[Senate Hearing 113-228]
[From the U.S. Government Publishing Office]




                                                  S. Hrg. 113-228


          CONCURRENT RESOLUTION ON THE BUDGET FISCAL YEAR 2014

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

                                HEARINGS

                               before the

                        COMMITTEE ON THE BUDGET
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               ----------                              


  February 12, 2013-The Budget and Economic Outlook Fiscal Years 2013-
                                  2023
  April 16, 2013-The President's Fiscal Year 2014 Budget and Revenue 
                                Proposal
  April 23, 2013-The President's Fiscal Year 2014 Budget Proposal and 
                       Veterans' Program Proposal
     June 12, 2013-The President's Fiscal Year 2014 Defense Budget
June 18, 2013-The President's Fiscal Year 2014 Education Budget Request

                                     
                                     

                                     

                                     


                                                        S. Hrg. 113-228

 
          CONCURRENT RESOLUTION ON THE BUDGET FISCAL YEAR 2014

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

                                HEARINGS

                               before the

                        COMMITTEE ON THE BUDGET
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________


  February 12, 2013-The Budget and Economic Outlook Fiscal Years 2013-
                                  2023
  April 16, 2013-The President's Fiscal Year 2014 Budget and Revenue 
                                Proposal
  April 23, 2013-The President's Fiscal Year 2014 Budget Proposal and 
                       Veterans' Program Proposal
     June 12, 2013-The President's Fiscal Year 2014 Defense Budget
June 18, 2013-The President's Fiscal Year 2014 Education Budget Request


                                     
                                     

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                        COMMITTEE ON THE BUDGET

                   PATTY MURRAY, WASHINGTON, CHAIRMAN

RON WYDEN, OREGON                    JEFF SESSIONS, ALABAMA
BILL NELSON, FLORIDA                 CHARLES E. GRASSLEY, IOWA
DEBBIE STABENOW, MICHIGAN            MICHAEL B. ENZI, WYOMING
BERNARD SANDERS, VERMONT             MIKE CRAPO, IDAHO
SHELDON WHITEHOUSE, RHODE ISLAND     LINDSEY O. GRAHAM, SOUTH CAROLINA
MARK R. WARNER, VIRGINIA             ROB PORTMAN, OHIO
JEFF MERKLEY, OREGON                 PAT TOOMEY, PENNSYLVANIA
CHRISTOPHER A. COONS, DELAWARE       RON JOHNSON, WISCONSIN
TAMMY BALDWIN, WISCONSIN             KELLY AYOTTE, NEW HAMPSHIRE
TIM KAINE, VIRGINIA                  ROGER F. WICKER, MISSISSIPPI
ANGUS S. KING, JR., MAINE

                     Evan T. Schatz, Staff Director

                 Eric Ueland, Republican Staff Director

                                  (ii)


                            C O N T E N T S

                               __________

                                HEARINGS

                                                                   Page
February 12, 2013-The Budget and Economic Outlook Fiscal Years 
  2013-2023......................................................     1
April 11, 2013 -The President's Fiscal Year 2014 Budget Proposal.
April 16, 2013-The President's Fiscal Year 2014 Budget and 
  Revenue Proposal...............................................   145
April 23, 2013-The President's Fiscal Year 2014 Budget Proposal 
  and Veterans' Program Proposal.................................   221
June 12, 2013-The President's Fiscal Year 2014 Defense Budget....   289
June 18, 2013-The President's Fiscal Year 2014 Education Budget 
  Request........................................................   403


                    STATEMENTS BY COMMITTEE MEMBERS

Chairman Murray...............................1, 61, 145, 221, 289, 403
Senator Session....................................6, 64, 148, 224, 295
Senator Johnson..................................................   407

                               WITNESSES

General Martin E. Dempsey, USA, Chairman, Joint Chiefs of Staff317, 319
Hon. Arne Duncan, Secretary, U.S. Department of Education......409, 414
Douglas W. Elmendorf, Director, Congressional Budget Office...... 9, 12
Chuck Hagel, Secretary, U.S. Department of Defense.............298, 302
Honorable Jacob J. Lew, Secretary , U.S. Department of the 
  Treasury.....................................................150, 153
Honorable Eric K. Shinseki, Secretary, U.S. Department of 
  Veterans Affairs.............................................226, 228
Honorable Jeffery Zients, Acting Director and Deputy Director for 
  Management, Office of Management and Budget....................67, 70

                         QUESTIONS AND ANSWERS

Questions and Answers.......................40, 108, 207, 278, 348, 461


         THE BUDGET AND ECONOMIC OUTLOOK: FISCAL YEARS 2013-23

                              ----------                              - 
- -


                       TUESDAY, FEBRUARY 12, 2013

                              United States Senate,
                                   Committee on the Budget,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 10:24 a.m., in 
Room SD-608, Dirksen Senate Office Building, Hon. Patty Murray, 
Chairman of the Committee, presiding.
    Present: Senators Murray, Nelson, Sanders, Whitehouse, 
Warner, Merkley, Coons, Baldwin, Sessions, Grassley, Enzi, 
Crapo, Portman, Toomey, Johnson, Ayotte, and Wicker.
    Staff Present: Evan T. Schatz, Majority Staff Director; and 
Marcus Peacock, Minority Staff Director.

              OPENING STATEMENT OF CHAIRMAN MURRAY

    Chairman Murray. This hearing is coming to order, and I 
want to apologize to members. We are starting a few minutes 
early because we have a number of votes coming up on the Senate 
floor.
    In the beginning, I want to start by just welcoming 
everybody to this first Senate Budget Committee hearing of the 
113th Congress. We have a number of new members. We welcome all 
of them. Senator Baldwin is here; Senator Kaine, Senator King, 
and Senator Wicker are joining us as well. Good to have you all 
on the Committee. I want to thank our witness, Dr. Doug 
Elmendorf, for being here, as well as my Ranking Member, 
Senator Sessions, and all of our colleagues who are joining us 
today.
    As we begin the budget process here in the Senate, I am 
hopeful that this Committee can be a place where we can come 
together to tackle our fiscal and economic challenges in a 
balanced way that works for the families and communities that 
we all represent.
    Budget issues have received a lot of attention over the 
past few years, but the conversation is too often focused on 
abstract numbers and the partisan back-and-forth. Budgets, 
however, are about a lot more than this. They are reflections 
of our values and our priorities and our vision for what our 
Government and our country and our economy should look like now 
and into the future.
    Budgets are not about us here on this Budget Committee. 
They are not about our colleagues across Congress or in the 
administration. They are about the families across America 
whose lives will be impacted by the decisions that we make. 
They are about their jobs and their children and their future, 
and we owe it to them to make sure they have a voice in this 
process and that their values and perspectives are heard.
    So I see today's hearing as the first part of a two-part 
opening examination of our Nation's fiscal and economic 
challenges. Today we will hear from Dr. Elmendorf about the 
budget and economic outlook for fiscal years 2013-23. Tomorrow 
we will hear from members of the public and experts to learn 
more about the impact of budget decisions on families and 
communities.
    Over the coming weeks and months, as we put together a pro-
growth, pro-middle-class budget resolution, I am going to 
continue making sure the voices of the American people are 
heard loud and clear throughout this process and that their 
values and priorities are being represented.
    As we start this hearing on the budget and economic 
outlook, I think it would be helpful to do a quick review of 
how we got to where we are today, because a look ahead is only 
valuable in the context of where we have come.
    I have served on this Committee now for 20 years, and in 
the time since I arrived our country went from having a serious 
deficit and debt problem to running surpluses and being on 
track to pay down the debt, to 8 years later being in an even 
worse position than we were before, to today when we are 
starting to turn the corner but still have a very long way to 
go.
    All of us remember the early 1990s. In 1992, the year 
before President Clinton came into office, the same year I was 
making my first run for the U.S. Senate, the Federal Government 
was taking in revenue equaling 17.5 percent of GDP while 
spending 22.1 percent of GDP. That was a deficit of 4.7 
percent. When he was sworn in, President Clinton promised to 
tackle the deficit while continuing to invest in jobs and the 
middle class.
    I bought into that vision, and I was proud to help make it 
a reality. When his bill to raise the tax rate on the highest-
earning Americans passed the Senate and House without a single 
Republican vote, the top Republican on the Senate Budget 
Committee at the time said it would ``devastate the economy.'' 
Others predicted calamity along similar lines.
    But as we all know now, it did not work out that way. The 
unemployment rate went from 7.3 percent at the beginning of 
1993 to 3.9 percent at the end of 2000. Over the course of 
those 8 years, 22 million jobs were created, and the economy 
grew at an average rate of 4 percent. And the deficit? Well, 
revenue increased from 17.5 percent of GDP to 20.6 percent, and 
responsible spending cuts brought Federal spending down from 
22.1 percent of GDP to 18.2 percent. So a 4.7-percent deficit 
was turned into a 2.4-percent surplus in 8 years, and our 
Nation was on track to completely eliminate the Federal debt by 
2010.
    Now, I do not think the revenue increase under President 
Clinton was the sole cause of economic growth, but I do think 
our responsible fiscal and economic stewardship played a role 
in keeping interest rates low and giving markets and small 
businesses the confidence they needed to expand and create 
jobs.
    Our work in the 1990s proved that calling on the wealthy to 
pay their fair share is not incompatible with strong economic 
growth. In fact, it is strongly associated with the kind of 
broad-based growth that helps the middle class prosper and 
expand.
    In 2001, many of us Democrats saw the surplus as an 
opportunity for our country to free ourselves from debt and 
invest in national priorities. But President Bush and his 
administration had other ideas. They saw it as a blank check to 
cut taxes and increase spending. President Bush and Republicans 
in Congress immediately worked to pass two sets of tax cuts 
that were heavily skewed towards the rich. When his first 
Treasury Secretary, Paul O'Neill, tried to warn that the second 
round of tax cuts would blast a hole in the deficit, Vice 
President Cheney informed him that, ``Deficits don't matter.'' 
Not too long after, O'Neill was fired.
    When Federal Reserve Chairman Alan Greenspan testified in 
front of this very Committee in support of the 2001 tax cuts, 
my colleague Senator Sarbanes predicted these tax cuts would 
``put us on the glide path to dissipate this hard-earned fiscal 
restraint.'' He, like many of us at the time, was ignored.
    President Bush took us into two wars without paying for 
them. He enacted Medicare Part D, a program that is estimated 
to cost taxpayers $60 billion this year alone without paying 
for that either. While he was President, more Americans lost 
jobs than got new ones. Inequality grew as the wealthiest 
Americans benefitted from the tax cuts while the middle class 
stagnated. By 2008, Federal revenues had plummeted back down to 
17.6 percent of GDP. Spending had shot up to 20.8 percent. We 
were back to a deficit of 3.2 percent. And all those 
projections about the national debt being eliminated were 
tossed out the window.
    When President Obama came into office, our country was 
losing over 700,000 jobs a month. He was desperately working to 
staunch the bleeding from the Wall Street collapse that 
threatened to push our country into a depression. Federal 
revenue plummeted even further. Middle-class families and the 
most vulnerable Americans were losing their homes, struggling 
to put food on the table, and worrying about what the future 
would be like for their children. But at the very time when we 
needed to be investing in our families and in our economy and 
focusing on growth, many of my colleagues went back to their 
file cabinets and dug out those talking points that they used 
back in the early 1990s. All of a sudden, they were telling us 
deficits were the most important issue to address and cutting 
spending was once again a new priority--not jobs, not the 
middle class, not economic growth, but deficits--forgetting 
what we did in the 1990s to get our country back on track, 
ignoring what happened during the Bush administration, and 
acting like the world was created on the day President Obama 
was sworn in. This narrow and short-sighted approach was wrong 
back in the early 1990s. It is just as wrong today, and it is 
not just Democrats who say so.
    Right now, the economy is still struggling. Millions of 
workers are looking for too few jobs. Aggregate demand is still 
far below its potential, and at the moment, the Federal 
Government is borrowing at historically low rates. Experts and 
economists across the political spectrum agree it makes sense 
to invest in job creation in the short term, while putting 
ourselves on a strong path to responsible and sustainable 
deficit and debt reduction over the medium and long term. And 
poll after poll shows that is what the American people support 
as well.
    Federal Reserve Chairman Ben Bernanke put this idea well in 
a speech he gave in August of 2011 when he said, ``Although the 
issue of fiscal sustainability must urgently be addressed, 
fiscal policymakers should not as a consequence disregard the 
fragility of the current economic recovery.'' And he said, 
``Fortunately, the two goals of achieving fiscal 
sustainability, which is the result of responsible policies set 
in place for the longer term and avoiding the creation of 
fiscal headwinds for the current recovery, are not 
incompatible. Acting now to put in place a credible plan for 
reducing future deficits over the longer term while being 
attentive to the implications of fiscal choices for the 
recovery in the near term can help serve both objectives.''
    I think that is exactly right. I will work with anyone to 
tackle our debt and deficit responsibly. But as I have told my 
Ranking Member, Senator Sessions, and others, I feel very 
strongly that it does not make sense to replace our budget 
deficits with deficits in education and infrastructure and 
research and development. If we cut our budget deficit by 
giving up on the investments we need to compete globally in the 
21st century economy, then we will not have done right by our 
economy today and certainly not for generations to come.
    So we absolutely need to tackle our debt and deficit in a 
responsible and sustainable way, but our top priority needs to 
be jobs and economic growth. And as we saw in the 1990s, those 
two go hand in hand.
    Which brings me to our witness today, and I am pleased to 
welcome back to the Committee the Director of the Congressional 
Budget Office, Dr. Douglas Elmendorf. The members of this 
Committee know Dr. Elmendorf well. He has appeared before us on 
numerous occasions and, of course, I want to thank you and your 
staff on behalf of this Committee for all the hard work and 
professionalism you provide to us and to Congress. I think it 
is fair to say the report you delivered to us last week on the 
state of the budget and economy over the next 10 years is a 
mixed bag, as it contains some hopeful signs but also 
highlights some real challenges for our Nation.
    In terms of the economy, on the one hand, we are starting 
to see the effects of the housing and financial crisis fade 
following the work we did in Congress to support the recovery. 
We are clearly not out of the woods, and far too many workers 
are still struggling to get back on the job. But housing prices 
and the stock market are rising, and that is certainly some 
welcome news.
    On the other hand, your report makes clear the economy 
still faces significant headwinds in the short term, 
particularly from the tightening of Federal fiscal policy. The 
sequester that is set to occur on March 1st is not the only 
policy action that is contributing to this fiscal drag, but it 
is a major factor. And in total, the impact of the fiscal 
tightening, including the March 1st sequester, is to depress 
economic growth by about 1-1/2 percentage points. That 
translates into about 2 million jobs by the end of this fiscal 
year. Leaving the sequester in place would lead to massive, 
self-inflicted damage that would hurt middle-class families, 
those already struggling in this economy, as well as our 
national security and future global competitiveness. But 
replacing it the way House Republicans have proposed with even 
more cuts to programs families and seniors depend on and 
without calling on the wealthy to pay even a penny more would 
be more damaging in the long run. That is why I believe very 
strongly that we should replace the sequester with a balanced 
package of responsible spending cuts and revenue from the 
wealthiest Americans. That approach makes sense for the Federal 
budget, and it makes sense for American families, particularly 
when we are talking about so many jobs and an unemployment rate 
that remains stubbornly high at near 8 percent.
    In terms of the budget outlook, we see some slight 
improvement. The deficit is expected to total $845 billion this 
year, the first time it will be below $1 trillion in 5 years. 
To put that number in perspective, relative to the total size 
of the economy, it is expected to equal 5.3 percent in 2013. 
Now, that remains too high, but it is progress. And, in fact, 
in 2009 the deficit was almost twice as large at just over 10 
percent of the economy. Unfortunately, CBO expects this 
downward trend in the deficit as a share of the economy to 
continue over the next few years, falling and remaining below 3 
percent through 2018, and this is even with the end-of-the-year 
budget deal.
    We also got what I believe is some good news in the area of 
health spending. As I was reading through the report, one 
section really got my attention, which was the discussion of 
the change in health spending in recent years. In fact, I 
stopped and underlined one statistic because I found it so 
surprising. The statistic is that CBO has lowered its estimate 
of Federal spending for Medicare and Medicaid to such a degree 
that spending for 2020, one year, just one year, is now $200 
billion lower than CBO thought back in 2010. That is an 
improvement of 15 percent. And let us be clear. That 
improvement has occurred since the enactment of the Affordable 
Health Care Act.
    Dr. Elmendorf, I know you have heard a lot from Senator 
Whitehouse and other Senators regarding their belief that 
current budget conventions and estimates miss the mark in the 
area of innovation and delivery reforms, and I will be 
interested in hearing your thoughts on what has led to this 
downward trend in health care spending.
    Of course, as with the economy, the news on the budget is 
by no means all good. As I mentioned earlier, we got hit at the 
end of the last administration with the confluence of a 
financial crisis, housing crisis, and deep recession. Largely 
as a result of those conditions, the debt skyrocketed in a very 
short period of time. The debt was equal to roughly 36 percent 
of the economy in 2007. It will soon be at about 76 percent. 
And if we do not tackle that responsibly, it will begin rising 
again by the end of this decade, particularly with the 
retirement of the baby-boom generation and increasing health 
care costs.
    So even with some good news, we have our work cut out for 
us as a Committee and as a Congress. This is a tough Committee 
with a tough mandate, and I look forward to working with all of 
my colleagues on both sides of the aisle to meet the challenge 
and address the budget in a way that is fair, works for the 
middle class and most vulnerable families, and invests in long-
term and broad-based economic growth. We did it in the 1990s. I 
am confident we can do it again.
    And, with that, let me turn it over to Senator Sessions for 
his opening comments, and then we will hear from Dr. Elmendorf. 
Senator Sessions.

             OPENING STATEMENT OF SENATOR SESSIONS

    Senator Sessions. Thank you, Madam Chair, and thank you, 
Mr. Elmendorf, for appearing before the Committee today. We 
value what you do. It is important to us to help us have honest 
numbers that we can work with, and honesty in our financial 
situation is absolutely critical at this point in history.
    I would also like to welcome the new members to the 
Committee, and I look forward to a productive year. We 
absolutely face some very serious challenges. And, of course, 
the reason Chairman Murray indicated that deficits have become 
the topic of the day is because we have never had such systemic 
deficits as we have today. They exceed anything the Nation has 
ever had, and we are on a systemic course that continues those 
deficits. And as the report that was given to us shows, they 
get worse in the out-years. We cannot continue on this course. 
Bowles and Simpson told us in this very room that this Nation 
has never faced a more predictable financial crisis.
    So that is why we have to talk about this, and we have to 
ask some fundamental questions. The Chair has set forth the 
President's, the Democratic majority's narrative. We reject 
that narrative. We have serious differences with that 
narrative. We will not go quietly on that because we believe 
some of the real problems that are being caused today are 
because of this kind of incorrect economic thinking.
    So it has been now 4 years since the Democratic-led Senate 
produced a budget. As the law requires, the Senate not only has 
a legal but a moral duty to present the taxpayers with a plan 
on how they will spend the Nation's money. So it is a tragedy 
that under Senator Reid's leadership we have not engaged in 
that kind of open public financial discussion that the American 
people deserve. Majority Leader Reid even said it would be 
foolish to have a budget.
    By contrast, the GOP House, in accordance with law, has 
laid out a budget plan each year. That plan will change the 
debt course of America. We may not all like everything that is 
in it, but it would put us on a positive path. And they will do 
another budget this year.
    So I am glad that we have had a relenting and are going to 
have a budget this year, else I wonder what our Committee might 
find itself having to do without a budget and whether we even 
need the Committee.
    So we look forward to meeting the Committee deadline of 
April 1st to publicly produce a resolution and then April 15th 
on the Senate floor, including the statutorily mandated 50 
hours of debate and a guaranteed vote.
    Madam Chairman, I stand ready to work with you and the 
staff to produce a budget that we can talk with the American 
people about. I believe that budget should balance. We should 
balance it at least within 10 years. It is something that we 
can do, and I think the report Mr. Elmendorf has given us shows 
us some of the ways that we can get there, and it is not a 
hopeless situation, but it is a very dire situation.
    The picture CBO paints of the next 10 years is immensely 
disturbing. Our gross Federal debt after rising $6 trillion in 
the last 4 years will rise another $9 trillion by 2023. CBO's 
report also suggests that then things only get worse outside 
that 10-year window, remain continuing up on an unsustainable 
financial path. And if it is unsustainable, that means we have 
to change it. Now this, despite the fact that CBO is projecting 
revenues to be well above the average of the last 40 years. 
Revenue will be up, according to CBO's numbers.
    The top economists agree, including a recent study from the 
International Monetary Fund, that total debt over 90 percent of 
GDP weakens economic growth. Federal Government debt is now--
gross debt_is 103 percent. In other words, our job-crushing 
debt not only threatens to collapse the economy through a 
financial crisis, as Simpson-Bowles predicted, but it is 
already destroying jobs and growth today. We are not receiving 
the growth today we should have as a result of the drag of this 
debt.
    CBO also projects that we are entering a future in which 
our debt is so great that our fastest-growing item in the 
budget will be interest payments. According to CBO, annual 
interest costs will quadruple, totaling $5.4 trillion over the 
next 10 years--$5.4 trillion. By 2020, just 7 years from now, 
interest costs are expected to exceed the cost of national 
defense. And I just left the Defense Committee hearing talking 
about the sequester and how damaging that will be to the 
Defense Department because half of the cuts fall on one-sixth 
of the budget, the Defense Department. And that is too severe 
for them. It needs to be spread out across the entire spending 
panoply.
    Interest payments, which help no one, build nothing, will 
crowd spending on the rest of the budget, and I think it will 
damage our economy in the meantime right now.
    And while we talk of cuts and frugality, total spending is 
expected to go up 67 percent over the next 10 years. No one is 
proposing a real cut in the actual amount of money spent. It is 
the growth in spending that we have to confront.
    Primarily alarming is the finding in an additional CBO 
report prepared at my request. Spending on just the ten largest 
welfare programs, means-tested and poverty programs, will 
increase even more--76 percent over 10 years. There are roughly 
80 welfare programs that overall comprise the single largest 
item in the Federal budget, larger than Medicare, Social 
Security, or defense. Improving these things would do a lot 
more than just saving money. Like 1996 that helped put us on a 
path to a balanced budget, smart reforms of welfare will help 
more Americans rise out of poverty--that is what I want to see; 
I want to see more people out of poverty--and will strengthen 
the institutions of family, charity, and community. We must 
talk honestly and with compassion about these issues.
    In that vein, I would also like to take a moment to address 
some comments, Senator Murray, that you made recently, that 
Republicans are committed to ``protecting the rich above all 
else'' and are only interested in ``starving programs''--I am 
quoting now--``that help middle-class families and the most 
vulnerable Americans.'' So that hurts my feelings. That is not 
what I believe in. I believe we have to have an economy that is 
growing, creating prosperity, that we need to help poor people 
get jobs and move forward in their lives, not be dependent, 
ever dependent on more and more Government checks, handouts, 
and programs. That would be the way to save this country, in my 
opinion. That is the way to help poor people, and I resent the 
fact that people suggest that those of us who have a different 
view of how to help poor people somehow do not care about them. 
Compassion and help for the poor and struggling amounts to more 
than just borrowing money and sending out more money in the 
form of checks.
    So my goal is to help working Americans from the social and 
economic harm that is caused by policies, I think, of this 
President and the Senate majority. These programs have not 
worked. In places like Baltimore, a great city, they are 
producing poverty, dependency, crime, and joblessness. That is 
what those programs are producing. One in three residents in 
Baltimore are on food stamps. One in three youth in Baltimore 
are living in poverty. There are solutions to these problems, 
and we can do better. We have to do better. We cannot continue 
on this course.
    So compassion demands change. Our goal must be to help more 
Americans find gainful employment and the opportunity to 
financially support themselves and their family and to prosper.
    Before closing my remarks, I would like to address the 
serious challenge we will be facing in the coming days. We are 
going to have to consider the immigration question. Studies 
show that the proposals for amnesty and legalization could add 
another $2.5 trillion to the national debt, or more, and we 
have to watch carefully that program.
    So I look forward to addressing these and other issues 
during today's hearing. We have no higher obligation as 
lawmakers than to protect the financial security of the 
Republic. And with regard to our present posture and state of 
the economy, the last big systemic challenge I think maybe our 
Nation faced was when Volcker and Reagan dealt with a 
continually surging inflation rate. They broke that rise and 
put us on a path to 20 years of growth. We are now on a 
systemically dangerous path of debt. It threatens our future. 
We are going to have to confront that with the same clarity and 
courage that they did at that time.
    And I came in 16 years ago, and I remember that Bush did 
spend more money than he should, and I was a critic of that. 
But I have to say that hardly a bill that came up that 
President Bush maybe proposed more spending that our Democratic 
colleagues did not complain because he did not spend enough, 
and I had to cast vote after vote after vote to try to contain 
the growth of spending, and it was usually every single 
Democratic colleague was voting to spend more and Republicans 
were taking the lonely position of trying to be responsible.
    So those are the issues that we face. Our debt course is 
one that we have to confront. But looking at it, Madam Chair, I 
do think based on the numbers in this report, which include the 
Budget Control Act control and the $650 billion tax increase 
that just passed, if we do some other things in a responsible, 
effective way, we can put this Nation on a sound course. We can 
remove the debt cloud, the drag that this debt has over us, and 
put us on the path to prosperity. That is what we have to do. 
We have no choice.
    I thank you.
    Chairman Murray. Thank you very much.
    With that, I will turn it over to Dr. Elmendorf for his 
opening statement, and for the Committee members, we are going 
to have a series of votes called. We will work our way through 
5 minutes each, and hopefully people can come back and forth 
between votes as much as we can so that we can allow everybody 
who would like to ask questions to be able to do that.
    Dr. Elmendorf, thank you.

  STATEMENT OF DOUGLAS W. ELMENDORF, DIRECTOR, CONGRESSIONAL 
                         BUDGET OFFICE

    Mr. Elmendorf. Thank you, Senator Murray and Senator 
Sessions. To all the members of the Committee, I appreciate the 
opportunity to be with you today and to discuss CBO's look for 
the budget and the economy over the next 10 years.
    Our analysis shows that the country continues to face very 
large economic and budget challenges. Let me discuss the 
economy first, and then I will turn to the budget.
    We anticipate that economic growth will remain slow this 
year because the gradual improvement that we see in underlying 
economic factors will be offset by a tightening of Federal 
fiscal policy scheduled under current law.
    The good news is that the effects of the housing and 
financial crisis appear to be finally gradually fading. We 
expect that an upswing in housing construction, rising real 
estate and stock prices, and increasing availability of credit 
will help to spur a virtuous cycle of faster growth in 
employment, income, consumer spending, and business investment 
during the next few years.
    However, several policies that will help to bring down the 
budget deficit will represent a drag on economic activity this 
year. The expiration of the 2-percentage- point cut in the 
Social Security payroll tax, the increase in tax rates on 
income above certain thresholds, and the cuts in Federal 
spending scheduled to take effect next month will mean reduced 
spending by both households and the Government. We project that 
inflation-adjusted GDP will increase about 1-1/2 percent this 
year, but that it would increase roughly 1-1/2 percentage 
points faster were it not for the fiscal tightening.
    Under current law, then, we expect the unemployment rate 
will stay above 7-1/2 percent through next year. That would 
make 2014 the sixth consecutive year with unemployment so high, 
the longest such period in 70 years.
    We expect that growth in real GDP will pick up after this 
year to about 3-1/2 percent in 2014 and the following few 
years. But the gap between the Nation's GDP and what it is 
capable of producing on a sustainable basis, what we call 
``potential GDP,'' still will not close quickly. Under current 
law, we expect output to remain below its potential level until 
2017, almost a decade after the recession started in December 
2007.
    The Nation has paid and will continue to pay a very high 
price for the recession and slow recovery. We estimate that the 
total loss of output relative to the economy's potential 
between 2007 and 2017 will be equivalent to nearly half of the 
output produced in the country last year.
    Let me turn now to the budget. Under current laws, the 
Federal budget deficit will shrink in 2013 for the fourth year 
in a row. At an estimated $845 billion, the deficit would be 
the first in 5 years below $1 trillion, and at 5-1/4 percent of 
GDP, it would be only about half as large, relative to the size 
of the economy, as the deficit was in 2009.
    Our projections based on current laws show deficits 
continuing to fall over the next few years before turning up 
again by the end of the decade and totaling nearly $7 trillion 
for the decade as a whole.
    Federal revenues are projected to reach 19 percent of GDP 
in 2015 and beyond because of both the expanding economy and 
scheduled changes in tax rules. That 19-percent figure compares 
to an average of about 18 percent over the past 40 years.
    At the same time, Federal spending will fall relative to 
the size of the economy over the next several years and then 
rise again. The decline can be traced to the caps on 
discretionary funding and the drop-off in spending that goes up 
when the economy is weak, such as unemployment benefits.
    But later in the decade, the return of interest rates to 
more normal levels will push up interest payments to nearly 
their highest share of GDP in 50 years. And throughout the 
decade, the aging of the population, a significant expansion of 
Federal health care programs, and rising health care costs per 
person will push up spending on the largest Federal programs. 
By 2023, spending reaches about 23 percent of GDP in our 
projection compared with a 40-year average of 21 percent.
    What does this mean for Federal debt? We project that debt 
held by the public will reach 76 percent of GDP this year, the 
largest percentage since 1950. And under current laws, we 
project that debt in 2023 will be 77 percent of GDP, far higher 
than the 39-percent average seen over the past 40 years; and it 
will be on an upward path. Such high and rising debt relative 
to the size of the economy is a significant concern for several 
reasons.
    First, high debt means that the crowding out of capital 
investment will be greater; that lawmakers will have less 
flexibility to use tax and spending policies to respond to 
unexpected challenges like a recession or a war; and that there 
will be a heightened risk of a fiscal crisis in which the 
Government would be unable to borrow at affordable interest 
rates.
    Second, debt would be even larger if current laws were 
modified to delay or undo certain scheduled changes in 
policies. For example, if lawmakers eliminated the automatic 
spending cuts scheduled to take effect in March but left in 
place the original caps, prevented the sharp reduction in 
Medicare's payment rates for physicians scheduled for next 
January, and extended the tax provisions that are scheduled to 
expire, without making any other offsetting changes in budget 
policy, then budget deficits would be substantially larger than 
in our baseline projections. And debt held by the public would 
rise to 87 percent of GDP by 2023 rather than the 77 percent 
under current law.
    Third, debt might also be larger than in our projections 
because even the original caps on discretionary funding in the 
Budget Control Act would reduce such spending to just 5.8 
percent of GDP in 2023, a smaller share than for any year in at 
least the past 50. Because the allocation of discretionary 
funding is determined, as you know, by annual appropriation 
acts, lawmakers have not yet decided which specific Government 
services and benefits will be constrained or cut to satisfy 
those caps, and doing so might be quite difficult.
    Fourth, projections for the 10-year period covered in this 
report do not fully reflect long-term budget pressures. Because 
of the aging of the people and rising health care costs, a wide 
gap exists between the future costs of the benefits and 
services that people are accustomed to receiving from the 
Federal Government, especially in the form of benefits for 
older Americans, and the tax revenues that people have been 
sending to the Government. It is possible to keep tax revenues 
at their historical average share of GDP, but only by making 
substantial cuts relative to current policies in the large 
benefit programs that benefit a broad group of Americans at 
some point in their lives.
    Alternatively, it is possible to keep the policies for 
those large benefit programs unchanged, but only by raising 
taxes substantially for a broad segment of the population. 
Deciding now what combination of policy changes to make to 
resolve the budget imbalance would allow for gradual 
implementation, which would give households and businesses time 
to adjust their behavior.
    Thank you.
    [The prepared statement of Douglas Elmendorf follows:]

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    Chairman Murray. Thank you very much.
    We will now do rounds of questions, and I am going to do my 
best to keep everybody at 5 minutes here so somebody has a 
chance.
    Mr. Elmendorf, I really want to begin with the question of 
sequester. I believe our focus should be on jobs and the 
economy, not on arbitrarily creating pain for American 
families. In your report and in comments you have made since, 
two things got my attention. The first is that, even with 
Congress having eliminated some of the so-called fiscal cliff, 
we still have in place enough fiscal tightening that growth 
this year will only be about half of what it should be. And the 
second is that the loss in economic growth translates into 
about 2 million jobs.
    Now, to be clear, the fiscal tightening is more than just 
the sequester, as we all know, but the sequester is a major 
part of it, and it is a piece that both sides I think agree is 
harmful to our economy, to our families, and our national 
security.
    It seems obvious to me that the answer is to replace the 
sequester with a phased-in approach that includes an equal 
amount or more of smart and sustainable spending cuts and 
additional revenue.
    So my question for you this morning is: Given that CBO 
notes that it expects a substantial slowdown in economic growth 
this year because of fiscal tightening, would it not be 
preferable to replace the sequester with a package of savings 
that is better targeted, that is programmatic rather than 
across the board, and that is phased in so it occurs when the 
economy is on a stronger footing?
    Mr. Elmendorf. Yes, Senator. If the sequester were replaced 
with a comparable amount of deficit reduction that was phased 
in more gradually, that would be better for the economy in the 
near term.
    The matter of what the composition of that fiscal 
tightening is I think can affect the economy, as we have done 
analyses over the past few years of different ways of spurring 
economic growth and jobs. We talked about the different sorts 
of effects the different components of taxes and spending 
policies can have on the economy. But, of course, the 
composition also bears very importantly on what you and your 
colleagues think the Government should and should not be doing 
and where our public resources should and should not be 
devoted. So as you know, there are important issues in the 
budgetary choices in addition to the economic effects.
    Chairman Murray. Okay. And, for the record, it is my 
recollection that you, like many people, have advised Congress 
that there are better and smarter ways to deficit reduction 
than through arbitrary, across-the-board cuts that are going to 
occur under sequester, correct?
    Mr. Elmendorf. Well, Senator, we do not make 
recommendations about policy. I think we have noted, as others 
have, that an across-the-board cut does not give you and your 
colleagues the chance to choose where you think the Government 
should be spending money on behalf of your constituents. I 
think that is a matter of--that is not a matter of economic 
analysis. It is a matter of allowing you and your colleagues to 
set the course of the Federal budget.
    Chairman Murray. Okay. In my opening comments, I talked 
about the improvement in health spending in CBO's projections, 
and I noted that since March 2010, lower health spending has 
resulted in revisions that lowered estimates of Federal 
spending for Medicare and Medicaid by $200 billion, about 15 
percent, in 2020. The Centers for Medicare & Medicaid Services 
have reached somewhat similar conclusions showing national 
health care expenditure growth rates at recent historic lows 
below 4 percent, levels well below those seen prior to 2009. 
Those are really encouraging signs, and we are hearing from 
providers and even your predecessor, Dr. Orszag, that 
significant innovation is already underway.
    I alluded in my opening statement I would give you a chance 
to comment on this improvement, and I was wondering if you 
could explain what led CBO to make those revisions.
    Mr. Elmendorf. Yes, Senator. There has been a marked 
slowdown in the rate of growth of health care spending across 
the health care system. We see this in private insurance costs. 
We see this in Medicaid; we see this in Medicare. And within 
Medicare, we see it in Part A, which basically pays for 
hospital services, and Part B, which basically pays for 
doctors' services, and in Part D, which pays for prescription 
drugs.
    So it is a very broad-based slowdown. It has been underway 
now for several years. We are working intensively, as are many 
other people, to try to understand better the sources of that 
slowdown, the causes of that slowdown.
    Our current assessment is that a part of that comes from 
the financial crisis and recession, which reduced the income 
and wealth that people have to spend on health care. But we 
think that a significant part is more structural in nature and 
involves underlying changes in the way that health care is 
practiced and delivered.
    The challenge for us and for others is to understand how 
much of those structural factors represent a transient 
phenomenon and how many represent a more enduring phenomenon, 
and we really do not know at this point. So what we have seen 
is that the spending in Medicare and in Medicaid in 2012 was 
about 5 percent below what we thought it would be in early 
2010. We have extrapolated some of those slower growth rates 
over the coming years so that we have, as you noted, Senator, 
marked down Medicare and Medicaid spending by about 15 percent 
in 2020 because of these reasons. Of course, there are other 
factors, legislative factors and economic changes, that matter 
for our projections as well. But because of what we see 
happening in the health care sector, we have marked down 
growth--marked down the level of spending by about 15 percent. 
We have also over the past 2 years--
    Chairman Murray. I am going to have to cut you off because 
I am going to have to limit everybody to 5 minutes. So I 
appreciate that response very much, and I will turn it over to 
Senator Sessions.
    Senator Sessions. Thank you.
    Thank you for your insightful report and comments. They are 
very important to us. I know CBO has worked hard in projecting 
growth rates. That is a big part of how you try to evaluate the 
impact of a budget and what we will be able to do financially 
over the next several years. We accept that as a reasonable way 
to do business, not perfect but reasonable, and I guess it is 
fair to say that you worked very hard to create an accurate 
picture.
    Mr. Elmendorf. My colleagues and I do, Senator.
    Senator Sessions. We just had a $616 billion tax increase, 
averaging about $60 billion a year extra income, and we are 
having recovery from the recession, the slowest in a decade but 
some recovery, and that results in a lower deficit, as you have 
reported to us. By 2015, the deficit is projected to be $430 
billion, the lowest you project over 10 years. That is slightly 
below the highest deficit President Bush ever had in his 8 
years. And you have GDP growth projected at 3.9 percent. Last 
year, we were at 2.2 percent, I believe. So that gives us some 
perspective.
    But after 2015, 3 years from now, the deficit starts a 
relentless rise again, increasing every single year almost 10 
percent a year and would more than double over the following 8 
years to $978 billion_is that correct?
    Mr. Elmendorf. Yes, Senator, that is right.
    Senator Sessions. And you do not see, unless something 
changes, any improvement in the out-years, but your report 
would indicate that the upward trajectory, as you said, we 
would still be on that upward trajectory?
    Mr. Elmendorf. Yes, Senator, that is right.
    Senator Sessions. And would you say that is an 
unsustainable path?
    Mr. Elmendorf. Yes, Senator. As we and many others have 
said, the debt cannot rise indefinitely as a share of GDP, and 
our projections under current law show debt rising relative to 
GDP in the back half of this coming decade.
    Senator Sessions. And it also increases the risk, as 
Erskine Bowles and Alan Simpson told us, of a fiscal crisis 
that might occur.
    Mr. Elmendorf. Yes, Senator.
    Senator Sessions. They said it was inevitable if we do not 
change this unsustainable path. Would you agree with that?
    Mr. Elmendorf. Well, in the longer-term projections that we 
have done, in the past years, we have shown debt rising 
relative to GDP under what had been current policies. We have 
not updated those projections, but, yes, if one extrapolates 
what we show at the end of the decade, then debt would continue 
to rise as a share of GDP.
    Senator Sessions. Well, under your analysis, you conclude 
that the revenues are growing each year. You show solid 
increases. And your growth rate of revenues for the Government 
basically runs in harmony with the GDP increase. As the economy 
increases, people pay more taxes and revenue increases. If it 
declines, revenue would decline. Is that fundamentally correct?
    Mr. Elmendorf. Yes, Senator.
    Senator Sessions. So even if tax increases were enacted--
let me just ask this. I think this is important for us to 
understand. If tax increases were enacted that were large 
enough to balance the budget by 2015, not just leave us with a 
$430 billion deficit, is it not a fact that under your analysis 
and assumptions, a deficit would begin to return that year or 
the next year, and it would increase each year over that 10-
year budget?
    Mr. Elmendorf. I think it depends, Senator, on the 
trajectory of the tax increase that you have in mind. So if the 
tax increase is a fixed number of billions of dollars per year, 
then, yes, the other factors will continue to push up--
    Senator Sessions. Right, well, fundamentally, is it not 
true that the deficits continue to rise and rise steadily 
because they are increasing faster than economic growth?
    Mr. Elmendorf. Yes, Senator. In our projections, spending 
is above--
    Senator Sessions. Excuse me. Spending is increasing at a 
rate higher than you project the economy to increase. Spending 
would be increasing around 6 or so percent; whereas, growth_and 
I will use your average, about 2 or so. And it is substantially 
less.
    Mr. Elmendorf. Yes, Senator. So we show spending continuing 
to rise--after the middle of this coming decade, we show 
spending continuing to rise as a share of GDP. Although we have 
not updated the longer-term projections, there is no reason to 
expect that to turn around because the fundamental drivers are 
the rising number of Americans collecting through these large 
benefit programs and the rising costs of health care per 
beneficiary.
    Senator Sessions. So, to my colleagues, this is the reason 
I think it is accurate to say we have fundamentally a spending 
problem rather than a tax problem, because if your revenue is 
not going to keep up with the spending because we are on an 
automatic course through entitlements and other programs and 
all our desires to spend more, then you are not going to get 
the country on a sound path.
    Mr. Elmendorf, debt, I believe, can slow the economy. Back 
in 2009, you wrote Senator Gregg stating that $850 billion 
stimulus would have an economic boost in the short term, this 
pushing out of stimulus money, but the cost of borrowing that 
money would inevitably become a drag on the economy, you told 
us. In fact, you said that by even next year--2014 I believe is 
what you projected back then--the benefits of the stimulus 
spending would be completely gone and there would be left a 
drag permanently on the economy. And so since there is no 
prospect of paying down that debt, we will have some drag--how 
much, we could dispute-- permanently as a result simply of that 
debt. Is that not correct?
    Mr. Elmendorf. Yes, Senator. If cuts in taxes or boosts in 
spending that stimulate the economy in the short run are not 
offset by some later tightening of fiscal policy, then the 
extra debt that is accumulated will be a drag in the long run.
    Senator Sessions. Thank you, Madam Chair. I have gone over 
my time limit. And the other debt we are adding also becomes a 
permanent drag on our growth, threatening the future of 
employment for millions of Americans.
    Chairman Murray. I would like to inform the Committee 
members that the way we are going to work in this Committee on 
recognizing Senators is, as in past traditions, by seniority 
before the gavel is hammered and order of arrival after the 
gavel, so we will begin with Senator Sanders.
    Senator Sanders. Thanks very much, Madam Chair, and, Mr. 
Elmendorf, Dr. Elmendorf, thanks very much for being with us.
    Just a few questions, and if you can give me some brief 
answers. Is it fair to say that one of the reasons we have the 
deficit today has to do with two wars that were not paid for; 
huge tax breaks, much of which went to the wealthiest people in 
this country; the Medicare Part D program that was not paid 
for; and a Wall Street-caused recession which resulted in 
significant declines of revenue? Would you say that that is one 
of the reasons we went from a surplus at the end of Clinton's 
administration to where we are today?
    Mr. Elmendorf. Yes, Senator.
    Senator Sanders. All right. The second question is: In 
terms of unemployment, the number roughly 7.8 percent is often 
thrown out, but would you agree that if you looked at real 
unemployment, people who have given up looking for work, people 
who are working part-time when they want to work full-time, 
that we are really looking at maybe 14 percent? Is that a fair 
statement?
    Mr. Elmendorf. Yes, Senator.
    Senator Sanders. All right, the point being that we are in 
the midst of a major, major recession.
    Now, the debate that is taking place in the Congress right 
now is many of my Republican friends believe that the answer to 
the deficit problem, which all of us agree is a serious 
problem, is to cut Social Security, is to cut Medicare, is to 
cut Medicaid, is to cut programs for children. And that is 
true. That is one way you can go forward. But some of us 
believe that we have to take a look at revenue and the fact 
that at 15.8 percent of GDP, revenue today is the lowest point 
that it has been almost in 60 years.
    Some of us also believe that we have to take a hard look at 
huge corporate loopholes, that before you cut a woman in 
Vermont who is living on $15,000 a year Social Security, you 
may want to end some of the loopholes that enabled the Bank of 
America to stash their money in the Cayman Islands and not pay 
any taxes at all. And that is kind of what the debate is about.
    So let me ask you this, just confirm if my information is 
right. In 1952, 32 percent of all revenue generated in this 
country came from large corporations. Today that number is 9 
percent. Does that sound accurate?
    Mr. Elmendorf. I am sorry, Senator. I just do not know that 
fact.
    Senator Sanders. Okay. In 2011, corporate revenue as a 
percentage of GDP was just 1.2 percent. Madam Chair, you 
remember many of our corporate friends coming here and how they 
were overtaxes. 1.2 percent of GDP happens to be, as I 
understand it, lower than any other major country in the OECD. 
So when people come in and say, ``Oh, we are paying 35 
percent,'' everybody here knows there is no corporation that 
pays 35 percent. If they do, they have to get rid of their 
accountants, that, in fact, the number on profits is 12 
percent. Is that true?
    Mr. Elmendorf. So, Senator, certainly right that the 
statutory tax rate in the corporate tax code and the average 
share of profits paid in tax by companies are quite different, 
but I do not know the numbers, and I do not know the--
    Senator Sanders. Okay. Let me see if you know this one.
    Mr. Elmendorf. --OECD countries.
    Senator Sanders. In 2011, my understanding is that 
corporations paid just 12 percent of their profits in taxes, 
the lowest since 1972. How is that?
    Mr. Elmendorf. I think that sounds about right, Senator.
    Senator Sanders. So, again, the choice that we face, do you 
really in the middle of a recession want to cut Social Security 
benefits and Medicare benefits when corporations today are 
paying 12 percent of their profits in taxes, the lowest since 
1972? Or do we think it might make more sense to ask our 
friends in the corporate world to pay a little bit more?
    Another question. My understanding is that one out of four 
major corporations, profitable corporations in this country, in 
2005, the last statistics I have seen--I am sorry I do not have 
closer ones--paid zero in taxes. Does that sound right to you?
    Mr. Elmendorf. I am sorry, Senator. I just do not know 
offhand. We can look these things up, but I do not carry them 
around in my head.
    Senator Sanders. All right. My understanding is that we are 
losing--and we have introduced legislation to remedy this--
about $100 billion a year in revenue, a year, by companies' 
offshoring their profits in the Cayman Islands, Bermuda, and 
paying zero in taxes.
    Mr. Elmendorf. Again, Senator, I do not--
    Senator Sanders. All right. I know that, but do you think 
it is a legitimate area to pursue, the fact that we have 
companies like Bank of America and virtually every major 
corporation stashing their money in the Cayman Islands, paying 
zero in Federal taxes? Is that something that you think would 
be a worthwhile pursuit?
    Mr. Elmendorf. Well, I think that it is certainly a 
legitimate issue for the Congress, and we released a report 
last month that reviewed the pros and cons of alternative ways 
of changing the tax system applying to multinational 
corporations.
    Senator Sanders. Okay. Madam Chair, I would just conclude 
by saying we have a great philosophical difference in this 
room, and some of us think that when the wealthiest people are 
doing phenomenally well, when corporate profits are at an all-
time high, we might want to ask those folks for more revenue 
rather than cutting back on the needs of some of the most 
vulnerable people in this country.
    Thank you, Madam Chair.
    Chairman Murray. Thank you.
    Senator Enzi.
    Senator Enzi. Thank you, Madam Chairman.
    I want to thank you for this great book. As an accountant, 
it has a lot of numbers in it; I love that. It does lead to a 
lot of technical questions, though, and I would rather submit 
those than ask them here.
    Mr. Elmendorf. Yes, Senator. We are happy to respond that 
way.
    Senator Enzi. I still have a few questions, though, and 
Senator Sanders brings up one. Are we paying out more in 
Medicare than we are taking in at the moment?
    Mr. Elmendorf. Well, as you know, Senator, the dedicated 
taxes for Medicare cover the Part A, or are designed to cover 
Part A, the hospital spending, and the Hospital Insurance Trust 
Fund is, in fact, losing money every year. The other parts of 
Medicare have no dedicated financing. They are funded by 
beneficiary premiums and by general revenue transfers.
    Senator Enzi. How are we doing on the difference between 
what is paid in for Social Security and what is going out 
monthly or annually?
    Mr. Elmendorf. So the dedicated taxes collected for Social 
Security are less than the benefits that are being paid out for 
Social Security.
    Senator Enzi. Is there anything in sight where that is 
going to change?
    Mr. Elmendorf. No, Senator. That will continue under 
current law.
    Senator Enzi. Thank you.
    Now, in the CBO report, you indicate that revenues are 
projected to increase by roughly 25 percent between 2013 and 
2015, and, in addition, growth of the economy is expected to be 
just one and four-tenths percent in 2013 but accelerate to 
three and four-tenths percent in 2014. I want to ensure that we 
all do not leave this hearing thinking that there is a direct 
link between increased revenues through tax hikes and increased 
economic growth.
    In that regard, to what extent do the increased taxes that 
were recently enacted and that pull money out of the hands of 
both employers and employees have a negative impact on your 
economic growth projections?
    Mr. Elmendorf. So, Senator, we think the increases in taxes 
is part of the fiscal tightening that is slowing the economy 
this year, just as the planned reductions in spending are 
slowing the economy this year. That and other sorts of deficit 
reduction are good for the economy in the medium run and long 
run, and that is one of the difficult trade-offs that you and 
your colleagues face.
    Senator Enzi. Thank you.
    The CBO report also indicates that after the economy 
adjusts this year to the fiscal tightening inherent in current 
law, underlying economic factors will lead to more rapid 
growth_ you project three and four-tenths percent in 2014 and 
an average of three and six-tenths percent a year from 2015 
through 2018. Can you walk us through your analysis leading to 
the conclusion that the economy will adjust this year and not 
over a longer period of time due specifically to the tax 
increases that were enacted earlier this year?
    Mr. Elmendorf. Yes, Senator. So there are two factors here. 
There is a growth of the underlying potential of the economy, 
and then there is some catch-up from the current level of 
output, which is below that potential, which amounts to putting 
unemployed workers back to work making better use of the 
factors and offices that we have. And both those factors are at 
work in the growth we see over the next half-dozen years.
    We think that the underlying forces driving the economy are 
finally--after long, lingering effects of the financial crisis 
and the housing bubble, we think those underlying forces are 
strengthening. We think those are going to help to pull the 
economy back up toward its potential output to put people back 
to work, but only gradually over the next 4 or 5 years.
    The tightening of fiscal policy is reducing deficits, and 
the lowered debt that will result will be good for the economy 
later on. It is also true that the higher tax rates that will 
be in place because of the expiration of tax cuts on higher-
income people, those higher tax rates will represent some drag 
on the economy, and we incorporate those factors in our 
baseline projections and in our analysis of the effects of 
alternative policies. We look at the effects of both debt on 
the economy and the effects of tax rates in distorting 
incentives to work and to save.
    Senator Enzi. Well, I will have a few more follow-ups on 
that one, but, slightly different, the President recently said 
that in the absence of a larger budget deal, Congress should 
pass a smaller package of spending cuts and tax reforms that 
would delay for a few months the sequester slated to go into 
effect. It is anticipated those tax reforms mean closing what 
the President perceives as loopholes. And it would have the 
effect of simply raising taxes.
    To what extent would raising taxes to offset a portion of 
the sequester have a negative impact on economic growth?
    Mr. Elmendorf. So I think the biggest issue to think about 
in terms of the effects of this fiscal policy on the economy in 
the near term is how quickly deficit reduction occurs, how much 
tightening occurs this year. But it is also true that the 
composition of the fiscal tightening, how much comes through 
certain sorts of spending cuts or certain sorts of tax 
increases can matter for economic outcomes, but the effect 
depends a lot on the specifics. When we have looked at 
different ways to boost the economy, we have found very 
different effects of different sorts of spending increases and 
very different effects of different sorts of tax cuts.
    So I do not want to make any very general statements 
because it really depends on what provisions of the Tax Code 
would be changed.
    Senator Enzi. I will follow up on that.
    Senator Enzi. My time has expired. Thank you.
    Chairman Murray. Thank you.
    Senator Whitehouse.
    Senator Whitehouse. Thank you, Madam Chair.
    Welcome back, Dr. Elmendorf.
    Mr. Elmendorf. Senator.
    Senator Whitehouse. Two quick things. The first is that--I 
think it is relevant to the topic you were just discussing. 
Europe has gone on an experiment in austerity as a solution to 
the recession, and it does not seem to be working very well. 
Spain's economy shrank 1.4 percent in 2012 and is projected to 
contract another 1.4 percent in 2013. Greece's economy shrank 6 
percent in 2012 and is projected to contract another 4.2 
percent in 2013. Italy's economy shrank 2.3 percent in 2012 and 
is projected to contract another 0.3 percent in 2013. 
Portugal's economy shrank 2.3 percent in 2012 and is projected 
to contract another 0.3 percent in 2013. Unemployment is in 
double digits in all of those countries. So although we are not 
recovering well, we are certainly recovering, and we see GDP 
growth. And if you look at some of the people who are close to 
this and looking at it, the conservative Daily Telegraph, 
Jeremy Warner, who supported this austerity program, has 
recently written about Britain that they are in a ``truly 
desperate state of affairs that demands swift and decisive 
action. We seem to have the worst of all possible worlds, with 
nil growth, some very obvious cuts in the quantity and quality 
of public services, but pretty much zero progress in getting on 
top of the country's debts.''
    The IMF, which had argued for austerity, now has corrected 
itself and says--the chief economist Olivier Blanchard said, 
``We find that forecasters significantly underestimated the 
increase in unemployment and the decline in domestic demand 
associated with austerity.''
    The Wall Street Journal, recently discussing Spain and its 
austerity program, said that it ``threatens to create a vicious 
cycle as mass layoffs to meet budget targets spark a deeper 
contraction, reducing tax revenue and increasing welfare costs, 
as well as damping consumption.''
    Now, Robert Frank, who is a well-regarded American 
economist at Cornell, has said, ``The cuts that are scheduled 
in the sequester are not a way to run a rational government. 
Cuts of any kind at this time are not a good idea. It is 
recessionary. It would slow growth for sure and put people out 
of work.''
    In that regard, the more conservative American Enterprise 
Institute, John Makin and Daniel Hanson said, ``An abrupt 
spending sequester scheduled to begin March 1st could cause a 
U.S. recession.''
    Do you recommend an austerity path at this point? What 
should we be doing that is different than the European 
austerity experiment that appears to have ended so badly for 
them?
    Mr. Elmendorf. So, Senator, we have not studied each of 
those European countries carefully, and as you know, there are 
many factors that affect their economic performance. But I 
think that the recessions and economic contractions that have 
occurred in countries that have pushed for very rapid 
contractions of fiscal policy are entirely consistent with the 
analysis that we have been offering to the Congress for many 
years now that raising taxes and cutting spending at a time 
when the economy is already weak and the Federal Reserve is 
limited in its further options to support the economy will tend 
to reduce output and reduce jobs relative to what would occur 
if fiscal policy were not tightened in those ways. And--
    Senator Whitehouse. And you are predicting a more than 1-
percent difference in GDP as a result of that if we do not 
manage the sequester properly, correct?
    Mr. Elmendorf. So we say that without any of the fiscal 
tightening that is occurring this year, GDP growth would be 1-
1/2 percentage points faster. The sequester itself we think 
represents about six-tenths of one percent of GDP growth this 
year and would mean a difference of roughly 750,000 jobs by the 
fourth quarter of this year.
    Senator Whitehouse. Okay. And one last point, a different 
point. I make it virtually every time we have a hearing, and so 
I now will give the abbreviated version here, and the Chairman 
was kind enough to mention my interest in this. But when we 
have a health care system that is spending 50 percent more than 
our least efficient international competitor, when everybody 
from the President's Council of Economic Advisers to the 
Institutes of Medicine say that there is over $700 billion 
every year to be saved in the American health care system, when 
companies like, in Senator Johnson's home State, Gundersen 
Lutheran, in Senator Toomey's home State, Geisinger, are 
actually showing the ways to reduce costs by providing better 
health care, I look forward to being able to work with my 
colleagues on the other side of the aisle to focus on that. I 
think when we look at Medicare benefits as the solution to our 
health care cost problem, we are fundamentally misdiagnosing 
the problem. When we misdiagnose a problem, we put the wrong 
cure on it. It will do harm, not good. And we really, I think, 
as a Congress can focus in bipartisan fashion on trying to make 
the American health care system at least as efficient as our 
least efficient international competitor rather than paying a 
50-percent inefficiency penalty on that compared to the rest of 
the world.
    Chairman Murray. Thank you.
    Senator Johnson.
    Senator Johnson. Thank you, Madam Chairwoman, Director 
Elmendorf. Let me first agree with Senator Sessions. I actually 
think we all share the same goal here. We all want a prosperous 
America. We want every American to be able to have the 
opportunity to build a good life for themselves and their 
family. It is a matter of, you know, how do we go about doing 
it, and it is really through economic growth.
    Director Elmendorf, in general, don't tax increases harm 
economic growth?
    Mr. Elmendorf. I think it depends what the alternative is, 
Senator. I am not trying to--
    Senator Johnson. I am just talking about--
    Mr. Elmendorf. --be difficult here.
    Senator Johnson. I am just talking about--
    Mr. Elmendorf. If the alternative is to run large deficits 
indefinitely, if the only available policy lever were a change 
in tax rates or some other change in the Tax Code, I am not 
sure what the answer to that question is.
    Senator Johnson. Let me point out a couple facts about 
economic growth. Even with the meager growth we have had since 
2009, Federal revenue has increased by $388 billion per year 
since that time period, correct?
    Mr. Elmendorf. I will take your word for that, yes, 
Senator.
    Senator Johnson. If we would just return to a normal 
economy, which we had in 2007, when revenue generation was 18.5 
percent of our economy, that would add an additional $435 
billion per year.
    Mr. Elmendorf. Again, we certainly think that when the 
economy is--the growth we have in the economy is an important 
factor pulling up tax receipts.
    Senator Johnson. Now, the tax increase, the punishing of 
success in the fiscal cliff piece of legislation, that in
    2014, according to the Joint Committee on Taxation, would 
raise, I believe, $41 billion in 2014. Is that about right?
    Mr. Elmendorf. That sounds plausible, Senator, yes.
    Senator Johnson. So increasing taxes on the rich is a tenth 
as effective if we would actually just return our economy to a 
normal economy. Is that about correct?
    Mr. Elmendorf. That particular policy, yes, Senator.
    Senator Johnson. Now, in your projections, you are taking 
us--and you pointed out that the 40-year average is 18 percent 
of revenue compared to GDP, and your projections now are saying 
you are going to somehow get 19 percent out of the economy. I 
would like to point out over the last 62 years, we have only 
had 13 instances where revenue actually hit 19 percent. Three 
of those, it actually peaked 20 percent. But I would like to 
just quickly show a chart here. We have had a wide variety of 
top marginal tax rates, I mean the attempt to punish success, 
which I think is the wrong way to go, of as high as 91 percent, 
70 percent, 50 percent, 28 percent under Ronald Reagan, I would 
like to point out. For a brief moment in time, we were actually 
72 percent free, then 35, 39.6 percent, we are pushing that top 
marginal tax rate up to 40 percent. But it is amazing how 
incredibly tight the average around that, in my case, 18.1 
percent over 50 year averages, what makes you think that we can 
actually extract over the next 10 years about 19 percent of 
revenue when we have not been able to do it regardless of how 
we have tried to punish success?
    Mr. Elmendorf. Well, Senator, as you know, there are a lot 
of other features of the Tax Code besides the top marginal 
rate, and one could draw pictures like that that showed the 
rates that applied to people at other points on the income 
distribution. There are a set of changes that have been made to 
what sort of income is taxed, what deductions and credits are 
available. So our projection is that under current tax law 
revenue will reach roughly 19 percent of GDP. That is not 
really hard for us to imagine given the way current tax law 
works.
    One factor, of course, is--another factor you know is that 
at points where tax receipts have moved up to be a higher share 
of GDP, Congress has often stepped in and made some change in 
the tax law to bring them back down. And you may do that again, 
but that is not what our baseline projections are--
    Senator Johnson. Okay. Let me quick answer Senator Enzi's 
question about how much more we are going to be paying out in 
benefits, and these are according to your schedules here. 
Between 2014 and 2023, we will pay out $5 trillion more in 
benefits to Social Security recipients and Medicare than we are 
taking in in terms of tax revenue and premiums on Medicare. 
Now, that $5 trillion compares to $9 trillion of total 
additional debt, it is almost 60 percent. If you are going to 
actually try and address the debt and deficit issue, wouldn't 
you actually have to try and propose a plan to save those 
programs for future generations? Wouldn't that be one of the 
first places you would look?
    Mr. Elmendorf. I think it is very difficult, Senator, if 
you look at our projections, to see how one can put the budget 
ultimately on a sustainable path without making significant 
changes in either of those large benefit programs or in the 
taxes paid by a broad cross-section of Americans.
    Senator Johnson. Okay. Well, let me also ask just about 
interest payments, because we will be paying about $5.4 
trillion in interest expense, and by the end of the period, we 
are about 5.2 percent of a 10-year Treasury note. I just want 
to put another chart up here. Over 30 years from 1970 to 1999, 
the average interest rate the Federal Government paid on its 
debt was 5.3 percent. We have been keeping that artificially 
low, 1.5 percent, to accommodate all this deficit spending. If 
we just reverted to that mean, that would be more than $600 
billion per year for increasing our interest rates by 3.8. 
Isn't that largely correct?
    Mr. Elmendorf. So as you noticed, Senator, our own 
projection has the 10-year Treasury note rate going to 5.2 
percent in the second half of the coming decade, and that is 
the reason why we show such a large increase in Federal 
interest payments.
    Senator Johnson. That is something we really need to be 
concerned about. What makes you think that we will not hit that 
5.2 percent a little bit quicker?
    Mr. Elmendorf. Because the weakness of the economy has kept 
down the private demand for credit and has led the Federal 
Reserve to keep interest rates low. In addition, there are 
serious economic and financial problems in Europe that have led 
people to put money in this country, and I think in general an 
aversion to taking financial risk given the events of the last 
half dozen years. We think those factors will persist for a 
while and then wane.
    Senator Johnson. Aren't seniors on fixed incomes the 
biggest victims of these artificially low held interest rate?
    Mr. Elmendorf. I do not know, Senator. We have not analyzed 
that. It is true that the people who are dependent on receiving 
interest payments are receiving lower payments because interest 
rates are low.
    Senator Johnson. Thank you.
    Chairman Murray. Senator Baldwin.
    Senator Baldwin. Thank you, Madam Chairwoman, and I have to 
tell you, it is a delight to have my first budget meeting. I am 
delighted to have Director Elmendorf here. And since you only 
get your first hearing once, I wanted to say a couple of 
things.
    I appreciated your opening remarks, Chairman Murray, about 
the fact that budgets truly are a statement of our values and 
our priorities as Americans. And for me, that means developing 
a budget that strengthens the essential pillars of our economy 
and economic security, especially for the middle class. Quality 
education, affordable health care, a good-paying job, 
retirement security are things that we really on to have a 
strong middle class. So I want to see us develop a budget that 
truly holds true to the belief that in America everybody gets a 
fair shot and everyone does their fair share.
    I believe--and many have echoed this sentiment--that our 
country faces twin challenges: the challenges of getting our 
economy or economic recovery, seeing it through, job creation, 
and particularly in the private sector, and confronting our 
debt and deficit. And I believe that we have to face both of 
these challenges head on and address them in a bold yet 
balanced way.
    In the past 2 years, we have made significant strides in 
achieving a $2.5 trillion bipartisan deficit reduction, but we 
obviously need to do more. But that is the trick, that is the 
challenge, that is the hardest task, is how do we forward a set 
of policies that helps us achieve both of those twin challenges 
without frustrating the other.
    So, Mr. Elmendorf, I would like to begin by asking you how 
we approach these twin challenges, these parallel challenges of 
job growth and deficit reduction. You highlighted in your 
testimony that there is a large gap between potential GDP and 
actual GDP, and that gap is almost as large as it was during 
the worst of our recession. This means that there is a 
shortfall in consumption, in Government spending and/or 
investment. Additionally, we have record low financing costs 
right now and unemployment levels of above 16 percent in the 
construction sector.
    In terms of economic multipliers, isn't it true that one of 
the best ways to increase growth in the future is to invest in 
infrastructure today?
    Mr. Elmendorf. Yes, Senator. Investments in infrastructure, 
if done in an intelligent manner, can provide a real boost to 
economic activity, not just today when the investment is 
occurring but over time as the investment yields returns.
    Senator Baldwin. And along those lines, what do you view as 
the other best economic multipliers strategies at this point? 
What gives us the most leverage?
    Mr. Elmendorf. Well, Senator, the most effective way that 
we know for the Congress to boost economic growth this year is 
to defer some of the fiscal tightening that is scheduled in 
current law. But I want to be clear that if that deferral 
occurs without some offsetting tightening of fiscal policy 
later, then that will make economic outcomes worse in the 
medium term and long term.
    Senator Baldwin. The dual twin challenges. You want to 
attack one without frustrating progress on the other.
    You stated in your testimony that this fiscal tightening 
that we are talking about would restrict GDP growth by 1.5 
percent and cost us 2 million jobs. In your testimony, you also 
stated that our unemployment rate would remain above 7.5 
percent for the foreseeable future through 2014. I have a 
chicken-versus-egg question for you. I know they are 
challenging. But in your view, to what extent is high 
unemployment a cause of weak economic growth as opposed to the 
effect of weak economic growth? And if high unemployment is, in 
fact, a cause of slower growth, what effect would direct 
Government action to lower our unemployment rate have on our 
overall fiscal situation?
    Mr. Elmendorf. So, Senator, we think that the high 
unemployment rate is primarily the effect of businesses not 
hiring, which is primarily an effect of their not seeing the 
demand for their products, and that policies that would boost 
the demand for business services would encourage businesses to 
hire more, and that would tend to bring down the unemployment 
rate.
    There are also policies that could be directed specifically 
at unemployed workers. We wrote a report last year on ways of 
responding to persistently high unemployment, and we talked in 
that report about some of the broad macroeconomic policies, but 
also about more targeted policies to help train workers, help 
connect workers to available jobs. Our view in that report was 
that those policies could be very helpful for certain people in 
certain circumstances but would be very difficult to implement 
on a national scale quickly enough to change, significantly 
change the trajectory of the overall unemployment rate over the 
next few years.
    Senator Baldwin. Thank you.
    Chairman Murray. Thank you.
    Senator Wicker.
    Senator Wicker. Thank you, Madam Chair, and thank you, Mr. 
Budget Director.
    The President a few days ago proposed a balanced approach 
to pay for sequestration in another way involving revenue 
increases and a different approach to making the budget 
savings. What would be the score of the President's proposal in 
this regard?
    Mr. Elmendorf. So, Senator, we have not seen a specific 
proposal, so I do not know what it--
    Senator Wicker. You know, I have not seen a specific 
proposal either, so it is hard to score that speech that the 
President made, isn't it?
    Mr. Elmendorf. Yes, Senator.
    Senator Wicker. Now, on the other hand, the House last year 
actually proposed legislation and passed legislation to deal 
with the sequestration. Is that correct?
    Mr. Elmendorf. Yes, Senator, that is right.
    Senator Wicker. Okay. Did you have an opportunity to score 
that?
    Mr. Elmendorf. We did, Senator, but I do not remember the 
estimate that we provided. But we provided the cost estimate.
    Senator Wicker. All right. And the Chair suggested earlier 
in this hearing that we avoid sequestration by restructuring 
the cuts to let them take effect a little more gradually that 
involve revenue there. Have you had an opportunity to score 
that proposal by the Democrats on this Committee?
    Mr. Elmendorf. No, Senator. We have not received a specific 
proposal of the sort that you are describing, and if we 
received--if such a proposal were made public and we were to do 
an estimate of it, then you and all of your colleagues would 
see it.
    Senator Wicker. Okay. Well, I think that would be very 
helpful because it is frustrating to me because, on the one 
hand, our brothers and sisters at the other end of the 
building, at least if they have taken the hit, proposed 
specific solutions to sequestration. They have been scored. 
They have been passed. They sat over here in the U.S. Senate 
all last year with no action, and yet we have suggestions by 
the President, suggestions by our friends on the other side of 
the aisle, but they cannot be scored, and we cannot have any 
idea what CBO would think about those.
    Let me just say this: There is a lot of revisionist history 
when it comes to this period that I participated in as a Member 
of the House of Representatives where we actually had budget 
surpluses at the Federal level. You would think from the 
Chair's opening statement that President Clinton came into 
office in 1993, proposed balanced budgets, got those balanced 
budgets, and we had 8 years of relative fiscal sense here in 
the Federal Government. The fact is, is it not, that President 
Clinton in 1993, in 1994, and in 1995 proposed in all of those 
years deficit spending as far as the eye can see? Is that 
correct?
    Mr. Elmendorf. I think that is right, Senator, but my 
recollection of the specifics of those budgets is not perfect.
    Senator Wicker. That is my recollection, too. As a matter 
of fact, in the 1995 budget proposed by President Clinton, who 
takes credit for the surpluses later on, it proposed over $200 
billion in budget deficits as far as the eye could see. And 
then what happened is in the 1994 election the people of the 
United States elected a Republican majority in the House and a 
Republican majority in the Senate. And I know you do not get 
involved in politics, but let me just observe that Chairman 
Kasich was directed by the Speaker of the House to come up with 
a very tough budget bill, and, in fact, the Republican 
majorities in the House and in the Senate got the President of 
the United States to buy into reconciliation, to buy into 
welfare reform, and on a bipartisan basis after Republicans 
took control of the House and Senate majorities, that is when 
we had budget surpluses. That is when the budget surpluses 
began. They were never proposed before then by President 
Clinton.
    Now, also, I do not recall President Bush getting us into a 
war in 2001. I recall Osama bin Laden and al Qaeda getting us 
into a war in 2001. And as I recall, it was
    passed unanimously in the United States Senate that we 
would retaliate in Afghanistan and go into war. It was not a 
Bush war. It was something that we all did and all Americans 
supported it--one dissenting vote in the House of 
Representatives. So I think it is disingenuous to have 
revisionist history when, in fact, we did have this war. We 
were in an economic recession in 2001. What would a tax 
increase have done to us in 2001 to pay for that war in 
Afghanistan? It would have been a huge drag on an already 
tenuous economy, would it not have?
    Chairman Murray. Dr. Elmendorf, I am going to ask you to 
sum that up really quickly, or there are several of us who are 
going to miss a vote.
    Mr. Elmendorf. An increase in 2001 would have had that 
effect, yes, Senator.
    Senator Wicker. Thank you very much, Doctor.
    Chairman Murray. I am going to recess and go over and vote 
at the end of this vote and the top of the next one and come 
back. If any members want to come back and ask questions of Dr. 
Elmendorf, I will do it between the third and fourth vote, and 
I will be here.
    We will take a quick break.
    [Recess.]
    Senator Merkley. [Presiding.] The Committee will come back 
to order, please. And as soon as my colleagues return, we will 
return to the regular order of questioning, but for now I am 
the only one here, so I will take advantage of that moment.
    Thank you. Good to have you here.
    Mr. Elmendorf. Thank you.
    Senator Merkley. And I appreciate so much the third-party, 
bipartisan analysis the CBO brings to our discussions. It helps 
if we have a common set of analyses to base our discussion and 
analysis on here in the Committee, and thank you for providing 
that.
    I wanted to start by asking you a question that may not be 
reflected in the numbers and maybe it cannot be, but that is 
for you to respond to, and that is, we have had a series of 
fiscal cliffs, if you will, not only the fiscal cliff December 
31st, but we have the upcoming concern over the debt ceiling, 
the continuing resolution, and so forth.
    It seems like we have been lurching from budget crisis to 
budget crisis. Is there any way of measuring that or do you 
make an attempt to measure the impact on decisions made within 
the economy and perhaps within your models regarding 
investments and so forth that might drive economic outcomes?
    Mr. Elmendorf. Senator, we do think that the ongoing 
uncertainty about Federal budget policy represents a drag on 
spending and, thus, on incomes and jobs. But we do not know how 
to quantify that effect. There is economic research--we have 
had some of this presented at our meetings of our panel of 
Economic Advisers--that tries to, is starting to build some 
evidence about the effects of policy uncertainty on the 
economy. But that is, I would say, still in a preliminary 
stage, and we do not know how important those effects are.
    We think the primary source of uncertainty that is holding 
back household spending and business investment and hiring is 
uncertainty about the income that households will have and the 
demand for the products that firms will face. But policy 
uncertainty is probably also playing some additional negative 
role.
    Senator Merkley. It was interesting to see a series of 
reports in December and on into January regarding retail sales, 
everything from clothing to other consumer goods, that seemed 
to show a significant change, and one possible explanation was 
related to the fiscal cliff and the recognition of what is 
going to happen in March. Another was that the payroll tax got 
changed, and folks had 2 percent less money in their paychecks. 
Do you have any sense of how that--was that expected, that 
turndown? If not, what is the best explanation or culmination 
of explanations?
    Mr. Elmendorf. So it is difficult to read too much into the 
very preliminary data we have for the beginning of this year. 
Our expectation had been and remains that the expiration of the 
payroll tax cut represents an important piece of fiscal 
tightening that is good for the deficit over time but is a 
negative factor for consumer spending in the first part of this 
year. But that is a judgment based on decades of evidence of 
other changes in income and how it affects spending, not really 
derived from what we have seen over the past month, but we just 
do not know enough of what is going on.
    Senator Merkley. So we are looking at another set of 
decisions, and right now we are on a course to have a 
significant drop in defense and non-defense discretionary 
programs. And one idea that has been put out there is, well, 
instead of reducing spending, let us reduce the spending on 
appropriated programs, if you will, let us reduce spending on 
tax loopholes. And for some, that is reducing spending; for 
others, increasing revenue. But largely, if you spend money on 
a tax loophole, it has a corollary in the real world, so it is 
fair to frame it that way.
    Have you all looked at the different impact of whether, 
say, shutting loopholes that give special payouts to oil 
companies versus cutting food stamps, just an imaginary 
comparison, has in terms of how it reverberates in the economy 
and affects working people?
    Mr. Elmendorf. So, Senator, we have not looked at 
particular--we have not formally analyzed the macroeconomic 
effects of closing particular tax loopholes. But we have said 
many times that the sorts of spending or tax changes that 
matter most for the economy in the short run are those that 
directly affect the spending by the Government or by households 
or by businesses.
    So food stamps are received by people who, as you know, 
have very little other income. They will tend to spend a very 
large share of any change, spend more if their food stamps go 
up or spend less if the food stamps go down. So changes in that 
way will tend to be passed through to changes in spending on a 
nearly one-for-one basis; whereas, most of the tax revenue is 
collected from people who are not living so close to the 
economic edge and thus will tend to respond less sharply in 
their spending for every dollar change in their after-tax 
income.
    So, in general, changes in food stamps will tend to have 
larger effects on the economy in the short term than changes in 
other spending programs or tax provisions, but we have not 
looked at the specific example you raised.
    Senator Merkley. Now that we are back in the world in which 
Social Security premiums are being paid for directly out of 
paychecks completely, the argument is often made that Social 
Security, the premiums go into the trust fund, the trust fund 
lends money out to earn a modest return, comes back, and they 
proceed to disburse it when folks become eligible. And in that 
sense, is it fair to say that Social Security does not 
contribute to the national debt?
    Mr. Elmendorf. I think that is not right, Senator, 
actually. The payroll tax receipts, as you know, that are going 
into Social Security are less than the benefits that are being 
paid out. And the interest payments that Social Security 
receives are a receipt to that part of the Government and a 
payment from some other part of the Government.
    In the work that we do, we tend to look at the Government 
as a whole, and on that basis, the dedicated Social Security 
taxes are less than Social Security benefits. So on that basis, 
the program is actually a drain on the budget today. But even 
if one includes the interest payments and looks at the overall 
Social Security balance, that is positive today, so the tax 
receipts and interest payments together are larger than benefit 
payments. But that will actually turn around within the coming 
decade, by about 5 or 6 years from now, I think. In our 
projections, the Social Security Trust Fund, even counting 
interest payments, will be running a year-to-year deficit, that 
is, it will be starting to draw down on the accumulated 
balances in the trust fund.
    Senator Merkley. It really does depend on how you view that 
trust fund, because if you view it as the equivalent of a semi-
private entity which is truly separate, it would be no more 
than my saving money and my spending money out of that account 
in the future, and it would be separate from the overall debt 
analysis. But I understand that ongoing, eternal question of 
how you frame that.
    Mr. Elmendorf. Again, sir, I would say that even taking the 
interest on board, we think that in 2017 the combined OASI and 
DI trust funds will be running a deficit, even including the 
interest payments that they are receiving. So it is not very 
far off before even on that basis the program will be in 
deficit.
    Senator Merkley. About roughly 20 years before the trust 
fund itself is depleted.
    Mr. Elmendorf. More than that, Senator, yes.
    Senator Merkley. Let me turn a little bit to the impact of 
health care. I believe your summary said that if you look at 
the current deficits, which have dropped significantly over the 
past couple years, but they are going to double over the next 
roughly 10 years, from $400-plus billion to $800-plus billion, 
and that health care costs are the biggest driver as a result 
of the pressures of an aging population, one of the things that 
is common in the Medicare system is fee-for-service.
    Now, fee-for-service basically says the more services you 
provide, the more profit you make. So whether you are building 
a piece of military equipment or running health care, it is an 
incentive to spend a lot, not necessarily to spend wisely.
    Has CBO done an analysis of the impact of fee-for-service 
on the cost of health care and the savings that might result 
from changing that structure?
    Mr. Elmendorf. So, Senator, I think there is a widespread 
view among analysts that moving away from fee-for-service to 
paying providers for handling an overall medical condition 
rather than for each individual service they provide, by paying 
them for providing that overall bundle of care in a high-
quality way, that sort of movement would be a great boon to our 
efficient use of health care dollars.
    In the work that we have done, I think the crucial question 
is what the movement is to, is what alternative method is put 
in place. So as you know, in the Affordable Care Act there were 
a lot of changes made in the fee-for-service part of Medicare, 
including a number of changes in how providers are paid, that 
represent moves away from a traditional fee-for-service 
approach. And we estimated that some of those changes would 
indeed save the Federal Government significant amounts of 
money. But I think the challenge now that you and your 
colleagues face is what other specific changes in Medicare you 
might make. And as we work with the staff of this Committee and 
others on potential changes in Medicare, we and your staffs are 
looking at different ways of changing the fee-for-service 
system. But just what the Federal changes should be to induce 
the sort of changes in the delivery of health care that people 
have in mind is not so straightforward, and I think that is a 
real--that is a fundamental challenge.
    Senator Merkley. Thank you very much. I think that given 
your analysis and that of everyone else, these are going to be 
the big drivers. I am sure members will be looking to the 
details that you all produce to try to understand the policy 
options.
    With that, our Chair has returned, so I will return the 
Committee to Chairman Murray.
    Chairman Murray. [Presiding.] Well, thank you very much, 
Senator Merkley. And we apologize to everybody. There are votes 
ongoing. Some members I believe are coming back. We are trying 
to get an assessment as quickly as possible on which ones are 
returning, so if you would not mind being flexible.
    I believe that Senator Portman will be arriving shortly. We 
are checking right now, and I will turn it over to him the 
minute he gets here. I believe Senator Warner also was going to 
return. If there are any offices that know whether their 
Senator is returning, it would be really helpful to us so that 
we can conclude this fairly quickly. Again, we do have votes 
ongoing.
    While none of my members are here, I will take this 
opportunity to ask you several questions, but, again, I will 
relinquish the minute someone walks in.
    Dr. Elmendorf, a lot of my colleagues attempt to claim that 
after the fiscal cliff deal, which raised about $600 billion 
from the wealthiest taxpayers, the tax discussion is somehow 
finished, and some point to CBO's new budget outlook, noting 
that projected revenues will rise above the 40-year historical 
average of 18 percent of GDP.
    But this argument really ignores some really important 
facts. It is true CBO expects revenues to average 18.9 percent 
of GDP over the next decade. It is also true that the last five 
times we have balanced the budget, revenues have been much 
higher, between 19.5 and 20.6 percent of GDP. Correct?
    Mr. Elmendorf. Yes, Senator, I think that is right.
    Chairman Murray. Okay. And their argument also actually 
fails to take into account for the reality that the baby-boom 
generation is entering its retirement years, and I want to 
paraphrase you, but you have noted that the past combination of 
policies regarding Federal spending and revenue cannot be 
repeated when it comes to the Federal budget going forward, 
which I take to mean that we are entering a new phase with 
respect to our fiscal pressures. That reality was recognized by 
bipartisan budget groups-- Simpson-Bowles and the Senate Gang 
of Six both did--and they proposed substantially more in 
revenue than will be generated by the 2012 fiscal cliff.
    So my question to you is this: If we were to hold revenues 
at an average of 18.9 percent of GDP, as you estimate, not to 
ask for a penny more of contribution from either the wealthiest 
of Americans or from some of the most egregiously wasteful 
loopholes in the Tax Code, if you could, lay out for this 
Committee some of the policy choices that Congress will have to 
face within a relatively short period of time.
    Mr. Elmendorf. Yes, Senator. If tax revenues are maintained 
at their historical average share of GDP, or even at the 
roughly 19 percent that we project for the end of this coming 
decade, then putting the Federal debt on a sustainable long-run 
path would require substantial cutbacks in the benefits and 
services that people receive from the Government relative to 
what would happen under current law or current policies. The 
numbers for the increase in beneficiaries of Social Security 
and Medicare are just striking. We estimate that by 2023 there 
will be about 40 percent more people receiving Social Security 
and Medicare benefits than received them last year. With a 40-
percent increase in the number of people receiving benefits, 
the total costs will be much higher or the benefits per person 
will have to be much lower.
    When we look out even over the next 25 years, as we did in 
our long-term budget outlook last year, we were clear that the 
biggest factor pushing up spending was the aging of the 
population and the growing number of people who would be 
eligible for these benefits under current law. The rise in 
health care costs per person in excess of GDP growth per person 
is a smaller factor, not an insignificant one but a smaller 
factor, actually, than the aging of the population.
    So over the past 40 or so years, leaving aside the 
developments of the past few because of the recession and 
financial crisis, but over the 40 years leading up to that, 
this country had an expansion of Social Security and health 
care programs that was essentially financed by a reduction in 
military spending as a share of GDP. There was no direct flow 
of money, but if you looked at the overall Government budget, 
the decline in defense spending as a share of GDP turned out to 
be essentially the mirror image of the increase in Federal 
spending on Social Security and the big health care programs 
between about 1970, say, and 2007.
    But that is the pattern that cannot be repeated, and it 
cannot be repeated because we now have a much sharper increase 
in the number of people who are beneficiaries of these 
programs, so the underlying forces pushing them up are 
stronger. We have also reduced defense spending to a much 
smaller share of the economy than it had been before. So that 
method essentially of dealing with the rising costs of these 
programs is not available at that order of magnitude. And this 
is not to say that changes cannot be made, of course, in 
defense spending or other things. But something different will 
have to happen going forward. And under current law, all 
Federal spending apart from that for Social Security and the 
big health care programs and interest payments, but everything 
else the Government does is already on track to become a much 
smaller share of the economy than it has been in the past. So 
even as things stand in these projections, the role of the 
Federal Government over the next decade relative to the past 
decade is sharply different, much more spending on these 
benefit programs, particularly for older Americans, and 
relative to the size of the economy on a track to have less 
spending on defense but also non-defense discretionary spending 
and the mandatory programs apart from Social Security and the 
big health care programs.
    So the share of GDP that we represented by in particular 
non-defense discretionary spending, and defense discretionary 
spending at the end of the coming decade, will be lower than 
they have been at any point in my lifetime, which is the period 
for which the Government has been collecting data on that 
basis.
    So there is a really profound shift underway, even under 
the current law, which is not enough to put the debt ultimately 
on a sustainable path. So if you and your colleagues want to 
put the debt on a sustainable path, and also if you want to 
undo some of the things that are in current law like the 
sequester, then you will need to make substantial changes 
either in those large benefit programs or in the share of GDP 
taken up by tax revenue.
    Chairman Murray. Okay. Let me check with our staff. Do we 
know if any members are returning?
    [Pause.]
    Chairman Murray. All right. I will ask one more question, 
and I would just like to notify all Senators, you have about 3 
minutes to let me know if you are returning, or your staffs. 
Otherwise, I am going to ask one more question and adjourn.
    Dr. Elmendorf, I did want to ask about the issue of 
sustainability as well as the second report you released last 
week on macroeconomic effects of alternative budgetary paths. I 
want to make sure that this Committee aggressively addresses 
the fiscal challenges we face, but to do it in a way that 
protects the recovery, puts in place sensible deficit 
reduction, and ensures the middle class get a fair deal.
    The groups like Simpson-Bowles and the Senate Gang of Six 
prioritized protecting the economic recovery. They proposed to 
put our debt on a stable downward path without making immediate 
drastic cuts, and that approach would really allow us to make 
smart cuts, smart investments, and ask that everybody pay their 
fair share.
    Your report suggests that in the near term large spending 
cuts would have a negative impact on growth, an effect that 
would be concerning given the relatively weak state of our 
economy today.
    How might we avoid that negative impact while still 
achieving the benefit to the economy of deficit reduction?
    Mr. Elmendorf. I think, Senator, to provide more support 
for the economy in the near term without damping long-term 
economic prospects, you and your colleagues could pursue a path 
of less fiscal tightening this year and next, accompanied by 
greater tightening later in the coming decade. And there are 
many different combinations of policies that could be used to 
achieve that, but I think that sort of path that had less 
fiscal tightening now and more later could be good for the 
economy in the short term and also could strengthen the economy 
in the medium term and long term.
    Chairman Murray. Okay. Well, CBO's analysis of alternative 
budgetary paths suggests that budget savings of about $4 
trillion over the next decade on top of the sequester and the 
savings already achieved in the last Congress would be 
necessary to come close to eliminating the deficit by 2023. 
What would be the consequences of implementing an additional $4 
trillion in deficit reduction, particularly if certain parts of 
the budget were to be excluded by defense or revenue?
    Mr. Elmendorf. Achieving that amount of deficit reduction 
would involve fundamental changes in some significant pieces of 
the budget, and the more pieces that were taken off the table, 
the more significant the changes would need to be in the 
remaining pieces. But the precise consequences, of course, on 
the benefits and services provided around the economy would 
depend on the nature of those cutbacks.
    Chairman Murray. All right. Let me check with my staff to 
see if there are any Senators returning.
    Okay. I think the votes contracted everybody's schedule 
this morning, and, Dr. Elmendorf, I know that you will answer 
any questions that are given to you in writing.
    I do want to thank all of our Committee members for 
participating today, and thank you, Dr. Elmendorf, for being 
here, as well as all the staff of the Congressional Budget 
Office. I know the hard work you put into preparing the budget 
outlook and helping our Committee.
    For all of our Committee members, I want to remind all of 
you that we do have our next meeting tomorrow at 10:30 to hear 
from members of the public and experts to learn more about the 
impact of budget decisions on families and communities, and as 
I said earlier, I am committed to making sure that families and 
communities have a voice in this process and that their values 
and perspectives are heard.
    Finally, for the information of all my colleagues, 
additional statements and/or questions to Dr. Elmendorf for 
this hearing record are due by 6:00 p.m. today to be submitted 
to the chief clerk in Room 624.
    With that, again, Dr. Elmendorf, thank you very much, and I 
will adjourn this hearing.
    Mr. Elmendorf. Thank you, Senator.
    [Whereupon, at 12:19 p.m., the Committee was adjourned.]

