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


                                                        S. Hrg. 113-127
 
            THE ECONOMIC COSTS OF DEBT-CEILING BRINKMANSHIP 

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

                                HEARING

                               before the

                        JOINT ECONOMIC COMMITTEE
                     CONGRESS OF THE UNITED STATES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 18, 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
                 Niles Godes, Democratic Staff Director



                            C O N T E N T S

                              ----------                              

                     Opening Statements of Members

Hon. Amy Klobuchar, Vice Chair, a U.S. Senator from Minnesota....     1
Hon. Kevin Brady, Chairman, a U.S. Representative from Texas.....     4

                               Witnesses

Dr. Mark Zandi, Chief Economist, Moody's Analytics Future, West 
  Chester, PA....................................................     6
Hon. David Malpass, President, Encima Global LLC, New York, NY...     7
Hon. Donald Marron, Institute Fellow and Director of Economic 
  Policy Initiatives, Urban Institute, Washington, DC............     9
Dr. Daniel J. Mitchell, Senior Fellow, Cato Institute, 
  Washington, DC.................................................    11

                       Submissions for the Record

Prepared statement of Hon. Kevin Brady...........................    30
Prepared statement of Dr. Mark Zandi.............................    32
Prepared statement of Hon. David Malpass.........................    43
Prepared statement of Hon. Donald Marron.........................    45
Prepared statement of Dr. Daniel J. Mitchell.....................    53
Report titled ``The Economic Costs of Debt-Ceiling Brinkmanship'' 
  submitted by Vice Chair Klobuchar..............................    56


            THE ECONOMIC COSTS OF DEBT-CEILING BRINKMANSHIP

                              ----------                              


                     WEDNESDAY, SEPTEMBER 18, 2013

             Congress of the United States,
                          Joint Economic Committee,
                                                    Washington, DC.
    The committee met, pursuant to call, at 2:33 p.m. in Room 
216 of the Hart Senate Office Building, the Honorable Amy 
Klobuchar, Vice Chair, presiding.
    Representatives present: Brady of Texas, Campbell, Carolyn 
B. Maloney, Cummings, and Delaney.
    Senators present: Klobuchar, Casey, Warner, Murphy, Coats, 
and Wicker.
    Staff present: Corey Astill, Doug Branch, Hank Butler, 
Conor Carroll, Gail Cohen, Sarah Elkins, Connie Foster, Niles 
Godes, Colleen Healy, and Robert O'Quinn.

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

    Vice Chair Klobuchar. Okay, thanks to everyone. I would 
like to call this hearing to order today. I am joined by the 
Chairman of the Committee, Mr. Brady, as well as a number of 
Members. I thank you for being here.
    I would also like to welcome--maybe I will wait until they 
come in, some of our guests; I do not think they are here yet--
here they come. We have a number of guests visiting us today 
from the Republic of Ireland and Northern Ireland. They are in 
the United States as part of the Boston College Irish 
Institute's Joined-Up Program. Thank you for being here. You 
are in for a treat, let me tell you.
    We have a very important topic today. I would like to 
introduce our witnesses.
    We have first of all Dr. Mark Zandi who is the Chief 
Economist at Moody's, where he directs economic research. Dr. 
Zandi was an advisor to the presidential campaign of Senator 
McCain and has provided economic advice to Congress for many, 
many years.
    Secondly, The Honorable David Malpass is the President of 
Encima Global, an economic research and consulting firm based 
in New York. He served as Deputy Assistant Treasury Secretary 
under Ronald Reagan, Deputy Assistant Secretary of State under 
President George H.W. Bush, and Republican Staff Director of 
the Joint Economic Committee. That's the most important 
credential that you have.
    [Laughter.]
    We also have The Honorable David Marron who is an institute 
Fellow and Director of Economic Policy Initiatives at the Urban 
Institute. He served as a member of the Council of Economic 
Advisers under President George W. Bush, and as the Acting 
Director of the Congressional Budget Office. He was the 
Executive Director of the Joint Economic Committee under 
Chairman Robert Bennett. There we are, another former Joint 
Economic Committee staff member.
    He recently served as a member of the Rivlin-Domenici Debt 
Reduction Task Force. We have actually had Alice Rivlin here to 
testify, so thank you.
    Also, Dr. Daniel Mitchell is a Senior Fellow at the CATO 
Institute where he specializes in tax reform policy. He was 
previously a Senior Fellow with the Heritage Foundation and an 
economist on the Senate Finance Committee. He also served on 
the 1988 Bush/Quayle transition team and was Director of Tax 
and Budget Policy for Citizens for a Sound Economy.
    You may think it interesting that we have four Republican 
witnesses here when I am chairing the hearing, but I think it 
goes to show this is a bipartisan issue and something that we 
have to come together on as a country, and there are 
differences among our witnesses, as we will soon see.
    In the summer of 2011, the United States experienced some 
of the costs of a protracted debt-ceiling showdown. As Congress 
struggled to raise the debt ceiling, the Dow Jones Industrial 
Average dropped more than 2,000 points, and Standard and Poor's 
downgraded the U.S. credit rating. Consumer confidence also 
fell sharply.
    During that debate, I heard from nearly 20 CEOs of major 
companies in my state urging Congress to set partisan divisions 
aside and reach an agreement to raise the debt ceiling.
    The delay in lifting the debt ceiling and the resulting 
uncertainty meant that the Treasury had to pay higher yields 
than otherwise would have been necessary, costing taxpayers 
$1.3 billion.
    After the 2011 debt-ceiling showdown, Federal Reserve 
Chairman Ben Bernanke told this Committee in very blunt 
language that ``It's no way to run a railroad.'' He is right.
    We now find ourselves in a similar situation: the Federal 
Government effectively reached its borrowing limit on May 19th, 
2013. The Treasury Department has taken extraordinary measures 
since then to postpone default for several months.
    Last month, Treasury Secretary Lew informed Congress that 
those extraordinary measures would run out in mid-October. In 
other words, we have about a month left to take action that 
will allow the U.S. Government to pay our bills--while we are 
at the same time of course facing, with the Continuing 
Resolution issue, potential government shutdown.
    We should learn from our experience in 2011--and not repeat 
it. We have seen this show before, and it reminds me of like a 
bad rerun of ``Three's Company.'' We don't have to have this 
happen. We can actually get this done.
    There is broad agreement that a default would cause 
significant harm to the economy. It would disrupt financial 
markets, limit access to credit, and raise financing costs. It 
would also trigger a run on money market funds and force the 
Federal Government to renege on commitments to individuals, 
businesses, and governments.
    For consumers, higher credit costs would mean less 
borrowing for purchases of homes, cars, or other durable goods. 
Businesses could face difficulties accessing short-term 
financing.
    A default would also require the Federal Government to 
suspend payments to creditors, program beneficiaries, and 
others. Delays in Social Security checks, Veterans benefits, 
and other programs would have a direct impact on millions of 
Americans and would negatively affect the economy by depressing 
consumer spending.
    Because a default would cause significant harm to the 
economy, even the mere prospect, as we've learned from the 
past, even the mere prospect of a default can affect the 
decision-making of households and businesses and slow economic 
growth.
    As discussed in the report that I released this morning on 
the costs of debt-ceiling brinkmanship, Congress has raised the 
debt ceiling more than 70 times since 1962, and voted on the 
debt limit 12 times since 2002. This is part of our 
responsibility.
    It is also clear that Democrats and Republicans need to 
come together on a long-term budget plan and focus on smart, 
balanced solutions to reducing our debt. We have had many 
discussions about this right here in this Committee. I am in 
the group of Senators that wants to go big; that believes we 
need to take the principles from the Debt Commission report, as 
well as the Rivlin/Domenici report, and take those and put them 
into action. But the place to do that is not at the last minute 
on the debt-ceiling issue.
    The Senate and House have each passed a budget. The 
President has been reaching out to Democrats and Republicans 
about the need to move forward on a budget deal. Many of my 
colleagues, including Senator McCain and Senator Collins, have 
joined Democrats to say we need to go to conference and agree 
on a budget that will allow us to address our fiscal challenges 
in a bipartisan way.
    While we have to do more to move the Nation forward toward 
fiscal responsibility, it is important to note that Congress 
has already taken steps to reduce deficits by at least $2.4 
trillion over the next 10 years.
    But the vast majority of the savings to date comes from 
spending cuts. If sequestration continues, the ratio of 
spending cuts to revenue increases will be four-to-one, which 
is not the ratio even suggested by the National Commission on 
Fiscal Responsibility and Reform.
    The Senate-passed budget also calls for a roughly even 
split between additional spending cuts and revenue increases.
    In addition to addressing the budget and raising the debt 
ceiling, there are a number of actions Congress should take to 
make sure that our economy continues to grow.
    One of them I will tell you is passing the Immigration 
bill: $160 billion in debt reduction over 10 years, around $700 
billion in 20 years.
    If you look at the Farm Bill, $24 billion reducing the debt 
over the last Farm Bill. You can go through a number of things 
that I think would make a difference for the economy and make 
things positive for the economy. Brinkmanship on the debt 
ceiling is not one of them. It will move us backwards and not 
forwards.
    I thank you to our witnesses, and look forward to hearing 
from you.
    Mr. Brady.

