail Cohen, Connie Foster, 
Colleen Healy, Mike Lee, Patrick Miller, and Robert O'Quinn.

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

    Chairman Brady. Well, good morning everyone. Welcome to the 
Joint Economic Committee's second hearing of the 113th Session 
of Congress. We have a great panel of witnesses today.
    I would like to yield for the opening statement to the 
Senior Senator, Republican Senator, Senator Dan Coats. Thank 
you.

   OPENING STATEMENT OF HON. DAN COATS, A U.S. SENATOR FROM 
                            INDIANA

    Senator Coats. Mr. Chairman, thank you. I want to thank you 
and Vice Chair Klobuchar for holding this hearing on a subject 
I think of vital importance to the future of our Nation's 
economy, and in fact our national security: the ever-growing 
debt deficit.
    Our spending addiction in Washington has led to the point 
where we now face the prospect of record deficits as far as the 
eye can see. The fact is that Congress and the Executive Branch 
have failed to address the debt crisis effectively. Temporary 
stopgap measures solve little, if anything; they simply put off 
the inevitable day of reckoning.
    Eventually we will reach a point where investors either 
stop buying our debt or insist on higher interest rates to 
account for the greater risk, potentially triggering a crisis 
of confidence.
    Many experts also believe that our failure to seriously 
grapple with our ballooning national debt is already having a 
significant detrimental impact on economic growth.
    We all know, or at least we ought to know, that our current 
path is unsustainable. Academics, economists, business leaders, 
the various bipartisan committees that have been formed, 
Republicans and Democrats, all basically repeat the same thing: 
Unless we make the tough spending choices that we have been 
avoiding for years, we are going to face a debt-induced 
meltdown. It is only a matter of time, and the clock is 
ticking.
    The plain fact is, in order to make a real impact on the 
deficit and the federal debt, we need to go big and we need to 
go bold. And the time to do that is now. We need to incorporate 
a combination of spending discipline with mandatory structural 
reform of our mandatory programs, and growth-oriented 
comprehensive tax reform.
    Those three elements, in my opinion, are absolutely 
necessary for us to achieve what we need to achieve.
    Today's hearing presents us with an opportunity to find 
common ground in tackling these difficult issues. I look 
forward to the testimony of our witnesses. I want to welcome my 
former colleague and friend, Senator Judd Gregg, who has had a 
distinguished career as Chairman of the Budget Committee, as 
someone looked to in the Congress as an expert on these issues. 
We are pleased to have him with us.
    Dr. Rivlin, I have learned about your Hoosier roots this 
morning to go with your many other great credentials in terms 
of service to this country and being such an outstanding voice 
currently dealing with this issue.
    Doug Holtz-Eakin, Dr. Holtz-Eakin, thank you very much for 
your continued work.
    And Simon, Dr. Johnson, we thank you also and we look 
forward to your testimony this morning, and your guidance and 
support and help in terms of how we can address this critical 
issue, because I think the time is now to do it.
    Mr. Chairman, thank you.
    [The prepared statement of Senator Coats appears in the 
Submissions for the Record on page 36.]
    Chairman Brady. Thank you, Senator.
    Vice Chair Klobuchar.

  OPENING STATEMENT OF HON. AMY KLOBUCHAR, VICE CHAIR, A U.S. 
                     SENATOR FROM MINNESOTA

    Vice Chair Klobuchar. Thank you very much, Mr. Chairman. 
And I wanted to also thank you for our last hearing. I think it 
had a very good tone and a very good start to our year with the 
Joint Economic Committee, which really can be a sounding board 
and a place where we can come together and talk about in a very 
timely way the proposals that are before the Congress.
    I did want to mention that Rachel and her family from 
Minnesota are the only ones from my Minnesota Breakfast that 
took me up on my invitation to come to this hearing. I see them 
back there this morning, and they are a reminder that we are 
talking about real families and real jobs and the future of our 
country here as we listen to these four great experts that 
appear before us.
    I see this as a time of great opportunity. Our economy has 
stabilized. The unemployment rate was the best it's been in 
years. Just this past month, the housing market is coming back. 
In my state, the unemployment rate is down to 5.6 percent, and 
we are seeing great expansion in exports in many of our 
industries.
    But what I see as holding us back right now is the 
inconsistency that we have seen in tax policy. It is the fact 
that companies are not able to know what is going to happen 
next with their investments, and the fact that we have not 
gotten a clear path to bring this debt down.
    We have made some progress, as we all know, with, first of 
all, the bipartisan Simpson-Bowles Commission, which I think 
did some very good work. I was one of 14 Democratic Senators 
that made very clear that we were not going to vote for a debt 
ceiling increase until we got that Debt Commission in place.
    I would have liked to see it statutory, something Senator 
Gregg and Senator Conrad worked so hard to do, but it is what 
it is. And it was not just a report that collected dust on a 
shelf; it actually gave us some ideas as to the Rivlin-Domenici 
work and a lot of the other work done by people right before us 
on this panel.
    But what has happened since the report has been released? 
We have achieved nearly $2.7 trillion in deficit reduction over 
a 10-year window. The goal of many is to at least get to $4 
trillion reduction in 10 years.
    The Senate proposal right now that is being marked up in 
the Budget Committee proposed by Senator Murray is another $2 
trillion in reductions, and I think it is something worth 
looking at. And I know the House also has its own proposal.
    Again, I see this as an opportunity. There is a sense of 
urgency--Senator Coats and I were together last night at a 
meeting--a sense of urgency that we have not had for awhile. 
Some of it is caused by the effects of sequestration, which I 
think most people would agree is not the exact way we want to 
handle this.
    Although we want to see some spending cuts, I also think 
that we can do this in a balanced way with a combination of 
revenue and spending cuts. We simply cannot afford to have a 
repeat of what happened last December with the brinkmanship. As 
much as I loved spending a very romantic New Year's Eve with 
Harry Reid on my left and Mitch McConnell on my right, every 
woman's dream, at the stroke of midnight, I believe there is a 
much better way that we can go forward here. And I hope it is 
going to start next week with keeping the government running 
with the Continuing Resolution, as it looks like it is, and 
hopefully putting some flexibility in with the sequestration, 
and then moving on to a major deal which the President has made 
clear that he wants, and I think you are hearing a lot of noise 
from Democrats and Republicans that they would like to see a 
balanced approach.
    So far, what we have seen of the debt reduction, which I 
just mentioned, the $2.7 trillion, 80 percent has come from 
spending cuts. And it comes out to a ratio of about 4-to-1 
spending cuts to revenue. That is actually a different ratio 
and higher on the spending cut end than that proposed by both 
the Simpson-Bowles and the Domenici-Rivlin proposal.
    So I think there is room to continue to look at revenue, 
whether it is closing loopholes, whether it is looking at 
things like, I will mention as being from a state that produces 
a lot of biofuels, that the ethanol tax credit expired. That 
saved billions and billions of dollars. The oil company 
subsidies are still in place, that's $38 billion, over the next 
10 years.
    Some of the tax breaks that are in place that incentivize 
companies to ship jobs overseas, that's $200 million. The home 
mortgage deduction, very important to me and to middle-class 
families, if you cap it at $500,000 in value on a home--so if 
you buy a $1 million home, you still get it up to $500,000, 
that saves $41 billion. Buffett rule, $53 billion.
    I think there are ways that we could add revenue into this 
mix without setting the recovery on its back and still get the 
spending cuts in place, and do them at a level that is 
different than the sequestration level.
    There are also proposals for Medicare. One I would throw 
out there is negotiation of prescription drug prices. That 
saves $240 billion in savings right there, as well as some of 
the additional delivery system reform that can be made.
    So I am looking forward to what our experts have to say. 
But overall, I feel a sense of urgency. I also feel a sense of 
incredible opportunity as I see that America is making things 
again and exporting to the world, and we have to do our jobs in 
Washington to allow our workers and our companies to move 
forward. And that means reducing our debt in a reasonable way.
    Thank you very much. Thank you, Mr. Chairman.
    Chairman Brady. Thank you, Vice Chair.
    The title of today's hearing is ``Flirting with Disaster: 
Solving The Federal Debt Crisis.'' And we have a distinguished 
panel who took time from their busy lives as national leaders 
to be with us today.
    I am honored to introduce former Senator Judd Gregg to our 
hearing today. Senator Gregg has served in his home State of 
New Hampshire as a Governor, as a U.S. Representative, and most 
recently a three-term U.S. Senator, thus making him the first 
elected official in the history of New Hampshire to achieve all 
three offices.
    During his tenure at the Senate, Senator Gregg was the 
Chairman of the Budget Committee and is a respected leader on 
fiscal policy, budgetary reform, and financial regulation. He 
was the original author of the Conrad-Gregg legislation, which 
was the impetus for Simpson-Bowles; a leader of the Wyden-Gregg 
Legislation for Bipartisan Tax Reform; and participated in 
several bipartisan efforts to reform entitlements in health 
care.
    Senator Gregg served on the National Commission on Fiscal 
Responsibility and Reform, along with another of today's 
witnesses, Dr. Alice Rivlin, where they worked toward finding a 
bipartisan solution to our Nation's debt crisis.
    I am honored to introduce Dr. Alice Rivlin. She is 
currently a Senior Fellow in the Economic Studies Program at 
the Brookings Institution, and a Visiting Professor at the 
Public Policy Institute at Georgetown.
    She has previously served as Vice Chair of the Board of 
Governors of the Federal Reserve System and Director of the 
Office of Management and Budget during the first Clinton 
Administration. Dr. Rivlin was also the first Director of the 
Congressional Budget Office after its establishment in 1975.
    In 2010, President Obama named Dr. Rivlin to the National 
Commission on Fiscal Responsibility and Reform, and there she 
worked alongside Senator Gregg to develop what is known as the 
Simpson-Bowles Plan.
    I would like to welcome Douglas Holtz-Eakin to our hearing 
today. Dr. Holtz-Eakin is currently the President of the 
American Action Forum in Washington, D.C. He has developed a 
distinguished record as an academic and policy advisor. Most 
recently he served as Commissioner on the Financial Crisis 
Inquiry Commission, the Director of Domestic and Economic 
Policy for the McCain Presidential Campaign. He served as 
Director of the Congressional Budget Office, assisting Congress 
in tax cuts and Social Security reform.
    He also worked to bring economic stability as the Chief 
Economist at the Council of Economic Advisers during the 
aftermath of the September 11th terrorist attacks. He has also 
taught economics at Columbia University, and became the Chair 
of the Department of Economics at Syracuse before being called 
to serve as Director of the CBO.
    Welcome.
    I would like to welcome also Dr. Simon Johnson to our 
hearing. He is currently Professor at the Sloan School of 
Management at MIT, and a Senior Fellow at the Peterson 
Institute for International Economics. He is also a member of 
the Congressional Budget Office's Panel of Economic Advisers, a 
research associate at the National Bureau of Economic Research, 
and a Research Fellow at the Center for Economic Policy 
Research.
    He is the founder of the Economics Blog, ``The Baseline 
Scenario'' and is a contributor to Project Syndicate. Prior to 
his current positions, he was Chief Economist at the 
International Monetary Fund and taught economics at Duke 
University's School of Business.
    Dr. Johnson brings a unique international perspective to 
our Nation's debt crisis.
    With that, I would like to introduce Senator Gregg for your 
testimony. Senator.