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            THE PRESIDENT'S FISCAL YEAR 2014 BUDGET PROPOSAL

                              ----------                              - 
- -


                        THURSDAY, APRIL 11, 2013

                              United States Senate,
                                   Committee on the Budget,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 2:07 p.m., in 
Room SD-608, Dirksen Senate Office Building, Hon. Patty Murray, 
Chairman of the Committee, presiding.
    Present: Senators Murray, Sanders, Whitehouse, Warner, 
Merkley, Coons, King, Sessions, Portman, Johnson, and Wicker.
    Staff Present: Evan T. Schatz, Majority Staff Director; and 
Marcus Peacock, Minority Staff Director.

              OPENING STATEMENT OF CHAIRMAN MURRAY

    Chairman Murray. This hearing will now come to order, and I 
want to thank again my Ranking Member, Senator Sessions, and 
all of our colleagues for joining us here today, as well as 
members of the public who are here in person or watching 
online.
    Today's hearing is on the President's fiscal year 2014 
budget proposal. Our witness is Acting Director of OMB Jeff 
Zients, who is here to talk about the proposal and answer our 
questions.
    Jeff, I just want to start by thanking you once again for 
being here today and for all of your hard work at OMB during 
some really tough times. Your skilled leadership has really 
been instrumental in helping our Nation work through a number 
of budget crises, any of which could been devastating to our 
fragile economic recovery had we been unable to work our way 
through them.
    And we especially appreciate your willingness to serve as 
Acting Director the past 15 months, including your work on the 
past two budgets. I know that you and your family have 
sacrificed a lot in order to provide continuity to this agency 
and the dedicated employees who work there.
    Mr. Zients. Thank you.
    Chairman Murray. It is sometimes pretty thankless work, but 
you have done a great job, and I want the record to reflect the 
thanks from me and from all of our Budget Committee. So thank 
you very much.
    Mr. Zients. Thank you.
    Chairman Murray. I imagine we are going to hear some 
questions about the timing of this budget today, but everyone 
really should keep in mind why our budget process has been 
operating so far outside of regular order.
    The uncertainty surrounding the fiscal cliff had major 
ripple effects on budget writing in Congress, as well as, I am 
sure, at OMB. The policy changes coming out of the year-end 
deal added to the challenges, and then sequestration, which we 
all hoped would be replaced, went into effect and shuffled that 
dynamic even further.
    So I am hopeful we can return to regular order in the 
budget process, but we should be clear. There has been nothing 
regular about the lurching from crisis to crisis over the past 
year.
    As I am sure Jeff will talk a bit more about, the fact that 
the President's budget timing has shifted, along with other 
considerations, has changed the way they have now approached 
their proposal.
    Normally, during times when we are not dealing with fiscal 
cliff uncertainty and devastating automatic cuts, the President 
lays out his budget proposal, the House and Senate hold their 
hearings on it, and it influences our work as we write our 
respective budgets in Congress.
    This year, of course, is different. The House has already 
passed their budget, the Senate has passed our budget, and now 
we are trying to move forward towards the next step in the 
process and find a way to get to a balanced and bipartisan 
deal.
    So President Obama has made it very clear that the proposal 
we are discussing today does not reflect his thoughts on the 
ideal policy, and it certainly does not represent any kind of 
new starting point for negotiations.
    It is not the budget I would write on my own, and it 
includes several policies that I do not think are the best ways 
to tackle the deficit and debt.
    While I was glad to hear some Republicans in the past few 
days express interest in finally putting an end to governing by 
crisis, I was disappointed to see members of leadership come 
out and seemingly reject any compromise at all. I hope 
Republicans are now prepared to tell us their ideas for a 
bipartisan path forward. And I know that the American people 
are expecting us to work together now to come to a deal. I know 
I am ready to do that, and I think the onus is on Republicans 
to now show us that they are as well.
    While this proposal reflects President Obama's compromise 
offer, I was very glad to see the President maintained his 
commitment to putting jobs and broad-based economic growth 
first. I know Democrats here in the Senate feel very strongly 
that protecting our fragile economic recovery is paramount. The 
budget we passed reflects that, and any deal we come to would 
have to work for middle-class families and the economy as well.
    One of the most important ways that both the Senate budget 
and the President's proposal puts the economy first is by 
replacing sequestration in a fair and responsible way.
    I know that when I went home to Washington state over the 
recess, my constituents were telling me about the negative 
impact that sequestration was already having on their families 
and communities. I am sure my colleagues heard similar stories 
back in their home States. And the problem is it is only going 
to get worse.
    We all know sequestration was never intended to take 
effect. It was supposed to motivate both sides to reach a 
compromise. That is why the Senate budget replaces those 
automatic cuts with an equal mix of responsible spending cuts 
and new revenue.
    And while the House budget refused to include any 
compromise in this area and replaces only the defense cuts 
while making even deeper cuts to programs families and seniors 
depend on, I am hopeful that we can work together on a fair and 
responsible replacement.
    In addition to replacing sequestration, the President's 
proposal, like the Senate budget, also prioritizes creating 
jobs and laying down a strong foundation for long-term economic 
growth through investments in early childhood education, 
college affordability, transportation infrastructure, and other 
key programs that we include in the Senate budget as well.
    I was also very glad to see that the President's proposal 
maintains the key principle in the Senate budget that is 
supported by bipartisan groups and the vast majority of the 
American people, that deficit reduction needs to be done in a 
balanced way, and includes a responsible mix of spending cuts 
and new revenue from those who can afford it the most.
    Since the Simpson-Bowles report was released in 2010, which 
recommended $4 trillion in deficit reduction, Congress and the 
administration have worked together to reduce the deficit by 
$2.4 trillion, with $1.8 trillion coming from spending cuts and 
$600 billion from allowing tax rates to rise on the wealthiest 
Americans.
    The Senate budget as well as the President's proposal 
builds on that work to exceed the bipartisan goal of $4 
trillion in a way that reduces the deficit to below 3 percent 
of GDP and that pushes our debt as a percentage of the economy 
down and moving in the right direction.
    If the Senate budget was enacted, the total deficit 
reduction since the Simpson-Bowles report would consist of 64 
percent from spending cuts, 14 percent from tax rates on the 
rich, and 22 percent from new revenue from closing loopholes 
and cutting wasteful spending in the Tax Code that benefits the 
wealthiest Americans and biggest corporations.
    The ratios under the President's compromise proposal would 
be slightly different, but the fact that it includes a mix of 
spending cuts and new revenue reflects the values and 
principles of balance and fairness that the vast majority of 
Americans have clearly stated they support.
    In addition to responsible spending cuts, a critical 
component of a balanced approach is ensuring that the burden of 
deficit reduction is not borne solely by the middle class, 
seniors, and most vulnerable families. And that means making 
sure that the wealthiest Americans and biggest corporations pay 
their fair share.
    Although our budget leaves the specifics to the Finance 
Committee and the President's proposal lays out a particular 
path, both put revenue on the table and specifically cite the 
need to close loopholes and wasteful deductions that benefit 
the rich.
    This should not be controversial.
    In 2012, on average, the top 1 percent of income earners 
saw their after-tax income increase by nearly $250,000 as a 
result of special tax provisions; the middle class only 
received an average of about $3,500. Those heavily skewed tax 
breaks do little for our economy; they just make it harder for 
middle-class Americans to get ahead. Especially at a time when 
we are looking everywhere for savings, we just cannot afford 
them.
    Even many Republicans agree there is waste to be found in 
the Tax Code. Speaker Boehner proposed raising $800 billion for 
deficit reduction by closing what he called ``special interest 
loopholes and deductions.'' Chairman Ryan has noted that, ``The 
Tax Code is patently unfair.'' And he has said that many of the 
deductions and preferences in our Tax Code are, and I quote, 
``mainly used by a relatively small group of mostly higher 
income individuals.''
    In fact, to keep the House Republican budget's tax reforms 
revenue neutral, as they have committed to doing, they would 
have to identify $5.7 trillion in savings from the Tax Code to 
pay for the tax rate cuts they want to give to the rich. That 
is almost six times what the Senate budget proposes.
    So House Republicans clearly know there are savings to be 
found in the Tax Code. The difference is that Democrats believe 
that instead of that savings going toward more tax cuts for the 
rich, we should use it to reduce the deficit and invest in our 
middle class.
    I was very glad to see that although some of the details 
differed, the President's budget reflects that critical idea as 
well. So I am looking forward to hearing more about the 
proposal today and asking some questions.
    The Senate budget that we passed last month reflects where 
I think our country needs to be, as well as the pro-growth, 
pro-middle-class values and priorities of Senate Democrats and 
the vast majority of the American people as we now move into 
negotiations with the House. I am hopeful that Republicans will 
come to the table and show they are willing to compromise to 
get to a deal.
    I have been talking to Chairman Ryan about my desire to 
move to the next step in this process under regular order and 
do everything possible in a conference committee to bring the 
House and Senate budgets together. I know it will be difficult, 
but it is what the American people expect, and I think we owe 
it to them to make it work.
    So with that, before we ask our witness to deliver his 
testimony and move to questions, I will turn to my Ranking 
Member, Senator Sessions, for his opening remarks.

             OPENING STATEMENT OF SENATOR SESSIONS

    Senator Sessions. Thank you, Director Zients. We thank you 
for your work and for your appearing before the Committee today 
to present the President's 2014 10-year budget. You have been 
placed in a difficult, unenviable position of defending a 
policy in terms of budgets that is indefensible. The 
administration has not indicated willingness to compromise, but 
as they have released with this budget, they slam the door on 
compromise, in effect, saying that this is not a compromise 
position. And Gene Sperling made that clear in other statements 
he has made. So this was not well received by those who thought 
that there may be some possibility of progress.
    Now, the Chair is correct that things can break, and we 
would hope that there is a possibility we will have some 
improvement. But the President's statement was very strong.
    His budget message in this document he submits uses the 
word ``balance'' seven times, and, of course, it does not 
produce a balanced budget. Our colleagues in the Senate used 
that word ``balance'' 230 times in the 15, 18 hours that they 
used to debate. This budget, like the Senate budget, is not a 
balanced budget, nowhere close to being a balanced budget, does 
not intend to be a balanced budget. Spending never equals 
revenues. Spending always goes up, and substantially so.
    Now, our colleagues in the House understand what balance 
means to the American people. You do not spend more money than 
you take in. That is what it means. The budget plan passed by 
the House achieves an actual balance of revenue and 
expenditures. Yours does not.
    The administration says this simple understanding of 
balance is not a correct one. They say in their arrogance that 
the more sophisticated and erudite and correct understanding of 
the word ``balance'' is that tax increases equals spending cuts 
and, therefore, you have a balanced plan.
    Tax increases equals spending cuts, and you have a balanced 
plan.
    But this budget does not achieve even that twisted 
definition of ``balance.'' In comparison with current law, the 
law we are operating under since August of 2011, the law the 
President signed, the budget increases spending and increases 
taxes.
    Commentators hoping for real progress have taken your 
numbers at face value and taken them as a cause for some 
optimism. A careful examination of the budget numbers, however, 
reveals little basis for optimism. In fact, this budget fails 
in every important category needed to put the Nation on a sound 
financial path.
    Using OMB's own numbers, your numbers, this budget will 
increase spending by one thousand twenty-five billion dollars 
relative to current law. Increases spending. That includes $61 
billion in spending proposed in this budget for this fiscal 
year, which ends less than 6 months from now. Taxes are 
increased by one thousand eighty-three billion. The deficit is 
largely unchanged, a meager $59 billion reduction in the 
deficit path we are on today.
    Total debt will continue to climb, increasing by $8.3 
trillion and reaching $25.4 trillion over 10 years. Stunningly, 
interest payments on that debt reach $763 billion in the last 
year of your budget, larger than the spending we have for 
national defense.
    So this plan is not balanced, even under the sophisticated 
understanding of balance propounded by the President, and that 
you have used, I believe. Mr. Lew certainly did. What this 
budget provides is the old-time Democratic religion of tax and 
spend. Under this budget, spending by the Federal Government 
will reach $4,200 per household in 2023.
    Democrats say the Government needs more money to finance 
the continued expansion of the State. They say the American 
people are at fault, they have not sent enough money here, we 
need to extract more from them and not reduce spending that we 
now have.
    So this President has already cajoled Congress into giving 
him some $1.6 trillion in tax increases--$600 billion in 
January of this year and $1 trillion as part of the health care 
law.
    The President is now asking for an additional $1 trillion 
in tax increases, and he wants more spending increases. Many 
Americans will pay for these tax increases, not just the 
mythical rich. We know that. These tax increases will weaken 
the economy, coming on the heels of tax increases that just 
took effect on January 1st of this year: higher income tax 
rates on income and capital gains, a new 3.8 percent tax on 
investment income, and a 0.9 percent Medicare tax surcharge.
    This budget amazingly creates new Federal entitlement 
programs. For example, rather than confronting abuses in 
existing public welfare programs, which are expected to grow by 
83 percent over the next decade, the budget creates a new 
educational entitlement for universal preschool financed by tax 
increases. It provides mandatory spending for neighborhood 
revitalization and subsidizes taxable bonds issued by State and 
local government.
    The tendency of this Government is to use tax increases to 
pay for new spending, and it has caught the attention of the 
fiscal watchdogs. ``The President's many new expensive spending 
initiatives, paid for in large part with additional tax 
increases, could detract attention from the need to come up 
with a bipartisan solution to the Nation's significant fiscal 
challenges.'' That is Maya MacGuineas at the Committee for a 
Responsible Federal Budget, a very respected commentator on the 
fiscal scene.
    So this budget has no real proposal for reforming 
ineffective and outmoded welfare programs that comprise in 
total the largest spending in the budget. And, sadly, there are 
no serious reforms for saving our endangered Social Security 
and Medicare programs--reforms that are essential.
    Will this budget get us out of a high-debt, slow-growth 
economy we currently find ourselves in? Again, the budget fails 
in that.
    After spinning the numbers in unjustified ways, the 
President claims that the debt-to-GDP ratio goes down starting 
in 2016 as the President will be prepared to leave office. And 
so the Republic is saved. There is no need to worry about 
entitlements or the specter of higher interest rates. Nothing 
really could be further from the truth.
    By your own numbers, this budget leaves us above the 90 
percent total of debt-to-GDP ratio that academic studies have 
shown tends to slow economic growth.
    In the last year of your budget, the gross debt is 97 
percent of GDP, leaving each American household with $189,000 
in debt. And in the out-years the entitlement avalanche is even 
more pronounced. You do nothing to help the United States avoid 
what Simpson and Bowles called ``the most predictable economic 
crisis in our history.''
    It is possible that the 2.9 percent real economic growth 
projected in this budget will prove optimistic given the high 
levels of debt and Federal taxation that are called for in the 
budget, and this is without any expectation, no projection that 
we might have a recession or a real spike in interest rates.
    So the world is a fragile place. The world economy is 
fragile. The budget leaves us vulnerable. There is no room for 
error. It chooses to grow the Government at the expense of the 
economy, and this is the wrong course.
    So I look forward to discussing some of these issues, and I 
would note, Madam Chairman, that, yes, the sequestration was 
hoped to be avoided, but the cuts in that sequestration were 
not to be avoided. They were in law and all agreed to by the 
President. So proposals to alter where the cuts fall rather 
than so disproportionately on the Defense Department are 
legitimate discussions, but not to alter that.
    And with regard to the Tax Code, the Democratic witness a 
few weeks ago told us that the deduction closings and loophole 
closings in the corporate tax rate should be used to reduce 
that corporate rate and not to spend on new programs. That is 
certainly what the Chairman of the Finance Committee, Senator 
Baucus, believes.
    So we have a lot of disagreement. I am disappointed in this 
budget. I look forward to discussing it with you and I will 
reflect that we are disappointed also that it was so late in 
coming.
    Thank you, Madam Chair.
    Chairman Murray. Director Zients, thank you very much again 
for being here. We will turn to you for your testimony.

STATEMENT OF THE HONORABLE JEFFREY ZIENTS, ACTING DIRECTOR AND 
DEPUTY DIRECTOR FOR MANAGEMENT, OFFICE OF MANAGEMENT AND BUDGET

    Mr. Zients. Thank you Chairman Murray, Ranking Member 
Sessions, and members of the Committee.
    I want to begin by thanking the Committee for holding the 
hearing yesterday for Sylvia to be the next OMB Director. If 
confirmed, we all believe she will do a great job, and we would 
encourage the Committee and the full Senate to move as fast as 
possible on her confirmation.
    I am pleased to be here today to present the President's 
fiscal year 2014 budget. The main message--and I am going to 
use a couple of slides--of the President's budget is that we 
can make critical investments to strengthen the middle class, 
create jobs, and grow the economy while continuing to reduce 
the deficit in a balanced way. We can do both balanced deficit 
reduction and jobs investments.
    On the left-hand side, in terms of balanced deficit 
reduction, the budget builds off the deficit reduction achieved 
to date. It includes the President's fiscal cliff compromise 
offer to Speaker Boehner from December. Importantly, the budget 
turns off the sequester by replacing the sequester cuts with 
balanced deficit reduction.
    At the same time, the budget proposes important jobs 
investments to enhance economic growth through skills and 
competitiveness with investments in education, R&D, and 
infrastructure. Each of these new investments are fully offset. 
They are fully paid for, and they do not add to the deficit.
    On deficit reduction, as the Chairman said, over the past 
couple years Democrats and Republicans have worked together to 
cut the deficit by more than $2.5 trillion. Here is a rack-up 
of the deficit reduction to date. The BCA capped discretionary 
spending, saving over $1 trillion; another $370 billion in 
savings to the 2011 appropriations; the end of last year's 
fiscal cliff agreement reduced the deficit by more than $600 
billion. Together, the deficit reduction lowered interest 
payments, saving an additional $480 billion. In total, more 
than $2.5 trillion in deficit reduction has been achieved.
    The President is committed to achieving a total of $4 
trillion in deficit reduction. As the Chairman cited, $4 
trillion is the benchmark set by Bowles-Simpson and other 
independent economists that puts us on a sustainable fiscal 
path. The good news is we are more than halfway there, more 
than halfway there on the $4 trillion target.
    The President's budget finishes the job with an additional 
$1.8 trillion of deficit reduction. The $1.8 trillion is from 
the compromise offer the President made to Speaker Boehner 
during fiscal cliff negotiations in December. By including this 
offer in the budget, the President is showing his willingness 
to compromise and make tough choices and his commitment to 
putting the country on a sustainable fiscal path.
    Here are the components of the deficit reduction, the $1.8 
trillion. Let us start on the left side with the $2.5 trillion 
we have already achieved. The first bar, $400 billion in health 
savings that strengthen Medicare by squeezing out waste and 
incentivizing delivery of high-quality and efficient health 
care.
    Next, $200 billion in savings from other mandatory 
programs, including reductions to farm subsidies, reforms to 
Federal retirement, and selling unneeded Federal real estate.
    Next, $230 billion by indexing annual inflation adjustments 
to the chained CPI.
    Another $200 billion in discretionary savings beyond the $1 
trillion that I mentioned earlier from the BCA caps.
    Next, $580 billion in revenues from tax reform, not by 
raising rates but by closing loopholes and reducing tax 
benefits for families with more than $250,000 in income.
    As a result of this, we have $190 billion in savings from 
reduced interest payments on the debt. At the same time, we 
invest $50 billion immediately in infrastructure to repair our 
roads and bridges and create jobs. In total, this achieves $1.8 
trillion in additional deficit reduction over the next 10 
years, bringing our total deficit reduction to $4.3 trillion, 
with more than $2 in spending cuts for every $1 in revenue.
    To be clear, this offer includes difficult cuts that the 
President would not propose on their own, including CPI, which 
the President is only willing to do with protections for the 
vulnerable and as part of this whole balanced plan. However, by 
including the compromise offer in the budget, the President is 
showing his willingness to make tough choices and his 
commitment to reducing deficits and putting the country on a 
sustainable fiscal path.
    Here are the annual deficits from 2012 through 2023. As you 
can see on the left-hand side, in 2012 the deficit was 7 
percent as a percent of the economy. The budget phases in 
deficit reduction to support the ongoing recovery, and by 2016, 
the deficit is below 3 percent. By 2023, it is below 2 percent, 
at 1.7 percent.
    As a result of this deficit reduction, debt as a percent of 
our economy is also on a declining path. With declining 
deficits and declining debt, the President's budget achieves 
important milestones of fiscal sustainability.
    This budget reaches those milestones of fiscal 
sustainability while investing in the drivers of economic 
growth. In doing so, it demonstrates that we do not have to 
choose between deficit reduction and economic growth. It shows 
that we can, and indeed we must, do both. The country will not 
prosper if we have unsustainable deficits. But it also will not 
prosper if our infrastructure is crumbling and our workers lack 
the skills to compete.
    Through paid-for initiatives like Pre-K for All, job 
training, and accelerated infrastructure investments, this 
budget will enhance our Nation's competitiveness. And through 
balanced deficit reduction, this budget will enhance confidence 
and lay the foundation for more durable economic growth. It is 
the right strategy for our economy, for creating jobs, and for 
building prosperity.
    I am happy to take your questions.
    [The prepared statement of Mr. Zients follows:]