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

    Chairman Brady. Vice Chair Klobuchar, our Distinguished 
Witnesses, and our Guests from the Republic of Ireland and 
Northern Ireland, welcome.
    On this Committee we often jest that Minnesota's delegation 
tends to dominate the Joint Economic Committee. I just want to 
give warning: As an Irishman, I have brought my reinforcements 
today.
    [Laughter.]
    Vice Chair Klobuchar and I agree that political 
brinkmanship over raising the debt ceiling is costly to our 
economy. I just wish President Obama felt as we do. His 
declaration this past weekend, quote, ``What I haven't been 
willing to negotiate, and I will not negotiate, is on the debt 
ceiling''--represents the inflexible brinkmanship that the 
American people deplore.
    Despite the recent decline in the federal budget deficit, 
future projections are troubling. Add to that an ever-growing 
national debt, Medicare whose main Trust Fund runs empty within 
12 years; and Social Security that had to borrow nearly $150 
billion last year from foreign investors and the Fed, simply to 
make payments to our seniors. As Dr. Zandi noted in his 
testimony, `` . . . the long term fiscal outlook remains 
disconcerting.''
    This bleak outlook hurts middle-class families and the 20 
million Americans who cannot find a full-time job today in the 
weakest recovery since World War II.
    That is why House Republicans have reasonably and prudently 
passed a bill to take default off the table and invited the 
President to sit down together--today--to find a bipartisan 
solution that puts Washington on a responsible fiscal path 
through pro-growth tax reform, ending wasteful spending, and 
taking substantive steps to extend the lives of Medicare and 
Social Security.
    Children born today in America owe nearly $50,000 as their 
share of the national debt. In other words, they owe a Lexus to 
Uncle Sam. If Washington does not change its spending ways by 
the time they reach 13 years old, they will owe another Lexus. 
And when they graduate from college ready to begin their 
career, they will owe yet a third.
    Of course young people do not buy luxury sedans for Uncle 
Sam. Instead, they pay the price for this generation's spending 
addiction through a sluggish economy with higher taxes and 
higher interest rates. So if they are able to find a job, they 
will have lower wages and keep less of their paycheck to pursue 
their American Dream.
    For the first time in our history, we cannot be confident 
that the next generation of Americans will be better off than 
the current one. That is unacceptable.
    Admittedly, the debt ceiling is an imperfect vehicle to 
control the growth of federal spending. I would prefer that 
Congress and state legislatures amend the U.S. Constitution to 
limit the growth of federal spending and require a balanced 
budget except during war or emergencies. However, the debt 
ceiling remains an effective tool for Congress and the 
President to reach bipartisan consensus on measures to limit 
the growth of federal spending and reform entitlements.
    Both parties, Democrats and Republicans, have used the debt 
ceiling as a responsible means to shore up America's financial 
house--the Omnibus Budget Reconciliation Act of 1990 came about 
through debt ceiling negotiations between Congressional 
Democrats and President Bush, and the Budget Control Act of 
2011 came about through debt ceiling negotiations between House 
Republicans and President Obama.
    It is irresponsible to give the White House another blank 
check. Instead, it is responsible to limit the growth of 
federal spending and secure the future of entitlement programs 
in exchange for raising the debt ceiling.
    If now is not the time to tackle Washington's spending 
addiction, when is? Perhaps brinkmanship is just another word 
for a long over intervention.
    One of today's witnesses, Dr. Mitchell, summarized good 
fiscal policy in a simple golden rule: Private output should 
grow faster than government spending. In other words, Main 
Street should grow faster than Washington. I agree.
    Some advocates of ``big government'' claim that modest 
savings from the recent sequester are decimating government 
services and threatening economic growth. The reality is that 
since the recession ended, real federal consumption and 
investment spending has grown faster than real GDP--6.4 percent 
compared with 4.6. The sequester is merely asking this 500-
pound Federal Government to lose 10 pounds.
    What ails our economy is not too little government, but too 
much. Therefore, I will soon reintroduce the Maximizing 
America's Prosperity or the MAP Act to limit the growth of 
federal spending through a new, innovative spending cap--non-
interest spending as a percentage of potential GDP.
    Using non-interest outlays as the numerator in the spending 
cap forces Congress to limit what it can control--program 
spending--through appropriations bills and changes in 
entitlement legislation, but not what it can't--interest 
outlays--that are determined by past spending decisions and the 
Fed's monetary policy.
    Using potential GDP as the denominator eliminates the boom 
and bust cyclicality in spending caps tied to GDP. The growth 
of GDP fluctuates with the business cycle, allowing blowout 
spending in boom years and then forcing deep cuts during 
recession. Using potential GDP provides a more stable, solid 
path for federal spending over time.
    Vice Chairman Klobuchar and I might not agree on what's the 
right level for a spending cap, but we should be able to agree 
on the right metrics. And non-interest spending as a percent of 
potential GDP is that right metric.
    I look forward to the testimony of today's witnesses.
    [The prepared statement of Chairman Brady appears in the 
Submissions for the Record on page 30.]
    Vice Chair Klobuchar. Thank you very much, Chairman Brady. 
Why don't we begin with Dr. Zandi.

     STATEMENT OF DR. MARK ZANDI, CHIEF ECONOMIST, MOODY'S 
                  ANALYTICS, WEST CHESTER, PA

    Dr. Zandi. Thank you, Vice Chair Klobuchar, and Chairman 
Brady, and the rest of the Committee. I welcome the opportunity 
to be here today.
    I am an employee of the Moody's Corp., but the views I 
express today are my own. I would like to make four points in 
my oral remarks:
    First, the Treasury debt limit must be increased by the 
last two weeks of October. By my calculation, the day the limit 
will be breached is probably October 18th. That's a day when 
Treasury has to make a payment to Medicare and Medicaid 
providers.
    It is of course very uncertain because of the timing and 
size of tax payments, so I do not know that for sure. I think 
the latest possible date that the limit has to be increased is 
November 1st. That is when a Social Security payment has to be 
made.
    So in the last two weeks, it is very important that you 
raise the debt limit by that point in time.
    The second point: If you do not raise the debt limit in 
time, you will be opening an economic Pandora's Box. It will be 
devastating to the economy.
    Now let me first say, I would not take any solace in the 
fact that financial markets are not going to react up until the 
day that you need to raise the limit. As Senator Klobuchar has 
said, we have seen this show before. And each time the show 
ends with you signing on the dotted line just in time. 
Financial markets fully expect that you will do that this go-
around. So I do not expect to see much going on in financial 
markets up until the time that the limit is going to be 
breached.
    If you do not do it in time, confidence will evaporate. 
Consumer confidence will sharply decline. Investor confidence, 
business confidence, businesses will stop hiring, consumers 
will stop spending. The Stock Market will fall significantly in 
value. Borrowing costs for businesses and households will rise.
    The other big hit to the economy of course is that the 
Treasury will have to eliminate its cash deficit and only spend 
what it is receiving in cash. By my calculation, in November 
that is about $130 billion. You annualized that, that is 9 
percent of GDP. That comes right out of the economy. We will be 
in the middle of a very, very severe recession, and I do not 
see how we'd get out of it. There is no monetary policy 
response in the current context. We are already at a zero 
interest rate. I just don't see what policymakers will do.
    So point number two is: You have to do something about the 
debt limit, D-day.
    Point number three: To address the debt limit I would not 
add to the near-term fiscal austerity. We have a significant 
amount of austerity entrained. This year, you add up the effect 
of the spending cuts and the tax increases, it's about 1\1/2\ 
percentage points of GDP, that's the most fiscal drag this 
economy has had to digest since just after World War II during 
the War drawdowns.
    So just for context, if fiscal policy was just neutral with 
respect to the economy, zero, given that the economy is growing 
2 percent with the drag, we would be growing 3\1/2\ percent 
right now. So that is quite significant. That is a significant 
drag.
    Now the drag will fade under current, last, next year, and 
the year after, but it is quite significant. I would not add to 
it in your attempts and efforts to address the debt limit. So 
that is point number three.
    The final point, point number four, is that it is entirely 
appropriate and desirable for you to address our long-term 
fiscal problems. They are quite significant and daunting. Under 
current law, under reasonable economic assumptions, we are 
going to have a big problem a decade out. When you move into 
the 2020s and 2030s, the deficit will rise sharply and the debt 
load will become unsustainable. So it is very important for you 
to start focusing on that.
    Now that may be a bridge too far in the current context 
because again you have to raise the debt limit by the last two 
weeks of October. So at the very least, I would be focusing on 
reforms to the budget process in terms of adopting things that 
will create transparency with respect to budgeting longer run 
things like adopting generational accounting, fiscal GAPP 
accounting. I would extend the budget horizon past 10 years so 
that we can start doing some entitlement reform and really see 
what the impact will be in the longer run.
    And finally, I would repeal the debt limit. It is very 
counterproductive. And if you cannot manage that, there are 
some reforms to the debt limit that can be implemented to make 
this much more effective and a lot less destructive.
    Let me finally say, I think our economy is on the verge of 
some very strong growth. The only missing ingredient is a 
decision, a reasonable decision in a timely way on the budget 
and the debt limit. If you can do that, we are going to be off 
and running.
    Thank you.
    [The prepared statement of Dr. Mark Zandi appears in the 
Submissions for the Record on page 32.]
    Vice Chair Klobuchar. Very good. Thanks for ending on that 
good note, and the opportunities that we have.
    Thank you.
    Mr. Malpass.

STATEMENT OF HON. DAVID MALPASS, PRESIDENT, ENCIMA GLOBAL LLC, 
                          NEW YORK, NY

    Mr. Malpass. Thank you very much. Hello, Vice Chairman 
Klobuchar, Chairman Brady, and Members of the Committee. Thank 
you for the invitation to testify on the debt limit. I will try 
to have some upbeat thoughts as I go along, as well.
    The debt limit increase is a vital economic and legislative 
issue. The national debt already exceeds the Nation's annual 
output, and the Administration is now requesting that Congress 
increase the debt limit above $17 trillion.
    As part of providing this increase, I think there should be 
an honest, national debate on federal spending priorities, and 
an agreement with the President on constructive spending 
restraint.
    There is a huge economic upside for jobs, investment, the 
Stock Market, and the dollar if you could lower the federal 
spending path, or rewrite the debt limit to make it more 
effective.
    The Federal Government is spending nearly $3.6 trillion 
every year, and is planning to increase spending rapidly in 
coming years, even with the sequester and the underfunding of 
national defense.
    Some of the spending is successful and adds to the Nation's 
wellbeing, but another portion of the spending--several hundred 
billion dollars--is not successful enough to justify the taxes 
and debt used to pay it. This has created a spending and debt 
crisis that harms the economy and undermines investment and 
jobs.
    The crisis is particularly acute because several categories 
of federal spending will need to increase over the next two 
decades as the Baby Boom ages and requires more government 
services.
    Given this demographic and interest rate cycle, spending 
and debt should be at lower than normal levels now in order to 
prepare for the coming increases. In addition, the maturity of 
the national debt held by the private sector should be longer 
than normal. Instead, the Fed's bond purchases have materially 
shortened the effective maturity of the national debt, and both 
spending and debt are at record levels even though the 
demographic bulge is just beginning to hit the federal budget.
    This leaves fiscal policy completely out of sync with long-
term economic growth. The debt limit provides a good 
opportunity to address this crisis. In negotiating the next 
increase, Congress and the Administration should take steps to 
downsize current spending and slow future spending growth.
    It is also vital to improve the allocation of spending. 
Less-successful government programs should be reduced in order 
to make room for new programs and for more spending on 
successful programs.
    In my August 30th Wall Street Journal column I advocated a 
menu approach in which the various parties suggest numerous 
methods to reduce spending, and then negotiate a compromise.
    I have advocated replacing the debt limit with legislation 
to establish continuous spending restraint that strengthens 
when the debt-to-GDP ratio rises above a ceiling. I was 
privileged to work for Senator Bill Roth on this Committee in 
1990 when he wanted to create a 50 percent debt-to-GDP limit.
    Unfortunately, the debt ratio is now more than double that, 
and it will take many years of continuous spending restraint to 
restore a more pro-growth debt level. In the ideal, there 
should be a downward glide path for the debt ratio. A new law 
would set gradually lower debt-to-GDP limits which, if 
exceeded, would require Congress and the Administration to 
reduce their spending commitments or face escalating procedural 
restraints on spending.
    In making budget decisions, one of the confusing issues is 
whether austerity is bad for growth. Austerity or fiscal 
consolidation encompasses two separate economic policies: 
government downsizing on the one hand, which causes more 
growth; and private-sector downsizing on the other hand, which 
causes recessions.
    Many of the reform programs undertaken in Europe that have 
been labeled ``austerity programs'' were harmful because they 
were built on private-sector austerity not government 
downsizing. The austerity often took the form of higher value-
added taxes, wealth taxes, and increases in government fees.
    As the U.S. examines its options, it should aim to reduce 
ineffective spending. It drains the private sector because it 
requires new taxes or debt. An open Washington discussion of 
spending restraint, even a contentious one, using a menu of 
options as I've suggested would receive a very positive market 
reaction.
    So in conclusion, the U.S. is stuck in a new normal of very 
slow economic growth, high unemployment, and falling median 
incomes. Federal spending and debt trends are weighing on 
growth and investment. The debt limit provides an opportunity 
to break out. The Administration and Congress should create a 
menu of constructive restraints and agree on a package.
    Movement in this direction would create a very positive 
economic and market reaction. Changes made now, even if they 
take effect in several years, would bring immediate benefits by 
improving the debt outlook.
    Thank you, very much.
    [The prepared statement of David Malpass appears in the 
Submissions for the Record on page 43.]
    Vice Chair Klobuchar. Thank you very much.
    Dr. Marron.