   STATEMENT OF HON. JUDD GREGG, FORMER CHAIRMAN OF THE U.S. 
             SENATE BUDGET COMMITTEE, RYE BEACH, NH

    Senator Gregg. [inaudible, microphone off.]
    Chairman Brady. If you could hit that microphone? And I 
know you said that before.
    Senator Gregg. I did it. And this is an entirely new 
experience.
    [Laughter.]
    Chairman Brady. It's good to see how the other side lives.
    Senator Gregg. A pleasurable one. Thank you for inviting 
me, and it is great to be here with this wonderful panel with 
my close friend, Dan Coats, who I served with for I've 
forgotten how many years but it's been quite a few.
    It is a pleasure to address the panel, and thank you for 
having me participate on this critical issue, which is critical 
to our Nation's future and prosperity.
    I think it was defined in some ways, and probably best by 
the Foreign Minister of Australia. He was speaking to Bob 
Zoellick, who was former head of the World Bank, and Bob is 
fond of telling the story about how he said to him just a few 
months ago, the Foreign Minister of Australia, he said to him: 
You know, the United States is one debt deal away from leading 
the entire world out of economic doldrums.
    And that is absolutely true. When you look at our country, 
so much is going right in this Nation right now, we are in my 
opinion on the verge of a massive economic expansion due to our 
shift in energy primarily, but also because we are still the 
place where great ideas come from, whether a Facebook or Apple, 
or in my region of the country health care.
    We have got huge amounts of liquidity, and we still have an 
extraordinarily entrepreneurial people ready to go out and take 
risks and create jobs. And the one thing that is holding us 
back is our fiscal policy, and the fact that we have this very 
serious and legitimate concern about the sustainability of our 
debt.
    The Simpson-Bowles Commission, which Dr. Rivlin and I 
served on, came to the conclusion that on our present path this 
Nation goes bankrupt. That is essentially the fact. Senator 
Coats referred to that fact. And we have to figure out how to 
straighten this out. We have to figure out how to do the deal 
that straightens this out.
    And I congratulate the Congress and the President for 
having made some progress--not as much as needs to be made, but 
there has been progress. And there is a long way to go. And the 
question is: How do we get to the next step? And what should 
the goal be?
    Well under Simpson-Bowles we suggested that the goal should 
be to stabilize the debt at 70 percent of GDP or less. That is 
a very high number. Historically, our debt since the end of 
World War II has averaged about 35 percent of GDP. To stabilize 
it at 70 percent of GDP probably does not put us on a health 
path, but it keeps us going.
    However, if we do not stabilize it at 70 percent of GDP, we 
are obviously going to go to regions which are now being tested 
by countries like Greece, and Spain, and Italy of over 100 
percent, which means inevitably, as Senator Coats referred to, 
the markets will lose confidence in our currency and our cost 
of debt will jump dramatically and we will have a fiscal 
crisis.
    Because think of it. If you look at the budget today, we 
spend about $250 billion on interest, $250 to $300 billion. If 
we were paying historic interest rates, we would be paying 
about $600 billion. $600 billion. We could not handle that. But 
we will pay much more than historic interest rates, we will pay 
a lot more if the markets lose confidence in our currency.
    So we have got to get this problem under control. We are 
now--you now are struggling with the sequester issue, which is 
an attempt to address the question. And the issue becomes how 
should we address the question?
    Well, clearly the sequester should be replaced by targeted 
action in the area of entitlement reform--and I know members of 
this panel are going to talk about ways you can do that, and I 
am a hundred percent for that. And the important thing about 
entitlement reform is that that is where the money is, so to 
say. You know, Willy Sutton used to say he robbed banks because 
that's where the money is. Well, if you are looking at the 
deficit and the debt, the thing that is driving it is our 
massive cost of entitlements.
    So we have to reform them. And another important thing 
about entitlement reform is it is not tomorrow that it has to 
occur. We have got 5 years, 10 years, 15 years that we can work 
our way into policies which change and bend the cost curve over 
the long run. And, which do it in a way which does not impact 
the recipients of entitlements in any significant way, but 
rather makes those programs like Medicare, Medicaid, and Social 
Security solvent.
    So that is one step we have to take. We also need tax 
reform, which has been referred to here. The Wyden-Coats 
proposal is an approach to that. But how do you structure this 
action? I've been thinking about this, and this is where I want 
to end, how do you get this done?
    Well, I think actually how do you get the deal done? Well, 
I think actually the Speaker of the House has laid out a 
pathway. He said: Let the Senate do it.
    [Laughter.]
    Well that is an interesting idea, and it is not a bad idea, 
by the way, with Presidential leadership. And I congratulate 
the President for in the last few weeks stepping forward and 
saying I'm going to get into the room on this issue.
    So I believe you can set up a structure here where you use 
the Senate as a sounding board, because there is a working 
center in the Senate, with Presidential leadership, where you 
develop a package which can actually address this issue 
substantively. And then take that package to the House as the 
Speaker has suggested, rather than have the House initiate it 
and take it to the Senate.
    I would caution this: The budget process is probably not 
going to be that process, because the budget process is 
inherently partisan. That is the nature of the budget process. 
It may set the goalposts at both ends of the field, but when 
budgets reach the Floor, especially in the Senate, they end up 
with a lot of votes being cast to lock in opinions and 
positions which are not very flexible.
    And to get this done, you are going to have to have 
compromise--compromise on both sides of the aisle.
    Two other points, structural points, which have to be part 
of any major deal:
    One is that you have to target the size of the government. 
Simpson-Bowles set it at 21 percent, or 21.3 percent. That sets 
everything in motion, spending restraint and revenues. And 
secondly, any changes in entitlement must be subject to a 67-
vote point of order before they can be reversed. Otherwise, you 
cannot lock them down for future Congresses.
    Thank you, very much.
    [The prepared statement of Hon. Judd Gregg appears in the 
Submissions for the Record on page 41.]
    Chairman Brady. Thank you, Senator. And to be clear, 
letting the Senate go first was not our first option.
    [Laughter.]
    But we are where we are. So we understand. Dr. Rivlin, you 
are recognized.

STATEMENT OF HON. ALICE RIVLIN, PH.D., SENIOR FELLOW, BROOKINGS 
                  INSTITUTION, WASHINGTON, DC

    Dr. Rivlin. Thank you, Mr. Chairman, and Vice Chair 
Klobuchar. I agree with everything my colleague, Senator Gregg, 
has said.
    Let me begin by saying, this hearing is entitled ``Flirting 
with Disaster: Solving the Debt Crisis.'' Let me respectfully 
suggest an alternative title: ``Growing the Economy and 
Stabilizing the Debt.''
    I make that suggestion because I think prosperity requires 
bipartisan cooperation to achieve two goals at once.
    One is faster economic growth and lower unemployment; and 
the other is a sustainable long-run budget plan that will halt 
the projected rise in the debt-to-GDP ratio and put it on a 
downward trajectory.
    It is not a choice. These two goals reinforce each other. 
Stabilizing and reducing future debt does not require immediate 
austerity. On the contrary, excessive budgetary austerity in a 
still slowly recovering economy undermines both goals, but it 
does require a firm plan enacted soon to halt the rising debt/
GDP ratio and reduce it over coming decades.
    And putting the budget on a sustainable path and reducing 
the debt will require bipartisan agreement on entitlement 
reform that slows the growth of health care spending and puts 
Social Security on a firm foundation for future retirees, and 
does that soon.
    It will also require raising additional revenue through 
comprehensive tax reform. I believe that enough discretionary 
spending restraint has already been accomplished--more than we 
suggested in Simpson-Bowles and Domenici-Rivlin. And that is 
why I think the sequester is really bad policy and should be 
replaced with entitlement reform and tax reform.
    I think we all know the reasons why entitlement reform is 
imperative. The combination of the demographics and health care 
spending growth makes Medicare and Medicaid and Social Security 
the drivers of unsustainable federal spending in future years.
    Social Security should be the easiest to reform, because it 
involves only money without the complexity of health care 
delivery, and it requires fairly minor, well-understood tweaks 
in benefits and revenues to regain fully funded status.
    Enactment of a bipartisan Social Security reform now would 
reassure current workers, demonstrate that our democracy works 
to solve problems before they reach crisis proportions, and 
contribute to stabilizing the debt.
    We cannot afford to wait on Social Security, whether we do 
it separately, as Senator Durbin is suggesting, or as part of 
the budget reform. Workers who will be retiring in 2033 are 
already in their mid-40s. We owe it to them to ensure that they 
can plan for Social Security as they reach retirement age.
    Medicare raises more complex issues, but even there a 
bipartisan compromise to slow Medicare growth without depriving 
seniors of needed health care is surely possible.
    American health care is expensive compared to that of other 
developed nations, and its quality is uneven. And part of the 
reason is our fee-for-service reimbursement system, which 
encourages providers to deliver more services but does not 
reward efficiency or quality.
    We can convert Medicare by changing the incentives to a 
more efficient system. There are two possible approaches to 
improving the performance of health providers along those 
lines, and one is to change the incentives in traditional 
Medicare toward rewarding quality and not quantity. And I'm for 
that.
    The other is to foster competition among health plans on a 
regulated exchange or market. We need to try both. And we do 
not need to do it by replacing Medicare with a premium-support 
model. We could introduce the competitive element more smoothly 
by ensuring that Medicare Advantage Plans compete in a more 
transparent marketplace, and improve incentives to lower costs.
    Finally, there is the question of tax reform. Both the 
Commissions that I served on had base-broadening and rate-
lowering plans, and we must do something like that. But let me 
reiterate, in closing, that both growth and debt stabilization 
are important, and they should be done simultaneously.
    Thank you.
    [The prepared statement of Hon. Alice Rivlin appears in the 
Submissions for the Record on page 47.]
    Chairman Brady. Thank you, Dr. Rivlin. Dr. Holtz-Eakin.

STATEMENT OF HON. DOUGLAS HOLTZ-EAKIN, PH.D., PRESIDENT OF THE 
             AMERICAN ACTION FORUM, WASHINGTON, DC

    Dr. Holtz-Eakin. Mr. Chairman, Vice Chair Klobuchar, and 
Members of the Committee:
    Thank you for the privilege of being here today. Let me 
just say at the outset, it is an honor to be on this panel with 
my former boss, Senator Gregg; and the founding Director of the 
CBO; and a gentleman who teaches at an institution where I 
couldn't get into graduate school.
    [Laughter.]
    So I am honored. No hearing is complete without a chart 
from CBO, so why don't we just start with the facts and remind 
ourselves that the most recent projections from CBO are 
actually quite daunting, in my view.
    They say that on auto-pilot, we accumulate $7 trillion in 
additional deficits over the next 10 years. And even more 
troubling, the trajectory is one where any illusory near-term 
improvement reverses about 2015 or 2016 and we see the sharp 
spiral upwards in the deficit and, importantly, in the debt in 
the hands of the public. That is part one of the bad news that 
comes out of the CBO this February.
    The second part is that underneath that is an economic 
projection which shows slow growth in 2013, about 1.4 percent, 
and a marked writedown in the long-term growth potential of the 
U.S. economy of about 2.2 percent over the long term. And I at 
least believe that those are not unrelated phenomenon, the debt 
and the growth.
    There is literature largely attributed to the scholars Ken 
Rogoff and Carmen Reinhart that suggests that countries that 
have gross debt, a slightly different measure of debt, over 90 
percent of GDP pay a penalty in the form of slower growth.
    The CBO projection says that the United States, which 
currently has federal debt in excess of the size of GDP, over 
100 percent of GDP, will remain at that level over the next 10 
years and thus will continuously pay a penalty in the form of 
slower economic growth of about 1 percentage point a year as 
the estimate. That translates into all sorts of things that are 
very close to home: a million jobs, slower income growth for 
American families, and a recipe for stagnation that the United 
States has the great opportunity to avoid, and should.
    And I concur with what Senator Gregg said at the outset. We 
have the capacity to do much better, and this is the break on 
our growth. Now what would it take to fix that?
    To get us out of the danger zone, to get us below 90 
percent of GDP requires something north of $4 trillion. And 
while I applaud the efforts of the Congress and the 
Administration in past years, I think it is not time to rest on 
our laurels. Our problems are significant and remain large.
    And smaller measures, those which merely stabilize the 
debt/GDP ratio in my view are in fact flirting with disaster. 
They say that should interest rates spike, as the Senator 
mentioned, or if economic growth does not turn out to be as 
robust as we might hope, the debt is not stabilized. It moves 
north, and it moves north quickly and runs the risk of 
generating a loss of confidence in the United States in world 
capital markets.
    And so I think that we cannot merely stop at trying to 
stabilize something which will at the end of the 10 years of 
stabilization go north again anyway. It is time to be 
aggressive. I think that is not inconsistent with more rapid 
economic growth. I think it is a foundation for more rapid 
economic growth.
    Now how do you do that? We can have a longer discussion, 
but sadly we are not the first country with the dual problems 
of bad growth and big debt. It has happened before. And if you 
look around the globe, there is no perfect solution. But to the 
extent that a playbook emerges, it contains some components 
that have come up today. One should undertake a comprehensive 
tax reform and use that as the foundation for better economic 
growth and financing the government. And one should use the 
spending side to control the growth of debt. But not all 
spending is created equal.
    The core functions of government--national security, 
infrastructure, basic research, education--need to be preserved 
in this process. And instead the focus should be on cutting 
transfer programs, which in the United States means dealing 
with the entitlement programs, the Social Securities, 
Medicares, Medicaids that Dr. Rivlin mentioned.
    I will point out--and I say this lovingly and gently--that 
the current strategy, which is to sharply raise taxes at the 
beginning of the year without reform, and to slash 
discretionary spending as far as the eye can see, is 180 
degrees opposite from what we should be doing. Other than that, 
we're doing fine.
    But this is an opportunity. I agree with that. We do have 
the ability to reform especially Social Security, which you can 
reform any of a number of ways and send the signal that we know 
how to deal with our problems, take some red ink out of our 
future and deal with the debt, and that would be a great first 
step toward addressing what I think is the paramount issue of 
our time. Thank you.
    [The prepared statement of Hon. Douglas Holtz-Eakin appears 
in the Submissions for the Record on page 65.]
    Chairman Brady. Thank you, Doctor. Dr. Johnson.