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    Chairman Murray. Thank you very much, Mr. Director.
    For the information of all of our Senators here, in 
deference to those Senators who have to wait a long time, I am 
going to be, to Senators on my left and on my right, very 
strict on time limits on the 5-minute time, so know that as you 
are going to into it, I am going to make sure that everybody 
gets a chance to ask their questions in a timely fashion.
    Senator Sessions. Well, 5 minutes is a pretty short time, 
Madam Chairman, I got to tell you. I know you want to get this 
through, and I know Mr. Zients does not want to be questioned 
hard about some of these numbers--
    Chairman Murray. I would object--
    Senator Sessions. --his numbers that are incorrect and his 
statement that is disappointingly incorrect. But--
    Chairman Murray. Senator--
    Senator Sessions. --you are the Chairman, we will try to 
cooperate. But I just want to be on record as saying I am 
disappointed that we are constricted. And presumably we will 
not have a second round either?
    Chairman Murray. I am willing to sit here as long as we 
need to. I am just trying to--I was trying to make a ruling to 
allow the Senators who are at the end of our aisle--
    Senator Sessions. If we could have a second round--
    Chairman Murray. If anybody wants to come back for a 
second--
    Senator Sessions. You are very--
    Chairman Murray. I will be happy to do it--
    Senator Sessions. That is good. That would be fair.
    Chairman Murray. --take an extra 5 minutes. I am not trying 
to be unfair to anybody's questions, and I assure you Director 
Zients has not asked me for relief. I am simply, in deference 
to a number of our Senators who have told me they need to leave 
early this afternoon, I want to have everybody gets a chance to 
ask. That is all.
    Senator Sessions. Fair enough.
    Chairman Murray. And I will restrict myself too.
    Director, since enactment of the fiscal cliff deal, which 
made most of the Bush tax cuts permanent but will raise about 
$600 billion from the highest-income Americans, some of my 
Republican colleagues have said that the tax discussion is 
finished and claim that because revenues as a share of the 
economy are now projected to rise slightly above their 40-year 
average of 18 percent of GDP, any additional revenue, even if 
generated by closing tax loopholes, is off the table.
    The last five times we have had a balanced budget, revenues 
were considerably higher than we are projected to experience 
going forward, even after the fiscal cliff. And now, unlike in 
past years, we also have to consider the retirement of the baby 
boomers and the critical need to invest in our people and our 
infrastructure to make sure we can compete on an international 
basis.
    The revenue policy in the budget that this Committee wrote 
and the Senate passed a few weeks ago was shaped by those 
unavoidable realities, and I believe that is what every 
bipartisan group that has examined our budget situation--
Simpson-Bowles, Gang of Six--has also recommended several times 
more revenue than the year-end deal will generate.
    So I wanted to ask you today whether or not you agree that 
raising additional revenue, if we are going to reduce deficits, 
has to be a part of it in a fair and balanced and sustainable 
manner. And, additionally, can you comment on the extent to 
which structural factors like demographics led the 
administration to propose additional revenue?
    Mr. Zients. Absolutely. You are right in that we do believe 
that we need to have additional revenues. In the $1.8 trillion 
compromise offer, there is $580 billion of revenue, all through 
tax reform so not raising rates.
    I think it is important to note that in December Speaker 
Boehner said that there was potentially $800 billion or more 
available through tax reform. So I think we all believe we can 
make our Tax Code simpler, fairer, and get rid of wasteful 
spending in the Tax Code.
    You are right also on demographics. Thirty million people 
are part of the baby boomers joining retirement, starting back 
a decade or so ago, going forward to the next decade. We have 
30 million new folks who will be recipients of Social Security 
and on Medicare. Those demographics are undeniable. So in the 
context of those demographics, and when you study historically, 
the proportion that is revenue, GDP, you are right that we 
absolutely need additional revenue. The President is proposing 
$580 billion, all through tax reform, not through raising 
rates. And, again, Speaker Boehner as recently as December said 
that $800 billion or more would be available through tax 
reform.
    Chairman Murray. Okay. President Obama made it very clear 
that his proposal is not the budget he would write on his own. 
It is not the budget I would write on my own. And there are 
some policies in there that I personally do not think are the 
best way to tackle the deficit and debt. But the President did 
say he wanted to lay out a path to a bipartisan deal that 
included some key Republican demands in return for significant 
revenue being put on the table.
    So I wanted to ask you, Mr. Zients, this budget includes 
the offer that the President made to Speaker Boehner in 
December. Some of the choices I believe are really quite stark. 
However, I do understand the President's determination to reach 
a bipartisan accord.
    Can you tell us why the President chose to submit a budget 
that represents last year's compromise offer rather than 
pursuing a fresh one?
    Mr. Zients. The President is very committed to getting the 
country on a sustainable fiscal course, and his commitment to 
that is reflected in his willingness to put forward what is a 
compromise offer. You know, whether it is in budget 
negotiations or my time in the private sector, if you are in 
the middle of a negotiation, then everybody retreats to their 
extremes, very little gets done. The President is very 
committed to getting something done, getting these manufactured 
crises behind us so businesses can grow and invest and hire. 
This is not his ideal way of doing deficit reduction. The 
chained CPI is in interest rate because Leader McConnell and 
Speaker Boehner asked for it. They also asked for age 67, which 
is not good policy, which the President is not willing to do. 
But as part of a balanced plan that does the $1.8 trillion, the 
President is willing to do CPI as part of that plan, while 
having one other condition on it--that it has provisions to 
protect the most vulnerable and older recipients of Social 
Security.
    Chairman Murray. In my last 15 seconds, what do you see as 
the path forward?
    Mr. Zients. I think you hit the nail on the head up front: 
regular order.
    Chairman Murray. Thank you very much.
    Mr. Sessions? Senator Sessions?
    Senator Sessions. You indicate that new spending is paid 
for, but that is exactly what this budget does. It increases 
spending almost $1 trillion and increases taxes a similar 
amount. It does not reduce the deficit in any significant way, 
almost a minuscule amount.
    You indicate in your statement and the President has said 
that the compromise includes $580 billion in additional revenue 
from taxes. Looking at your own table on page-- Table S.4, page 
187 of your budget, it indicates that over the next 10 years, 
in the absence of adopting the President's policies, revenue 
would be $40.089 trillion. Then you go to the next page, Table 
S.5 on page 189, it shows the revenue after adopting the 
President's policies, and it is $41.231 trillion, equaling an 
increase in projected revenue of $1.14 trillion.
    Isn't your compromise hiding over a half trillion dollars 
in tax increases over the current baseline?
    Mr. Zients. No. And I think this is a very important point 
to make because my guess is the structure is going to be 
important for our conversation throughout. If you remember the 
first slide, it has two sides. It had a compromise offer for 
$1.8 trillion of deficit reduction. The President stands by 
that--
    Senator Sessions. Are you saying this budget has $1.8 
trillion in deficit reduction over the current baseline, over 
the current law?
    Mr. Zients. The structure is important. On the other side 
are investments, each of which is paid for. Pre-K is an 
example. There is a tobacco tax.
    Senator Sessions. Yes, it is paid for. With what?
    Mr. Zients. With a tobacco tax.
    Senator Sessions. Is that included in the $580 billion--
    Mr. Zients. Senator--
    Senator Sessions. --in new taxes you say is there?
    Mr. Zients. Let me--
    Senator Sessions. Yes or no. Is it in the 580--
    Mr. Zients. The President--this will answer your question. 
The President is willing to do that deal on the left-hand side. 
He is willing to--
    Senator Sessions. I am looking at--
    Mr. Zients. He believes it should be--
    Senator Sessions. --not a chart, Mr. Zients.
    Mr. Zients. Let me be clear. The President stands by the 
$1.8 trillion compromise offer. The President also believes 
that we should be investing in Pre-K and other areas that will 
help grow the economy, help our competitiveness, but that 
offer, that $1.8 trillion offer--
    Senator Sessions. Well, let me just conclude. I appreciate 
that. I will conclude that you did not count the $70 billion in 
tax increases to pay for the children, so that is up over $580 
billion, another 70-some-odd billion. And there is a series of 
those in there that total up $1.142 trillion in new taxes. Is 
it not?
    Mr. Zients. Let us--I think you are on the same page--
    Senator Sessions. Is it not--
    Mr. Zients. --that we are willing to do, the President is 
willing to do the $1.8 trillion deficit reduction package, 
which includes $580 billion through tax reform. He believes 
that additional investments should be made to improve our 
competitiveness--
    Senator Sessions. Did you count increasing the unemployment 
surcharge by $15 billion as new taxes?
    Mr. Zients. There is no increase in the unemployment 
insurance during the next few years across time.
    Senator Sessions. What about the Superfund tax increase of 
$20 billion? Was that scored in your $580 billion--
    Mr. Zients. The $580 billion is all through tax reform, and 
the President has two specific policies to back that up: a 28-
percent maximum on deductions and the Buffett Rule. But I want 
to be clear that that offer stands. We believe, the President 
believes that are worthy investments that should be made to 
improve our competitiveness, put people back to work, each of 
which is offset.
    Senator Sessions. Mr. Zients, all I am going to tell you is 
I read your budget, it increases taxes in plain numbers by over 
$1 trillion, and it increases spending by almost that same 
amount, virtually having no deficit reduction. So your 
statement, repeated statement that your budget raises taxes and 
reduces spending is utterly inaccurate.
    Mr. Zients. Senator--
    Senator Sessions. Yes, it is.
    Mr. Zients. Senator, it is time that we come together, get 
something done, get these manufactured crises behind us. In 
that spirit, the President has put forward $1.8 trillion. The 
investments are sound investments that should be made, each of 
which is offset. But the President will do the compromise deal.
    Senator Sessions. Well, Ms. Maya MacGuineas feels that the 
increase in spending jeopardizes the progress that could be 
made, and I totally agree. This is not a compromise plan. It is 
a tax-and-spend plan that does not alter the debt course of 
America, and that debt course, as Mr. Bowles told us, is 
unsustainable at this point.
    Mr. Zients. So two things. One, I think it is very 
important that one understand that the primary driver of 
spending increase is that the President's plan turns off the 
sequester with balanced deficit reduction. Maya MacGuineas_you 
have mentioned her a couple of times now--
    Senator Sessions. If you turn off the sequester--
    Mr. Zients. --she does not have--
    Senator Sessions. --have you not increased spending by 
about $1.1 trillion?
    Mr. Zients. Maya MacGuineas, the person you have quoted 
several times, does not have the sequester in her baseline. We 
replaced the sequester with balanced deficit reduction. And at 
the end of the day, when you are in business, you look at a 
bottom line. It is your profits. It is your sales growth. The 
bottom line here is that we have deficits on a declining path 
below 2 percent in 2023 at 1.7 percent, and debt as a percent 
of the economy is on a declining path. So we can spend lots of 
time looking at big numbers and different baselines. Let us 
make sure we focus on the bottom line.
    Senator Sessions. Well, your budget increases the deficit 
by $8.2 trillion over 10 years? Yes or no.
    Mr. Zients. The deficit--the deficit--
    Senator Sessions. In your own number--
    Mr. Zients. The deficit as a percent of the economy is at--
    Senator Sessions. No. I asked you the dollars.
    Mr. Zients. --1.7 percent.
    Senator Sessions. Did it increase the deficit by $8.2 
trillion?
    Mr. Zients. I need to check--
    Senator Sessions. You do not know what is in your numbers, 
how much you increase the deficit?
    Mr. Zients. There are a lot of numbers there. What I can 
tell you is what we should focus on, and this is exactly what 
Bowles-Simpson does, and other groups. What is debt as a 
percent of our--what is the deficit--
    Chairman Murray. I am sorry.
    Mr. Zients. --as a percent of our economy? We are less than 
2 percent at the end of the window at 1.7 percent.
    Senator Sessions. Chairman Murray increases the deficit 
$7.3 trillion, considerably better than yours.
    Senator Wicker. Hear, hear.
    Chairman Murray. Senator Sanders.
    Senator Sanders. Very nice of you, Senator Sessions, to 
compliment Senator Murray.
    Chairman Murray. I will take it.
    Senator Sanders. it is unusual.
    Mr. Zients, thanks very much for being with us.
    Mr. Zients. Thank you.
    Senator Sanders. Let me begin. I am Chairman of the Budget 
Committee, and I have the misfortune of trying to follow in the 
footsteps of Patty Murray, who did a wonderful job.
    Chairman Murray. Veterans Committee.
    Senator Sanders. Veterans Committee. I am sorry. I am not 
trying--Veterans Committee. And I want to ask you a question 
about veterans' benefits. Right now in our country, as I think 
you know, we have more income and wealth inequality than at any 
time since the 1920s. In fact, between 2009 and 2011, as you 
well know, all of the new income created in America went to the 
top 1 percent. In the midst of that growing inequality where 
the wealthy are doing phenomenally well while the middle class 
in many ways disappears, we are looking in the President's 
budget at very significant cuts to the benefits of disabled 
veterans. In fact, the chained CPI would impact the benefits of 
3.2 million veterans with war-related disabilities. The largest 
cuts in benefits would impact young, permanently disabled vets 
who were seriously wounded in combat, and these are really 
significant cuts.
    Our veterans who started receiving VA disability benefits 
at age 30 would have their benefits reduced by $1,425 a year at 
age 45, $2,300 at age 55, and $3,231 at age 65. Spouses, widows 
of soldiers who were killed in action, would also see cuts.
    In the midst of enormous income and wealth inequality, Mr. 
Zients, do you really think we should move toward deficit 
reduction on the backs of men and women who have lost arms and 
legs defending this country.
    Mr. Zients. Clearly veterans, Wounded Warriors, are a top, 
top, top priority for this President and this First Lady and 
for this country. All means-tested veterans programs would be 
exempt from CPI, as would be the case with means-tested 
programs--
    Senator Sanders. I am familiar with the so-called 
superlative CPI. But you will not disagree with me that the 
overwhelming majority of disabled vets would suffer cuts?
    Mr. Zients. The annual increase that they would have, their 
inflation increase, would be indexed to chained CPI.
    Senator Sanders. Right. And do you disagree with the 
numbers that I said. I believe they are accurate.
    Mr. Zients. I have no basis for--
    Senator Sanders. Okay. So I am just asking you, when you 
one out of four corporations in America that pay zero in taxes, 
when the effective corporate tax rate today is 12 percent, the 
lowest that it has been since 1972, do you not think that there 
are ways to move toward deficit reduction in a way that is 
fairer than on the backs of disabled veterans?
    Mr. Zients. Well, clearly we share passion for taking care 
of our veterans. As we move forward in deficit reduction, we 
should work together to make sure that what we--
    Senator Sanders. But we are not doing that, Mr. Zients. We 
are talking about significant cuts on people who have given, 
you know, more than--
    Mr. Zients. I want to be clear that the benefit would be 
calculated the same way. The annual increase would be index--
    Senator Sanders. And the figures that I--
    Mr. Zients. The most vulnerable veterans--
    Senator Sanders. All right. But those are a small--I 
understand. That is a good talking point. But the vast majority 
of disabled vets would see significant cuts as opposed to the 
current chained CPI.
    Let me ask you another question, and that is the issue of 
revenue. In 2012, as I recall, revenue was about 15.8 percent 
of GDP, the lowest in about 60 years. And it is going to go up 
a bit. My understanding is that the President's proposal for 
corporate tax reform is to try to do away with loopholes 
without bringing in--in a deficit-neutral way, without bringing 
in any new revenue.
    When you have major corporation after major corporation 
paying zero in taxes, when we are losing about $100 billion a 
year through offshore tax havens, why are we not talking about 
bringing in substantial sums of new revenue rather than cutting 
Social Security or benefits for disabled vets?
    Mr. Zients. The President's position on corporation tax 
reform has remained the same, which is, first of all, it has to 
pay for the $40 billion or so of so-called annual extenders, so 
that is $400 billion across a 10-year period of time. Those 
have to--either those annual extenders have to go away or they 
have to be paid for as part of corporate tax reform.
    What is corporate tax reform all about. It is about growing 
the economy and creating jobs. So companies that get tax breaks 
for moving jobs overseas, those will go away. R&D--
    Senator Sanders. But isn't it also--we are here to--I 
apologize for interrupting. I do not mean to be rude, but we do 
not have a lot of time.
    Mr. Zients. Please. Please.
    Senator Sanders. But here we are struggling to deal with 
deficit reduction. Do you not see, when the corporate tax rate 
today is at 12 percent, the lowest that it has been since 1972, 
do you not see the opportunity to bring in substantial sums of 
revenue through tax reform?
    Mr. Zients. We see the opportunity, as I mentioned before, 
to get rid of those annual extenders which cost $40 billion a 
year. We see the opportunity to reward companies through things 
like the R&E tax credit, which only applies to R&E done here in 
America, extending that permanently while getting rid of tax 
havens and other loopholes to grow the economy and create jobs. 
If--
    Chairman Murray. Senator Sanders--
    Mr. Zients. I will just finish my statement. If there is 
not going to be a corporate tax reform process that does what 
we just talked about, then those closing of loopholes and 
getting rid of wasteful tax expenditures should go to deficit 
reduction, I agree.
    Chairman Murray. Thank you very much.
    Senator Sanders. Thank you.
    Chairman Murray. Senator Johnson?
    Senator Johnson. Thank you, Madam Chair.
    Director Zients, welcome back.
    Mr. Zients. How are you?
    Senator Johnson. You are going to miss this, right?
    My assumption was the reason that you were 2 months late in 
presenting your budget really was the CBO score, CBO baseline 
under the fiscal cliff deal, trying to get that all in order.
    Mr. Zients. Yes, it was the fiscal cliff deal, which, you 
know, impacted--ended up impacting obviously the revenue side 
and discretionary side, November and December, as Senator 
Portman--sorry, November and December as Senator Portman knows 
are the prime budget times. We really had to put things on 
pause during that period of time.
    Senator Johnson. Okay. So, again, we are comparing all of 
your numbers really against the CBO baseline. Getting back to 
Senator Sessions' question on revenue, your budget now is going 
to raise revenue by 42.1--let me see here. It is always 
difficult to follow this stuff--$41.2 billion over 10 years, 
$41.2, and the CBO baseline is $40.2, so that is $1 trillion, 
correct? So revenue is up a trillion, but you are saying you 
are going to increase taxes $580 billion.
    Mr. Zients. Yes.
    Senator Johnson. So what is the other revenue?
    Mr. Zients. Well, as I said before, there are paid-for 
investments, also like the tobacco tax for Pre-K. Those are 
investments that the President believes we should make. But the 
$1.8 trillion of deficit reduction, that package, that 
compromise deal, is not conditioned--is not conditioned on 
making those other investments.
    Senator Johnson. Okay, but you are increasing revenue by $1 
trillion. How likely do you think it is that we are actually 
going to achieve deficit reduction outside your 
administration's time frame here? What I am looking at is, 
again, comparing the CBO baseline, it is claiming about $1.7 
trillion of deficit reduction. But the fact is you actually 
increase the deficit over the first 4 years, the 4 years of 
your administration, by $540 billion. So the deficit actually 
increases over the CBO baseline by $450 billion, and then the 
last 6 years of the budget window, when you are out of office, 
then you reduce the deficit by about $2 trillion.
    How likely is it that you will actually increase the 
deficit by $450 billion during your administration but then 
will actually realize that $1 trillion of deficit reduction in 
the last 6 years--
    Mr. Zients. Well, I think we see with the BCA that when we 
sign something into law, we live by the caps.
    Senator Johnson. Aren't you getting out of--aren't you 
canceling half the BCA, the sequester part?
    Mr. Zients. No. We are--
    Senator Johnson. You are canceling that. You are--
    Mr. Zients. We are placing the sequester--the sequester was 
never intended to be implemented. The sequester was meant to be 
such bad policy that it would force balanced deficit reduction. 
It was never intended to be implemented. I think we can all 
agree to that.
    Senator Johnson. It was intended to reduce spending by 
another $1.2 trillion, which now you are canceling.
    Mr. Zients. No. It was intended--
    Senator Johnson. Yes.
    Mr. Zients. --to create $1.2 trillion of balanced deficit 
reduction.
    Senator Johnson. Listen. No, in your budget you have 
canceled the $1.2 trillion--
    Mr. Zients. And replaced it with balanced deficit 
reduction.
    Senator Johnson. --with $1 trillion of increased revenue, 
taxes.
    Mr. Zients. No, with $1.8 trillion of deficit reduction 
where there is $580 billion of revenue.
    Senator Johnson. Well, again--
    Mr. Zients. That was always the intention--
    Senator Johnson. The point being is the serious part of 
your budget is the first couple years, and you are actually 
increasing the deficit by about $250 billion in the first 2 
years. That is really the direction of your budget.
    Mr. Zients. This might be--
    Senator Johnson. You are increasing deficits.
    Mr. Zients. This might be a fundamental difference between 
us. We believe that deficit reduction is important, putting the 
country on a sustainable--
    Senator Johnson. But something kind of like Wimpy, though: 
``I will gladly pay you Tuesday for a hamburger today.''
    Mr. Zients. But in and of itself, not an economic policy. 
We have to get people back to work. We have to create jobs. We 
have to grow this economy. We have to compete globally. The 
deficit reduction alone is not--
    Senator Johnson. Anyway, so you are increasing--you are 
increasing the deficit in the first 4 years by $450 billion, 
are you not?
    Mr. Zients. We have--
    Senator Johnson. Compared to the CBO, that is a correct 
figure, is--
    Mr. Zients. We have deficit on a declining path--
    Senator Johnson. You are increasing the deficit over the 
CBO baseline in the first 4 years by $450 billion, are you not? 
That is--
    Mr. Zients. I think the important thing to do is by 2016--
    Senator Johnson. Can you say yes or not? That is correct, 
isn't it?
    Mr. Zients. --you are below--
    Senator Johnson. Okay. Let us move over to what I was 
talking to Sylvia Burwell about yesterday. Just in terms of 
agreeing on numbers, you can never solve a problem unless you 
can start agreeing on numbers. According to OMB's analysis, the 
trust fund has no value to the Federal Government. Would you 
agree with that?
    Mr. Zients. Which trust fund?
    Senator Johnson. The Social Security Trust Fund has no 
valued because you have the trust fund holding about $2.6 
trillion worth of assets in Social Security and then you have a 
$2.6 trillion liability to the Treasury. When you consolidate 
that, that has no value in terms of making payments on Social 
Security. Isn't that correct?
    Mr. Zients. No. The trust fund has value.
    Senator Johnson. To who?
    Mr. Zients. The trust fund has value to Social Security.
    Senator Johnson. So where is the liability? Do you disavow 
the fact that Treasury has the liability of $2.6 trillion that 
offsets in a consolidated statement--
    Mr. Zients. I think what you are talking about is the 
difference between gross debt and debt held by the public. If 
you--
    Senator Johnson. I am talking about having some--I am 
talking about having some value to actually make payments on 
the $1.3 trillion of deficit spending of Social Security over 
the next 10 years.
    Mr. Zients. That has the full faith--
    Senator Johnson. There is no value--
    Mr. Zients. That has the full faith and credit of the U.S. 
government.
    Senator Johnson. Your OMB says that nets to zero. Isn't 
that correct?
    Mr. Zients. Social Security is not the driver of our near-
term fiscal issues.
    Senator Johnson. I was just asking--
    Mr. Zients. Social Security--Social Security--
    Senator Johnson. I was not asking that question--
    Mr. Zients. --is solvent to 2033.
    Senator Johnson. Does the Social Security Trust Fund have 
any value to pay off those benefits?
    Mr. Zients. The Social Security Trust Fund is solvent 
through 2033. Those assets are backed by the full faith and 
credit of the U.S. Government.
    Senator Johnson. Okay. Thank you, Madam Chair.
    Chairman Murray. Thank you.
    Senator Whitehouse?
    Senator Whitehouse. Thank you very much, Madam Chair. And 
welcome, Mr. Zients.
    Mr. Zients. Thank you.
    Senator Whitehouse. I am afraid this is your last time 
before us, which is probably a mixed blessing from your point 
of view. But thank you for your service.
    Mr. Zients. Thank you.
    Senator Whitehouse. Two topics and then a question.
    The first is on health care delivery system reform. 
Bipartisan, nonpartisan, very expert groups have said that 
there are savings available in the health care system between 
$700 billion and $1 trillion a year. And the administration in 
many ways has deployed quite a lot of resources to try to 
implement delivery system reform, and we gave you 45 different 
provisions in the Affordable Care Act to try to help you do it.
    What frustrates me is that, to date, the administration has 
yet to put a savings target on this effort. The talk is still 
about bending the health care cost curve. I would urge OMB to 
urge the administration to be accountable and set a target, 
because an organization as big as the United States Government 
is not going to respond as effectively to a meaningless and 
unaccountable standard like bend the health care cost curve as 
it will to this much dollar savings by this date from these 
mechanisms.
    Now, you have built some health care cost savings into 
this. Some of it requires political changes that are going to 
be difficult. But there has yet to be a hard number that is the 
administration's target on what it is going to do for delivery 
system reform. So I would urge you to please reconsider that. 
We are left completely at sea when the administration that has 
the implementation power for this will not even set a target 
for itself.
    The second thing is on chained CPI. I would like to put 
into the record a summary sheet that we have done, if I may do 
so, without objection.
    Chairman Murray. Without objection.
    Senator Whitehouse. It shows, I think, that it is just as 
wrong as it can be to have made that choice. I do not care 
where it came from. I do not care if it was Speaker Boehner's 
idea. It is wrong. Social Security, as you just said, has not 
contributed to the deficit problem. And seniors, at least the 
ones that I deliver Meals on Wheels to in senior high-rises, 
are not living so high off the hog that they are great people 
to go after. And the protection of vulnerable seniors, as I 
read your plan, is actually less than the hit to them. They end 
up still negative, even at 85 years old, because by the time 
they get the 5-percent hit--5-percent benefit, they are getting 
a 6.5-percent hit.
    So I just want to let you know, anything I can do to be a 
foe of that, I intend to do. The $15 billion that comes back to 
seniors through the benefit against the $230 billion overall 
cut to me is a fig leaf.
    Mr. Zients. A couple of comments?
    Senator Whitehouse. Yes.
    Mr. Zients. First--
    Senator Whitehouse. Leave me time
    Mr. Zients. I will go fast. Let me just go to bottom-line 
results on health care. Total health care spending grew by 3.9 
percent in 2011--
    Senator Whitehouse. I know. I know all that. I know all 
that.
    Mr. Zients. That is the third year in a row--
    Senator Whitehouse. Let me go to my--
    Mr. Zients. Let me go to Medicare spending, though. 
Medicare spending per beneficiary grew only 0.4 per 
beneficiary--
    Senator Whitehouse. I know all that.
    Mr. Zients. --in fiscal year 2012.
    Senator Whitehouse. I know all that.
    Mr. Zients. Okay. On CPI--
    Senator Whitehouse. Do not tell me things I have not asked 
you about that I already know.
    Mr. Zients. The protection for the older beneficiaries--
    Senator Whitehouse. Yes.
    Mr. Zients. --for the most vulnerable, i.e., the lowest 
income, they will actually not at age 85, as you suggested, be 
behind. They will actually be ahead, because it is a 5-percent 
adjustment based on the median.
    Senator Whitehouse. We will take a look at that because 
that is not what we are looking at.
    Mr. Zients. Okay.
    Senator Whitehouse. Do you know what a fiscal multiplier 
is?
    Mr. Zients. Sure.
    Senator Whitehouse. Okay. There is an ideology around here 
that all cuts help grow the economy--all cuts help grow the 
economy--and that all Federal spending is a burden on the 
economy, and that here endeth the lesson. That is all there is 
to it. It is that simple. That is ideology.
    There is also economics. Economics says that the impact of 
cutting and spending by the Federal Government on the economy 
varies depending on the condition of the economy. And right now 
we have a whole raft of reports coming out showing that the 
fiscal multiplier is actually above 1, which means that every 
dollar cut out of the economy in terms of Federal spending does 
more damage to the economy than it saves. You have Oxford 
Economics saying that the fiscal multiplier is 1.4; Goldman 
Sachs, that famous left-wing institution, 1.5; IMF, 1.7; UC 
Berkley, 2.5; and a group out of Northwestern University shows 
it actually at 3.7. If it is 3.7, that means that every dollar 
you cut in spending, you reduce GDP by $3.7. You are creating 
actual damage in the economy by cutting spending.
    Is that something that we should be considering in the 
Budget Committee as we hear this repeated ideology that all 
cuts help and all spending is bad?
    Mr. Zients. I think we have an immediate task, which is the 
sequester. So the sequester is $85 billion taken out of the 
economy, hundreds of thousands of jobs. Goldman, CBO, and 
others say it is a half to 1 percent of GDP. We need to 
immediately turn off the sequester, which was never intended to 
be implemented, and replace it with balance deficit reduction 
that phases in as the economy improves.
    Senator Whitehouse. Thank you.
    Chairman Murray. Thank you.
    Senator Portman?
    Senator Portman. Thank you, Madam Chair. And, Director 
Zients, welcome back for your last visit, which is probably a 
happy thing for you. But thanks for your service.
    I must tell you, I feel like I am living in a separate 
universe when I hear the discussion about the budget and what 
we just heard about ideology. We are in a deep fiscal hole. We 
have never experienced this as a country, so very few 
economists can tell us exactly what is going to happen. But the 
best economists out there all agree that we are in danger, and 
Rogoff and Reinhart, of course, have told us that when you hit 
90 percent of GDP, you end up having an impact of 1 or 2 
percent to the Nation's growth, which means about a million 
jobs this year alone. So the notion that we can continue 
careening down this path of record debt, now over $17 trillion, 
gross debt over 100 percent of our economy, and an annual 
deficit again this year of $1 trillion--we have never had a 
deficit of $1 trillion until 3 years ago. Now we have had--we 
will have had 4 years of it. This is dangerous. And we have 
already had one downgrade. We are on a negative watch for the 
others. And what happened in Southern Europe could happen to 
us.
    And so I know you probably do not disagree with anything I 
just said, but you might disagree with whether your budget 
proposal is adequate to it. But this notion that we should just 
go ahead and spend and do not worry about it, that the chickens 
will not come home to roost, is really dangerous. I mean, who 
gets hurt the worst? The folks who are on the first or second 
rung of the ladder trying to get on the third or fourth rung.
    And so I applaud some things in this budget. One is the 
fact that you are willing to take one small step and talk about 
the entitlement programs. As you know, CBO has told us in this 
Committee that these incredibly important programs that are a 
safety net, that must be preserved, are going to increase 95 
percent in spending over the next 10 years, almost 100-percent 
growth, almost doubling spending. And 100-percent growth in 
those programs and you all do propose something, would is to 
have an accurate measure of inflation for CPI. It is not a cut. 
The question is how much the inflation adjuster ought to be, 
and you use what you think most economists agree with, and so 
that is a measure that I think is fair. It also affects taxes, 
of course, so it raises revenue as well, because taxes are 
indexed, and the brackets being indexed are affected by what 
the measure of inflation is. So it is about $100 billion in 
taxes, too. So I think that is good.
    I think on the corporate reform side, I will say I read the 
corporate reform part a little differently than some of my 
colleagues on my side and the other side. I do think that this 
is all about growth and all about jobs and all about revenue, 
ultimately. And we have the most competitive--a non-
competitive, antiquated corporate tax system in the world, the 
highest rate, of course, among all developed countries. Even 
when you include the effective rate, it is still way above the 
average of these other countries. And so I am glad you said in 
your budget for the first time that you ought to not use these 
preference reductions or loophole closures for the budget 
deficit generally but for revenue-neutral tax reform. So I want 
to give you credit for that, and it is consistent, as you said, 
and which the President has said, over the years, in fact, and 
what most people believe has to be done if we are going to 
become competitive.
    By the way, CBO has told us 70 percent of that benefit of 
the lower rate goes to who? Workers. And this is about those 
workers, again, middle-class Americans who are trying to keep 
their job or get a job and have decent pay when their pay has 
gone down almost 4,500 bucks over the past several years on 
average. So I thank you for that.
    What I am concerned about is this just does not seem to be 
nearly up to the task that we identified, and let me ask you a 
couple questions, if I could. One, what is the debt-to-GDP in 
the tenth year in terms of the gross debt? We have your chart 
as to the public debt. What is your gross debt number?
    Mr. Zients. I can get that for you while I also would say 
that CBO and others all agree that gross debt is not a terribly 
meaningful metric.
    Senator Portman. Well, you just said the trust fund is an 
asset. If you believe that, you must think gross debt is 
important.
    Mr. Zients. And so, you know, when you--
    Senator Portman. You cannot have it both ways.
    Mr. Zients. I think the right way to look at it is debt 
held by the public, and debt held by the public is 73 percent--
    Senator Portman. Because you do not think that the trust 
fund should be made whole in Social Security?
    Mr. Zients. I am saying when you are benchmarking, you are 
using the R&R study and benchmarking and worried about our 
economic growth--
    Senator Portman. Well, and R&R talks about--
    Mr. Zients. --versus other countries. If I can--
    Senator Portman. I do not have a whole lot of time left, 
but let us just stipulate that you do not have a gross debt in 
your figure, but it is about 100 percent of the economy. It is 
between 95 and 100 percent--
    Mr. Zients. And, again, I do not--we join CBO in not 
thinking that is the right way to look at it.
    Senator Portman. Well, it is the right way to look at it if 
you consider the trust fund to be something that we ought to 
replenish and it ought to be made whole. In terms of Social 
Security, again, telling you you are doing the right thing, a 
small step admittedly because it does not solve the problem, 
but with regard to Social Security, what is the shortfall this 
year in Social Security, payroll taxes being paid versus 
benefits being paid out.
    Mr. Zients. Social Security is working how it was intended 
to work.
    Senator Portman. What is the shortfall----
    Mr. Zients. It is solvent through--
    Senator Portman. What is the shortfall this year?
    Mr. Zients. I do not have that number handy.
    Senator Portman. $77 billion. A $77 billion shortfall this 
year.
    Mr. Zients. Again, while Social Security is not a driver of 
our immediate fiscal situation, we should talk about reforming 
Social Security across time.
    Senator Portman. We should, of course.
    Mr. Zients. And the President--
    Senator Portman. And where does that $77 billion come from? 
It comes from general revenue. So here is my bigger point. When 
you look apples-to-apples comparison to what you all have in 
the CBO baseline--and baseline, by the way, for those listening 
who might not understand all this jargon, it just means if we 
do not do anything, just like, you know, what is the autopilot? 
If we do not have this budget, given the crisis that we face, 
your debt to GDP-- public debt, not gross debt; and let us use 
your numbers, public debt--is actually higher than CBO's 
because they use different economic assumptions than you do. 
You have higher GDP. Yours is actually above the Blue Chips as 
well, and that is fine. But I am just saying we are not getting 
at the problem if it actually is an increase in the deficit 
over the next few years--
    Mr. Zients. Well, we all know that we could spend the next 
2 weeks discussing baselines and--
    Senator Portman. Well, no. That is fine. Let us just--
    Chairman Murray. Senator, I hate to--
    Mr. Zients. --bottom line. The bottom line--
    Chairman Murray. Senator Portman, if I can interrupt--
    Mr. Zients. --is the President's budget--
    Senator Portman. The bottom line is if we do not do 
anything, the situation would be better than--
    Mr. Zients. If I could just say one more sentence, the 
bottom line is the President's budget has deficits below 2 
percent in 2023, and debt as a percent of the economy on a 
declining--
    Chairman Murray. Senator Portman, I hate interrupting, but 
I have Senators at the end of the line here who are--
    Senator Portman. Thank you.
    Mr. Zients. Thank you, Senator.
    Chairman Murray. --pressing me to allow them a chance.
    Senator Warner?
    Senator Warner. Thank you, Madam Chairman. And, Mr. Zients. 
great to see you. I think you are seeing one of the reasons why 
it is hard to get a grand bargain. But, candidly, the fact that 
you are getting as much grief from both sides of the aisle 
shows me that you are probably in the zone where things are 
going to get talked about, because if there is not some angst 
on both sides, we are not going to get things done.
    I would point out to all my colleagues that actually the 
President's budget is the only one of the three budgets between 
the Senate budget or the House budget that at least starts to 
take on the challenges around Social Security. The Senate chose 
not to; the House chose not to. And chained CPI, which examples 
that were used earlier, your COLA increase might go from $36 a 
month to $33 a month based on historic norms, I think quite 
honestly, which solves about 22 percent of the Social Security 
problem, does not solve it all but it takes about a fifth of it 
out of the way. I actually think the overwhelming majority of 
Americans would believe, if rather than looking at the dramatic 
fall off the cliff that Social Security is going to hit--and I 
actually believe earlier than 2033--you know, I commend you for 
taking an appropriate stand.
    I also would agree that, as some of my colleagues have 
said, you know, we cannot, no matter how--we cannot cut our way 
or we cannot tax our way simply to prosperity. We also have to 
have a growth agenda. And I would point out that there was a 
lot of talk made here of Simpson-Bowles. I think I would 
argue--I have spent as much time with that report as most on 
this Committee. Simpson-Bowles, Domenici-Rivlin, all laid out 
in their agendas, one, that our problem on debt and deficit--
and I am particularly on this side of the aisle was probably 
one of the more obsessed members about that issue--that this is 
not as much an immediate problem, but an intermediate problem 
and needs to have phase-ins. And both Simpson-Bowles and 
Domenici-Rivlin said as part of a growth agenda on items like 
infrastructure, which your budget has included and paid for, 
those are things that will actually help grow the economy, 
which will at the end of the day generate additional revenue--
    Mr. Zients. Yes.
    Senator Warner. --as well and be part of a longer-term 
solution. And as we have continued to see the markets-- 
actually, I have been a little bit surprised--continuing to buy 
our debt at interest rates of record lows, and as Chairman 
Bernanke and others at the Fed have said, this is an 
intermediate problem, not one that needs to be solved tomorrow 
but does need to be acted upon, I do believe an investment 
component in a budget is a responsible and reasonable thing, 
and as well as something that both Simpson-Bowles and Domenici-
Rivlin did.
    I would also point out on Maya MacGuineas, again, somebody 
who I have spent an enormous amount of time on and worked 
closely with her organization, in her statement she does point 
out that public debt would fall from 77 percent in 2013 to 73 
percent by 2023. I think the goal was closer to 70. I would 
rather it get lower than that, but it is in the right 
direction.
    Her quote as well is, ``pleased to see the President's 
continued support of deficit reduction,'' and ``he is still 
serious about fiscal reform.''
    So while, again, this may not be the budget any of us would 
have individually written, it is a budget that I think starts 
us down towards structural reform of our entitlements, which I 
would say to some folks on my side of the aisle, the math is 
pretty persuasive. On average, the person pays in about 
$115,000 in Medicare taxes and takes out about $320,000 in 
Medicare taxes. That is not sustainable.
    When I was a younger, 16 people were working for every 1 
person on Social Security. Now it is three. In 15 years it will 
be two. It is the most successful program ever put in place, 
but the math is not sustainable. And nothing is self-correcting 
about this unless we act, and I commend you and the President 
for making some of the--starting down some of the hard choices 
that need to be made.
    On the revenue item, I tell you, I would just simply say, 
you know, I think with the demographic bulge and with even no 
matter what kind of structural reform of entitlements we would 
have, the idea that we are ever going to go back to a 
sustainable fiscal circumstance with anything around the 18.6 
or even 19 percent is just not in the realm of reality, that if 
we are not between 20 and 21 percent of revenue on an ongoing 
basis, we will just--we are never going to get close.
    Now, that does not mean as well that we do not need to 
drive down our costs, and I want to in my last 17 seconds 
commend you on one other item, finally, on GPRA, a little 
important bill that nobody has ever heard of that actually 
Senator Sessions helped get through, and I appreciate that. You 
have finally identified some of the underperforming programs, 
and of the 215-odd programs you have identified for either 
substantial cutback or elimination, 56 of those are programs 
that were in the process of being eliminated because of GPRA. 
And I have done over my time, but I would look forward to 
working with you and your successor, Sylvia Burwell, on making 
sure that on some of these programs we actually end up making 
the hard choice of finally eliminating them. We are going to be 
under tight fiscal constraints for as far as the eye can see, 
and we just do not have room for inefficient programs in this 
Federal Government.
    Mr. Zients. Thank you, Senator Warner.
    Chairman Murray. Thank you.
    Senator Wicker?
    Senator Warner. There was no question there.
    Chairman Murray. But you filled your time.
    Senator Wicker?
    Senator Wicker. Madam Chair, first a matter of 
housekeeping. Mr. Zients said the path forward is regular 
order. The Senate has passed a budget. The House has passed a 
budget. Has a conference committee been appointed and have 
conference meetings been scheduled?
    Chairman Murray. No, we have not done that yet, and the 
Senate is--I have had a chance to talk to my counterpart in the 
House, and we are looking to move forward on that. I believe 
that we need to get to a conference committee and am working to 
get to that.
    Senator Wicker. Well, I certainly support regular order 
there.
    Mr. Zients, this budget does not balance at any point 
within 10 years, does it?
    Mr. Zients. No. The President--
    Senator Wicker. Okay. That is fine. You do not need to 
explain. Is there a glide path for it to balance later on in 
the century after the 10-year period?
    Mr. Zients. This budget makes significant progress. As 
Senator Warner said, it brings the deficit to below 2 percent, 
debt as a percent of the economy down significantly. It is a 
big step forward, but the important thing--
    Senator Wicker. Okay. Well--
    Mr. Zients. The important thing, I want to make this point, 
if you would give me one minute, is that we need to get this 
economy ramped further up. We have added 6.5 million jobs 
across the last 37 months, 14 straight quarters of GDP growth--
    Senator Wicker. You know, I do not mean to be rude, Mr. 
Zients. I just asked if it gave us a glide path to balance at 
any point, and you are free to explain on someone else's time.
    Mr. Zients. Significant progress consistent with Bowles-
Simpson. Most importantly, we need to focus on jobs and growing 
this economy.
    Senator Wicker. I think I understand the answer to that is 
no.
    Let me ask you about the estate tax. You know, the 
President signed only 4 months ago the bipartisan vote, passed 
the Senate by 89-8, to permanently set the estate tax rate at a 
top rate of 40 percent with an exemption of $5.12 million 
indexed for inflation. He just signed that 4 months ago. Now, 
for some reason the President proposes to return that back to 
the old rate 4 months later. Surely you do not--well, let me 
ask you this: How much theoretically does this raise in 
revenue?
    Mr. Zients. Well, he is not suggesting that we do this 4 
months later. He is suggesting that in his budget he is 
proposing in 2018--
    Senator Wicker. Okay. Four months later, he proposes to--
    Mr. Zients. In 2018, and that is to return to the 2009 
parameters.
    Senator Wicker. Right.
    Mr. Zients. The 45 percent rather than 40 percent. Still a 
$3.5 million exemption per individual. I think the figure is 
three out of 1,000 estates would be impacted by this. I think 
that in the context of the fiscal situation that we have all 
talked about, the need to put the country on a sustainable 
fiscal path, the President believes that that is fair and good 
policy.
    Senator Wicker. Okay. And yet he signed a bill on a 
permanent basis to put it at 40 percent and 5.12 inflation 
adjusted. I would have to say this, Madam Chair. I think the 
President cannot realistically believe that this has a prayer 
of passing. And so the $79 billion--I never got my answer 
there, but the book says it is supposed to raise $79 billion--
is just totally false.
    But let me move on to my last question. I appreciate what 
Senator Warner said about the Consumer Price Index. You know, 
the President told a group of us last night that chained CPI 
has a bad connotation. Maybe we need to give it another name. I 
have come up with one, Madam Chair. Let us call it 
``TRICOLA''--truth in cost of living adjustments.
    Now, isn't it a fact that the President's proposal is a 
more accurate measure of the inflation adjuster than the 
current CPI we have?
    Mr. Zients. Well, I think that--I am not an economist, and, 
again, the President would not do chained CPI or superlative 
CPI on his own as part of balanced deficit reduction.
    Senator Wicker. Is he suggesting a more or less accurate 
inflation adjuster?
    Mr. Zients. I think he uses it as a technical rationale for 
chained CPI.
    Senator Wicker. Is that it is more accurate?
    Mr. Zients. As a technical rationale for using chained CPI. 
At the same time, it is very important to protect the most 
vulnerable and to have a bump for older Social Security 
recipients.
    Senator Wicker. Well, let me just say this: Mr. Warner has 
left the room, but I think he put it correctly. You are talking 
about $3 a month, and with protections in there for the bottom 
tier of benefit recipients. If we cannot do that to save the 
system and to save a successful program, then we are pretty 
well not going to be able to save Medicare and Social Security 
in the future.
    Would you agree also that it is a balanced approach-- and 
we have heard this ad nauseam--in that chained CPI or the new 
TRICOLA not only saves us in the spending side of it, but also 
it does amount to a significant revenue raiser?
    Mr. Zients. It does have a component of changing how the 
annual increase in tax brackets are calculated. It does result 
in more revenue.
    Senator Wicker. It results in a substantial amount of new 
revenue. So in that sense, Madam Chair, we have the answer to 
our President's request for a balanced approach. Thank you.
    Chairman Murray. Thank you.
    Senator Merkley?
    Senator Merkley. Thank you, Madam Chair, and thank you for 
your testimony, Mr. Zients. I applaud the President's attention 
to manufacturing in this budget. I applaud his investment in 
education, early education and STEM, his understanding of the 
importance of investing in infrastructure, and of the goal of 
laying out a plan that lowers the debt as a ratio to GDP. All 
these are good things.
    I am going to expand on the conversation we have been 
having about CPI, and I noticed you were careful not to say it 
was not more accurate, as my colleague asked you to say. And, 
of course, there is a good reason for that. I think you are 
aware that the CPI index as applied to Social Security is not 
based on a basket of goods faced by our senior citizens. You 
are aware of that? Just yes or no is fine.
    Mr. Zients. It is based on a certain measure of cost of 
living and the chained CPI.
    Senator Merkley. Please tell me you know that it is not 
based upon a basket of goods seniors face. This is the most 
fundamental fact in CPI.
    Mr. Zients. It is an annual inflation adjustment--
    Senator Merkley. It is based on a basket of goods that all 
Americans face, not that seniors face. Am I right or wrong?
    Mr. Zients. It sounds like that is the case, yes. It is 
used across--
    Senator Merkley. Please, simple answers are fine in this 
room. We do not--
    Mr. Zients. It is used across many Government programs, and 
as we talked about--
    Senator Merkley. Great.
    Mr. Zients. --it is also used across the Tax Code.
    Senator Merkley. Because it does not track what seniors 
face, there is a separate CPI for what seniors face. It is 
called ``CPI-E.'' I assume you are familiar with that.
    Mr. Zients. What I know about CPI-E is that it is very 
early stage index that is not terribly well developed at this 
stage.
    Senator Merkley. Thank you. It is developed to track what 
seniors face. It goes the opposite direction of what you are 
proposing in a chained CPI, which is less accurate about what 
seniors face in their basket of goods. And I think that is very 
important because at the heart of this is an issue of fairness.
    Now, there are many ideas that have been put forward about 
how to make sure that we have a trust fund that is not only 
solvent for 20 years but solvent for 75 years. Those include, 
for example, a sliding-scale means testing the 25 percent most 
affluent retired Americans. So they get a little bit less. They 
still get Social Security, but they get a little bit less. Has 
the President and his team carefully looked at such measures 
and tried to evaluate them in terms of fairness to our seniors?
    Mr. Zients. So let me just comment a little more on CPI-E. 
My understanding is that it is not proven. It is only 
experimental. I want to emphasize the chained CPI would apply 
across all Government programs, excluding means-tested 
Government programs. I also want to emphasize that we have 
talked about that there will be a bump-up for older Social 
Security beneficiaries.
    As to Social Security overall, the President has put 
forward principles for Social Security reform and would engage 
in a Social Security reform process.
    Senator Merkley. Thank you. I do not think you answered my 
question. Should I repeat it for you? Has the President's team 
looked at other strategies for reducing the costs of Social 
Security that might be fairer such as means testing the 25 
percent richest seniors in a sliding scale, a modest reduction 
in their benefits?
    Mr. Zients. Social Security is not the driver on near-term 
fiscal issues. Social Security is a reform process that the 
President has laid out principles for. The reason that chained 
CPI is in the compromise offer is that Speaker Boehner and 
Leader McConnell asked for it to be in. They also asked for us 
to consider moving the age for Medicare eligibility to 67. We 
are not willing to do that. We are willing to do chained CPI 
under two conditions: one, it is part of balanced deficit 
reduction--
    Senator Merkley. Thank you. I am going to cut you off 
because you have chosen not to answer the question I asked you, 
if you had looked at other strategies affecting Social 
Security. I will take that your avoidance of answering is 
simply no. I would like to encourage the administration, as I 
have on multiple occasions, to look at many other strategies 
that have been suggested that are fundamentally fairer, that 
protect the solvency of Social Security for 75 years, go much 
further in that sense than this 20 percent improvement we have 
before us, but do not reduce Social Security for hard-working, 
middle-income Americans.
    I want to close by noting that under the charts that 
Senator Sessions referred to, I see under the outlay section a 
0.3 reduction, a $0.3 trillion reduction, and I see under 
receipts a 1.1 increase. That totals 1.4. I am not seeing 
where--and this is compared to the baseline that you have on 
the previous chart.
    Mr. Zients. What page or table are you referring to?
    Senator Merkley. Yes, 186 is the baseline. That is the 
adjusted baseline, S.4 on 187. And on 189 is the proposed 
budget, and if you compare the outlays and the baseline, those 
are 46.8 versus 46.5 in the President's budget. That is a 0.3 
reduction in outlays. And if you compare receipts, there is a 
1.1 increase. So 0.3 and 1.1 is 1.4. Where is the other $400 
billion?
    Mr. Zients. Well, I think actually the easiest way to see 
the deficit reduction is to use Table S.3. As I explained 
before, we have in the baseline sequester-- because, 
unfortunately, that has been implemented. We replace sequester 
with balanced deficit reduction, which I think most people 
believe is a much better path for this country. And in doing so 
you have that discrepancy.
    If you look at Table S.3, you will see--
    Senator Merkley. Okay. But if we simply compare the 
baseline to the President's budget, it would be 1.4.
    Mr. Zients. So the President's--the baseline has the 
sequester in as all spending cuts, which was never the intended 
policy. We are replacing that with balanced deficit reduction--
    Senator Merkley. I understand
    Mr. Zients. --which is laid out on S.3.
    Senator Merkley. Thank you for that clarification.
    Chairman Murray. Senator Coons.
    Senator Coons. Thank you, Chairman Murray.
    Thank you, Acting Director Zients, for your testimony and 
for coming here today. As I am sure has been said before, a 
budget is a statement of priorities and values, and in my view, 
the President's budget is an important contribution to our 
ongoing conversation. It does the right thing by prioritized 
job growth and investing in our economy in the short run. There 
are a number of things in here that I am very interested in, 
find appealing, as others of my colleagues have commented, 
focus on STEM education, on manufacturing, on investing in R&D 
and infrastructure. But there are other things that are part of 
any rough-hewn compromise that are objectionable to some, as 
you have heard today.
    Last month, when we passed the Senate budget resolution, I 
think we also struck a balanced compromise that was a mix of 
tough spending cuts with revenue increases. This budget, as I 
have understood it so far, builds on the very real progress we 
have made, the $2.4 trillion in progress towards the broadly 
agreed roughly $4 trillion objective. It does about another 
$1.8 trillion.
    I wanted at the outset to say I was thankful to see there 
was some continued investment in a project near and dear to my 
region, the Delaware River dredging, as well as a variety of 
programs that I have long championed and believe in, the 
Manufacturing Extension Partnership and a broad range of other 
manufacturing-related initiatives I would like to ask about.
    But the President also included difficult choices on 
entitlement reform, and I would like to drill down a little bit 
further if I could to follow on some questions you haveten from 
the previous two Senators. In my view, when it comes to any 
conversation about entitlement reform, we have to be clear 
about maintaining a circle of protection around our most 
vulnerable that is both rooted in our most fundamental values 
and in what I hear from the people of Delaware. I have 
consistently voted against proposals that would dismantle 
Medicare, Medicaid, and Social Security, turn them into voucher 
or block grant programs. These are vital programs seniors have 
worked for their entire lives and I think need and deserve 
protection.
    So in the conversations you have been having today, there 
has been some dialogue, some discussion about what is chained 
CPI and what are the provisions. If I understand correctly, the 
budget as proposed, as you have just recently said, includes 
some protections for the most vulnerable. Would you explain 
those in a little bit more detail for me?
    Mr. Zients. Any Government program that is means-tested 
would not be subject to the chained CPI.
    Senator Coons. So what would the principal exclusion-- what 
would that mean for veterans' benefits or SSI or--
    Mr. Zients. The means-tested veterans' programs--we had a 
discussion on veterans before you came in--would be excluded. 
SSI is excluded. Pell is excluded. Social Security, as we have 
talked about, chained CPI applies. Chained CPI applies to 
Federal retirement programs. We could get you a more complete 
list, but that is a representative sample.
    Senator Coons. And a reference to an additional payment for 
those who have been on Social Security for a long time--
    Mr. Zients. That is right. At 76 there is a bump-up, which 
is based off of the average benefit, 5 percent of the average 
benefit, and that phases in across the following 10 years.
    Senator Coons. And the rationale for--
    Mr. Zients. As I said, anyone who is on SSI, that is means-
tested. That is not--that would not be subject to chained CPI.
    Senator Coons. You had an exchange, a conversation with 
Senator Merkley about the different versions of CPI: CPI-U, 
CPI-W, CPI-E, chained CPI. And you were asked previously about 
whether chained CPI was more accurate. My understanding is for 
a long time it has been viewed by economists as being a more 
accurate predictor broadly, not for the specific population of 
seniors or the most vulnerable.
    Mr. Zients. Yes.
    Senator Coons. Help me understand--
    Mr. Zients. That is my understanding. Again, I am not an 
economist, but my understanding is it has to do with the 
substitution effect, that when something is priced higher, if 
there is an opportunity to buy a like good or a similar good 
that is less expensive, you know, chicken versus another type 
of meat, that you need to take into account the substitute 
effect. But, again, in terms of real technical expertise, I do 
not pretend to have that, and we can certainly follow up and 
give you more--
    Senator Coons. My sense was the name ``chained'' comes from 
chaining the effects from quarter to quarter or month to month. 
The substitution effect you are talking about is if the price 
of apples goes up very quickly, folks will substitute oranges 
for apples.
    Mr. Zients. That is right.
    Senator Coons. If the price of beef goes up, they will buy 
chicken. But I think the specific question Senator Merkley was 
trying to drill down on was for those of us who share a concern 
about its potential impact on seniors and the most vulnerable, 
is it an accurate predictor of the basket of costs, whether 
housing or medical or food, that would be relevant? Or is there 
a more accurate predictor?
    Mr. Zients. Well, again, for the most vulnerable, the 
chained CPI will not apply. There will be the increases we 
talked about for the older beneficiaries. My understanding is 
there is a technical rationale for chained CPI being a better 
indicator or tracker, if you will, of annual inflation.
    Senator Coons. You said earlier that the President rejected 
a request and asked for consideration of raising the age of 
Medicare, but was willing to move forward with chained CPI, and 
one of its benefits was it raised revenue as well as reducing 
costs. Could you talk about that a little further?
    Mr. Zients. Well, I think, importantly, on the age 67, that 
is just cost shifting.
    Senator Coons. Right.
    Mr. Zients. It is cost shifting to the private sector. It 
is cost shifting to our seniors. It could leave people 
uninsured. That is not good policy. The President is not 
willing to do it. Chained CPI the President has been clear he 
will not do on its own. It has to be part of balanced deficit 
reduction that includes revenue. The $1.8 trillion package has 
$580 billion of revenue in it, and he will only do chained CPI 
with the protections that we just talked about, protections for 
the most vulnerable and protections for older recipients of 
Social Security.
    Chairman Murray. Thank you very much. I will--
    Senator Coons. I see I am out of time. I apologize. Thank 
you.
    Chairman Murray. Thank you, Senator.
    Senator Sessions?
    Senator Sessions. Mr. Zients, on Table S.13, Federal 
Government financing and debt, the gross debt of the United 
States in 2013 is $17.2 trillion, and in 2023, it is $25.4 
trillion, a net increase of $8.2 trillion in the gross debt of 
the United States, according to your own numbers in your budget 
that you have submitted to the Senate and the Congress of the 
United States. Is that not correct?
    Mr. Zients. Well, let me just catch up to you. I think that 
you are citing gross debt, and we have spent some time talking 
through how gross debt is not the right metric. I think the 
right--
    Senator Sessions. Well, but if you are wrong about that 
question--let us talk about the gross debt. So you agree that 
it is an $8.2 trillion increase in the gross debt.
    Mr. Zients. Yes, that--
    Senator Sessions. By your own numbers.
    Mr. Zients. Right. I do not think the gross debt is the 
right metric here--
    Senator Sessions. Now, you say you are not an economist, 
but you say the gross debt is not the right metric.
    Mr. Zients. I will join CBO--
    Senator Sessions. Let me put up a chart--
    Mr. Zients. --in saying that gross debt is not the right 
metric.
    Senator Sessions. All right. You join with CBO, but I think 
there has been a serious misunderstanding about that. The 
Rogoff-Reinhart study and their work that considered the debt 
crises in countries all over the world for over 100 years, they 
say in this paper, public debt refers to the gross central 
government debt. And they say that is the number that they had 
when they calculated that debt over 90 percent of GDP slows 
growth.
    So I would ask you, if you are wrong in that estimation, 
that the important figure is the gross debt, would that not 
mean the United States is at risk for slow growth right now, a 
fact that you said is most important for--
    Mr. Zients. First, let us go someplace that we both agree 
on. We need to reduce our deficits, and we--
    Senator Sessions. I know, but this is really important.
    Mr. Zients. --need to reduce that as a percent--okay. In 
terms of--
    Senator Sessions. This is really important.
    Mr. Zients. In terms of that study, it is benchmarking 
versus other countries, and other countries have different 
financing systems. If the U.S. measured the same way as other 
countries, our debt would be well below that 90 percent. It 
would be much closer to the debt held by the public, which is 
in the mid-seventies.
    Senator Sessions. Well, let me point out that three other 
studies in recent years have been done in Europe. The European 
Central Bank, the International Monetary Fund, and the Bank for 
International Settlements, they have all done independent 
analysis. They showed that high government debt weakens the 
economy, slows growth, and our growth is well below what CBO 
was predicting just a few years ago.
    Last year, they predicted--2 years ago, they predicted 2012 
would be 4.4 percent growth. It came in at 2.2 percent growth, 
well below what CBO was projecting.
    Mr. Zients. One thing I would agree on--
    Senator Sessions. I would say, just to follow up--and this 
is a serious matter. We need to address it. Those three 
studies--European Central Bank, IMF, and the Bank for 
International Settlements--also used gross debt, and each one 
of those analyses that they have produced, the United States is 
at a level where our growth is being slowed by the existing 
level of debt. And to me that gives us a great imperative to 
get off this track and begin to place our country back into a 
debt level that is sustainable.
    Mr. Zients. So I am sure you spend a lot of time with 
businesspeople around the country. I do the same. I think that 
we also agree that we need to decrease our debt as a percent of 
our economy.
    I will tell you something that is holding back growth right 
now. It is the manufactured crisis after manufactured crisis 
coming out of Washington. We need to turn off the sequester. We 
need to do balanced deficit reduction and let our job creators 
create jobs without worrying about what Washington is going 
to--
    Senator Sessions. Well, we certainly need to avoid crises 
everywhere we can. However, the August 2011 debt ceiling 
increase resulted in the only real reduction in the growth of 
spending, $2.1 trillion, and it was a firm commitment and law 
to reduce spending by $2.1 trillion. And that was not--
    Mr. Zients. That crisis also led to a severe drop in 
consumer confidence, a rating decrease, and tremendous reaction 
across the economy.
    Senator Sessions. So it was--
    Mr. Zients. We cannot repeat that. We owe it to this 
country, to our job creators, to people who are seeking jobs, 
to avoid that type of crisis. The President--
    Senator Sessions. We need to avoid that crisis and we need 
more help from this administration to get our debt level down. 
And you are raising taxes substantially in this budget that you 
produced. You raise taxes. But, Mr. Zients, unlike what Senator 
Warner suggested, we are not using those taxes to reduce the 
debt. They are being used to fund new spending above the 
spending level we are on. The CBO baseline, the law that we 
passed in August of 2011 increases spending about 5 percent 
plus a year.
    Mr. Zients. Senator--
    Senator Sessions. So this would not reduce spending. It 
would just reduce the growth of spending--
    Mr. Zients. The President's budget--
    Senator Sessions. --under current law, and you increase 
that. You increase spending over the steadily increasing CBO 
baseline. That is what you do.
    Mr. Zients. The President's budget puts this country on a 
sustainable fiscal path, invests in jobs and competitiveness, 
and gets this economy growing again.
    Chairman Murray. Okay.
    Senator Sessions. And makes it worse than the current 
situation.
    Chairman Murray. Director Zients, I just have a couple more 
questions. I was really pleased to see the President's budget 
included a strong focus on early childhood education. As you 
know, that is an area of particular interest to me. I have long 
believed that early childhood education is one of the best 
investments the Federal Government can make. We know the 
research that shows that a child's early years are a critical 
development stage, and early childhood education really is a 
great benefit to that child, their family, their community, and 
our country.
    So I wanted you to speak to that issue for a minute. Your 
budget proposes expansions in several areas of childhood 
education. Can you speak to how many children currently have 
access to pre-kindergarten and other early childhood education 
programs and how the proposals that you are presenting would 
expand those?
    Mr. Zients. Yes, I do not have those exact statistics with 
me, but my team will definitely follow up. I share your passion 
around early childhood and the importance of it for our 
competitiveness, the return on investment that we will get from 
that. The tobacco tax will fund the Pre-K initiative. It also 
at the same time will reduce smoking. It will discourage 
teenagers from smoking, and it will hopefully encourage folks 
to quit. So it has great public health benefit, and at the same 
time I share your passion about the Pre-K initiative.
    Chairman Murray. Okay. I appreciate that, and I really 
would like to see those numbers.
    Mr. Zients. We will get those to you.
    Chairman Murray. I also wanted to ask you about an area 
really important to me at home, and that is the Pacific salmon 
issue. There are many species of Pacific salmon and steelhead. 
They are really central to the cultural identity of my home 
State and really the west coast, and they support commercial 
fisheries, recreation, tourism, and economic activities, and 
they are very sacred to many of our Native American tribes, 
and, really, we have an obligation on treaty requirements that 
we have to meet.
    So I was really dismayed to once again see how drastically 
underfunded the Pacific Coastal Salmon Recovery Fund is. Even 
in today's austere times, which we all recognize, and with 
sequestration, the cuts that are called for in this program are 
much greater as a percentage of total funding than for a lot of 
the other programs in the discretionary funding.
    I just want to remind the administration this program 
leverages State, local, and private dollars to recover these 
species that are vital to so many areas of our economy and to 
our treaty obligations in the Pacific Northwest. So I am 
disappointed again in the funding, and I will work with your 
replacement, as well as this administration, because this is 
something critical to all of us at home.
    Mr. Zients. I will take that feedback. Obviously, it is 
difficult times, particularly on the discretionary side with 
the caps.
    Chairman Murray. Thank you very much.
    We have two more questioners for you, and then we are going 
to call the hearing to a close. Senator Johnson and then 
Senator Whitehouse.
    Senator Johnson. Thank you again, Madam Chair.
    Mr. Zients, let us go at the Social Security Trust Fund 
another way here. Let us just go through the transactions. what 
happens when the Social Security Trust Fund basically starts 
paying for benefits using U.S. Government bonds? What happens?
    Mr. Zients. It will sell those bonds.
    Senator Johnson. To who?
    Mr. Zients. To the public, and it will be reflected in our 
public debt, the metric that I keep turning to.
    Senator Johnson. So we are going to have to, again, float 
those bonds, and somebody is going to have to give us money for 
that again.
    Mr. Zients. That is all reflected in the President's 
budget.
    Senator Johnson. Which is just very similar to when the 
U.S. Treasury floats a bond to finance the deficit.
    Mr. Zients. Yes. At the end of the day, the Social Security 
Trust Fund is working the way it was intended to work, which is 
that it is--
    Senator Johnson. But, again, it is going to have to--
    Mr. Zients. And it is solvent through 2033. At that point, 
if we do nothing--which I do not think would be any of our 
strategies--the benefit would go down to 75 percent. Clearly, 
we need to reform Social Security. It is not an immediate 
driver of our issues, but it is an issue we need to tackle.
    Senator Johnson. But it is doing the exact same thing as 
U.S. Treasury has to print a bond and then sell that to the 
public. And as we continue to grow our debt, it is going to 
more and more difficult to sell those--
    Mr. Zients. Well, I think we are--
    Senator Johnson. --U.S. Government-backed bonds. Correct?
    Mr. Zients. --all in passionate agreement that we need to 
get our fiscal house in order, and we need to bring down our 
deficits. We need to bring down our debt as a percent of GDP. 
The metric that I keep coming back to is debt held by the 
public. That is reflective of the dynamic you just described.
    Senator Johnson. But, again, there is no difference whether 
it is the Social Security Trust Fund selling a bond to the 
creditors or the U.S. Treasury selling a bond.
    Mr. Zients. And that ends up--when they do that--
    Senator Johnson. It is the exact--
    Mr. Zients. --that is reflected in debt held by the public.
    Senator Johnson. It is the exact same--
    Mr. Zients. But they are not--
    Senator Johnson. --thing.
    Mr. Zients. That bond is not being sold today. it is being 
reflected across time, and when you have debt on a declining 
path, it includes the dynamic that you just described.
    Senator Johnson. So, again, in your--
    Mr. Zients. So we are driving down--
    Senator Johnson. In OMB's own publication--and I do not 
have the graphic up here, but it basically is talking about 
that, you know, when you consider the asset of the Social 
Security Trust Fund offset against a liability of the U.S. 
Treasury, it nets to zero. In terms of the value to the Federal 
Government, the Social Security Trust Fund has zero value. Do 
you agree with your own agency's publication?
    Mr. Zients. I agree with the conversation we are having 
here. I cannot take a quote out of context and not understand 
the whole thing.
    Senator Johnson. Okay.
    Mr. Zients. So what I said is that when Social Security 
sells those bonds to the public, that is reflected in the debt 
path that we have been talking about, which is on a declining 
path starting in 2016. And that is why the debt held by the 
public I believe is the right metric for us all to be using.
    Senator Johnson. The reason I am making such a big point of 
this is I do not see any way we start solving these problems 
until we are honest with the American people in terms of the 
depth of the problem. And for anybody to say that Social 
Security is solvent to the year 2035 is just--I just think that 
is a false statement, because you have a cash deficit--
    Mr. Zients. Well, that is the Social--
    Senator Johnson. You have a cash deficit of $5.1 trillion 
that we are going to incur between now and 2032, quite 
honestly.
    Mr. Zients. Well--
    Senator Johnson. And, we have--again, all we are going to 
have to do is we are going to float those bonds.
    Mr. Zients. But this is the Social Security Actuary. It is 
2033, not 2035, I think you just said. And I think we all agree 
that we do need to tackle our Social Security set of issues 
across time. It is not an immediate driver, but it is something 
that we should move on.
    Senator Johnson. Okay. Within the next 10 years, the cash 
deficit in Social Security will be about $1.3 trillion. That is 
according to the Social Security Administration. The chained 
CPI that the President has included in his budget reduces 
benefits by a more accurate inflation calculation, by about 
$130 billion. Correct?
    Mr. Zients. Well, I think across time that compounds quite 
a bit, so--
    Senator Johnson. In the first 10 years, that is--
    Mr. Zients. Right, but be careful about the compounding 
effect of it. So it is more significant across time because of 
the compounding effect.
    Senator Johnson. What would it be in the second decade?
    Mr. Zients. I do not know that exact number. We can follow 
up.
    Senator Johnson. Okay.
    Mr. Zients. But a multiple of that.
    Senator Johnson. But it is fair to say that in terms of 
solving--
    Mr. Zients. And I think you heard Senator Warner--
    Senator Johnson. Unfortunately, I was at a different 
hearing. Sorry.
    But in terms of just the magnitude of the problem, what the 
President is proposing here with the chained CPI would solve 
about 10 percent of the 10-year deficit in Social Security 
benefits exceeding the revenue generated. Correct?
    Mr. Zients. I think that is about right. Again, I think we 
are in passionate agreement that we should be tackling Social 
Security reform in a way that is balanced, that protects the 
most vulnerable, and it is not a crisis but it is something 
that we should do.
    Senator Johnson. Okay. Well, thank you, Madam Chair. Thank 
you, Director Zients.
    Mr. Zients. Thank you.
    Chairman Murray. Senator Whitehouse, last 5 minutes.
    Senator Whitehouse. Thank you, Madam Chair.
    Director Zients, I was a little bit out of time last time, 
so I want to go back to my fiscal multipliers again, and we had 
described how the fiscal multiplier is basically the 
measurement of the effect of Government spending or Government 
cuts on gross domestic product on the economy. And if the 
number is over 1, we pointed out that actually you are doing 
more damage to the economy by cutting. And I used the example 
that hypothetically the Northwestern University and National 
Bureau of Economic Research recent number suggests that the 
fiscal multiplier might be 3.7, and that that means that if you 
cut $1 in Federal spending, if that number is accurate, you are 
causing $3.7 in reduced economic activity.
    And what I want to add to that is that the reverse is true 
as well, that if, in fact, the fiscal multiplier is at 3.7, as 
the National Bureau of Economic Research suggests, $1 of 
additional Federal spending will create $3.7 in additional 
activity. So the $3.7, as I understand it, applies both to the 
magnifying effect of a cut, also the magnifying effect of 
Federal spending, while the fiscal multiplier is in that 
position. Is that your understanding as well?
    Mr. Zients. Yes.
    Senator Whitehouse. So the other thing I wanted to touch 
base and ask--I was running out of time, and I did not want to 
hear a speech from you about health care, about stuff that I 
already knew. But I do want to give you the chance to answer 
that question now that we do have the time. There was a point 
that you were trying to make, and I wanted to get to the fiscal 
multiplier, so why don't we spool back to where we were when I 
was explaining my concern that the Obama administration has not 
set a specific target with a dollar target amount and a date 
for its delivery system reform efforts and my view that that is 
an impediment to the successful accomplishment of those 
efforts. The example I use is I do not think we would have put 
a man on the moon when we did if President Kennedy's goal had 
been to bend the curve of space exploration. It was because we 
had a hard target, accountability metric that the agencies of 
the Federal Government and the private sector all came together 
around that.
    So that was my point, and you wanted to respond. Go for it.
    Mr. Zients. No, I think as someone who spent 29 years in 
the private sector, I could not agree more in terms of having a 
handful of metrics to drive performance. You know, right now, 
standing up ACA is a very high priority. Implementing the--
hopefully passing the budget and implementing these reforms to 
Medicare is important. But I think a conversation with 
Secretary Sebelius and getting advice from you on the metrics 
and how her metrics compare to what you are thinking would be a 
healthy conversation. We definitely need--in order to manage 
health care costs toward high-quality care delivered at a lower 
cost--that is a hard thing to do. There is a lot of variation, 
as you know, in care across the country, and there is not a 
good correlation between how much people spend and the quality 
of that care. Figuring out those best practices and how we 
implement them across the system and what metrics we use to 
drive toward high-quality, lower-cost care is central. And I 
would encourage that conversation, and I will absolutely let 
Secretary Sebelius know that you have specific thoughts on it.
    Senator Whitehouse. And I think the other point that you 
are making is that the growth rate in our health care cost has 
come down significantly since the passage of the Affordable 
Care Act--
    Mr. Zients. You have had 3 years in a row now where-- this 
is not Federal costs. This is health care costs for our 
country.
    Senator Whitehouse. For the country.
    Mr. Zients. Which, you know, in my old life trying to run a 
business, a significant part of your cost structure is your 
health care cost. So this is important for our competitiveness. 
We have had 3 years of below 4 percent. That is the first time 
that has happened in 50 years.
    So there is more work to be done, but we are making 
progress. CBO actually cites ACA as one of the drivers of that 
progress.
    Senator Whitehouse. The two main drivers that are cited, as 
I understand it, are that the economic troubles we are having 
have probably reduced it somewhat, and the Affordable Care Act 
have--
    Mr. Zients. Absolutely, which is doing a better job of 
aligning incentives and getting providers to work together and 
finding those best practices and implementing those and 
incenting those.
    And then the other figure I cited was Medicare on a per 
capita basis cost growth has come in quite a bit. Now, we do 
have the demographic challenge that we talked about, that we 
will have many more participants in the Medicare program.
    Senator Whitehouse. So last point. To the extent that our 
colleagues want to reduce the cost of so-called entitlements 
like Medicare, we are actually already doing it, and it is 
built into the projections going forward because those numbers 
have come down. Correct.
    Mr. Zients. Absolutely.
    Senator Whitehouse. Thank you.
    Chairman Murray. Thank you very much. I really want to 
thank the participation and cooperation of all of our 
colleagues today. And, Mr. Zients, I especially want to thank 
you for coming to testify and, again, for serving as Acting 
Director of OMB.
    As a reminder to all of our colleagues, statements and/or 
questions for the record for today's hearing are due in by 
12:00 p.m. tomorrow, and we are meeting against next Tuesday, 
April 16th, to consider the President's fiscal year 2014 budget 
proposal, and Secretary of Treasury Jacob Lew will be here to 
testify on behalf of the administration.
    Again, Mr. Zients, thank you very much.
    Mr. Zients. Thank you for having me.
    Chairman Murray. The hearing is adjourned.
    [Whereupon, at 3:55 p.m., the Committee was adjourned.] 

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     THE PRESIDENT'S FISCAL YEAR 2014 BUDGET AND REVENUE PROPOSALS

                              ----------                              - 
- -


                        TUESDAY, APRIL 16, 2013

                              United States Senate,
                                   Committee on the Budget,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 3:01 p.m., in 
Room SD-608, Dirksen Senate Office Building, Hon. Patty Murray, 
Chairman of the Committee, presiding.
    Present: Senators Murray, Nelson, Sanders, Whitehouse, 
Coons, Kaine, Sessions, Enzi, Portman, Johnson, and Ayotte.
    Staff Present: Evan T. Schatz, Majority Staff Director; and 
Marcus Peacock, Minority Staff Director.

              OPENING STATEMENT OF CHAIRMAN MURRAY

    Chairman Murray. This hearing will come to order, and I 
want to thank all of my colleagues, and in particular our 
Ranking Member Senator Sessions, for joining me today, as well 
as all the members of the public who are watching, whether it 
is here in person or from home.
    Before we begin, I do just want to take a quick moment to 
express my dismay and heartache at the tragedy that took place 
at the Boston Marathon yesterday. Secretary Lew, I know you 
have a strong connection to Boston. And I know I join with all 
of our colleagues here, and all Americans, in saying that my 
thoughts are with the athletes and the spectators, their 
families, and everyone who has been impacted from around the 
world. And I echo President Obama, who said last night that all 
Americans stand with the people of Boston, and that we will 
bring those people responsible to justice.
    We are here today to continue our discussion of the 
President's fiscal year 2014 budget proposal and, particularly, 
its approach to reducing the deficit through a combination of 
spending cuts and new revenue from those who can most afford 
it.
    Secretary Lew, it is nice to welcome you back to this 
Committee in your new role as Secretary of the Treasury, and 
congratulations and thank you so much for your doing that and 
for appearing, of course, before us today, and for all of your 
work, really, to help strengthen our economy and our middle 
class.
    As we all know, yesterday was Tax Day. Americans across the 
country sat down at their kitchen tables or at a computer and 
filled out a lot of complicated forms. It is a common 
experience but, unfortunately, one that some workers and 
families experience very differently than others. This year, 
for example, it will be very possible for a hedge fund manager 
to pay a lower tax rate on his income than a soldier or a 
police officer or a teacher.
    Taxpayers will subsidize millionaires more when they 
purchase a second home or a yacht than they will middle-class 
families who are purchasing their very first home. American 
families will continue to subsidize billions of dollars in tax 
incentives for companies reporting record-breaking profits. And 
the complicated forms that I just mentioned, a lot of that 
complication is due to tax expenditures, which a member of 
President George W. Bush's Council of Economic Advisers called 
``spending in disguise.''
    The majority of these tax expenditures, about 70 percent of 
them, are structured so they are more valuable as your income 
increases. In 2012, middle-class families received an average 
benefit from tax expenditures of about $3,500. But the top 1 
percent of income earners received an average benefit of nearly 
$250,000. In other words, the less you needed, the more you 
got.
    And tax expenditures are estimated to cost us $1.3 trillion 
this year. We have heard testimony in this Committee that too 
many of those expenditures are not doing much to support our 
economy, although they have helped to drive the effective tax 
rates of the wealthiest Americans to historic lows.
    At a time when we are looking for savings everywhere to 
address our debt and deficit, finding ways to both make our tax 
code fairer and help reduce our deficit makes sense. And 
addressing tax earmarks for special interests, like tax 
subsidies for the fossil fuel industry and the special tax 
rates applicable to hedge fund managers' income, should be at 
the top of our list. We should also address the tens of 
billions of dollars lost each year to offshore tax abuse and 
the nearly $400 billion the IRS has told us we lose each year 
to the tax gap.
    These are the kinds of goals a bipartisan budget deal could 
accomplish, which is one of the reasons why it is so important 
that we take advantage of the opportunity we have right now.
    The Senate has passed our budget, the House has passed 
their budget, and the President weighed in with a bipartisan 
path forward, and now we need to do everything we can to get to 
a balanced and fair agreement. And an essential part of any 
agreement will be asking the wealthiest Americans and biggest 
corporations to pay their fair share.
    That is why I am pleased the President's budget proposal 
maintains the key principle in the Senate budget, which is 
supported by bipartisan groups and the vast majority of the 
American people: we need to tackle our deficits and debt in a 
balanced way, with a mix of spending cuts and new revenue from 
those who can afford it most.
    If the Senate budget were enacted, 64 percent of total 
deficit reduction since the original Simpson-Bowles report 
would come from spending cuts--64 percent--14 percent would 
come from rate increases on the wealthiest, and 22 percent 
would come from new revenue raised by closing tax loopholes and 
cutting wasteful spending in the Tax Code that benefit the 
wealthiest Americans and biggest corporations.
    The ratios under the President's compromise proposal would 
be slightly different, but the fact that it includes a mix of 
spending cuts and new revenue reflects the principles of 
balance and fairness that the vast majority of Americans 
support.
    It is disappointing that, given the clear need for fairness 
in our tax code and the need for a balanced approach to deficit 
reduction, the budget passed in the House last month represents 
the opposite values and principles. The House budget doubles 
down on protecting tax cuts for the wealthiest Americans.
    According to the Center on Budget and Policy Priorities, to 
avoid increasing the deficit while achieving its tax reform 
goals, the House budget would provide filers with incomes of $1 
million or more an average net tax cut of $245,000, while 
families with children who make less than $200,000 would see 
their taxes increase by $3,000 on average.
    The House budget pursues an extreme, cuts-only approach, 
slashing our investments in education and infrastructure and 
research that help ensure our country can create good middle-
class jobs in the future. All in all, the House budget is an 
extreme plan that makes it harder for the middle class, and 
those aiming to reach the middle class, to get ahead.
    It just will not work for American families or for our 
economy and it certainly does not suggest the willingness to 
compromise, or work across the aisle, that we will need to see 
from Republicans in the next few months.
    We have reached a unique point in the last 2 years of 
discussions about our country's economic and fiscal future, one 
that both Democrats and Republicans have pursued. We have the 
opportunity now to go to conference through regular order, 
debate our different approaches, and hopefully come to a fair, 
bipartisan deal.
    This process, which I would think my Republican colleagues 
would want to begin as soon as possible, will require tough 
choices on both sides. Democrats have consistently shown we are 
willing to do so, and now it is up to Republicans to join us at 
the table ready to compromise.
    Secretary Lew, as you know from your history of bipartisan 
budget deals, including the year-end deal to avert the fiscal 
cliff, revenue will have to be a focal point of our debate and 
any solution.
    Republican leaders, who are seemingly rejecting any effort 
at compromise, will need to put our families and our economy 
above partisan ideology. This should be doable, especially 
because some leading voices in the Republican Party have 
expressed a willingness to look at new revenue.
    Speaker Boehner himself has proposed raising $800 billion 
in deficit reduction by closing special interest loopholes and 
deductions, likely including many of the ones I just talked 
about. In the House budget, Chairman Ryan's tax plan implicitly 
assumes he can find $5.7 trillion in savings from our Tax Code. 
He, of course, puts every dollar of these savings to rate 
reduction and puts nothing toward addressing our debt and 
deficit.
    But the majority of the Senate has made it clear that when 
it comes to eliminating spending in the Tax Code or moving 
forward with tax reform, we must identify savings to address 
our debt and our deficit. Doing so would be consistent with the 
approach supported by the vast majority of Americans and with 
bipartisan recommendations and would help us reach the fair and 
comprehensive agreement that American families and businesses 
deserve.
    I hope that our hearing today can be a productive part of 
this conversation, and I want to again thank everyone for being 
here. Secretary Lew, I look forward to hearing more from you 
about the President's proposal today and why new revenue from 
the wealthiest has to be part of any fair and responsible 
budget plan.
    With that, I will turn it over to Senator Sessions for his 
opening remarks.

             OPENING STATEMENT OF SENATOR SESSIONS

    Senator Sessions. Thank you, Madam Chairman. The budget of 
the United States is indisputably in terrible shape, and we 
remain on an unsustainable path.
    I would note, however, in defense of the House budget, that 
it balances in 10 years. It does not just use the word 
``balance.'' Its revenue equals its outflow. That is what a 
real balance means, although we are in ``Through the Looking 
Glass'' sometimes in this place, and we do not understand what 
a balanced budget is.
    It is a balanced budget, and it allows spending to increase 
3.4 percent each year. That is the kind of budget we ought to 
be doing here, not another one that increases taxes but 
increases spending almost as much.
    The President has now sent us his budget. It came after the 
Senate and House had passed their budgets. But we do have--
Madam Chairman, you mentioned tax expenditures, but I do recall 
so vividly the witness you called, a Democratic witness who 
told us there are tax expenditures, deductions that can be 
eliminated and loopholes that can be confronted in corporate 
tax policy, but that all of that should be utilized to reduce 
our rates because we have the highest corporate tax rate in the 
world, and we should be using that to reduce the corporate rate 
rather than increasing spending, and that is the view shared by 
the Democratic Chairman of the Finance Committee, Max Baucus, 
also.
    I have examined this budget. I did not really intend to 
talk about it too much, but you have talked about, and I know 
Mr. Lew will talk about it also. We have disagreed over these 
things before, and I do not really want to prolong it. But I do 
think it is important that I share a few thoughts about it.
    The President says this budget raises taxes $580 billion 
over 10 years, but the budget actually calls for $1.1 trillion 
in tax increases. It is easy for anyone to figure this out. If 
you subtract the total taxes in OMB's baseline shown on Table 
S.5 from the total revenues OMB proposes in Table S.4, the 
difference is $1.1 trillion. That is just a fact. The House 
Budget Committee independently analyzed the budget. They 
reached the same number. It is easy to see.
    The President uses the term ``balanced'' seven times in his 
cover letter on the budget in his message, but it does not 
balance. It does not pretend to balance. And not once does he 
reveal that he raises taxes $1.1 trillion.
    Your budget would require people to send $1.1 trillion more 
to Washington at a time when the economy is already weak. But 
this does not go to reduce the debt. It is not even used to 
reduce the debt.
    You also increase spending $1.1 trillion over current law 
that the President signed into law August almost 2 years ago. 
The budget hides this by using a number of gimmicks. For 
instance, it claims $675 billion in savings from war costs--
costs that are not going to happen because we are drawing down. 
And that was virtually basically emergency spending.
    It hides another $250 billion in spending by just asserting 
that Congress will eventually find offsets to the so-called doc 
fix, but CBO will not score that as an offset, paid-for 
expenditure, and it should not be.
    You then claim the budget will reduce deficits by $1.8 
trillion. That is just not accurate. Compared to current law, 
the law we are on, the baseline we are on, apples to apples, 
excluding the war cost gimmick, the deficit reduction in this 
budget is no more than about $100 billion over 10 years, not 
$1,800 billion.
    The administration claims that the increased spending and 
debt will grow the economy, however. We are not to worry, it is 
going to grow the economy. The Government has tried to boost 
the economy through stimulus spending for several years. That 
has not worked. It has failed. Instead, we have the weakest 
recovery since the end of World War II, and this has meant that 
Federal tax revenues have failed to recover as we would like to 
see them recover from a growing economy, and that has 
contributed to our debt problem, leaving us more debt than 
projected.
    How weak has this recovery been? After 63 months from the 
beginning of the recession, the total number of people who have 
jobs remains far below the number that were working when the 
recession began. Total employment is 2,847,000 below the level 
of employment in December of 2007, and wages are not up either. 
Wages are down.
    At no time since the end of World War II have we had such a 
high percentage of working-age Americans simply give up trying 
to find work. Over 5.5 million workers have left the labor 
force since the recovery began. An additional 485,000 left just 
last month, with only 88,000 new jobs being created. One might 
think that this is due to people retiring, but the data show 
that only a fifth of the people who have dropped out of the 
labor market retired. So people are just giving up.
    Why are they dropping out? The likely truth is unsettling. 
The four-fifths who have not retired are working-age Americans 
who may be forced to live on food stamps or housing assistance 
or Government programs in a netherworld of no work and 
dependency on the Government. This budget does nothing to 
effectively help them, but continues a tax-and-spend policy 
that has not worked.
    The fact is spending continues out of control. I believe 
that spending and debt is affecting our economic growth 
adversely right now. Entitlement spending would continue to 
grow at 5.2 percent, much faster than OMB expects the economy 
to grow. Yet the administration refuses to reform the broken 
welfare and retirement programs that are driving the spending 
surge. You did propose a CPI change that helps somewhat, but is 
not in any way a systemic fix of a program out of control.
    Later in the 10-year budget window, these surging programs 
overwhelm the rest of the budget. But let us focus today on a 
danger here. I will not argue with you anymore in my questions, 
Mr. Lew, about the budget numbers. I know what you will talk 
about in your talk, though I disagree with your analysis. This 
budget increases our debt over $8 trillion over 10 years. That 
is a fact. That is in your own tables that you have given us. 
That is an increase of $61,000 for every household--$61,000 in 
additional debt per household over the next 10 years. This is 
more debt than the budget that our Chairperson has produced for 
us and the Senate passed.
    Based on your own numbers, gross debt never gets lower than 
96 percent of GDP. Erskine Bowles sat in the chair you are in 
now and said we face the most predictable economic crisis in 
our Nation's history. This budget does not avert that crisis. 
It increases deficits over current law over the next few years. 
It increases deficits more than current law over the time that 
President Obama remains in office and adds more debt than the 
Senate budget.
    We are in a danger zone, and there are many ways for us to 
get out of it, but this budget does not get us out of it.
    Mr. Lew, congratulations on your confirmation. You got a 
strong vote. I gave you a hard time. We disagreed on a lot of 
issues. But you are our Secretary of the Treasury. You are an 
individual that I think has the ability to help us get out of 
this fix and get us on a path to sound economic growth. I will 
be asking some questions about our current financial situation, 
where we will be going in the future, and I appreciate having a 
discussion with you on those issues.
    Chairman Murray. Thank you very much.
    With that, we will turn to you, Secretary Lew, for your 
opening statement.