STATEMENT OF HON. DONALD MARRON, INSTITUTE FELLOW AND DIRECTOR 
     OF ECONOMIC POLICY INITIATIVES, THE URBAN INSTITUTE, 
                         WASHINGTON, DC

    Dr. Marron. Thanks. This is a real treat to be here. Vice 
Chair Klobuchar, Chairman Brady, and Members of the Committee:
    Thank you for inviting me to discuss the debt limit. It is 
a particular pleasure for me to appear today before this 
Committee, since it gave me my start in public service a bit 
more than a decade ago.
    I would like to make six basic points today:
    First, Congress has to increase the debt limit. Failure to 
do so will result in severe economic harm. Treasury would have 
to delay billions, then tens of billions, then hundreds of 
billions of dollars of payments. Through no fault of their own, 
federal employees, contractors, program beneficiaries, and 
state and local governments would find themselves suddenly 
short of expected cash, creating a ripple effect through the 
economy.
    A prolonged delay would be a powerful anti-stimulus that 
could easily push our economy back into a recession, as Mark 
said.
    In addition, there is a risk that we might default on the 
federal debt. Now I should emphasize that I expect that 
Treasury will do everything in its power to make debt service 
payments on time, if it's pushed to the limit, but there is a 
risk that it won't succeed.
    Indeed, we have precedent for this. In 1979, Treasury 
accidently defaulted on a small sliver of debt in the wake of a 
debt limit showdown. That default was narrow in scope, but 
financial markets reacted badly and interest rates spiked.
    If a debt limit impasse forced Treasury to default today, 
the results would be much more severe. Interest rates would 
spike. Credit would tighten. Financial institutions would 
scramble for cash, and savers might desert money market funds. 
Anyone who remembers the financial crisis should shudder at the 
prospect of reliving such disruptions.
    Second, Treasury doesn't have any super-extraordinary 
measures hidden away in a desk drawer if the debt limit is not 
raised in time. Pundits have suggested that Treasury might 
sidestep the debt limit by invoking the Fourteenth Amendment, 
minting extremely large platinum coins, or selling gold and 
other federal assets. But Administration officials have said 
that none of those strategies would actually work.
    Third, debt limit brinkmanship is costly even if Congress 
raises the limit at the last minute. As we saw in 2011, 
brinkmanship increases interest rates and federal borrowing 
costs.
    The Bipartisan Policy Center, building on work by the 
Government Accountability Office, estimates that that crisis 
will cost taxpayers almost $19 billion in extra interest costs. 
Brinkmanship also increases uncertainty, reduces confidence, 
and thus undermines the economy.
    In 2011, for example, consumer confidence and the stock 
market both plummeted while measures of financial risk 
skyrocketed.
    Finally, brinkmanship weakens America's global image. The 
United States is the only major nation whose leaders talk 
openly about self-inflicted default. At the risk of sounding 
like Vladimir Putin, such exceptionalism is not healthy.
    [Laughter.]
    Fourth, as this Committee knows well, our economy remains 
fragile. Now is not the time to hit it with unnecessary shocks.
    Fifth, as the CBO confirmed yesterday, the long-run budget 
outlook remains challenging. Deficits have fallen sharply in 
the past few years, but current budget policies would still 
create an unsustainable trajectory of debt in coming decades.
    Congress should address that problem, but the near-term 
fiscal priorities are funding the government and increasing the 
debt limit.
    Finally, Congress should rethink the debt limit and indeed 
the entire budget process. Borrowing decisions cannot be made 
in a vacuum separate from other fiscal choices. America borrows 
today because this and previous Congresses chose to spend more 
than we take in--sometimes with good reason, sometimes not.
    If Congress is concerned about debt, it needs to act when 
it makes those spending and revenue decisions, not months or 
years later when financial obligations are already in place.
    When the dust settles on our immediate challenges, Congress 
should re-examine the entire budget process, seeking ways to 
make it more effective and less susceptible to dangerous after-
the-fact brinkmanship.
    Now I have completely failed at the challenge of saying 
something upbeat, so in conclusion let me say that I think 
actually all of these challenges are soluble with good spirit 
and working together. And thank you for inviting me to appear 
today.
    [The prepared statement of Dr. Donald Marron appears in the 
Submissions for the Record on page 45.]
    Vice Chair Klobuchar. Thank you very much.
    Dr. Mitchell.