STATEMENT OF SIMON JOHNSON, PH.D., RONALD A. KURTZ PROFESSOR OF 
 ENTREPRENEURSHIP, SLOAN SCHOOL OF MANAGEMENT, MIT AND SENIOR 
    FELLOW, PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS, 
               CAMBRIDGE, MA, AND WASHINGTON, DC

    Dr. Johnson. Thank you, Mr. Chairman, and thank you, 
Members of the Committee, for the invitation.
    I agree with some of the points that have been made by my 
distinguished colleagues. I think this is an opportunity. I 
would recommend drawing on the international experience to 
which you mentioned at the beginning, Mr. Brady, my work with 
the International Monetary Fund, my work on economic crises 
over 25 years around the world. I think you should aim for more 
debt reduction over the next two decades than even Senator 
Gregg suggested. I think a target debt/GDP by 2030 in the range 
of 40 to 50 percent makes sense because you do not know what is 
going to happen in a country like the United States with 
opposition in the world and needs to have what the IMF likes to 
call fiscal space; the ability to take on challenges both 
domestic, for example, in the case of another financial crisis, 
or international. We do not know what is going to come our way.
    So I think you should seize this moment. I agree also with 
my colleagues, there are some things on the table, including 
Social Security reform, that are achievable.
    I think unfortunately we are perhaps inadvertently already 
in a fiscal disaster. Senator Coats is of course correct, there 
is one kind of fiscal disaster that involves people not being 
willing to buy your debt, interest rates go up, the currency 
collapses, and you go hand-in-cap to the International Monetary 
Fund.
    That is not our reality today, obviously. I doubt that is 
what we face over the next decade or two. I think we are much 
more likely to get what Dr. Holtz-Eakin referred to, which is a 
confused combination of policies that emerge from our 
distinguished and wonderful Constitutional system--don't get me 
wrong--but the way it is playing out is a big unfortunate. And 
particularly undermining again what Dr. Holtz-Eakin said, which 
is the essential public goods that the government provides, 
research and development, for example, defense, the readiness 
of our military forces also an essential part of maintaining 
prosperity.
    I think what we should do, and what I hope you will do, is 
assess the programs that we have, both in terms of their pro-
growth impact--which is the returns on much of that; I read the 
CBO literature carefully; returns are impressive; and not just 
Social Security but also the social insurance we provide 
through the health care system.
    I think we would all agree is the big sticking point. I do 
not think the issue there, by the way, is Medicare per se, 
although obviously the numbers Dr. Holtz-Eakin showed are 
correct, if you want to look out 50, 70 years, it is all about 
health care--but it is health care spending. Not just the 
government-provided part of health care; it is the entire 
health care spending, the drivers of health care spending.
    If you take those out of the budget and shift them onto 
firms, or onto families, that is a big competitive disadvantage 
to the American companies. I talk a lot to CFOs and CEOs about 
tax reform, corporate tax reform, and I think there are some 
sensible ideas out there, but I always impress on them that in 
20 years the big driver of loss of competitiveness in the 
United States is going to be our health care system.
    I think I have recommended to many of you and to your staff 
before, but I will recommend again, Statistical Table 12-A in 
the IMF's Fiscal Monetary publication--all the good stuff in 
the IMF papers is at the back in the statistical tables--12-A 
compares projections of health care spending and the impacts on 
budget looking out 20, 30, 40 years across the countries we are 
going to be competing with.
    This is where we really look bad. We have to get a handle 
on that. And you have to decide, with an aging population, with 
improvements in medical technology, with an inability or a 
great difficulty of running private insurance schemes for 
people who are in their 80s and 90s--that was the experience 
before Medicare; that will be the experience if Medicare ends--
how much social insurance did you want to provide?
    As Senator Gregg said, what is the size of government as a 
percent of GDP that is consistent with that? I am afraid, in 
the numbers that I look at--again drawing on the CBO--21 
percent of GDP is low, looking out over 3, 4 decades, because 
of what is happening to the nature of our population.
    This of course brings us to the most difficult issue, which 
is revenue. I do not see how you could balance the budget in 10 
years without increasing revenue; I read Mr. Ryan's budget 
proposal; I don't think that is a good idea. I don't think that 
is conducive with continued growth, let alone accelerating 
growth for the kind of prosperity we are hoping for.
    I think the specifics that Senator Klobuchar put on the 
table, the specifics that are in the Senate budget proposal 
that Senator Murray presented yesterday, should absolutely be 
part of the agenda. And I hope they are part of the 
conversation. And I hope that they are part of the compromise.
    As Senator Gregg said, we are one good debt deal away from 
a great period--another great period of American prosperity.
    Thank you, very much.
    [The prepared statement of Simon Johnson appears in the 
Submissions for the Record on page 76.]
    Chairman Brady. Thank you, Dr. Johnson.
    I have to confess, I hope to live my entire life without 
ever reading the IMF's Statistical Table 12-A----
    [Laughter.]
    Just let me be clear there.
    The testimony was excellent. I had a chance to read it 
earlier this week. It was very insightful, and I think that Dr. 
Holtz-Eakin's point on the growth gap of the current recovery, 
and the prospect--not reality--the prospect of potential GDP 
falling permanently over the long haul is a concern of the 
Joint Economic Committee. And together in a bipartisan way we 
are going to look at ways we can close that, both on the fiscal 
and monetary side as we go forward.
    I have a couple of questions that I would like to run 
through quickly. None of them are ``got'cha'' questions. We 
rarely have this opportunity with you four experts here.
    So on making Social Security and Medicare solvent over the 
long term what is critical to all of this is timing. How soon 
should Congress and the President act to assure investors, to 
avoid a potential downgrade, to really address our financial 
situation.
    Senator? Each of you? How soon should we act on reaching 
the solution?
    Senator Gregg. I think you have to act to show seriousness 
of purpose as soon as possible. And when you do that, I think 
some of the growth issue is going to be addressed, because I 
think the markets will respond, as well the investment 
community to that sort of action.
    Chairman Brady. I agree.
    Senator Gregg. That means setting up a definable process 
for getting to closure on an agreement on entitlement spending 
and on revenues.
    Chairman Brady. You're thinking this year, or next?
    Senator Gregg. Oh, this year. Before June, hopefully.
    Chairman Brady. This year. Thank you. Dr. Rivlin.
    Dr. Rivlin. For Social Security, I would say 10 years ago. 
But this year will do.
    [Laughter.]
    We have known about this problem for a long time and have 
not fixed it.
    On Medicare, I would say right now. We are still learning 
about how to improve the efficiency of health care, but I think 
the accumulating knowledge gives us enough to go on right now.
    Chairman Brady. Got it. Dr. Holtz-Eakin.
    Dr. Holtz-Eakin. I do not have a clever way to impart a 
greater sense of urgency. I mean, the sooner the better. Let's 
face it. And there are some demographic mechanics that make 
this an imperative.
    If you think about changing Social Security for example, 
and there has been the convention of grandfathering those who 
are of a certain age or younger, 55 or younger, I am now 55. I 
am the trailing edge of the Baby Boomer generation. If you 
grandfather me, you grandfather the problem. And so the bumper 
sticker should be: Get Doug Holtz-Eakin, and get him this year.
    [Laughter.]
    Chairman Brady. We'll get that printed up. And you're 
talking about timing of this year, act now, Federal Government, 
ten years. Got it. Dr. Johnson.
    Dr. Johnson. Well for the record, I would like to note that 
Dr. Rivlin has actually been warning us all about this since 
the 1980s. So it is 30 years ago. And I think you should act 
immediately.
    Why not establish a bipartisan commission along the lines 
of that established by President Reagan and Congress in the 
1980s? Specifically I would suggest to deal with Social 
Security. That is surely not an easy problem, but a problem 
where the two sides seem better able to come together.
    On health care and on Medicare, that seems more difficult. 
And I agree with showing purpose would be very helpful, and if 
there are ways to take that away from the intensity of the 
partisan discussion that would be extremely constructive, but I 
am not sure I have seen that on the table yet.
    Chairman Brady. And I agree. We ought to be--we could save 
Social Security this afternoon. The truth is, we all know what 
needs to be done.
    Along those lines, there is talk about changing CPI and 
Social Security and some means-testings for Medicare. Are those 
two reforms alone enough to make those programs solvent over 
the long term? Or do we need to do more?
    Senator.
    Senator Gregg. Those would go an inordinate amount of the 
way, but you should also adjust the BIN points, obviously, 
which is means-testing, and probably the age. Interestingly, in 
Simpson-Bowles we decided to take Social Security out of the 
deficit debate and the debt debate and deal with it separately. 
I understand Senator Durbin is suggesting that also.
    There are only four or five moving parts and they can be 
adjusted so quickly, if you can get the politics to agree to do 
it, and that is why doing it independent of the debt issue is I 
think so important to take the politics out of the issue.
    In my view, if the Durbin approach was followed, it should 
be--that Commission should report by Easter and vote on it 
before the summer recession.
    Chairman Brady. Dr. Rivlin.
    Dr. Rivlin. You need to do more. The chained CPI is a 
technical change which would improve the estimate of inflation 
in the benefits. But it need not be done in a way that hurts 
low-income or especially old people.
    In the Domenici-Rivlin plan, we did go for chained CPI but 
we also bumped up the minimum benefit, and the benefit at age 
85, so that you don't disadvantage people who live a long time. 
I am increasingly for that (laughing).
    And on Medicare, yes, you need to do both. And I am not a 
fan of raising the age at this point, actually.
    Chairman Brady. Got it. Dr. Holtz-Eakin.
    Dr. Holtz-Eakin. I would concur. I think you need to do 
more, no question.
    On Social Security, I think it is very important to 
remember that you are really not doing more. The current plan 
is that the program will remain actuarially solvent. And the 
way we are going to do it is we will have essentially a Social 
Security sequester, an across-the-board cut at 25 percent.
    That is a disgraceful way to run a pension program. And so 
it is not about doing more to Social Security; it is about 
doing something more intelligent, and doing it now so that 
people can plan.
    On Medicare, I think the number one priority should be to 
put it on a budget. Right now the gap between payroll taxes and 
premiums going in and spending going out is $300 billion a 
year. It is a third of our trillion dollar deficit. It's got 
10,000 new beneficiaries every day.
    So you have to send the signal to the provider in the 
beneficiary community that there is a certain amount of money. 
Go do something smart with it.
    Chairman Brady. Thank you. Dr. Johnson.
    Dr. Johnson. Congressman, as you know on Social Security we 
did not index the maximum wage subject to Social Security. I 
would go back to what worked for Ronald Reagan. If it worked 
for Ronald Reagan, it should work for us today.
    I think you should look at pension age. But you have to be 
very careful that, while longevity on average has increased 
substantially in American males aged 65 who are expected to 
live 3 years longer than was the case in 1970, that is not true 
across the entire wage distribution. Manual workers, lower 
income people, have not--lower income males have not had an 
increase in longevity. And I think you want to be very careful 
about balancing those adjustments in that framework.
    And just changing the CPI does not do that for you. And on 
Medicare----
    Chairman Brady. If I may, Doctor, I apologize. We are going 
to let you step forward in just a second. I want to turn this 
over to Vice Chair Klobuchar. But a quick question: A lot of 
talk about tax increases again. We have had a first round, 
about $1 trillion in the President's new health care law, a 
half a dozen of which have kicked in this year.
    Republicans and Democrats agreed on $600 billion plus at 
the beginning of this year's fiscal agreement. Absent 
fundamental tax reform, does anyone on the panel want to argue 
that another round of tax increases will be helpful to the 
struggling economy?
    [No response.]
    Vice Chair.
    Vice Chair Klobuchar. Did you want them to answer?
    Chairman Brady. I got the answer I wanted, so----
    [Laughter.]
    It's like Moneyball. Hang up. Vice Chair.
    Vice Chair Klobuchar. Okay. We can go back and answer some 
of those later. I just wanted to get some common ground here. 
It appears as though all of our witnesses agree that 
sequestration is not the best solution right now. Is that 
correct?
    And that----
    Senator Gregg. If I could just annotate that, it is a 
better solution than doing nothing.
    Vice Chair Klobuchar. Okay. Thank you. But we could do this 
in a more nuanced way in terms of where the spending cuts hit. 
All right.
    And then also that we should be doing something to keep 
Social Security solvent, and that there are many ways to do 
that. I am not going to get into those details. I thought that 
the Chairman did a good job of getting some of those answers, 
but that that could be done in a way that the savings would go 
back into Social Security as Senator Durbin has suggested. And 
there are many ways that we could do that.
    I guess my question is: As we go forward here--two. One is 
the substance of how we should do this balance with the 
spending cuts and revenue. And the second is something Senator 
Gregg raised about how we get this done procedurally. Because I 
completely share in this view that we are one debt deal away 
from being able to not only expand but to also tackle some of 
these other issues that we have to work on in Congress, whether 
it is immigration reform, or whether it is some of the 
workforce training issues that we are confronting right now.
    I mentioned about how with the spending cuts when you 
include sequester about 80 percent enacted since 2011 has been 
spending cuts for the debt reduction. And that is not 
consistent with where the Rivlin-Domenici or Simpson-Bowles 
were. What balance do you think would be best?
    I think I'll just ask you two that question, first, 
starting with Dr. Rivlin and then Senator Gregg. With the 
remaining amount to get to at least the $4 trillion.
    Dr. Rivlin. I think it works out to roughly half and half. 
I am not sure how we add up the numbers exactly, but we need 
substantial increases in revenue from tax reform.
    I would not give a positive answer to the Chairman's 
previous question. We have lots of room to reduce spending in 
the Tax Code. And we need to do that. And it will produce more 
revenue in a progressive way over time, and we need to do that.
    Vice Chair Klobuchar. And you see that as, if we do it in 
the right way--and I threw a few ideas out there, and obviously 
you have some as well--that we could do that, in addition to 
making some spending cuts, and then some of the entitlement 
reforms that you suggested, that we could do that in a way that 
would not set us back, which I think is important to everyone 
up here.
    Dr. Rivlin. I think we have done enough cutting in 
discretionary spending as a total. You can reallocate it toward 
more growth-producing things, and perhaps over time away from 
defense and toward domestic, but I would not say more 
discretionary cuts were the priority at all.
    I think the stabilization of the debt depends on reforming 
the entitlements.
    Vice Chair Klobuchar. Senator Gregg.
    Senator Gregg. I think in order to get Republican buy-in on 
further revenues you are going to have to do policy changes in 
entitlement accounts that bend the curves in the outyear in a 
very substantial way, and make it clear that those accounts are 
sustainable.
    And once you do that, you can get a buy-in I believe from 
many Republicans on the issue of taxes through tax reform. And 
affixing a number to that, well Simpson-Bowles was 3-to-1 
theoretically; the President has been 2-to-1. My view is that 
it is the policy that should drive this, and the key policy is 
entitlement reform that bends the outyear curve.
    Vice Chair Klobuchar. And I know, coming from New Hampshire 
you have seen some of the Dartmouth studies on the delivery 
system reform, and the Mayo Model, and those things that I hope 
would be a part of this.
    Senator Gregg. Absolutely. I don't think you can get there 
without doing what Dr. Rivlin referred to, which is you shift 
from a utilization system to a qualities and outcome system. 
You start to capitate the costs so that your people are--the 
system is reimbursed on the individual, as versus on the 
procedure.
    And that is going to get you where you want to go. And 
interestingly enough, there is a massive amount of activity 
occurring in the marketplace right now. It is occurring in your 
state at the Mayo Clinic. It is occurring in Utah. It is 
occurring in Pittsburgh. It is occurring at Baylor. To try to 
accomplish that.
    Vice Chair Klobuchar. And then on this process issue, which 
we talked about some when I saw you yesterday, when you talked 
about the Senate going first--and I appreciated the Chairman's 
not being even snarky about the Senate----
    [Laughter.]
    One of my favorite former House Members, Congressman 
Oberstar, always used to joke that all they ever do in the 
Senate is confirm judges and ratify treaties. And I said we 
haven't even been confirming enough judges lately.
    But I think things have greatly improved in the last year 
in terms of getting some of the mid-sized bills through the 
Senate, whether it's the Farm bill, the Patent Reform bill, the 
Transportation bill. And as you noted, I see a lot of hope with 
this group in the middle that is working on the debt.
    And I wondered if you could talk about, if we pass a budget 
in the House and Senate, as I think is happening as we speak, 
then how we procedurally get to this place where we are in a 
conference committee, but then we allow the Senate to work with 
the President, who clearly is now very engaged in this issue to 
come up with some kind of deal that could be the true 
compromise you are talking about.
    Senator Gregg. Well, Dr. Holtz-Eakin would probably have a 
view on this, but I think that the budget process is probably 
the wrong vehicle. Because when it hits the floor, you are 
going to see all sorts of hot-button amendments which are going 
to put people in positions of voting and formalizing their 
position in a way which is not constructive to compromise.
    And then, assuming you could even get a conference, the 
vehicle for getting something significant done would be 
reconciliation. And you cannot do significant health care 
reform through reconciliation, in my opinion, even though 
Obamacare was allegedly done that way, but you really can't do 
it. Because your reconciliation inherently produces, instead of 
getting a horse you get a camel. In fact, a multi-backed camel, 
because of the Byrd Rule, which goes through and makes public 
policy--just eviscerates good public policy, the Byrd Rule 
does.
    So I think you are going to need a new vehicle. You are 
going to need the President leading the group. The President 
has got to be in the room, and he's got to bring everybody 
together and people have to agree on what they need to do, and 
then you develop the vehicle to accomplish the goal.
    Vice Chair Klobuchar. And I know a lot of this was just 
what we saw in the papers, but I have seen numbers on this. It 
seemed to me at the end of the year that the President and 
Speaker Boehner in their proposals were not that far apart in 
terms of optimism for trying to get this done. Has anyone 
looked at those?
    Dr. Rivlin.
    Dr. Rivlin. Yes, I think they were very close. And the 
importance of having the President help broker the deal I think 
is very high.
    Vice Chair Klobuchar. Okay. Do you want to add something 
here, Dr. Holtz-Eakin, Dr. Johnson, generally to my questions?
    Dr. Holtz-Eakin. ``Close'' does not count until you get a 
signature, so there is a lot of work to be done. And I think 
this discussion underestimates the importance of getting the 
White House involved. And the White House needs to exercise a 
degree of leadership that has been missing. Only the White 
House can put out a proposal that says this is a national 
issue. Only the President is elected by all the people. And his 
missing in action on this over the past years has stopped the 
Super Committee from being successful. That was a lot of good 
work. It was done with great intention. It did not get across 
the finish line.
    Things only get across the finish line with White House 
leadership, and that is an imperative at this moment.
    Vice Chair Klobuchar. Dr. Johnson.
    Dr. Johnson. Senator, we spend about 17, 18 percent of GDP 
on health care. The British spend 8 percent. Our government 
spends 8 percent. We get about the same outcomes as the 
British. I am not recommending their system, but I think using 
the pricing, using the power to negotiate the cost of 
prescription medicines in this context, and other assertions of 
the market power to the government when you are buying that 
much health care, is essential if you want to control the 
costs.
    Vice Chair Klobuchar. Okay. Very good. Well I appreciate 
all your comments. Senator Murphy is going to fill in for me, I 
believe, for awhile. I am going to be over at Judiciary, but I 
thank you for what you have done. And I do see some common 
ground here, and I see some common ground up here, especially 
in our really strong belief that we have to get this done and 
get moving on this, and the time for games is over.
    So thank you very much.
    Chairman Brady. Thank you, Vice Chair.
    Senator Coats.
    Senator Coats. Thank you, Mr. Chairman.
    This is a fascinating discussion. I really appreciate the 
comments from all of you, particularly from Senator Gregg and 
supported by others, in not just the ``what.'' We have been 
debating what should we do for a long time now, and we have had 
numerous commissions and committees and so forth and so on. But 
also the ``how.''
    Because if time is of the essence--and I think there is 
unanimous agreement that we need to do this now; we run into 
political difficulties really once we get past July and people 
start focusing on the next election in 2014 and Members are 
looking to what do I need to do to protect myself from the 
onslaught of why did you do this? In primaries and so forth. 
And then you're into a Presidential cycle.
    And so that pushes real opportunities like this one into 
about 2017, which I think most of you would conclude is way too 
late. So this is the time. This is the time to do it. And so 