   STATEMENT OF THE HONORABLE JACOB J. LEW, SECRETARY, U.S. 
                   DEPARTMENT OF THE TREASURY

    Secretary Lew. Thank you, Chairman Murray and Ranking 
Member Sessions, and I, too, would like to begin by just saying 
that our hearts go out to the people of Boston today. It is a 
second home to me. It is very personal thinking about that 
place and those people. And they are in our thoughts and 
prayers today, and we are going to do everything we can to find 
out who did this.
    I appreciate the opportunity to testify today on the 
President's budget. I would like to begin by taking a quick 
look at our economy. Our economy is much stronger today than it 
was 4 years ago, but we must continue to pursue policies that 
will continue to grow the economy and create jobs.
    Since 2009, the economy has expanded for 14 consecutive 
quarters. Private employers have added nearly 6.5 million jobs 
over the past 37 months. The housing market has improved, 
consumer spending and business investment have been solid, and 
exports have expanded.
    But we have very tough challenges still. We have removed 
much of the wreckage from the worst economic crisis since the 
Great Depression, but the damage left in its wake is not fully 
repaired. Families across the country are still struggling. 
Unemployment remains high. Economic growth needs to be faster. 
And while we have made progress, we need to do more to put our 
fiscal house in order.
    At the same time, political gridlock in Washington 
continues to generate a separate set of head winds, including 
harsh, indiscriminate spending cuts from the sequester that 
will be a drag on the economy in the months ahead if they are 
not replaced with sensible deficit reduction policies like the 
ones in the President's budget.
    This budget is animated by the simple notion that we can 
and must do two things at once: we must strengthen the recovery 
in the near term, while reducing the deficit and debt over the 
medium and long term.
    This has been the President's longstanding approach to 
fiscal policy, and when you compare the trajectory of our 
recovery with those of other developed economies in recent 
years, it is clear why the President remains so committed to 
this path.
    It is important to bear in mind that our deficits are 
already falling. In the last few years, the President and 
Congress working together have come to hammer out historic 
agreements that substantially cut spending and modestly raise 
revenue. When you combine these changes with savings from 
interest, we have locked in more than $2.5 trillion of deficit 
reduction over the next 10 years. And now we are putting 
forward policies that will lower the deficit to below 2 percent 
of GDP and bring down the national debt relative to the size of 
the economy over 10 years.
    We restore the Nation's long-term fiscal health by cutting 
spending and closing tax loopholes, taking a fair and balanced 
approach. At the same time, the budget incorporates all the 
elements in the President's offer to Speaker Boehner last 
December, demonstrating his readiness to stay at the table and 
make very difficult choices to find common ground.
    Consistent with that offer, the budget includes things the 
President would not normally put forward, such as means-testing 
Medicare through income-related premiums and adopting a more 
accurate but less generous measure of inflation known as 
``chained CPI.''
    It includes these proposals only so we can come together 
around a complete and comprehensive package to shrink the 
deficit by an additional $1.8 trillion over 10 years and to 
remove fiscal uncertainty that hampers economic growth and job 
creation.
    This framework does not represent the starting point for 
negotiations. It represents a fair balance between tough 
entitlement savings and additional revenues from those with the 
greatest incomes. The two cannot be separated and were not 
separated last December when we were close to a bipartisan 
agreement.
    This budget provides achievable solutions to our fiscal 
problems, but as crucial as these solutions are, we have to do 
more than just focus on our deficit and debt.
    Now, the significance of balancing the budget is something 
I know well. Under President Clinton, I helped negotiate the 
ground-breaking agreement with Congress to do just that. And as 
Budget Director in that administration, I oversaw three budget 
surpluses in a row and worked with many on the left and the 
right on a plan to pay down the debt.
    But that does not mean we should make deficit reduction our 
one and only priority. So, in addition to ensuring that we have 
a sound fiscal footing, this budget lays out initiatives to 
fuel our economy now and well into the future. Every one of 
these initiatives is paid for in our deficit reduction package, 
meaning they do not add a dime to the deficit.
    As the President explained in his State of the Union 
address, the surest path to long-term prosperity is to 
strengthen the middle class. This budget does that by zeroing 
in on three things: bringing more jobs to our shores, equipping 
American workers with the skills they need to make the United 
States more competitive, and making sure hard work amounts to a 
decent living.
    We will strengthen manufacturing and domestic energy 
production, invest in infrastructure and worker training, and 
expand opportunities for children and those hardest hit by the 
recession.
    The President has provided a detailed blueprint for growing 
our economy and cutting our deficits, and as this budget shows, 
we do not have to choose between the two and, indeed, we must 
not. We can adopt a powerful jobs and growth plan even as we 
embrace tough reforms to stabilize our finances.
    The debate we are engaged in is very important. It is part 
of a complex sorting-out process that will determine our 
Nation's future. But as everyone on this Committee knows, the 
path before us is going to be a struggle. It is going to 
require difficult decisions that will directly affect the daily 
lives of millions of Americans, and it really matters that we 
get it right.
    Thank you, and I look forward to answering your questions.
    [The prepared statement of Secretary Lew follows:] 

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    Chairman Murray. Thank you very much, and, Secretary Lew, 
let me start. I want to ask you a question that I also asked 
Acting Director Zients last week, because I feel the topic 
really does cut to the heart of the current budget debate.
    Since enactment of the fiscal cliff deal, which made most 
of the Bush tax cuts permanent but does raise $600 billion from 
the highest-income Americans, we hear Republicans now claiming 
that the tax discussion is finished because revenues as a share 
of the economy are now projected to rise slightly above their 
40-year average of 18 percent of GDP. They are saying that any 
additional revenue, even if it is generated by closing unfair 
tax loopholes, is off the table.
    But as you well know from your time as OMB Director during 
the late 1990s, every time we have had a balanced budget in 
recent memory, revenues have been higher than we are projected 
to experience going forward, even after the fiscal cliff deal. 
And now, unlike in past years, we have to consider the 
retirement of the baby boomers and the need to invest in our 
people and in our infrastructure so that we can compete 
internationally.
    The revenue policy in the budget that this Committee wrote 
and the Senate passed a few weeks ago was shaped by those 
unavoidable realities, and I believe that is why every 
bipartisan group--Simpson-Bowles, Gang of Six--has also 
recommended several times more revenue than the year-end deal 
brought us.
    So, Secretary Lew, I would like you to respond to that and 
what you would say in response to the notion that somehow the 
revenue discussion is finished.
    Secretary Lew. Madam Chair, I totally agree with the notion 
that, in order for us to reduce the deficit and ultimately 
close the gap so that we can have a conversation about 
balancing the budget in the future, revenue is going to have to 
be higher than it is in the baseline.
    In December, there was a broad understanding that if there 
was going to be a deal, a real deal, something that covered 
everything, there would be more revenue than the $600 billion 
that was enacted in January. There was a debate as to whether 
it should be $1 trillion, $1.2 trillion, or more, but it was 
clear that $600 billion was not going to close the gap.
    I think if you look at the next 10 years, the next 20 
years, the baby boom is retiring, and that is a fact. We have 
known that fact, you know, for a very long time, and that means 
more people, 30 million more people, are becoming eligible for 
Medicare and for Social Security. So the thing that is going to 
drive up spending is not decisions that we are making today. It 
is decisions that were made a long time ago, and I think we 
have a real obligation to keep the commitments behind that.
    So if we are going to talk about closing the deficit or if 
there is going to be a discussion about balancing the budget, 
if you do not honor--if you honor those commitments, you are 
going to need more revenue. There is no way to cut your way out 
of that alone.
    Now, it does not take the kind of revenue that puts us into 
a place that should create the kind of partisan gridlock that 
we have seen over revenues. It just takes a fair mix. The 
President's plan is $2 of spending cuts for every $1 of 
revenue. That is something he has been saying. He said it all 
fall, all summer. And I think the American people accept that.
    Chairman Murray. Okay. During February 2012, the White 
House released a framework for business tax reform that 
supported lowering the top corporate rate to 28 percent in a 
revenue-neutral fashion by eliminating loopholes and taking 
other steps to broaden the tax base. The administration's most 
recent budget for the first time also embraces revenue-neutral 
business tax reform.
    Now, I am sure you are aware that there are many Democrats 
in Congress who do not agree with the idea that corporate 
taxpayers should not have to contribute to deficit reduction. 
Not only are corporate revenues as a share of the economy at 
historic lows, but at the same time, in recent years middle-
class taxpayers have been asked to bail out and subsidize large 
corporations who are making record profits.
    In your testimony before the Ways and Means Committee last 
week, you noted that the White House supports revenue-neutral 
corporate tax reform, but only in the context of comprehensive 
tax reform--I assume meaning individual and corporate reform 
together--that raises revenue for deficit reduction.
    So can you elaborate a little bit on that and explain where 
you are?
    Secretary Lew. Sure, I would be happy to.
    I think that when we look at the fiscal challenges, the 
only way we are going to get to the kind of balanced and fair 
solution is if there are additional revenues. The President's 
budget calls for $580 billion of additional revenues to hit the 
deficit target.
    In terms of where those revenues come from, we have been 
clear. We think they should come from those at the high end of 
the income scale. Now, that is a pretty clear overlap with 
individuals who benefit a lot from corporate profits, so I do 
not think it is fair to say that we have shielded high-income 
or big investors from potential tax increases.
    On the business side, our view is that one of the real 
benefits of business tax reform is to make it more competitive 
to do business in the United States than overseas. And we have 
a challenge that our statutory tax rate on the business side is 
very high. Our average tax rate is not as high as our statutory 
rate because we have so many loopholes and deductions and 
special provisions.
    So the goal is to bring down the statutory rate by closing 
loopholes, and we have a number of things that are offsets for 
specific things in our budget as well, but do not net out to 
any new taxes.
    So we think it is fair. We think it puts a burden on those 
who are able to pay and where the income is in the current 
distribution of income in this country.
    Chairman Murray. I assume that you are talking about moving 
both of those at the same time. Correct?
    Secretary Lew. Well, it certainly would be our notion that 
it should be part of an overall fiscal frame. Obviously, 
Congress will choose how to move pieces of legislation. But I 
think even if you just look at the decisions businesses make to 
organize either as a corporation or as a partnership, I think 
you need to know what the world is going to look like in both 
the individual Tax Code and the business Tax Code in order to 
make a sensible decision. So we need the deficit reduction, and 
it also makes more sense to do tax policy that way.
    Chairman Murray. All right. Senator Sessions?
    Senator Sessions. Mr. Lew, I do agree that economic growth 
is so important for us. If we can get that, it will help our 
situation. I am generally of the view that we cannot grow our 
way out of this. I think we need to have some belt tightening. 
You say we should have some more tax increases.
    Carmen Reinhart and Ken Rogoff published a best-selling 
book that concluded that when gross debt as a percentage of GDP 
approaches or exceeds 90 percent, it hurts economic growth. I 
think you and I have talked about that before.
    When Senator Conrad asked Secretary Geithner, your 
predecessor, about this study, he said it was an excellent 
study and in some ways understated the danger. We are now at 
106 percent of GDP gross debt. There has been a disagreement 
about whether we were talking about public or gross debt, but 
it is clear from our review of the Rogoff-Reinhart study their 
numbers were based on 90 percent of gross debt, it is the 
numbers they have.
    But in February of this year, importantly, the Federal 
Reserve sponsored a conference in New York dedicated to looking 
at the question of how high debt impacts economic growth and 
can slow job creation. The participants looked at all the 
studies on debt and growth.
    For instance, a study published by the International 
Monetary Fund concluded that levels of debt above 90 percent of 
GDP have a significant negative impact on growth.
    A study by the Bank of International Settlements concluded, 
``The results support the view that, beyond a certain level, 
debt is bad for growth. For government debt, the number is 
about 85 percent of GDP.''
    The European Central Bank published a report called ``Debt 
and Growth: New Evidence for the Euro Area'' that found, ``For 
high debt-to-GDP ratios above 95 percent, additional debt has a 
negative impact on economic activity.''
    Well, I guess my first comment would be--and I would make 
one more observation. As I understand the Federal Reserve's 
discussion about this, the presenters concluded that the 
correct figure is gross debt, not public debt, in their 
discussion. And these studies that I have just read are all 
talking about gross debt, not public debt.
    So I guess I would ask you, first and foremost, do you 
think that high debt can slow economic growth? And do you think 
our debt level is at such a level that it could be impacting 
our growth right now?
    Secretary Lew. Senator, I do think that it is important for 
us to make sure that debt does not grow beyond a danger point. 
I would disagree in terms of whether the metric should be the 
debt held by the public or the gross debt.
    I think when you look at the United States and the way we 
have our public finance structured and other countries', for 
most countries there is no big difference between gross debt 
and what we call ``debt held by the public,'' because they do 
not fund their insurance programs like Social Security with 
trust funds.
    I think it is a difference that makes a difference. I think 
if you look at the presence of the Federal Government in the 
marketplace, it is debt held by the public that represents our 
borrowing in the marketplace.
    Senator Sessions. Well, can I just interrupt you briefly? 
Because time does go by. But I know a lot of people have 
assumed that to be the figure, but our research indicates 
otherwise. Do you have any studies that have actually stated 
that the better figure is gross debt--or public debt rather 
than gross debt?
    Secretary Lew. Well, I would be happy to go back afterwards 
and, you know, give you the basis for the thought. But in the 
few minutes that we have, I would just make a couple of other 
points, if I could, Senator.
    You know, our treatment of the unified budget, as had the 
surpluses that were in the trust funds for many years, 
contributing to smaller deficits. For many years, when the 
Social Security and Medicare Trust Funds were, you know, more 
flush, it made it easier to avoid making the tough decisions in 
the rest of the budget, and it made it possible to do things 
like pass tax cuts that we could not afford and to put wars on 
the credit card.
    I think that we are going to have to pay those bills. I do 
not disagree with you. And I also do not disagree that we still 
have to do some belt tightening. The President's budget has a 
lot of belt tightening in it. So we agree that there needs to 
be some belt tightening. Where we disagree is there has to be a 
balance between revenue and spending cuts.
    I would argue that debt held by the public is the right 
measure. That is what the financial markets have looked at for 
a very long time, and I would be happy to follow up on it with 
you.
    Senator Sessions. We will have to look at that some more. I 
will just quote from the Rogoff-Reinhart report recently: ``In 
this paper, `public debt' refers to gross central government 
debt.'' And I think the other studies do, too.
    So I would suggest that 2 years ago, in 2010, the 
Congressional Budget Office projected that we would have growth 
in 2012 of 4.4 percent of GDP, and we came in at 2.2 percent of 
GDP. And we had a very slow fourth quarter, and we got a real 
bad jobs number this last week, which indicates to me that our 
debt may be the precipitating factor that is not being properly 
calculated. And I thank the Chair for giving me time to study 
that. If you are in error about that, then I think it gives 
greater credence to our need to change our debt course.
    Chairman Murray. Thank you.
    Senator Sanders?
    Senator Sanders. Thank you, Madam Chair. And 
congratulations, Mr. Secretary. You managed to squeeze to 
squeak in without my vote. But you did it.
    [Laughter.]
    Secretary Lew. Someday I will get it.
    Senator Sanders. Someday. I am going to give you the 
opportunity right now to get you to change my mind.
    [Laughter.]
    Senator Sanders. Mr. Secretary, in your prepared remarks, 
you stated that, ``The chained CPI is a more accurate measure 
of inflation...''
    Madam Chair, I want to introduce and put into the record 
with unanimous consent a letter signed by 250 Ph.D. economists 
and 50 social insurance experts that states that the chained 
CPI is not the most accurate measure of inflation for seniors. 
And, in fact, as you know, Mr. Lew, many economists will tell 
you, including people from the AARP and quite knowledgeable 
people on senior issues, that the current formulation 
underestimates inflation for seniors because it does not fully 
take into account what seniors spend money on, which is 
prescription drugs, health care, heating, food--which is going 
up faster than general inflation.
    So, Madam Chair, I would ask unanimous--
    Chairman Murray. Without objection.
    Senator Sanders. Mr. Secretary, according to the Social 
Security Administration, under the administration's chained CPI 
proposal, average 65-year-old retirees would lose about $658 a 
year in Social Security benefits by their 75th birthday, a 
cumulative loss of more than $4,600.
    I understand the theory of the chained CPI is that if you 
do not want steak, you can eat chicken. In my State, the 
weather gets 20 below zero, and a lot of elderly people spend a 
lot of money on heat. Your budget, the President's budget, is 
going to make significant cuts in LIHEAP for a start. But on 
top of that, I want you to tell the people, the elderly people 
in Vermont, what substitute they might use for heating oil when 
the weather gets 20 below zero. Do you have any good ideas for 
them on that one?
    Secretary Lew. Senator, I do not disagree that heat is a 
big issue in Vermont. It is a big issue in the Northeast. And 
in all the years that I worked on the LIHEAP program-- which I 
do not right now, but for many years I did--I worked to make 
sure that the assistance went to the states that were hard hit 
by things like heating oil.
    Senator Sanders. But this budget, as you know, makes over 
$400 million in cuts.
    Secretary Lew. Yes, I actually am less familiar with some 
of the details on the spending side of this budget than I have 
been when I did--
    Senator Sanders. My point that I just wanted to make-- and 
forgive me, I do not mean to be rude. We just do not have a 
whole lot of time.
    The second point that I want to ask you is that White House 
spokesman Jay Carney said--and I think, by the way, you said 
something fairly systemic risk, but this is what Carney said, 
November 26, 2012: ``We should address the drivers of the 
deficit, and Social Security currently is not a driver of the 
deficit.'' Adding that Social Security should be addressed on a 
``separate track.''
    I think a number of administration people have 
acknowledged--Mr. Zients was here last week--that Social 
Security has a significant surplus, and its trust fund could 
pay out benefits for the next 20 years. If Social Security is 
not a cause of the deficit, why are you proposing in your 
budget to cut Social Security?
    Secretary Lew. Senator, I think the President made clear in 
the budget, I tried to make clear in my opening remarks, that 
the President would not normally choose to put a proposal like 
this forward. We have been in 2-1/2 years of budget discussions 
of one form or another where it has been made crystal clear 
that there is no path to a bipartisan agreement, something that 
Republicans will sign on to with revenue, that does not include 
fixing the chained CPI--changing the chained--adopting the 
chained CPI.
    I tried to make the case, as I did in my remarks, and I 
believe that it is overall a more accurate measure. CPI is used 
for many purposes in the Government--
    Senator Sanders. I do not want to argue that point. I 
disagree with you, not for seniors.
    But let me ask you this question. I think essentially your 
political point of view is you want to make a compromise. 
Republicans wanted to privatize Social Security for years. They 
wanted to cut access for years. And you are giving them a 
little bit of something. They will want more.
    In your compromise efforts, what have you gotten from my 
Republican friends? Will any of them stand here and tell me 
that they are prepared to support more revenue now?
    Secretary Lew. Well, Senator, I can tell you, the President 
has made clear that he is not proposing chained CPI on its own. 
It is something he is proposing as part of a package that would 
resolve these budget issues for some time, that would have a 
balance of the kind of spending cuts and tax increases that 
would move the country in the right direction.
    I know that there are many who are concerned that, even as 
part of a package like that, we should not do chained CPI. But 
the thing I would tell you very strongly is it is not something 
that can be pulled apart from the other elements.
    Senator Sanders. Let me ask you this, and now I speak as 
Chair of the Veterans Committee, inheriting that Committee from 
the wonderful job that Patty Murray did. You also know that it 
is not just cuts in Social Security. You know that it is 
significant cuts in benefits for disabled veterans. And these 
are fairly significant. We are talking about VA disability 
benefits at age 30. Folks would have their benefits reduced by 
$1,425 a year at age 45 and $3,200 a year at age 65.
    At a time when one out of four major corporations pays zero 
in taxes, when we have growing wealth and income inequality in 
this country, by which the wealthiest people are doing 
phenomenally well, do you really think from a moral perspective 
it is appropriate to balance the budget or move to deficit 
reduction on the backs of men and women who have lost their 
arms and legs defending this country?
    Secretary Lew. Senator, I think you have to look at this 
budget in its totality. There are billions of dollars in one 
year of spending initiatives for health care, for job training, 
for job search assistance. This administration takes very 
seriously its obligation to veterans, and we have put together 
a budget that represents that.
    Senator Sanders. If I could just--it does. Your VA budget 
was a decent budget. I said that just yesterday at a hearing. 
On the other hand, I do want you to really think about cutting 
benefits for men and women who have lost arms and legs 
defending this country.
    Thank you.
    Chairman Murray. Senator Enzi.
    Senator Enzi. Thank you, Madam Chair, and thank you, Mr. 
Secretary, for being here, and I hope you will answer 
additional questions in writing--with the help of your staff, 
of course, because there are a lot of questions on a budget of 
this magnitude.
    In your testimony, you said that the budget was closing the 
gap, and in your response to Senator Sessions, you said that 
there was a lot of belt tightening. It appears to me that most 
of the sequester was eliminated, and that is the first real 
cuts that we have made. But there is a proposal in there for 
$580 billion in additional taxes.
    Now, the summary tables accompanying the President's budget 
show gross debt increasing from $17.2 trillion to $25.4 
trillion by fiscal year 2023. So it is fair to say the 
President's proposed budget increases gross Federal debt by 
over $8 trillion.
    Secretary Lew. Senator, it depends, obviously, how you 
measure in order to answer your question. Our budget reduces 
the debt from where it would be without our policies. 
Obviously, there is going to be additional debt as long as we 
have a national debt to service, and, you know, that is 
something we are going to work our way down.
    But I do not think that, looking at the sequester the way 
you described it, is--well, it is not the way we look at it. 
The sequester was not meant to be policy. When it was enacted, 
it was not meant to be policy. It was meant to be so bad that 
we would avoid it, and the super committee, which the Chair 
knows well--
    Senator Enzi. But it did wind up being passed and signed.
    Secretary Lew. Well, it was signed into law with the super 
committee created, and the super committee did not hit the 
deadline--
    Senator Enzi. If I had more time, I would go into that one 
in a lot more depth, but you did eliminate most of the 
sequester.
    Secretary Lew. But that was the goal. That was the goal.
    Senator Enzi. The gross debt increases $17.2 trillion to 
$25.4 trillion. That does not sound like a lot of belt 
tightening to me. And the Congressional Budget Office projects 
somewhat higher interest rates than the President's budget. 
Even using those lower interest rates in the budget, OMB 
expects that the cost of servicing our debt will exceed the 
costs of national defense by 2020.
    What would be the effect on deficits if interest rates 
were, say, one percentage point higher than forecast?
    Secretary Lew. Clearly, it is very sensitive in interest 
rates. I think that if the--the question, I think, is how 
quickly can we reduce the deficit while we are contributing to 
the kind of economic growth that we need to create jobs and 
have the economy moving in the right direction.
    The sequester moves in the wrong direction. The sequester 
takes too much out of the economy in a ham-handed way that was 
designed to be bad policy and it is bad policy. It is bad for 
difference, it is bad for domestic programs.
    So we intentionally replace it with more sensible policies. 
So that was not an accident. It was an intention. It was what 
the joint committee was hoped to do. I know the Chair tried 
very hard to get the joint committee to an agreement.
    This is an attempt to get to that kind of an agreement on a 
bipartisan basis to make sensible policy that can balance the 
kind of growth in the short term and deficit reduction in the 
medium and long term. That was the goal when the sequester was 
created.
    Senator Enzi. Well, I think the sequester could have been 
done a lot more diplomatically and a lot more beneficially. I 
did not appreciate the notice that went out that it should be 
made painful. Our State had a budget deficit. They knew a year 
ago they were going to have a budget deficit. I think with 
sequester we knew we were going to have a deficit. Our Governor 
said, ``Every department, every agency, every program needs to 
give me a 2-percent reduction, a 4-percent reduction, a 6-
percent reduction, and an 8-percent reduction.'' He looked 
through those to see how consistent the reductions were in each 
of those areas and wound up having to implement a 6-percent 
reduction. And you did not hear a whine from the people around 
Wyoming that they had been significantly hurt, because they cut 
the worst first. So there are ways of doing that, but not 
unless there is some leadership from the White House.
    Along with the interest rates, of course, there is the 
near-term assumption that growth in gross domestic product is 
significantly rosier than what the CBO economic and budget 
outlook is and also what is contained in the Blue Chip Economic 
Indicators, which is an average of 50 private forecasts. So the 
administration projects GDP growth being one-half of a 
percentage point higher than the Blue Chip and 1.2 percentage 
points higher than CBO.
    In 2014, this rosier outlook continues to be about seven-
tenths percentage points higher than both CBO and Blue Chip. 
Over the entire 10-year window, the administration predicts 
higher growth than Blue Chip forecasts.
    Why are your economic forecasts so much higher than the CBO 
and the private sector?
    Secretary Lew. Senator, depending on which years you look 
at, we are a little higher in some years, lower in other years. 
I think in the short term we are already seeing the economy 
outperform the expectations that were originally used in the 
budget. So we are in the range of the mainstream assumptions. 
We are in the Fed's range of assumptions. We could go 
assumption by assumption. I do not think you are going to find 
overall that they are very inconsistent. There is never any two 
forecasts each year that are exactly the same. But ours are 
well within the band of mainstream forecasts.
    Senator Enzi. I think the Government has a record of being 
phenomenally wrong. I yield my time.
    Chairman Murray. Senator Kaine.
    Senator Kaine. Thank you, Secretary Lew. Good to have you 
with us today. I want to begin by thanking you for producing a 
budget that tries to balance some very difficult--very, very 
difficult issues. I appreciate the elimination of the sequester 
because, as you pointed out, it was not Congress' intent that 
it should go into effect. No rational body would have designed 
cuts of this kind, across-the-board cuts that would have fallen 
equally on so many programs. There is not a single American who 
thinks we should be spending less money on cybersecurity, for 
example. And so the notion that because Congress designed this 
mechanism of pain that was never supposed to go into effect, 
that we should just accept it seems to me to be ridiculous. I 
was not here when it happened, so I guess I it is easier for me 
to criticize it. But my purpose of criticizing is just to find 
an alternative. And the Senate budget did that, and I am happy 
that the President's budget did that.
    I do not fault you for laying out a series of compromises 
that might not be your opening gambit. I want to associate 
myself with some of Senator Sanders' points. I think that 
Social Security does not contribute to the deficit. I think the 
best way to deal with Social Security reform is to deal with it 
separately from the deficit. I think the best and first thing 
to do, to the extent that we are going to wrestle with Social 
Security solvency, is to consider the payroll tax cap and 
adjust it upward and possibly even adjust it upward without 
adjusting benefits as a form of means testing. And so in those 
senses, I think we are probably in the same place on a lot of 
the policy issues.
    But where I would differ a little bit is I do not think by 
putting a good-faith discussion about is there a more accurate 
way to calculate the CPI on the table that you are trying to 
harm veterans or harm anyone.
    There is either a more accurate way to calculate CPI or 
there is not. If it not a more accurate way to calculate CPI, 
especially as the CPI would affect seniors, you know, that is 
something that I would like to dig into. And if it is not more 
accurate, I would not support it. But I do not think you are 
making an attempt to harm folks. But I do credit your point 
that you are trying to do something that is big picture.
    As I look at this budget, I see a whole series of things 
where you are attempting, the White House is attempting, the 
President is attempting, to find reasonable compromises to try 
to find that big deal.
    You do not propose any increase in tax rates. You could 
have done that. My sense is Republican colleagues have often 
taken pledges that would render that a nonstarter from the very 
beginning, regardless of oath of office. And so as a way of 
compromising with those who have taken such pledges, you have 
avoided any increase in tax rates.
    You have focused on tax expenditures, where the other side 
has often said that is a fair way to look at it. The tax 
expenditure adjustments that you put on the table are quite 
modest. The amount of tax expenditures in the budget every year 
is about $1.3 trillion; $583 billion over 10 years, if we just 
even it out across 10 years, $60 billion a year, you have 
reduced the size of the tax expenditures in the budget by about 
5 percent a year, which strikes me as extremely reasonable in 
terms of compromising given the size of some of the cuts we 
have seen in sequester and otherwise.
    You have proposed to do corporate tax reform and make it 
revenue neutral, which, again, does not make everybody on my 
side of the aisle happy. That seems to be clearly a compromise.
    I do agree with also the question that Senator Sanders 
asked. For all these compromises, no comments have been made 
today to suggest you are getting any credit--any credit--for 
adjusting to try to compromise with the other side. But in 
another sense, I do not mind because your goal is not to try to 
impress or get comments. Your goal is to try to do what the 
American public want. And I think what the American public 
deeply want us to do is to take the two budgets, the House 
budget and the Senate budget, to take our different 
philosophies and to try to find some longer-term deal that 
would keep the economy strong while we are responsibly managing 
the debt and deficit as a percentage of GDP, and to do that in 
a way where we can do it, set it and forget it for a while, and 
then allow some positive market forces to move forward.
    So as you will notice, I have not asked any questions, and 
my time is almost up. But what I just want to say is there are 
really two philosophies that are competing right now, and that 
is, what do we do to fix the American balance sheet? And I 
think one philosophy is you fix one side of the balance sheet. 
And the other philosophy is you fix both sides of the balance 
sheet. And I am going to associate myself with those who say 
you have to fix both sides of the balance sheet. And I 
appreciate the fact that your budget does just that and does it 
by offering a number of compromises that shows you have been 
listening to both Houses and both parties and you are trying to 
find a path forward where we can find that kind of a 
compromise. And I wish you the best in that work.
    Secretary Lew. Well. thank you, Senator. I think that very 
much captures the intent and the spirit of the budget, and it 
reflects what I think is what the American people very much 
want us to do.
    Chairman Murray. Senator Portman.
    Senator Portman. Thank you, Madam Chair. And I appreciate 
your being here, Secretary Lew, and I enjoyed talking to you in 
the Finance Committee about some of these issues.
    I would like to associate myself with Senator Kaine's 
comments about the need for us to figure out how to deal with 
this debt and deficit, because I do think that is what the 
American people want us to do. They want to see this economy 
grow. And as Senator Sessions has made clear--and I think it is 
backed up by all kinds of studies, but also just common sense--
having record deficits and debt--and this year's deficit is 
going to be over a trillion bucks, and the debt is at record 
levels--does have a negative impact on the economy, and it is 
tough for us to see the kind of robust economic recovery we all 
hope for until we deal with this issue. I think that is 
something that you have talked about. Your budget indicates how 
you would like to get there.
    I do not think it is enough, as you know. I do not think it 
is adequate to the task before us. I will say, because my 
colleague has said that Republicans are not saying anything 
good about it, I do like the fact that the tax reform piece on 
the business side is revenue neutral. I will also say that when 
you ask, you know, who benefits from this, it is not the board 
room. CBO has a study, and, you know, they are the nonpartisan 
folks up here who tell us what the economic impact is. They say 
70 percent of the benefit of a lower rate on the corporate side 
is going to go to who? The workers. Why? Because we are not 
competitive now. And I think you said that accurately.
    I will say that you do not have enough money to do it in 
here because you have in your budget $335 billion and 
elimination of loopholes, tax preferences. But then you create 
another $241 billion of new loopholes. And I am not suggesting 
they are all bad. In fact, one of them I really like, which is 
making the R&D credit permanent. That is the research and 
development, or R&E credit, as some call it, and that is a good 
thing. But the net of that would be enough to finance about 
one-tenth of a 1-percent cut in the corporate rate. And we do 
have the highest rate among our trading partners, the highest 
in the industrialized world.
    And, by the way, we are not only number one, even if you 
assume that the effective rate is what we ought to be talking 
about, the Tax Foundation tells us our effective rate is 26 
percent, it is still above the average. And when you add State 
taxes, of course, which some countries have and some do not, 
then it is even higher.
    So the fact is we are high, and that is one reason we are 
losing headquarters and we are losing jobs. And we see it every 
day.
    But can you tell us, do you have additional thoughts on 
corporate reform to meet the standards you set up in your own 
budget?
    Secretary Lew. Well, Senator, obviously our budget is not 
an exhaustive list of the things that could be done to broaden 
the base as we go through tax reform. Our goal would be to work 
together. It is going to be tough. I mean, we have had this 
conversation before, and every one of these deductions has 
fierce defenders. But if we are going to be able to succeed in 
substantially lowering the corporate tax rate, it is going to 
require that we go at a lot of things that are in the Code 
right now. We would look forward to working on a bipartisan 
basis to do that.
    I do think that the point you were making about the 
deficit, record deficits not being good, I agree with that. 
That is why we are bringing the deficit down. It is why at the 
end of the budget window in this 10-year window our budget 
deficit would be 2 percent of GDP--less than 2 percent of GDP, 
which is tremendous progress. We have already cut in half the 
deficit as a percentage of GDP. We are now proposing to go down 
to 2 percent or under 2 percent--on the way to further policy 
discussions where, you know, it has rarely--this has never 
gotten done in just one piece of legislation.
    Senator Portman. Let us talk about that for a second. I, as 
you know, disagree with some of the economic assumptions, as 
Senator Enzi talked about, you know, because they are way above 
CBO and even above Blue CHIP, but sort of different numbers. 
But apples-to-apples comparison, we still have, unfortunately, 
a budget deficit as a percentage of GDP that is relatively 
high, but more importantly is the debt. And, by the way, in 
that tenth year you can always get that last number down to 
get, you know, under 3 percent, and that is fine, and we 
should--
    Secretary Lew. It is under 2 percent.
    Senator Portman. Under 2 percent.
    Secretary Lew. We cannot get it from 3 to 2 so easily.
    Senator Portman. But we are still talking about, based on, 
again, an apples-to-apples comparison with CBO, probably high 
70s on public debt and 100 percent on gross debt. So, 
obviously, you are not satisfied with that, I know. And the 
reason is we really do not deal with this mandatory spending 
issue. And there is a lot of talk today about CPI. I would just 
remind my colleagues on this side who are complaining that 
there is no guarantee of tax increases if the administration 
supports anything on CPI--and, by the way, the CBO number is 
$340 billion a year, is about $230 billion because you do not 
do the full chained CPI. But I, you know, commend you for 
taking a step in the right direction in terms of an accurate 
measure of inflation at a time when we have these explosion in 
costs and we have to deal with it to save the programs.
    But it is about $100 billion in taxes, so it is $130 
billion under your numbers in savings, and then it is $100 
billion in additional revenue. So just to remind folks, because 
of the fact that our income tax brackets are indexed to 
inflation, and inflation will be relatively less by this more 
accurate measure. So there are not a lot of tax increases.
    But on chained CPI, I will give you a chance to respond 
generally to this, but we have been told by CBO that these 
incredibly important programs cannot be sustainable in their 
current form, and what they have said is Social Security, 
Medicare, and Medicaid alone increase by 95 percent over the 
next 10 years, a 100-percent increase almost. And so if you 
look at what you all have proposed on the mandatory spending 
side, we actually take mandatory spending from about 65 percent 
of the budget today to about 77 percent of the budget in 2023.
    I know there is concern around this table about research 
and our military and about education and other things. My point 
is we are continuing to squeeze that part of the budget that is 
annually appropriated here, and we are putting more and more 
into mandatory.
    So when I said earlier, you know, it is not adequate to the 
challenge that we face, it is in terms of the spending and it 
is specifically in terms of the mandatory side and the fact 
that, under your own numbers, your net interest goes from $220 
billion today to $763 billion in 2023. And, again, you have 
substantial increases, and this mandatory part of the spending 
is going to crowd out other spending.
    Do you have any thoughts on that?
    Secretary Lew. Well, may I take a couple of minutes, Madam 
Chair?
    Senator Portman. I will not ask any more questions. Sorry, 
Madam Chair.
    Chairman Murray. Okay. We will give you a few seconds here 
to answer that long question.
    Secretary Lew. First, in terms of where our debt as a 
percent of GDP would be, publicly held debt would be at 73 
percent at the end of this period, which is a lot of progress. 
I mean, we obviously need to keep bringing it down. But that is 
at a level that, you know, is enormously better than if it were 
at 100. I mean, we are making--which is where it was projected 
to go.
    The full chained CPI--
    Senator Portman. By the way, it is not projected-- well, 
never mind. It is not--under the CBO analysis, it is 76.
    Chairman Murray. If we can let him answer the question.
    Senator Portman. Yes.
    Chairman Murray. I do have to turn to Senator Whitehouse.
    Secretary Lew. The full chained CPI, the reason we do not 
take credit for all the savings is we have from the very 
beginning, every time we have discussed doing chained CPI, it 
has been something that we said was essential that there be 
provisions that protect the most vulnerable. And I actually 
think there has been pretty broad bipartisan agreement that if 
we change the way we calculate the CPI, even if we can justify 
that it is a more accurate measure, for certain populations 
even small adjustments are something that cannot be absorbed.
    So that is something we put in our proposal. You know, 
people can debate whether or not you have drawn the line in the 
right place. But I think everyone can agree that the very old--
the ``old-old,'' as they say--for whom $10 a month is a 
difference that makes a huge difference, is the kind of thing 
that has to be reflected, and that is why there is an offset. 
So we have not taken full credit for it because we have built 
in the ability to protect those who would be most adversely 
affected.
    On the question is it sufficient, in all the negotiations 
that I have sat through on the budget, there were three things 
that we were told were critical if there was going to be a 
willingness on the part of Republicans to do more revenue. We 
have put two of those in this budget. We put in means testing 
Medicare through premiums, and we put in chained CPI.
    Now, I think that that is going more than halfway. That is 
a way of saying we very much want this to come to closure in a 
way that can give some confidence that for the next number of 
years the budget is in a decent place, and you come back and 
you visit it.
    I think the right way to do Social Security reform is 
outside of the context of a budget bill. That is how it was 
done in 1983. I think that it is going to be impossible to get 
the kind of bipartisan cooperation to deal with Social Security 
if it is intertwined with a budget bill.
    Now, some of my friends say that chained CPI crosses that 
line. Chained CPI is something that affects many, many parts of 
the budget. So I think we have gone, you know, considerably 
more than halfway to try and elicit the kind of cooperation to 
put together a serious bipartisan effort.
    Senator Portman. Thank you.
    Chairman Murray. Senator Whitehouse.
    Senator Whitehouse. Thank you, Secretary Lew. I appreciate 
very much that cutting Social Security is sort of catnip for 
Republicans, and as a negotiating strategy, I can understand 
why you might want to advance that to sort of get things 
started.
    But I really join my colleagues in disputing that it is a 
more accurate version of the CPI than--at least for seniors. 
Most seniors spend their money on food and drink, health care, 
gas, and heat. And if you look at 2010, food went up 1.5 
percent, health care went up 3.3 percent, gasoline went up 13.8 
percent, fuel oil went up 13.5 percent; and their existing 
COLA, the one that I guess you guys think is too high, went up 
0 percent.
    The following year, 2011, food and beverage went up 4.5 
percent, medical care went up 3.5 percent, gasoline went up 9 
percent, heating oil went up 14.3 percent. That is on top of 
the previous raises in the previous year. And the COLA again 
went up 0 percent.
    So when that is the environment in which most seniors live, 
please, fine, make it your negotiating strategy. But I think to 
tell the public that it is actually more accurate where seniors 
are concerned is just factually a mistake. And so I would like 
to at least urge that on you.
    I have a question about the so-called fiscal multiplier, 
which is, as you know, the ratio between Government spending 
and economic growth. And as I understand it, if the fiscal 
multiplier is below 1, that means that Government spending is 
not economically effective and that it does not create as much 
economic growth as the spending itself. And if it is over 1, 
that means that there is an amplifying effect in the economy.
    We have seen I think as many as five recent reports that 
show in the circumstances that we are in right now, there is a 
way above 1.0 fiscal multiplier, which would mean that cuts in 
Federal spending have a much more dramatic negative effect on 
the economy, and Federal spending itself has a much more 
dramatic beneficial effect on the economy.
    I think that that is a fact. Our friends on the other side 
believe that it is a matter of faith that all Federal spending 
is bad for the economy, all Federal spending cuts are good for 
the economy. I think that is ideology, not economics. Where do 
you think the fiscal multiplier--what signals should we be 
taking from the fiscal multiplier information that we are 
getting out of some pretty conservative institutions, like 
Goldman Sachs and Oxford Economics and the International 
Monetary Fund?
    Secretary Lew. Senator, I have read probably a dozen 
different analyses of what the impact of the sequester will be 
on the economy, and all of them assume that if the sequester 
stays in effect, it will take in the neighborhood of a half a 
percent out of GDP, which supports very much the notion that 
there is a direct effect, that Government spending has an 
effect on the macro economy.
    Now, I for one do not understand why this is a time when 
one would want to reduce GDP by half a percent. If we get into 
the high 2's or cross the line to 3, that is hundreds of 
thousands of jobs. And that is a world of difference to real 
people.
    So I very much believe we need to reduce the deficit in the 
medium term and the long term. I think if you look at the 
history of the last 4 years, the experience of the United 
States versus the experience in countries where the move to 
fiscal consolidation has been more rapid and more abrupt, we 
have had better recovery from the recession, which also 
supports the theory that you are articulating.
    I do not think we can put it off forever. The sooner we 
lock into place a plan that gives confidence to the whole 
economy that we are not going to either have gridlock or 
kicking the can down the road, it will probably have a very 
substantial beneficial effect in terms of decisions to invest 
and hire.
    Senator Whitehouse. A vicious circle is an economic 
possibility in which Government cuts lead to GDP shrinking, 
lead to lower revenues, lead to a worse deficit. And if you are 
following the ideology, you chase that with more cuts which 
drive the economy down further, which leads to less revenue, 
which creates bigger deficits, and down the spiral you go. Is 
there any example you can think of in the world right now where 
we might be actually seeing that take place?
    Secretary Lew. Senator, I just spent 2 days meeting with 
European finance ministers, and you do not have to look very 
far to see examples of where the rapid reductions in public 
spending slowed the recovery or caused a double-dip recession. 
I urged many of our friends in Europe that it was a time for 
them to think more about balancing growth and jobs with the 
pace of fiscal consolidation. And I do not think it is a choice 
between the two. Just as our budget has to balance the two and 
accomplish both, that was the message that I carried to them. I 
would rather have our growth rate than theirs right now. But I 
am not happy with ours. Ours needs to be better, which is why I 
think we need to replace the sequester.
    Senator Whitehouse. Thank you, Chairman.
    Chairman Murray. Thank you.
    Senator Johnson?
    Senator Johnson. Thank you, Madam Chair.
    Mr. Lew, isn't it true that your budget actually increases 
the deficit over the CBO baseline in the first 3 years?
    Secretary Lew. I do not believe--
    Senator Johnson. It does by $326 billion. Actually, if you 
add in 2013, it is $450 billion. So--
    Secretary Lew. Yes, I think it may just be the first year. 
I will go back and check.
    Senator Johnson. No, it actually does the first 3 years. 
During the rest of President Obama's administration, the 
deficit increases over CBO baseline. Then, of course, after 
President Obama leaves office, then you supposedly claim about 
$2 trillion worth of deficit reduction. So I guess my question 
is, you know, how credible is that type of budget for actual 
deficit reduction?
    Secretary Lew. I think if you look at the policies of this 
budget, they are very credible. You know, there might be small 
differences in terms of scoring. But you enact policies like 
the policies in the President's budget, and it is going to 
reduce the deficit.
    Senator Johnson. We are already trying to cancel 
sequestration, so the promise of deficit reduction in the 
future is not particularly credible.
    Secretary Lew. Well, if you enact it now--
    Senator Johnson. Let me turn--let me turn to--
    Secretary Lew. In the case of sequestration, Senator, we 
did not enact alternate policies. This is alternate policies 
that are being recommended.
    Senator Johnson. Okay. Anyway, so the first 3 years, your 
budget actually increases the deficit by $326 billion. Let us 
talk about Social Security. It is true that in the next 10 
years Social Security will run a cash deficit of $1.3 trillion. 
Isn't that correct?
    Secretary Lew. Well, I think that you are defining the 
Social Security fund drawing down its trust fund--
    Senator Johnson. Cash. No, I am talking about just cash 
right now.
    Secretary Lew. I have a fundamental disagreement, Senator--
    Senator Johnson. No. Hang on. In terms of the dedicated 
revenue coming in versus the amount that is being paid out will 
be $1.3 trillion, according to the Social Security 
Administration.
    Secretary Lew. But that is not the measure of whether 
Social Security is running a deficit.
    Senator Johnson. Then over the next--
    Secretary Lew. From 1983 until now, we have been building 
up reserves to draw down when we need them. So those reserves 
are part of--
    Senator Johnson. So let us talk--good. Let us talk about 
the Social Security Trust Fund. What assets does the trust fund 
hold?
    Secretary Lew. Senator, there are special treasuries in the 
trust fund.
    Senator Johnson. So let us go through the scenario when we 
are no longer adding to that trust fund with interest payments 
now, and the trust fund actually has to start redeeming those 
bonds. Who pays those things off?
    Secretary Lew. It obviously comes back to the unified 
budget, just as the benefit of the surplus went to the unified 
budget while the surpluses were being built up.
    Senator Johnson. Acting Director Zients said that you sell 
those bonds to the general public. That is not correct, is it?
    Secretary Lew. Well, to finance whatever deficit we have at 
the Federal Government, you do go to the general public for 
bond--for--
    Senator Johnson. The Treasury will do that, not the Social 
Security Trust Fund.
    Secretary Lew. Correct.
    Senator Johnson. So let us talk--
    Secretary Lew. The special bonds are between Treasury and 
Social Security.
    Senator Johnson. Okay. Let us put up on the screen here a 
report by the Office of Management and Budget that basically 
says what I have been trying to make the point, that the Social 
Security Trust Fund in total, on a consolidated basis, has no 
value to the Federal Government. Do you agree with this 
statement put out by the Office of Management and Budget that 
these balances are available for future benefit payments but 
only in a bookkeeping sense? The holdings of the trust fund are 
not assets of the Government as a whole that can be drawn down 
in the future to fund benefits. They are claims on the 
Treasury.
    Let us go to the next slide here real quick. Basically what 
we are talking about is the Social Security Trust Fund, yes, 
has assets, Treasury bonds worth $2.7 trillion right now. But 
at the same time, the Treasury holds that liability. When you 
consolidate that--I mean, you are a financial guy. You 
consolidate that statement, those cancel out, it is worth 
zero--netting to zero. I mean, isn't that correct that the 
Social Security Trust Fund has no value to the Federal 
Government? Isn't that--
    Secretary Lew. I do not agree with that, Senator. I am 
happy to answer the question--
    Senator Johnson. So you do not agree with your own Office 
of Management and Budget?
    Secretary Lew. If you read that whole chapter, that chapter 
says quite a number of things, and if you would permit me, I 
would be happy to answer the question.
    Senator Johnson. Well, tell me how those have any value 
whatsoever and why those would not be included in total debt.
    Secretary Lew. Senator, from 1983 until now, we have been 
building up surpluses in the Social Security Trust Fund. In 
years when there were balances that were positive, it went to 
the benefit of the unified budget, and it made it possible to 
do things like enact tax cuts and make it seem like we could 
afford--
    Senator Johnson. Right, that money was spent. It is gone.
    Secretary Lew. Okay, but, Senator--
    Senator Johnson. It is gone.
    Secretary Lew. --I do not believe that. I think--
    Senator Johnson. It was not invested in a real asset that 
has value to the Federal Government.
    Secretary Lew. See, that is where I fundamentally disagree 
with you. That is an asset that is backed by the full faith and 
credit of the United States, like every other bond.
    Senator Johnson. That gets replenished how?
    Secretary Lew. I do not believe--
    Senator Johnson. Increasing taxes or by floating more 
bonds?
    Secretary Lew. I do not believe that we will--
    Senator Johnson. Increasing more debt.
    Secretary Lew. I do not believe we will tell the American 
people that the full faith and credit matters in other cases 
but not in Social Security. It does put a burden on all of us 
to make balanced fiscal policy to reduce the deficit so that we 
can have a fiscal position where we can make--do the right 
thing and pay back the Social Security Trust Fund. But I think 
it is not right to say that it is meaningless. I just disagree 
with that.
    Senator Johnson. It nets to zero. The value of the trust 
fund nets to zero to the Federal Government.
    Secretary Lew. That is a--
    Senator Johnson. Isn't it true the Federal Government is 
either going to have to tax the American public or the Treasury 
will have to float different bonds? You are going to have to do 
the same thing--
    Secretary Lew. You will have to have a unified budget that 
can, at the bottom line, pay the bills, and either there will 
be revenues or spending cuts elsewhere or borrowing. I do not 
disagree with that. But what you are saying is different. You 
are saying that it is meaningless. And it is not meaningless. 
It is a bond backed by the full faith and credit of the United 
States.
    Senator Johnson. It is a bookkeeping--it is a bookkeeping--
    Secretary Lew. The fact that accountants describe something 
in one way does not give it the status you are giving it. I 
have made this case for many decades. I fundamentally disagree 
with the view you are taking.
    Senator Johnson. Okay. Thank you, Madam Chair.
    Chairman Murray. Thank you.
    Senator Coons?
    Senator Coons. Well, thank you, Mr. Secretary, for your 
testimony here today. Thank you, Madam Chair. Just a moment to 
breathe, if we could.
    Secretary Lew. No, I am fine.
    Senator Coons. I think the President's budget has a lot to 
commend it. There is obviously a lot to dislike and a lot to 
like, and I appreciate your coming and taking vigorous 
questions and challenges from both parties, from both sides of 
the dais here.
    In general, as you know, budgets are a reflection of values 
and priorities. I think the President's budget, broadly 
speaking, does the right thing by prioritizing investment and 
growth in the short run, and then focusing on competitiveness 
in the longer run. And as previous questioners suggested, there 
is a counter-example in Europe to look at in terms of strict 
austerity and its impact in the short run.
    I think we had comparable goals when we enacted the Senate 
budget last month focusing on the investments we need to make 
in order to help grow the economy while also engaging in 
responsible deficit reduction. In particular, I have been 
concerned about how we accomplish that, responsible deficit 
reduction, while still enacting a circle of protection around 
the most vulnerable in our society and ensuring that we do not 
undermine some of our most treasured programs.
    We have made a lot of progress, $2.4 trillion together so 
far towards that $4 trillion deficit reduction objective, and 
it is my hope that we will find ways to work together towards 
that.
    I wanted to talk with you about interest rates, if I could. 
I think further deficit reduction is absolutely critical. We do 
have to reduce our deficits, and we have to deal with our 
national debt. And a big reason for that is so that we do not 
have interest payments that crowd out other priorities, whether 
it is Head Start, affordable housing, cancer screening, R&D, 
infrastructure.
    Interest rates are at an all-time low. Table S.12 of the 
budget says we had a 10-year note rate of 1.8 percent in 2012, 
but it forecasts that rate going to 5 percent by 2023, if I 
have that right.
    In the long run, what is driving that increase in interest 
rates? It is obvious, I think, that higher debt can lead to 
higher debt service, but is there a connection between higher 
debt and higher interest rates in the market? And if--or I 
should probably say when--interest rates do rise, what is the 
impact of that on seniors, on students, on families, on 
businesses? Because I think to have a whole picture here, we 
need to also focus on those broader macroeconomic impacts on 
working people, students, and seniors.
    Secretary Lew. Senator, the forecast shows that both growth 
goes up and interest rates go up. I think it is very different 
if interest rates go up while the economy is growing. And right 
now we have very low interest rates, in large part because we 
were in the deepest recession of a generation, and those low 
interest rates were a way to help get out of the recession.
    So I think that the reason for interest rates going up 
makes a big difference. I do not think that where we are now is 
permanent and normal interest rates. And as long as the economy 
is growing and interest rates are going up in an orderly way, 
not spiking in a way that is out of line with economic growth, 
you know, from a Federal perspective, obviously, we will see 
more robust revenue because a larger economy throws off more 
income. And that is why our budget shows that you can 
accommodate, you know, too large a national debt, but you can 
accommodate it in a growing economy. If you do not have a 
growing economy, I do not know how you can accommodate it, 
because if interest rates go up and the economy does not.
    For individuals, you know, one of the things that we think 
is very important is that as many families as possible get a 
chance to refinance their mortgages while interest rates are 
low. You know, this is a time-limited opportunity. We are not 
going to be in a world of 3.5- to 4-percent mortgages forever. 
As many families as can should refinance, and we have done 
everything we can, and we hope to pass legislation making it 
possible to help more families.
    I am not sure when you get to seniors how to answer your 
question. It tends to be less of a direct issue in the lives of 
seniors. They are not typically taking mortgages at the same 
rate that, you know, they did when they were younger. But, 
obviously, to the extent that seniors have debt and they have a 
fixed income, you know, it will be more pressure. I think there 
are other things we have talked about here that are probably 
more of a direct factor in the economic well-being of seniors, 
things like we were talking about earlier with fuel prices.
    Senator Coons. If I could have just a brief follow-on, what 
fiscal policy tools do you propose in order to keep interest 
rates and interest payments in check, since I think there would 
be some really negative consequences if the interest rates rise 
but growth does not?
    Secretary Lew. Well, you know, this budget incorporates, as 
you pointed out, a rising interest scenario. So I think the 
fact that we have built in the capacity to manage a debt 
service with interest rates getting back into what is a more 
normal range is one answer which is very important.
    In our regular management of the national debt, we have 
been working to make sure that we do it in an orderly way. 
There has been some extension of maturities that gives you a 
little bit more adjustment space. But we do not market-time the 
purchases of the sale of Federal debt, and I do not think we 
should start now.
    Senator Coons. Thank you, Mr. Secretary.
    Thank you, Madam Chair.
    Chairman Murray. Thank you.
    Senator Ayotte?
    Senator Ayotte. Thank you, Madam Chairman. I appreciate it. 
Thank you, Secretary. I appreciate your being here today.
    I wanted to ask you, within the Affordable Care Act there 
was, in order to pay for the Affordable Care Act, a tax that 
recently lawmakers from both sides of the aisle are concerned 
about, and I think there is a recognition that it taxes--that 
it will have the potential of stifling innovation and impacting 
American jobs in the area of the medical device industry.
    Just looking at, you know, one State, the State that I 
represent, New Hampshire, certainly having visited many of 
these companies in our State, I have heard directly that this 
2.3-percent tax on revenue is having a negative impact both on 
the cost of the devices that will be passed on to consumers, 
also on their hiring projections, and then finally many of them 
are taking it out of their research and development budget, 
which we, of course, want Americans to have the very best 
medical devices.
    So the vote passed in the budget resolution 79-20 to repeal 
this tax. You know, there is not much around here that we get 
79 votes for in the Senate, so I guess I would ask you, given 
the bipartisan support in the United States Senate for 
repealing this tax, what is the President's position on the 
medical device tax repeal? And will he commit--will I guess you 
as the Secretary of Treasury, if you have spoken to him about 
it--I hope that he would commit to working with both sides of 
the aisle to support bipartisan efforts to overturn this tax, 
which I think that there is agreement is harming an important 
industry within our country that also, of course, most of all 
helps the patients that want the very best medical devices?
    Secretary Lew. Senator, I think we all agree that having 
the best technology available for our patients is a very high 
priority. I think it is also important, though, to note that 
there has been a dramatic increase in the costs associated with 
the reimbursement for these medical devices, and I am aware of 
the vote, you know, in the Senate on the budget resolution.
    I think there were some misunderstandings at the time of 
the vote in terms of how it affected U.S. versus foreign 
manufactured devices. In fact, it does not distinguish, so a 
foreign device sold here would be covered by it just as much as 
a U.S. device. It has nothing to do with making U.S. industry 
less competitive against devices that are manufactured 
elsewhere.
    It obviously is a piece of the funding that is in the 
Affordable Care Act. It is something that, you know, if it were 
to have to be replaced, there is--
    Senator Ayotte. Well, Mr. Secretary, I understand that it 
would treat foreign as well as American devices the same, but 
the reality is that on the ground what we are hearing from the 
medical device companies in this country is a 2.3-percent tax 
on revenue, if you couple that with the actions of the FDA, 
this is an industry that is becoming less competitive. It is an 
industry that is very vibrant, and so, you know, I would hope 
that the President would work with us to try to come up with a 
solution to repeal this tax, because it would be good for our 
economy.
    Secretary Lew. I would only point out that it has been a 
very profitable business, so this is not a difference that is 
the difference between it being profitable to being in--
    Senator Ayotte. Except can I ask you, given that it is a 
2.3-percent tax on revenue, even if I am a startup and I do not 
make a profit, don't I still have to pay the tax?
    Secretary Lew. Well, if you have sales, you are--
    Senator Ayotte. I have sales, but I have no profit because 
I am a brand-new company, starting with a brand-new device in 
this country, a brand-new idea, the basis of innovation in this 
country, I still have to pay the tax, don't it?
    Secretary Lew. I believe that is correct. I would have to--
it is on the sale of the devices, yes.
    Senator Ayotte. So when you talk about these companies 
being profitable, the reason that the concerns are coming back 
on innovation is because the companies that it punishes the 
most, frankly, are the startups because it is a tax on revenue, 
not profit. So I think this is one of the issues that many of 
us on both sides of the aisle are hearing about.
    Secretary Lew. I understand the concern, and maybe there is 
a way of looking at it differently than the way it was 
designed. It is always a dangerous business to reopen something 
when it is a critical funding element in a complicated piece of 
legislation. But the idea was not to target startups. It has a 
much broader effect than that, and many, if not most, of the 
sales are not of startups. But I would be happy to go back and 
take a look at that?
    Senator Ayotte. I appreciate it. I know my time is up. I 
have some questions I will submit for the record, including one 
on Iran sanctions. So I will submit those for the record. Thank 
you.
    Secretary Lew. Yes, and I would be happy to answer them.
    Senator Ayotte. I appreciate it. Thank you.
    Chairman Murray. Thank you.
    Senator Nelson?
    Senator Nelson. Do you feel a little chagrined, Mr. 
Secretary, that you put out what you consider a fair and 
balanced approach to a budget as your first offer and you are 
getting hit from both sides?
    Secretary Lew. I think we are proud to defend the budget 
that we put out.
    Senator Nelson. But, you know, from revenue versus cuts, 
you have just one to three, one part revenue to three parts of 
cuts. And the budget that came out of this Committee, it was 
bold. It was one to one, half revenues and half cuts to lower 
the deficit. So even your proposal, which is more modest, is 
getting all kinds of stuff.
    Secretary Lew. Ours is two to one, not three to one.
    Senator Nelson. Two to one.
    Secretary Lew. Yes.
    Senator Nelson. Well, my compliments to the Chairman. She 
was bold.
    I would be curious, because I am in a State that does not 
have a State income tax. And what is deductible to our citizens 
is the State sales tax, which is sizable, 6 percent. Why is 
that something--what was your calculation that you wanted to 
eliminate that as a deduction?
    Secretary Lew. Well, to be clear, we did not eliminate it 
as a deduction. We have a cap of 28 percent in our budget that 
essentially says for people who are in the very top bracket, 
they will get the same benefit of deductions as people in the 
28-percent bracket. So that is different than eliminating 
deductions.
    It is something we only do as part of a budget that overall 
is helping to pay for infrastructure and other important things 
that we need to do in this country. So, you know, it is like 
many other things in our budget. It is connected to an overall 
set of policies.
    Senator Nelson. I would just point out for your folks 
sitting behind you that the sales tax deduction expires at the 
end of this year, and therefore, you would have the treatment 
differently of different States as to what would compromise 
that 28 percent.
    Secretary Lew. Senator, I am sorry. I have to correct 
myself. I was talking about the deductibility of taxes 
generally which is covered by the 28-percent provision. Because 
the sales tax deduction is an expiring provision, it does 
expire unless it is extended. And what we said was we wanted to 
work with the Congress on expiring provisions, and we are 
obviously going to have to pay for the expiring provisions that 
are--if they are extended. And, you know, we would be open to 
working with you on that. I was talking about the general 
deduction of State and local taxes.
    Senator Nelson. Do you want to comment on the territorial 
tax system?
    Secretary Lew. The debate is often laid out in pretty stark 
terms of either territorial or worldwide. It actually is 
already something of a hybrid, and I think we will find a path, 
if we can accomplish business tax reform, to find the right 
balance of the hybrid where we can address the concerns about 
competitiveness without having the enormous revenue loss 
associated with the kind of black-and-white choices.
    I think that we--you know, we put a worldwide minimum 
proposal--global minimum proposal in our white paper, and we 
would look forward to working with the Congress in the context 
of corporate and business tax reform to see if we can find that 
right balance.
    Senator Nelson. Do you see any potential change of the 
sequester in the present fiscal year until September the 30th?
    Secretary Lew. Senator, that is really a question of 
whether Congress is prepared to take action. We have made clear 
we think it would be advisable to act sooner rather than later. 
The cuts are not good. They are not good on the defense side; 
they are not good on the nondefense side.
    In the macroeconomic sense, every month they are in place 
is costing us GDP growth. So I think the sooner, the better.
    The President put this budget forward in, you know, large 
measure to try to jump-start the conversation, to get it to a 
place where we can see where the reasonable center is.
    Getting back to your initial question about chagrin, 
obviously there is going to have to be some willingness to do 
business in that reasonable center if it is going to work in 
any timely way.
    Senator Nelson. And I must say that I am concerned, because 
I do not see a lot of give. And the whole process of putting a 
budget together is a give-and-take, and especially in a country 
as big and as broad and as complicated as our country. And yet 
it is like there are two different worlds out there. And you 
have heard some of that questioning right here.
    Thank you, Madam Chairman.
    Chairman Murray. Thank you very much.
    Secretary Lew, I just had one additional question. You 
know, over the past several decades, we have witnessed a 
dramatic rise in income inequality in this country. Over that 
time period, we have seen top tax rates on earned income, 
capital gains, and dividends fall considerably, and not only 
that, the number of so-called tax expenditures, which often 
primarily benefit the wealthiest Americans, has exploded. Due 
to the confluence of those factors, we now have a situation in 
which we see the wealthiest Americans are able to pay tax at a 
lower effective rate than a typical middle-class family.
    Can you comment on what you see as the relationship between 
our country's tax policy and rising inequality?
    Secretary Lew. Senator, there is no doubt that the trend 
over the last few decades is as you describe: a heavy 
concentration of income growth at the very high end and at the 
expense of the middle and the bottom. That has real 
implications for our tax system because we tax income, and if 
income is at the top, there is going to be more of a burden of 
taxation at the top as well.
    I think it was very important in January to have the top 
rate go back to 39.6. I did not support lowering it in the 
first place. The economy was doing quite well with the 39.6-
percent rate. I think it will continue to do well with the 
current rate where it is.
    We have also put in our budget what we call the ``Buffett 
rule'' to make sure that, you know, people who earn a million 
dollars or more pay at least a minimum tax rate that puts them 
above where middle-class people are. Again, it is only fair. I 
mean, if through a complex set of tax deductions and forms of 
income people who make millions of dollars pay a lower 
percentage tax rate than people who work for $50,000 a year, it 
is just not right.
    So I think our budget addresses that. I think it is 
something the Tax Code has to deal with, because the Tax Code 
and income tax is based on income. And I think we have made 
more progress in January than we had for a long time in terms 
of the Tax Code reflecting that, and I think if the Buffett 
rule were enacted, it would make further progress. And tax 
reform which takes away deductions that go disproportionately 
to people at the high end or that put a cap on deductions at 
the high end would have the same effect.
    Chairman Murray. Okay. Thank you very much.
    Senator Sessions?
    Senator Sessions. Thank you, Madam Chair.
    Well, this tax policy and income inequality is a problem 
for me. It seems to me quite clear that the President believes 
that you should just tax the upper-income people more and pass 
out benefits to other people with the money extracted from 
them. I do not believe that is the right approach.
    We do have a growing income inequality. The average working 
person has not had his wages kept up with inflation for, I 
think, 15 years or more--maybe longer than that. Some say back 
to 1970. So it is a really worrisome thing. I just reject the 
idea that you solve it by raising more taxes.
    And let me just say we have looked at the numbers, we have 
studied the Borjas report, three members of the Civil Rights 
Commission have written. This immigration bill will bring in a 
huge number of low-wage workers, and there is no doubt that it 
will impact adversely already hurting low-income workers in 
terms of their wages not advancing and in terms of higher 
unemployment. And that is going to be clear as we go through 
this debate, colleagues. You are going to have to look at those 
numbers. It is an absolute fact.
    We have a surplus, as the Civil Rights Commission said_used 
the word ``glut''--of low-wage workers, low-skilled workers. 
Businesses--I do not share the view that we have a shortage of 
low-wage workers. So I will wrestle with that, and we can 
figure out precisely what the impact is and how to create an 
immigration policy that does not hurt those who are already 
hurting, create an immigration policy and a social welfare 
policy that moves people from dependency and Government 
benefits to independence in the workforce. I know we can do 
better, and I hope we will on that.
    Mr. Lew--
    Secretary Lew. I was just going to respond, if I could, 
Senator. You know, I believe that it is considerably more than 
just a question of tax policy, so I did not mean in my response 
to the Chair to suggest that the entire answer to income 
disparity is on the tax side. The question was: What role does 
the Tax Code play?
    Our fundamental challenge is to create good middle-class 
jobs, to have a growing economy so we create more and more good 
middle-class jobs with good wages, and that will actually put 
more people into the place where they are paying taxes because 
they are earning more income.
    I think the minimum wage is part of it, also, because the 
minimum wage has eroded considerably in the last decades. And I 
think the benefit of immigration reform is, I think, greater 
than your comments suggest, because right now we have people 
who are in the shadows who are working without legal status, 
and if those people come out of the shadows, it becomes much 
less likely that they are going to drive down labor rates.
    Senator Sessions. I would totally disagree with that, and I 
think that economic studies are going to prove that is wrong. 
It is going to pull down wages, and you also have a 50-percent 
increase in the future flow in addition to the large numbers 
that would be legalized. But we will go through that as the 
debate goes.
    One thing I would say with regard to Senator Johnson's 
questions, if you believe there is a valid Social Security 
Trust Fund--and I do; I believe our trustees, I believe they 
have a Treasury bill note, an IOU from the U.S. Treasury. But 
Senator Johnson is correct. If you believe that it is a valid 
trust fund, it is owed money, we have saved no money to pay it 
back, and it should be part of the--and it is part of the gross 
debt of the United States of America, that unpaid internal 
debt, then you should count the gross debt as the most 
appropriate figure for ascertaining the true debt of the United 
States.
    And with regard--and I will let you respond, but in the 
paper presented to the Fed conference in New York February 
22nd, the title of it is ``Crunch Time,'' Mr. Lew, ``Crunch 
Time: The Fiscal Crises and the Role of Monetary Policy.'' And 
in their abstract, first page, they say, ``We analyzed the 
experience of advanced economies using both econometric methods 
and case studies, and conclude that countries with debts above 
GDP and persistent current account deficits are vulnerable to 
rapid fiscal deterioration as a result of these tipping point 
dynamics. Such feedback is left out of current long-term U.S. 
budget projections and could make it more difficult for the 
U.S. to maintain a sustainable budget course.''
    And then a little further one, it makes the--answers our 
question about gross debt. After setting forth one of the most 
complex economic formulas I have ever seen, they say, ``Note 
that gross debt regression has a better predictive power than 
net debt regression.''
    So we rail about those figures, and I think we are in a 
danger zone. You need to help us get out of it. Your budget 
does not. But I yield.
    Secretary Lew. You know, I think that the--I appreciate 
that you agree that the Social Security Trust Fund is real. I 
think it is an important point.
    Senator Sessions. It is a legal document. There are 
trustees who hold notes on the U.S. Treasury.
    Secretary Lew. In my new role--
    Senator Sessions. That is a fact.
    Secretary Lew. In my new role as Chair, I consider them to 
be real obligations, and I am glad that you agree.
    Senator Sessions. But there is no money to pay it with.
    Secretary Lew. But at the point when the Social Security 
Trust Fund is being drawn down for, you know, the purpose it 
was intended, it has an impact on the unified budget, the 
bottom line of the unified budget. And if we look at our 
deficit and the unified budget year to year, that will 
incorporate the effect of paying back the Social Security Trust 
Fund. So I think that is actually a more accurate way of doing 
that than looking at gross debt.
    Senator Sessions. That is not what the--
    Chairman Murray. Senator Sessions--
    Senator Sessions. --told the Fed.
    Chairman Murray. Senator Sessions--Sanders. Senator 
Sanders.
    [Laughter.]
    Senator Sanders. It has been a long hearing, right?
    Senator Sessions. Making a habit of that.
    Senator Sanders. I knew, by the way, that if I listened to 
Jeff Sessions long enough, I would find areas where I agree 
with him. I knew it. And he made two good points.
    Number one, obviously the Social Security Trust Fund is 
real. It is held by bond backed by the faith and credit of the 
United States of America. And if we stop paying that, we do not 
have to worry about anything else, Jeff. The entire world will 
be in a financial collapse. We do not have to worry about 
Social Security.
    The second point, though, where you were right--and I think 
Secretary Lew is right--is on immigration. His point, taking 
people out of the shadows so that they are not exploited, is a 
good thing because it will raise the wage structure. On the 
other hand, your point is also a good point. If the Chamber of 
Commerce were to get its way and bring hundreds of thousands of 
low-wage workers into this country, there is no question in my 
mind it would drive wages up. I think that was your point.
    But I want to go to another issue. Out of curiosity, Mr. 
Secretary, you mentioned earlier that you gave the Republicans 
two out of three. You gave them cuts in Social Security, and 
you gave them deficit-neutral tax reform. What was the third 
thing you have not yet given them?
    Secretary Lew. Senator, the third item was eligibility age 
in Medicare. That has been the thing we have heard over and 
over again, and I think you and I have had private 
conversations about this.
    Senator Sanders. Yes.
    Secretary Lew. We have come to the view, after looking at 
it very carefully, that it actually does not have any savings, 
it increases national health care spending.
    Senator Sanders. Right. Okay. Let me ask you this, getting 
back to one of your gives to our Republican friends. The GAO 
just came out with a report the other day--published by Reuters 
yesterday, I think--``Corporate tax breaks cost U.S. Government 
$180 billion per year.'' A huge amount of money.
    Now, what I do not understand is at a time when one out of 
four corporations pay nothing, many major corporations, some of 
the most profitable corporations of the world, pay nothing--
maybe they get a rebate from the IRS--why you think it is more 
preferable to cut benefits for disabled vets or cut Social 
Security on people making $15,000, $16,000 a year, rather than 
getting some revenue from these large corporations?
    Secretary Lew. So, when, I guess I am not sure that is the 
way I would describe the trade-off. If we are saying we need 
$580 billion of revenue and we are saying that revenue has to 
come from closing tax loopholes that go to people in the top 
brackets, one could argue it is a different form. I mean, the 
beneficiaries of corporate profits are in those top brackets. 
So if we can increase the competitiveness of the United States 
and have job creation expand and we get the revenue on the 
individual side, that was the--
    Senator Sanders. Well, that is a big if, and I understand 
that many of the people who get their dividends from corporate 
stock are in the top 1 percent. But, on the other hand, as you 
know, while corporate profits today are at an all-time high, 
corporate income tax revenue as a percentage of GDP is near a 
record low. True? That is true. I mean, that is--and today, as 
opposed to, say, in 19--
    Secretary Lew. I do not know if it is a record. It is low.
    Senator Sanders. Well, I will give you an example. Back in 
1952, 32 percent of all the revenue generated in this country 
came from large corporations. Today that number is 9 percent.
    Now, many of our friends here talk about how high corporate 
tax rates are. You know--and I think you have indicated--that 
is the nominal rate.
    Secretary Lew. The statutory rate.
    Senator Sanders. Right. The effective tax rate is just 12 
percent, and, in fact, in 2011--and this is an important point 
to make--corporate revenue as a percentage of GDP was just 1.2 
percent lower than any other major country in the OECD.
    So my question, again--I do understand your point. But are 
you really suggesting to me, when the GAO tells us we are 
losing $180 billion per year, there is no way to capture 
revenue from corporate tax loopholes to help us with deficit 
reduction that is preferable than cutting Social Security?
    Secretary Lew. Senator, if the world were a binary choice 
between those two, it would be different than the world that, 
you know, the budget is in. If you add to that the choice of 
raising revenue from the top brackets, I think that is a better 
way to do it than to do something which might be something 
there is an argument about, but we believe is something that is 
a competitiveness issue for bringing jobs to the United States, 
which is lowering the business tax rate.
    Senator Sanders. But you can do both, and, again, I would 
argue that right now corporate revenue as a percentage of GDP 
today is the lowest among any OECD nations.
    Secretary Lew. I would be happy to follow up on this, 
Senator. The effective bonus depreciation over the last number 
of years has been to reduce taxes now so that taxes will be 
higher in the future. The deductions have been accelerated and 
taken now. And I am not sure the extent to which that explains 
the phenomenon of the lower corporate tax share, but I would be 
happy to take a look at it.
    Senator Sanders. Thank you.
    Chairman Murray. Senator Kaine, my understanding is you had 
no additional questions.
    Senator Whitehouse, the last 5 minutes is yours.
    Senator Whitehouse. Thank you very much. Two things.
    As you are considering lowering the corporate tax rate for 
the folks at the top, we might want to consider figuring out 
ways to raise the corporate tax rate for the folks at the 
bottom. Rhode Island has CVS located in it, which is a great 
chain of drug stores pretty much all across the country now, 
and being a retail store, they pay pretty much a 35-percent 
rate. And to see their rate go down I think would be very good 
for them and probably good for Rhode Island.
    At the same time, a lot of Rhode Islanders take cruises, 
and a lot of them take cruises on Carnival Cruise Lines. 
Carnival Cruise Lines pays a 0.8 percent corporate tax rate. 
And it is hard for me to understand why even if you have 
adjusted CVS' rate from 35 to 25--let us just pick that as a 
hypothetical number--you still have Carnival Cruise Lines out 
there at 0.8, and they are not unique. You can look at tech 
companies, you can look at electric manufacturing companies, 
you can look at oil companies, and over and over again what 
they are paying to the United States in taxes is zero.
    So I hope we will consider ways to try to prevent that kind 
of tax evasion on the corporate side as well as just lowering 
the top. We should lower both bands if we are going to go that 
way, in my view.
    Secretary Lew. Well, I think there are two things that are 
at issue. One is, in some of the cases you mentioned, it is 
because of deductions and credits that are available that in 
broadening the base would go away. And that is why tax reform 
will be very hard, because it will be a tax increase on 
companies that take advantage of special provisions. There are 
other--
    Senator Whitehouse. But it is also sheltering offshore--
    Secretary Lew. That is my second--the other issue is 
overseas shelters, and that falls into two categories. There 
are legal and illegal overseas transactions. We have worked 
very hard to try and create an environment of much greater 
transparency so that we can see and other countries can see 
when companies are illegally hiding income. And we are very 
open to exploring ways to close down legal means of creating 
tax havens.
    Senator Whitehouse. One thing that I would like to mention 
on that subject is that I think, at least in Rhode Island, when 
I talk to people about this, folks understand about spending 
and they are concerned. They understand about borrowing and 
they are concerned. They understand about revenues, and they 
know that we are at a more or less all-time low, at least in 
modern history, for tax revenues. And then there is that fourth 
piece that rarely gets discussed, and that is all the tax 
spending, all the tax earmarks, what goes out the back door of 
the Tax Code.
    And what many Rhode Islanders do not understand--and I will 
ask you to check my numbers. I think they are roughly right. If 
we allow for no growth, then in the 10-year budget period we 
are looking forward to more than $11 trillion goes out the back 
door of the Tax Code. If you allow for reasonable expectations 
about growth, more than $14 trillion goes out the back door of 
the Tax Code. And if you count the amount of revenue that is 
hidden offshore and never even gets calculated in the Tax Code, 
guesstimates range on that pretty widely, but it could be $17, 
$18 trillion, out of which, to Senator Kaine's point, what you 
are looking for is a pretty small percentage. But it is also 
astounding to most people that actually if you count it that 
way, more money goes out the back door of the Tax Code than 
actually gets collected by the United States Government in 
revenues. So why would we not want to look at that part of the 
Tax Code other than it tends to go to people who can get deals 
into the Tax Code and it is biased towards higher-income and 
politically connected institutions? Correct?
    Secretary Lew. We very much want to go at that base of $1 
trillion a year of tax expenditures. It may be that we can 
accomplish more than others have been able to accomplish in the 
past and we can do better. And we look forward to working with 
you on that.
    Senator Whitehouse. And the last point, and as Monty Python 
said, ``Now for something completely different,'' as Secretary 
of the Treasury, you oversee the Commissioner of the Internal 
Revenue Service. The Internal Revenue Service oversees the tax-
exempt organizations. The tax-exempt organizations include 
501(c)(4)s. 501(c)(4)s, some of them, are groups that are 
engaged in very aggressive political activity. One study showed 
32 different 501(c)(4)s actively engaged in political activity, 
in fact, even reporting it to the Federal Election Commission, 
but they signed a form at the IRS that said they would do no 
political activity at all. And in a hearing I held on the 
Judiciary Committee last week, it turned out that zero cases 
had been referred by the IRS to the Department of Justice, not 
over complicated tax matters, not over peculiar calculations of 
Tax Code liability, but over whether these statements were 
false or not, which, as the woman from the DOJ said, ``That is 
a plain-vanilla criminal case.'' But they are getting exactly 
zero referrals, and every witness said that the IRS was the 
wrong place for these cases to be made. They were ill suited, 
un- or understaffed, and unwilling.
    So I would ask you to consider having a conversation with 
the Attorney General about changing the paradigm between the 
IRS and the Department of Justice so that it can make these 
plain-vanilla cases without the IRS giving a referral where the 
IRS has apparently fallen down pretty heavily in making those 
referrals.
    I think this study took 72 501(c)(4)s and looked at them, 
and of them, 32 had made the apparently totally false statement 
that they would not engage in political activity. And I think 
in a country of laws, failing to enforce the law is a mistake.
    Secretary Lew. I am happy to take a look at it, Senator.
    Senator Whitehouse. I appreciate it. We will look forward 
to working with you on it. Thank you.
    Thank you very much, Madam Chair.
    Chairman Murray. Thank you very much.
    Let me thank all of our Senators for participating in this 
hearing today. Secretary Lew, thank you very much for coming 
here to testify and your incredibly important work on all this.
    As a reminder to all my colleagues, additional statements 
and/or questions for the record are due by 12:00 p.m. tomorrow. 
And we will meet again next Tuesday, April 23rd, to consider 
the President's fiscal year 2014 budget and veterans programs. 
Secretary Shinseki will be here. This is going to be an 
important hearing, and I encourage our members to attend.
    Thank you very much. Thank you, Secretary Lew.
    Secretary Lew. Thank you, Madam Chair.
    [Whereupon, at 4:54 p.m., the Committee was adjourned.] 