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

    Dr. Mitchell. Thank you very much, Vice Chair Klobuchar, 
Chairman Brady, and other Members of the Committee:
    I have five points I want to make. I am a centrist. I am 
between Mark's four points and Donald's six points.
    First, it is very important to understand that our chief 
fiscal problem is excessive federal spending. Deficits and debt 
are undesirable, of course, but they are simply ways of 
financing government spending; and the other ways of financing 
government spending--higher taxes and printing money--they are 
also undesirable.
    In other words, we should look at government spending on 
things that it is not very efficient at doing. That is sort of 
the underlying disease, and deficits and debt are symptoms, but 
so are higher taxes.
    Second, the best way to gauge good fiscal policy, as 
Chairman Brady indicates, is to try to control government 
spending so it grows slower than private sector economic 
output. If you do that, you are shrinking the burden of federal 
spending as a share of GDP over time and you get a very 
positive self-reinforcing cycle in that ratio of government 
spending as a share of GDP where the numerator is shrinking and 
denominator is growing.
    If you do not do that, if you allow government to grow 
faster over an extended period of time than the private sector, 
sooner or later--it might be 5 years, it might be 50 years--but 
sooner or later, you are going to wind up like Greece. Because 
it is a mathematical certainty that if government for a long 
period of time grows faster than the private sector, you get in 
trouble.
    Why? The private sector is your tax base. And if government 
is always growing faster than the private sector, no amount of 
tax increases in the long run are going to solve the problem. 
And that is assuming that you identify fiscal balance as the 
problem rather than the overall burden of government spending.
    Third, I want to say something very optimistic. It is 
possible to make rapid progress with even a modest amount of 
spending restraint. Consider what has happened in the past two 
years.
    For the first time in five decades, the government spending 
in nominal terms has shrunk, where government spent less last 
year than the year before, and less that year than it spent 
before that. And what has happened during that two-year period? 
Well the burden of government spending has fallen from 24.1 
percent of GDP to 21.5 percent of GDP. And for those who focus 
on red ink, it is worth noting that that period of fiscal 
restraint resulted in our deficit going from $1.3 trillion to 
$642 billion.
    And indeed, if we maintain some sort of fiscal discipline 
going forward, it is amazing how quickly we can make progress. 
If government grows just 1 percent a year, we balance the 
budget in 3 years. If it grows 2 percent a year, we balance the 
budget in 4 years. And if we let government grow 3 percent a 
year, we balance the budget in 7 years.
    Indeed, it is worth noting what happened in Canada in the 
1990s. They had a 5-year period where government spending grew 
1 percent a year--and this was mostly under a liberal party 
control in Canada at the time--in that 5-year period, they went 
from having a 9 percent of GDP deficit at the start, to a small 
budget surplus at the end.
    And it is worth noting that of course their economy grew 
faster, not slower, as the burden of government spending fell.
    My fourth point is that an increase in the debt ceiling is 
not needed to avoid default; it is needed to avoid messy 
budgeting; it is needed to avoid some of the complications with 
payments to providers, state and local governments, and all 
those other things that Donald mentioned. But when you have 
annual interest payments of $230 billion, roughly, and annual 
tax revenues approaching $3 trillion, you do not need to be a 
mathematical genius to realize that the Treasury Department 
should be able to manage that and avoid default, even though, 
as I said, it would be a messy process for other parts of the 
budget.
    Indeed, I even quote Donald in my testimony--but since he 
is here, let me go ahead and cite two other people: Stan 
Collender said, quote: `` . . . it's worth taking a few steps 
back from the edge'' `` . . . a default wouldn't be automatic 
because payments to existing bondholders could be made the 
priority while payments to others could be delayed for 
months.''
    The Economist Magazine said, quote, ``Even with no increase 
in the ceiling, the Treasury can easily service its existing 
debt; it is free to roll over maturing issues, and tax revenue 
covers monthly interest payments by a large multiple.''
    The only caveat would be if for some reason the Treasury 
Department did not want to pay interest on the debt, and I do 
not think that is realistic or likely at all.
    My final point is that a fight on the debt limit might be 
worthwhile if it generates some sort of good fiscal policy 
outcome. And let's look at Greece as an example of what not to 
do.
    There is nothing akin to a debt limit in that country. But 
imagine there was. And imagine that a group of lawmakers, say 
15 years ago, dug in their heels and said, no, we are not going 
to allow more red ink. That probably would have caused a lot of 
turmoil at the time, but if the net result was to force Greek 
politicians to restrain the growth of spending over a multi-
year period, then it is quite likely that the people of Greece 
would have been spared the economic and fiscal misery that they 
are suffering right now.
    Let's close with an analogy. Yesterday's long-run fiscal 
outlook from CBO shows that a do-nothing or status quo approach 
guarantees fiscal chaos. In other words, we are in a car. We 
are heading toward a cliff. We do not know whether we are going 
to hit that cliff in 5 years, 25 years, but if we do not take 
steps now when it is relatively easy, we will eventually cause 
a crisis.
    So I suggest that we should begin to steer away from the 
cliff, perhaps by adopting something similar to Switzerland's 
debt break, which is of course akin to Congressman Brady's MAP 
Act, to impose annual limits on the growth of government 
spending.
    Thank you, very much.
    [The prepared statement of Dr. Daniel J. Mitchell appears 
in the Submissions for the Record on page 53.]
    Vice Chair Klobuchar. Thank you very much, Dr. Mitchell. I 
wanted to first touch on this concept that if we just let this 
go that we are okay.
    I guess history for me means something. When you look back 
at what happened in 2011, costing taxpayers $1.3 billion 
because of the higher yields that had to be paid, and this is 
in our report; the fact that we had the Dow drop 2,000 points; 
the fact that we had our credit rating downgraded. And from 
what I have heard from these credit rating agencies, we can 
expect this to happen again at great peril to our economy.
    Just as you have pointed out, Dr. Zandi, we have this 
possibility of actually gaining ground right now vis-a-vis the 
rest of the world.
    So could you respond to some of the other witnesses here in 
terms of what they have said? And I think Dr. Marron also noted 
even a small lapse of the debt ceiling in a certain area 
created some major problems.
    Dr. Zandi. Yes. I think the 2011 experience is obviously 
very instructive. I think the difference between the experience 
we are going to go through over the next few weeks and then, 
then investors really had no roadmap. They did not have the 
good sense of how Congress would behave and whether you would 
come together at the end and sign on the dotted line.
    It came pretty close, and it did create a lot of angst, and 
markets fell, and confidence eroded, and it is costing us even 
to this day in the form of a higher interest rate.
    But in the current context, I think people and investors 
are fully anticipating that at the end of the next few weeks 
when we reach that day of reckoning when there is no way for 
the Treasury to use extraordinary measures to navigate around 
the limit, that you are going to act. And that is why you are 
not seeing anything in financial markets. That is why stocks 
prices----
    Vice Chair Klobuchar. Do any of the witnesses think that 
the President will sign a bill, or the Senate will pass a bill 
that either defunds Obamacare or delays the funding of 
Obamacare? Because that is what is attached to the House CR, 
one of them, and then to the--right now, to the debt ceiling 
proposal.
    Dr. Zandi. Right.
    Vice Chair Klobuchar. And so that is my concern, when we 
talk about brinkmanship, is that that is what is there right 
now. And I completely understand using a discussion of the debt 
ceiling as a way to talk about our debt, and I have been 
supportive of the efforts of the Gang of Eight, and these other 
groups, and have supported their work and would like to move 
forward, and thought that Speaker Boehner and the President 
were not that far apart in their negotiations at the end of the 
last year, which would have meant we would have had a much more 
long-term approach to debt reduction than the kind of band-aid 
we got at the end of the year.
    I just wanted to turn, Dr. Marron, to----
    Mr. Malpass. Madam Chairman, you asked what could the 
Senate do, and I think the Senate could respond to the House 
with alternative versions of spending restraint.
    The House is looking at it saying we do not want to spend 
money on this. And so it is incumbent on the Senate to come 
back and say, okay, we disagree with that, but we would like to 
see reductions in spending in this other area. So that you get 
a negotiation process going.
    The market would respond very favorably to that, if your 
response was one of reasonable offers of spending reduction.
    Vice Chair Klobuchar. Well I think when you look at the CR, 
there is not a set number right now on the CR. And I think that 
negotiations on that number could occur. But the issue is that 
we are not even there because what we have been told is we 
cannot get this bill unless we defund Obamacare.
    And I just wanted to go to one last point here, Dr. Marron, 
about the business community. You work with the business 
community, and I was remembering back in 2011, a coalition of 
nearly 500 business leaders wrote to Congress and the President 
urging Congress to put aside our differences and come together 
for the good of the country and the debt limit.
    The letter said: A great nation, like a great company, has 
to be relied upon to pay its debts when they become due. And 
then it went on to discuss the negative effects on business.
    I personally, as I mentioned, some of our most conservative 
CEOs sent a letter saying: I know there may not be an agreement 
on how to do this. We think this has to be done in terms of the 
long-term debt, but the debt ceiling is not the place to play 
games in terms of the effect it is going to have on our 
employees and our businesses.
    Could you address the business concerns?
    Dr. Marron. Sure. I mean, so I absolutely agree. The United 
States Federal Government has the full capability of paying its 
bills as due. And we ought to be carrying out our obligations 
to the beneficiaries who are relying on them.
    We ought to be a good business partner to the businesses 
that rely on us to pay them for the services they provide to 
the Federal Government. And for all those reasons, we have the 
capability. It is in our own interest, and it is the moral 
thing to do. For all those reasons, I think we ought to be sure 
that we pay all our obligations on time.
    Vice Chair Klobuchar. Okay. Very good. I stayed within my 
five minutes, I'd like to point out to the entire Committee----
    [Laughter.]
    Next, Chairman Brady.
    Chairman Brady. Thanks. Thank you all for testifying today. 
You are well respected. The points were really well made, and 
we appreciate it and it is very timely.
    So let me ask a question: Does anyone believe the 
President's and the Senate Democrats' position that we will 
pass a debt ceiling limit without any checks or balances on 
spending, does anyone here believe that is going to happen? 
Maybe that is the other, the flip side of this brinkmanship 
rhetoric.
    I appreciate the points that this is--the debt ceiling is 
one of the few remaining opportunities for restraining 
expansion of the Federal Government. And Vice Chairman 
Klobuchar said the same in 2011. Now it is time to have the 
vote tied in with getting some progress on the long-term debt 
for the country.
    And I think that is where Republicans and Democrats 
actually agree going forward.
    So, very briefly, Mr. Malpass, you made the case that it is 
economically important to restrain the growth. So what are the 
one or two most key elements Congress ought to be focusing on 
on that restraint in that area?
    Mr. Malpass. I think it is useful to have both sides 
offering their vision of how to restrain spending. There are 
ample areas. Senator Enzi was in New York on Monday and said 
there were $900 billion of spending restraint that is available 
to Congress.
    We have seen in the recent Ag bill a huge amount of extra 
spending. Each of these is going to be painful. My bottom line 
is that Congress should, and is almost required by its 
responsibility, to prioritize spending so that there is a 
concept that some of it is less vital than others.
    Chairman Brady. And you are thinking both continuing within 
discretionary funding, because there is still spending that is 
less of a priority there, and as well as the steps we take to 
make Social Security and Medicare solvent for future 
generations?
    Mr. Malpass. Yes. In yesterday's CBO numbers, they showed 
the rapid growth of entitlements in the outyears. So it would 
be very market positive if Congress began talking about ways to 
slow the growth in entitlement spending.
    It would set the U.S. apart from other countries in its 
ability to adjust to the aging demographics.
    Chairman Brady. So our government's financial outlook is 
getting worse, not better, as we sit here today?
    Mr. Malpass. Yes. Because of the trend path in spending, 
the debt is going to mushroom. It is vital that steps be taken 
now to find ways to have an open discussion of ways to slow 
down that growth in spending.
    Chairman Brady. Thank you.
    Dr. Mitchell, you take the controversial position that a 
short-term default would not be nearly as damaging as the 
consequences of our long-term financial insolvency. I note that 
the House has already passed legislation that takes default off 
the table; that requires the Federal Government Treasury to pay 
the bonds as they come due in full interest. It looks like we 
are getting set to do that again on Friday.
    You know, do you think that is one avenue that helps 
reassure markets in the short term so that we can actually 
focus on solving, together--Republicans and Democrats--the 
long-term problem we have?
    Dr. Mitchell. Well I do not think that default is on the 
table at all for the reasons I mentioned earlier, with nearly 
$3 trillion of revenue being generated and only about $230 
billion of annual interest payments.
    So unless the Treasury Secretary wanted the U.S. to 
default, which I am sure he does not, it is just unrealistic. 
My argument is that short-term controversy and fiscal mess, as 
Donald mentioned because of the payments for other things 
besides interest payments on the debt would be a relatively 
small price to pay if at the end of the day, we avoid the kind 
of truly horrific, catastrophic fiscal problems that you see in 
European countries that never did have an action-forcing event 
like a debt limit that enabled them to get control of spending.
    So are we willing to incur a little bit of headache and 
hassle and fighting now to avoid a much, much bigger fiscal 
crisis at some point down the road? And if I knew when that 
was, I would be one of these rich Wall Street guys. But, you 
know, all I know is it is going to happen if we do nothing.
    Chairman Brady. So you are saying the most dangerous and 
risky path is continuing the unrestrained spending and ignoring 
the problems with our entitlements?
    Dr. Mitchell. Yes. If you look at that CBO Long-Run Fiscal 
Outlook, it is very, very clear that the growth of entitlement 
programs, left unreformed, will be an enormous burden on our 
economy. Even if a couple of trillion dollars of revenue just 
floated down from Heaven, that would not change in my mind that 
the argument that we need to make Medicaid and Medicare and 
Social Security more structurally sound with the kinds of 
reforms that people have been talking about.
    Chairman Brady. As I yield back, I recall a hearing here 
two years ago when we asked experts--Republicans and 
Democrats--what is the true debt ceiling of America? What is 
the point where investors lose confidence?
    And from all parties, the answers were relatively the same. 
Which is: We don't know. It's sooner than you think. Don't wait 
to find out. Act as soon as you can.
    Vice Chairman.
    Vice Chair Klobuchar. Thank you very much.
    Representative Maloney.
    Representative Maloney. Thank you very much. And I would 
like to welcome all the panelists, especially Mr. Malpass who 
is from the Great State of New York, and a former candidate for 
the United States Senate. We appreciate all your testimony.