focusing on the how do we get it done, I appreciate Senator 
Gregg's contributions in that regard.
    The question, Dr. Rivlin you said in your testimony, you 
said that comprehensive tax reform and the other reforms that 
needed to be made to stabilize the debt need to be 
simultaneous. How do we make these simultaneous?
    And I guess I would ask that question of Senator Gregg 
because you were talking about the how. If we all agree that 
they need to be simultaneous, there is a lot of talk about 
comprehensive tax reform. That takes a year at least, or it is 
going to take more than a year and so forth. And right now they 
are separated in terms of what we need to do now.
    So it is discretionary spending and mandatory now, tax 
reform later. So, Senator Gregg, do you have a suggestion as to 
how we push tax reform as simultaneously with this other 
effort?
    Senator Gregg. I think you need an agreement that is a 
hybrid reconciliation bill--it probably shouldn't even be 
called ``reconciliation''--but that essentially outlines in 
very specific language as to what the committees of 
jurisdiction must do, and the time frame they must do it, so 
that they are reporting back on comprehensive tax reform and 
entitlement reforms essentially on a time track that is very 
visible, very transparent, and everybody knows it has to be 
done.
    And failure to do that needs, in my opinion, a fallback 
position which forces action. Maybe you just take Simpson-
Bowles and use it as your fallback position, but something like 
that so that you end up with--or Wyden-Coats would actually be 
an excellent fallback position on the tax side--so that you get 
something done, and you have a clear pathway, and it is subject 
to certain rule requirements which force it to be done.
    Senator Coats. Appreciate the plug for Wyden-Coats. Anybody 
else want to comment on that? I think the question pretty much 
has been answered.
    Let me go to a second. Michael Boskin and Austan Goolsbee 
testified before us just a few weeks ago. We were talking about 
balance, and that question has come up.
    Dr. Boskin said, well, there are two different types of 
balance. The President basically defines balance in more of a 
socioeconomic way. That is, fairness requires 50 percent taxes/
50 percent spending. He said, but economic balance doesn't fit 
that model at all.
    The ratio, if you want to achieve the kind of growth that 
is necessary and put us on the right path and deal with this 
debt/deficit issue, that balance needs to be, he said, a 5-to-1 
or 6-to-1 ratio. Austan Goolsbee said, well, at least it ought 
to be a 3-to-1 ratio, and not lower than that.
    Well currently we are either at a 2-to-1 with the political 
system essentially right now saying, no, no, it needs to be 1-
to-1. What are your thoughts on that? Let me start at the other 
end with Dr. Johnson
    Dr. Johnson. Well on this point I think, Senator, I 
disagree with Dr. Boskin. I think that--again, you have to go 
program by program. And I understand this format, we do not 
have a lot of time to do this. I did write a book on this 
topic--I understand Mr. Brady might not want to read that, 
either----
    [Laughter.]
    But if you go through what does the government do, and I 
think to the point, to your point which is a very good point, 
what gets in the way of growth? What is good for growth? What 
gets in the way of growth? And what is part of a reasonable, 
fairly basic compared to other countries, but reasonable system 
of social insurance that we have developed over the decades?
    When I look at it that way from the bottom up, I come to 
the position that, while there are important changes to be made 
on the spending side, some of which you have already done, some 
of which Senator Klobuchar talked about, I lean much more 
towards overall revenue side. The Bush tax cuts took about $4 
trillion--looking over the decade, the basis that we usually 
do--about $4 trillion in revenue out of the system.
    I would seek--and I was trying to dissent on your earlier 
question, Chairman Brady--I would seek to replace that--not 
immediately; not with immediate austerity, so don't please 
misquote me on that--but over two decades I would like us to 
get back to the kind of revenue trajectory we were on prior to 
the Bush tax cuts.
    And then we have to look, going beyond the two decades, at 
Dr. Holtz-Eakin's chart and say, okay, what is happening to the 
demographics of our population, to the income-earning 
capabilities, to the kind of health care that people want and 
hope to get when they are 95 in 2050.
    Senator Coats. Thank you. Dr. Holtz-Eakin, did you want to 
comment on that?
    Dr. Holtz-Eakin. Economic balance says revenues match 
expenditures. And that is the only balance that has any sort of 
substantive foundation. The rest is politics. And all these 
ratios are politics.
    Everyone in this town loves to talk about taxes. You know, 
I used to have hair and they were still talking about taxes 
back then. All we talk about is taxes. The fundamental 
decisions the government makes is to spend the money.
    So I would go back to what Senator Gregg said. Design the 
programs. Decide how large the government is going to be. Do a 
tax reform to finance it so that the budget balances, which is 
something we have--a discipline we have lost in the Federal 
Government that needs to be restored.
    Senator Coats. Dr. Rivlin.
    Dr. Rivlin. I do not see any magic in Mike Boskin's 
assertion that there is a specific ratio of taxes that is most 
conducive to growth. I think we can make our tax system a lot 
more conducive to growth by getting rid of the spending in the 
Tax Code, or reducing it, and still raise considerably more 
revenue in a more pro-growth way.
    And I do not think it is realistic that a country with our 
values can absorb half-again as many seniors over the next 10 
years by reducing their benefits in order to get to balance 
that way. It is just not realistic.
    Senator Coats. My time has expired. But a quick comment, 
Senator Gregg.
    Senator Gregg. Well I think the appropriate way to approach 
this is to set the size of the government as a percent of GDP. 
Once you have done that, everything else falls from that. 
Historically it has been 19.8 percent. We have had a massive 
expansion of retirees. Simpson-Bowles agreed to go to 21\1/2\. 
Somewhere between those two numbers is probably the right 
number.
    Senator Coats. Thank you. Thank you, Mr. Chairman.
    Chairman Brady. Thank you. Representative Cummings.
    Representative Cummings. Thank you very much.
    First of all, Dr. Johnson, thank you for referring to 
entitlements as ``social insurance'' because that is exactly 
what it is. Sometimes I think we forget that.
    And one of my concerns, Dr. Rivlin and Senator Gregg, is 
that when we are dealing with entitlements, changing CPI, 
raising the age, things of that nature, at what point do we get 
where people simply are placed in a position, say, for example, 
where they have got to take a voucher out to get insurance, and 
they are not able to afford it, at what point does it become 
counterproductive?
    In other words, folks are not able to get the health care 
that they need. Or they are falling into a situation where, 
like many African American males, they die before they even get 
Social Security. They die. They're dead.
    Or say if you change the age with regard to Medicare, 
needing Medicare when you cannot get it, or whatever. And I am 
just wondering. You know, Mark Zandy came here awhile back, and 
one of the things he said was the thing that drives Medicare 
costs of course is the cost of medicine.
    And he said that he felt that there was some sign that the 
cost of medicine in Medicare, the inflation in Medicare costs, 
was at least beginning to stabilize. And he said that he 
believed that it was in part due to the Affordable Care Act.
    And I am just wondering, you know, how do you all see that? 
I am really concerned, because a lot of my constituents, all 
they have is Social Security and Medicare. That's it. They 
don't have any pensions. They don't have any savings. Many of 
them have been victims of the Recession, lost their homes, lost 
all their equity.
    And there are a lot of people like that. It sounds like you 
all took it into consideration with the Domenici-Rivlin report 
where you looked at older folks and you needed to have 
different formulas and that kind of thing, but I am just 
curious. I know there is a lot there, but I would like for you 
to address that.
    And finally, how important is it, Senator Gregg--and I 
agree that we need to separate Social Security from all of the 
other things, the other social insurance type matters that we 
are dealing with.
    Dr. Rivlin. I think you are raising absolutely the right 
considerations. When you do either Social Security reform or 
Medicare reform, you have to look at who is impacted by it.
    But I believe you can put Social Security back on a firm 
foundation without making it harder for low-income, low 
earners. As I said, in Domenici-Rivlin we actually increased 
the benefits, made them better off in the reforms that we put 
in place.
    And then you have to do some compensatory things at the 
high end, a little less generous benefits for people with 
higher income.
    In Medicare, I believe that we can make our system more 
efficient by rewarding quality and outcomes across the board in 
getting away from fee-for-service in a way that does not hurt 
anybody in the near-term.
    Now maybe in a few decades we will have to worry about 
rationing care, but we have such an inefficient health system 
that we can squeeze out some of this duplication and excess 
spending on health without hurting patients. I truly believe 
that.
    Representative Cummings. Senator Gregg.
    Senator Gregg. I think Dr. Rivlin is absolutely correct on 
both points, and Simpson-Bowles did the same thing that 
Domenici-Rivlin did, which was to actually increase benefits to 
single women over 85, and low-income individuals.
    And I actually believe if you do Medicare reform correctly, 
you actually get a better system at a lower cost, which is 
exactly what we need, which is what Dr. Johnson's point is. You 
can't have our health care system absorbing so much of the 
economy.
    Do you separate out Social Security from the others? I 
think you should. My concern about doing it too quickly, 
although it should be done immediately, without moving the 
other part of the equation is it is going to take a lot of air 
out of the balloon once you fix Social Security to do the rest 
of the problems. Even though substantively it does not impact 
our long-term debt dramatically to fix Social Security, it 
psychologically would. And I am not sure how much energy would 
remain to do the Medicare fixes and the tax reform if you did 
Social Security unilaterally and on a separate track.
    But it can be done and should be done because it is doable.
    Representative Cummings. Dr. Johnson.
    Dr. Johnson. Just one point on the age of Medicare, which 
has not really come up yet but obviously it is in the mix. I 
think that is one you should worry about a great deal, 
Congressman. If you move that from 65 to 67, that is going to 
impact exactly the groups that you are worried about.
    This is a very hard risk to insure. It is going to be 
expensive if they do it by themselves. The companies are not 
going to want to take on that risk. That is an additional hit 
to American competitiveness, by the way.
    So moving the age of Medicare--I agree of course with 
making the system run better with controlling the price of 
prescription drugs. It is going to be essential. I would not 
advise increasing the age at which people qualify for Medicare.
    Dr. Holtz-Eakin. Could I just add a footnote to that? I 
mean in the aftermath of the Affordable Care Act we have 
exchanges which have subsidies for low-income Americans of any 
age. And presumably they would provide quality insurance.
    And so the notion that somehow changing Medicare is going 
to leave people outside the safety net is just not true.
    Representative Cummings. Well unfortunately, and as I 
close, there's a proposal to get rid of the Affordable Care 
Act. So we have to take that into consideration, too--I don't 
think it's going anywhere, but thank you very much.
    Chairman Brady. Thank you, sir. Representative Paulsen.
    Representative Paulsen. Thank you, Mr. Chairman. A great 
hearing and some similar, common themes actually from all of 
you that have taken the time to testify today.
    There is a question right now, knowing that debt is an 
issue and it is a drag on our economy, I want to dive into this 
a little bit deeper with Dr. Holtz-Eakin. But it absolutely is 
an issue.
    The question is sort of how urgent is it of an issue right 
now? I know that Senator Gregg had a column recently in The 
Hill from February 25th how the window of opportunity is 
closing. Mr. Chairman, if I could just submit that for the 
record, that would be great.
    [The article titled ``Windows of Opportunity Closing'' 
appears in the Submissions for the Record on page 83.]
    Representative Paulsen. And also, mention the President 
just yesterday in an interview, he actually said that we don't 
have an immediate crisis in terms of debt. He said for the next 
10 years we are in a sustainable place.
    That is kind of an interesting comment to me. I think CBO 
kind of backs up, we've got a serious growth gap now. There's a 
drag on the economy in terms of having a report that says debt 
held by the public is projected to remain historically high 
relative to the size of the economy for the next decade.
    And already such a debt would increase the risk of fiscal 
crisis during which investors would lose so much confidence in 
the government's ability to manage its budget that the 
government would be unable to borrow at affordable rates.
    And what is clear, there is this correlation between high 
levels of government debt and slower growth. And, Dr. Holtz-
Eakin, you did not touch on it in your oral testimony but in 
the written testimony you did talk about this one percentage 
point penalty.
    Can you just talk a little bit real quick on that based on 
your testimony regarding that one percentage point penalty, 
when you're at a certain level above 90 percent of debt, and 
the drag on the economy. And I should ask you this, too. Do 
CBO's projections of employment and income growth, do they 
fully account for the loss imposed by slower economic growth, 
in your view?
    Dr. Holtz-Eakin. Well the empirical finding--this is not my 
finding, but this is out of the literature--is that highly 
indebted countries over 90 percent of GDP gross debt, is the 
measure of debt used here, pay about a one percentage point--
that's the median estimate--penalty in growth per year.
    And often the question is sort of how does this happen 
miraculously that we grow more slowly? But if you think about 
where we are with dramatic levels of debt, over 100 percent of 
GDP, the projections that show an unsustainable trajectory, if 
you do not make a commitment to control spending, then what 
have you said to the world?
    You have said, well, if you want to locate here, or hire 
here, expand here, then you face two futures. Future number one 
is where we do not do anything. We do not fix the spending. We 
do not fix anything. And we hit a financial crisis--it is not 
exactly a pro-growth policy.
    Or future number two is one where we try to tax our way out 
of this problem. And that is utterly detrimental to growth, 
particularly given where we are. And so it is not surprising to 
me that heavily indebted countries, particularly when you get 
out in the tail where we're headed, have bad growth problems. 
It is a terrible signal to send.
    And so that, I think, merits some fixing. Now I just want 
to say, there is this counter-argument that says, no, no, no, 
we want to spend now, stimulus. You know, I'm not a big fan of 
that, but there is not as big a conflict as you might think, 
because if we do the right reforms that everyone here has 
talked about, go where the money is in the mandatory spending, 
you can take the pressure off the discretionary side. You do 
not have to have discretionary austerity, and we can do a lot 
better.
    Representative Paulsen. Yes, I would concur. That would be 
the right direction. But let me just ask this question for 
everyone on the panel real quick, because it seems to be almost 
universal, almost universal in the testimony that in these 
bipartisan plans we need part of the focus to be on fixing the 
Tax Code. Right? And economists call for lowering rates, 
especially the corporate rate, broadening the base, eliminating 
loopholes.
    However, at times around the Capitol, most of the 
discussion has been centered around on boosting revenue as a 
part of the existing Code from reforms. Should the discussion 
about higher revenues focus on reforming the Tax Code to spur 
higher economic growth levels? Or should it be more focused on 
getting more revenues out of the existing Tax Code?
    Senator Gregg, and we will just go right down.
    Senator Gregg. I think Simpson-Bowles got it right on this 
point. We reduced deductions and exemptions so that we 
generated $1.1 trillion of revenue every year. We took $1 
trillion of that and reduced rates. So the rates under Simpson-
Bowles were 9, 15, and 23 percent on the individual side. We 
took $100 billion and reduced debt.
    So over the 10 years of the Simpson-Bowles $4 trillion 
number, $1 trillion came out of revenue and $4 trillion came 
out of--was represented as being savings. But the purpose of 
the tax reform in Simpson-Bowles was to create a Tax Code which 
would energize massive growth where people would invest for the 
purposes of return rather than for the purposes of avoiding 
taxes. And as a result, you would not only get the static 
number of $100 billion of more revenue coming into the 
Treasury, but you would get an actual dynamic number of much 
more than that.
    Representative Paulsen. Dr. Rivlin.
    Dr. Rivlin. I think fortunately it is not a choice. If we 
do the right thing on reforming the Tax Code, we will have more 
revenues and we need them.
    Dr. Holtz-Eakin. I agree with that. I think one of the 
lessons here is something the Senator said earlier, and I want 
to emphasize it. If you lose sight of good policy in the effort 
to get the right numbers, this is a bad exercise.
    A tax reform is good policy. It will cause growth. It will 
also generate revenues.
    Dr. Johnson. Congressman, I think you should be bolder on 
taxes: Value Added Tax. Shift from taxing income to taxing 
spending. Actually, there is a lot of agreement across the 
political spectrum that that is the right general idea. But 
there is very little agreement that you want to go anywhere 
near VAT.
    And just, if I could add to what Dr. Holtz-Eakin said about 
the debt and how much time do we have, which is a great 
question, we have no idea. It depends not just on us, it 
depends on the world. We are the world's number one reserve 
currency.
    If the world shifts its portfolio preferences away from the 
dollar towards, I don't know, the Euro, the Renminbi, some 
other currency, other countries would like that role, then the 
time frame is much shorter. If we stay number one in this 
specific reserve currency sense indefinitely because the 
Chinese blow up their financial system, or the Europeans fail 
to turn around their sovereign debt, then we have a lot more 
time.
    Nobody knows the answer to that question. We should start 
now. We should not act precipitously or in a way that damages 
ourselves. We should set ourselves on a course where people 
say, yes, the Americans have got their fiscal affairs in order 
looking out two, three decades.
    Thank you.
    Representative Paulsen. Thank you.
    Chairman Brady. Great. Thank you. Representative Delaney.
    Representative Delaney. Thank you, Mr. Chairman. And thank 
you for organizing such a terrific panel. I thought the 
comments really have been exceptional, and I think, Senator 
Gregg, you started us off in almost a pitch perfect tone. So I 
appreciate that very much.
    I have--and Dr. Holtz-Eakin, I think that you framed the 
urgency of dealing with this appropriately. And it seems to me 
we almost have some room to over-correct for the problem. 
Because if we act now, as we know we don't have to affect 
current beneficiaries, or even people who are close to being 
current beneficiaries, and if we almost can over-correct for 
the problem, if we have more economic growth than we expect, if 
we can actually bend the cost curve in health care, or these 
other demographic shifts, it gives us tremendous flexibility.
    And it kind of tees up a question, or two questions I would 
like to ask each member of the panel.
    The first is: It seems to me our debt issue should be 
broken into almost two categories. The debt that we have in 
years, call it 1 to 10, which we tend to talk a lot about 
because our budget framing is in 10 years; and then the debt 
crisis that occurs in years 11 through 20, or post-11, if you 
will. And it seems to me, at least in my own opinion, it is the 
second component that is of most concern and will lead to all 
the negative consequences everyone has talked about.
    It will also crowd out every other priority in our budget. 
There will be an interest rate crisis, as Dr. Johnson 
referenced. We do not know when it will happen. The only thing 
we know for sure is we will not be able to predict when it 
happens.
    So my question is: If we were able to successfully deal 
with the future debt concerns that are depicted on the graph so 
well, do we have more flexibility to deal with years 1 through 
10? In other words, is really the problem here the debt in the 
out-years, as opposed to the debt in the short years? Because 
it seems to me we do need to be making investments in our 
economy not so much for the purposes of pure economic stimulus, 
but for the purposes of preparing a broader number of Americans 
for a new world that is fundamentally changed because of 
globalization and technology. And a broad number of Americans 
have been left behind because of that, and a narrow number of 
Americans have benefitted because of that. Not because they did 
anything wrong, it is just the way the cards have been dealt.
    So it feels to me like we do need to make investments. And 
if we could deal with the long-tail risk on our debt, our 
ability to manage, it seems to me, the debt in the next 10 
years is dramatically enhanced and we are in a much better 
position to do the things we need to do.
    So my first question is: Does the panel agree with that?
    And then the second question--and I will lay them both out 
and this way you can deal with them at the same time--is: Dr. 
Johnson, you said something very interesting about thinking 
about revenue and spending levels in the future. And I agree 
with what Dr. Holtz-Eakin said which is this is a mathematical 
formula.
    We should figure out what we spend, and then we should 
develop revenue-gathering methodologies to match what we spend. 
And historically we have thought about these things in kind of 
the 18 to 19 to perhaps the 20 percent range, and that has been 
based on a looking-back approach. And whenever we have gotten 
outside of those bounds, either on the revenue side or on the 
spending side, we end up in very significant issues like we 
have now.
    And we did both of those things. We went way outside it on 
the revenue and we went way outside it on the expenditures, and 
now we have a significant debt. It is pretty obvious.
    In the future--and the world has changed. We are in a 
global economy. Technology has changed everything. We are 
likely to have a sustained period of income inequality because 
people with educations and access to capital do really well in 
this world. And then you have the demographic changes.
    Should we think about that number differently? Is it 18 to 