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THE PRESIDENT'S FISCAL YEAR 2014 BUDGET PROPOSAL AND VETERANS' PROGRAM 
                               PROPOSALS

                              ----------                              - 
- -


                        TUESDAY, APRIL 23, 2013

                              United States Senate,
                                   Committee on the Budget,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 10:33 a.m., in 
Room SD-608, Dirksen Senate Office Building, Hon. Patty Murray, 
Chairman of the Committee, presiding.
    Present: Senators Murray, Nelson, Whitehouse, Merkley, 
Baldwin, Kaine, King, Sessions, and Ayotte.
    Staff Present: Evan T. Schatz, Majority Staff Director; and 
Marcus Peacock, Minority Staff Director.

              OPENING STATEMENT OF CHAIRMAN MURRAY

    Chairman Murray. Good morning, and welcome to this 
morning's hearing on the fiscal year 2014 budget and the fiscal 
year 2015 advance appropriation request for the Department of 
Veterans Affairs. Thank you to Secretary Shinseki and your team 
for being here this morning. I know you have been very busy 
over the past couple weeks as you worked to get this budget 
request out.
    One month ago, the Senate passed our budget resolution. 
There was plenty of debate and plenty of disagreement, a long 
markup in this Committee, and extensive consideration on the 
floor. But there was never any question about the importance of 
providing for our Nation's veterans.
    The budget resolution protected funding for veterans 
benefits and services. It also included deficit-neutral reserve 
funds to assist in several important policy areas, including 
eligibility and delivery of benefits, rural health care, 
education and training, veterans' families, and homeless 
veterans.
    The Department's budget submission will help inform us as 
we move forward in discussions with the House on a compromise 
budget resolution.
    The President's request is $152.7 billion for VA in fiscal 
year 2014 and $55.6 billion in advance appropriations for 
medical care in fiscal year 2015. Overall, this is a strong 
request, and it represents an increase of more than 10 percent 
over last year. It also makes important investments in some 
high priority areas.
    As we have discussed in the past, it is important that the 
Department follows good financial management principles. This 
means being straightforward with Congress about what the 
Department's real needs are.
    It also means accurately projecting costs and savings. And 
it goes without saying that we expect the Department to be good 
stewards of taxpayer dollars, especially in this difficult 
budget environment. There is no place for wasteful spending or 
inefficiency.
    One of the newest developments is VA's recent announcement 
that it will focus on expediting claims that have been pending 
for more than a year by granting provisional ratings. This will 
allow veterans to receive benefits while their claims are 
finalized. I am pleased the Department is taking action and 
trying a new initiative to make a difference for our veterans.
    But I still have a number of questions about how this will 
be implemented. Certainly we cannot maintain the status quo, 
where almost 70 percent of our veterans are waiting 125 days or 
more for their claims.
    Secretary Shinseki, considering the steps you have taken to 
address this problem so far, I think you share my concern and 
dedication to solving this. So I look forward to exploring this 
new initiative with you today.
    I was pleased to see the Department requested almost $7 
billion in funding for mental health care. This is an increase 
of more than 7 percent.
    During the last Congress, we took a hard look at mental 
health in VA and found some serious problems. VA was generally 
providing good mental health care. But understaffing and long 
wait times were plaguing the VA and keeping veterans from the 
care they needed.
    Importantly, we also found that the Department did not have 
an accurate, reliable way of measuring the need for mental 
health care and of distributing its staff effectively. We asked 
the Department to undertake a number of reforms to improve 
access to care and bring down unacceptably long wait times. 
This included key changes that were part of the Mental Health 
ACCESS Act.
    Today, I hope we will hear more about what progress the 
Department is making in implementing those changes.
    As I have said before, not every veteran will be affected 
by these invisible wounds. But when a veteran has the courage 
to stand up and ask for help, the VA must be there every single 
time. VA must be there with not only timely access to care, but 
also the right type of care.
    This is especially important at a time when 22 veterans 
every day are taking their own lives. The VA has a number of 
good initiatives, such as the Veterans Crisis Line and the 
Suicide Prevention Coordinators, but we clearly need to do 
more.
    As you know, women are the fastest growing part of the 
veteran population. The VA has needed to make major changes to 
ensure there is a full range of health services for female 
veterans, that facilities are safe and privacy is protected, 
and support services are available. The requested $422 million 
for gender-specific care for women is a 13.7-percent increase 
over last year.
    I will also continue working to end the terrible epidemic 
of military sexual assault in the services. In the coming days, 
I will be introducing legislation to help prevent sexual 
assault and protect the victims. And at the same time, the VA 
must continue to provide for those suffering from MST. Only a 
small fraction of sexual assaults in the military are reported, 
so the VA has to provide both the highest quality treatments, 
but also outreach and screening to help the victims get into 
care.
    Developing a seamless transition is another challenge the 
VA and DOD continue to face, though we have made important 
progress.
    The requirement in the VOW to Hire Heroes Act making the 
Transition Assistance Program mandatory, along with a major 
overhaul of the curriculum, has created a much more useful tool 
to assist servicemembers who are leaving the military. And the 
feedback I have received is that even colonels and sergeants 
major found the training invaluable. If even those senior 
leaders are benefitting from the help on resume writing and VA 
resources, we are doing something right.
    Other requirements, to expand job opportunities and 
eliminate barriers to getting civilian licenses and 
credentials, are key to combating the unemployment rate for 
veterans which is still far too high. We have made a great deal 
of progress working with employers to encourage them to hire 
veterans. And I will continue to engage our private sector 
partners to help them understand the skills veterans bring to 
the table and why they make the best of employees.
    Getting our veterans into education programs, good jobs, or 
starting small businesses does not just benefit the veteran; it 
helps us grow our economy and the middle class. It builds on 
the investments we have made in our veterans as they continue 
to help our communities, our businesses, and their fellow 
veterans.
    While we are making these investments in our veterans, we 
must also continue to invest in VA infrastructure. I have 
concerns about the proposed cuts to major construction and non-
recurring maintenance. The Department is proposing a 47-percent 
cut in non-recurring maintenance and only $342 million in major 
construction funding. This comes while the Department still 
estimates it has between $54 and $66 billion in infrastructure 
needs. I was pleased to see the request includes funds to 
complete work on the mental health building in my home State of 
Washington at the VA hospital in Seattle.
    Information technology also provides a critical role in 
many of the Department's major initiatives, and it is a key 
part in giving our servicemembers a truly seamless transition 
from active duty to civilian life.
    The President's budget request includes an overall 18-
percent increase in IT funding for the VA. This request 
includes a number of important priorities, such as the 
continued development and implementation of the Veterans 
Benefits Management System.
    The request would also fund further development of the 
Virtual Lifetime Electronic Record, which, while implemented 
regionally, has not been rolled out nationwide. However, the 
recent announcement by VA and DOD that the Departments will no 
longer pursue development of a single electronic health record 
has raised important questions about the future of the iEHR 
program.
    The Departments must clearly define the path forward for 
this important project and address the underlying reasons for 
the program's abrupt change of course. VA and DOD have to make 
sure there is clear, strategic leadership to guide further 
development of the iEHR program.
    So, Secretary Shinseki, I want to thank you for your 
dedication and leadership over the past several years. It is 
not easy to steer the Federal Government's second largest 
Department. And it is not easy to make the changes that are 
needed.
    You have set some very ambitious goals, including ending 
veteran homelessness, breaking the claims backlog, and 
transforming the way the VA delivers health care.
    Setting these high goals is a good thing. And I am 
confident you have set these goals because of your continuing 
demand for excellence on behalf of our Nation's veterans.
    We recognize the good progress that has been made, but we 
will continue to push you to meet those goals. So I am looking 
forward today to a constructive discussion about the challenges 
ahead, the concerns that we have, and what we can do to provide 
the resources and authorities that you need.
    I will now call on Senator Sessions, our Ranking Member, 
for his opening statement.

             OPENING STATEMENT OF SENATOR SESSIONS

    Senator Sessions. Thank you very much, Chairman Murray, and 
thank you, Mr. Secretary, for being here today. I recall well 
our working together when you were Chairman, and you produced 
the Stryker vehicle that is so much a part of the military army 
today. I am real impressed with your performance and leadership 
on that, and you serve your country so well with integrity and 
courage.
    Let me begin by saying that much of America's greatness 
comes from our veterans. I believe that supporting them, as we 
have committed to do, is one of the main priorities of the 
United States Government. This is a belief that goes well 
beyond party lines. It goes beyond State lines.
    This budget request is one that, in a time where 
sequestration is affecting many programs, including our defense 
budget, the defense budget is getting cut significantly. It 
looks like another $480 billion or so, $490 billion, in cuts in 
addition to an almost equal number previously. But we do see a 
$2.5 billion increase from last year's levels in support of the 
commitment of the Nation to those who have served and 
sacrificed for our country. They served not because they had to 
but because they were willing and able to serve. It is 
undeniable we owe much to the courageous men and women who put 
their lives on the line for their country and their countrymen 
repeatedly.
    So my concern today with the budget that is before us is 
whether or not we are truly serving our veterans effectively in 
the best way we can. Can we do it better? As we examine the VA 
budget more closely today and hear from Secretary Shinseki, it 
is my hope that the questions that I have and others have will 
be answered.
    I hear from veterans in Alabama about the major concerns 
facing the veteran population, and the top-most concern I am 
hearing right now is about the very serious backlog of 
disability compensation claims. That is just a top concern for 
our veteran community.
    Another thing I heard recently was a passionate call by 
former servicemember I believe in Vietnam who expressed 
concerns about the suicide situation in the military and among 
veterans. The Chair has raised that. I do think we need to 
focus on that and ask if there are other things that we can do 
to confront that problem.
    Mr. Secretary, in last year's fiscal year 2013 budget, you 
requested an increase of $9.2 billion to decrease the backlog 
of disability claims. I have a press release that your 
Department issued in February of 2012 discussing the fiscal 
year 2013 VA budget. It states, and I quote: ``By 2013, the 
budget projects no more than 40 percent of compensation and 
pension claims will be more than 125 days old.''
    It goes on to say that claims were at 60 percent in 2012. 
But as of last Monday, April 15th, disability compensation 
claims were at 70 percent, with nearly 900,000 claims pending 
for more than 125 days. So this is a problem that is not 
getting better, it would appear, but it hasten worse.
    This budget for fiscal year 2014 includes an increase of 
$10 billion over the fiscal year 2013 levels for the Veterans 
Benefit Administration, which administers those disability 
claims. How do we know this money is being used to fix the 
backlog when the performance levels on the issue are worse than 
previously? So we will have to look at that.
    Another issue that the Chair mentioned was the electronic 
records. We have a national discussion of those issues at the 
time of the concern at Walter Reed, and that was perceived to 
be a way to improve dramatically the seamlessness of our health 
care system. That it is not there may be justifiable, but it is 
a concern. We would like to see it get there so it is fully 
operational in serving like we think it can serve to benefit 
health care and avoid delays and paperwork problems.
    The budget before us now states that the backlog problem 
will be under control by 2015. I look forward to greater detail 
on your plan to do this, and I am sure my colleagues do as 
well.
    Mr. Secretary, thank you and your team for being with us 
today. I know you care about these issues, and we look forward 
to cooperating with you in a common concern.
    Chairman Murray. Thank you very much, Senator Sessions.
    Now let me introduce our witness today. Our panel consists 
of Veterans Affairs Secretary Shinseki. He is accompanied by 
Under Secretary for Health Robert Petzel and Under Secretary 
for Benefits Allison A. Hickey. Also accompanying the Secretary 
are Under Secretary for Memorial Affairs Steve L. Muro; Acting 
Assistant Secretary for the Office of Information and 
Technology Stephen W. Warren; and Executive Director for the 
Office of Management and Chief Financial Officer Todd Grams.
    We look forward to hearing from you. All of the witnesses' 
statements will be in the record. Secretary Shinseki, we will 
hear from you verbally, and then we will go to questions and 
answers from all of us. So thank you very much for being here, 
Secretary Shinseki.

 STATEMENT OF THE HONORABLE ERIC K. SHINSEKI, SECRETARY, U.S. 
                DEPARTMENT OF VETERANS AFFAIRS;

ACCOMPANIED BY THE HONORABLE ROBERT A. PETZEL, MD, UNDER SECRETARY FOR 
            HEALTH; THE HONORABLE ALLISON A. HICKEY, UNDER SECRETARY 
            FOR BENEFITS; THE HONORABLE STEVE L. MURO, UNDER SECRETARY 
            FOR MEMORIAL AFFAIRS; STEPHEN W. WARREN, ACTING ASSISTANT 
            SECRETARY FOR THE OFFICE OF INFORMATION AND TECHNOLOGY; AND 
            W. TODD GRAMS, EXECUTIVE DIRECTOR FOR THE OFFICE OF 
            MANAGEMENT AND CHIEF FINANCIAL OFFICER
    Secretary Shinseki. Well, thank you, Madam Chairman, 
Ranking Member Sessions, distinguished members of the 
Committee. Thank you for this opportunity to present the 
President's 2014 budget and 2015 advance appropriations 
requests for the VA. We deeply value your partnership and 
support in providing the resources needed to assure quality 
care and services for veterans.
    Let me also acknowledge other partners who may be here 
today, our veteran service organizations with whom we work 
fairly closely and whose insights and support make us much 
better at our mission of caring for veterans, their families, 
and survivors.
    Madam Chairman, thank you for introducing the members of 
the panel and also for accepting my written statement.
    The 2014 budget and 2015 advance appropriations requests 
demonstrate the President's steadfast commitment to our 
Nation's veterans. I thank the members for your resolute 
commitment to veterans as well and seek your support on these 
requests.
    The latest generation of veterans is enrolling in VA at a 
higher rate than previous generations. Sixty-two percent of 
those who deployed in support of operations in Afghanistan and 
Iraq have used at least one VA benefit or service.
    VA's requirements are expected to continue growing for 
years to come, and our plans and resources must be robust 
enough to care for them all.
    The President's 2014 budget for VA requests, as the 
Chairman outlined $152.7 billion--$66.5 billion in 
discretionary funds and $86.1 billion in mandatory funding-- an 
increase of $2.7 billion in discretionary funds, 4.3 percent 
above the 2013 level.
    This is a strong budget which enables us to continue 
building momentum for delivering three long-term goals we set 
for ourselves roughly 4 years ago, and the first is to increase 
veterans' access to VA benefits and services.
    The second is to eliminate the disability claims backlog in 
2015, understanding when we open access, we are adding to 
workload.
    And then, finally, and thirdly, key for us is ending 
veteran homelessness in 2015.
    These were bold and ambitious goals 4 years ago. They 
remain bold and ambitious today because veterans deserve a VA 
that is an advocate for them and one that puts resources behind 
its words.
    Access. Of the roughly 22 million living veterans in this 
country today, more than 11 million now receive at least one 
benefit or service from VA, an increase of over 1 million 
veterans in the past 4 years. We have achieved this by opening 
new facilities, renovating others, increasing investments in 
telehealth and telemedicine, sending mobile clinics and vet 
centers to remote areas where veterans live, and then using 
every means available, including social media, to connect more 
veterans to VA. Increasing access has been a success story at 
VA.
    Regarding the backlog, too many veterans wait too long to 
receive benefits they deserve. We know this, and it is 
unacceptable. And no one wants to turn this situation around 
more than this Secretary or Secretary Hickey or the workers at 
VBA, 52 percent of whom are veterans themselves.
    We are resolved to eliminate the claims backlog in 2015, a 
goal we set a few years ago. And in 2015, the intent is that 
claims will be processed in 125 days or less at a 98-percent 
accuracy level.
    Our efforts mandate investments in VBA's people, processes, 
and technology. In terms of our investments in people, more 
than 2,300 claims processors have completed training to improve 
the quality and productivity of their claims decisions. More 
are being trained each day, and this will be an ongoing effort. 
VBA's new employees now complete more claims per day than their 
predecessors.
    Processes. Use of a disability benefits questionnaire, DBQ, 
an online form for submitting medical evidence, has dropped 
average processing times of medical exams and improved 
accuracy. We are now organized into three lanes for processing 
claims: an express lane for those that will predictably take 
less time; a special operations lane for unusual cases or those 
requiring special handling; and the core lane for the 
remainder, which will be the majority of claims.
    Technology is critical to ending the backlog. Our paperless 
processing system, which we call VBMS, Veterans Benefits 
Management System, will be faster, improve access, drive 
automation, and reduce variance. Thirty-six regional offices 
now VBMS. All 56 will have it by the end of this year.
    Finally, homelessness. The last of our three priority goals 
is to end veterans' homelessness, again, in 2015. Since 2009, 
we have reduce the estimated number of homeless veterans by 
more than 17 percent. The latest available estimate from 
January 2012 is 62,600. There is more work to be done here, but 
we have mobilized a national program that reaches into 
communities all across this country. Prevention of veterans' 
homelessness will be our follow-on main effort for the long 
term.
    So, Madam Chairman, we are committed to the responsible use 
of the resources you and this Congress provide. Again, thank 
you for the opportunity to appear here today and for your 
support of veterans, and we look forward to questions.
    [The prepared statement of Secretary Shinseki follows:] 

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    Chairman Murray. Thank you very much, Mr. Secretary.
    Let me start. As I mentioned, you have a new announcement 
of a new initiative to expedite claims that have been waiting 
for over a year, and that is encouraging, and I am glad to see 
that the Department is taking action, but I do have some 
questions about how it is going to be implemented, and I wanted 
to ask you, if the VA determines the veteran's final rating is 
lower than the provisional rating, will the Department seek to 
recover money that has already been paid to that veteran?
    Secretary Shinseki. Madam Chairman, you know, that is a 
question--what I would say is that, historically, when we have 
established a standard for a veteran, we have usually stayed 
with that. And let me call on Secretary Hickey here, but my 
intent is that the provisional rating that is provided will be 
on those issues for which we have clarity and documentation and 
we can render a decision. For issues where documentation is not 
provided, those are the issues that will remain open up to a 
year for veterans to locate, with our help even, documentation 
that would allow us to make a decision there.
    Secretary Hickey?
    Ms. Hickey. Chairman Murray, thank you for the question and 
for your interest in this initiative, which we think is really 
important to ensure that we are taking care of those veterans 
who have waited the longest while we completed the more than 
260,000 Agent Orange Nehmer claims to take care of our Vietnam 
veterans over the last 2-1/2 years.
    We are using the provisions that allow us to make good 
decisions, so we will continue under this provisional criteria 
to use service treatment records, to use private medical 
records, to use the information available on our veterans in 
terms of the nature and character of their service. So all the 
similar evidence that we have used in previous decisions we 
will use again to ensure that we do not make any of those kinds 
of decisions. I do not expect to see any of those decisions 
where we overcompensate for a claim.
    The other thing that we will do is we will keep--the reason 
for the provisional decision, that would put a really huge 
safety net under every one of our veterans. We are going to 
keep the record for a whole year, the ability for our veterans 
to come back with additional evidence. And we will keep asking 
if we do not have--
    Chairman Murray. So the additional year will only be to 
provide information to have an additional claim, not to lower 
the claim?
    Ms. Hickey. The reason for the year is to allow additional 
evidence to increase the rating, if necessary. So I think in 
that, it advantages our veterans for that additional year. And 
then they still have, after that, the same appeal processes 
that they have had in the past. So we do not anticipate having 
conditions where we overpay a veteran under this initiative.
    Chairman Murray. Mr. Secretary, are you going to need 
additional support from the Defense Department in order to meet 
the timelines you proposed?
    Secretary Shinseki. For these particular claims?
    Chairman Murray. Correct.
    Secretary Shinseki. We are dealing with claims in our 
inventory right now, and so we are--I think we have as much 
control as we need. Of course, we work closely with the Defense 
Department on an ongoing basis because the sharing of data is 
something that goes on daily.
    Chairman Murray. Okay. There are a number of different 
services that are contingent on a disability rating. Benefits 
from health care, home loans, designation as a disabled 
veteran-owned small business, they all rely on the rating that 
you are talking about. How will this provisional rating affect 
those other benefits?
    Secretary Shinseki. Secretary Hickey?
    Ms. Hickey. Chairman, thanks for the question. I will tell 
you that in the same way that we provide those additional 
benefits today associated with a claims decision, we will 
continue that avenue.
    I will say, though, that any veteran who is returning home 
today does not require a decision from us to seek the 5 years' 
worth of medical care that this Congress made provision for. 
They can still get that by just showing up to one of the VA 
medical hospitals or clinics and get that medical care for free 
without a decision even today associated with this new 
initiative. It does not have an impact there. They still can 
get health care.
    Chairman Murray. Okay. Under this initiative, as you just 
described, there is the provisional rating that will be given 
to them, and then they can make continued claims. So are we 
looking at increasing the workload by requiring two ratings 
decisions instead of one?
    Ms. Hickey. Chairman, we are not. We are actually trying to 
benefit the veteran who has been waiting the longest in this 
case. We want to get a decision to them. If that veteran 
returns after the fact saying, ``I have additional 
information,'' we will expedite that claim to the front of the 
line. We will re-rate it based on the additional information; 
then we will get them a final decision.
    Chairman Murray. Okay. There are a number of efforts going 
on, programs like Benefits Delivery at Discharge and fully 
developed claims process. Both have been successful. They need 
to be maintained. A successful Integrated Disability Evaluation 
System, the IDES, is critically important to our injured 
servicemembers. There is a lot of work that still needs to be 
done from both DOD and VA on that, and we cannot lose sight of 
keeping making improvements to fundamental issues in the claims 
processing that we still have.
    So are you going to be able to implement this new 
initiative and still support all those other efforts?
    Secretary Shinseki. Chairman Murray, that is our intent, 
and as you implied earlier, this requires a level of continuous 
synchronization between DOD and VA.
    As you know, BDD, Benefits Delivery at Discharge, Quick 
Start, IDES, Integrated Disability--these are DOD programs in 
which VA has provided our capability to support on medical 
exams. And so there is good collaboration there. We do this 
best when we have some indication of what the flow is, and then 
we match up.
    About the only times we have run into difficulty here is 
when the flow exceeded what we thought it was going to be, and 
then there is a period in which we have to generate additional 
capability. But these are things we work on a daily basis.
    Chairman Murray. Okay. I have a number of additional 
questions. I am going to let my Committee members go ahead. 
Senator Sessions had to leave for a few moments, so I will turn 
to Senator Ayotte first.
    Senator Ayotte. Thank you, Madam Chairman. I want to thank 
all the witnesses for being here, for what you do is so 
important to the country, and how we treat our veterans is 
incredibly important.
    I wanted to ask you, Mr. Secretary, New Hampshire is a 
State that does not have a full-service veterans hospital. And, 
in fact, as you know, Alaska and Hawaii also do not, but they 
at least have an active-duty hospital there that New Hampshire 
does not have as well. So we have nearly 10 percent of our 
population--we are a State that serves--has served in the 
military, and many of our veterans are traveling long distances 
to get the care that they deserve and across State lines, and 
it is very difficult for many of them.
    So I wanted to ask you, does the VA have a plan to ensure 
that all States have access to a full-service veterans 
hospital? Or in the absence of a hospital, you have, for 
example, instances where you have entered into a contract, for 
example, with the Concord Hospital. And so while our veterans 
are waiting, we would like a full-service hospital. But even 
access to health care that is already available to, for 
example, local hospitals would be very important to our 
veterans.
    Could you help me with that?
    Secretary Shinseki. Sure. Senator, I am going to call on 
Dr. Petzel here in a second, but let me just say up front, for 
4 years now my commitment has been that veterans ought not to 
have to wait for access to health care, and so for Iraq and 
Afghanistan veterans, this discussion about 5 years of care 
under VA is important. It also increases our responsibilities. 
And it is not just access, but it is access to quality health 
care.
    Senator Ayotte. Right.
    Secretary Shinseki. And it should not matter whether it is 
a veteran living in a rural area or a veteran in an urban 
environment. And so we have to create the opportunities to meet 
those requirements. Whether it is a full-service hospital or 
some combination of working with quality hospitals that are 
currently available to us, we arrange our relationships to 
provide what the veterans deserve.
    And so with that, Dr.--
    Senator Ayotte. Mr. Secretary, I certainly want to hear 
from the doctor. I just wanted to follow up, though. Would you 
agree with me that New Hampshire is certainly in a unique 
position vis-a-vis other States, not having that full-service 
access for our veterans?
    Secretary Shinseki. I would, Senator. But I would also say 
that in terms of the access criteria that I described, one of 
the things, for example, we do is provide fee basis for those 
veterans to quality medical facilities that are already there. 
And this is our fee-basis arrangement. I think we spend maybe 
$5 billion to provide that kind of access, and we are 
increasing it in the 2014 budget.
    Senator Ayotte. I appreciate that, and I will have a couple 
of specific follow-ups on certain areas of our State with 
regard to more access. Thank you.
    I wanted to allow the doctor to answer.
    Dr. Petzel. Thank you, Senator. The Secretary described, I 
think, the situation quite well. Specifically in New Hampshire, 
we have a very extensive outpatient operation at Manchester and 
a number of community-based outpatient clinics around the 
State, as well as the access to telehealth.
    In Manchester particularly, there is specialty services as 
an outpatient available, and probably more than 90 percent of 
the health care needs of people are met in those kinds of 
services. We have what I would deem to be an excellent contract 
with Concord for the immediate hospitalization right in that 
metropolitan area of Manchester. And then for quaternary and 
tertiary care, people are referred, as they had been previously 
even with inpatient beds, to the Boston VA Medical Center and 
also to the White River Junction VA Medical Center.
    I think one of the most important indicators of the fact 
that this is working well is the satisfaction of the veterans 
that use health care in that area with the Concord contract. 
They are very satisfied. They have good access to really 
excellent inpatient care through that contract and through fee 
basis.
    Senator Ayotte. So, Doctor, that contract with Concord is 
only providing that type of access to a limited number of 
veterans in our State. And so many of them that have to, for 
example, live in the North Country of our State, they are in a 
position where--and I would love to have you all come up to the 
northern part of our State and see the geography up there and 
see the mountainous terrain and where they are having to drive 
to get to White River Junction, and many of them just to get 
from the north part of the State to Manchester, 150 miles. And 
the same thing with trying to go over to Massachusetts. Many of 
them are having very-- difficulty with it.
    So I wanted to ask you in particular, because the Concord 
contract, I agree, is a very positive thing, and it is my hope 
that you will expand that to other areas of the State that have 
many geographic challenges, including, for example, Berlin. I 
was up at Androscoggin Hospital recently, and they are very 
interested for the northern part of our State of having a 
similar contract that you already have in place with Concord. 
And I hope that that is something that you would consider, 
particularly in the northern part of New Hampshire.
    Dr. Petzel. Yes, we would.
    Senator Ayotte. I appreciate it. And as a follow-up to 
that, our delegation on a bipartisan basis, we appreciate, Mr. 
Secretary, that we have asked you in Colebrook, which is even 
farther north than Berlin that I just told you in New 
Hampshire, that you had written our delegation in July of 2012 
saying that you were considering putting a telehealth 
technology partnership in that area. So I wanted to follow up 
on where that is.
    And then we have also requested a view if you would 
consider putting a part-time CBOC in that area in conjunction 
with the telehealth initiative, because it is so far north for 
our folks to go from there over to White River Junction, that 
they are having a lot of difficulties. And our veterans in our 
North Country deserve the same kinds of access to other more 
populated areas of the state, I think you would agree.
    Dr. Petzel. Thank you, Senator. We can explore both of 
those that you mentioned. The telehealth clinic, as I 
understand it, is proceeding apace. I do not know exactly where 
it sits now. We can certainly get back to you about that. And 
the partial clinic that you described, we will look into that.
    Senator Ayotte. I really appreciate that, and this is 
something that my colleague Senator Shaheen and I have been 
working on together, and our entire delegation feels this is 
very important to our veterans, particularly in the northern 
part of our State. So thank you.
    Chairman Murray. Thank you.
    Senator Whitehouse?
    Senator Whitehouse. Thank you, Madam Chair, and welcome, 
Secretary Shinseki and your team. There are two things I would 
like to raise.
    The first is just to note my continuing objection to the 
President's decision to put the so-called chained CPI benefit 
cut in for Social Security recipients and for disabled 
veterans. The context for this is that a 100-percent disabled 
veteran who begins to receive benefits at age 30, which is not 
unheard of considering the young men and women who are 
sustaining very significant injuries overseas now, would see 
$1,425 less a year at age 45, $2,341 less a year at age 55, and 
$3,233 less a year at age 65. And as you know, we are not very 
profligate in our spending on these veterans. This is a pinch 
that they will really feel.
    And my take is that, at least with respect to Social 
Security, the COLA is too low already. When you look at the 
kind of things that seniors and disabled veterans are likely to 
be spending their resources on, it is food, it is health care, 
it is heat, and to a degree, perhaps also gasoline. When you 
look at those things, you look at 2010, food was up 1.5 
percent, medical care was up 3.3 percent, gas was up 13.5 
percent, fuel oil was up 13.5 percent. The COLA went up zero 
percent. It strikes me that for that year the COLA was too low, 
not too high.
    You go to the next year, food was up 4.5 percent, health 
care was up 3.5 percent, gas was up 9.5 percent, fuel oil was 
up 14.3 percent. That is on top of the increases in the 
previous year, not incorporating them, so you would actually 
have to sum those increases and add a little bit for the 
compounding. Again, zero in the cost-of-living adjustment.
    So I think that this is a very misguided strategy, and I 
just want to serve notice to everybody in the administration 
who has a role in this that I intend to fight it with whatever 
means I have at my disposal.
    The second piece that I want to--you can comment on that if 
you want, but let me get my question I have to you out, which 
is something specific to Rhode Island. You have been to Rhode 
Island a couple of times to visit Senator Reed and myself, and 
each time I have talked to you about the problem we have that 
the VA has a terrific electronic health record, but if a 
veteran gets hit by a bus in Kennedy Plaza and rushed to the 
Rhode Island Hospital emergency room, it does not do them any 
good because the VA record is enclosed within the VA system.
    Rhode Island is one of the most advanced States in terms of 
developing electronic health records and providing true 
interoperability among different components. And we are working 
very hard to try to integrate the VA into that process. It is 
not easy. There are technical problems. There are funding 
problems and so forth. But what I would like to ask you to do 
is to convey your view, if it is your view, down to the folks 
in Rhode Island that this should be a priority for them. And to 
the extent that the so-called VLER Program, the Virtual 
Lifetime Electronic Record initiative, is extended, I would 
like to have Rhode Island become--I think you call them 
``VLER,'' ``a VLER site.''
    I honestly do not think that there is a State that is 
further ahead than Rhode Island in terms of developing an 
interoperable electronic health record. There are individual 
companies that are where you can have a CEO direct here is what 
we are going to do, but in terms of a whole community of 
everybody, from the imagers to the laboratories to the 
hospitals to the providers, I really think that we are at the 
forefront. And I would ask that in the spirit that we should be 
doing what we can in this area to let the lead dogs move 
faster, to put an asterisk next to the effort in Rhode Island 
and try to give it some of your and your staff's direct 
personal attention, if you can do that.
    You can respond to both of those if you wish.
    Secretary Shinseki. Well, Senator, on the first issue, the 
chained CPI proposal, I would just say thanks for, you know, 
your statement here. I would also point out that the President 
has been very clear in his consistent desire to protect 
vulnerable populations. The proposal excludes means-testing 
veterans' pensions, which have provided to low-income wartime 
veterans who are age 65 and older or who are under 65 but 
remain totally permanently disabled as a result of conditions 
unrelated to military service. And I believe that addresses 
some of your concerns.
    Senator Whitehouse. Only a little bit, just because of the 
numbers involved. The President identifies $230 billion in 
savings from the so-called chained CPI benefit cut. And all 
those programs put together that you mentioned put back $15 
billion. So there is still a huge whack that is taken out of 
the populations that are subject to chained CPI, and the amount 
that gets brought back is pretty small, less than 10 percent. 
It is whatever percentage $15 billion is of $230 billion.
    Secretary Shinseki. I would also include that the budget 
proposal excludes certain veterans' education programs as well. 
Post 9/11 GI bill, Montgomery GI bill for active-duty, those 
inflationary adjustments are decided elsewhere, so they are not 
included under chained CPI.
    Senator Whitehouse. And on the VLER Program in Rhode 
Island?
    Secretary Shinseki. On the VLER Program, I would say we 
have been very aggressive in our outreach between VA and DOD in 
terms of record sharing, and then a number of pilot test 
events, west coast and east coast, between VA, DOD, and the 
civilian community. And, you know, I regret that we have not 
made it up to your home State yet, but I do recall our 
discussion, and that is something I would be happy to explore 
with you.
    Senator Whitehouse. If you could review it and give it a 
moment of your personal attention, talk to your senior staff 
about it and see what we can do, that would be helpful to us.
    Secretary Shinseki. Sure.
    Senator Whitehouse. I truly believe--there is actually, 
Madam Chair, quite an interesting report in the HELP Committee 
written by the minority criticizing the so-called high-tech 
bill that provides for meaningful use of electronic health 
records in the private sector that it did not focus enough on 
interoperability. And I think they are actually dead right 
about that. So I think you need to put your resources where the 
lead dogs are. The pack will never run faster than the lead 
dogs. Move out the lead dogs and let us get this done.
    Thank you.
    Chairman Murray. Senator Baldwin.
    Senator Baldwin. Thank you, Chairman Murray, and I 
appreciate the fact that you are holding this hearing today. 
And I also want to thank our panel, Secretary Shinseki and all 
of the panelists. Thank you for being here today and also thank 
you for your service to our country.
    As we face our budget challenges, one of the most important 
things for me is ensuring that we are keeping our promises to 
our veterans and their families. When our servicemen and -women 
return from serving their country, they and their families 
deserve the peace of mind that they will have all the resources 
they need to thrive upon their return.
    However, for many of our returning veterans, this is not 
the case. Too many are waiting far too long for the benefits 
that they have earned. In Milwaukee, Wisconsin, alone, veterans 
are waiting an average of more than 311 days for their claims 
to be processed. And I know that the VA has recently announced 
a new process to expedite claims that have been pending for 
over a year. However, while these reforms are positive steps, 
veterans do not want to hear about new programs or new 
processes. They really want results, and so do I. And in this 
regard, I look forward to working with you to make sure that we 
finally tackle in a comprehensive way this claims backlog.
    Moving on to another area in which I have some very serious 
concerns, Secretary Shinseki, I want to start by asking you 
about the VA's response to the epidemic of military sexual 
trauma among our brave veterans. I have two specific areas that 
I want to delve into and ask you about.
    First, we know that the high prevalence of military sexual 
trauma among female veterans requires a substantial degree of 
staff and provider sensitivity at VA health facilities. Yet we 
also know from a number of studies that the VA is still 
struggling to provide gender-specific let alone trauma-informed 
care.
    We know that the VA is all but failing our women veterans 
in the screening process for military sexual trauma. A recent 
American Legion report found that 40 percent of female veterans 
were dissatisfied with the screening process.
    And we know the VA struggles to hire experienced staff and 
provide guidance for those mental health providers who will 
work with victims.
    The second area, I understand that legislation has been 
introduced to help assist survivors of military sexual assault 
in securing VA benefits. I have heard from veterans in the 
State of Wisconsin who are dealing with severe PTSD due to 
military sexual trauma, in some cases so severe that they are 
unable to work. But as these brave women have related to me, 
their dealings with the VA system and trying to secure adequate 
benefits can feel very traumatic in and off itself.
    So I would like, Secretary Shinseki, for you to provide me 
with, for purposes here today, a brief update on these two 
issues--the gender-specific and gender-sensitive services, and 
then as well as the issue of accommodating benefits to serve 
the needs of those who have suffered military sexual trauma.
    Secretary Shinseki. Well, Senator, I am going to call on 
two people who work with this issue daily, but let me just say, 
if you were to look at our budget over the past 4 years, five 
submissions now, I think in the case of women veterans funding, 
between 2009 and this year's budget, 2014, you would see a 
134.4-percent increase in funding, which I hope suggests to you 
that women's issues are important to us. And we realize that 
today women veterans comprise about 6 percent of our veteran 
population, but we know out there in the active force, 15 
percent in the active military and in the reserve component 
about 17 or 18 percent. So we understand there is a growth 
coming, and we are trying to get ahead of it.
    I am going to call on Dr. Petzel to talk about the 
investments in health care, both in infrastructure, programs, 
and in research as well.
    And let me just set up the second response to you, and I 
will ask Secretary Hickey to take that on from a benefits 
perspective.
    The issue is sexual assault. We can call it, you know, MST, 
military sexual trauma, as though it were a condition, but this 
is assault. And I do know that in DOD they are taking great 
strides to address this.
    On our side, I think in the past we may have been less 
discerning about these issues. But I can tell you, since her 
arrival, Secretary Hickey has gone back and relooked at 
previous cases and challenged ourselves that our instincts and 
our assumptions were correct.
    For one thing, we know that these assaults are 
underreported, and then even at this stage of asking for 
benefits, it is difficult for people to come forward and say 
this happened. So I think Secretary Hickey will describe a 
fairly generous approach to reviewing these cases.
    Let me start with Dr. Petzel and then Secretary Hickey.
    Dr. Petzel. Thank you, Mr. Secretary.
    Senator Baldwin, over the past 15 years, the VA has 
invested, as the Secretary has indicated, in trying to provide 
for a safe, private, sensitive environment for women in our 
clinics and in our medical centers. And I think we have made 
great progress. We still have things that we need to do, but I 
think we have made great progress.
    In terms of services specifically, we are developing a 
three-part program to provide gender-specific care to women. 
The first is the women veterans' clinic. In about 76 of our 
places where we have large numbers of women, we have clinics 
that basically have all the services one might need 
concentrated in one place.
    Secondly, in those areas where there is a smaller 
population of women veterans, we have primary care women 
veterans' clinics where the primary care clinic is exclusively 
devoted to the needs of women veterans and the primary care 
providers are trained to provide gender-specific and -sensitive 
care.
    And then in those remaining places, such as our community-
based outpatient clinics, we have trained at least one primary 
care provider in each one of those clinics in gender-specific 
care again so that virtually at 100 percent of our places, 
primary care can be delivered in a gender-specific fashion.
    In terms of military sexual trauma, we screen everybody. 
Everybody, male or female, that comes to the VA is screened for 
military sexual trauma. In 2012, 24 percent of the women that 
we screened indicated that they had been subjected to some form 
of sexual trauma or assault. And 1.2 percent of men also 
indicated they had been subjected to some sort of sexual 
assault.
    We provide gender-specific military sexual trauma treatment 
at all of our medical centers. All primary care providers and 
all mental health providers have been trained in recognizing 
and in dealing with military sexual trauma--
    Chairman Murray. I hate to interrupt, but we have gone way 
over time. If you can summarize really quickly, we can get to 
Senator Sessions.
    Dr. Petzel. All right. I am sorry.
    We have special places where we can give specific, very 
special care for military sexual trauma. Not to say that we do 
not have more work to do, but I think we have made good 
progress in identifying the problem and providing the 
appropriate treatment.
    Secretary Shinseki. Madam Chairman, may I ask Secretary 
Hickey to very quickly respond to the benefits?
    Ms. Hickey. Very quickly, we now have a woman, as requested 
by our people who suffer from military sexual trauma PTSD, in 
every single regional office. They are the only ones that are 
trained to do these claims. They are done down our special 
operations lane to handle them sensitively. No one else is 
allowed to touch them but that woman who is designated in every 
single regional office.
    When I arrived in 2011, in June 2011, within 2 weeks I had 
them pull a statistically valid sample. I saw that we did have 
a problem. We had a 35-percent grant rate compared to about a 
55-percent grant rate for PTSD due to the other conditions. I 
jumped on it fast. We drove new training, integrated training 
with the health folks, and within 6 months had that gap totally 
closed, and will remain closed. I check it every 3 to 4 months. 
And right now we are within 2 to 3 percentage points of every 
other grant for PTSD within MST right up next to it.
    Chairman Murray. Thank you very much.
    Senator Sessions?
    Senator Sessions. [Presiding.] Thank you. One thing I would 
like to emphasize is that it is not a definition of good policy 
or concern just to spend more money. So we have been spending 
more money. Some of that is, I know, necessary. Maybe all of it 
is necessary. But we do, I believe, have a right to expect 
efficiency.
    I was just looking at the job situation, the programs that 
we have for impacting jobs. According to the GAO, there are 40 
job training programs in America, Federal job training 
programs. GAO's most recent duplication report made a specific 
recommendation for VA to ``incorporate DOD's employment 
assistance initiatives into the agreements that guide 
interagency cooperation.''
    Do you agree with that, Secretary Shinseki? And have you 
made any progress toward that?
    Secretary Shinseki. Senator, I am not particularly 
familiar, I would say, with this particular GAO report. Let me 
get into it and provide you a better answer.
    But I would just say, if we were to look back over what 
this Department has tried to do for 4 years, efficiency, 
effectiveness, savings has been very much a priority.
    Senator Sessions. Well, it is going to take strong 
leadership, there is no doubt about that, and you have to stay 
on it every day. But I think the point of this is should we be 
creating a more veteran-specific program and allocating more 
resources for that? Or can we somehow coordinate with many of 
these other existing programs that have training for carpenters 
or computer experts and that sort of thing? And I believe we 
can do a better job. The idea that this Government ought to 
have 40 job training programs--not in the VA you do not have 
40, but throughout the whole Government--speaks to some of the 
inefficiencies and duplications we have.
    Secretary Shinseki. Well, I would say, Senator, about the 
only area that we have a specific training program would be 
where we have a need and there is a population of veterans not 
being addressed elsewhere, for example, homeless veterans, and 
our opportunity to provide them work experience occurs in our 
National Cemetery System where they come in as entry-level 
folks, and then we give them a successful work experience. It 
is a modest payroll, but at the end of the year-long training 
program in which we invest the experience of other senior 
people into their development, they have a choice to come to 
work for us or to go out and do it elsewhere. So that is one 
example of where we meet a need, because, one, we have a 
requirement to backfill our retirements. And then we have the 
homeless population in need of an opportunity.
    We do the same in our emergency rooms where we take medics 
and corpsmen from the military, and for a variety of reasons, 
they immediately are not able to be certified in the States 
where they are residing, and so we will take a number of them, 
put them in our ERs, and have them work for us and develop the 
credentials they need. Very modest.
    Senator Sessions. Well, Mr. Secretary, I think those are 
some good, specific proposals that we should do more of in the 
Government, and I do think we can do a better job of having 
military people certified for State--according to State rules 
if they often have been operating at standards far above what 
the States require, but then they are unemployed until they can 
get their State certifications. There has been some good work 
done on that.
    Can I just ask you this question, a bigger question? Where 
are we in terms of the next 10, 15 years with the number of 
veterans you serve? What will the trends look like as we go 
forward in terms of the number?
    Secretary Shinseki. Senator, I think as we look back 
historically, after an operation ends, VA's requirements in 
terms of veteran support has generally grown for about 10 
years. And so I would expect that in our case, we will continue 
to see a growth in requirements of veterans coming to us, and 
especially in this case. We are dealing with a very small 
professional force, but one that has been used repeatedly over 
10 to 12 years. And with the advances in battlefield medicine, 
many of them are incurring serious and complex injuries.
    So I think our requirements--my answer to your question is 
historically there has been continued growth. In our case, I do 
not see a need to change that. We will continue to see growth 
over the next 10 years, but the complexity of the cases we deal 
with will add a measure we probably have not seen before.
    Senator Sessions. Thank you. Do you have any percentage 
numbers of growth? Have you made any estimates of what those 
numbers might be?
    Secretary Shinseki. Well, Senator, we here rely on DOD's 
sort of flow of what they think it is going to be. At one point 
we were told a million veterans over the next 5 years, and so 
we are trying to understand what that flow rate will be.
    Senator Sessions. Is that more or less than what we have 
seen in the last 5 years?
    Secretary Shinseki. Generally what we have seen in the last 
4 years.
    Senator Sessions. Maybe you could give us a report on that. 
I am just curious about the total numbers.
    And, you know, the disability backlog needs to be dealt 
with. Let me say this to you. When you get behind and people 
start rushing, we start throwing money at problems, sometimes 
it does not work very well, and we do not do it as well either. 
So I know you have to strike that balance. I encourage you to 
do so, both in terms of doing a full evaluation and getting 
people their disability promptly and making evaluations that 
are justified in the process. So speed can be a problem, but 
the growing backlog situation we have seen recently is not 
acceptable, and you probably have already discussed that while 
I had to step out. But if you have not, you might give us an 
insight.
    I think I am over my time, so you can be brief, if you 
would.
    Secretary Shinseki. Well, Senator, let me try to do this 
very quickly. Let me start by just telling you that I am 
sensitive to your concerns about, you know, ensuring that 
taxpayer dollars that are provided to us by the Congress are 
zealously guarded and executed in meaningful ways. And, 
therefore, we have taken a deliberate approach in this issue on 
resolving the claims backlog. It did not begin 4 years ago. It 
has been decades in the making.
    But over the past 4 years, we have taken actions to 
generate savings for ourselves and reinvest them in our own 
budget, $528 million for fee basis at the medical care rates; 
$200 million savings in acquisition improvements, $200 million 
in a better way of fielding information technology projects. 
Four years ago, we were fielding less than 30 percent of them 
successfully. Today we are in excess of 80 percent. And then 
$142 million First Notice of Death. We go after these so that 
we can take those dollars and reinvest them in the next budget 
cycle so that while the top line may be established, we are 
buying down the requirement for new dollars, if we could.
    Let me turn to the backlog. We sit astride a river of 
paper. We get paper, we process paper. That is the way it has 
been. It is not efficient. It is not effective from a 
management standpoint because you cannot see all of your 
variance. We need to go to an automation system.
    We have been developing this automation system for 2 years 
now. It is being fielded. We started 6 months ago. It is called 
VBMS, Veterans Benefits Management System. It is in 36 of our 
56 stations today. It will be in all 56 by the end of this 
year.
    But having an automation system is one thing. Unless it is 
connected, it leads nowhere. So a part of this has also been 
connecting with DOD, who has agreed to provide us electrons by 
the end of this year. This will be an important connection, and 
this is an important partnership.
    Part of this is we have 800,000 claims already in paper. 
Some of that already begun in paper we are going to allow to 
finish in paper. That is the most efficient way and the fairest 
way to get them through the system. The rest of that in paper, 
we are currently scanning into electrons to feed our electronic 
database.
    And, finally, we have provided veterans an online 
capability to file claims electronically. So this is the year 
where all these connections come together. To do this, we have 
requested an increase in the budget of VBA, our Benefits 
Administration, by 13 percent and an increase in IT for 10 
percent, crucial to making these connections sync up and have 
our promised delivery in 2015. We are ahead of 2015, and we 
intend to end the backlog then.
    Chairman Murray. [Presiding]. Thank you very much.
    Senator Kaine?
    Senator Kaine. Thank you, Secretary Shinseki, and to your 
team. You know, three stats kind of occur to me as you talk 
that ought to cause us pause and tell us what our works is 
going to be like here in supporting your mission: the growing 
number of veterans that you just testified to in the aftermath 
in that million estimate, what we will see in the next few 
years will present additional challenges.
    You indicated in your testimony, your written testimony, 
that 62 percent of veterans of IF, EF, and New Dawn are using 
at least one VA service, and you suggested that was higher than 
earlier norms. What would have been a norm in an earlier time 
period?
    Secretary Shinseki. I would say something in the low 30 
percent.
    Senator Kaine. So a growing number of veterans, a higher 
percentage of them using at least one VA service, and then this 
aspect of your testimony: the average number of claim 
conditions for our recently separated servicemembers is now in 
the 12 to 16 range, roughly five times the number of 
disabilities claims by veterans of earlier eras. Growing 
numbers of vets, higher percentage accessing at least one 
service, and those filing disability claims claiming numbers of 
disabilities about five times earlier averages. This is a very 
significant challenge, obviously, and it is going to be with us 
for a long time.
    And that moves into some follow-up questions I had to 
Senator Sessions on the backlog issue. You indicated that the 
VBMS management system has already been implemented across a 
number of your regions, and then will you just tell me, it will 
be in all regions by when?
    Secretary Shinseki. Well, our plan laid out by December of 
this year, but our feeling, it is going well enough that I can 
anticipate that is going to be sooner. And I always hesitate to 
put the sooner date out there because you know one hiccup 
there, and--
    Senator Kaine. Sure, right.
    Secretary Shinseki. --we are having to revisit that.
    Senator Kaine. But I understand you started to implement 
this system, the VBMS system, in 2011?
    Secretary Shinseki. 2012.
    Senator Kaine. 2012?
    Secretary Shinseki. 2011 was testing and, you know, 
bringing folks that could help us. But we began in September of 
2012, so we are 6 months into it.
    Senator Kaine. And when was the system--when did you start 
to design the system? It was tested in 2011. When was the 
design started?
    Secretary Shinseki. Probably 2 years ago, early 2011, late 
2010. I do not have a specific date, but it is about then, and 
I will tell you the reason this occurred. In 2009, we were 
given the 9/11 GI bill, a brand-new program. We had no 
automation for it. We were a paper-driven exercise there. That 
fall of 2009, just to get 173,000 veterans into schools was a 
major effort because it was pen and paper.
    Senator Kaine. And, Secretary, if I could just stop you 
right there, in 2009 when you got the new GI bill and it was 
paper driven, was everything else paper driven too pretty much 
at that time?
    Secretary Shinseki. Everything else, yes.
    Senator Kaine. So we went to war in 2002--well, 2002 
immediately after--into Afghanistan or 2001, 2003 in Iraq. We 
did not have an electronic system for managing VA benefits 
until you started to try to work to design one in 2009?
    Secretary Shinseki. Well, you know, I think there may have 
been several efforts that did not pan out.
    Senator Kaine. So you would describe what existed before 
2009 as rudimentary at best, even as we were 5, 6, 7 years into 
two wars?
    Secretary Shinseki. Yes, that is correct.
    Senator Kaine. Well, obviously, getting that system right 
is key. We have three freshmen right here. We all got elected 
in November, and people started writing Senator Kaine, Senator 
King, and Senator Baldwin that first day, and we did not show 
up until January 3rd. We had massive backlogs. And what they 
told us all is: Before you freak out about the backlog, you 
have to have a system for dealing with it.
    I mean, I am just kind of stunned as I hear that we did not 
have a credible system for dealing electronically with 
veterans' claims until you started to do that work in 2009- 10, 
and we were already 7, 8 years into a war by the time we did 
it. No wonder we are having such challenges today.
    One kind of claim that I am particularly interested in is 
mental health claims. I had a recent experience with an 
individual veteran in the Hampton Roads area who had called 
seeking mental health assistance--who had e-mailed the local VA 
seeking mental health assistance and was given an appointment 
8, 9 months into the future.
    When we checked it out, what we found is that if he had 
called by phone, there was an effective triage to try to 
determine if he needed mental health assistance right away. But 
if you e-mailed, which, frankly, is a little bit easier to do 
for some people that are trying to overcome the stigma of ``I 
guess I need mental health assistance,'' to e-mail in was a 
little bit easier, there was no triage done on e-mails coming 
in seeking help.
    You talked about the way you are trying to manage claims. 
Mental health claims are particular ones because I think a lot 
of mental health professionals say once somebody gets over that 
burden of saying, ``Okay, I admit, I need help,'' if you do not 
take advantage of their request for help pretty much when they 
ask, 6 months later bad things could have happened. Somebody 
could have committed suicide, or other problems, or they may be 
in a mind-set where now they are self-medicating, and ``I do 
not even want to come in for an appointment, I do not need 
help.''
    What are you doing within the VA on this mental health 
issue, which is so connected to veteran suicide, to try to 
triage and respond promptly to mental health claims?
    Secretary Shinseki. Well, Senator, I am going to call on 
the expert here, Dr. Petzel, but let me just say, again, if we 
look at what we have tried to do in terms of budgeting to 
provide resources to address issues like mental health, since 
2009 up to the 2014 budget, we have increased our investments 
in mental health by 56.9, almost 57 percent.
    For the individual who is looking for mental health care, 
there is no claim to be filed, there is no waiting in line. For 
the veteran that is coming back from Afghanistan and Iraq, they 
present to a medical facility with identification, and they are 
enrolled, and their access to mental health is immediate. If it 
is urgent, it is within 24 hours. If it is urgent, there will 
be some scheduling. If it is routine, there will be another set 
of scheduling tasks.
    We hold ourselves to a pretty high standard of 14 days for 
an initial appointment for a non-urgent condition. We are not 
where we want to be in meeting that standard, and, therefore, 
we hire staff to give us that capability. But this is an 
ongoing balance between our requirement just grew, we need to 
have staff to accommodate. And so that will continue.
    Dr. Petzel?
    Dr. Petzel. Thank you, Mr. Secretary.
    Senator Kaine, just to go through a couple of other things, 
one is that we have for phone, as you mentioned, the crisis 
hotline, which has worked very well--800,000 calls, 26,000 
rescues from people harming themselves, and good, hot transfers 
of patients to immediate care.
    As the Secretary mentioned, you can walk into either a 
clinic or the emergency room, and you will be seen immediately. 
Anybody with an urgent or emergent need will be evaluated 
immediately.
    I would like to talk with your staff afterwards to find out 
about this e-mail call--
    Senator Kaine. Good. We have some information to share with 
you.
    Dr. Petzel. --to see where that e-mail went and to find out 
exactly what happened.
    For patients that are established, we have secure messaging 
where they can communicate back and forth with their providers. 
But I would want to find out where that e-mail went.
    We are, as the Secretary mentioned, holding ourselves to a 
high standard of 14 days for the routine appointment, and we 
are getting better and better at both measuring and meeting 
that standard. Very importantly is making people aware of the 
fact that, one, these services are available; two, that it is 
okay to come, that it is okay to say, ``I have a mental health 
problem.'' And we have two campaigns going on, one directed at 
veterans specifically called ``Make the Connection,'' and 
another one directed at both veterans and family members, 
urging them to understand what the signs are, urging them to 
know what can be done, and urging them to get people into care.
    Our biggest issue and our biggest problem really are the 
people that do not come to us. When somebody comes to us 
seeking care, we usually do an excellent job of taking care of 
them. It is reaching the others that we need.
    Chairman Murray. Thank you very much.
    Senator King?
    Senator King. You must not get up in the morning of a 
hearing like this and say, ``Gee, I cannot wait to get over 
there for the questions.'' So I want to start with a 
compliment. The VA hospital in Togus is a gem. It is the oldest 
VA hospital. Togus, Maine, is the oldest VA hospital in the 
country. I was there just a couple of weeks ago. A good friend 
of mine's husband recently passed away at the hospice facility, 
the new hospice facility there. Nothing but positive comments 
about the treatment received at that facility. The staff you 
have there is fantastic, and it really is a model of serving 
our veterans well. So I want to share that with you. That is 
something that is really working.
    I just want to express my frustration about the backlog and 
about the computer system. I do not understand, Madam Chairman, 
why Government agencies have so much trouble getting systems 
running. Amazon does it, eBay does it. If eBay, you know, had a 
system like this, they would have been out of business a long 
time ago. I do not understand why the FBI, the Veterans 
Administration, the Defense Department just cannot seem to get 
these systems going, and this is no answer, Mr. Secretary, but 
it is just frustrating. It costs us a fortune, and they never 
seem to work, and they do not talk to each other, and it is 
just very frustrating. I am going to spend some time here 
working on this.
    I thought that the VA--I have always been told that the VA 
medical records system, electronic medical records system, was 
one of the best in the there, and now I am hearing it is--has 
something deteriorated in the last few years?
    Secretary Shinseki. Senator, our electronic health record 
remains quality. At one time it was well up there, and I think 
over time others have closed the gap. But it still remains 
about the best electronic health record in this country.
    Senator King. But it is not interoperable with the 
Department of Defense?
    Secretary Shinseki. It is not. And so for the past 4 years, 
two Secretaries, first Secretary Gates and then Secretary 
Panetta and I, and now Secretary Hagel and I will undertake 
dealing with the frustration you described, and that is, why 
don't we have a single, common, joint, integrated electronic 
health record?
    Senator King. And, of course, we ought to have one for the 
whole country. I would settle for the VA and the Department of 
Defense, but it would be nice if every hospital in America was 
not reinventing this.
    Secretary Shinseki. Sure. And I think between the 
Secretaries, the intent was if we get this right, this will be 
of great use to--other health care systems in the country will 
not have to invest development dollars in a program they may 
not be able to afford. And I think this is what the President 
had in mind when he declared VLER, this Virtual Lifetime 
Electronic Record, that would do, you know, administrative data 
as well. But a key piece of that would be the Integrated 
Electronic Health Record that both DOD and VA were putting 
together.
    Senator King. Well, I commend you on that project and hope 
you will give it the highest priority, because once we get the 
systems in place that Senator Kaine mentioned, then everything 
else can fit. That will deal a lot with your backlog and all 
the other issues.
    Senator Whitehouse asked a question about the chained CPI. 
Do you have a figure of what that would cost veterans over 10, 
20, 30 years, and also what the escape hatch for low-income and 
disabled veterans that you mentioned would deduct from that? In 
other words, I am trying to get an idea of what we are--what 
are we talking about for numbers here?
    Secretary Shinseki. I do not have the numbers. I did not 
the numbers that the Senator provided, and I will have to go 
and take a look at that.
    Senator King. Well, that overall number he mentioned of 230 
billion I think is the number for the chained CPI for all of 
Government. But I would appreciate if for the record you could 
do some looking at what it would cost veterans and then what 
would be put back by the escape hatches that the President has 
proposed in his budget. It just gives us a better idea of what 
it is we are actually grappling with here, having the real 
numbers instead of speculation about what it would be save and 
what it would cost.
    Secretary Shinseki. Okay. I will do that.
    Senator King. I was late for this hearing. I just came from 
a hearing at the Armed Services Committee with the Army, and we 
were talking about outplacement and what happens when somebody 
leaves the military, falls under your jurisdiction, and then 
has a hard time finding a job.
    Are you satisfied with the Department of Defense's work on 
transitioning soldiers and sailors and marines into the private 
sector economy? It just seems to me they spend a lot of money 
on recruiting. Perhaps they could spend some money on what 
amounts to outplacement.
    Secretary Shinseki. Well, Senator, we have for several 
years now worked very closely with DOD to create a Transition 
Assistance Program that is different than the one I remember 
when I left the military, and this one is intended for both 
Departments to share in that transition period so that when the 
uniform does come off, for our purposes we have the data we 
need to make decisions regarding health care needs for the long 
term, and benefits issues that a veteran may have. Not all 
veterans will have those issues, but for the ones who do, we 
need to have that handoff. And, also, a decision to go to 
college, that should be accomplished before the uniform comes 
off so that there is a vector on which a veteran is moving, 
whether it is to college, whether it is to vocational training, 
whether it is straight to employment. And that is work in 
progress.
    Senator King. Well, one thing the veterans have when they 
leave is tremendous training, and one of the problems across 
the country is that that training does not necessarily match 
the certification requirements of individual States. And I 
would urge a research project, if you will, to see what the 
certification requirements are and how we can work with the 
individual States. It is ridiculous that you have someone in 
the military who is trained as an electrician and cannot become 
an electrician in whatever the State is because they do not 
meet some apprenticeship requirement when that is what they 
have been doing.
    So I would urge you. I think that is something that could 
be done that would ease this transition. It is very 
frustrating, if I were a veteran and had those kind of skills, 
that I could not get a job because I do not meet some kind of 
paper requirement when I have been doing it for 4 or 5 or 10 
years in the military.
    Secretary Shinseki. I would say, Senator, the military, as 
I recall, does document that work experience, and now it is a 
matter of having various trades and States accept it. And I 
would say at the last annual Governors conference, I do know 
that the First Lady had this discussion with the Governors 
present and asked them in each of their States to take a 
leadership role in this. And I understand some States have 
already legislatively begun to create those opportunities you 
describe.
    Senator King. Thank you. As a former Governor, I still 
believe in States rights, but I think this is one where the 
States ought to act with alacrity.
    Thank you, Mr. Secretary.
    Chairman Murray. Thank you.
    Senator Merkley?
    Senator Merkley. Thank you, Madam Chair, and thank you, Mr. 
Secretary, for all of your companions who are working so hard 
on these issues.
    I wanted to first thank you very much for working closely 
with my team on the burial waiver issue. Very, very thoughtful, 
very thorough, and deep appreciation.
    I wanted to ask you about the Veterans Job Corps. I am 
happy to see the budget include $1 billion in funding for this. 
The reason I am so interested in this is when I met with our 
soldiers overseas in Iraq and Afghanistan, many of them talked 
about their anxiety in finding jobs when they came home. And 
for those who cannot find jobs in this difficult job 
environment, it seems like having a volunteer corps--or a job 
corps, not a volunteer corps but a job corp, in which folks can 
get their feet back on the ground, create structure in their 
lives, create income while they are readjusting to life 
stateside would be enormously valuable and related to the 
broader issues we face in kind of the disorientation that 
soldiers have and their financial success in transition.
    We had a vote on this in the Senate where we did not get 
cloture. I hope we are going to be revisiting it. But do you 
consider this to be an important, valuable initiative?
    Secretary Shinseki. Senator, thank you for that question. 
Several initiatives here. I think you will recall that out of 
the White House there was a tremendous effort under a program 
called ``Joining Forces'' where the First Lady and Dr. Jill 
Biden reached out to the private sector and asked employers to 
step forward and provide, as I recall, up to 100,000 jobs for 
military spouses and veterans by the end of fiscal year 2013. 
That target was met in 2012, and I think they have increased 
their objective to something in the neighborhood of 250,000. So 
that is one effort.
    On Veterans Job Corps, the proposal is to look at $1 
billion in mandatory funds for up to 20,000 veterans over the 
next 5 years in conservation and restoration, law enforcement, 
and infrastructure projects on public lands. This is intended 
to address the issues that you described of members in the 
military coming back and having immediate access to the kinds 
of jobs that require skills and experience that they have had 
recently. So it is national parks and forests, national 
monuments, other public lands, everything from park maintenance 
projects to patrolling public lands, rehabilitating natural 
recreational areas, and then administrative, technical, law 
enforcement-related activities. That is the program, and it 
remains high priority.
    Senator Merkley. Well, thank you so much for advocating for 
it, and I wanted to mention that I hope that if we can 
accomplish this, we can also include forest health jobs in our 
national forests because we have millions of acres that need to 
be thinned for better ecosystems, better timber stands, fewer 
fires, and less disease. And it is a very solid, robust way to 
be engaged in furthering a public good, if you will.
    I wanted to turn to the suicide hotline or the veterans 
hotline, and I think the statistic that really strikes me in 
your testimony on page 15 is, ``In the most serious calls, 
approximately 26,000 men and women have been rescued from a 
suicide in progress...'' That is phenomenal. And how many 
others have been helped as they were maybe hours away or days 
away by the concern expressed, the access to resources, the 
chance to talk to other veterans?
    I just want to make sure that this has all the support it 
could possibly have and to note that there is a group in Oregon 
that provides backup services to this line when they have a 
high demand and need additional folks. This is a group that has 
done a lot of work with our National Guard, and so I thank you 
for that contract to that group in Oregon.
    But do we have the resources here that we need? And is this 
playing an important role?
    Secretary Shinseki. Senator, I would just begin by saying, 
you know, one suicide by a veteran is a tragedy, and it is one 
too many, and that has been the approach we have taken for 4 
years now. Our mental health budget, as I indicated earlier, 
over 2009 to 2014 has been increased by nearly 57 percent. You 
know, 57 percent is a percentage, but the 2014 request is for 
$6.9 billion. That is how much effort we are putting into this.
    And one of the programs that is resourced by this is the 
National Veterans Crisis Line you described in Canandaigua, New 
York, probably in the last 5 years, near 800,000 calls, but the 
key factor here is the 26,000 interventions you describe.
    What we have watched over time is those calls continue to 
increase. The number of crisis calls, the 26,000, have begun to 
taper off. And our understanding of these data points is that 
people are calling earlier, not at the last minute, and our 
clinicians online--these are actually professional mental 
health folks--are able to get them referred into mental health 
care. They are getting there. We see the trends. And our 
suicide rates have stayed flat. They are still too high, but we 
think we have a program here that works. But the crisis line is 
sort of that last resort. It is not the solution here, and so 
we are putting energy into research and trying to understand 
what DOD--how to deal with this better in the future.
    And I know Dr. Petzel has something to add, but let me just 
try to stifle him for a moment and see if you have any other 
questions here.
    Senator Merkley. Doctor, my time has expired, so I will 
mention three things, and I will leave it to the Chair as to 
whether--one, I wanted to mention the hard work on 
homelessness. I will follow up with some questions for the 
record about the estimates. I was surprised to see the 17-
percent decrease. That is tremendous. I wanted to understand 
better how those statistics are put together, because I am not 
seeing the decrease in my State, so I want to understand that. 
But I applaud it.
    Second, I want to emphasize the point that has been made 
about the disability claims. That is a huge issue.
    And, finally, I want to echo Senator Whitehouse's concerned 
about the chained CPI.
    Thank you.
    Chairman Murray. Thank you very much.
    Senator Nelson?
    Senator Nelson. General, thank you for your services to our 
country and your continuing service to our country.
    No doubt you are all the more frustrated in realizing that 
so many of the veterans retire, and where do they come? They 
come to my State of Florida. The Tampa Tribune points out 
recently that the Veterans Affairs Regional Office in St. 
Petersburg is behind on benefit claims processing; 70 percent 
of the claims are classified as backlogged and older than 125 
days. And I am sure that is an enormous frustration to you. It 
clearly is to us. And so we wish you the best as you try to get 
your hands around this, and the money that you are spending on 
all of the IT, then you have to implement all of that IT.
    I would merely bring up one other issue, and that is the 
one that you and I have--you graciously have talked to me 
individually about the Orlando VA hospital. It was supposed to 
be completed a year ago. In January, we got a report that says 
that it is 75 percent complete. And yesterday I got a report 
that it is 75 percent complete. And we have been assured that 
the VA says that it will be open August of this year.
    What can you tell us, please?
    Secretary Shinseki. Senator, I believe the original date 
was October of 2012, so we are behind schedule. Construction 
continues on this VA medical center. For the most part, it is 
complete. It is the main building that is still left to be 
completed.
    Overall, several days have passed, but my number here says 
it is 79 percent. But we continue to make progress. There are 
people on-site.
    The contractor has been served two cure notices and one 
show-cause notice for not staying with the schedule and the 
contracting timelines we had agreed to.
    We received a response to the show-cause letter that was 
issued in January. We have just received the response, and we 
are going through it now and trying to be as collaborative with 
the contractor to get us to complete this project, you know, as 
we had expected. And--
    Senator Nelson. Then does this imply that it will not be 
completed in August of this year?
    Secretary Shinseki. I do not know that yet. I mean, we are 
dealing with a contractor's response to show-cause, and, 
frankly, the contracting folks are into this, and at some point 
I will get an assessment of what they--
    Senator Nelson. Does this suggest incompetence on the part 
of the contractor?
    Secretary Shinseki. Is this--say that again?
    Senator Nelson. Does this suggest incompetence on the part 
of the contractor?
    Secretary Shinseki. Since this is in a contract phase, 
allow me not to pass judgment here. I would just say we are 
behind schedule.
    Senator Nelson. Well, that must be, of course, doubly 
frustrating to you who are trying to get all of this care done. 
For example, the community living center and the domiciliary, 
that is all complete.
    Secretary Shinseki. That is correct.
    Senator Nelson. But you cannot open it up until you get the 
rest of the complex complete.
    Secretary Shinseki. That is correct.
    Senator Nelson. And that is a domiciliary facility for 
about 60 beds for homeless vets. We cannot just accept this. It 
seems to me that from your office you ought to suggest that 
some heads ought to roll so that people know that we mean 
business when we set a contract and set some deadlines.
    Are there financial, are there severe financial penalties 
in the contract for not completing on time?
    Secretary Shinseki. I would say there are provisions for 
that. I am not knowledgeable enough to declare whether they are 
severe or not, but these are normal steps in the contracting 
process.
    Senator Nelson. Maybe that suggests that we ought to 
rethink how we contract. If there are just provisions and there 
are no severe financial penalties or financial incentives, the 
carrot-and-stick approach, maybe our contracting is outdated.
    Secretary Shinseki. I did not mean by the use of the word 
``provisions'' that there were no carrot-and-stick 
opportunities here. They are there. I am just not familiar with 
exactly the details of it.
    Senator Nelson. Well, I would request, since the Chairman 
of the Veterans Committee is here, Senator Sanders, I would 
suggest that since we have this continuous delay in the 
construction of a major VA facility in a State where veterans 
are moving to in droves, my State, that there be a response to 
the Committee of record, Senator Sanders' Committee, on what 
are the provisions and what are we going to do about it in 
future contracts so we do not have these kind of delays. 
Financial incentives of both benefits and penalties have worked 
in the past.
    Secretary Shinseki. We do have those as part of the 
contract. I am happy to provide that for the record.
    Senator Nelson. Thank you.
    Chairman Murray. Senator Sanders, the Chairman of the 
Veterans Committee, has joined us. Thank you very much. Senator 
Sanders.
    Senator Sanders. Thank you, and, Madam Chair, let me 
apologize for being so late, but I was chairing a Subcommittee 
on primary health care for the last couple of hours, which 
takes me to one of the questions I would like to ask perhaps 
Dr. Petzel or the Secretary.
    I just spent several hours on Saturday in White River 
Junction and being very impressed by some of the work they are 
doing in terms of diabetes prevention. But, Dr. Petzel, my 
impression is that the VA is actually cutting edge in terms of 
addressing, Madam Chair, what is clearly one of the health care 
crises facing our country. God knows how many people are coming 
down with diabetes, are going to lose their legs, are going to 
go blind, end up in kidney dialysis.
    What is the VA doing in terms of treating people who are 
likely or at risk for diabetes? Mr. Secretary?
    Secretary Shinseki. Mr. Chairman, let me call on Dr. Petzel 
to provide his insights, and I will try to wrap when he is 
done.
    Dr. Petzel. Thank you, Mr. Secretary.
    Chairman Sanders, the concept that you described was people 
that are at risk for developing diabetes, and I want to just 
describe briefly a program that the VA is pioneering where we 
are taking a selected group of what we call pre-diabetics, 
people who have mildly elevated but not seriously elevated 
blood sugars, and enrolling them in a 16-week program involving 
nutrition and exercise to try and prevent them and teach them 
the life habits to prevent them from developing Type 2 diabetes 
in the future. Type 2 diabetes is an epidemic in this country, 
and the veteran population is not being spared that.
    In addition to that program, we have extensive programs 
within our PAC systems, the Patient Aligned Care teams in 
primary care, to deal with diabetes. The emphasis, again, is on 
exercise and nutrition so that you do not have to take insulin, 
so that you do not have to take the medications that might be 
associated with it.
    You are absolutely right, the VA is on the cutting edge.
    Senator Sanders. And not only that, if I might ask, you are 
doing some very interesting work with telehealth. I learned a 
little bit of a lesson. I thought, ``Telehealth, well, that is 
nice. A psychiatrist can talk to a patient.'' It is a heck of a 
lot more than that. In other words, as I understand it, early 
treatment, if somebody has a symptom, a foot problem, that can 
be treated. If it is ignored, you could lose your foot. Is that 
correct?
    Dr. Petzel. That is correct.
    Senator Sanders. Tell us a little bit about what the VA is 
doing in that area.
    Dr. Petzel. Well, first of all, we were one of the first 
health care organizations to have a set of measures related to 
the care of diabetes, so we require a foot exam at least 
annually. We require an eye examination at least annually. We 
follow the blood sugar, we follow the cholesterol. We require 
the cholesterol to be below a certain level.
    Senator Sanders. Is that a cost-effective--I mean, forget 
the fact that people obviously do not want to go blind or lose 
their feet. In terms of saving money, if you amputate and have 
to treat that, isn't that pretty expensive?
    Dr. Petzel. This is very cost-effective care. Preventing 
the complications of diabetes not only enhances people's lives, 
but it saves money.
    Senator Sanders. Mr. Secretary?
    Secretary Shinseki. I would just add, just to wrap here, 
dialysis. We have historically employed commercial support on 
dialysis, and here of late I have asked and Dr. Petzel has led 
in bringing free-standing dialysis capability back inside the 
VA, not a lot but enough to help us understand dialysis in the 
way that we should.
    We are a health care institution. If we outsource all of 
our dialysis, it is out there and we do not think twice about 
it. If we do some of it in-house, it forces us to think about 
the question you are asking: What causes all of this that ends 
up in dialysis? And it will force us to put research dollars at 
the front end to solve the problem as opposed to at the back 
end outsource the service. So I think for VA this is an 
important step.
    Senator Sanders. Madam Chair--and this is an issue we look 
forward to working with you on. I have been getting around a 
little bit, going to some facilities, and, again, as I 
mentioned, I was at my own facility in Vermont just this 
Saturday. And you know what I noticed? They have built a really 
pretty much state-of-the-art gymnasium in the facility which 
they say is being utilized by some 400 veterans. People come 
down every morning to exercise, work together.
    Can you give us a guess, anyone, as to how many of your VA 
facilities have exercise gyms?
    Dr. Petzel. Many of them do, Senator Sanders. I cannot tell 
you how many do. We would have to get back to you, take that 
for the record.
    Senator Sanders. All right. Let me ask you this also. I 
noticed when I went to L.A. and Brooklyn, New York, that there 
was a discussion of acupuncture being increasingly used and 
wanted by veterans in terms of, among other things, pain 
management. One of the problems that I understand is that if 
somebody utilizes acupuncture, that treatment has to be given 
by a physician with expertise in acupuncture.
    Have you explored enabling folks who are experts in 
acupuncture but not physicians to be able to practice within 
the system? Mr. Secretary or Dr. Petzel?
    Dr. Petzel. You are correct, Senator Sanders. As it stands 
right now in the VA, acupuncture is administered by physicians, 
often anesthesiologists. We are exploring the possibility of 
providing the credentialing and privileging of people other 
than physicians who are trained in acupuncture.
    Senator Sanders. Well, we are going to help you because we 
are going to be introducing a pilot project to see if we can 
move that along.
    But is that problem--and, again, I want to congratulate 
you. And, again, as the Secretary knows, my major criticism of 
the VA is they forget to tell the world what they are doing. It 
is an area that has to be worked on, because I think there is a 
lot--at a time when we are spending so much money on health 
care, and when the VA is coming up with cutting-edge 
improvements and cost-efficient programs, it would be helpful 
to the rest of the world to know about that.
    That would be my questioning right now. Thank you, Madam 
Chair.
    Chairman Murray. Thank you very much.
    Let me follow up on Senator Kaine's question on the mental 
health, and he gave you a specific example, but as you know, 
this is something we have been very concerned about, making 
sure that we get access at a critical moment for someone coming 
in for mental health care. And you have asked for a $469 
million increase in mental health, and I appreciate that.
    Under the Mental Health ACCESS Act that we passed, we 
required VA to develop new tools to determine exactly whether 
our VA facilities were meeting that 14-day standard that your 
answer to Senator Kaine was on. We had found previously that 
that was not being met. I assume those new tools are in place 
now. Can you tell us now what the current wait times are, 
according to the new tools that have been put in place and the 
staffing, any staffing shortfalls that you have?
    Secretary Shinseki. Dr. Petzel.
    Dr. Petzel. Thank you, Mr. Secretary.
    Madam Chairman, we have done a number of things since we 
last talked about this in the Senate Veterans' Affairs 
Committee. I want to just go through, before I talk about the 
wait times, a few of the other things that have been done.
    First of all, we have redone the way we measure wait times. 
We now use two different measures, depending on whether you are 
a new patient into the system or whether you are an existing 
patient that is going for either further treatment or another 
kind of treatment.
    For new patients, it is the ``create date,'' so when you 
call or you walk in and say, ``I want to be seen,'' or are 
judged to be needed to be seen for mental health, that is the 
starting time.
    Chairman Murray. Right.
    Dr. Petzel. And the appointment time then is measured from 
that ``create date.''
    Chairman Murray. Okay. So knowing that, what are our 
current wait times? And my time is short, so I want--if you can 
just answer the question.
    Dr. Petzel. About 50 percent of our patients are being seen 
in less than 14 days, and about 50 percent are being seen in 
more than 14 days right now. That is from November. We do not 
have data since we haveten this going in the entire system.
    The average wait time for an appointment for a new patient 
that is not walking in for an emergency is 15 days. So we are 
getting close, but we are not there, and I would openly admit 
that we--
    Chairman Murray. And if you could answer me in writing on 
the staffing levels, because that is a critical part of this, 
and it is certainly important to all of us.
    Dr. Petzel. Right.
    Chairman Murray. I just wanted to quickly ask a couple 
other questions. One of them is on the integrated health care 
record that has been referred to back and forth here between 
the Department of Defense and the VA. We knew from the Walter 
Reed time, scandal time, that this was a critical effort. A lot 
of money has been put into this to have a coordinated record 
system. We considered the Department's joint development of a 
single integrated electronic health care record as really a 
cornerstone of that whole solution, but the Departments have 
now abandoned the drug cartel of a single record in favor of 
just interoperability between the two systems.
    We have a March 28th memorandum from the DOD Operational 
Test and Evaluation Director that criticizes DOD's approach to 
the iEHR development as being, quote, manifestly inconsistent 
with the President's Open Standards Agenda for electronic 
health care records and notes that this resistance appears to 
be based on an in correct assumption that using open standards 
will take too much time.
    I disagree. I support the White House's approach to 
implementing open standards. Open-source development brings 
together Government, industry, academia, and drives innovation, 
and is the right way forward. Are you concerned that DOD's 
apparent preference for commercial software will make achieving 
true interoperability even more difficult?
    Secretary Shinseki. Madam Chair, let me just say, like you, 
I am committed to what we have been asked to produce here, and 
I would say that over my 4 years of working with Secretary 
Shinseki Gates and Panetta and now Secretary Hagel that both 
Secretaries are committed to a single, joint, common, 
integrated electronic health record, open in architecture and 
nonproprietary in design, which is what the President asked us 
to go to work on.
    For Secretary Hagel, who arrived and was not familiar with 
the previous history on iEHR, he asked for time to get into is 
and understand where the program was. And so I await the next 
opportunity for the two of us to sit down here and ensure that 
the program is on track as we have committed to.
    Chairman Murray. Well, I hope that is going forward, and I 
will certainly push DOD to do the same.
    There is a December 6, 2012, memo from the U.S. Chief 
Information Officer and U.S. Chief Technology Officer that 
requires VA and DOD to submit a number of documents regarding 
the status of iEHR program, and I would ask t you provide us 
with a complete set of those documents as well.
    Secretary Shinseki. All right.
    Chairman Murray. Finally, just really quickly on Washington 
State, I appreciate the VA hospital campus construction being 
part of the budget. As you know, that is ongoing. But we still 
have some clinics that are really now behind schedule. 
Bremerton is behind because the Navy decided not to pursue a 
joint clinic, and the budget request does not reflect that 
change. And there has to be some progress on opening the new 
clinic in the North Olympic Peninsula and addressing some of 
the staffing concerns.
    So I would just ask you if you could let me know back-- you 
do not have to do it at this moment--where we are. We have to 
expedite those clinics, and they remain a top priority of ours.
    Secretary Shinseki. We will do that, Madam Chair.
    Chairman Murray. Thank you very much.
    Senator Kaine?
    Senator Kaine. Thank you, Madam Chair. Just two sort of 
compliments to finish off.
    First, the VA has five polytrauma centers around the United 
States where it is both care but also research about how to 
deal with these complex injuries we were describing earlier. 
One of them is in Richmond at the McGuire VA, and I was there 
about 60 days ago, and very impressive, and I think that is, as 
I understand it, not just a VA effort but a VA-DOD effort to 
deal with these complex kinds of injuries that we are seeing. 
That kind of collaboration is to be encouraged.
    And, second, Mr. Secretary, in response to some questions 
of both Senator Sessions and Senator King, you were talking 
about work at the VA to help folks on training, job training 
programs that you have that are very specific to needs you have 
or skills that veterans have that probably ought to be dealt 
with in a very direct way. But you made a point that I think is 
a really good one, which is the right way to start to deal with 
veterans' unemployment is not to start with veterans, but it is 
to start that vector of post-military employment while someone 
is in the military, whether it is through credentialing or 
other kinds of training. The first bill that I put in--and it 
is kind of related to my Armed Services portfolio--is the Troop 
Talent Act that is very much about credentialing, but about 
during the active-duty phase of somebody's experience when they 
are picking up skills, why not have them get credit for the 
skills at their moment of maximum training, at the very moment 
that they obtain them? You know, there is good work we can do 
working with veterans to tackle unemployment issues, but if we 
go further upstream and start to deal with this question while 
somebody is in active service, I think we will find that we can 
move the numbers on veterans' unemployment in a much more 
significant way. And I think some of the programs that you have 
at the VA might offer us some instruction for how to do it 
earlier, and I look forward to working together with you on 
that.
    Senator Shinseki. I am happy to work with you on that, 
Senator. Great points.
    Senator Kaine. Thank you.
    Thank you, Madam Chair.
    Chairman Murray. Thank you very much.
    Secretary Shinseki, thank you to you and your entire team 
for coming here today. And as I said before, a budget is a lot 
more than just numbers and spread sheets. It really is a 
reflection of our values and our priorities, and certainly one 
of our absolute highest priorities is caring for those who 
served and sacrificed for the Nation.
    So I really appreciate your coming here and this discussion 
and looking at how we are going to look at our budget in the 
future.
    Senator Sessions asked you a bit about what comes down the 
pike 10 years from now. We have to be looking at that as we 
have a large number of veterans returning, an aging veteran 
population. The challenges are not going away, and we cannot 
just budget by the moment. We really have to look at how this 
is impacting our future. So I very much appreciate you and your 
team for all your work.
    So as a reminder to all my colleagues, additional 
statements or questions are due for today's hearing by 6:00 
p.m., and I would ask, if there is no objection, that testimony 
for the record submitted by the Wounded Warrior Project be 
included in this record.
    [The prepared statement of the Wounded Warrior Project 
follows:] 