    This morning President Obama urged CEOs to call on Congress 
to avoid the debt ceiling showdown and the damage it would do 
to business and the economy. He described the financial 
brinkmanship that was taking place. He called it terrifying, 
and it should not be tied to ideological arguments, which is 
what is happening in Congress.
    In a general sense, do you have any reports--or maybe you 
could get it to me in writing, if not right now--of the damage 
that it did to our economy in the 1970s, and the other times 
that we have just gone up to the brink? And how harmful is it? 
And this uncertainty certainly has a terrible impact on 
businesses.
    Senator Klobuchar talked about the letters that came in 
from American business urging us to work together and avert it 
in the past, and we do not seem to have the same type of voices 
from American business now as we have had in the past. Why do 
you think that is? That American business is not weighing in 
with the letters and the phone calls that we have gotten in the 
past? Maybe they just believe it is not going to happen--your 
point, Mr. Zandi--but in a general sense, your response to 
this?
    Mr. Malpass. Very nice to see you.
    My sense is, the markets have examined carefully the actual 
dynamics of debt payments during the 2011 incident. What I am 
seeing and hearing right now is, no real market concern about 
either a default or a technical default.
    My thought would be that there is going to be less of a 
market reaction throughout this period because we went through 
the experience in August of 2011.
    Representative Maloney. Dr. Zandi.
    Dr. Zandi. I think we have become desensitized. We have 
gone down this path a number of times--2011, and----
    Representative Maloney. Same old same old.
    Dr. Zandi. Yes. And each time we have the brinkmanship, 
there is vitriol, we hit each other over the head. But at the 
end of the day when it comes down to brass tacks, we come to an 
agreement. And there is a hundred percent certainty in the 
marketplace right now that that is the movie we are going to 
see.
    If we don't--and in fact, I would argue, in a couple, three 
weeks--say we get into the early part of October and no one is 
fashioning a narrative, or a storyline with respect to how this 
is going to work out, then the markets will start to react. 
Because they will say, how is this all going to play out?
    And then a couple, three days before D-day, whenever that 
is, October 18th, or October 21st, the markets are going to 
react very violently. So it is going to be: I am okay. And then 
it is going to be: I am not okay. And then you are not going to 
be able to get that back into the box.
    Representative Maloney. And Chairman Brady----
    Mr. Malpass. Madam, if I may, we should note that July and 
August of 2011, the bond market reacted favorably to the risk 
of default. Meaning, the yields fell sharply during that period 
of time.
    From a bond market standpoint, investors tend to run into 
the Treasury market the bigger the risk of a stalemate in 
Washington.
    Dr. Zandi. Just a point of clarification, a very important 
one. The Treasury yields fell. Every other yield rose. So 
borrowing cost to businesses, borrowing costs to consumers, to 
households because of higher mortgage rates because of the 
spreads widened because of the concern.
    Representative Maloney. Well Chairman Brady also talked 
about tying deficit reduction to any of these negotiations, but 
tying it together creates another type of uncertainty for 
businesses and investors. And this uncertainty would jeopardize 
economic growth.
    But we do need to reduce the deficit. And Senator Warner 
has been so effective in pointing that out in his studies, 
also. But have we swung the pendulum too far? We have achieved 
$2.4 trillion in deficit reduction. The CBO came up with a 
study last week saying that sequestration was costing 1.7 
million jobs in one year; and that the severe cuts are hurting 
the economic growth that expands the economy.
    And so the whole type of indiscriminate spending, I tell 
you I just got out of an election in New York City. I have 
never seen it so bad. Forty-five percent of the population is 
near poverty line, or poverty line. People are afraid of not 
being able to even stay in their apartments because of the 
recession, downturn in the economy.
    The $40 billion, now we're going to have it on the Floor, 
cuts in the SNAP program, where people do not even have the 
food they need. So are the cuts getting too close? Some people 
think it should be a one-to-one, but it is now like a four-to-
one spending cuts to revenue increases. And is this--how much 
more deficit reduction is needed to put the Nation on a 
sustainable fiscal path? And how should we balance between 
spending cuts and revenue increases?
    Have we reached a point where we are overall hurting the 
economy? And I would like to ask Dr. Zandi. You know, he is an 
economist who gets fired if he is wrong. So I always like to 
hear him. When you work for a think tank, you don't necessarily 
get fired; but if he's wrong for Moody's, they're going to fire 
him.
    Dr. Zandi. Yes, they will. Yes, they will.
    [Laughter.]
    I only have to be right, though, like 53 percent of the 
time.
    [Laughter.]
    So they'll leave me alone. I think the fiscal austerity, 
the spending cuts and tax increases that you speak of, in the 
near term is overdone. If I were king for the day, I would 
smooth that in over a longer period of time to allow the 
private economy to digest that fiscal drag.
    So we are navigating through it. It is painful. Our economy 
is very lackluster. Unemployment is still very high. It is not 
coming down quickly enough, in large part because of the 
austerity. But nonetheless, I think ideally it would be better 
to smooth that in over time.
    Clearly we needed to bring down the deficits. We needed to 
get the deficits down at least to stabilize the debt-to-GDP 
ratio. But we are doing that awfully quickly and taking a big 
chance in the process.
    Representative Maloney. Any other comments on it?
    [No response.]
    Vice Chair Klobuchar. All right, thank you very much, 
Representative. Representative Duffy.
    Representative Duffy. Thank you, Madam Vice Chair.
    Thank you, panel, for being here today. You know, I did not 
necessarily run for Congress in 2010 to come here and raise the 
debt ceiling. I came here to reform the way we spend, reform 
the way our government works.
    But I've got to tell you, I am willing to raise the debt 
ceiling. I am willing to take that vote and get some trouble 
back at home as long as we engage in a reform of the way we 
spend.
    I am willing to vote if we reform our entitlement program. 
But for the panel, or my friends across the aisle to say, 
listen, we just want a straight debt ceiling increase with no 
real reform? I think you are going to be hard-pressed to find 
colleagues on my side of the aisle to actually vote for that.
    So when we talk about brinkmanship, we all have to come to 
the center. And my good friend, Senator Klobuchar, might say, 
well, listen, we're not going to give up on Obamacare, whether 
defunding it or delaying it, but we will come to the table and 
we will actually look at our entitlement system. We will look 
at the way we spend.
    But we have to engage in some form of a dialogue where we 
can meet in the middle. And I think brinkmanship is one where 
one side--like the President says, hey, I will negotiate with 
Syria, or with the Russians, but I won't negotiate with 
Republicans on the debt limit.
    That is brinkmanship. In 1990--you guys only went back to 
1990, but in 1990, as you guys recall, Democrats held the Bush 
Administration hostage over the debt ceiling. Same goals. 
Different tools were used, but same goals.
    Just to look back, you guys are well aware of a quote from 
March 16th, 2006, from a famous Senator. He gave a Floor speech 
where he said:
    Increasing America's debt weakens us domestically and 
internationally. Leadership means that the buck stops here. 
Instead, Washington is shifting the burden of bad choices today 
onto the backs of our children and grandchildren. America has a 
debt problem and a failure of leadership. America deserves 
better. Therefore, I intend to oppose this effort to increase 
America's debt limit.
    You guys all know who that--who gave that famous speech, 
right? President Barack Obama.
    And so when we talk about brinkmanship, I am not in favor 
of that. But I am also in favor of a group of men and women 
from both parties and both Chambers coming together to find 
solutions to this problem.
    And so I guess, Mr. Zandi, and Mr. Marron--I'm slaughtering 
your name and I apologize--do you think this is a one-size 
solution? Are you telling--are you here testifying today that 
we should just increase the debt limit without any negotiation 
on reforming how we're spending? That is not your position, is 
it?
    Dr. Zandi. Well what I am here to say is: You need to raise 
the debt limit. I mean, there are no options. Otherwise, it is 
disastrous and it is counterproductive to your own goals 
because it is going to result in a recession, bigger deficits, 
and raise the debt.
    You know, my sense is that both Democrats and Republicans 
have negotiated and debated the debt limit since the debt limit 
has been around, since 1962 or whenever it was put into place. 
So it has been used by both sides.
    But that does not make it right. You know, you can only put 
the gun to your head so many times before someone is going to 
make a mistake and pull the trigger, and it is to everyone's 
detriment.
    So, you know, maybe this is the best time to say: Look, 
this is not the way to run a railroad.
    Representative Duffy. And maybe to this point, I mean the 
panelists have all agreed we have to reform the way we spend. 
There are long-term consequences for the fiscal course we're 
on. I don't think anyone has disagreed with that.
    One of the problems is our entitlement system. And the 
long-term issues that that brings 10 and 15 years down the 
road. My question is: Where is the plan coming from the 
President that says: Listen, I may not like Paul Ryan. I don't 
like the House budget. But let me tell you my plan to reform 
entitlements that is going to bring us on this pathway to 
sustainability, or reform spending that brings America on this 
pathway to sustainability, where there we can come together and 
negotiate?
    I have not seen that plan yet. I mean, the budgets that 
come out, they never balance. They never, ever, ever balance, 
the President's budget doesn't. I don't know if they're 
political documents, but at some point if we are going to 
negotiate outside of the debt limit, we need to be able to have 
an honest conversation.
    And if you cannot get people to come to the table and 
honestly talk about these problems, I do not know how we come 
to a resolution unless you get a deadline that says we are all 
going to come to the table or there's going to be big problems.
    Does anyone disagree with that?
    Mr. Malpass.
    Mr. Malpass. No. I agree. And I think there's not enough 
emphasis on the upside. There's been a lot of talk about 
brinkmanship or the idea of going up to the end, but in reality 
I think it is going to come up to voters. There ought to be a 
presentation by Members of ideas about how to restrain 
spending, creating a national debate that begins to make 
progress on this.
    We have a gigantic spending problem in the Federal 
Government, and it is time today to start down this path. This 
has been going on year after year, where you say, well, next 
year we are going to deal with some way to restrain spending.
    I think right now is as good a time. Markets are in a very 
healthy condition. And so it is a good time to have this 
debate.
    Dr. Mitchell. Congressman, if I could add one thing. The 
President has never proposed a plan that balances, but one 
thing that concerns me is that he did say the value-added tax 
was, quote, ``something that has worked for other countries.'' 
This does make me worry that he sees Europe as a role model to 
follow, when certainly the events that we are seeing with the 
welfare states collapsing in many European countries should be 
a warning sign to all of us that we cannot allow government 
spending to grow; it has already climbed since the end of the 
Clinton Adminstration from total government spending on the 
U.S. at about 32 percent of GDP to now 37, 38 percent of GDP. 
We cannot allow it to climb to European levels at 45 or 50 
percent of GDP.
    Representative Duffy. And before I get gaveled down--which 
I am right now--I would just note that I think you make a good 
point with regard to some countries that are going through 
fiscal problems today. Fifteen years ago I bet they do wish 
they'd had a debt limit and people held them accountable to get 
that reform done. That's a great analogy.
    Vice Chair Klobuchar. And I want to take you up, 
Representative. We're turning to Senator Warner who has done so 
much work in this area, but we want to get our Senate budget 
and House budget to conference committee. So if you could join 
us, that is where we can have this discussion, and that is why 
Senator McCain and Senator Collins have joined us in saying 
let's get them to conference committee. That is the place to 
have this discussion, and not with a few weeks to go on the 
debt ceiling.
    So with that, I turn it over to Senator Warner.
    Senator Warner. Thank you, Vice Chairman.
    You know, I have not been here that long but I have been in 
business a lot longer than I have been in politics, and it is 
stunning to me that anybody that would claim economic expertise 
would say that messing with the full faith and credit of the 
United States of America is a responsible action.
    I mean, it is mind boggling. I am going to make a couple of 
comments here. There has been no major industrial nation that 
has ever gone through a significant default and recovered. I 
mean, Argentina did a decade ago, maybe not a major industrial 
nation but depending on the estimates 40 to 60 percent of net 
wealth in that country disappeared in a few days, a few weeks.
    The analogies back to 2011 when our first absurd actions 
around here, when, yes, perhaps money moved to T-bills a bit 
because we looked only slightly less worse off than Europe, and 
we still had a few remaining bullets of extraordinary actions 
on monetary policy--that have all been spent now.
    The Fed acted today to extend one more time actions that, 
you know, can only go so long because of our inability to do 
our basic job. We, candidly, ought to all get fired if we don't 
raise this debt limit.
    Again, I respect my colleagues and people on the panel who 
say we need to control spending. We absolutely do. And I have 
laid out a series of plans with Republicans and Democrats that 
make major changes to entitlements.
    But I find it stunning to me that there are people that 
think that this can be solved on simply one side of the balance 
sheet, without looking at any historic norms on the revenue 
side as well. With an aging population. And even with the 
entitlement changes that are needed, any notion that we are 
going to be able to drive spending down to 18, 19 percent GDP 
with an aging population and increasing medical technology is 
so divorced from reality that it is, you know, it is not a 
budget that has I think again much merit.
    I desperately think the challenge here has been about how 
we find revenues. I think the New Year's Eve deal was a bad 
deal, and a huge missed opportunity to do the major economic 
entitlement transition and change that needed to be made. And 
the relatively marginal amount of additional revenue that is 
needed to be made, this is the thing that is so absurd.
    We took $4.5 trillion out of the revenue stream on the so-
called Bush-or-Obama, because both parties were part of this 
tax cut. Nobody is talking about putting $4.5 trillion back in 
the revenue stream.
    Simpson-Bowles, roughly about 1.5. Gang of Six, about 1.2. 
We're talking about putting about a third of that back in the 
revenue stream, along with major entitlement changes. That is a 
negotiating point that would be valid.
    I would argue--I mean, memo to Congress going forward, I 
would simply say when we set up the so-called Budget Control 
Act we set up, let's think of the stupidest thing we could do 
as a default mechanism to make sure that we would not allow 
that to happen. It is called ``Sequestration.''
    I would ask any of my colleagues in either party to come 
with me to NIH, or come with me to Hampton Roads, where we have 
so many of our military installations, and see the cancer that 
is eating at the insides of both the people who are making 
long-term commitments to public service, our Nation's 
readiness; or from a business perspective. The House budget, 
which over about a 10- or 11-year plan, takes domestic 
discretionary spending from 16 percent of spend when you can't 
count tax expenditures down to about 4 percent.
    I spent my career investing in businesses. I would never 
have invested in a business that spent less than 5 percent of 
its revenues on training and equipping its workforce, investing 
in its plant and equipment, which is our Nation's 
infrastructure, and in a global economy staying ahead of the 