19? Or in the future is it 21 to 22? So is debt in the next 10 
years the problem, is the first question. And what should that 
range be when we are thinking about years 11 through 20 in the 
future.
    We'll start with Senator Gregg.
    Senator Gregg. Well I do not think you can ignore the next 
few years. But there is no question that if you are going to 
address this issue in a way that has substantive impact on the 
future of our Nation, the prosperity of our children, and our 
standard of living, it is the second 10 years, and the third 10 
years that are the important years, in my opinion, relative to 
policy changes you can make today that impact those years.
    That is actually why I was so encouraged by the President 
putting ``change CPI'' on the table. Because in the first 10 
years, it is not a big number relative to Washington terms. 
It's $200 to $300 billion. But in the second 10 years, it is 
probably close to $1 trillion. In the third 10 years, it is 
multiple trillions. It is a compounding event.
    It is also why I suggested that any agreement that be 
reached has to be subject in the Senate to a 67-vote point of 
order. Because otherwise nobody is going to believe the changes 
which really start to grab in the second and third 10 years.
    I do believe the size of the government is going to have to 
grow simply because of the demographic shift. That is why, as 
probably one of the more fiscally conservative members of the 
Senate, if not the most at the time, although Coburn was on the 
Commission too, I voted for going to 21 percent as the size of 
the government under Simpson-Bowles because of the huge shift 
in demographics.
    Representative Delaney. Dr. Rivlin.
    Dr. Rivlin. The second 10 years or the third 10 years are 
obviously the most important, and most of the sensible reforms 
in entitlements do not cut in until then. And that is why we 
need them.
    But I would not ignore the first 10 years, either. I think 
we can raise more revenue by reforming the Tax Code, and that 
would help our growth sooner than the end of 10 years.
    And I do not think we know how long it might be before we 
had some kind of a debt crisis. And the cost of servicing the 
debt will rise quite quickly, even if interest rates only go 
back to normal.
    On the size of government, we are going to have to go up, 
and I would think actually a little higher, to 22, 22\1/2\, is 
likely to be necessary to absorb this number of seniors.
    Dr. Holtz-Eakin. Great questions. I feel like it's an oral 
exam.
    [Laughter.]
    Let me be brief. Again, I would share the urgency about not 
waiting for the second 10 years. I understand we will get 
bigger changes from those. And there are a couple of reasons 
for that.
    One is, you do not want to rely on the projections. The 
precision of these projections has enormous amounts of 
uncertainty. You cannot count on getting to the second 10 years 
in ways that the charts might appear. And that is a risk I do 
not want to run.
    Second is, you have to somehow commit to fixing the second 
10 years and do nothing in the first. It is hard to sell that, 
that, really, we're going to be serious in 10 years. So moving 
now I think is very important.
    And I do not think that investing is at odds with fixing. 
As I said before, these are both imperatives. And lastly, I 
think there is a big difference between the size of government 
and the composition and what it does. And I think there is a 
very real competitiveness issue and educational reforms that we 
need that are not at odds with picking the size of government 
that is within the traditional norms.
    Dr. Johnson. I agree completely with the way you framed the 
question. I think we need to think about human capital, 
investing in human capital, in a global world where we have a 
lot of people breathing down our necks one way or another are 
the only people who want to trade with us on a reasonable 
basis. The shift in inequality since the tax reform in 1986 is 
stunning, and I think was quite unexpected by anyone who was 
involved in designing the tax system at that point.
    And I think we need to consider that and think about the 
opportunities for younger Americans' education and health care 
that is available to people who do not have a lot of resources 
right now but who are the foundation of productivity and 
competitiveness as you look out through the rest of the 
century.
    I think we are having a very good discussion about the size 
of government. I think that is exactly--as Senator Gregg said, 
that is where you should start. What does it take to provide a 
reasonable level of public goods, both the productivity kind 
and the redistribution kind.
    My math comes out with a different number, and we should 
look at those details. We may be talking about different end 
dates. But I see something more like 23, 24 percent for the 
medium term. I am looking out decades here. But I think that is 
the right conversation to have. What does it take, given your 
demographics, and given the public good you want to provide, 
and then how are you going to finance that?
    I am absolutely on board with the idea that you do not say, 
yes, we are going to fix this in 15 years. Or, I think Senator 
Gregg hit the nail on the head when he said: Put in legislation 
that is easy to repeal when things get tough--absolutely you 
don't do that. Act now, but do not act for immediate austerity. 
You do not need that. You do not want that.
    Act in a way that is consistent with investing for the 
future while demonstrating you have made credible commitments 
to fiscal responsibility. And I am here I think representing 
the view that you need to move much more on the revenue side 
than even my distinguished colleagues want to move.
    Representative Delaney. Thank you.
    Chairman Brady. Thank you. Representative Campbell.
    Representative Campbell. Thank you, Mr. Chairman, and thank 
you three doctors and a senator. Could be a movie.
    [Laughter.]
    There is the old saying that the first step to recovery is 
admitting you have a problem. I first came to Congress in 2005, 
and I would argue then that there was a minority in both 
Parties that thought that the debt and deficit were a 
significant, or certainly ``the'' significant problem.
    I thought we had gotten over that. I thought that by now 
maybe people would see that this is a serious problem, if not 
the most serious problem.
    Yesterday, the President came and spoke to us, the House 
Republican Conference. Frankly, I was discouraged--not that he 
came and spoke; that is always good. But I was discouraged by 
some of what he said, which was that he made it clear that he 
didn't believe that balancing the budget was something that we 
ever needed to do.
    Now I am a CPA so, you know, balancing the budget has a 
symmetry to it which I sort of like as an accountant. But from 
my view, balancing the budget is much more than that; that it 
is something that creates the kind of conditions, or frankly to 
be on the trajectory that will balance the budget will create 
the kind of conditions to unleash the growth that we have 
before us that Senator Gregg has discussed.
    I believe what the President said, as I recall, yesterday 
was that he wanted to stabilize the deficit at 3 to 4 percent 
of GDP. That to me does not solve the problem. And I was 
discouraged by the idea that that was what his main objective 
was, and that any other objective beyond that he felt was 
unnecessary.
    Your thoughts?
    Dr. Rivlin. Let me start. I think the important thing now, 
and we have all stressed it, is not to have your debt growing 
faster than your GDP. And get it on a downward trajectory.
    It is not necessary, in my opinion, to balance the budget 
exactly but we should have deficits that are well below our 
growth of GDP on the average. That is what we did at the end of 
World War II. We had a huge debt then, over 100 percent of GDP. 
We did not run surpluses. We ran small deficits and grew the 
economy faster than the debt.
    We got to a more comfortable state where we were down 
around a debt of about 30 percent of GDP. I would like to get 
there eventually, but not so fast that we wreck the economy.
    Dr. Johnson. What Dr. Rivlin said is exactly in line with 
what the International Monetary Fund says to countries around 
the world, and what your government through the Treasury 
Department urges the IMF to say to countries: Stabilize, bring 
down debt-to-GDP so you want to have growth. And you need to 
consider how much growth you can achieve when you are thinking 
about reasonable, responsible deficit targets.
    But stabilizing, talking about, thinking about is the right 
debt-to-GDP for the country, that is the right conversation.
    Dr. Holtz-Eakin. So I think the problem with stabilizing 
debt is we already have too much. So you are stabilizing at a 
high and dangerous level with unknown risks, like higher 
interest rates, which would further tie the hands of future 
democracies. I mean, that does not make sense for the United 
States.
    I will speak out on behalf of balancing the budget. I mean, 
I am a Ph.D. economist and I was indoctrinated that balancing 
the budget is stupid, and primeval, and represents a 
neanderthal way to think, and I have come around to the point 
of view that we need fiscal discipline in the United States.
    And a commitment to something like a balanced budget is 
something that will be important; that you can design balanced 
budget goals with sufficient flexibility for economic and 
national security emergencies; that they are not dangerous to 
growth; and that we ought to think very hard about a commitment 
to balanced budgets in one form or another.
    Senator Gregg. If our goal is to reach a deal, we should 
not get engaged in this fight. I am 100 percent for balancing 
the budget. I did it governor, and it was my goal here in the 
Congress for years.
    But our goal should be to stabilize the policies which are 
driving our debt. And that means we have got to get everybody 
in the room around those policies and address them. And in 
accomplishing that, we will make--the outcome will be, the 
result will be that we will move close enough to a balanced 
budget so that those of us who want to balance the budget will 
have a reasonable shot at it; and those who want to maintain a 
debt, a deficit of 2 to 3 percent will have their ability to 
make that argument, too.
    But the goal--we should not get sidetracked. In my opinion, 
we should not get sidetracked on this debate because it really 
is not going to move the process forward. Our process needs to 
be to reach a comprehensive, bipartisan agreement--it has to be 
bipartisan because this is a divided government--and so this 
debate I think sidetracks us. Even though it is very important, 
as a Republican, that we balance the budget, I know that that 
is not the position of the President and I do not want to hold 
him to my position in order to get a deal.
    Representative Campbell. Thank you.
    Chairman Brady. Thank you. I would like to welcome Senator 
Murphy to the Committee. And as a former House Member just out, 
I hope you remember some of the little people you met along the 
way.
    [Laughter.]
    We are glad you are here at the Joint Economic Committee.
    Senator Murphy. That is why I asked for this Committee, to 
remind me of all my friends in the House.
    This is a fantastic panel, Mr. Chairman. Thank you for 
putting it together. I have learned a lot already, and I have 
two questions and maybe I will only have time to fit one of 
them in.
    But one of the things I am fascinated by is the relative 
unanimity of this concept that you decide what you need to 
spend money on, what you absolutely need, get a government no 
bigger than what is necessary, and then you fashion revenues 
around it in a way that makes sense so that you have got a 
revenue structure that promotes growth.
    And so I think it might be worthwhile, at least for me, to 
spend just a little bit of time talking about from an economic 
perspective what we actually need to spend money on. You know, 
it worries me that we are spending 3 percent of our GDP on 
infrastructure, when Europe is spending twice that, China is 
spending four times that.
    It worries me that it is three times as expensive today to 
get an advanced degree in this country in real dollars than it 
was in 1980; that we are spending less money today on worker 
training than we ever have before.
    And so I guess my question is: What does the data tell us 
are the greatest chances to get real economic multipliers out 
of investment and spending? What are the accounts that you 
would recommend that we be protecting or advocating for 
increases to try to generate real economic growth?
    For instance, in this last round of negotiations over the 
CR we seemed to protect defense spending, and very little else; 
when, well you certainly have an argument, aside from economic 
multipliers, as to why you should spend on defense, it doesn't 
necessarily add, as does education investment or job training 
investment, or infrastructure investment.
    So can you guys just talk a little bit about what portions 
of the discretionary budget you think are most important to be 
held harmless in order to kind of generate economic growth down 
the line in this new framework?
    Senator Gregg. Well that is an ``eye of the beholder'' 
issue. But the first obligation of a national government is 
national defense, in my opinion. That does not mean you hold it 
harmless, because I happen to believe the Defense Department 
can be subject to fairly stringent review and probably save a 
heck of a lot of money. And I actually think that that is one 
of the pluses of the Budget Act Agreement of 2011, and the 
sequester, is it is going to force the Defense Department to 
face up to some of this.
    I am a great believer in investing in infrastructure. I 
believe that that does give you a very significant return, and 
it is hard dollars on hard projects. I think the biggest 
failure of the stimulus package, besides the fact it was not 
paid for and it was too much--which were two fairly big 
failures--was that only 16 percent of it went into 
infrastructure, which was foolish.
    I think R&D is important. I think education is important. 
But I think Dr. Rivlin has made the point: Discretionary is not 
where the problem is. These are all discretionary issues. The 
problem is not in the discretionary accounts. The problem is in 
the entitlement accounts when it comes to spending.
    And so the focus should be entirely on entitlement accounts 
and how you make those deliver quality outcomes at a better 
price.
    Dr. Rivlin. I would favor spending on smart infrastructure 
investment and smart education and science investment, a 
shifting toward those priorities. But I think it is really a 
question of how well you spend the money, rather than the 
quantity, and we have not done a terribly good job in spending 
on our infrastructure in the best way.
    So it is not just a question of more. But the real point is 
the one Senator Gregg made. That unless we curb the rates of 
growth of spending on older people, primarily, that spending is 
going to squeeze out investments in young people and eventual 
higher growth.
    Dr. Holtz-Eakin. I can only echo the comments. It is very 
important to spend this money well. And I spent two years on a 
bipartisan Transportation Policy Project looking at reforms. We 
have 100 transportation programs that do not unify to serve any 
federal purpose, and do not deliver anything in the way of 
economic benefits to a Nation that needs better infrastructure.
    And so getting these programs to actually produce value for 
their dollars is step number one. That goes in other areas, as 
well.
    I mean, I think education and health we both know are 
delivering products of highly uncertain quality for enormous 
amounts of money. They go up a lot. And we need to clean that 
out. And that I think is one of the hidden pieces of the 
defense spending.
    That is not all planes, and tanks, there are big pension 
problems and big health problems in the defense budget, as 
well. We need to fix those, and that will help us focus on the 
core things which are national security and basic research and 
infrastructure, things our Founders would recognize as 
government.
    Dr. Johnson. I would agree with much of what has been said, 
but want to add and reinforce the importance of children, and 
children's health, and children's education. I am very worried 
about the cuts to Medicaid.
    About half of Medicaid goes to children. These are the 
future of the country. The way the economy has played out over 
the past three decades, completely unanticipated, has skewed 
the income distribution massively in an almost unprecedented 
way in this country. And it means that many people at the 
bottom end of the income distribution cannot invest, do not 
have the money to invest, in the kind of education they want 
for their children. And they cannot afford decent food in some 
cases, or there is a tradeoff between food and health care.
    This is a terrible situation.
    In terms of holding people harmless, Senator, I would try 
to hold harmless, really try very hard to hold harmless the 
children who are right now in the line of fire for a lot of the 
austerity that is being discussed.
    Senator Murphy. Thank you, Mr. Chairman.
    Chairman Brady. All right. Thanks, Senator. For the final 
question, Representative Amash.
    Representative Amash. Thanks, Mr. Chairman, and thanks to 
the panel for being here and sharing your insights.
    I want to discuss a Constitutional balance-the-budget 
amendment for a little bit. About a year-and-a-half ago there 
were votes in the House and the Senate on balanced-budget 
amendments, or BBAs. There were two versions in the Senate.
    The Senate had 67 Senators vote ``yes'' on at least one 
version. In the House we came up with about 23 votes short of 
the two-thirds necessary. States have balanced-budget 
amendments in their constitution, and they follow different 
fiscal rules.
    So I want to ask Dr. Johnson. You have had concerns about 
capping spending as a percentage of GDP. Could you elaborate on 
those concerns?
    Dr. Johnson. Well actually I was expressing support for 
what Senator Gregg said, which is you should first decide what 
is the right level of spending as you look out over some 
decades, given the nature of your society, how you think the 
world is going to change, what threats you will face militarily 
and non-military threats, and what role you want government to 
play.
    And obviously there is a very wide range of views about the 
role of government in this room, but that is the right place to 
start the discussion. If you can agree on that, and we have 
heard 19 percent, 21 percent, 22 percent, and I think I am at 
23, 24 percent, that is about the right spectrum for views, 
once you have decided on that, then figure out how to fund that 
in a responsible way.
    And aiming for balancing the budget I think is fine. I also 
agree with Senator Gregg, it gets in the way now. And the right 
way to operationalize the goal is to think about debt relative 
to GDP.
    Representative Amash. But you would object to putting into 
a balanced budget amendment a cap?
    Dr. Johnson. I have never--I have never and will never 
describe the idea of balancing the budget as neanderthal or 
primitive. That is not my view. The United States was run for 
the first 150 years on the principle that we should aim to 
balance the budget at least in good times.
    However, there come times which are not so good, and there 
are times like this in the 19th Century, also, where it is 
advisable to have the ability to slip out of balance towards a 
deficit, assuming that you share the goal of coming back 
towards, more closely towards a balanced budget, and bringing 
down the debt-to-GDP.
    My goal for debt/GDP is far below where it is today, and 
far below where it is in those charts. I want 40 to 50 percent, 
based on experience. But that is the heuristic I would propose 
for the modern world, not the heuristic that served them well 
in the 1830s.
    Representative Amash. Dr. Rivlin, would you oppose the idea 
of putting a cap, a percentage of--spending as a percentage of 
GDP in a balanced-budget amendment?
    Dr. Rivlin. I think it is a diversion from the real 
problem, which is thinking about how do we control the cost of 
the entitlements so they are not rising faster than the economy 
is growing.
    That is hard. And we have got to do it. And how do we set 
up a tax system that is more pro-growth? Putting algebra in the 
Constitution, as my former colleague, Charlie Schultz, used to 
say, does not solve anything. If you are to put a balanced-
budget amendment in, you have to put in so many exceptions that 
it is gobbledegook. I would not do it through the Constitution. 
I would do it through action of the Congress and the President.
    Representative Amash. How about the idea of just balancing 
the budget every year, with the exception of emergencies? Would 
you support that idea?
    Dr. Rivlin. No, I would not support it as a general idea 
because there are emergencies. We have just lived through an 
emergency.
    Representative Amash. But with the exception of an 
emergency. I think any balanced-budget proposal is going to 
have an escape clause for emergencies.
    Dr. Rivlin. Well it would depend on what an ``emergency'' 
is. If the economy is in deep recession, balancing the budget 
is a crazy and counter-productive thing to do.
    Representative Amash. Would you be more likely to support a 
policy, say a Constitutional amendment, that was 
countercyclical?
    Dr. Rivlin. Then you get into the writing algebra into the 
Constitution. I am opposed to doing this through the 
Constitution. Do it through policy.
    Representative Amash. Senator Gregg, in June 2011 you wrote 
that conservatives must not let advocacy for a balanced-budget 
amendment be an excuse for avoiding votes on difficult but 
crucial reforms. And you have echoed that here. And I agree 
with that.
    Do you have any intrinsic objections, though, to a well-
crafted bipartisan and broad balanced-budget amendment?
    Senator Gregg. No. I supported it numerous times. My point 
there was that there were--a balanced-budget amendment is going 
to take years to ratify. Years. And it gives some people 
political cover to say, well, I am for the balanced-budget 
amendment therefore I do not have to make this tough vote 
because I have already voted for the balanced-budget amendment.
    There are very tough votes that are going to have to be 
made here that have nothing to do with whether or not you are 
for or against a balanced-budget amendment, and you should 
not--and people should not use the balanced-budget debate as a 
way to get off the point of making those tough votes. That was 
my point.
    Representative Amash. Mr. Chairman, may I ask one more 
question?
    Chairman Brady. We are out of time, Representative. I 
apologize about that. If you would like to submit it in writing 
to the witnesses, would you mind responding promptly to the 
Representative?
    [Panel Members nod affirmatively.]
    Representative Amash. Thank you, Mr. Chairman.
    Chairman Brady. Thank you, so much. This is such a great 
discussion, I frankly hate to end that way since this has been 
one of the most thoughtful and insightful panels we have had an 
opportunity to hear from. This is the right issue at the right 
time.
    One theme we hear is the easy votes are over. If we are 
going to tackle our biggest challenges, the easy votes are 
decades behind us. And so on behalf of Vice Chair Klobuchar and 
myself, I want to thank you all for being here. Thanks to the 
Members for their questions.
    The hearing is adjourned.
    [Whereupon, at 11:09 a.m., Thursday, March 14, 2013, the 
hearing was adjourned.]
                       SUBMISSIONS FOR THE RECORD