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    Chairman Murray. With that, this hearing is adjourned.
    [Whereupon, at 12:24 p.m., the Committee was adjourned.] 

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        THE PRESIDENT'S FISCAL YEAR 2014 DEFENSE BUDGET REQUEST

                              ----------                              - 
- -


                        WEDNESDAY, JUNE 12, 2013

                              United States Senate,
                                   Committee on the Budget,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 10:30 a.m., in 
Room SD-608, Dirksen Senate Office Building, Hon. Patty Murray, 
Chairman of the Committee, presiding.
    Present: Senators Murray, Wyden, Nelson, Whitehouse, 
Warner, Kaine, Sessions, Portman, Johnson, and Ayotte.
    Staff Present: Evan T. Schatz, Majority Staff Director; and 
Eric M. Ueland, Minority Staff Director.

              OPENING STATEMENT OF CHAIRMAN MURRAY

    Chairman Murray. Good morning, and welcome to the Senate 
Budget Committee hearing on the fiscal year 2014 budget request 
for the Department of Defense, and I want to thank Secretary 
Hagel, General Dempsey, and Under Secretary Hale for being here 
with us this morning.
    The President has requested $526.6 billion in funding for 
DOD, with one-third going to operations, one-third going to 
personnel costs, and the remaining third used for investments. 
The President has also requested an additional $79.4 billion in 
Overseas Contingency Operations funding for DOD.
    While the base budget request is essentially flat-lined, 
the Department is in a complicated position. They are finally 
ending the war in Afghanistan; implementing a new national 
security strategy; executing the pivot to Asia; and preparing 
for a range of potential problems, including North Korea, Iran, 
Syria, and the ungoverned spaces and extreme poverty that breed 
conflict. All of this has to be done with limited resources 
while facing continued sequestration.
    Secretary Hagel, clearly you have a very difficult task in 
front of you.
    A wide range of options has been put forward by many 
different groups to help meet these strategic goals while 
dealing with the budget constraints. None of them are easy, but 
I look forward to discussing them today. And I am especially 
interested in the findings of your Strategic Choices and 
Management Review.
    I also want to highlight one of the Department's challenges 
in particular. After ending the war in Iraq, we are also 
finally winding down the war in Afghanistan. As we close out 
these campaigns, it is appropriate to draw down the funding 
that will no longer be needed. But this must be done 
responsibly, by finding the right balance between capabilities 
and capacity. At the same time, Congress needs to begin the 
process of modifying or repealing the Authorization for the Use 
of Military Force.
    Overall, I support the President's commitment to that end. 
But this discussion is still in the early stages. We need to be 
sure that when we are ready to roll back the authorization, 
there is an appropriate and effective legal framework in place.
    The new laws must be flexible enough to deal with rapidly 
changing events and our continuing efforts to protect the 
country from terrorists and atypical threats, while pulling 
back authorities that are only appropriate during wartime.
    As we prepare for that discussion, I am very concerned 
about the effects sequestration is having now, and I am even 
more concerned about the long-term impact it will have if we 
cannot come together to replace it.
    Civilian defense employees are being furloughed. The Air 
Force has now grounded 31 squadrons, and by the end of the 
fiscal year, two-thirds of Navy ships and squadrons will not be 
combat ready. And the Marine Corps believes a little less than 
half its combat units will not be combat ready by the end of 
the year, which is troubling to hear from the Nation's forces 
expected to respond to any situation at a second's notice. This 
should not be difficult.
    Our colleague Senator McCain has called sequestration 
``devastating'' to our military.
    Speaker Boehner has talked about how it would ``hollow our 
military.''
    Democrats agree sequestration is a terrible way to cut 
defense spending the same way it is a terrible way to cut 
spending on education, health care, and other national 
investments.
    That is why the Senate budget takes a measured and fair 
approach to completely replace the sequester with a balanced 
mix of revenue and spending cuts. And it is why I believe one 
of our highest priorities right now should be coming together 
to get this done for the American people.
    We could be well on our way to a compromise budget 
resolution. It has now been 81 days since the Senate passed our 
budget resolution. Since then, Republican leadership in the 
Senate and a minority of Senators have held this process 
hostage.
    Let us be clear. Their obstructionism not only defies 
common sense, but it is dangerous.
    I just described some of the most serious ways 
sequestration threatens our national security, and I imagine we 
will hear more of that today. Secretary Hagel and General 
Dempsey, we know these cuts will make it incredibly hard for 
you and our men and women in uniform to protect the country.
    That is why Democrats have gone to the floor of the Senate 
12 times now to ask consent to go to conference so we can move 
forward with fully replacing the sequester in order to protect 
our men and women in combat and our future readiness. We have 
been joined by Republicans like Senator McCain and Senator 
Collins, and many more have expressed public opposition to 
their leadership's obstruction. But, unfortunately, each time 
we have been blocked.
    We want to do the right thing--talk and debate the issues 
with our House counterparts openly and follow regular order. 
Republicans have spent years saying the biggest problem was the 
Senate not passing a budget. Now that we have passed one, they 
are running away from regular order as quickly as they can.
    And this is especially disappointing to me since Republican 
brinksmanship is how we ended up with sequestration in the 
first place. Continuing to manufacture crises is the only way 
to make the situation worse for the defense budget. Refusing to 
work together or compromise will force the Pentagon to deal 
with strict, across-the- board sequester cuts in future years, 
instead of the relative flexibility they would have in meeting 
lower spending limits under a budget and appropriations bills 
enacted through regular order. So I am hopeful that Republicans 
end their latest push toward brinksmanship and join us at the 
table in a budget conference under regular order.
    And I want to be clear; I join the President, Leader Reid, 
and others in this: We are not going to negotiate over the debt 
limit. The United States is not going to default on our debt, 
and we are not going to let Republicans play political games 
with the global economy. We are still trying to fix the 
problems that were caused the last time that was tried in 2011. 
We cannot allow it to happen again.
    To that end, the Senate budget resolution calls for $552 
billion in discretionary defense spending in fiscal year 2014 
and for $5.9 trillion over 10 years. The resolution also 
includes several reserve funds that allow for additional 
funding so long as it is offset appropriately. The Senate 
amount is significantly higher than the sequester levels, as 
well as the major bipartisan budget plans like the Simpson-
Bowles Commission.
    Now, after years of growth in the base defense budget--from 
$287.4 billion in fiscal year 2001 to $527.5 billion in fiscal 
year 2013--these reductions in growth will be significant. But 
they can be accomplished hand in hand with our military 
strategy and our need to ensure readiness for the current and 
future threats. There are still options available to meet these 
spending targets, and I hope we can work together to budget for 
the Department of Defense, with a focus on real threats, real 
needs, and common sense.
    The Department needs to be reexamining how it can get the 
effects it needs as efficiently as possible, continue efforts 
to improve procurement to control costs and reduce waste, and 
work with Congress to determine how to balance force structure, 
modernization, readiness, and care for our service members and 
families.
    Most importantly, the Senate's defense level is also part 
of an overall framework that would take a balanced, fair, and 
responsible approach to our budget by raising revenues, finding 
mandatory spending savings, and by cutting both defense and 
non-defense discretionary spending.
    On the other hand, the House approach I believe is the 
wrong way to go.
    In order to keep defense spending at the pre-sequester 
levels, Congressman Ryan's plan slashes other key areas of the 
budget. For example, international affairs funding-- which is a 
vital part of our overall national security efforts--would be 
gutted under the House budget.
    Marine Corps Major General James Mattis recently testified, 
``If you do not fund the State Department fully, then I need to 
buy more ammunition, ultimately.''
    He is absolutely right, and I am very concerned that this 
type of unbalanced approach could have serious consequences.
    Aside from the budget differences, there are several policy 
areas we need to address. Secretary Hagel and General Dempsey, 
I know you agree that the greatest strength of our military is 
the character and dedication of our men and women who wear the 
uniform.
    Our service members volunteer to face danger, to put their 
lives on the line, to protect our country and its people. But 
there are some dangers that cannot be accepted and none of our 
courageous service members should ever have to face. Sexual 
assault has no place in our military; it goes against 
everything our services stand for.
    It is absolutely unconscionable that a fellow service 
member, the person you trust to have your back and be there for 
you, would commit such a terrible crime. Worse is the 
prevalence of these crimes. The number of sexual assault cases 
has increased by more than a third since 2010. And of the 
estimated 26,000 cases in 2012, less than 3,000 service members 
reported these crimes.
    Of those who bravely came forward to report the abuse, an 
astounding 62 percent of them were retaliated against in one 
way or another. That is absolutely unacceptable.
    Equally troubling are the multiple reports of these crimes 
being committed by the very people who were responsible for 
preventing sexual assaults and helping victims. In fact, just 
last Saturday we learned the Army suspended the general in 
command of all Army forces in Japan over allegations that he 
failed in his duties to report and investigate a sexual 
assault.
    This is an appalling situation that seems to get worse by 
the day. We need a cultural overhaul. We need to create a 
system where the protection and safety of victims is 
unquestionable, a system where those who commit these crimes 
and those who allow for this behavior are punished.
    Secretary Hagel, you have taken some steps to help combat 
these terrible betrayals of trust, and we all really appreciate 
that. But it is also time for Congress to act on legislation to 
give victims the protections they deserve to seek justice and 
which gives the Pentagon the tools to deal with this growing 
crisis.
    I believe the solution starts with a dedicated legal 
counsel--specifically for victims--that is with them every step 
of the way through what is a deeply personal and painful 
process, which is exactly what Senator Ayotte, who is on this 
Committee, and I have proposed in bipartisan legislation. And I 
want to especially thank Senator Ayotte for being such an 
outstanding partner on this and for all she has done to push 
this bill forward.
    In addition to endorsements from important groups like the 
Service Women's Action Network and the Military Officers' 
Association, our bill now has 37 cosponsors and strong support 
from both parties, which should tell you we are doing the right 
thing.
    Our bill is the Combatting Military Sexual Assault Act. It 
is aggressive and it is effective. It makes critical 
improvements to attack this unconscionable issue from several 
angles by empowering victims with special military lawyers to 
help guide them through the legal process; it prohibits sexual 
contact between instructors and trainees during basic training 
to make sure the terrible things we saw at places like Lackland 
Air Force Base and Aberdeen Proving Grounds will not happen 
again.
    And the bill also ensures members of the National Guard and 
Reserves will always have access to sexual assault response 
coordinators. And finally, it ensures sexual assault charges 
receive fair, thorough consideration, sending them to only the 
highest courts-martial. This will ensure that no individual 
member of the chain of command can misuse their authority to 
deny justice and hurt the victim.
    The provisions of this bill were put together very 
carefully. I believe it works with the steps that you and the 
services are taking. It will be effective and will get to the 
heart of the sexual assault problem. This is the legislation 
that is workable and will make a difference.
    And, General Dempsey, I was pleased to see you give your 
support to the central provision of our bill--providing Special 
Victims' Counsels to victims of sexual assault--during the SASC 
hearing last week, and I thank you for that.
    In addition to combating sexual assault, there is much work 
to be done in providing adequate mental health care to our 
service members and their families.
    And I am pleased to see in your testimony today that the 
Department's fiscal year 2014 request would protect funding for 
mental health care. There are several different initiatives to 
expand access to care, including some being piloted in my home 
State of Washington. I look forward to hearing more from you 
about the effectiveness of those programs and which should be 
expanded to help more service members.
    One of the key initiatives that needs to stay on track is 
the DOD-wide review of mental health care which I asked 
Secretary Panetta to begin. A similar review by the Army has 
provided very important lessons, but I still have some 
concerns. And that is why completing the DOD-wide review to 
identify gaps in care and improvements must be made. Secretary 
Hagel, as we discussed yesterday, that review needs to be 
completed soon, and I look forward to hearing from you on the 
response to that.
    We also need to improve our understanding of suicide and 
efforts to prevent it. The Army recently released data showing 
there have already been 109 potential suicides this year--in 
the Army alone--compared to 49 Army casualties in Afghanistan. 
This is an absolute tragedy, not only because of how many we 
have had this year, but because each year the number of 
suicides goes up.
    Home towns should never be more lethal than the 
battlefield, and we have to be working to turn this around.
    Developing a seamless transition is another challenge that 
VA and DOD continue to face, though important progress has been 
made. This will be even more important as the war in 
Afghanistan now winds to a close and you begin to right-size 
our military forces. I have worked with the Department to make 
the Transition Assistance Program mandatory. Along with a major 
overhaul of the curriculum, this has created a much more useful 
tool to assist service members leaving the military. I look 
forward to additional components and improvements that are 
coming.
    Other requirements to expand job opportunities and 
eliminate barriers to getting civilian licenses and credentials 
are key to combatting the unemployment rate for veterans which 
is still far too high. And I would like to hear from you about 
what you are doing to collaborate with our States and the 
private sector to bring our training and licensing requirements 
closer together.
    We have made a lot of progress working with employers to 
help them hire veterans, and I will continue to engage our 
private sector partners to help them understand the skills that 
veterans bring to the table and why they make some of the best 
employees.
    Helping our service members transition into education 
programs, good jobs, or starting small businesses does not just 
benefit the service member. It helps us grow our economy and 
the middle class and builds on the investments we have made in 
our newest veterans, as they continue to help our communities, 
our businesses, and their fellow veterans.
    I also want to continue working with you on the significant 
improvements needed in the Integrated Disability Evaluation 
System--IDES. In particular, this means developing an end-to-
end technology solution to get service members through this 
process quickly and accurately. I wrote to Deputy Secretary 
Carter in June of last year calling for the Departments to 
develop a solution, but the goal is still a very long way off, 
and there are other steps we need to make to improve the 
process that we will work with VA on, such as ensuring they 
provide sufficient exams for the PEB decisions.
    I am also concerned about the effort to develop systems to 
allow communication between the VA and DOD's medical records.
    Clearly the best option would have been a single joint 
electronic health record system that is open-source. This would 
have been the most effective solution; it would have 
revolutionized the market. But the Department has backed away 
from that goal, and I think everyone in this room is concerned 
you spent hundreds of millions of taxpayer dollars--and 
thousands of staff hours over the last few years--trying to 
create an integrated IT platform with the VA only to announce 
you were unable to find a solution.
    Now, I know there are significant questions about how to 
move forward, but I expect that you and Secretary Shinseki will 
clearly define a plan and ensure leadership remains behind this 
important project. The lack of seamless integration between our 
two largest Departments is one of the most critical areas to 
address in order to reduce costs, increase efficiencies, and 
make sure our service members and their families get the care 
they need and deserve.
    Overall, considering the serious budget challenges we face, 
now more than ever we must finally have effective collaboration 
between the Department of Defense and the VA.
    It is not easy to get the Government's two largest 
bureaucracies to work together efficiently. This is a common 
theme in many of the areas that I just discussed. It will 
require your direct attention, including evaluating whether the 
entities tasked with overseeing VA-DOD collaboration are 
effective. But with a former Deputy Administrator of VA as the 
Defense Secretary and with a former Chief of Staff of the Army 
now heading the VA, we should be well positioned to make 
progress.
    With that, thank you very much, all of you, for being here 
today and for your service to the country.
    And with that, I will turn it over to my Ranking Member, 
Senator Sessions, for his opening statement.

             OPENING STATEMENT OF SENATOR SESSIONS

    Senator Sessions. Well, the Chairman has got a lot for you 
to do, and we have a lot to do.
    I want to welcome Secretary Hagel and General Dempsey and 
Comptroller Hale to the Committee. Your work on behalf of 
national security efforts and our men and women in uniform that 
help provide our security is so much appreciated. We have the 
finest military the world has ever known. They are courageous 
and dedicated. They have responded to our call time and time 
and time again, multiple deployments away from their families, 
and they have responded with such fabulous dedication.
    In the past, I am not sure that would have happened. But it 
is happening today, and I think a lot of that is leadership, 
commitment, and dedication, and the quality of the people we 
have in our services.
    But we are facing challenges now. We will talk about the 
budget challenge today, and the Chairman has mentioned other 
issues that we will be talking about.
    The sexual assault problem is real. General Dempsey, I 
appreciated your frank testimony before the Committee last 
week, the Armed Services Committee, and I know we will have an 
additional hearing this afternoon, several hours on that very 
subject before the Armed Services Committee, because that 
crisis cannot continue. And I believe you were crystal clear 
you intend to make sure it does not. And, Secretary Hagel, I 
know you share that commitment.
    And I am also concerned about the suicide rate in the 
military, and I know it is a priority. It has been talked about 
for several years, and our top officers have discussed it, but 
we have not gotten to the bottom of that. And I know you are 
working on that.
    Madam Chair, I would like to take a moment, a personal 
moment, to express my appreciation to Marcus Peacock. You know 
he will be leaving us. He is my Staff Director, and he has just 
done such a fabulous job. I asked him to be the kind of leader 
that would work with your staff, and even though you and I can 
really tee it up sometimes on our different views, I believe 
our staffs have worked really well together, and I think Marcus 
deserves so much credit for that. He is a man of integrity and 
ability. He was at OMB, and I have just been so lucky to have 
him on my staff and want to personally say at this moment how 
much I appreciate you, Marcus.
    Chairman Murray. And, Senator Sessions, I echo those 
comments. Marcus, thank you for your tremendous service.
    Senator Sessions. You just have people every now and then 
that you run into that love their country, put the service to 
their Nation first, and work hard at it constantly, and he is 
just one of those.
    And I am really excited that we will be able to add to our 
staff, as our Director, Eric Ueland, who is known all over the 
Senate as one of the finest Senate staffers we have had in the 
Senate in recent years, and we are blessed to have him on 
board, and I think you will enjoy working with him also.
    The fiscal year 2014 budget request for the Department of 
Defense comes to us at a very challenging time. With a diverse 
set of escalating global threats and a continued domestic 
fiscal crisis, it is more important than ever that we work 
together to make sure our military has the capacity and the 
sources to ensure the Nation continues as a positive force in 
the world. I know all of you believe in that.
    In evaluating the President's budget, I found the most 
troubling aspect to be the treatment of how the sequestration 
part of the Budget Control Act is treated. For the second 
straight year, the impact of these sequestration reductions on 
our national defense spending have been hidden from the 
Congress and the public at large.
    Surely the President claims his budget replaces 
sequestration, but he fails to provide a plan that has any 
chance of passing in Congress. If there is one thing the 
Department of Defense does need now--and I believe you 
gentlemen would agree--it is a concrete plan, some certainty on 
how to provide for the defense in these difficult times.
    Unfortunately, uncertainty has become the hallmark 
characteristic of defense budgets in recent years. This is 
clearly seen in looking at the last four Department of Defense 
requests for 2014 funding levels. In the fiscal year 2011 
budget, the future year defense plan that you based your budget 
on and you projected to continue forecasted that we would spend 
$598 billion in fiscal year 2014.
    In each subsequent budget submission, planned funding 
levels for fiscal year 2014 fell, culminating with your request 
this year for $527 billion, which is above the sequester 
number, as you know, significantly. That is a drop of $71 
billion for DOD funding levels from what was projected just 4 
years ago.
    There will be some who say spending at the Department of 
Defense contributed to our current budget problems and, 
therefore, deserves to be cut more than other parts of the 
budget. Well, that is wrong. We need to know some facts that I 
think are indisputable. Consider the following:
    Fifty years ago, the United States spent 46 percent of its 
budget on defense. Under the President's budget, just 17 
percent of Federal spending will go to defense. The wars in 
Iraq and Afghanistan have been charged with causing our 
deficits and putting us in an unsustainable debt course. But 
they only amount to 4 percent of our total Federal outlays 
since 2001. The wars, yes, were costly, in blood and treasure 
both. But it really only amounted to 4 percent of the Federal 
Government spending. In effect, it was $1.4 trillion for both 
wars in Iraq and Afghanistan and $36 trillion for all other 
spending in the United States Government during that period of 
time.
    In the post-September 11th era, we spent an average of 4 
percent of our GDP on defense, which is 3 percent lower than 
the post-World War II average of 7 percent of GDP on defense. 
Under the President's budget, we are projected to spend only 3 
percent of our GDP on defense over the budget window. By fiscal 
year 2023, the last year of the President's 10-year budget, 
defense spending as a percentage of GDP will hit an all-time 
post-World War II low of 2.4 percent.
    Now, I am not saying we cannot manage our money better and 
keep our costs down, but the truth is it is not--the problem in 
our deficits are far deeper than the war, the wars, or the base 
defense budget.
    While DOD is still trying to cope with an initial $500 
billion in cuts from the caps under the Budget Control Act, 
sequestration would cause another nearly $500 billion in cuts. 
And this is occurring while many of the fastest growing drivers 
of our debt on the non-defense side of the budget are held 
harmless from any cuts. Many of them have no cuts whatsoever. 
This disparity, we will see that sequestration causes our 
national defense spending on DOD to contract by 11 percent, and 
non-defense spending at the same time over the next 10 years 
will increase 44 percent. That is inflation-adjusted 2012 
dollars over the fiscal year 2014 2012 through 2023 period.
    So, again, let me repeat that. Over this period of time, 
basically half of the cuts are falling on the defense budget, 
and that is only one-sixth of the Federal budget. The other 
five-sixths of the budget, many departments are having zero 
cuts, and have been increasing at far greater rates than the 
Defense Department. They will have an increase of 44 percent.
    So we cannot stand by and allow this unbalanced approach to 
remain the law of the land. There is too much at stake. Senator 
Hagel, General Dempsey, I want to ask you to reduce spending, 
be tighter with your management, do everything possible to be 
effective and lean and efficient. I do not hesitate to ask you 
to do that, and I think we can improve there. But I want to say 
to you, I do not think we should ask you to be in a position 
where the cuts are too fast and it hammers morale in the 
military and those who work for our Government in the military. 
We do not want to be hammering procurement systems that cause 
us to have penalties, delays driving up the cost per item 
because we could not fulfill the contract plan that we had to 
produce it at a more cost-effective rate. We have just got to 
be careful when we ask you to reduce spending that we are not 
asking you to do things that are unwise, drive up costs, and 
reduce readiness and capability.
    So we have a constitutional obligation to provide for the 
defense of this Nation of ours and a moral responsibility to 
pass a safe Nation on to our children.
    So I know that you are here and Congress has been 
confronting this openly, which I am glad to see we are, but at 
some point I hope you will also look up that number, 1600 
Pennsylvania Avenue. The President is the commander in chief of 
the United States military, and Congress has got certain 
matters that they can accept and certain things they cannot 
accept. And we need some leadership from the President to 
understand that there are things that he is not going to get 
and things he has asked for in his budget are not going to 
happen. And we need to be able to work together to see if we 
cannot find other places where we can cut spending.
    Medicaid has been increasing over the last decade. There is 
no reduction in Medicaid. Food stamps have gone from $20 
billion to $80 billion over the last decade. Four times it has 
gone up. Zero reductions in the sequester for food stamps.
    So I would just say there are places around here we need to 
be looking at, and we can save some money and spread the 
reductions around and call on all our agencies to tighten their 
belts, too. And I do not think international affairs spending 
is sacred--the State Department needs to its their belt, too. 
You go in to see the salaries they get and the expensive 
embassies that they are building around the world. They have to 
tighten their budget, too, and spread this around some.
    So I am concerned about it. It is hitting us right now 
because we are marking up the defense budget today and 
tomorrow. We are marking to an unrealistic number, I am afraid. 
And, Secretary Hagel, I know you have committed to giving us 
some information on how we could have more flexibility in the 
Defense Department and do a better job of confronting those 
challenges, and I hope you will do it.
    Consider me a friend, an ally. I believe that we can work 
with the President, I believe we can work with the Senate. But 
right now things are not going in a good direction. I do not 
see a plan right now to get us there. And, Madam Chair, I hope 
this hearing will help us make improvements.
    Chairman Murray. Thank you.
    With that, we will turn it over to our witnesses today. I 
again want to thank all of you for taking time out of very busy 
schedules to come before us. Secretary Hagel, we will begin 
with you.

    STATEMENT OF THE HONORABLE CHUCK HAGEL, SECRETARY, U.S. 
  DEPARTMENT OF DEFENSE, ACCOMPANIED BY THE HONORABLE ROBERT 
         HALE, UNDER SECRETARY OF DEFENSE (COMPTROLLER)

    Secretary Hagel. Chairman Murray, Ranking Member Sessions, 
distinguished members of the Committee, thank you for the 
opportunity to discuss the President's 2014 budget.
    I very much appreciate this Committee's continued support 
of our men and women in uniform. As you have noted in your 
opening statements, some of the specific programs that you have 
focused on, led on, have been very important to getting started 
and sustained.
    As we discuss numbers, budgets, and strategic priorities, 
we will not lose sight of these men and women serving across 
the globe. As you all know, their well-being depends on the 
decisions we make here in Washington. And as you have noted, 
Madam Chairman, the President has requested $526.6 billion for 
the Department of Defense fiscal year 2014 base budget and 
$79.4 billion for Overseas Contingency Operations.
    My written statement contains considerable detail on both 
budget requests. This morning, allow me to briefly focus on 
three areas before I take your questions: first, the continued 
budget challenges facing the Department in fiscal year 2013 as 
a result of sequestration: second, the Department's fiscal year 
2014 budget request; and, third, how the Department is 
preparing for future budget uncertainty and the prospect of 
further reduced resources.
    As you know, the Department has been forced to implement 
deep and abrupt cuts in the current fiscal year because of 
sequestration. According to the latest guidance from the Office 
of Management and Budget, the Department has cut $37 billion in 
spending through the remainder of this fiscal year. With our 
internal decision to shift the impact of sequestration away 
from those serving in harm's way and force readiness, the cuts 
now fall heavily on DOD's accounts that train and equip those 
who will deploy in the future.
    The Department is also experiencing higher wartime costs 
than expected. As a result of these factors, the Department is 
facing a shortfall of more than $30 billion in our operation 
and maintenance budget for fiscal year 2013.
    To deal with this shortfall, the Department has cut back 
sharply on facilities maintenance, instituted hiring freezes, 
cut overhead spending, reduced important but lower-priority 
programs, directed furloughs of nearly 700,000 civilian 
employees, and submitted a $9.6 billion reprogramming request 
to Congress.
    Given the scale of this shortfall, the reprogramming and 
other steps we have taken to cut non-essential spending are not 
enough. While we have protected spending to sustain the war 
effort and defend America's vital strategic interests, the 
Department's day-to-day activities will be significantly 
disrupted for the remainder of this fiscal year. Each of the 
military services has begun to significantly reduce training 
and maintenance of non-deployed operating forces.
    For example, the Army has stopped rotations at its key 
combat training centers for all but deploying units. More than 
a dozen combat coded Air Force squadrons either already have or 
will soon stop flying. And the Navy has curtailed deployments.
    To avoid even more significant reductions to military 
readiness, I directed furloughs of up to 11 days for most of 
the Department's 800,000 personnel. I made this decision very 
reluctantly. I made it reluctantly because I recognize the 
significant hardship this places on our civilian personnel 
across the country and their families. But the current budget 
environment is requiring very difficult decisions and options.
    The President's fiscal year 2014 budget continues to 
implement the $487 billion in spending reductions over 10 years 
agreed to in the Budget Control of 2011, as Senator Sessions 
noted. If the sequester-related provisions of the Budget 
Control Act are not changed, fiscal year 2014 funding for 
national defense programs will be subject to an additional $52 
billion reduction in DOD funding. And if there is no changes, 
continued sequestration will result in roughly $500 billion in 
additional reductions to defense spending over the next 10 
years.
    The President's fiscal year 2014 budget replaces 
sequestration and gives the Department the time and the 
flexibility--the time and flexibility--to plan and implement 
spending reductions wisely and responsibly, and we can do that 
wisely and responsibly.
    In particular, this budget enables the Department to 
support troops still at war in Afghanistan, protect readiness, 
modernize the military's aging new weapons inventory in keeping 
with the President's strategic guidance, and sustain the high 
quality of the all-volunteer force.
    This budget also continues the Department's approach of the 
last couple of years of targeting growing costs in areas of 
support, overhead, acquisition, and pay and benefits.
    Over the next 5 years, DOD has identified $34 billion in 
new savings across these categories. This includes weapons 
program restructuring and terminations. They achieve $8.2 
billion in savings. Slowdowns in military construction are also 
included, and reductions in other lower-priority programs.
    Our military compensation package preserves DOD's world-
class pay and benefits while putting our military on a more 
sustainable path for the future. It includes changes to the 
TRICARE program to bring the beneficiary's cost share closer to 
the levels envisioned when the program was first implemented.
    The Department of Defense also must be able to eliminate 
excess infrastructure. The President's fiscal year 2014 budget 
requests authorization for one round of base realignment and 
closure in 2015.
    Now, as we all know, BRAC is an imperfect process, and 
there are up-front costs, but in the long term, there are 
significant savings. The previous rounds of BRAC are saving $12 
billion annually. We cannot justify funding unnecessary 
infrastructure when we are reducing our force structure.
    Since 2003, DOD has divested more than 100 foreign bases 
and operations, and we are on schedule to close or consolidate 
over 20 more overseas operations. Although there are clearly 
opportunities to achieve significant savings by improving 
efficiency, consolidations, and reducing overhead, the scale of 
the current spending reductions will also require cuts and 
changes to military operations.
    The fiscal year 2014 budget request seeks to further align 
budget programs with the President's defense strategic guidance 
while continuing to reduce the size of the ground forces and 
retire aging aircraft and ships. This budget invests in key 
elements of our defense strategy, including implementing our 
rebalance to the Asia Pacific region; maintaining a safe, 
secure, and effective nuclear stockpile; increasing investment 
in cyber capabilities; and sustaining the growth of special 
operations. And this budget seeks to preserve a combat-ready 
force and sustain the high quality of an all-volunteer force.
    The fiscal year 2014 budget reflects DOD's best efforts to 
match ends, ways, and means during a period of intense fiscal 
uncertainty.
    It is obvious that significant changes to the Department's 
top-line spending would require significant changes to the 
budget plan.
    Consequently, I directed a Strategic Choices and Management 
Review in order to assess the potential impact of further 
reductions and then plan for those continued reductions if 
necessary.
    I have received the initial internal results of the review, 
and I am now reviewing them, and I will continue to share those 
results with Congress.
    The Defense Department will continue find new ways to 
operate more affordably, efficiently, and effectively. However, 
as I have stated, continued cuts on the scale and timeline of 
sequestration would require significant reductions in core 
military capabilities and the scope of our activities around 
the world.
    The President's fiscal year 2014 budget sustains our 
military strength in an environment of constrained resources, 
giving DOD the time and the flexibility to make the necessary 
reductions and adjustments over a 10-year time frame.
    Hard choices will have to be made over the next few years. 
In the past, many modest reforms to personnel and benefits 
along with efforts to reduce infrastructure and restructure 
acquisition programs were met with fierce political resistance, 
and they were never implemented. As you all know, we are now in 
a totally different fiscal environment. New realities are 
forcing us to more fully confront these tough and painful 
choices and to make the reforms necessary to put this 
Department on a path to sustain our military strength for the 
21st century and meet new and complicated global threats. This 
will require the continued support and partnership of the 
Congress, and I look forward to your questions after General 
Dempsey's statement.
    Thank you.
    [The prepared statement of Secretary Hagel follows:] 

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    Chairman Murray. Thank you very much, Mr. Secretary.
    General Dempsey.