competition, which is R&D. And yet that is our business plan at 
this moment in time.
    That is a business plan that I would have never accepted. 
It was a business plan that, candidly, Mitt Romney would have 
never been able to get through Bain Capital. So I urge, and I 
accept, candidly, the fact that a lot of folks on my side of 
the aisle have not been willing to go as far as we need to go 
on entitlements.
    And let's have that discussion. But anybody that says on 
any historic basis, looking at the past 75 years of when those 
five or six years when we've had balanced budgets, when those 
revenues have ended up between 19.5 and 21 percent, that 
somehow we're going to get back to a historic 18 percent 
revenue line that is going to be sustainable with anything 
approaching what the American people have come to expect, is 
again divorced from reality.
    So I appreciate the Chair and the Vice Chair holding this 
hearing, but I guess I would have to say--and both sides bear 
plenty of blame--but the notion that the greatest Nation in the 
world with the dislocation in Europe, with China slowing down, 
with India's economy almost grinding to about 4 percent growth, 
with countries like Turkey and Brazil that we saw as growing, 
with the uncertainty that we see--and I will acknowledge I have 
been a bit of a debt Cassandra, I know I've been called on my 
side--you know, we got through the debt limit that didn't 
crash. We got through the so-called Super Committee, we didn't 
crash. We got through the stupid fiscal cliff.
    But I tell you, I think this time we are playing with fire 
exponentially greater without virtually any other tools to 
react.
    So my apologies to the panel that I went past my time.
    Vice Chair Klobuchar. Oh, it was more than worth it. Thank 
you, Senator Warner. It was very good. Thank you.
    Senator Warner. Thank you.
    Vice Chair Klobuchar. All right. Senator Coats.
    Senator Coats. Well I appreciate the passion of my 
colleague, and I know that he spent an extraordinary amount of 
time and effort trying to pull together bipartisan support for 
putting together the larger plan which would incorporate a 
number of factors that could have put us on the path to fiscal 
health.
    And I was not a central part of that, but I was a part of 
it, and I think the Chairman was also, and a number of efforts 
have been made, as you know, over the past three or four years 
to achieve the so-called ``deal'' that reassures investors 
around the world, reassures the financial markets, and sends 
the message that they have finally gotten their act together. 
And even though this will require a long-term effort to get to 
where we ultimately want to get, just coming together in 
support of something of that magnitude, which would include 
probably tax reform, a significant comprehensive tax reform, 
which would include entitlement, structural entitlement reform, 
puts them on the glidepath to continued sustainability, which 
it's not on now. Which would have incorporated both revenue and 
meaningful spending.
    Replacing sequester with something far more efficient in 
terms of how we separate the essential functions of the Federal 
Government--that we all want and know we need to Support--from 
``well, this would be nice to do, but we just don't have the 
money to do it, and once we get it, maybe we should take it 
up'' from ``why are we even doing that in the first place?''
    But despite the efforts, whether it's the Gang of Six, the 
Committee of 12, Simpson-Bowles, Domenici/Rivlin, all the 
efforts, the Dinner Party Group that I've been a part of--they 
have all come up short. And they have not--and it has led us to 
a series of crises, whether it is debt limit crisis, whether it 
is a funding next year's government crisis which we are facing 
here in just a week and a half--it has not removed that cloud 
of uncertainty that exists.
    You know, you talk to CEOs, business people, whether they 
are small, medium, or large, they are essentially kind of 
frozen in place in terms of hiring, in terms of expanding, in 
terms of research and development commitments, in terms of 
looking to the future.
    Now the discouraging part of all this is that, despite all 
these efforts, it appears that there is no real early solution 
in place. The Congress is divided on how best to go forward 
regarding revenue versus spending.
    The public is divided in terms of what we think they want 
us to do. I think it is fair to say that the current 
Administration is holding to a formula which cannot be accepted 
by the Congress.
    And so, despite this, we have stumbled through. I think 
everyone acknowledges that we could have been doing much 
better.
    My question is: Stepping away a bit from the debt limit, 
anticipating that probably we are going to keep doing these 
kind of things for the next three-and-a-half years, we are 
going to have a new President in 2017. Based on your knowledge 
of where we are, what we have done so far, some of it 
constructive and helpful, but likely what we won't do going 
forward for the next three-and-a-half years, what is that new 
President going to face when he sits down with his team, his 
economics team, and says okay, where are we? And what kind of 
situation are we in?
    Are we going to continue to have to rely on some outside 
precipitating factor like what happened in Europe, a Greece, or 
a crisis, or a spike in interest rates that is going to drive 
us to some type of compromise solution?
    I would just like to get your thoughts on that. Why don't 
we start with Dr. Zandi and go down the line, and that is my 
only question, and give the panel a chance to address that 
question.
    Dr. Zandi. I think if you can, if Congress and the 
Administration can come reasonably together and pass a budget, 
fund the government, extend the debt ceiling, and do nothing 
else, nothing else, the economy will kick into gear and in 2017 
the next President will be facing an economy that is pretty 
close to full employment.
    I fully agree that we have long-term fiscal problems. 
Entitlement reform is necessary. Tax reform is necessary. But 
the key issue, the only missing ingredient to a much better 
economy over the next few years to really getting things 
rolling here and getting us back to full employment, is for you 
all to come to terms and just sign on the dotted line and we 
will be off and running.
    Senator Coats. But part of my question was, not only was--
--
    Vice Chair Klobuchar. Senator Coats, because you had 
already gone over your time, we are just going to give each 
witness 30 seconds, like Dr. Zandi, to answer it, if that is 
okay. Thank you.
    Mr. Malpass. Thank you. Some quick points. It would be a 
missed opportunity right now to pass this opportunity by. I 
think critical is to take small steps. If there were simply one 
program that you knew of in the vast government that there 
could be bipartisan consensus that it could be downsized, that 
would go a long way. That would be a starting point. It is 
something we are not doing right now.
    By the time you get to 2017, if you assume things stay as 
they are now, that means there will not have been a single 
program that you can identify that needs to be downsized. That 
means U.S. growth will have been slower. We will have millions 
of people unemployed, or who have not found a job because of 
that inaction going on right now.
    Senator Coats. Dr. Marron.
    Dr. Marron. So clearly we will miss many opportunities to 
do larger things. A couple things that will press. One 
emergency that is going to come in the 2016-2017 time period 
the disability portion of Social Security, whose Trust Fund 
will likely run out of resources. And so the new President in 
2017 may face that as a pressing new immediate fiscal 
challenge.
    And then one thing that will happen is, a lot of the 
uncertainty around the implementation of health reform will 
presumably be resolved by then--not all, by any stretch, but we 
will learn a lot in the next few years about how health reform 
operates or doesn't operate, which I think will be very 
important information for thinking about health care going 
forward.
    Dr. Mitchell. I will say something optimistic. In the last 
two years, because we have actually reduced government spending 
a little bit two years in a row, the deficit has fallen by more 
than 50 percent, and the burden of government spending has 
dropped by a couple of percentage points of GDP.
    If over the following three years before the next President 
takes office, we limit the growth of government so it grows by 
one percent a year, the new President will have a balanced 
budget and be in a much stronger position to start considering 
some of the entitlement reforms to deal with the long run.
    So I think there is light at the end of the tunnel if we 
can just make sure the trend lines are correct in terms of the 
growth of government versus the growth of the productive sector 
of the economy.
    Senator Coats. Madam Chairman, thank you.
    Vice Chair Klobuchar. Very good, Senator Coats. I know 
we're almost done here, so if you want to stick around and ask 
Dr. Zandi your second question, we're not going to do a second 
round but you can do it on your own.
    And next we have Senator Murphy.
    Senator Murphy. Thank you very much, Madam Vice Chair. 
Thank you for having this hearing. Thank you to our witnesses.
    Sorry I'm a little late in getting here, but am glad to be 
here in time for Senator Warner's very passionate case on 
behalf of a balanced approach. I think he makes as good an 
argument as anybody in this place as to ultimately what our 
approach has to be to get beyond government and budget setting 
by manufactured crises.
    But I guess I look at it at a little bit simpler level. And 
that is in terms of making a distinction between policy and 
process.
    When I got to the gas station to fill up my car with a tank 
of gas, that is policy. I have made a decision that I need gas 
in the tank and I'm going to pay for that, and maybe as a 
consequence I am not going to, you know, go out and get an ice 
cream with my kids that night.
    The process is when I stick the card in the machine to pay 
for it. That's not a decision that I make. That's just a 
consequence of the decision I made when I filled up the tank of 
gas.
    And as I listen to people prognosticate as to how this 
whole thing may play out over the next several weeks, that 
there's some suggestion that maybe we will do a continuing 
resolution and then a couple of weeks later potentially 
abrogate American debt obligations, the hypocracy to me is just 
stunning; that within weeks we would make a policy decision to 
spend more than we are taking in, and then just a handful of 
days later essentially refuse to pay the bill, the equivalent I 
think of essentially filling up your tank and then driving off.
    My question, though, is about what this all means for the 
flow into the United States of foreign investment. I was in 
Europe--I'm Chair of the European Subcommittee on the Foreign 
Relations Committee--I was there earlier in the year, and if 
you want to feel good about America, go to Europe.
    They look at the American economy with some degree of envy 
because they see rates of growth that, although anemic are 
better than what many of those countries are experiencing. They 
look at demographic trends that are very positive in the United 
States compared to the aging populations of Europe. They look 
with some envy upon our energy sector as we are starting to 
achieve a greater degree of energy independence.
    And they scratch their heads because the one thing they 
don't understand is how, based upon all that relatively good 
news, especially as compared to Europe, we haven't figured out 
that the one thing that stands in our way, as Mr. Zandi has 
said, and others have said over and over again, is our ability 
to get control of these long-term liabilities.
    And so my question in that context--and I will frame it to 
whomever wants to take the question--Mr. Zandi, you have been 
taking most of these first, so I will give it to you first, is: 
If we continue in this sort of cycle of manufactured crisis 
after manufactured crisis, what does this mean for the flow of 
foreign investment into the United States? What has it meant 
already, and what can it mean in the future?
    There is world capital that is looking to find a home and a 
place, and my question is: Have our actions over the past 
several years already had a chilling effect on the amount of 
foreign investment in the United States? And what is the future 
if we continue to be trapped in this cycle?
    Dr. Zandi. Well I think the evidence is that it undermines 
confidence in the ability to pay our obligations. It raises the 
cost of funds, and investors are demanding higher interest 
rates as a result. That is the evidence that we have gotten 
from the 2011 event, that it has raised interest rates even a 
small amount, but that adds up to a lot of money because we are 
talking about trillions of dollars in debt.
    So it is incredibly costly, and the only thing that has 
really saved us from an even greater cost is that the rest of 
the world is in worst shape. And their political and budget 
issues are much worse than our own.
    Senator Murphy. Right. And I guess that's the context of my 
question, that given the potential return on investment in 
other first-world or G-20 countries, does that still create an 
incentive to put money into the American economy 
notwithstanding the crisis? Or do we still have a chilling 
effect above and beyond some relative competitive advantage we 
have against the rest of the world.
    Dr. Zandi. Well we can't keep going down this path, because 
presumably the rest of the world is going to get their act 
together.
    Senator Murphy. Right.
    Dr. Zandi. And if we don't, we are going to have a problem.
    Senator Murphy. Any other comments?
    Mr. Marron.
    Dr. Marron. I would just say that from where I sit, I mean 
I think the primary risk of these showdowns is mostly borne by 
Americans--particularly if you had a government shutdown, or if 
payments don't go out.
    And then as Mark says, obviously if there is some aspect of 
this that really weakens confidence in our system and the odds 
that folks' capital will be treated well here, it is clearly a 
significant risk. But really I think most of it is about 
Americans.
    Senator Murphy. But I think, just to wrap up, Senator 
Klobuchar, I think, Dr. Zandi, your comment is spot on. We have 
not maybe borne the full brunt of this because there has not 
been a lot of safe landings any other place. But to the extent 
that Europe does make a turn, or other places do, that hurts us 
even more.
    Dr. Zandi. And actually evidence of that, there are a 
couple of economies that have gotten it together--Canada is a 
good case in point; Australia is another pretty good case in 
point--and they have benefitted enormously from the capital 
flows that have come to their country. That is because they are 
on sound fiscal ground and they are doing the right thing.
    Senator Murphy. Thank you.
    Vice Chair Klobuchar. Very good. Well I want to thank our 
witnesses today. We had a very good attendance, I hope you 
noticed, and a tribute to all of you as witnesses, as well as 
the importance of this issue.
    As I was sitting here--not that I wasn't raptly listening 
to every word of my colleagues--but I did look at the iPad and 
I noticed a story just posted on the Star Tribune that the Twin 
Cities economy grew at its fastest pace in nearly a decade last 
year. The U.S. Commerce Department reported Tuesday that real 
GDP, the total value . . . grew by 3.9 percent, adding more 
than $7 billion in economic activity.
    So that is the kind of good news that is out there, and I 
think it is what Dr. Zandi was talking about when he talked 
about how we are on this cusp of some real economic expansion.
    I even think when, Dr. Mitchell, you talked about some of 
the work that has occurred on bringing down the debt that has 
helped to at least make people understand that the Congress is 
serious about doing something.
    That being said, I would just end with this. We are on this 
cusp of opportunity, and I don't want us to go backward by 
sending the economy into a downward spiral. And I would much 
prefer to do the kind of work we could do in a conference 
committee, or the kind of negotiations that were going on at 
the end of last year with Speaker Boehner and the President and 
others and the work that's been going on with Senator Warner 
and a group of us on the debt reduction, than having something 
sort of political positioning going on on either side on this 
debt ceiling.
    And that's my last words. I don't know if you want to say 
anything here, Mr. Chairman.
    Chairman Brady. Well I appreciate you holding this hearing. 
It is timely. It is important. Our panelists really were very 
articulate, and it just seems to me with the Fed continuing to 
pump this monetary morphine into Wall Street, now is the time 
for us to get our fiscal act in order because the clock is 
really ticking. This is the perfect opportunity.
    Vice Chair Klobuchar. Very good. Thank you, everyone, and 
the hearing is adjourned.
    (Whereupon, at 3:53 p.m., Wednesday, September 18, 2013, 
the hearing was adjourned.)
                       SUBMISSIONS FOR THE RECORD