                Prepared Statement of Senator Dan Coats
      I would like to thank Chairman Brady and Vice Chair 
Klobuchar for holding this hearing on a subject of the most vital 
importance for our nation's economy and, indeed, our national security: 
the ever-growing federal debt.
      Our spending addiction in Washington has, at long last, 
led us to the point where we now face the prospect of record deficits 
as far as the eye can see, a spiraling federal debt that now exceeds 
$16 trillion, and the possible further downgrading of the credit rating 
of the United States. Were interest rates not artificially held down by 
the Fed at historically low levels, we might already be facing our day 
of reckoning. According to the Congressional Budget Office, even a one 
percentage point increase in interest rates would add $1.1 trillion to 
the United States' debt over ten years. And that new debt would occur 
without any changes in spending or taxes, so individuals would have no 
more money in their pockets and the government would not be spending 
any more--interest rates would simply drive our debt out of control.
      The fact is that Congress and the Executive branch have 
utterly failed to address the debt crisis effectively. Temporary 
stopgap measures, such as the recent suspension of the debt limit for 
four months, don't solve anything--they simply put off the inevitable 
day of reckoning. Despite the hype, the supposedly ``massive'' 
sequester cuts will do little to improve the long-term fiscal condition 
of our nation. According to the Bipartisan Policy Center, these 
arbitrary, poorly designed budget cuts will merely delay our national 
debt reaching 100 percent of GDP by two years.
      Eventually, we will reach a point where investors either 
stop buying our debt or insist on higher interest rates to account for 
their greater risk, potentially triggering a crisis of confidence. We 
do not know when that tipping point will be, but if you look at our 
total government debt as a percentage of GDP compared with some nations 
that have already reached that tipping point and gone into full-fledged 
fiscal crisis, it is cause for serious concern. We all know that we are 
going to have to make the tough spending choices that we've been 
avoiding for years, or we are going to face a debt-induced catastrophe 
that will make the economic downturn we experienced a few years ago 
look minor by comparison.
      Many experts believe that our failure to seriously 
grapple with our ballooning national debt is already having a 
significant detrimental impact on economic growth. They understand that 
a mounting debt will one day need to be paid for with either higher 
taxes or reduced benefits. Our failure to deal with our spending 
addiction and long-term debt has created a cloud of economic 
uncertainty that suppresses consumer confidence. It's causing investors 
to remain on the sidelines and preventing business owners from hiring 
new employees. Our refusal to address out-of-control deficit spending 
is like a foot on the neck of the economy.
      We all know--or we ought to know--that our current path 
is unsustainable. Academics, economists, business leaders, and even the 
bi-partisan Simpson-Bowles Commission established by the President all 
repeat the same thing: unless we make the tough spending choices that 
we've been avoiding for years, we are going to face a debt-induced 
catastrophe. It is only a matter of time, and the clock is running 
down.
      There is widespread agreement that the only way to get 
our long-term debt under control is to tackle the difficult problem of 
soaring mandatory spending. According to the Simpson-Bowles Commission 
Report:

                By 2025, revenue will be able to finance only interest 
                payments, Medicare, Medicaid, and Social Security. 
                Every other federal government activity--from national 
                defense and homeland security to transportation and 
                energy--will have to be paid for with borrowed money. 
                Debt held by the public will outstrip the entire 
                American economy, growing to as much as 185 percent of 
                GDP by 2035. Interest on the debt could rise to nearly 
                $1 trillion by 2020. These mandatory payments--which 
                buy absolutely no goods or services--will squeeze out 
                funding for all other priorities.

      The plain fact is, in order to make a real impact on the 
deficit and the federal debt, we need to go big and go bold. In 
addition to discretionary spending reforms, we need real action on 
reforming our mandatory spending. Medicare, Medicaid, Social Security, 
and ObamaCare are projected to outstrip all tax revenue. There simply 
won't be enough money to spend on anything else.
      We won't have enough to cover our commitments to seniors 
either. In America, we have always prided ourselves on fulfilling our 
commitments to future generations, but our failure to act now all but 
ensures drastic cuts to Medicare and Social Security beneficiaries in 
the future.
      Today's hearing presents us with an opportunity to find 
common ground in tackling these difficult issues. We will hear about a 
number of different approaches to tackling our long-term debt problem 
and explore where there is agreement and where there is disagreement. I 
look forward to the testimony of the expert witnesses we have assembled 
here today to address the question of how we go about solving our 
federal debt crisis.