 STATEMENT OF GENERAL MARTIN E. DEMPSEY, USA, CHAIRMAN, JOINT 
                        CHIEFS OF STAFF

    General Dempsey. Thank you, Chairman Murray, Ranking Member 
Sessions, distinguished members of the Committee. Thank you for 
this opportunity to discuss the budget proposal for fiscal year 
2014.
    This hearing comes during a period of extraordinary 
uncertainty. Risks to our Nation's security are increasing, but 
the resources for and the readiness of our forces are 
decreasing.
    The will to win of our service men and women remains 
undaunted, but the means to prepare to win are becoming more 
uncertain by the day.
    This budget was purpose built to keep our Nation immune 
from coercion. It is a responsible investment in an unrivaled 
joint force that is ready with options for a dangerous and 
uncertain future. It supports our forward deployed operations, 
upholds funding for emerging capabilities like cyber, and it 
reduces the conventional resources, the conventional and 
nuclear forces that have proven so essential to our defense 
over time.
    Most importantly, it protects investment in our decisive 
advantage, which is, in fact, our people. It treats being the 
best led, the best trained, and the best equipped military as 
the non-negotiable imperative. It also makes sure that our 
wounded warriors and their families receive world-class care, 
family and medical services that are worthy of their service to 
the Nation.
    There are some things this budget does not do. It does not 
reflect the full sequestration amount; rather, it imposes less 
reduction and it gives us more time to implement new cuts.
    The consequences of full sequestration and its attendant 
risks to our national security will gain clarity in the weeks 
ahead. As you well know, the Senate asked us to provide our 
assessment of the impact on the joint force by the 1st of July.
    Nor does this budget account for the costs of restoring 
lost readiness. We do not yet know the full costs to recover 
from the readiness shortfalls that we have experienced this 
fiscal year. As expected, we continue to curtail or cancel 
training and exercises across all services for those units that 
are not preparing to deploy. As a result, we are less ready 
every day for unforeseen crises or contingency operations. In 
effect, we are foreclosing on options.
    And it is more expensive to become ready than it is to 
remain ready. This means that the costs to recover lost 
readiness will at some point compete with the costs of building 
the joint force we believe we need in 2020.
    As our military power becomes less sustainable, we become 
less credible. We risk breaking commitments and losing the 
confidence of partners and allies. We lose the confidence over 
our defense industrial base and, worst of all, potentially the 
confidence of our men and women in uniform and their families.
    Now, this outcome is not inevitable. Working together, we 
can uphold the readiness and the health of the force at an 
affordable cost. To do this, just as you said, Chairman, we 
need the certainty of a predictable funding stream, a reliable 
top line. We also need the time to implement tradeoffs in force 
structure modernization and readiness, as well as compensation. 
And we need the full flexibility to keep the force in balance. 
We simply cannot afford to postpone essential reforms through 
compensation and health care. Both must be allowed to grow more 
gradually.
    We should stop pouring money into excess facilities and 
unwanted weapons systems. Real institutional reform is the only 
way to avoid repeating the mistakes of past drawdowns, and we 
do have a history of drawdowns.
    We have an opportunity this time--actually, we have an 
obligation with this and any future budget to restore 
confidence. We have it within us to stay strong as a global 
leader and a reliable partner.
    Thank you for all you have done on this Committee to 
support our men and women in uniform. I count on your continued 
support, and I look forward to your questions.
    [The prepared statement of General Dempsey follows:] 

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    Chairman Murray. Thank you very much.
    With that, we will turn to our questions, and, Secretary 
Hagel, let me begin with you. You asked for more time before 
cuts take place and certainty when it comes to the defense 
budget. The Senate budget that we passed here provides both. It 
actually starts by eliminating sequestration and replacing it 
with a balanced mix of savings and revenue and spending, 
including defense, and ensures that those savings in defense do 
not begin until fiscal year 2015, which will give the 
Department the time you have asked for to plan appropriately.
    The Senate budget plan reduced defense spending by about 
$250 billion over 10 years. That is about half of the roughly 
$500 billion in cuts and sequestration. And by replacing the 
sequestration and ending this budgeting by crisis that we are 
doing, it provides certainty on the funding levels for DOD for 
the next 10 years.
    Unfortunately, as I mentioned in my opening remarks, 
because we have not been able to go to conference, that is 
actually ensuring that we are going to have another round of 
sequestration on us very quickly, which will again be across-
the-board, indiscriminate cuts from DOD funding in fiscal year 
2014. And, frankly, I see that as a plan for failure.
    So I think the most important thing we can do right now for 
the long-term good of our military is to follow regular order, 
go to conference, and then pass a compromise budget that fully 
replaces sequestration, and I really would like to do that if 
we can have the ability to do it. But I wanted to ask you today 
if you could comment on the long-term budget and the need for 
that that replaces the sequester and how that will affect your 
ability to plan and execute your national security strategy.
    Secretary Hagel. Thank you for the general and broad 
question, because it does frame everything. It frames our 
ability to respond to the responsibilities we have for our 
national security well into the future.
    I think much of what General Dempsey's testimony was about 
really focused on this. When we have the inability to plan and 
have no certainty from month to month, year to year, as to what 
our possibilities are for contracts, for acquisitions, for 
technology, for research, the technological advantage that we 
have in the air and the superiority we have at sea, the 
training, the readiness, all of these are affected by the lack 
of certainty for planning.
    The chiefs say to me, when I have spent a lot of time with 
them, as the Chairman has over the last 3 months going through 
the review, ``If you can give me any clarity on what kind of 
resources I have, I can build you an army with some degree of 
certainty, and I can build you a force structure that will 
match our strategic interests and our strategic guidance as to 
not only enhancing but preserving our national security 
interests around the world.''
    I cannot give them that, and when I cannot give them that, 
then we have to continually go back and adjust and adapt, and 
we are then forced to do some of the things that you have 
noted, as Senator Sessions did, as I did in my testimony, 
furloughs for people, a good example of that. You are not 
building a skill set in your civilian employment when that 
threat of employment is there, whether they are going to be not 
only furloughed but maybe RIF'd.
    This gets into contractors. We often hear--and I suspect it 
will come up here--``Well, why do you use contractors?'' Well, 
mainly why anybody uses contractors is because there is a 
specific skill set that you may not have in-house, and that is 
more expensive. So you are building nothing for the future 
because you are essentially using your readiness not only in 
employment and the military and planning for the future, just 
to protect the immediacy of unwinding a war in Afghanistan or 
the immediacy of our force structure and the priorities of our 
readiness.
    So I know that is a long answer, but it does--everything I 
have said, it fits into, folds into your overall question. That 
is why time and flexibility are absolutely key here. If we have 
the flexibility and the time to bring this down, we can do 
that. That is manageable. And there are a lot of things that we 
should be doing, we can be doing to be more efficient and still 
protect the interests of this country and still be the most 
effective fighting force. But where we are essentially is when 
you are talking about the kind of abrupt cuts without slowing 
the growth, then what you are really bottom line saying is that 
you are going to cut your combat power. And in the end, combat 
power and the readiness and everything that fits into that is 
the one core asset that you must preserve and continually 
enhance for the future, whether it is cyber or anything else.
    Chairman Murray. Okay. And I need to turn it over to 
Senator Sessions, but let me ask you specifically. Obviously 
the President had hoped that we would not have sequester in 
effect for 2014, so that is not included in your budget 
request. I know, General, you mentioned the Strategic Choices 
and Management Review that you expect to have out in a few 
short weeks. Is there anything that you are finding right now 
that you are going to face that you could share with us that 
would help us understand just for 2014, if we do not move 
forward and replace the sequester, what we will be facing?
    Secretary Hagel. The reason that I directed a Strategic 
Choice and Management Review 3 months ago was, as I said in my 
comment, my opening statement, to prepare for what may 
eventually be a continued uncertainty of our resources. And so 
we asked all of our senior leadership to be involved and 
participate, as they did. We have our nine combatant commanders 
coming in for a 2-day conference this week. They have been 
involved. But the point is, to answer your question, that we 
have done this in order to project out as to what kind of 
limitations and planning that we are going to have to do to 
protect our defense capabilities based on, as your original 
question, the uncertainty of these budget issues.
    As to the review and the results, as I said in my 
statement, I am looking at those; General Dempsey is looking at 
those. We are reviewing those. This was not intended to be a 
set of recommendations; rather, it was intended to be a set of 
choices based on these different possibilities and these 
different scenarios.
    Chairman Murray. You would not want us to have this happen. 
You are planning for it. We will see what that is going to be 
in a few short weeks. My goal is to get us to conference and 
solve this so we can replace sequestration. I think that is 
critically important. But I think we are going to all have to 
be eyes open when you produce that report in a few weeks.
    General?
    General Dempsey. If I could add, Senator, by way of 
context, Senator Sessions mentioned that when we did our 
future-year defense plan 4 years ago, fiscal year 2014 was to 
be funded at $598 billion. If you count sequestration, it goes 
to $474 billion. So the way to think about sequestration is not 
that it is the deepest cut we have ever experienced in our 
history. We have had deeper cuts. But it is by far the 
steepest. And when the cut is steep, we limit the places we can 
go to get the money, because a lot of this money is unavailable 
in the short term. We can make long-term institutional reform, 
but you cannot sweep it up in the near term. That is the 
problem we are having.
    Chairman Murray. Okay. I very much appreciate it.
    Senator Sessions.
    Senator Sessions. Thank you.
    General Dempsey, I believe that is correct. It is pretty 
obvious when you look at it that is too rapid a reduction. So I 
guess you are saying there may be more savings that we could 
effectuate over time, but doing it on such a short-term basis 
requires damaging decisions to be made.
    Just briefly, Secretary Hagel and General Dempsey, this 
$9.6 billion reprogramming requiest, as I understand it, we 
came out under the funding needs for OCO, the Overseas 
Contingency Operations, by about $9.6 billion. And I have been 
surprised to find out--and I understand--that you are having to 
take that out of the base defense budget.
    Now, we all need to know there are two funding sources 
here: the base budget and overseas contingency operations. War 
costs are coming down in an independent way. Are you being 
asked to fund the shortfall in the war costs out of your base 
defense budget in addition to the other cuts that have fallen 
on the Defense Department?
    Secretary Hagel. Let me just make a general comment, and 
then I will ask the Comptroller to answer specifically the 
numbers questions.
    As you said, Senator Sessions, we have two budgets, 
different reasons. You accurately noted that we are $10 billion 
below last year's fiscal year 2013 request. Those numbers will 
continue to come down, and eventually we will, I hope, be able 
to phase out that process. But it is essentially to pay for war 
efforts, as you know. And when I was in the Senate--and I was 
actually on this Committee for 4 years--we financed our two 
wars essentially out of emergency supplemental appropriations. 
And that is where a lot of this started.
    As has been noted, I think at least in my statement-- and 
the Comptroller can address this--the additional costs as we 
reset and unwind and transition from Afghanistan have been 
significantly more. It costs an awful lot of money to get your 
people out, do it responsibly, get your equipment out, which we 
have an astounding amount of equipment in Afghanistan to do it 
right. It is a dangerous area. It is much more complicated than 
just moving down through the desert in Iraq to the port and 
then ship it out. It is different.
    So that is another part of the OCO funding, but I just 
wanted to give you that maybe general sense of this, and then 
ask the Comptroller to go into more detail. Thank you.
    Mr. Hale. Senator Sessions, we are funding the OCO 
shortfall in two ways. Part of it is by moving money around 
within OCO, delaying, for example, equipment that we would have 
bought to replace equipment damaged in Afghanistan, and out of 
our base budget. And you are correct, some of it is coming out 
of the base budget. I do not have in my head the exact split, 
but a substantial part is coming out of the base budget.
    Senator Sessions. Well, to that extent, I mean, the whole 
war, the $1.4 trillion over the last 10 years or so that we 
have used on the war efforts have been emergency spending. And 
the base defense budget has been paid for under the budget 
accounts of the United States. So it seems to me--have you 
considered asking for a supplemental to avoid--additional cuts 
to the base budget. hese cuts are in addition, it seems to me, 
to the $52 billion you have to talk about FY 2014 for because 
you have to find more savings, and then those savings could 
have been used next year to pay for other cuts. Now they have 
to be used to fund war costs that we have normally been funding 
through supplementals.
    Mr. Hale. Just let me give you the numbers. About $4 
billion out of the base budget. The rest is--
    Senator Sessions. Well, I would be interested in discussing 
that. But the difficulty we have, colleagues, on the sequester, 
sequester is part and parcel of the Budget Control Act that was 
passed in August of 2011. We raised the debt ceiling $2.1 
trillion. We promised to reduce the growth of spending by $2.1 
trillion over 10 years, and there were no tax increases in 
that. We did have an agreement that a committee would work on 
how to spread those cuts around to consider if they could not 
reform our entitlements. And the Committee could have proposed 
tax increases if they chose. But the law that passed was to 
reduce spending by $2.1 trillion, unwisely, as it turns out, on 
how the cuts were to fall, and they were too much on defense. 
But that is what passed.
    And so I think there is a strong feeling in Congress that 
we have--it will be very corrosive of public integrity and the 
integrity of Congress to waltz in now and say less than 2 years 
later, about 2 years later, we are going to give up and forget 
what we said we were going to do when the going gets a little 
tough. So what should happen is we should look at this 
government, see how much more the Defense Department can handle 
over time in reducing spending, and look for ways to find other 
savings in our Government and stay on track.
    We just had a $600 billion increase in taxes in January. I 
do not suppose any of that was used to fix this problem.
    Now, Secretary Hagel, you stand behind the President's 
defense request proposal for 2014 and the out-year budgetary 
levels that accompany that proposal?
    Secretary Hagel. Yes. As I said in my opening statement, 
Senator, that budget is a budget that sustains all of national 
security interests and protects those interests, keeps a 
strong, viable funding source, and continues to make the kind 
of adjustments and reductions that we need over the next 10 
years.
    Senator Sessions. So the plan that would cut $130 billion 
more than the President's request would still allow you to meet 
the strategic requirements that you believe the Nation must 
meet?
    Secretary Hagel. I think we could manage with that 
additional cut on top of the President's $150 billion. But as I 
have said and the Chairman said--and the Chairman should 
respond to this as well--make no mistake, when you are taking 
those kind of numbers out of a budget, there will be 
adjustments to that budget. And that means adjustments to the 
strategic interests and how we implement those programs to 
protect those strategic interests.
    I do not know, General Dempsey. You may want to respond.
    General Dempsey. This review that the Secretary has led 
allows us to see the impact of not only the President's fiscal 
year 2014 submission but also the Senate's plan, and then full 
sequestration. And it does pose a series of choices which 
become pretty difficult.
    When you add up the 487 that we were tasked to reduce, the 
Defense Department, by the Budget Control Act and then add the 
500 to it--and we did some things with Secretary Gates in terms 
of efficiencies--it comes out to about $1.2 trillion. $1.2 
trillion leaves a mark on the United States armed forces that 
would make it--we have not made this actual--we have not 
decided that it would make our current strategy infeasible, but 
it would put it at great risk and could make it infeasible.
    Senator Sessions. When do you expect that report to be 
available for Congress?
    Secretary Hagel. Well, as I said, the initial results have 
been completed. I have them. I am going through them. As I also 
noted, it is not a set of recommendations. It is a set of 
choices. Essentially, simply, it is what the Chairman just 
noted.
    Senator Sessions. Well, we really need recommendations.
    Secretary Hagel. Well, we will have recommendations for, 
obviously, our internal use, but as I also noted, we will be 
sharing this with the committees as to where we are going. We 
have to, because this is also going to guide 2015 budget 
requests and how we play this out for going into 2014.
    Chairman Murray. Thank you very much, and I know we have 
both gone over. Our witnesses have to leave at 12:15, I 
believe, to go to the House, so we are going to try and keep 
everybody on track here as best as we can.
    Senator Wyden.
    Senator Wyden. Thank you, Madam Chair. I welcome our 
guests. I just want to highlight two points before questions.
    First, let me commend you, Madam Chair, and the Senator 
from New Hampshire, Kelly Ayotte, on your great work with 
respect to the sexual assault issue. This has gone on and on. 
This scourge has been debated for it seems like longer than--a 
longer running debate than the Trojan War. I very much support 
your leadership in this regard to get this rooted out finally.
    Point number two, Senator Murray has stressed how important 
it is to have a bipartisan conference on the budget. This is a 
view that I very much share, and what is striking is outside 
the Senate--outside the Senate--security and economic thinkers, 
our leading thinkers of both political parties, say this is 
exactly the time for a long- term strategy. That is what a 
budget conference would provide us the ability to do, is to 
look at the 10-year window to tackle these issues. Senator 
Sessions makes the point with respect to health costs. Senator, 
I am laying out a Medicare reform proposal tomorrow. Other 
colleagues have as well. We should have the kind of bipartisan 
conference on the budget that Senator Murray talks about. I see 
Senator Portman and others are making the case of how important 
it is we tackle these issues in the long term, and I commend 
them.
    Let me ask you, General Dempsey--and, Secretary Hagel, we 
enjoyed working together on the Intelligence Committee--the 
first question about the contractors. What is striking is the 
inability to really hone in on the numbers so that we can get a 
sense of how to tackle this issue.
    Comptroller Hale, last February, you estimated that in 
terms of contractors, your calculation was that we had about 
300,000. According to a GAO analysis that was published last 
month, there were over 710,000 full-time contractors working 
for the Department.
    So let us start with you, General Dempsey, on this point. 
How do you explain the discrepancy in the numbers? And how are 
you and your colleagues going to get us the accurate figures so 
we can get on top of this issue?
    General Dempsey. Well, actually when you get eventually 
over to Mr. Hale, I think we have accurate numbers. I do not 
know how--
    Senator Wyden. Well, no. We have right now--
    General Dempsey. I think your 700,000 number is accurate.
    Senator Wyden. So what Comptroller Hale said last February, 
when he estimated--when he said it was 300,000, that was not 
accurate?
    General Dempsey. Well, he is right there.
    Senator Wyden. Okay. Let us get him in.
    Mr. Hale. There are different definitions, Senator Wyden. I 
was referring to the contractors where we have better data that 
are funded through what is called operation and maintenance. 
The best numbers we have for all our service contractors, about 
700,000. The number is--we gave that to GAO.
    Let me just say it is not as easy--
    Senator Wyden. Well, on that point, then get me in writing 
the difference between the types of contractors.
    Mr. Hale. Okay. I will do that. It is not as easy as it 
sounds. When you do a fixed-price contract, the contractor has 
no obligation to tell you how many people have to be doing the 
job. They just do it, and if they do it right, they get paid. 
So we are actually going and modifying all our contracts--at 
some cost to the Government, I might add--and requiring they 
provide that data. So you will have more accurate information, 
but at some cost.
    Meanwhile, we are doing the best estimates we can, and I 
think 700,000 is close for service contractors. Now, there are 
people working on weapons that would add to that number.
    Senator Wyden. In writing, the difference between the 
various contractors.
    Mr. Hale. Got it.
    Senator Wyden. Let me ask one other question of you, 
General Dempsey. On the C-23 Sherpa aircraft--these are the big 
planes, the big cargo planes used in Sandy for delivering 
individuals, cargo--the message from the Congress has been, 
``Do not get rid of them. Do not divest them.'' The Army's 
response has been to order the Sherpas flown to Oklahoma to be 
boxed up and then I guess they are going to be divested. It is 
almost like the Army is saying, ``If you will not let us divest 
them, we will not let the Guard fly them.''
    Now, we have a lot of us here in the Congress-- again, both 
political parties--who strongly support the role of the Guard, 
and these planes that were used in Hurricane Sandy and our 
State, and we are looking in the West particularly at 
horrendous fires this upcoming summer. This would be a chance 
to help the Guards' critical domestic missions. I do not know 
how we are going to help those critical domestic missions by 
parking the planes in a hangar.
    So what is your take on this? And what ought to be done?
    General Dempsey. Well, Senator, the C-27--and this has been 
the subject of a great deal of analysis in terms of its cost, 
operating cost, and its utility. And the Army-Air Force 
cooperation was actually quite encouraging in the sense that 
the gap, if you will, as you have described it, with the 
retirement or the divestiture of the C-27 can be covered by the 
C-130.
    Now, you know, there are some who disagree with that 
analysis, but if it has not been laid out for you, we can 
certainly--
    Senator Wyden. Well, that may well be. Let me wrap up with 
this, Madam Chair. Why are they in the hangars? Here we have 
what all sides have said is a significant number of aircraft. 
They are in the hangars. We want the Guard, whose work we 
support and admire, to have the tools. Why are they sitting in 
the hangars?
    General Dempsey. Well, the Guard will have the tools, sir, 
but--
    Senator Wyden. But, still, the question is: Why are they in 
the hangars?
    General Dempsey. Well, because it costs money to operate 
them. They are not operated for free.
    Senator Wyden. About as good a value as we can get in this 
country.
    Thank you, Madam Chair.
    Chairman Murray. Senator Johnson.
    Senator Johnson. Thank you, Madam Chair.
    Speaking of sitting in a hangar, General Dempsey, I would 
like to talk a little bit about Commander's In-Extremis Forces 
(CIFs). It is my understanding that these are units of 40 
special operations individuals that are basically there for 
rapid response, rapid deployment. Is that correct?
    General Dempsey. Yes, it is one of several capabilities 
like that.
    Senator Johnson. And we have one of those in Europe, C-110, 
it is called the European Commander's In-Extremis Forces 
(EUCOM)?
    General Dempsey. Each combatant commander has one.
    Senator Johnson. Okay. There was a report on April 30th 
filed by Adam Housley that the EUCOM CIF was not at their home-
base in Europe but actually deployed on a training exercise in 
Croatia. Is that correct?
    General Dempsey. Are you talking about last September?
    Senator Johnson. Yes, during Benghazi.
    General Dempsey. It was on a training mission in Bosnia, 
right.
    Senator Johnson. On the night of the terrorist attack in 
Benghazi, correct?
    General Dempsey. That is correct.
    Senator Johnson. What is the time to deployment of those 
forces? What is their standing order?
    General Dempsey. Their response times are ratcheted up and 
down based on the threat. They can be anywhere from n plus 1, 
notification plus 1, which means they are sitting on the 
tarmac, up through about n plus 6, depending on the threat.
    Senator Johnson. Now, according to Adam Housley, through a 
whistleblower, that individual stated that force could have 
been in Benghazi 3-1/2 hours, 4 to 6 hours, somewhere in that 
time frame. Is that correct? Were they at that stage of 
readiness?
    General Dempsey. No, I would not agree to that timeline. 
The travel time alone would have been more than that, and that 
is if they were sitting on the tarmac.
    Senator Johnson. Was the command of EUCOM CIF transferred 
during the Benghazi attack from European Command to AFRICOM?
    General Dempsey. There was a point at which the CIF was 
transitioned over to AFRICOM, yes, sir.
    Senator Johnson. At what point was that transferred?
    General Dempsey. It occurred, as I recall now, during the 
night of September 11th.
    Senator Johnson. Can you give me any kind of timeframe on 
that? Do you know exactly when it--
    General Dempsey. No, not from memory. I can certainly take 
that--
    Senator Johnson. Yeah, I would certainly like to find that 
out. Was that unit ever deployed anywhere?
    General Dempsey. Anywhere after the Benghazi attack?
    Senator Johnson. During the Benghazi attack, during that 
12- to 24-hour period. Did they leave Croatia?
    General Dempsey. They were told to begin preparations to 
leave Croatia and to return to their normal operating base in 
Stuttgart.
    Senator Johnson. Okay. So, again, have you checked into 
specifically what their time to deploy orders were at that 
moment?
    General Dempsey. Yes, not only for that particular element, 
but for fleet antiterrorism support teams. For all of the 
various response forces, we do have that timeline available.
    Senator Johnson. Okay. So, again, what I want to know is 
what was their standing order time to deployment at the moment 
of the Benghazi attack? Was it T plus 1 or T plus 2? What was 
their standing order?
    General Dempsey. Well, given that they were on training 
event, it was probably at n plus 6, but let me take it for the 
record.
    Senator Johnson. Okay. Well, I appreciate that.
    Senator Johnson. During our Foreign Relations Committee 
hearing on Benghazi, a number of people made the comment that 
the State Department simply did not have the funds to provide 
the security. Is it true that the Defense Department was 
providing security in Benghazi?
    General Dempsey. There were six individuals under 
Department of Defense authority in Benghazi.
    Senator Johnson. And the State Department does not pay for 
that, correct?
    General Dempsey. That is correct.
    Senator Johnson. Did the State Department, did Secretary 
Clinton ever contact the Department of Defense asking for 
additional security because she was getting requests from 
individuals in Libya for additional security?
    General Dempsey. I do not know if she contacted the 
Department. I was not contacted.
    Senator Johnson. Okay. Can you check that for me for the 
record?
    General Dempsey. Sure.
    Senator Johnson. Had Secretary Clinton or somebody from the 
Department of State contacted the Defense Department, would you 
have provided security in Benghazi?
    General Dempsey. We routinely respond to Department of 
State requests for support.
    Senator Johnson. And what they were really requesting, the 
people on the ground there, was not particularly a large 
deployment, correct? They were talking maybe about 16 security 
individuals?
    General Dempsey. At one time we had 16 there, that is 
correct.
    Senator Johnson. Okay. In your opinion, had we had just a 
minimal force, armed force of trained defense military 
individuals in the compound in Benghazi, would that attack have 
ever occurred?
    General Dempsey. I have--I cannot speculate about that 
hypothetical because literally it is hypothetical. I mean, 
whether the--
    Senator Johnson. Well, it is true the minimum number of 
special operations individuals repelled the attack then. When 
they came from the annex to the consulate, they basically 
repelled the attack, correct?
    General Dempsey. Well, it was from the consulate to the 
annex, but the--
    Senator Johnson. Well, the first time it was from the annex 
to the consulate, right?
    General Dempsey. The first event occurred at the consulate 
to--
    Senator Johnson. Right, and then we had special ops folks 
or, you know, contractors come from the annex to the 
consulate--
    General Dempsey. That is correct.
    Senator Johnson. --to repel the attack.
    General Dempsey. To recover, that is right--well, to 
recover the individuals who had been attacked.
    Senator Johnson. So I think the assumption would be if we 
had maybe four time full--16, which means four people full-time 
guards at that consulate, probably that attack never would have 
occurred.
    General Dempsey. Well, if you are asking me would 
additional security forces have made a difference in any number 
of ways, the answer is yes, of course.
    Senator Johnson. Okay. Well, thank you.
    Thank you, Madam Chair.
    Chairman Murray. Yes, Senator Kaine.
    Senator Kaine. Thank you, Madam Chair. I would like to cede 
a couple of seconds at the start for Senator Wyden to finish up 
an inquiry.
    Senator Wyden. Thank you very much.
    General Dempsey, our Guard says it is, in fact, the C- 23s 
that are in the hangars now, and they have been ordered to move 
C-23s there. So that is still the question, and if you could 
get back to me, I would appreciate it.
    Chairman Murray. Senator Kaine.
    Senator Kaine. Great. Thank you, Madam Chair, and welcome 
to the witnesses. Thanks for your service in a time of danger. 
I just was thinking this morning, you have been OPTEMPO in war 
for 12 years, you, the military in the United States. That is 
longer than the Revolutionary War. That is longer than the 
Vietnam War. That is longer than any period of OPTEMPO 
warfighting in the history of this country. So I am going to 
start with a thank you. And then I am going to say thank you 
for serving in a time of uncertainty. Both your written 
testimony and your oral testimony, Secretary Hagel, ``Today the 
Department of Defense faces the significant challenge of 
conducting long-term planning and budgeting at a time of 
considerable uncertainty...''; and, General Dempsey, ``This 
year's posture testimony comes in the context of extraordinary 
uncertainty.'' And when I read the testimony and heard it, it 
kind of struck me. You guys are good diplomats. You mentioned 
uncertainty as if it was a hurricane or something. It is 
Congress. It is not a hurricane. It is not an uncertainty like 
we do not know what is going to happen. You are dealing with a 
Congress that will not give you a budget, that will not give 
you a number. You might like the number. You might not like the 
number. But you are dealing with a Congress, the first of the 
three co-equal branches, that will not give you a budget around 
which you can plan the defense of this Nation.
    So I appreciate the euphemisms in the testimony, and I 
think that is probably wise to do if you are sitting on that 
side of the Committee room. But that is what we are dealing 
with here. We are with a Congress that will not give you 
certainty, will not do its job. It is only Congress that can 
appropriate money, and Congress is not doing the job. It is 
just outrageous. And we sat through so many hearings, Madam 
Chair, whether it is in this Committee or on the Armed Services 
Committee, and we have had these same conversations for the 
last number of months, and we have, you know, kind of wanted to 
beat up on people on this side of the aisle when it is us, it 
is Congress that is not doing what needs to be done.
    I am going to go to the floor at a little bit after noon, 
and I am going to make the 13th motion, Madam Chair, to put a 
budget that we passed in this Committee and then passed on the 
Senate floor into conference with the House. We passed it on 
the 23rd of March after a full Committee process where we had 
numerous amendments here and then a full process on the Senate 
floor, where we had numerous amendments there.
    We passed it after hearing over and over again that the 
Senate would not pass a budget. And we passed one. And yet we 
are not allowed because of procedural rules in the Senate and, 
frankly, a desire, I think, by the House, we are not allowed to 
initiate a budget conference to try to give you the certainty 
that you need, the certainty that our Nation needs.
    So, you know, I start really my thoughts with this sense of 
gratitude for service in a time of 12 years of war, but also 
service where you are facing an uncertainty that is completely 
under the control of the people who sit in this room and sit on 
this Capitol. And the fact that we are not giving it to you, 
that you can, you know, come here still with the spirit of 
equanimity, I applaud you for it.
    To a couple of questions. Furloughs are of great concern to 
me in Virginia. So many DOD civilians have been furloughed. 
Furloughs to me are kind of a short-term strategy. If you have 
to do a steep cut in the way you used it, General Dempsey, 
``steep cut'' furloughs, it is not really a long-term strategy. 
The longer-term strategy is, well, you know, if we finally get 
a budget number and it is a tight budget number, then, you 
know, everything is not worth everything else, you do not do 
across-the-board furloughs.
    Talk a little bit, if you can--and I know July 1 is really 
the date for sharing with Congress your sense, but talk a 
little bit about furloughs as a long-term strategy, whether you 
would tend to use them or whether you would probably set that 
aside as you do with long-term challenges. And then I have one 
last question.
    Secretary Hagel. Senator, thank you. Well, furloughs is not 
a strategy, as you have appropriately noted. It is a reaction. 
It is triage. It is a reality. And that is exactly, as I noted 
in my statement, why I was forced to make a decision after many 
weeks of review by the Comptroller and his staff--and all the 
chiefs, by the way-- and all our senior uniform were involved 
in this. No one wanted to do this, Senator. But I had then a 
choice to make to go further in cutting into our readiness 
around the world, and I could not do that. And so, yes, it is 
the worst way to have to respond to anything, but it was a 
necessity, and we all came to the same conclusion.
    The last point I would make, uncertainty, which I have 
talked about, you have all talked about. With this cloud of 
uncertainty continuing to hang over all of us, these kinds of 
issues, furloughs, all go with that for our workforce, are 
going to be something we are going to continue to live with. It 
is very unfair to these people. It is unfair to this country to 
have--to be put in that kind of a situation and then still ask 
these people to make the contributions they are and the 
sacrifices they are for this country.
    Senator Kaine. Madam Chair, could I take 30 more seconds?
    Chairman Murray. Okay. We do have a hard stop at 12:15.
    Senator Kaine. I will take it off record. I will take it 
off record.
    Chairman Murray. I appreciate it very much.
    Senator Ayotte.
    Senator Ayotte. Thank you very much. Let me just thank the 
Chairman. I am very pleased that the bill that we have offered 
providing special victims counsel to victims of military sexual 
assault, I want to thank Chairman Dempsey and Secretary Hagel 
for supporting our efforts, and right now it is in the mark, 
and I will make sure that it continues in there.
    Chairman Murray. Great. Thank you.
    Senator Ayotte. Thank you for your leadership on this. I 
have really enjoyed working with you, and this is such an 
important issue for our military.
    I wanted to ask Chairman Dempsey, in follow-up to what 
Senator Johnson just asked you about the attack on the 
consulate in Benghazi, something that I have wanted to know an 
answer to, which is that on February 7th you testified before 
the Senate Armed Services Committee, and you were asked a 
question by Senator Graham, and he asked you whether General 
Ham had issued a stand-down order to the military personnel in 
Tripoli or elsewhere who were preparing to go to assist those 
in Benghazi.
    Then we heard before the House Oversight Committee that Mr. 
Hicks, who was the former Deputy Chief of Mission, said that 
Colonel Gibson, who was on the ground in Tripoli, did receive a 
stand-down order, and so, General Dempsey, I have not had an 
opportunity to follow up with you based on the February 7th 
testimony. Mr. Hicks testified that he believed this stand-down 
order came from AFRICOM or Special Operations Command in 
Africa.
    General Dempsey, can you help me understand who issued the 
stand-down order and what happened there, why the special 
forces that wanted to go with, I understand it, under Colonel 
Gibson in Tripoli were told not to go and who gave them that 
order, from there they wanted to go and help in Benghazi on 
that night?
    General Dempsey. Yes, thanks, Senator. Based on that 
testimony, I went back and--
    Senator Ayotte. I had a feeling you would. That is why I 
wanted to--
    General Dempsey. Yes, of course. And there were two 
different groups of--there were six people, not all working for 
the same command. Two of them were working with Joint Special 
Operations Command. They were collocated with another agency of 
Government in Tripoli. And four were working under the direct 
line of authority of Special Operations Command Europe--or 
AFRICOM, AFSOC. And it was the four you are speaking about. The 
other two went. The other four, by the time they contacted 
their command center in Stuttgart, they were told that the 
individuals in Benghazi were on the way back and that they 
would be better used at the Tripoli airport because one of them 
was a medic, that they would be better used to receive the 
casualties coming back from Benghazi, and that if they had 
gone, they would have simply passed each other in the air. And 
that is the answer I received.
    Senator Ayotte. Okay. So--
    General Dempsey. So they were not told to stand down. A 
stand-down means do not do anything. They were told to--that 
the mission they were asked to perform was not in Benghazi but 
was at Tripoli airport.
    Senator Ayotte. Can I ask you, General, they had requested 
to go, though.
    General Dempsey. That is correct.
    Senator Ayotte. They asked to go to support what was 
happening in Benghazi from Tripoli, correct?
    General Dempsey. That is correct.
    Senator Ayotte. And they were told, from what you are 
saying, not to go because of the timing--
    General Dempsey. Because of timing and that they would be--
they would contribute more by going to the Tripoli airport to 
meet the casualties upon return.
    Senator Ayotte. I do not know if you know the answer to 
this today, but if you do not, can you get back to me on it? 
Can you tell me when they made the request and what the timing 
was of that request and when they were told to stay in Tripoli? 
I would appreciate a follow-up on that.
    General Dempsey. Yes, I will.
    Senator Ayotte. Thank you very much.
    Senator Ayotte. I wanted to ask both Secretary Hagel and as 
well as you, General Dempsey, about the situation with al Qaeda 
in the Arabian Peninsula. I saw a May 2013 letter from General 
Holder talking about the AQAP being the most dangerous regional 
affiliate of al Qaeda and a group that has committed numerous 
terrorist attacks overseas. Would you tell me, what is the--how 
dangerous is this group?
    General Dempsey. I think that that characterization of them 
is actually accurate. They are dangerous for two reasons. One 
is their aspiration to attack the homeland and Europe, which 
puts them--which makes them unique in many of the other 
affiliates. Many of the other al Qaeda affiliates are more 
local and regional. This one has global aspirations.
    Senator Ayotte. Where are they located?
    General Dempsey. Well, they are generally located in 
southeast Yemen, generally.
    Senator Ayotte. Yemen? And what is the security situation 
in Yemen right now?
    General Dempsey. Better than it has been in a very long 
time, but still relatively unstable. President Hadi has 
partnered with us in helping build up the Yemeni security 
forces.
    Senator Ayotte. But does he have full control of the 
country?
    General Dempsey. No, he does not have full control of the 
country.
    Senator Ayotte. Right. And what about the prison break 
situation? There have been multiple prison breaks, even going--
I mean, there were like six of them, the last one in 2011. Does 
he have any more security over that situation?
    General Dempsey. As I said, Senator, the situation is 
improved since President Hadi became the head of state. He has 
changed leaders in some of the Republican Guard units. But it 
would not be possible for me to declare that it is a stable 
environment.
    Senator Ayotte. Okay. I thank you. I appreciate all of you 
being here. Thank you.
    Chairman Murray. Senator Nelson.
    Senator Nelson. Thank you, Madam Chair.
    Later today, in the Armed Services Committee, we are going 
to consider a sense of Congress that I assume most people will 
agree with, Mr. Secretary, the sense of the Congress that 
commanding officers are responsible for establishing a command 
climate in which sexual assault allegations are properly 
managed and fairly evaluated and a victim can report criminal 
activity, including sexual assault, without fear of 
retaliation, including ostracism and group pressure from other 
members of the command.
    Mr. Secretary, I am given to believe that a survey was 
conducted among victims, and 50 percent of the victims say that 
if they report the assault, they do not think it does any good. 
Are you aware of that survey? General Dempsey is shaking his 
head yes. Is that correct, General?
    General Dempsey. It is.
    Senator Nelson. Okay. Then my question to you, Mr. 
Secretary, is: Do you think that by removing the chain of 
command in order to prosecute sexual assault in the military, 
will that give the incentive for the victim--will that give 
more incentive for the victims to come forward?
    Senator Hatch. Senator, thank you. First, let me respond to 
your first point about the resolution that you think will be 
presented in the markup. I would fully support every word of 
that, obviously.
    Senator Nelson. I am sure that will be unanimous.
    Secretary Hagel. As to your question, I have said first we 
need to look at every option, every possibility, which we are. 
As you know, there are 26 pieces of legislation on this. And we 
are listening to people, chiefs, panels, a litany, pages of 
things that we are doing and started doing the last 3 months. 
Not enough. We have to do more. But some things have to change. 
I think we all accept that.
    Now, to your specific question, I have also said that 
anything we do, anything the Congress does, it needs to be done 
very thoughtfully, because there will be consequences to 
anything that comes out of this as to how we handle this in the 
future. I do not personally believe that you can eliminate the 
command structure in the military from this process, because it 
is the culture, it is the institution, it is the people within 
that institution that have to fix the problem. And that is the 
culture, the people are the culture. So I do not know how you 
disconnect that from the accountability of command.
    Now, as I said, we need to change some things. We can do 
things much better. We will have to. But I think we have to be 
very careful when we talk about thinking the command structure 
out of this process.
    Senator Nelson. Certainly it has been pointed out that 
cultural changes such as integration in the military, such as 
don't ask, don't tell, that the command structure was 
absolutely essential. In this case, we are talking about the 
reporting of a crime. Do you see a distinction there as to why 
the command structure should still be in place?
    Secretary Hagel. Well, first, I think we all accept it is a 
crime, and it needs to be treated as a crime. The things that 
Senator Murray and others have been doing on victims' rights, 
special counsel, all the things that are going forward need to 
be done. We should have done them. We have not, but we will. 
All that has to be done.
    Now, to your question, I do not think you can fix the 
problem, Senator, or have accountability within the structure 
of the military without the command involved in that. And I 
have believed, like in everything in life, accountability 
matters. You hold us each accountable. You are accountable, I 
am accountable, the general is accountable. And that is where I 
think we have had a disconnect on--not all of it. It is 
cultural. There are a lot of things involved here. But if you 
do not hold people accountable, then you are not going to fix 
the problem. You can pass all the laws you want, and that is 
not going to work. So that would be my response to your 
question.
    Senator Nelson. Madam Chairman, since you want to move 
along, I will submit for the record an additional question on a 
different subject having to do, as we leave Afghanistan, is 
there equipment that we can leave there that will help 
Afghanistan society more readily be able to support themselves.
    Chairman Murray. Okay. T
    Chairman Murray. Senator Whitehouse.
    Senator Whitehouse. Thank you, Chairman. Secretary Hagel, 
welcome back to your old haunts. It is a delight to have you 
here.
    On the same subject that Senator Nelson was asking about, I 
am a believer that at some point you should just bring in the 
FBI and the Department of Justice and treat a rape like a rape 
and throw people in prison. But short of that, the Department 
of Justice has an Office on Violence Against Women, and it has 
an Office on Victims of Crime, both of which have considerable 
experience. I was a U.S. Attorney. I think highly of those 
offices. Do you have plans to engage with those offices to 
improve the type of services that are provided in the military 
and sexual assault situations?
    Secretary Hagel. The answer is yes. We are doing those 
things. We are taking the initiatives internally that we need 
to do. A number of things we have already begun. A number of 
legislative proposals will be and are being put forward, as you 
know, that need to be, I think, accomplished as well. So the 
short answer is yes.
    Senator Whitehouse. And to a completely different topic, 
and then probably well beyond this budget year, but I think it 
is a budget issue this Committee may be facing for a while. The 
American military has an increasingly robust and increasingly 
frequent role in responding to international emergencies--
tsunamis, earthquakes, famines, floods, and so forth. How 
significant a component do you see that being in the future of 
the military budget? Do you see that we should be expecting 
significant increases in that area? And from a strategic policy 
point of view, how would you evaluate that use of our American 
military in terms of building international good will and 
projecting American values?
    Secretary Hagel. It is, I think, a critically important 
part of our foreign policy, clearly in our national interest. 
We, as you suggest, have had over the years significant 
capacity to help countries during these disasters. We have very 
recent examples certainly within our own country, the National 
Guard--the Reserves and National Guard in particular had the 
resources to do that. We should respond and we will continue to 
respond.
    As to the budget, yes, those kinds of programs will 
continue. They need to continue. It is clearly in our interest 
around the world, and it is humanitarian. Where we can help, we 
will continue to help.
    Senator Whitehouse. But beyond the humanitarian value, you 
see that it is part of the strategic value that the military 
provides America in its relationship with foreign nations?
    Secretary Hagel. Well, it is part of it. Our charge, our 
objective, our mission, our responsibility, is the national 
security of this country first. But that unfolds into many 
areas of how we do that. When you are making friends around the 
world, when you are developing partners and allies, you are 
developing the next generation of global citizens who see 
America helping them. I would say that cuts right directly to 
the national interest and security of our country, and we can 
do that, and we have been doing that. We do it better probably 
than anybody does, the military.
    Senator Whitehouse. It certainly is, I think, a point of 
pride that we can take as Americans how well we can deliver 
necessary humanitarian resources in the wake of a catastrophe, 
almost anywhere on the planet. There is nobody who matches us 
in that strength.
    Lastly, on cybersecurity, we are continuing to try to find 
a way forward to develop a bipartisan bill here in the Senate 
in the wake of the President's Executive order, which I think 
was both a necessary and a correct step, but not a sufficient 
step because of the inherent limitations that attend an 
Executive order as opposed to full-blown congressional 
legislation.
    Could you comment for a moment on where you see that 
theater of operations for the military and for the country? I 
would note that General Alexander has asserted--who I have the 
highest regard for, by the way, has asserted that he believes 
that the United States is on the losing end of the biggest 
transfer of wealth in the history of humankind as a result of 
cyber intrusions--not necessarily military ones, industrial 
espionage, but where do you see your role going forward on 
that?
    Secretary Hagel. First, I recall our days together on the 
Intelligence Committee when we worked on this issue, and it has 
not gotten any less complicated, to your point.
    As to our role, you may have noted that we have requested a 
significant increase in our cyber capacity in this budget, and 
we have continued to do that for the obvious reasons. I have 
said many times, Senator--I said it when I was in the Senate 
and out of the Senate--that I think cyber represents as great a 
threat to this country as any one thing, and there are a lot of 
threats--nuclear threats, weapons of mass destruction. But for 
the reasons you know and everybody who knows anything about 
this understand why I say that.
    So this is an area that we have obviously cyber command 
responsibility for. General Alexander I think is on the Hill 
today, this afternoon, and as you know, he is dual hatted in 
his capacity as NSA Director as well as cyber command.
    The Defense Department has essentially most of the assets 
here, as you know. This is an interagency issue, as everyone 
knows, where Homeland Security has a significant amount of the 
authority. How then do you not only just interagency--which I 
think is going along pretty well, but the bigger issues, the 
privacy issue, the business issues, and what I understand 
really led to the breakdown in your efforts here on the Hill 
and trying to find compromise legislation last December, that 
yet needs to be bolted together.
    But we have a very significant part of this, but we have 
jurisdictional limitations, too, as to what we can do and what 
we cannot do. Our main responsibility is to protect our 
national security as defined by defense establishment, 
Government and so on interests. But, again, as you know, when 
you veer out in the private sector and how far you can go, what 
legal authorities you have, what laws govern that are, I think, 
the large area of some contested debate.
    Chairman Murray. Thank you.
    Senator Whitehouse. I thank all the gentlemen at the table 
for their services. Thank you, Chairman.
    Chairman Murray. I appreciate that, and I know out of 
respect of your time, you have asked to be able to have a 
moment before you head to the House, so I appreciate all of you 
and your testimony today. I apologize to any Senators, Senator 
Kaine, for not getting their final question in. But Senators 
can submit additional statements or questions by 6:00 p.m. 
today, and we would ask that all of you get then back as 
quickly as possible. And, again, thank you very much for your 
service and for appearing before this Committee today.
    Senator Sessions. Thank you very much.
    Secretary Hagel. Thank you.
    General Dempsey. Thank you.
    [Whereupon, at 12:11 p.m., the Committee was adjourned.] 

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       THE PRESIDENT'S FISCAL YEAR 2014 EDUCATION BUDGET REQUEST

                              ----------                              - 
- -


                         TUESDAY, JUNE 18, 2013

                              United States Senate,
                                   Committee on the Budget,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:35 a.m., in 
Room SD-608, Dirksen Senate Office Building, Hon. Patty Murray, 
chairman of the committee, presiding.
    Present: Senators Murray, Wyden, Nelson, Stabenow, 
Whitehouse, Kaine, Crapo, Johnson, and Ayotte.
    Staff Present: Evan T. Schatz, Majority Staff Director; and 
Eric M. Ueland, Minority Staff Director.

              OPENING STATEMENT OF CHAIRMAN MURRAY

    Chairman Murray. Good morning. This hearing will now come 
to order, and I want to thank Senator Johnson, who is standing 
in today for our Ranking Member, Senator Sessions, and all of 
our colleagues who are joining us for this hearing today, as 
well as the members of the public and those who are watching 
online.
    I also want to thank our witness today, Secretary of the 
Department of Education, Arne Duncan, for being here to testify 
and answer our questions. We really appreciate your 
participation today.
    The specific of today's hearing is to discuss the 
President's Fiscal Year 2014 Education Budget Request, but I am 
hoping the conversation will be broader than that, because our 
students and our families are facing some very serious 
challenges today and those challenges are going to get worse, 
not better, if we fail to act.
    Now, when I worked with my colleagues here on this 
committee to write the Senate budget that passed just a little 
more than two months ago, one of our highest priorities was 
investing in programs that would pay off for our country over 
the long term and ensuring the United States continues to lead 
in so many sectors for years to come. We thought it was 
important to protect our economic recovery and work to create 
jobs today, of course, and we certainly all agree we need to 
work together to tackle our long-term fiscal challenges.
    But we were also very focused on looking beyond the current 
crisis and making sure that we are building a strong foundation 
for long-term and broad-based economic growth, because as any 
business owner will tell you, no matter how challenging the 
current environment is, you never want to cut the investments 
that will allow you to compete and prosper once that crisis 
ends. And as any farmer will tell you, no matter what happens, 
you never want to eat your seed corn.
    I have heard a lot from my Republican colleagues over the 
past few weeks, who want to spend time now debating what our 
fiscal challenges are over not just the 10-year window, but for 
the years beyond, as well. They think the 10-year window does 
not show the full scope of our challenges and want to focus on 
our problems decades from now.
    And I certainly agree, we should all be working together to 
tackle our long-term budget challenges. They are real and they 
will not go away if we just ignore them. But I do not think 
working together on our 30-year problems means that we should 
ignore our 30-day problems, and I do not think it means we 
should not be working right now in a bipartisan budget 
conference so that we can do everything possible to bridge the 
divide between the House and Senate budgets, to replace 
sequestration in a fair and responsible way, to return our 
budget process to regular order and give the American people 
some confidence that their Government can operate without 
lurching from crisis to crisis.
    I also hope that anyone focused on our 30-year fiscal 
challenges would also be concerned about our other 30-year 
challenges. Are we going to be a Nation that continues to lead 
the global economy 30 years from now? Will the children of 
today, who will be the workforce of 30 years from now, have the 
education and training they need to fill the jobs our 
businesses will be creating in 2043? Are we going to be able to 
compete with countries like China and Brazil and India that are 
making serious investments and major commitments to educating 
scientists and engineers? That is the kind of 30-year thinking 
I think we should be doing, too, and that is what so much of 
what we are going to be discussing today is all about.
    Investments in education, from early childhood programs 
through college, are some of the smartest the Federal 
Government can make. According to a study done at the 
University of Chicago by Nobel Prize winner Dr. James Heckman, 
high-quality early childhood education programs have a 7 to 10 
percent rate of return through better educational outcomes.
    We also know that those with a high school diploma or less 
are more likely to be unemployed, to be among the long-term 
unemployed, and to earn substantially less than their 
counterparts. And according to the Bureau of Labor Statistics, 
workers with a college degree can expect to make about a 
million dollars more over the course of their careers than 
those with just a high school diploma.
    Among our Nation's manufacturers, 82 percent report a 
moderate to serious skills gap in their skilled positions. 
Seventy-four percent say that this skills gap has negatively 
impacted their business, and 70 percent expect it to get worse. 
McKinsey Global Institute estimates that the U.S. will need to 
produce roughly a million more postsecondary degrees by 2020, 
40 percent more than today, to ensure we have the skilled 
workers that our economy needs. Tony Carnevale, the Director of 
the Georgetown University Center on Education and the 
Workforce, who testified, actually, before this committee back 
in February, estimated that by 2018, nearly two-thirds of U.S. 
jobs will require some education or training beyond a high 
school diploma.
    So, we have a lot of work to do when it comes to making 
sure our students and our workers are getting the education and 
training they need. But, unfortunately, our current path is 
taking us in the wrong direction. Sequestration, which was 
never intended to take effect and was written into the 
bipartisan Budget Control Act to bring both sides together to 
the table to compromise, is starting to hit children and 
students hardest in communities across our country. These 
children and students did not cause the debt and deficit 
challenges we are focused on addressing, but under 
sequestration, they bear one of the largest impacts of this 
cut.
    I saw this firsthand myself in a recent visit to a Seattle 
pre-kindergarten classroom. After I had an opportunity to read 
a story to the students at Denise Louie Education Center, I sat 
down and had a conversation with the staff about the $130,000 
that had been cut from their center's budget this year due to 
sequestration and how that was going to affect the low-income 
children that they serve. They told me that to manage the cuts 
so far, the already cash-strapped center had to eliminate two 
full weeks of their preschool program that so many of our local 
parents depend on while they are at work. They have had to 
eliminate a classroom. They have cut slots for children. And 
they have let staff go. They are fighting to serve as many 
children as they can, but they told me it is only going to get 
harder if these sequestration cuts continue.
    This story is being told thousands of times over in 
communities all across this country. Hundreds of thousands of 
children will lose access to Head Start programs if 
sequestration continues.
    We also know these automatic cuts will be very harmful in 
our school districts, particularly those with high populations 
of low-income, military, and Native American children. Cuts to 
Title I and IDEA and Impact Aid are going to lead to teacher 
layoffs and reduce supports and services for these children who 
we know are among the most vulnerable.
    For those reasons and many more, the Senate budget fully 
replaces sequestration with an equal mix of responsible 
spending cuts and new revenue from those who can afford it the 
most and it does not unfairly hurt the families we need to 
invest in. I know that the President's budget proposal replaces 
sequestration, as well, and I am going to keep working with 
Republicans and Democrats to replace those automatic cuts that 
hit both defense and non-defense spending in a way that does 
not place the entire burden on the backs of seniors and 
families.
    Now, the House Republican budget took a very different 
approach. Their budget makes no attempt to replace 
sequestration in a balanced or fair way. It does not call on 
the wealthiest Americans or biggest corporations to pay a penny 
more towards their fair share. And it simply ignores the BCA 
caps on the defense side, which would lead to another round of 
sequestration in fiscal year 2014 if it was ever enacted. 
Instead, House Republicans shift the entire burden of the cuts 
onto our children and our families and our communities. Their 
recently released spending levels for education programs came 
in at 18.6 percent below sequestration levels. That would mean 
bigger cuts--much bigger cuts--to Title I, to IDEA, to Impact 
Aid, to Pell Grants, the very core programs that support 
education in our country, and it would mean we could not even 
consider new investments in our students to make sure they can 
compete in the global economy. The House Appropriations 
Committee has been clear. They do not think those numbers are 
actually workable, and they are right. They are not.
    So I am looking forward to discussing this further today 
and I am certainly going to keep fighting to make sure we are 
moving our students and our schools forward, not backward. And 
I am also interested in hearing more about the Administration's 
other education priorities today. Of course, ensuring access to 
early childhood education has been a longstanding priority of 
mine, so I was very heartened to hear the President speak about 
early learning in his State of the Union, and I was very glad 
to see such an emphasis on birth-through-5 learning 
opportunities in both your budget, Secretary Duncan, as well as 
in the HHS budget. I am looking forward to working with you to 
make all of our children in our country have access to pre-
kindergarten, which we know is such an important step to 
ensuring the academic success of all of our young people.
    As we all know, our college students and their families are 
up against a critical deadline, as well, July 1, coming very 
fast at us. The current fixed interest rate on Stafford Federal 
subsidized loans will double to 6.8 percent unless we here in 
Congress take action. That does not make sense to me, and it 
needs to be stopped. Students are taking on more and more debt 
and struggling to pay it back today. So the last thing we 
should do is make it even harder for them.
    So I, personally, strongly support extending the current 
interest rate cap on these loans to make sure students are 
protected when interest rates rise, and I am going to keep 
fighting for that in the coming weeks and I hope Congress can 
work now on a bipartisan basis to help keep interest rates low 
for our college students. This is a short-term solution, of 
course, and we need to keep working to make sure our higher 
education system is working for students and for businesses 
that depend on it to graduate workers ready to fill our 21st 
century jobs.
    I am certainly interested in hearing more of your thoughts 
on this issue, Secretary Duncan, as well as the other policies 
in your budget that impact our students and families.
    As we all know, the budget debate here in Washington, D.C. 
is often centered around abstract numbers and far too often 
ends up being mired in partisanship and budget games. But what 
should not be controversial or partisan is the idea that we 
should be investing in our students and making sure our country 
is positioned to compete and win in the 21st century economy. 
That is what this hearing is about today, and that is what I am 
working toward as I continue urging Republicans to join us in a 
budget conference that they have spent years saying they wanted 
and work with us on a budget deal to put our country on a 
responsible path this year, next year, and for years to come.
    With that, I will turn it over to Senator Johnson for his 
opening statement.

              OPENING STATEMENT OF SENATOR JOHNSON

    Senator Johnson. Well, thank you, Madam Chair, for calling 
this hearing. It is obviously very important. I want to welcome 
the witnesses and thank you for coming to give us your 
testimony and answer questions, Secretary Duncan and Mr. 
Skelly.
    You know, there is no doubt about it that we all know that 
education is really key. I think we share that same goal, that 
we want to make sure that our children are armed with the tools 
to lead a successful and productive life. You know, when I meet 
with students, I frequently cite the three things that if you 
either do or avoid doing, you will have a pretty good chance to 
lead a successful life.
    The first one of those is really to make sure you graduate 
from high school, at least. You know, getting as much education 
beyond that is going to dramatically increase your chances of 
being successful in life. And then, of course, do not do drugs. 
And do not have a baby out of wedlock. Get married first. If 
you just basically follow those three rules, you have a very 
high probability of leading a successful life; so education, 
obviously, is important.
    Madam Chair, I am glad you talked about the 30-year budget 
window because I think that is going to be a relevant 
discussion. I hope maybe at some point in time we can hold a 
hearing, sooner rather than later, on that. The reason, 
certainly, somebody like me is concerned about that, the 
numbers in the budget, is because if we do not get our debt and 
deficit under control, if interest rates spike just to a 30-
year average, the last 30-year average, about 1.5 percent, or 
5.3 percent, we could add $600 billion per year in terms of 
interest expense. I mean, talk about crowding out valuable 
spending on things like education. That is one good way of 
doing it.
    What I would like to do, and I just found out, I was going 
to stand in for our Ranking Member yesterday, so I did not have 
much time--I really put my staff through the wringer, and I 
appreciate the Secretary reaching out and finding out what we 
would like to talk about--I would like to throw just a few 
facts and figures on the board here, just to lay out in terms 
of what we spend, what we do invest, and we have been investing 
heavily in education.
    From a business perspective, if you are going through any 
kind of budget process, you want to know the numbers and you 
want to have the measured results. One thing I found out just 
in this very quick exercise of the last day or so, it is very 
hard to come up with the measured results. This seems to be one 
area that people have not been particularly really interested 
in getting detailed measurements over a long period of time, 
but we certainly can measure some spending.
    So I have the first chart on here talking about what we 
have spent overall, and I have used my starting point as really 
when we established the Department of Education on the Federal 
level, 1978. And then we are using 2011 numbers because those 
are the ones that were available. And these are all, by the 
way, adjusted for inflation. So K through 12 in 1978, we were 
spending about $321 billion, again, in 2011 dollars. Today, we 
are spending $700 billion per year. That is a 118 percent 
increase.
    And, by the way, let me just back up to stipulate that from 
1980 until the year 2011, our population has increased about 38 
percent. So you would expect spending to go up 38 percent. We 
have increased spending 118percent.
    In terms of college, we have gone from $175 billion of 
spending up to $483 billion per year. That is a 176 percent 
increase.
    So in terms of total education spending on an annual basis, 
we have gone, in inflation-adjusted dollars, from $496 billion 
per year to almost $1.2 trillion per year. Again, put that 
number in perspective. That is eight percent of our economy.
    So, again, we all think education is very important, but we 
are investing in it. We are spending money. More than 10 
percent of our entire economy is what we put in education. The 
question is, are we getting the results?
    Just real quick in terms of spending per student, K through 
12, 1978, we were spending about $7,300 per student. Now, we 
are spending about $13,000 per student. That is a 79 percent 
increase. In terms of college spending, $14,822 in 1978. Today, 
we are spending $21,857. That is a 48 percent increase.
    In terms of college aid, we have gone from 1978, spending 
about $4,500 per student up to close to $15,000 per student as 
tuition rates have basically done the same thing, from about 
$4,600 per year to a little under $14,000. So student aid has 
certainly kept up with the increase in tuition.
    But, again, you take a look at those percentage changes, 
way above the percent increase in terms of population.
    The next slide. So what has all that spending got us in 
terms of results? You know, the NAEP score in terms of reading 
in 1978 was 285. Today, it is at 286. That is a 0.4 percent 
increase improvement. The NAEP score in terms of math went from 
300 to 306. That is a 2percent increase.
    In other metrics, kind of late-breaking, in terms of world 
rankings, I have seen a number of different studies. In 2009, 
Program for International Student Assessment ranked the U.S. 
14th in reading, 17th in science, 25th in math. In 2012, a 
Pearson study, the Economist Intelligence Unit said, in 
general, we rank 17th. So, unfortunately, we are, at best, in 
the middle of the pack in terms of world rankings. That is not 
very good.
    And you mentioned student loans. In 1978, again, in 
inflation-adjusted dollars, our children were indebted to the 
tune of about $304 billion in 2011 dollars. Today, that number 
is about $1 trillion. In other words, we have enticed our 
children to take on massive amounts of student debt, and 
unfortunately, a Northeastern University study, I think came 
out last year, found that 50 percent of recent college 
graduates are either unemployed or underemployed in their 
field. We are not doing a very good job in terms of directing 
our kids into the types of fields that employers actually 
value.
    Another statistic that I think is interesting is the number 
of years to complete a 4-year college degree. I do not have the 
hard number on this, but I know in Wisconsin, talking to 
educators, they were saying it is about 5-1/2 years. I have 
heard the national average is 6 years to complete a 4-year B.A. 
I mean, we have to understand what is going on there.
    Next graph. One of the projects that I had undertaken is 
sort of a then and now study of what do we spend and how does 
it compare against inflation. And one of the points I want to 
make is in a free market competitive society, we have realized 
enormous productivity gains in the free market economy. So, in 
other words, inflation-adjusted spending per household for 
appliances has actually declined 64 percent. For clothing, it 
has declined 57 percent. Food, it has declined 32 percent. 
Again, that is because consumers, individuals, are going in a 
free market competitive environment, and as a result of that 
competition, productivity gains have been tremendous.
    Unfortunately, in things like education, which is basically 
paid for by the government, we have seen a 195 percent 
increase, basically, a doubling--a more than doubling of 
spending. And, again, it is due to government spending as 
opposed to individuals.
    Last slide. This is one I use in my PowerPoints all the 
time, talking about the annual cost of college. Back in the 
1960s, on average, it cost a little over $1,000 for room, 
board, and tuition for an average college. Had that figure 
grown just by the rate of inflation, today, college students 
would be spending about $7,400 per year, room, board, and 
tuition. In fact, they are spending close to $18,000. So the 
cost of one year in college has risen at 2.4 times the rate of 
inflation.
    Just to kind of conclude my remarks, I mean, that is the 
question I have. I mean, what is so different about what we are 
spending on education that its costs have risen by 2.4 times 
the rate of inflation? Those are some serious questions we need 
to ask as we are talking about investing more. Now, the 
President is proposing spending money on early childhood 
development. We have to really take a look at what we have 
spent and what have been the results, and that is what, 
hopefully, we will get to at the bottom of this hearing.
    Thank you, Madam Chair.
    Chairman Murray. Mr. Secretary, thank you very much for 
your passion on these issues and for coming today to testify 
before the committee. You can go ahead with your remarks.