Prepared Statement of Hon. Kevin Brady, Chair, Joint Economic Committee
    Vice Chair Klobuchar, distinguished witnesses, and guests from the 
Republic of Ireland and Northern Ireland, welcome.
    Vice Chair Klobuchar and I agree that political brinkmanship over 
raising the debt ceiling is costly to our economy. I wish President 
Obama felt as we do. His declaration this weekend--``What I haven't 
been willing to negotiate, and I will not negotiate, is on the debt 
ceiling.''--represents the inflexible brinksmanship the American people 
deplore.
    Despite the recent decline in the federal budget deficit, future 
projections are troubling. Add to that an ever-growing national debt; 
Medicare whose main trust fund runs empty within twelve years; and 
Social Security that had to borrow nearly $150 billion last year from 
foreign investors and the Fed simply to make payments to our seniors. 
As Dr. Zandi noted in his testimony, `` . . . the long term fiscal 
outlook remains disconcerting.''
    This bleak outlook hurts middle-class families and the 20 million 
Americans who can't find a full-time job today in the weakest recovery 
since World War II. That's why House Republicans have reasonably and 
prudently passed a bill to take default off the table and invited the 
President to sit down together--today--to find a bi-partisan solution 
that puts Washington on a responsible fiscal path through pro-growth 
tax reform, ending wasteful spending and taking substantive steps to 
extend the lives of Medicare and Social Security.
    Children born today owe nearly $50,000 as their share of the 
national debt. In other words, they owe a Lexus to Uncle Sam. If 
Washington doesn't change its spending ways by the time they reach 13 
years old, they'll owe another Lexus. And when they graduate from 
college ready to begin their career, they'll owe yet a third.
    Of course, young people don't buy luxury sedans for Uncle Sam. 
Instead, they will pay the price for this generation's spending 
addiction through a sluggish economy with higher taxes and higher 
interest rates. So if they are able to find a job, they'll have lower 
wages and keep less of their paycheck to pursue their American Dream.
    For the first time in our history, we can't be confident that the 
next generation of Americans will be better off than the current one. 
That's unacceptable.
    Admittedly, the debt ceiling is an imperfect vehicle to control the 
growth of federal spending. I would prefer that Congress and state 
legislatures amend the U.S. Constitution to limit the growth of federal 
spending and require a balanced budget except during war or 
emergencies. However, the debt ceiling remains an effective tool for 
Congress and the President to reach bi-partisan consensus on measures 
to limit the growth of federal spending and reform entitlements.
    Both parties, Democrats and Republicans, have used the debt ceiling 
as a responsible means to shore-up America's financial house--the 
Omnibus Budget Reconciliation Act of 1990 came about through debt 
ceiling negotiations between congressional Democrats and President 
Bush, and the Budget Control Act of 2011 came about through debt 
ceiling negotiations between House Republicans and President Obama.
    It is irresponsible to give the White House another blank check. 
Instead, it is responsible to limit the growth of federal spending and 
secure the future of entitlement programs in exchange for raising the 
debt ceiling.
    If now isn't the time to tackle Washington's spending addiction, 
when is? Perhaps brinkmanship is just another word for a long overdue 
intervention.
    One of today's witnesses, Dr. Mitchell, summarized good fiscal 
policy in a simple golden rule: private output should grow faster than 
government spending. In other words, Main Street should grow faster 
than Washington. I agree.
    Some advocates of ``big government'' claim that modest savings from 
the recent sequester are decimating government services and threatening 
economic growth. The reality is that since the recession ended, real 
federal consumption and investment spending has grown faster than real 
GDP--6.4 percent compared with 4.6 percent. The sequester is merely 
asking the 500-pound federal government to lose about 10 pounds.
    What ails our economy is not too little government, but too much. 
Therefore, I will soon reintroduce the Maximizing America's Prosperity 
or MAP Act to limit the growth of federal spending through a new, 
innovative spending cap--non-interest spending as a percentage of 
potential GDP.
    Using non-interest outlays as the numerator in the spending cap 
forces Congress to limit what it can control--program spending--through 
appropriations bills and changes in entitlement legislation, not what 
it can't--interest outlays--that are determined by past spending 
decisions and the Fed's monetary policy.
    Using potential GDP as the denominator in the spending cap 
eliminates the ``boom-bust'' cyclicality in spending caps tied to GDP. 
The growth of GDP fluctuates with the business cycle, allowing spending 
blowouts in boom years, and then forcing deep cuts during recessions. 
Using potential GDP provides a more stable path for federal spending 
over time.
    Vice Chair Klobuchar and I might not agree on what's the right 
level for a spending cap, but we should be able to agree on the right 
metric. And non-interest spending as a percent of potential GDP is the 
right metric.
    I look forward to the testimony of today's witnesses.