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                Prepared Statement of Senator Judd Gregg
    Chairman Brady, Vice Chair Klobuchar, Senator Coats, Representative 
Maloney and other members of the Committee, I appreciate this 
opportunity to discuss the state of the national debt.
    Robert Zoellick, the past head of the World Bank, is fond of 
telling the story of how the Foreign Minister of Australia said to him 
a few months ago that: ``America is one debt deal away from leading the 
world out of its economic doldrums.''
    He is right.
    Dangerously, some observers believe the country has completed its 
work on deficit reduction. Despite some improvements, however, the debt 
will continue to rise as a share of our economy over the long-term. 
This fact continues to present a serious economic danger for the United 
States.
    We are now engaged in the struggle to obtain a debt deal large 
enough to stabilize the debt and put it on a downward path, at a time 
when Washington and the media are energized on the issue of dealing 
with the sequester.
    We know the problem. It is that our present rate of accumulating 
debt due to our historically large deficits will inevitably lead to a 
fiscal crisis.
            the drivers of our nation's long-term debt load
    Any debt reduction plan needs to primarily focus on changes to 
those programs that are driving the problem. These of course are the 
major entitlement accounts, Medicare, Medicaid and Social Security, 
along with comprehensive tax reform.
    While it is has been good to see progress made over the last two 
years on enacting some savings, unfortunately all of the measures put 
in place have ignored smart entitlement reforms to control spending 
over the long-term and comprehensive tax reforms to make the tax code 
more efficient. These are the primary fiscal challenges facing us, and 
we can no longer avoid them. We've done the easy work of deficit 
reduction--enacting discretionary limits and raising taxes on wealthy 
Americans. We must renew our focus on the remaining elements of fiscal 
reform.
    Rising health care costs and an aging population are the central 
drivers to our rising debt trajectory. We cannot continue to let health 
care costs rise faster than our National income. We must find ways to 
adopt sensible reforms to address population aging and rising health 
care costs this decade before costs reach untenable levels.
    Smart entitlement reforms need to involve adjustments which grab 
hold in five years, ten years, and fifteen years so that they make 
these programs sustainable and affordable not only in the next few 
years, but in the long term.
             how deficits and debt inhibit economic growth
    Professors Reinhart and Rogoff have done exceptional work on 
documenting the inevitability of a reduction in economic well-being if 
our debt to GDP ratio passes certain benchmarks, which we are quickly 
closing in on. A large number of other studies from universities, the 
Congressional Budget Office, the International Monetary Fund, and other 
organizations worldwide show us that the conclusion is clear: rising 
debt will hold back strong economic growth down the road. This occurs 
as rising debt pushes up interest rates, ``crowding out'' private 
investment.
    Equally important is the fact that it is a distinct likelihood that 
the financial markets themselves will at some point, sooner rather than 
later, look at our massive accumulation of debt and conclude that we 
will be unable to pay it back. The markets will react to this by 
assuming that the currency will have to be devalued through inflation 
and the cost of servicing our nation's debt will jump radically. This 
will significantly compound what will be a dire fiscal situation.
    Debt reduction done right can actually strengthen the economy down 
the road. A recent analysis from the Congressional Budget Office found 
that a $2 trillion reduction in primary deficits could boost the size 
of GNP by nearly 1% over ten years. And in the short-term, there is 
evidence that just the announcement of a long-term deficit reduction 
plan could bolster the recovery by improving confidence and certainty 
about United States fiscal policy.
               what amount of deficit reduction is needed
    The ``deal'' that can avoid this crisis is apparent and very 
doable.
    The goal of deficit reduction must be to put the debt on a clear 
downward path as a share of the economy, this decade and over the long-
term. Achieving that goal will require reducing the debt to below 70% 
of the size of the economy by 2023.
    The good news is that the President and Congress has tried over the 
last several years to grapple with how to come to terms with our debt 
problems and have accomplished a hard $2.5+ trillion dollars of debt 
reduction out of the total needed. The Budget Control Act of 2011 cut 
$917 billion dollars in mostly discretionary spending, prior continuing 
resolutions enacted hundreds of billions in discretionary spending 
savings over ten years, and the fiscal cliff agreement, formally known 
as the American Taxpayer Relief Act, generated over $600 billion 
dollars in new revenues. These were serious steps down the road of 
putting our fiscal house in order, but we are not there yet.
    In the wake of these efforts, getting control over our debt will 
require additional deficit reduction.
    Our fiscal problems will self-correct if our government reduces our 
deficits and debt over the next ten years by at least an additional 
$2.4 trillion dollars in reforms, reforms that should also increase in 
their effectiveness beyond this ten-year window. In total, this would 
produce over $5 trillion in savings when including the policies we have 
already put in place. This represents the minimum amount of savings 
needed to put the debt on a downward path as a share of the economy to 
below 70%.
    Ideally, lawmakers would aim for an even larger amount of savings. 
In today's terms, the President's own National Commission on Fiscal 
Responsibility and Reform would produce a total of between $6.5 and $7 
trillion in savings over ten years--an even more aggressive target.
    Some observers have said we only need an additional $1.5 trillion 
in savings over the next ten years in order to stabilize the debt as a 
share of the economy. While it is true that $1.5 trillion would likely 
stabilize our debt this decade, it would likely be insufficient to 
control the debt over the long-term, leaving the country open to 
serious risks, including:

      No Room for Error for future deficit-increasing policies 
or if economic projections are too rosy;
      No Long-Term Stability in the face of rising health care 
and retirement costs that become harder to contain later this decade 
and beyond, requiring a ``running start'' to control the debt and 
interest payments later on;
      Slower Economic Growth due to higher interest rates 
``crowding out'' investment; and
      No Fiscal Flexibility in the case of natural disasters, 
security needs, or an economic downturn.

    Putting debt on a downward path with another $2.4 trillion in new 
deficit reduction would address the risks. This may seem like a great 
deal of money, but when one considers that it is off a base of 
approximately $40 trillion dollars of spending over the next ten years, 
it is definitely manageable.
  what policies can congress pursue to reduce the debt and encourage 
                            economic growth
    Most of the changes that are needed now, unlike the practical 
effect of continuing to reduce spending through the sequester, are 
changes to entitlement programs and tax policy which can and should 
compound in their effectiveness as we move beyond this initial ten year 
window.
    What is the deal we need? It should obviously start by an agreement 
to replace the sequester with targeted and effective changes to federal 
fiscal policy that gets a reduction in the deficit over the next ten 
years of at least $2.4 trillion dollars and that can be presumed to do 
significantly more than that in the following decades. It should be an 
agreement that at a minimum has a goal of stabilizing our debt to GDP 
ratio at 70 percent or less. Why wait for another fiscal speed bump to 
address these issues?
    The President proposed a specific change, which would be a 
significant contributor to this type of responsible action, when he 
proposed changing the manner in which the Federal cost of living 
adjustment (COLA) is calculated to make it more accurate.
    In their latest framework, Sen. Simpson and Erskine Bowles have put 
forward $600 billion as a credible and bipartisan target for health 
savings over ten years, which could be achieved through various 
options, including many outlined by the Committee for a Responsible 
Federal Budget, which I have attached to my testimony. It is a specific 
and doable list. Much of it is directed at making Medicare and Medicaid 
better programs by focusing on outcomes and value rather than 
utilization and repetition.
    Of course, there is also the proposal for approximately $200 to 
$300 billion in entitlement savings that was reportedly agreed to 
between the President and the Speaker in the summer of 2011 and which 
was further discussed during the fiscal cliff negotiations. These are 
presumably well-vetted ideas that are essentially off the shelf ready 
for a ``deal.''
    Take any permutation of these proposals and add in the CPI change 
proposed by the President, known as ``chained CPI'' and throw in a 
long-term adjustment in the eligibility age for Medicare and Social 
Security (which reflects the large increase in life expectancy that we 
have seen and will continue to see) and you have the spending side of a 
very strong package.
    Comprehensive tax reform is also necessary. Although a significant 
majority of the reduction in our deficit must come from the spending 
side of the ledger, reforming the tax code to lower rates and 
broadening the tax base will be good both for the economy and our 
fiscal health. Ironically, Senator Coats, the lead Senate Republican of 
this Committee has, along with Senator Wyden, proposed such an approach 
and it would be a good guide to developing a bipartisan, strong bill to 
fundamentally improve and reform our tax policy as a nation making us 
more competitive.
    There are at least two other crucial points that the ``deal'' must 
include. First, it must be based off an agreement that fixes the size 
of the government as a percent of GDP. The federal government since the 
end of World War II through 2007 has been approximately 19.8 percent of 
GDP. In the last few years it has grown to over 23.5 percent and is 
still headed up. Some of this growth is inevitable due to the 
retirement of the baby boom generation, which is doubling the number of 
retirees in our society. Agreeing to fix the size of the government to 
a percent of the GDP that is closer to its historical range is 
essential to driving long-term solutions to our debt problem. The 
National Committee on Fiscal Responsibility and Reform used the metric 
of 21.3 percent, which is realistic in light of the demographic shift. 
This metric also sets an appropriate relationship between spending 
restraint and revenues of about three to one in the out years.
    Secondly, all entitlement changes that reduce projected spending 
need to be locked in with a procedural provision that keeps later 
Congresses from arbitrarily rescinding them. This can be done by making 
attempts to reverse such changes subject to a 67 vote point of order in 
the Senate.
    The opportunity for the ``deal'' is sitting there. It is not rocket 
science or, for that matter, even model rocket science. It is very 
doable and all the policy options are well debated, vetted, and known. 
It should be simply done so that a predictable fiscal crisis can be 
muted and our nation can move on as a better and stronger place for 
ourselves and our children.
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                Opinion: Windows of opportunity closing

                            (By Judd Gregg)

    Two events are starting to close the windows of opportunity for 
this president to govern and for this Congress to contribute to 
governance.
    The first became clear with the release of the minutes from the 
most recent meeting of the Fed. The days of expansive monetary policy 
and low interest rates are numbered.
    It is obvious that, even among some members of the Fed's board, 
there is a growing restiveness about the policy of pumping near-
limitless amounts of new dollars into the economy in the name of 
pushing full employment.
    Yes, seeking full employment had always been one of the Federal 
Reserve's two core responsibilities. But the other one--the imperative 
to protect the value of the currency--has historically and 
appropriately taken precedence.
    No one can look at the Fed's actions over the last few years and 
not conclude that the risk created by the constant and massive printing 
of money is real. Its potential to destabilize the dollar is 
significant.
    This reality is beginning to cause the Fed membership, if not its 
leadership, to question whether staying the course of this 
extraordinary balance sheet expansion in pursuit of full employment is 
a good trade-off. It is inevitable that the Fed is going to have to 
take action to contract this expansion. Interest rates will rise. The 
adjustment will probably come sooner rather than later. The 
implications for the president, the Congress and federal fiscal policy 
are dramatic.
    The Fed has been busily laying down a thick smoke screen that has 
allowed the president and the Congress to obfuscate the real cost of 
the incredible deficits and resulting debt that they have been running 
up over the last four years.
    This cover is going to be pulled away as the Fed adjusts its 
policies. It will lead to a rather stark awakening. The unconscionable 
and profligate fiscal policies will be called to account for their true 
costs with a massive spike in the cost of federal interest payments.
    If interest costs for the federal government simply return to their 
historic levels, it will add $400 or $500 billion of new expenses to 
the annual federal balance sheet. This will overwhelm any tax increase 
even this President can contemplate and any spending cuts that even the 
most ardent House Republican could pursue. It will mean billions and 
billions of dollars of unanticipated obligations.
    If the federal government had a budget, which due to the Senate 
Democratic leadership it does not, it would blow a hole the size of 
Alaska in it.
    All this for interest payments that do virtually nothing to help 
deliver a better-governed nation or a stronger economy. It is money 
thrown out the window. It will compound dramatically the difficulties 
involved in addressing our deficits and long term insolvency issue.
    There is now a window of opportunity to correct the county's debt 
problem amid this artificial environment of exceptionally low interest 
rates created by the Fed. But the window is closing and it will not 
reopen.
    The failure to get our fiscal situation in order during this unique 
period will go down as a major act of misfeasance by the President and 
the Congress. Neither history nor our children will view their actions 
kindly.
    The second event that is going to limit the ability to govern by 
those charged with governing is the return to the election cycle. Some 
would say in observing the President's performance that he has never 
stopped electioneering.
    But the fact remains that there is a period--albeit one which is 
fast moving toward its close--when, in theory at least, the two sides 
should be able to mute the politics and come together to govern. By the 
end of the summer, this window will also close. The chance will most l 
ikely be lost.
    Both sides have an obligation to take at least one more serious run 
at getting something done to right the unsustainable course of our 
federal fiscal ship.
    If first lady Michelle Obama allows her husband to play golf with 
Tiger Woods, it should not be too much of a reach to tell her husband 
to go play golf with the Speaker.
    Tell them to hit the restart button. Tell them to do something good 
together for the county and our kids. Just the two of them in a golf 
cart for four hours working out America's, and for that matter the 
world's, problems. How refreshing that would be.
    Judd Gregg is a former governor and three-term senator from New 
Hampshire who served as chairman and ranking member of the Senate 
Budget Committee and as ranking member of the Senate Appropriations 
subcommittee on Foreign Operations. He also is an international adviser 
to Goldman Sachs.
    Source: http://thehill.com/opinion/columnists/judd-gregg/284575-
opinion-windows-of-opportunity-closing
  

                                  
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