STATEMENT OF HONORABLE ARNE DUNCAN, SECRETARY, U.S. DEPARTMENT 
                          OF EDUCATION

    Secretary Duncan. Thank you so much, and good morning, 
Madam Chairman and members of this committee. I am pleased to 
be here today to talk with you about President Obama's vision 
for investing in education in ways that ensure a quality 
opportunity for every child and that deliver a strong return on 
investment, or ROI, for the taxpayers' dollar.
    As you walk through this conversation, I am going to ask 
you to think about a 4-year-old little girl, because this is 
not just about programs and accounts and budgets. It is about 
the consequences of the choices we make for real families and 
real children, yours and mine. It is not about cheap words and 
empty sayings. It is about the values we choose to live by.
    This little girl is named Tokyo. She is four years old and 
she lives in Takoma Park, Maryland. I met her a few months ago. 
Her mom is currently studying under a Pell Grant to become a 
music teacher. And Tokyo is lucky. She has had a great 
experience in preschool and she already reads at a third grade 
level. She is ahead of the game right now. Every one of our 
babies deserves a system that starts them strong and supports 
them at every step, and unfortunately, as all of you know, that 
is not the reality for anywhere near enough of our Nation's 
young children.
    I hope we can all agree that improving our education 
outcomes is a vital national interest. The decisions we make 
will have a major impact on our economy, on our country's 
economic competitiveness, and on that 4-year-old little girl's 
chances of having the good life she deserves as part of a 
thriving middle class. That is a core American value. But right 
now, frankly, it is in some danger.
    You already know that we have lost our place as the global 
leader in college completion, that today, we rank about 14th. 
That is no badge of honor. Collectively, we should be ashamed.
    Here is another indicator that should concern us. Let us 
look at what is happening in employment for our Nation's young 
adults. In 2000, we were doing better than France, Britain, 
Japan, Germany, and Canada. But by 2011, we were doing worse 
than all of them. Why? David Leonhardt, the Pulitzer Prize 
winning economics writer, said, and I quote, ``The United 
States has lost its once large lead in producing college 
graduates, and education remains the most successful job 
strategy in a globalized technology-heavy economy.'' And that 
is why we have been working so hard to improve opportunities 
for every child to again make the United States the global 
leader in college completion. Fourteenth is simply not good 
enough.
    We have been working for 4 years to raise standards, to 
improve teaching and learning, establish strong systems for 
technology and data, fix our Nation's most broken schools, and 
make college more affordable and accessible, and we have made 
some real progress. Accountability matters. Results matter. 
Metrics might not tell the whole story, but they do not lie, 
either.
    Let me walk through where we are at today. Our Nation's 
high school graduation rates are at their highest level in 
almost three decades, in 30 years. That is a major, major step 
in the right direction, because as all of you know, today, if 
you drop out of high school, you are basically condemned to a 
life of poverty and social failure. This work is that serious 
and the stakes today are that high.
    That improvement is due, in part, to meaningful progress in 
fixing our Nation's lowest performing schools. Today, there are 
700,000 fewer students attending chronically failing high 
schools than when President Obama was elected. We have a long, 
long way still to go, but the trends are absolutely going in 
the right direction.
    We have 9.4 million low-income students who are now 
attending college on Pell Grants. That is an increase of over 
50 percent. We have seen a major jump in students attending 
college, especially a student from the minority community. 
African American students, 38 percent are attending today 
versus just 30 percent in 2000. For Hispanic students, today, 
it is up to 32 percent attending college compared to 22 percent 
in 2000.
    And we are beginning to see the payoff. As you may have 
seen in the news last week, the proportion of young people with 
college degrees has hit a new high. In 1995, a quarter of 
American young people had a Bachelor's degree. Now, it is a 
third. And women and minorities are a big part of this change. 
That is great news, but it does not make us the global leader. 
Our competitors have not been resting. We still have a long, 
long way to go, and our collective challenge is to get better 
faster despite the tough economic times. Our children, our 
communities, and our country cannot wait.
    We are doing everything we can to help States unleash pent-
up energy for innovation and reform and move away from the old 
broken system of No Child Left Behind. Thirty-seven States and 
D.C. are already approved for ESEA flexibility, with ten other 
States looking for approval, and we are continuing to work with 
them.
    But for all the progress, we know there is still so much 
work ahead of us. Too many kids, especially low-income kids and 
minorities, are not receiving the education they need to reach 
their middle-class dreams, and let us look at the numbers. 
Fully 96 percent of kids from the highest-income group complete 
high school, while only 63 percent of those from the lowest-
income quartile do. And when we look at who graduates from 
college, the income gap is staggering. Fewer than one in ten of 
our low-income children graduate from college. That hurts us as 
a country, in jobs, in international competitiveness, and what 
it means for the lives of kids in poverty.
    What is the most important single thing we can do in 
education to change these outcomes? I am convinced it is to 
invest in preschool. Madam Chairwoman, you already know all of 
this. As a former preschool teacher of 7 years and a school 
board member who fought so hard to rescue preschool programs in 
Washington State, you have literally lived this. But give me a 
couple minutes to try and lay it out for your friends and 
colleagues here.
    On average--on average--children from low-income families 
start kindergarten at 5 years old in the fall. The average 
child from a disadvantaged community starts kindergarten 12 to 
14 months behind their peers in language development and pre-
reading skills. That is morally unacceptable and it is 
educationally unsound, and we know how to fix it.
    As you quoted, Nobel Prize winning economist James Heckman 
says this is one of the few public investments with no trade-
off, because the return on investment, the ROI, on preschool is 
so high. In the second sentence there, he says, and I quote, 
``It reduces''--this investment ``reduces the inequality 
associated both with the accident of birth and, at the same 
time, raises the productivity of society at large.''
    But to date, we are simply not serious about preschool in 
this country. Other countries are out-innovating and out-
investing us in this space. The United States today ranks 28th 
among Organisation for Economic Co-operation and Develpment_
OECD countries in the enrollment of 4-year-olds in early 
learning. And maybe that is not surprising. The United States 
ranks 25th among OECD countries in public funding for early 
learning. If we expect to compete effectively in a global 
economy, we have to invest in what matters most.
    President Obama's Preschool for All proposal can be a game 
changer in expanding access and improving quality for the 
children and families who need it the most. It is a major 
investment to tackle a major issue.
    Think about that 4-year-old girl. Whether she is from 
Henrico County, Virginia, or Middletown, Ohio, or Montgomery, 
Alabama, she deserves a supportive word-rich environment. She 
may not have the home life that can pick up the academic slack, 
but she deserves access to preschool.
    Our business leaders understand what is at stake here. 
People like James Zimmerman, the former CEO of Macy's, and John 
Pepper, former CEO of Proctor and Gamble and head of the Board 
at Disney, have said, and I quote, ``Universally available pre-
kindergarten is not only the right thing to do, but the smart 
thing to do.'' Other countries have realized this. China 
reportedly has set a goal of giving 70 percent of all children 
three years of pre-kindergarten education. And we have hundreds 
of both CEOs and military leaders who have signed letters 
urging us collectively to work together and to invest.
    Why is this the smart thing to do? Because of ROI, return 
on investment. James Heckman found that for every dollar we 
invest in preschool, every single dollar returns seven dollars. 
About four dollars from that dividend comes from increased 
earnings, increased tax payments from greater productivity, and 
decreased public assistance. The remainder, almost three 
dollars, comes from reduced costs, reduced costs of crime, 
cops, and jails. We simply should ask ourselves, preschools or 
prisons? Where do we want to invest? What do we value, and what 
do we stand for?
    Some folks would prefer that we not fund early learning 
with a cigarette tax, and if you have other, better ideas about 
how we should fund this opportunity for our young people, I am 
absolutely happy to have that conversation. But we have to 
invest.
    Today, less than three in ten, less than 30 percent of 4-
year-olds have access to high-quality pre-K. The status quo is 
not good enough. This is fundamentally a question of 
investment. We cannot do this by wishing it or by magic. We are 
talking about a million of our Nation's babies who will finally 
get a leg up and a chance. One- point-one million 4-year-olds 
who have been left out. We cannot solve this problem for free. 
We have to invest.
    And many States are already making serious investments 
here, States like Oregon and Georgia and New Jersey and 
Washington. They realize the impact here and they are leading 
the way. Governors from both parties, Republicans and 
Democrats, are showing courage and vision here. They need a 
partner with us here in Washington.
    Affordable early learning is the most important thing we 
can do in education to help strengthen families. But I can also 
tell you what does not help. What does not help is incoherent 
cuts to programs serving our most vulnerable students.
    Sequestration, as you talked about, Madam Chairwoman, 
continues to hurt low-income and special needs students, young 
families counting on Head Start programs, the children of 
military families, and communities whose schools rely on Impact 
Aid. Why is any of this okay? Why do we have the political will 
to fix lines in airports but not to invest in vulnerable 
children and families? That simply makes no sense to me 
whatsoever.
    We also need your help to keep interest rates low on 
student loans, which will require your action before July 1 to 
prevent rates from doubling. We know you share that concern and 
want to keep working with you to find an approach that will 
help keep college affordable for students and families now and 
in the future.
    By the same token, to make college more accessible, we have 
dramatically simplified paperwork to make it easier for 
families to gain access to Federal student aid, and the result 
will be even more high-needs students attending college, many 
actually being the first in their families to achieve that 
dream.
    In K-to-12, ESEA flexibility has provided crucial space for 
innovation and systemwide improvement, the best help we can 
give States until you collectively reauthorize and fix ESEA. 
Under ESEA flexibility, we are seeing States show real courage, 
raising standards, refining systems of support and 
accountability for schools, and holding more schools 
accountable for the learning of students with special needs.
    We have also acted to improve services for students with 
special needs. During our Administration, we have requested 
hundreds of millions of dollars in increased funding in 
addition to the unprecedented $11 billion provided under the 
Recovery Act, including significant improvements at the 
preschool level.
    We are also focused on the needs of students in rural 
communities. Many of our 2014 competitive grant proposals will 
include criteria or priorities specifically targeting rural 
communities, and we welcome the input of Congress as we work to 
ensure that all of our competitive grant programs give strong 
opportunity to rural schools and students. We want to see every 
community in America have excellent educational opportunities.
    What that improved opportunity adds up to is a return on 
investment for our economy and for our families. According to a 
recent Brookings study, the benefits of a college degree can be 
compared to an investment that returns 15.2 percent a year.
    We know that the engine of our economy in a globally 
competitive environment is having the best-educated workforce 
in the world, and we know that giving every child an 
opportunity is the right thing to do. It is who we are as a 
country.
    Thank you so much. I look forward to your questions.
    [The prepared statement of Secretary Duncan follows:] 

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    Chairman Murray. Thank you very much, Mr. Secretary.
    Let me start out with sequestration. I am very concerned 
and have said repeatedly that this managing our country by 
crisis to crisis is really hurting families across the country 
and sequestration is particularly damaging, as I talked about 
in my opening statement. We replaced sequestration in the 
budget that the Senate passed. As I said, it was never intended 
to take place. We did invest in education and research and 
development and in infrastructure that are priorities that will 
help our country remain competitive in the future. But I am 
very concerned about this sequester and its impact right now on 
children and middle-class families, as well as, by the way, the 
2014 House spending bill, which is, on the Labor, Health, and 
Human Services side, shockingly low.
    I wanted to ask you, as we start out here, can you give us 
some sense of what you are hearing from States and school 
districts and colleges about the impact of the current and the 
actually future sequester cuts, as well?
    Secretary Duncan. Well, let me just show you a couple of 
headlines from papers around the country in the past couple 
days. Spending cuts taking hard toll on Head Start. Sequester 
closing home base Head Start programs. Sequester impacting Head 
Start. So almost every day from across the country, we are 
seeing real stories of real kids being hit--of job losses, 
programs ending early.
    Let me just walk you through the numbers. Sequester leads 
to a cut in IDEA Part B spending for children with special 
needs, $598 million. Those kids are all coming back to school 
this fall. They are not disappearing. Title I, poor kids, $725 
million. Work-study, people working hard to try and pay their 
way through college, $49 million. And one I think people do not 
fully understand, the name is Impact Aid. Impact Aid is $60 
million. Impact Aid funds those communities that do not have a 
property tax base. Those communities are generally Native 
American Reservations, children who desperately need a better 
education, and children of military families around military 
bases. And the fact that we allow these children's parents to 
go overseas and lose their lives fighting for our freedom and 
then give them an inferior education, again, is mind boggling 
to me. It is absolutely staggering. So why we allow these kinds 
of things to happen_we are not living our values.
    Chairman Murray. And I, as a former school board
    member, know that those people back in Washington, D.C. 
make these big line cuts, but you sitting there in your 
community have to face a lot of parents who, with tears in 
their eyes, who are not getting what they need for their kids. 
So this is big.
    And the 2014 House spending levels which will be on top of 
sequestration, can you talk about that?
    Secretary Duncan. Yes. So sequestration, the short math is 
a 5 percent cut, and I gave you those numbers. The House budget 
is a 19 percent additional cuts on top of that. So the math 
there would be $2.5 billion less for Title I, poor children; $2 
billion less for IDEA Part B children with special needs; $4.5 
billion less for Pell Grants, so, again, do we want more people 
having access to college or less? Do we want a more educated 
workforce or a less educated workforce? One-point-five billion 
less for Head Start; and $200 million less for Impact Aid, for 
military families and Indian kids.
    And let me just be really clear. I spend more of my time 
looking at our international competitors, because jobs are 
going to go to the country with the best educated workforce. I 
think it is really important that we try and keep these jobs in 
this country. Other nations, our competitors, are not managing 
their education strategy via sequester. They are out-educating, 
they are out-investing, they are out-innovating. South Korea, 
by every measure, is out-educating us, is probably the world's 
leader in college graduation rates. In the past decade, they 
have increased their education spending by about a third. We 
have increased by about 6 percent.
    So other countries are not sitting passively by while we 
continue to be dysfunctional here. They have long-term 
commitments to doing the right thing for their children and for 
their country, and I just think, right now, we are poorly 
serving not just our children, but our Nation's economic 
competitiveness because of the--
    Chairman Murray. And where we are going to be 30 years from 
now.
    Secretary Duncan. --because of the dysfunction here.
    Chairman Murray. Okay. But let me ask you about interest 
rates. I am really concerned about the impact on families 
today. I listened to Senator Johnson's opening statement. 
Actually, State support for higher education has been on a 20-
year decline in this country, and tuition and fees have gone up 
above inflation rates, and those increased costs are being 
directly impacted--impacting our students and their families.
    The same thing with interest rates. We both talked about 
it. Two weeks from now, the student loan interest rate is going 
up. Can you talk a little bit about what that is going to mean 
to our families today?
    Secretary Duncan. Yes. Well, this is happening at a time, 
again, when we are desperately trying to increase college 
enrollment rates and college completion rates, and again, we 
are 14th in the world, and the President has challenged us to 
be first in the world. I think that is a really important 
accountability measure for me and my team. Can we help lead the 
country to being first in the world in college graduation rates 
again? Anything we do to make college less affordable, less 
accessible, is a step in the wrong direction.
    And Congress has an opportunity to work in a bipartisan way 
to fix this and not have student interest rates get worse. 
Again, we want to improve things. All this is doing is trying 
not to make things worse.
    Chairman Murray. And can you explain the Administration's 
opposition to the House bill and the rate increase that it 
represents for low- and middle-income families.
    Secretary Duncan. So, again, it is so important that we put 
in place a fix. Now, I would personally prefer a longer-term 
fix. I am open to a shorter-term fix. What I am not open to is 
doing nothing. And so we can--you know, lots of folks are 
engaged here, Democrat, Republican, House, Senate, so I am 
actually hopeful we can get this done. We all need to 
compromise. We all need to come to the middle. But inaction 
would lead to a doubling of rates to 6.8 percent and that is 
untenable.
    Chairman Murray. And your opposition to the House bill, can 
you--
    Secretary Duncan. There are parts, and there again, people 
are making a good faith effort. There are parts in there that 
make sense, but we do not want to balance the budget on the 
backs of young people and so we think this should be budget 
neutral. This should not be used to reduce the deficit.
    Chairman Murray. Okay. I appreciate that. And I agree. We 
need to look at the cost of higher education and all the 
impacts on that. But in the meantime, right now, we need to 
keep the interest rates low and look at the longer-term 
proposals--
    Secretary Duncan. That is the least we can do. Again, this 
is not--if we get this done, this is not a Profile in Courage. 
This should be low-hanging fruit that we just get done together 
and move on to the next tougher challenge and the next tougher 
challenge. If we cannot get this done, that is a really sad 
statement.
    Chairman Murray. Okay. Thank you very much.
    Senator Johnson.
    Senator Johnson. Thank you, Madam Chair.
    Let me go back to my last slide there. I do not have to put 
it up, but the basic point, had the cost of college just grown 
by the rate of inflation, it would be 2.4 times lower than it 
is today. So, Mr. Secretary, what explanation do you have that 
the cost of college has increased to 2.4 times the rate of 
inflation over that time period?
    Secretary Duncan. Well, I do not think you or I or anyone 
here wants to defend the increasing costs of college. So what 
we have proposed in our budget is a billion-dollar investment, 
a race to the top--
    Senator Johnson. But, Mr. Secretary, we have invested. I 
mean, my point being, my earlier slide when I was talking about 
the modest spending in 2011 dollars, whether it is K through 12 
up 2.4 times, college up 2.8 times--
    Secretary Duncan. No, I have the question. Let me--give me 
a chance to answer.
    Senator Johnson. Sure.
    Secretary Duncan. So, there are a couple of explanations. 
First of all, and not to justify raising the cost, part of the 
increased costs are actually that more people are going to 
college. So part of that is a good thing.
    Senator Johnson. No, this is per student spending.
    Secretary Duncan. Okay. Then, again, what we are proposing 
is a race to the top for higher education to change behavior. 
And let me tell you, this is complicated, so give me one second 
on this. This has to be about shared responsibility.
    So we need States to invest in higher education. In tough 
economic times, 40 States cut funding to higher education, and 
then costs go up there. Forty States did not cut funding to 
prisons. Again, it is really interesting to me how people make 
those choices. And we also want to incentivize universities to 
keep their tuition down and increase the efficiency. And so we 
need to move everybody-- the Federal level, State level, 
universities--to do the right thing, to increase productivity, 
to use technology in different ways--I think technology can be 
very helpful here_and to make sure we are keeping costs down 
and increasing completion rates.
    Senator Johnson. But, we have thrown money at the problem. 
I mean, when you are increasing spending at 2.4 times what we 
were spending--again, these are inflation- adjusted dollars. So 
we are spending 2.4 times, at a minimum, in education today 
than we were 30 years ago, and we have not gotten the results. 
So we have been throwing money at the problem. I mean, when you 
are spending 2.4 times and the costs rise at 2.4 times the rate 
of inflation, do you kind of correlate those two facts, that we 
are throwing money at it--
    Secretary Duncan. I think, again--
    Senator Johnson. --and does that possibly increase the 
costs?
    Secretary Duncan. --there is a complexity here that you 
have to get past the sound bites. We need to be able to look at 
a couple of different things.
    Senator Johnson. No, you are trying to get past the 
numbers.
    Secretary Duncan. No, I am not. Not at all, Senator. I have 
been a very strong proponent of challenging universities to 
keep their tuition down. There is no--
    Senator Johnson. But this is beyond universities. I mean, 
this is just our education system itself.
    Secretary Duncan. No, you are talking about higher 
education.
    Senator Johnson. Well, in this one. But, I mean, in 
general, the cost per student is higher.
    Secretary Duncan. Well, let me--let us stay on higher 
education for a minute and then we can talk K-to-12. So on 
higher education, I am right with you, that we need to 
challenge universities to keep tuition down, to make sure they 
are becoming more efficient by using technology in different 
ways. You have seen some places start to break through. There 
have been very few incentives to do that.
    The conversation I would like to have is interesting to me. 
We have undoubtedly the best system of higher education in the 
world. It is also a very inefficient marketplace. Young people 
with 7,000 choices do not always pick the best choice, and so 
now we use some transparency to help people make better 
choices, and now we want to incentivize universities to do the 
right thing. We produce a scorecard, as you know, to try and 
give transparency and help people make better choices. So I--
    Senator Johnson. So you are asking for a Federal Government 
solution. What I tried to do in my one slide there, is show 
that where the government controls the spending, the cost of 
education has risen dramatically. We have not had the 
productivity gains. Where consumers, individual consumers make 
those choices, we have had huge productivity gains over the 
last 30 or 40 or 50 years. So--
    Secretary Duncan. Again, I--
    Senator Johnson. --again, your solution is more government 
spending, which everybody calls investment.
    Let me ask you one other potential problem. Since, 
particularly, the 1960s, we have had the formation of and the 
rise of public sector unions. Do you think that in any way, 
shape, or form has contributed to the rising costs of 
education?
    Secretary Duncan. I do not know the correlation there. It 
is interesting. I look at outcomes. I look at results for 
children. And if you look at two of the highest performing 
States in the country by every measure, one is Massachusetts, 
one is Maryland. Both actually have fairly strong unions. You 
look at some other States that have very weak unions in their 
States and student performance is much lower. So I think it is 
really interesting that some people like to say this 
contributes to that. But if you look across the nation, some of 
our highest performing States actually are fairly strong union 
States.
    Senator Johnson. When you take a look at per student 
spending--we talked about global rankings--I have a couple 
figures, and that is part of the problem is you have different 
studies. But in prep material by the Budget Committee here, 
they are showing about $11,000 per K through 12 student. I have 
about $13,000. The OECD average is about $8,200 there. So we 
spend more than our global competitors and our results are 
quite a bit less, are they not?
    Secretary Duncan. No, that is accurate. Let me just take it 
one step further. Again, I spend a lot of time looking at these 
international comparisons. So two things are true. On a per 
pupil basis, relative to other OECD industrialized countries, 
we do spend more. Where we are nearly at the bottom 
internationally is we spend much less on our most disadvantaged 
kids and they are much more generous in their investment in the 
kids who need the most help.
    Senator Johnson. Just a quick question. Around the world, 
how many other education systems are unionized?
    Secretary Duncan. I do not have the number off the top of 
my head. Many. Many.
    Senator Johnson. Okay. Thank you, Madam Chair.
    Secretary Duncan. Just quickly on that, we actually do an 
international conference each year. We bring in the highest 
performing and the most rapidly improving nations from around 
the world, and we bring in my counterparts, the secretaries of 
education, and we bring in the union leaders from that country 
and figure out how we can all work together and sort of get 
past the traditional animosity and in a collaborative manner 
get better results for kids. There have been some fascinating 
international meetings. This has never happened before.
    Chairman Murray. Thank you.
    Senator Stabenow.
    Senator Stabenow. Thank you very much, Madam Chair, and I 
thank you, Mr. Secretary.
    First, let me just follow up on the conversation you just 
had. When you are comparing to other countries, are those 
countries--the comparisons you are making are in public 
funding, correct?
    Secretary Duncan. Yes.
    Senator Stabenow. They are making public investments.
    Secretary Duncan. Right, and we also--again, all these--the 
important comparisons to make, many other countries have much 
less diversity than we do. Many other countries have much less 
inequities--
    Senator Stabenow. Correct.
    Secretary Duncan. --in terms of income, income gaps, yes.
    Senator Stabenow. Well, the reason I am raising it, when 
China is doing it, they are not doing it through private for-
profit entities. This is public funding.
    Secretary Duncan. This is absolutely--
    Senator Stabenow. So everybody else in the world 
understands--
    Secretary Duncan. Yes.
    Senator Stabenow. --there is a public function that we are 
all benefitting from--
    Secretary Duncan. Again--
    Senator Stabenow. We are the only ones debating whether or 
not somebody should make a profit off of something that is 
important to everybody--
    Secretary Duncan. So, South Korea, which leads the world 
right now in education in many indicators, has increased its 
public funding for public education by about a third in the 
past decade. They see it as an investment in--
    Senator Stabenow. As an investment. So this is something--
    Secretary Duncan. --in their economic competitiveness.
    Senator Stabenow. Yes. I think that is just an important 
thing. We seem to be the only ones--you know, I find it 
interesting--first of all, thank you for your and the 
President's dedication on the early childhood education effort. 
There is no question that we need to give children a better 
start in the beginning. There is no question that the strength 
of our country has been our ability to out-educate and out-
innovate the competition, and we make things and grow things, 
and you put that all together, that created the great American 
middle class--
    Secretary Duncan. Yes.
    Senator Stabenow. --which is shrinking at this point as we 
are having fewer investments in those things, while everybody 
else around the world says, we want to be like America. So they 
are doing what we used to do and we are now having this debate 
about whether or not the public sector should be a part of this 
great effort to be globally competitive. Nobody else in the 
world has that debate but us right now.
    Secretary Duncan. Yes.
    Senator Stabenow. But let me ask you, when we--we see on 
the one hand the need on early childhood, and then we see what 
is happening to students and student loans and there is no 
question about it that our young people are coming out of 
college with thousands, tens of thousands, in some professions 
and some degrees, hundreds of thousands of dollars in debt. You 
could buy a big new house in Michigan for the debt that many of 
our medical students are coming out with, or other graduate 
degrees, and it puts them under a huge situation and, frankly, 
relates to whether or not they choose to go into primary care 
or a specialty so they can afford to get out of debt. So a lot 
of choices being made based on how do I get out of debt.
    So I just want to go back to this question that is in front 
of us on July 1, because for me--I mean, would you agree that 
the goal has to be that student interest rates should not 
increase costs for students short term or long term, because 
part of what we are seeing in the proposals that are coming 
forward is they sound good in the short run, but there is no 
cap. And then you look long term and it is worse for students.
    Secretary Duncan. So--
    Senator Stabenow. So, would you not agree, we need to look 
at the short term in solving the problem, and make sure that 
when we get done, that the next generation you are talking 
about is not in worse shape because of the long-term solution?
    Secretary Duncan. Yes, but again, I think this is the 
minimum goal. What we are trying to do here--
    Senator Stabenow. Absolutely.
    Secretary Duncan. --is not make the problem worse--
    Senator Stabenow. This is the minimum, not make it worse.
    Secretary Duncan. I want to make college more accessible, 
more affordable, make sure more people from disadvantaged 
backgrounds have access, make sure people do not have 
tremendous debt at the back end--
    Senator Stabenow. Absolutely.
    Secretary Duncan. So this is a minimum step in the right 
direction that we need to have the political will to work 
together and figure out.
    Senator Stabenow. So the minimum is just do not do harm, 
keep the rates--
    Secretary Duncan. Do not make things--do not make it--
    Senator Stabenow. Do not make--
    Secretary Duncan. Do not make a bad problem worse.
    Senator Stabenow. Right. So, July 1, we need to keep the 
interest rates where they are, and then deal with a number of 
things that have come up that I think are really important for 
us to look at. Major banks get a better deal on interest rates 
to the discount rate than college students. Now, I understand 
people can debate that, sort of, risk levels and so, but there 
is something to think about here when we look at who is getting 
the better deal on interest rates in this country and where our 
long-term interests are. And when we look at the fact that the 
total debt load for students right now is over a trillion 
dollars and where that money could be going, if, in fact--
    Secretary Duncan. It is a big number--
    Senator Stabenow. It is a big number.
    Secretary Duncan. This actually is an interesting sort of 
public sector-private sector debate. One thing we did, which 
you might not agree with, Senator Johnson, which I am actually 
really proud of, is that we stopped subsidizing banks that are 
making loans, saving about $68 billion. We used $28 billion for 
deficit reduction and used $40 billion to increase Pell Grants.
    Senator Stabenow. Right.
    Secretary Duncan. That additional funding helped us to go 
from 6 million Pell recipients to 9.6 million. So it is just 
interesting how we can try and get to the right answer. Again, 
wildly controversial here in Washington. I thought it made a 
lot of sense around the country. The fact that we have had a 
more than 50 percent increase in Pell Grant recipients, that is 
a pretty big deal.
    Senator Stabenow. Right. And, Madam Chair, just in--I know 
my time is up. Let me just say that as we go forward on a final 
solution, I know you share my concern that we not end up--we 
are talking about deficit reduction, which is a good thing, 
when we took the subsidy from the banks.
    Secretary Duncan. Yes.
    Senator Stabenow. But we do not want to tax students with 
more debt in order to go to deficit reduction as a country. 
That makes absolutely no sense to do, and so I look forward to 
working with you on that.
    Secretary Duncan. And I will say that I have had bipartisan 
interest in--bipartisan commitment to that idea, the 
Republicans and Democrats who agree that that is not the right 
way to balance the budget.
    Chairman Murray. Thank you.
    Senator Ayotte.
    Senator Ayotte. Thank you, Madam Chairman.
    Thank you, Mr. Secretary, for being here, I wanted to ask 
you about the student loan issue that certainly other Senators 
and Senator Stabenow have just touched upon, which is, as we 
all know, if we do not act by July 1, the new interest rate for 
subsidized Stafford loans will double to 6.8 percent.
    And it just strikes me, as I see where we are right now, 
that the proposal of the Senate Republicans is not that far off 
from where the President is on this issue, and the President 
and Senate Republicans have put forth proposals that are 
market-based that lock in rates for the life of the loan. So I 
guess I wanted to ask you, and also to address all borrowers, 
which I think is really important. We cannot just carve out--
let us have some certainty for all borrowers and really 
affordable loans for all borrowers.
    So where are we on this? I firmly believe this is an area 
where we can come up with a bipartisan agreement. When I see 
what the President has, when I see what Republicans are putting 
forth, where are the discussions on this and can we move this 
forward so that we are not waiting until the last minute on 
July 1, so that we can resolve this for the American people?
    Secretary Duncan. I would love that. Congress seems to only 
act in the 11th hour, so if we could set a new precedent here, 
that would be fantastic. But, again, I am like you. I am 
hopeful, and people think I am crazy or naive. I think, again, 
the White House, Republicans in the House, Republicans in the 
Senate, Democrats in the House, Democrats in the Senate, 
everyone is engaged. Every single one of you is asking about 
this--
    Senator Ayotte. And I do not think we are that far off.
    Secretary Duncan. I think there are some differences, but I 
think they are resolvable. And, again, we all have to 
compromise--it's how a democracy works.
    Senator Ayotte. Right.
    Secretary Duncan. We all have to compromise. We all have to 
come to the middle. But I am very hopeful that this can get 
done.
    Senator Ayotte. So, have you been engaged in any 
discussions on this?
    Secretary Duncan. I am talking to people every single day.
    Senator Ayotte. Okay. Well, I am hopeful that we can get 
this done, too, and when I look at what the President has put 
forth, when I look at certainly what Senate Republicans have 
put forth, I think there is a way to resolve this on a 
bipartisan basis for the obviously, the students and the 
parents in this country.
    So I thank you on that and wanted to ask you about the 
issue of--there was a quote that troubled me, and someone may 
have already asked you about this, but in an interview last 
week, you mentioned that schools are going to play a role in 
the implementation of the Affordable Care Act. I believe it was 
a statement you made to Politico, and you said that, quote, 
``we actually have a team here that is sort of helping on ACA 
implementation.'' Can you tell me what you meant by that in 
terms of--
    Secretary Duncan. Sure.
    Senator Ayotte. --the Department's involvement in ACA 
implementation?
    Secretary Duncan. If schools have questions, if districts 
have questions, we have one or two people who are there to help 
provide answers.
    Senator Ayotte. But are you dedicating special staff? Is 
there an education piece that is being brought in the schools 
on the Affordable Care Act?
    Secretary Duncan. I would not say that. One piece in the 
Affordable Care Act that I thought was very encouraging was an 
investment in school-based health care clinics. So that is not 
through our Department. That is through HHS, which we have 
tried to partner with--Secretary Sebelius has been a great 
partner in lots of ways to increase the number of schools with 
school-based health care clinics.
    Senator Ayotte. Will your Department be involved in 
disseminating or requiring schools to disseminate information 
about the Affordable Care Act?
    Secretary Duncan. We have not done anything like that.
    Senator Ayotte. Okay. Are there any plans to do that?
    Secretary Duncan. Not that I am aware of.
    Senator Ayotte. Okay.
    Secretary Duncan. Again, we just want to be a resource, and 
if people have questions, we want to be available to try and 
answer them.
    Senator Ayotte. Okay. So what your answer was, that you are 
just being a resource, it is not that the Department of 
Education is taking a role, a particular role in the Affordable 
Care Act?
    Secretary Duncan. We want to be a resource.
    Senator Ayotte. Okay. You know, obviously, the concern I 
have is that, certainly, to the extent it is an issue of 
allowing children to know that they can stay on their parents' 
insurance until age 26, I understand that as a piece. But to 
make the Department of Education have any role in disseminating 
information about it troubles me in terms of even how we would 
fund that, given your main function. So that is why I raised 
the issue.
    Secretary Duncan. No, that is a fair question, and I think 
there is no conflict there. But, to be clear, I have been very 
clear in many graduation speeches, letting young graduates know 
that they could stay on their parents' insurance until age 26.
    Senator Ayotte. Well, I can--
    Secretary Duncan. I have to say, it is one of the biggest 
applause lines I get.
    Senator Ayotte. I can understand that.
    Let me ask you, Secretary, about the STEM education piece--
    Secretary Duncan. Yes.
    Senator Ayotte. and I know I do not have a lot of time 
left, but this is an area which I think is very important for 
the country, for us to move forward. But in 2010, GAO found a 
massive amount of duplication, 13 agencies spending over $3 
billion on 209 STEM programs and a degree of overlap in 83 
percent of these programs. So they recommended that it be 
guided by a robust strategic plan. Where are we in terms of 
using taxpayer dollars more efficiently to get a better outcome 
in the STEM education area?
    Secretary Duncan. This is extremely important. A lot of 
that conversation is where are the jobs of the future, and we 
all know so many of the high-wage, high-skilled jobs of the 
future are in the STEM fields, and we have significant unfilled 
jobs today with employers who are looking for skills that we 
are not providing. So this is one I take very seriously.
    The President has challenged us and challenged the entire 
Administration to coordinate. We want to invest, and we are 
going to do a much better job working with our sister agencies 
across the Administration. We want to invest in a couple of 
different areas. We have found movement where we provide some 
funding, but where there is local skin in the game, private 
sector business community, higher education, K-to- 12, we find 
where we leverage investments, there is a huge amount of 
movement. And so we want to invest in what we call STEM 
Innovation Networks, Innovation Hubs around the country, see 
who wants to work there.
    We want to create a STEM Master Teacher Corps. So many of 
our children start to turn off to the STEM areas not in high 
school, but in the fourth and fifth and sixth grades, where 
they have teachers who are not comfortable and confident with 
the content knowledge. And so we, as a country, have to get 
much better in this area and we are committed to doing 
everything we can to provide leadership, not just in the 
Department of Education, but Administration-wide, to support 
this effort.
    Senator Ayotte. Thank you. I thank you for being here and I 
will have a couple of follow-ups for the record. Thank you.
    Secretary Duncan. Thank you.
    Chairman Murray. Senator Kaine.
    Senator Kaine. Thank you, Madam Chair, and thank you, 
Secretary Duncan, for being here.
    I would like to have that last chart that Senator Johnson 
had back up, if I could, showing inflation-adjusted cost of 
tuition over time, if you could find that chart. There we go.
    Secretary Duncan, you made a point in connection with this 
chart that I want to drill down on, because I think it is very 
important, about two solutions. I do not view the big red 
number at the end as an indication that government has just 
been throwing money at it. I do view it as calling for a couple 
of potential reforms.
    If you look at the chart from 1964 to 1988, it did not 
change that much, the actual dollar, an inflation-adjusted 
number, and 1988 was not that far off. It looks like the huge 
change was between 1988 and 2010, and I can just tell you, from 
my experience as Governor, you made a point that is very right. 
The amount of State support for higher education in many States 
has been on a very flat path and in some States actually a 
declining path, and if you actually--
    Secretary Duncan. Forty States declined.
    Senator Kaine. Forty States. And if you look at between the 
late 1980s, when sentencing, mandatory minimums, three strikes 
you are out started to hit, the growth in State funding for 
prisons and incarceration dramatically exceeded the growth in 
State funding for higher education. So in Virginia, for 
example, you go to University of Virginia_UVA, you go to the 
college of William and Mary, the percentage of the school's 
budget that is State general fund support has declined very 
dramatically. When State funding declines, tuition goes up_
    Secretary Duncan. Yes.
    Senator Kaine. --and that has been a huge factor in tuition 
increases. And I say this as a Governor.
    Secretary Duncan. Yes.
    Senator Kaine. I have some complicity in this. We were 
dealing with a very difficult budget situation and it made it 
hard for us to fund higher education to the degree that we 
wanted.
    So the red number that is growing is not just, well, 
government has been throwing money at the problem. To the 
contrary, tuitions often go up because State governments, for a 
variety of reasons, many of them legitimate financial issues, 
have had a hard time funding higher education. So that is one 
issue. So keep pressure on States to fund.
    But you did mention the second one, as well. We have to 
keep pressure on universities to control costs. I mean, I think 
we all have the experience of going to universities and seeing 
how they often compete with each other based on the quality of 
the gym and the dining room and all kinds of facilities that 
are not necessarily curricular.
    And to the same degree that this Administration, I think, 
has done good work on requiring for-profit colleges, you want 
Pell Grant monies, you want Stafford loan monies, show us that 
you have a graduation rate, show us that you have post-
graduation employability statistics, we ought to have the same 
discussion with some carrots but also with some sticks with the 
entire higher education community, public, private, and 
nonprofit. You want Pell Grants? You want Stafford loans? Show 
us that you are doing things to control the costs.
    Part of it is a lack of cost control in the university 
community, public and private. But part of it is declining 
State support, not throwing money at a problem, it is that we 
are taking money out of higher education at the State levels.
    Secretary Duncan. So you have lived this and you understand 
this at a really intuitive level. So I agree with everything 
that you said. I would love to see a chart over--for every 
State, you get some money, so we would have to do it for every 
State over the past 20 or 30 years, State spending on higher 
education versus State spending on incarceration. That would be 
a fascinating chart to look at.
    Senator Kaine. I know exactly what that chart would look 
like.
    Secretary Duncan. Yes. In some States, it is--the contrast 
is staggering. So, again, what do we value? Where do we want to 
put scarce taxpayer dollars? What is important to us growing a 
vibrant and thriving middle class? Is it locking more people up 
or is it educating them?
    We have to challenge--again, this is about shared 
responsibility, so we have to challenge States to do the right 
thing and we have to challenge universities to do the right 
thing. Most of our funding--the vast majority of our funding 
has been on inputs, on access. Very little is on outcomes, your 
point about, you know, Pell and other things- -
    Senator Kaine. Right.
    Secretary Duncan. --and we are spending lots of time 
thinking about what we could do differently there.
    But, again, I go back both in the early learning space and 
in the K-to-12 space. We are seeing some pretty 
transformational change in part due to race to the top 
opportunities.
    Senator Kaine. Mm-hmm.
    Secretary Duncan. We have not had a race to the top type 
competition in the higher education space, and that is what we 
are proposing--
    Senator Kaine. Good.
    Secretary Duncan. --in this year's budget, to, again, 
incentivize three things: To incentivize States to invest; to 
incentivize universities to keep costs down; and to incentivize 
universities to build cultures of completion.
    The final thing I will say, quickly, is that when I--
    Senator Kaine. Because I have one more quick question, and 
I have--
    Secretary Duncan. Sorry. Sorry. I will be quiet. Go ahead.
    Senator Kaine. Let me do this. I do not know whether this 
is a terminology question or a policy question, when I hear 
discussions of college completion, college graduation rates, 
U.S., State, or compared to international norms. I always 
wonder about the fantastic graduates of the Newport News 
Shipbuilding Apprentice Academy, who often have a high school 
degree, or maybe they have been in the military, or sometimes 
they have a Master's degree and they want to go back and learn 
how to be a shipbuilder and welder. And they are tremendously 
trained and they have great jobs and they make great livings 
for their families, but I worry that we do not count them, and 
if we do not count them or talk about them and as we focus on 
our educational programming, we have too narrow a view of what 
higher education is.
    You have done a great job, I think, of making sure that 
community colleges are always at the table when we are talking 
about college completion, but I do not think we are yet doing a 
good enough job of really explaining, incentivizing, funding, 
and planning the right way for post-high school education to 
include career and technical offerings that are not offered on 
a college campus, because those are some of the best-paid jobs 
in Virginia and some of the best workers building the largest 
manufactured items on earth, but I do not know that they get 
counted in the college completion statistics.
    Secretary Duncan. So, again, I think you and I see the 
world very similarly. So I always try and talk about college 
and careers, college and careers, and for me, the goal is to 
have everyone graduate from high school prepared for some form 
of learning beyond that--4-year universities, 2-year community 
colleges, trade, technical, and vocational training. And we 
should count all that. We value all that. We have--
    Senator Kaine. But do we count that in our, you know, as we 
measure college graduation or as the international norms 
measure college completion and they rank us 14th in the world, 
are they measuring people who do not go to community college? 
They do not go to a for-profit college, they do not go to a 
traditional 4-year college, but they get a welding certificate 
from the Newport News Shipbuilding Academy.
    Secretary Duncan. That is not measured in college 
completion rates and it is an important indicator--
    Senator Kaine. Yes.
    Secretary Duncan. _and it is a separate--part of what we 
are proposing is to do a lot more of this at the high school 
level, to have a high school level redesign in order to have a 
much greater emphasis on career and technical education, and 
vocational education, or whatever you want to call it. Some 
schools do an amazing, amazing job with this. Not enough do.
    Senator Kaine. It is something I would like to work on. 
Thanks.
    Chairman Murray. Thank you very much.
    Senator Whitehouse.
    Senator Whitehouse. Thank you, Chairman.
    Good morning, Mr. Secretary.
    Secretary Duncan. Good to see you.
    Senator Whitehouse. We have just been through the education 
bill on the HELP Committee and there was a considerable 
discussion about the burden that the Department of Education 
imposes on State and local communities, and I would like to 
give you a chance to answer some questions about that.
    Let us start with the simplest one, which is how many FTEs 
does the budget you have proposed for the Department of 
Education support, Federal FTEs?
    Secretary Duncan. Forty-two-hundred full-time equivalent 
positions.
    Senator Whitehouse. Forty-two-hundred. People brought--
    Secretary Duncan. For the record, we are one of the 
smallest Federal agencies, just to put that out there.
    Senator Whitehouse. People brought books this thick to the 
hearing that were their binders for filings that had to be made 
to the Department of Education. Have you done any formalized 
studies, or has GAO or anybody done any formalized studies to 
quantify the externalized costs that your programs impose on 
State and local communities, and if so, when, and what are the 
results of those studies?
    Secretary Duncan. Well, beyond studies, what we have 
actually tried to do is provide flexibility. We thought so much 
of No Child Left Behind_NCLB_ was broken, was onerous, was top-
down from Washington, and we have had 37 States, including your 
home State, and another ten coming apply for flexibility. 
Frankly, we wanted Congress to fix No Child Left Behind. 
Congress has been pretty broken. So we were lucky enough to 
have the flexibility to provide waivers and much greater 
flexibility, and we are seeing 37 States, again, across the 
political spectrum, jump at this. And we are working with an 
additional ten States, so it is virtually every State in the 
country.
    So, I want to be clear. We are not just looking at this. We 
are actually taking concrete action that seems to be 
universally appreciated.
    Senator Whitehouse. Well--
    Secretary Duncan. And let me also say--
    Senator Whitehouse. --there are two different things.
    Secretary Duncan. Okay.
    Senator Whitehouse. One is the sort of handcuffs that No 
Child Left Behind put on school districts. The waivers that you 
have granted have allowed more flexibility, have allowed them 
to escape the handcuffs, have allowed them to teach much more 
to the child rather than to the test and so forth. So that has 
been good from a policy point of view, but it may or may not 
make it easier for them to cope with the pure, sheer 
administrative burden of reporting and compliance and waiver 
application and grant Administration and all of that stuff.
    And if you have not ever done a kind of comprehensive study 
of how much of that cost gets externalized to States and to 
cities, I would like to ask you to work with us on figuring out 
a way we could get that done. It has a general component, which 
is if it is too high, then it is a waste of effort and it is 
taking away from kids. And it has a focus component, because 
small school districts, like those in Rhode Island, and rural 
school districts and people who do not have an enormous amount 
of bureaucratic infrastructure to cope with Federal 
requirements, are put at a disadvantage in terms of how they 
deal with those responsibilities.
    Secretary Duncan. It is--
    Senator Whitehouse. Also, there is a bias, as well as a 
burden, that is potentially put in there. And I think it is 
worth attending to and finding out what the story is because, 
otherwise, we are going to keep seeing these big binders being 
brought in to hearings. They will be anecdotal concerns, but we 
will not really have solid evidence. And you are telling me, I 
think, that we do not really have solid evidence, right?
    Secretary Duncan. We have done some work and we can always 
do more. I think it is a very real point. You hit on both of 
them. You do not want to waste people's time and you do not 
want to make it impossible for a small district or a rural 
district to access resources. So none of that is in the 
public's best interest.
    So it is fascinating. When I travel, I always--everywhere I 
go, I ask people, tell us where we are being redundant, tell us 
where we are being duplicative. The last thing I want to do is 
waste your time. I have been on the other end of this stuff. I 
have lived this. So whatever came out of your hearing, whatever 
concrete evidence--it may be anecdotal, like this report, you 
asked for three times. Or, this is one piece of paper rather 
than 50. Whatever concrete evidence came out of that, I would 
love to hear that and I would love you to hold me personally 
accountable for looking into that and figuring out where we can 
reduce burden. I have zero interest in making people spend time 
on bureaucracy rather than teaching kids to read and keeping 
them in school.
    Senator Whitehouse. My last question is about Pell Grants, 
which we take very seriously in Rhode Island. We have a lot of 
loyalty to Senator Pell. When those things kicked off, they 
paid about 70 percent of regular State college education. Now, 
it is closer to 30 percent.
    Secretary Duncan. Yes.
    Senator Whitehouse. The Republican budget in the House 
would flatline it for the 10-year budget period, as I 
understand it. What is your plan and what impact would the 
difference between where the Republicans budget it and where 
you would budget it, what impact does that have in the real 
world for lives?
    Secretary Duncan. Well, again, I think all of us, 
regardless of our politics or ideology, I think, and I 
desperately hope, we want to have the best educated workforce 
in the world. We want to have the highest percent of college 
graduates. And there is a study that came out just yesterday 
from the Council on Foreign Relations. I encourage all of you 
to look at this, college degree attainment. We are third 
amongst 55- to 64-year-olds, so older folks. But we are 13th 
amongst 25- to 34-year-olds. So we are losing ground here. We 
are not maintaining. We are not stagnating. We are actually 
going south relative to other countries.
    So anything that makes college more affordable, more 
accessible, I am for. Anything that makes college less 
affordable, less accessible, I think we cut off our nose to 
spite our face.
    And, just quickly, my staff just handed me a note_under the 
flexibility we have done, they actually did do a study. We 
estimate a reduction in burden of over three million hours with 
a cost savings of approximately $50 million for SEAs and LEAs. 
So not that we cannot do more, not that we should not do more, 
but this is we something that we are thinking about very, very 
seriously.
    Senator Whitehouse. For the record, Madam Chair, can I get 
the--afterwards, if you can get me a citation to that study or 
a copy of it. Thank you, Madam Chair.
    Chairman Murray. Senator Wyden.
    Senator Wyden. Thank you, Madam Chair.
    Secretary Duncan, I do not get to see you often because of 
committee assignments, but when I read your comments, 
particularly on education issues, the way you link opportunity 
and accountability, I think, makes a lot of sense and ought to 
be our philosophical underpinnings in this area.
    Also, I want to take note of the fact that constituents 
often ask whether I have had to guard you in any basketball 
game with the President, and I have said, thank goodness, no, 
because he is talented and I was too small--
    Chairman Murray. I do not get that question.
    [Laughter.]
    Senator Wyden. Well, I was too small, and I made up for it 
by being slow, neither of which are challenges for the 
Secretary.
    Here is my question, Mr. Secretary, and it deals with the 
question of higher education and the question of what our 
policy is going to be in the future. Historically, we have said 
our focus will be on access and trying to make sure we get 
students in the door. And I do not take a back seat, and I know 
you do not, in terms of access, Pell Grants and Stafford loans 
at affordable rates.
    But it seems to me we are now moving in the direction of 
adding another component, and that is value. That is what the 
Administration has sought to do in The Collefe Scorecard. That 
is, as you know, what is behind the legislation with Senator 
Rubio, the bipartisan bill, the Student Right To Know Before 
You Go Act. And I think we both want to make sure that we can 
get information out about graduation rates and debt levels and 
remedial education, and my reason for bringing it up is the 
question of how it is going to be possible to get what students 
are likely to earn when they get a degree from a particular 
school. And I have students ask me about this constantly. They 
do not want this to be the only measure of their education, but 
they want it to be one measure.
    Now, on the issue of employment and earnings, the 
scorecard, and we just looked at it, is basically left blank, 
and I know this is a very difficult area to address 
administratively, and that is because of the existing 
Congressional ban on the unit record type system.
    Secretary Duncan. Yes.
    Senator Wyden. So, Senator Rubio and I worked with a 
variety of colleagues and experts, privacy experts, education 
experts, but what is your thinking in terms of how we can 
particularly find a way--because I think Senators of all 
political philosophies want to work with the Administration on 
this--how can we figure out a way to get that information out 
in a usable fashion? I think our bill is one. It is not the 
only possible way, but particularly because I think the 
Administration bumped up against the Congressional ban with 
respect to unit records, how do you see tackling this?
    Secretary Duncan. So, let me just back up for a second.
    Senator Wyden. Yes.
    Secretary Duncan. Your basic premise is exactly right, 
that, yes, we want to encourage access and opportunity. We 
desperately have to do that. But for me, the goal is not to 
have more kids enter college. The goal is to have a lot more 
complete college. And, collectively, we have not had enough 
either incentives or disincentives, carrots and sticks, to 
change behavior there. We talked about time to completion and 
other things. We have a lot of hard work to do.
    I just so appreciate your leadership. I appreciate you 
working in a bipartisan way. What we tried to do last year is, 
on a voluntary basis, produce a Scorecard. All we can do on a 
voluntary basis is do that. If Congress acts, then we have a 
chance to do something. We hope to add earnings to the 
Scorecard later this year, and we all need to collectively find 
this right balance. It is critically important that we maintain 
individuals' privacy and have all those safeguards there, but 
at the same time have much greater transparency.
    And I said earlier, before you were here, that it is so 
interesting to me that we have unquestionably the best system 
of higher education in the world, 7,000 choices, for profit, 
nonprofit, public, private, 4-year, and 2-year institutions, 
but we have a very inefficient marketplace. We have young 
people choosing the wrong schools for the wrong reasons. It is 
because the process is so overwhelming. So whatever we can do 
to provide transparency, I am a big believer that that helps to 
change behavior.
    The last thing I will say, quickly, is when I led the 
Chicago Public Schools, we tracked college completion rates for 
our grads very closely. We saw young people with identical 
scores, identical Grade Point Averages_GPAs, going to two 
different schools, some graduating students at 80 percent and 
some graduating students at 25 percent. The difference was 
staggering. And so we, frankly, started to steer kids towards 
certain institutions of higher education and, frankly, away 
from others. And I think we need to have a much more informed 
population. And again, the goal is not to go. The goal is to 
walk out with a diploma at the back end.
    Senator Wyden. Well, those are points well made, and I 
think what I would like to do is have our staff follow up with 
yours. They have been very helpful. Because I think that the 
challenge, particularly administratively, is you bump up 
against this flood, you know, Congressional ban, and then there 
are some questions about what you can collect and what you can 
publish, and is it short term or is it long term. We can get 
this done.
    I appreciate the approach the Administration is talking 
about, and this, in my view, Mr. Secretary, would be a 
transformation of Federal education policy. It will keep our 
historic focus on access, and that is something that we should 
never budge an inch away from. But I think adding value, as you 
and the President want to do, makes a lot of sense, and I look 
forward to working with you.
    Secretary Duncan. Thank you for your leadership.
    Senator Wyden. Thank you, Madam Chair.
    Chairman Murray. Senator Nelson.
    Senator Nelson. Good morning, Mr. Secretary.
    Secretary Duncan. Good to see you.
    Senator Nelson. I am at a loss to understand why the 
Administration is proposing to cut STEM funds in half and to 
reorganize it through the Department of Education, National 
Science Foundation, and the Smithsonian. I have seen STEM work 
so well, STEM funds through an agency, such as NASA, where peer 
review funds are going on a specific NASA mission, and yet that 
is being cut out in the Administration's proposal. So why do 
you think this reorganization is going to help us get, at the 
end of the day, where we all want to get to, which is the 
emphasis, of course, on the STEM education?
    Secretary Duncan. So, I do not think we are looking to cut 
STEM budgets in half at all. So I think that is not correct, 
and I will just walk through potential increases we are looking 
for: STEM Innovation Networks, $150 million; STEM Master 
Teacher Corps, $35 million; STEM Teacher Pathways Program, $80 
million; Effective Teaching and Learning, $150 million. But, 
let me be clear. What we are trying to do is better coordinate 
across the Administration, and it is a desperately important 
investment. I think there have been lots of pockets of 
excellence, one-offs. I do not think we have done enough to 
incentivize local communities to have buy-in. Charlie Bolton is 
a great friend. He is doing an amazing job.
    We want to all work together, you know, without ego and 
without bureaucracy in silos and that is the only goal here. My 
interest is seeing a lot more students have access to teachers 
who love the STEM fields. My interest is to have a lot more 
young people who choose to major in the STEM areas when they go 
to college. And as you know, so many people go to college 
wanting to major in it and then they wash out because they are 
not prepared.
    So that is--I think we all have the same long-term goals. 
We can sort of walk through how we do it. But, I do the 
President has challenged us to help provide some leadership 
across the Administration so that we are all not operating in 
our silos but are working together to try and make sure young 
people are prepared for where so many of the jobs of the future 
are going to be.
    Senator Nelson. I will just mention in passing that since 
you are a great student of history and educational history, you 
know what happened to this country when we had these 
extraordinary ``gee whiz'' successes in the great space race 
back in the late 1950s and the early 1960s. And I would hope 
that as we get our space program cranked up again and that we 
start to see some of the ``gee whiz'' things pursuing the goal 
that the President has laid out, which is to go to Mars, that 
that might bring a lot more young people into these fields of 
high technology, which clearly happened during the 1960s.
    Secretary Duncan. Yes. No, I would be happy to follow up in 
any way, and again, we have a real shortage of math and science 
teachers in this country, which I think if we do not 
fundamentally address that, we will never produce the students 
that we need long term. Not everyone agrees with me on this, 
but I have publicly proposed that we pay math and science 
teachers more money to work in disadvantaged communities and in 
rural communities and the inner city. We have had a couple 
decades' shortage and I do not want to just admire the problem. 
I want to do something about it.
    Senator Nelson. On another subject, and this will be my 
final question, why do you not just state for the record for 
the committee, if we had the continuation of the sequester, 
what impact that that would have on student aid programs.
    Secretary Duncan. So, again, this is just the sequester 
that I will address, and the House budget is much worse, which 
we talked about earlier. But the impact of the sequester--
    Senator Nelson. Think of both, then.
    Secretary Duncan. The impact of the sequester is a $598 
million cut for IDEA Part B, children with special needs; a 
$725 million cut for poor children, Title I; a $49 million for 
Work-Study, young people working hard to get through college 
and graduate; and for Impact Aid, children of military 
families, Native American children, who rely heavily, 
disproportionately on our Federal funding, a $60 million cut. 
So that is the sequester.
    With the House budget, which is an additional 19 percent 
cut on top of the 5 percent sequester cut, those numbers get 
even more devastating: A $2.5 billion cut for Title I for poor 
kids; a $2 billion cut for IDEA, children with special needs; 
$4.5 billion less for Pell Grants; $1.5 billion less for Head 
Start, and we talked extensively about how important it is to 
get our babies off to a great start from ages zero to 5; and 
finally, $200 million less for children of military families 
and children on Native American reservations.
    Senator Nelson. That speaks for itself. Thank you, Madam 
Chairman.
    Chairman Murray. Thank you very much.
    Mr. Secretary, as you know, I have been passionate about 
early childhood education forever. It is what got me involved 
in politics and continues to keep me going. I was thrilled when 
the President talked about the importance of investing in early 
learning in his State of the Union address and glad to see the 
new investments in children from birth through 5 in both your 
budget and the HHS budget. Those investments echo what we put 
in place in our budget a few months ago, and it is a priority 
that I know we share.
    I was out talking to a kindergarten teacher just a few 
weeks ago who told me that 80 percent of the kids do not come 
to her classroom in the fall with any kind of pre-K education, 
which means that she says I have so many kids who do not know 
how to turn a page when they open their book, do not know how 
to hold the scissors or a pencil. The disparity is just 
incredible, and how far she has to bring those kids to catch 
them up to where they need to be. So, to me, this is absolutely 
imperative.
    And I know you have been traveling around the country 
talking to both Democratic and Republican Governors about their 
support for this and I wanted you to talk a little bit about 
why the--what the Governors are saying to you, why this is so 
important.
    Secretary Duncan. Yes. Well, again, I just think, going 
forward, your personal leadership and passion and 
insightfulness on this is going to be so helpful. I think a lot 
about--I have never had a job before where I know I am going to 
get fired. I have a time-limited span here, 3 years, 6 months, 
whatever it might be. And I think a lot about what are not the 
15 things I can do, but what are the two or three most 
important things I can do to help the country while I am here.
    And, arguably, at the top of the list would be dramatically 
expanding access for our babies to high-quality early childhood 
education, that it is the great equalizer. And I just keep 
saying, education, we have to get out of the catch-up business 
and get our children starting kindergarten on a more level 
playing field.
    And, again, the return on investment_ROI, the economic 
reality--this is not just some feel good thing. The ROI on this 
is pretty staggering, seven-to-one. How many of your 
investments in the stock market are getting seven-to-one? 
Pretty good deal. Pretty good deal.
    And for all the dysfunction here in Washington, again, I am 
actually hopeful, because you have Republican and Democratic 
Governors who are investing very heavily. I mean, these are 
still tough economic times. These are not easy decisions. But 
you can go to Michigan and Alabama and Mississippi, you go to 
Massachusetts, you know, a million places I can talk about, 
Nevada, where people are really-- Washington, your state--where 
Governors in tough times are investing because they get it. 
They get the ROI.
    What is so interesting to me is that all of them invest--
virtually every single one of them still has long waiting 
lists. There is tremendous unmet need. And people sort of say, 
well, just let the Governors do it. Again, today, less than 
three in ten, less than 30 percent of our 4-year-olds have 
access to high-quality early childhood education.
    So if we want to get just a tiny bit better, I want to be 
transformational here. I want to change the course of these 
kids' lives forever and for our country. And so to do that, 
yes, we need Governors' leadership and tremendous bipartisan 
support. The majority of Governors in their State of the State 
speeches talked about this. Many of these Governors are 
investing, they are not just talking about it. They are putting 
skin in the game. But they are not getting to where they need 
to go, and Michigan recently, Georgia recently, is oing some 
good things, but still has an 8,000-kid waiting list, so is not 
even close--
    Chairman Murray. Right, and not to mention the fact, the 
mobility of kids, if we just have kids moving around the 
country, as we do today, and you have kids coming from States 
that do not invest in it, it is a national issue.
    Secretary Duncan. The final thing I will say is just again 
to emphasize why your leadership is so important. Two- and 
three- and 4-year-olds do not vote. They do not have Political 
Action Committee_PACs. They do not have lobbyists. Far too many 
politicians are wired to think short-term. This is the ultimate 
long-term play. We will not see the full dividends for 10, 20, 
30, 40 years, 50 years. But with vision and foresight and 
leadership like yours, I think we have a chance to change our 
country for the next couple decades here and I am going to do 
everything I can to make sure we provide those opportunities.
    Chairman Murray. And, finally, what do you see happening 
internationally? If we are cutting all of these programs back 
through sequestration and not doing the right thing, what are 
other countries doing?
    Secretary Duncan. Well, again, this is a Council on Foreign 
Relations report yesterday, so hot off the press. It shows the 
U.S. ranks first in high school degree attainment for our 55- 
to 64-year-olds, our folks moving towards retirement, but we 
are tenth among 25- to 34-year-olds.
    Chairman Murray. So what does that do for our 
competitiveness?
    Secretary Duncan. Where are the jobs going to go? Are the 
jobs going to go to where we are less educated or more 
educated? Jobs can go anywhere in a globally competitive 
economy. That is high school. College degrees, we are third 
amongst 55- to 64-year-olds, but 13th among 24- to 34- year-
olds.
    And so this is--yes, it is about education, but it is about 
so much more than education. It is about fighting to have a 
strong and vital middle class. It is about keeping great jobs, 
high-wage, high-skilled jobs in this country. And employers are 
going to go to where the most educated workforce is, and I hope 
to goodness it is here, but they will go to China, India, or 
South Korea or Singapore or wherever it might be where they can 
get an educated workforce, and the middle class--
    Chairman Murray. So, the investment that we make today is 
absolutely critical 10, 20, 30 years from now.
    Secretary Duncan. Absolutely. And if we do not change 
direction, I worry about where our country is going. This is 
not--the status quo is not good enough. We should be ashamed 
that we are not leading the world in these things. And we have 
rested on our laurels for far too long. We have become 
complacent and other countries have simply passed us by, and 
then we wonder why we struggle economically.
    Chairman Murray. Thank you very much.
    Senator Johnson.
    Senator Johnson. Thank you, Madam Chair.
    I just have to challenge the notion that we are not 
spending enough on education. I do not think it is a spending 
problem. But, again, to reiterate what I was saying before, in 
total in 2011--I do not have the exact numbers for 2012 or 
2013--we spent basically $1.2 trillion educating our kids. That 
is eight percent of our economy. You can compare that, again, 
in inflation-adjusted dollars, to 1978, where we spent $496 
billion, again, inflation-adjusted. So that is 2.4 times the 
level of funding into education. It is not a matter of how much 
money we are spending. I mean, do you dispute that basic 
funding level?
    Secretary Duncan. I think that--
    Senator Johnson. I mean, it is very easy to say, well, so 
now compared to last year when we were spending a lot of money, 
we are going to spend a little bit less, but we are pouring 
money into education. By the way, we put men on the moon 
spending a whole lot less on education and we actually had 
pretty good science and math programs back then.
    Secretary Duncan. So, Senator, I have never advocated for 
investing in the status quo. Everything we have done, we have 
tried to drive a vision of reform and make some very tough 
calls, and early childhood space is not about access. It is 
about high quality. K-to-12 is about increasing graduation 
rates. Higher education is about increasing graduating rates. 
But I think if we share--we can debate how we get there, but if 
you agree with me that being 14th in the world in college 
graduation rates is unacceptable, of having a high school 
graduation rate below so many countries, if we agree that is 
unacceptable, what I would love to do is have a conversation 
about how we get better outcomes--
    Senator Johnson. Sure.
    Secretary Duncan. --and how we help keep those jobs in this 
country.
    Senator Johnson. I think our educational outcomes are 
totally unacceptable. But, again, it is not a problem of money.
    Secretary Duncan. Well, let me--
    Senator Johnson. Again, we have been pouring money into it.
    Secretary Duncan. Hold it. You keep saying--let me just 
challenge you.
    Senator Johnson. Yes.
    Secretary Duncan. On the early childhood space, if less 
than three in ten 4-year-olds have access to high-quality pre-
K, if our goal is to get a million more children ready for 
kindergarten when they enter, I do not have a cheap way to do 
it. It is an investment. This means--
    Senator Johnson. Well, maybe we have to reallocate, 
reprioritize spending, then. You know, one of the things I was 
trying to point out in my charts is, coming from the private 
sector, you look at anything else, almost anything else in the 
private competitive sector, there have been huge productivity 
gains. And in education, with computers, we should have huge 
productivity gains, but we do not. We are spending more per 
pupil and we are getting terrible results. I mean, what is the 
answer for that? It is not throwing more money at it.
    Secretary Duncan. Well, again, so there is a level of 
complexity. I just want to try and get you beneath the talking 
points. And so--
    Senator Johnson. It is not--no, this is not talking points. 
I was heavily involved in the education system and I am looking 
at it as an accountant. We are spending a lot of money per 
pupil--
    Secretary Duncan. So--
    Senator Johnson. --and we are not getting the results. That 
is not a talking point. That is a fact.
    Secretary Duncan. So what we are trying to do, technology 
can be a huge game changer, and you may have seen--
    Senator Johnson. But it has been around for 10 years and 
has not been a game changer.
    Secretary Duncan. I agree with you, so we agree on the 
problem. The question is how we get there. Part of the 
challenge is lack of broadband access in many of our 
communities, and we have talked about dramatically increasing 
broadband access. Technology education moves far too slow. 
Technology has changed how we do business. It has changed how 
we interact--
    Senator Johnson. I will say, government-run programs, 
government-funded programs run way too slow.
    Let us talk about early childhood development before I run 
out of time here. GAO conducted a study on duplicative 
programs. There were 45 early learning and childhood programs. 
And then the Department of Health and Human Services in 2012 
issued a study about the Head Start preschool program and found 
it had little to no impact on the cognitive, socio-emotional, 
or parenting practices of participants by the time they reached 
the third grade. How do you respond to that? Again, we are 
looking at, hey, let us pour more money into it--
    Secretary Duncan. No--
    Senator Johnson. If what we have does not work, why would 
we want to pour more in?
    Secretary Duncan. Very simple. There are lots of studies, 
and we can give them to you, that show city after city, State 
after State, where we have seen big benefits. About 20 
percent--what that study measured, again, you have to look at 
the detail. That study evaluated children who had access to 
Head Start, not who actually attended Head Start. And about 20 
percent of the kids in that study never actually attended Head 
Start.
    So, yes, we need high quality. For the first time ever, and 
I give her great credit, Kathleen Sebelius is making Head Start 
programs recompete, and if they are not getting results, they 
have to come back in or they will be cut. But, again, look 
below the headlines. If the study looked at 20 percent of kids 
who had access but did not attend, just pause for a second.
    Senator Johnson. Okay. But let me conclude here, again. 
Again, I am all for education. I understand it is absolutely 
vital. But the other reason I am looking at a 30-year budget 
window is when we are trapped in a 10-year budget window, we 
are grossly underestimating the real problem here.
    So you take a look at the first decade and it is maybe a $6 
or $7 trillion deficit. You project that out, and the numbers 
we are coming up with--they are preliminary, but they have been 
reported, so I will say they--we are talking about over 30 
years, $72 to $107 trillion deficit from the Federal 
Government. That is a huge problem, and unless we start 
addressing it--and if our solution to all these other problems 
is just throw more money at them--
    Secretary Duncan. No--
    Senator Johnson. --more money that we simply do not have--
    Secretary Duncan. I think we have to--and maybe you will 
agree, maybe you will disagree--I think we have to walk and 
chew gum at the same time. Look what we did in reforming 
student loans. We saved $68 billion. We took $40 billion to 
increase access to Pell Grants. We did that without going back 
to taxpayers for a nickel. Do you think that is good 
government?
    Senator Johnson. Well, again, I am happy to prioritize 
spending, and I am happy to work with you to prioritize that 
spending. But again, you do need some general understanding of 
the huge problem we are facing and we cannot just keep throwing 
more money at the problem. We have to actually start looking at 
how much we have spent and measure the results and realize, 
well, if that has not been working, we have to look at some 
other program.
    Secretary Duncan. I one hundred percent agree, and again, I 
want you to look at high school graduation rates, college 
graduation rates. We are measuring this every single day. We 
are looking at differences in achievement gaps. If we are not 
seeing progress, I would be having a very different 
conversation. We have a long way to go, but you are seeing 
movement in the right direction. And, again, never pushing to 
invest in the status quo, trying to drive a vision of reform.
    But, again, I go to James Heckman, who is much smarter than 
I, Nobel Prize winning economist. He tells me we get a seven-
to-one investment. You are a very astute businessman. I think 
we need to listen. I think we need to pay attention.
    Senator Johnson. Well, let me just say, I truly appreciate 
your efforts and your dedication to the problem. I really do, 
so thank you, Mr. Secretary.
    Secretary Duncan. Thank you.
    Senator Johnson. Thank you, Madam Chair.
    Chairman Murray. Senator Whitehouse, did you have any 
additional questions?
    Senator Whitehouse. No.
    Chairman Murray. Well, Mr. Secretary, I really appreciate 
your coming today. I really believe that we have to make the 
investments that we need to make today so that ten, 20, 30 
years out from now, we have a strong, viable workforce and a 
country that is strong competitively and those investments that 
we make are really why we have focused so hard on this. That is 
what you do every single day, and I just want you to know how 
much I appreciate this discussion and look forward to working 
with you on this.
    So thank you very much for that, and I want to thank all of 
our colleagues who participated today. The record will be open 
for any additional questions, due by 6:00 p.m. today.
    And, again, Mr. Secretary, thank you very much.
    Secretary Duncan. Thanks for the opportunity.
    Chairman Murray. The committee is adjourned.
    [Whereupon, at 12:13 p.m., the committee was adjourned.] 

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