    [GRAPHIC(S) NOT AVAIALBLE IN TIFF FORMAT]
    
                  Prepared Statement of David Malpass
    Vice-Chairman Klobuchar, Chairman Brady, members of the Committee, 
thank you for the invitation to testify on the debt limit. It's a vital 
economic and legislative issue.
    The national debt already exceeds the nation's annual output, and 
the Administration is now requesting that Congress increase the debt 
limit above $17 trillion. As part of providing this increase, I think 
there should be an honest national debate on federal spending 
priorities and an agreement with the President on constructive spending 
restraint. There's huge economic upside for jobs, investment, the stock 
market and the dollar if you could lower the federal spending path or 
rewrite the debt limit to make it more effective.
    The federal government is spending nearly $3.6 trillion per year 
and is planning to increase spending rapidly in coming years even with 
the sequester and the underfunding of national defense. Some of the 
spending is successful and adds to the nation's well-being, but another 
portion of the spending, several hundred billion dollars, is not 
successful enough to justify the taxes and debt used to pay for it.
    This has created a spending and debt crisis that harms the economy 
and undermines investment and jobs. The crisis is particularly acute 
because several categories of federal spending will need to increase 
over the next two decades as the baby boom ages and requires more 
government services. Government health-care spending will more than 
double over the next decade to $1.8 trillion annually in 2023, while 
annual debt-service costs are expected to quadruple as interest rates 
normalize.
    Given this demographic and interest rate cycle, spending and debt 
should be at lower-than-normal levels now in order to prepare for the 
coming increases. In addition, the maturity of the national debt held 
by the private sector should be longer than normal. Instead, the Fed's 
bond purchases have materially shortened the effective maturity of the 
national debt, and both spending and debt are at record levels even 
though the demographic bulge is just beginning to hit the federal 
budget. This leaves fiscal policies completely out-of-synch with long-
term growth.
    The debt limit provides a good opportunity to address this crisis. 
In negotiating the next increase, Congress and the Administration 
should take steps to downsize current spending and slow future spending 
growth. It's also vital to improve the allocation of spending--less 
successful government programs should be reduced in order to make room 
for new programs and for more spending on successful programs. In my 
August 30 Wall Street Journal column, I advocated a menu approach in 
which the various parties suggest numerous methods to reduce spending 
and then negotiate a compromise.
    Looking longer term, Congress should work to repeal and replace the 
current debt limit with a more effective limit. The current debt limit 
law is fatally flawed because Congress and the President are able to 
make unlimited spending commitments without first choosing how to pay 
for them. The debt limit law was initially created in 1917 to 
facilitate debt rather than limit it. The goal was to relieve 
Congressmen from having to vote for individual bond issues to fund 
their spending plans. This has left members unaccountable to voters--
they get to create new spending programs and then let the Treasury 
Department and President demand more debt in order to pay for spending 
that has already occurred. The debt limit needs to be rewritten so that 
debt is approved prior to spending commitments rather than after-the-
fact.
    In my Forbes and Wall Street Journal columns, I've advocated 
replacing the debt limit with legislation to establish continuous 
spending restraint that strengthens when the debt-to-GDP ratio rises 
above a ceiling. I was privileged to work for Senator Bill Roth on this 
Committee in 1990 when he wanted to create a 50% debt-to-GDP limit. 
Unfortunately, the debt ratio is now more than double that, and it will 
take many years of continuous spending restraint to restore a more pro-
growth debt level. In the ideal, there should be a downward glidepath 
for the debt ratio. It would set gradually lower debt-to-GDP limits 
which, if exceeded, would require Congress and the Administration to 
reduce their spending commitments or face escalating procedural 
restraints on spending.
    I emphasize the huge economic and market upside from lowering the 
spending path and rewriting the debt limit to make it effective. Around 
the world and in the competition among U.S. states, investors reward 
spending limitations--private sector investment and employment increase 
and median income rises. The second term of the Clinton Administration 
provides an example.
    Movement toward spending restraint would also cause U.S. assets to 
appreciate materially. This lowers the cost of capital and creates more 
jobs. We've already seen a demonstration of that with the big market 
gains when the sequester was implemented. The sequester was a blunt 
instrument--well-thought-out spending restraint would be even better 
received by financial markets.
    There's been a great deal of discussion about whether an extended 
negotiation over the debt limit might unsettle financial markets or 
slow the economy. I think the benefits of a negotiation far outweigh 
the costs. Bond markets have examined the U.S. debt limit process and 
are very comfortable holding U.S. Treasury debt during debt limit 
negotiations--in fact, bond yields fell sharply during the 2011 
negotiations, with the 10-year Treasury yield falling from 3.2% to 2% 
in July and August 2011.
    In contrast with August 2011, it's unlikely that a major credit 
rating agency would downgrade the U.S. credit rating. I think financial 
markets would greet a partial shutdown of government spending during 
the debt limit negotiations with a yawn or quiet applause. The 
Administration would like to use financial markets to scare Congress 
into a clean debt limit, but I think the reality is that voter reaction 
will be the stronger referee on the debt limit negotiation. If voters 
think the negotiations are reasonable and constructive, they'll 
tolerate a partial shutdown, as will financial markets. There's no 
indication that financial markets are worried about a default or 
technical default on U.S. debt.
    In making budget decisions, one of the confusing issues is whether 
austerity is bad for growth. Austerity or ``fiscal consolidation'' 
encompasses two separate economic policies: government downsizing on 
the one hand, which causes more growth; and private sector downsizing 
on the other hand, which causes recessions. Many of the reform programs 
undertaken in Europe were harmful because they were built on private 
sector austerity, not government downsizing. The austerity often took 
the form of higher value-added taxes, wealth taxes and increases in 
government fees.
    As the U.S. examines options, it should aim to reduce ineffective 
government spending. It drains the private sector because it requires 
new taxes or debt. An open Washington discussion of spending restraint, 
even a contentious one using a menu of options--would receive a very 
positive market reaction.
    In addition to spending restraint, I think the debt limit increase 
should include three steps to make the debt limit more honest. In 
recent years, the Federal Reserve has incurred extra debt by buying 
higher coupon Treasury bonds at a premium. The cumulative premiums that 
the Fed has paid and includes in its liabilities is already $200 
billion and climbing fast. It is true national debt and should be 
included in the statutory debt limit.
    Second, the Treasury is planning to issue a new class of debt, 
floating-rate notes. This would understate the nation's fiscal burden 
because interest payments on this type of debt will go up faster than 
on fixed-rate debt when interest rates rise.
    Third, the debt limit should also consider the burden the Fed is 
creating for future taxpayers by buying longer-term Treasurys with 
trillions of dollars in short-term Federal Reserve debt. This will 
escalate the deficit and the national debt when interest rates rise.
    One of the reasons for a debt limit is to protect future 
generations. This is being undermined by the government borrowing 
short-term. One concept would be to require Treasury to maintain a 
five-year minimum on the effective duration of the national debt held 
by the private sector. The Fed's bond purchases and any floating-rate 
notes issued by Treasury would reduce the effective duration, causing 
Treasury to lengthen the maturities of its fixed-rate debt issuance.
    In conclusion, the U.S. is stuck in a ``new normal'' of very slow 
economic growth, high unemployment and falling median incomes. Federal 
spending and debt trends are weighing on growth and investment. The 
debt limit provides an opportunity to break out. The Administration and 
Congress should create a menu of constructive restraints and agree on a 
package. Movement in this direction would create a very positive 
economic and market reaction. Changes made now, even if they take 
effect in several years, would bring immediate benefits by improving 
the debt outlook.

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                   Prepared Statement of Dan Mitchell
    Vice Chair Klobuchar, members of the Committee, thank you for this 
opportunity to testify about the debt limit. My name is Dan Mitchell. 
I'm a Senior Fellow at the Cato Institute. The views I express here 
today are my own.
    I want to make five points.
    First, it's important to understand that America's chief fiscal 
problem is an excessive burden of government spending. That's true 
today, and, as yesterday's long-run CBO fiscal outlook demonstrated, 
too much spending is our problem in the future.
    Deficits and debt are undesirable, of course, but so are high taxes 
and printing money, which are the other two ways of financing 
government spending.
    Simply stated, the true fiscal tax on our economy is how much 
government is spending. That's the problem. Deficits and debt, by 
contrast, are symptoms of that problem. Overall government spending is 
the measure of how much money is being diverted from the economy's 
productive sector. That's the primary problem. The various ways of 
financing that spending are secondary problems.
    Second, the best way to gauge the success of fiscal policy is to 
see whether the burden of government spending is growing faster or 
slower than private economic output. If the private sector is growing 
faster than the government--which I consider to be the Golden Rule of 
Fiscal Policy--then lawmakers are doing a good job.
    But if the converse is true and the burden of spending is rising 
faster than the private sector, then policy is heading in the wrong 
direction.
    The data for any one year is important, but the real test is what 
happens over time. In other words, fiscal trendlines are critical.
    If government spending grows slower than the productive sector of 
the economy for an extended period of time, this almost certainly means 
better economic performance because the relative burden of government 
is declining. And because the problem of spending is being properly 
addressed, this also means that the symptom of red ink almost certainly 
is falling as well.
    But if the opposite occurs, and government grows faster than the 
private sector for an extended period, then it's just a matter of time 
before serious fiscal and economic problems occur. Nations such as 
Greece, for instance, got in trouble because the politicians did the 
opposite of the Golden Rule of Fiscal Policy.
    Third, it's possible to make rapid progress with even a modest 
amount of spending restraint. Consider what's happened the past two 
years. For the first time in more than 50 years, we've enjoyed two 
consecutive years when overall government spending was lower than the 
previous year.
    This has led to a big improvement in the key fiscal indicator, with 
the burden of federal government spending falling from 24.1 percent of 
GDP to 21.5 percent of economic output. And because there was progress 
on the real problem, the symptom of red ink got much better as well, 
with the deficit falling by more than 50 percent, from $1.3 trillion to 
$642 billion.
    We don't even need that degree of fiscal discipline going forward. 
As illustrated by this chart, we can balance the budget in just 3 years 
if spending grows by an average of 1 percent annually. Red ink 
disappears in 4 years if spending grows by an average of 2 percent per 
year. And the deficit goes away in 7 years if spending grows by an 
average of 3 percent each year.

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    Indeed, it's worth noting what Canada achieved in the 1990s. The 
burden of government spending had reached crisis levels by 1992, with 
government consuming more than 50 percent of economic output. But 
Canadian lawmakers--primarily during a time when the Liberal Party was 
in charge--put the brakes on spending.
    For a period of five years, government outlays grew by an average 
of just 1 percent per year. That dramatically reduced the burden of 
government relative to the private sector. And by dealing with the 
underlying problem, Canada also went from having a large deficit of 
about 9 percent of GDP to a budget surplus.
    Let's now deal directly with the debt ceiling. My fourth point is 
that an increase in the debt ceiling is not needed to avert a default. 
Simply stated, the federal government is collecting far more in revenue 
than what's needed to pay interest on that debt.
    To put some numbers on the table, interest payments are about $230 
billion per year while federal tax revenues are approaching $3 trillion 
per year. There's no need to fret about a default.
    But don't believe me. Let's look at the views of some folks that 
disagree with me on many fiscal issues, but nonetheless are not prone 
to false demagoguery.
    Donald Marron, head of the Urban-Brookings Tax Policy Center and 
former Director of the Congressional Budget Office, explained what 
actually would happen in an article for CNN Money.

        If we hit the debt limit . . . that does not mean that we will 
        default on the public debt. . . . [The Treasury Secretary] 
        would undoubtedly keep making payments on the public debt, 
        rolling over the outstanding principal and paying interest. 
        Interest payments are relatively small, averaging about $20 
        billion per month.

    And here is the analysis of Stan Collender, one of Washington's 
best-known commentators on budget issues.

        There is so much misinformation and grossly misleading talk 
        about what will happen if the federal debt ceiling isn't 
        increased . . . it's worth taking a few steps back from the 
        edge. . . . if a standoff on raising the debt ceiling lasts for 
        a significant amount of time . . . a default wouldn't be 
        automatic because payments to existing bondholders could be 
        made the priority while payments to others could be delayed for 
        months.

    Or what about the Economist magazine, which made this sage 
observation.

        Even with no increase in the ceiling, the Treasury can easily 
        service its existing debt; it is free to roll over maturing 
        issues, and tax revenue covers monthly interest payments by a 
        large multiple.

    Let me add one caveat to all this analysis. I suppose it's possible 
that a default might occur, but only if the Secretary of the Treasury 
deliberately chose not to pay interest in the debt. But that won't 
happen. Not only because the Obama Administration wouldn't want to 
needlessly roil financial markets, but also since research by 
Administration lawyers in the 1960s concluded that the Secretary of the 
Treasury might be personally liable in the event of a default. Mr. Lew 
has more than one reason to make sure the government pays interest on 
the debt.
    My final point is that a fight on the debt limit might be 
worthwhile, even if it does cause considerable short-run angst and 
uncertainty. It all depends on whether it leads to desirable reforms.
    Let's look at the example of Greece. There's nothing akin to a debt 
limit in that country, but imagine there was. Let's further imagine 
that a group of lawmakers 15 years ago dug in their heels and refused 
to allow more red ink.
    That probably would have caused a lot of turmoil at the time. But 
if the net result was to force Greek politicians to restrain spending 
for a multi-year period, then it's quite likely that the people of 
Greece would have been spared the economic and fiscal misery that 
they've been suffering over the past few years.
    Let's close with an analogy. Yesterday's long-run fiscal outlook 
from CBO shows that a do-nothing or status-quo approach guarantees 
fiscal chaos. We don't know if a crisis will occur in fifteen years or 
twenty-five years. Or maybe we even have more than 25 years since the 
U.S. will benefit from capital flows when nations such as Japan and 
France implode.
    But at some point the United States will suffer the same type of 
crisis that we've witnessed in other nations. We're in a car and we're 
heading toward a cliff, even though it's hard to estimate how much 
father we can drive before we careen over the edge.
    Wouldn't it be a good idea to take steps today--when it's 
relatively easy--to avoid that potential future crisis? To at least 
begin to steer away from the cliff? Perhaps by adopting something akin 
to Switzerland's ``debt brake,'' which basically imposes an annual 
spending cap?
    In other words, I'm not at all worried about short-run 
brinksmanship. Particularly since there's no realistic possibility of 
default. But I am worried about the long-run trendline of government 
spending. And if some brinksmanship today means spending in the future 
won't grow as fast, then the nation will be in a much stronger fiscal 
position.

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