[Senate Hearing 113-229]
[From the U.S. Government Publishing Office]
S. Hrg. 113-229
BUDGET COMMITTEE MID-SESSION HEARINGS FISCAL YEAR 2014
=======================================================================
HEARINGS
before the
COMMITTEE ON THE BUDGET
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
----------
February 13, 2013 -The Impact of Federal Budget Decision Families and
Communities
February 26, 2013 -The Impact of Federal Investiments on People,
Communities and Long-Term Economic Growth
March 5, 2013 -Reducing the Deficit by Eliminating Wasteful Spending in
the Tax Code
May 22, 2013 -Supporting Broad-based Economic Growth and Fiscal
Responsiblity through Tax Reform
June 4, 2013-Fiscal and Economic Effects of Austerity
June 26, 2013 -Investing in Our Future: The Impact of Federal Budget
Decisions on Children
July 23, 2013-The Impact of Sequestration on National Security and the
Economy
July 30, 2013-Containing Health Care Costs: Recent Progress and
Remaining Challenges
September 24, 2013 -The Impact of Political Uncertainty on Jobs and the
Economy
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
S. Hrg. 113-229
BUDGET COMMITTEE MID-SESSION HEARINGS FISCAL YEAR 2014
=======================================================================
HEARINGS
before the
COMMITTEE ON THE BUDGET
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
----------
February 13, 2013 -The Impact of Federal Budget Decision Families and
Communities
February 26, 2013 -The Impact of Federal Investiments on People,
Communities and Long-Term Economic Growth
March 5, 2013 -Reducing the Deficit by Eliminating Wasteful Spending in
the Tax Code
May 22, 2013 -Supporting Broad-based Economic Growth and Fiscal
Responsiblity through Tax Reform
June 4, 2013-Fiscal and Economic Effects of Austerity
June 26, 2013 -Investing in Our Future: The Impact of Federal Budget
Decisions on Children
July 23, 2013-The Impact of Sequestration on National Security and the
Economy
July 30, 2013-Containing Health Care Costs: Recent Progress and
Remaining Challenges
September 24, 2013 -The Impact of Political Uncertainty on Jobs and the
Economy
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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
Pages
February 13, 2013 -The Impact of Federal Budget Decision Families
and Communities................................................ 1
February 26, 2013 -The Impact of Federal Investiments on People,
Communities and Long-Term Economc Growth....................... 85
March 5, 2013 -Reducing the Deficit by Eliminating Wasteful
Spending in the Tax Code....................................... 181
May 22, 2013 -Supporting Broad-based Economic Growth and Fiscal
Responsiblity through Tax Reform............................... 273
June 4, 2013-Fiscal and Economic Effects of Austerity............ 339
June 26, 2013 -Investing in Our Future: The Impact of Federal
Budget Decisions on Children................................... 469
July 23, 2013-The Impact of Sequestration on National Security
and the Economy................................................ 555
July 30, 2013-Containing Health Care Costs: Recent Progress and
Remaining Challenges........................................... 625
September 24, 2013 -The Impact of Political Uncertainty on Jobs
and the Economy................................................ 719
STATEMENTS BY COMMITTEE MEMBERS
Chairman Murray................1, 85, 181, 273, 339, 469, 555, 625, 719
Senator Session...........4, 84, 184, 276, 343, 445, 473, 559, 628, 722
Senator King..................................................... 77
WITNESSES
Honorable Gary D. Alexander, Secretary, Pennsylvania Department
of Public Welfare..............................................37, 39
Joseph Antos, PhD.,Wilson H. Taylor Scholar in Health Care and
Retirement Policy, American Enterprise Institute.............672, 674
Jared Bernstein, PhD., Senior Fellow, Center for Board of
Governors and Policy Priorities..............................229, 231
Jennifer Cari Green, Secretary, Neurosurgery and Plastic Surgery
Services, Madison Army Medical Center, Representing the Aerican
Federation of Government Employees...........................576, 578
Anthony P. Carnevale, PhD, Director and Research Professor
Georgetown University Center on Education and the Workforce..107, 109
Shavon Collier, Parent, Edward C. Mazique Parent Child Center,
Inc..........................................................514, 516
Veronique DeRugy, PhD., Senior Research Fellow, Mercatus Center
at George Mason University...................................305, 307
Thomas Donnelly, Resident Fellow and Co-Director of the Marilyn
Ware Center for Security Studies, American Enterprise Institute
for Public Policy Research...................................591, 593
Stephen L. Ferguson, Chairman, Cook Group, Inc.................129, 131
Salim Furth, Senior Policy Analyst in Macroeconomics Center for
Data Analysis, The Heritage Foundation 2, 415..................
Robert Greenstein, President, Center on Budget and Policy
Priorities.....................................................20, 21
Simon Johnson, Ronald A. Kurtz Professor of Entrepreneurship
Sloan School of Management, Massachusetts Institute of
Technology, and Senior Fellow, Peterson Institute for
International Economics 1, 404.................................
Edward D. Kleinbard, Professor of Law, University of Southern
California Gould School of Law...............................186, 189
Mark N. Klett, President and Chief Executive Officer, Klett
Consulting Group, Inc. 2, 564..................................
Bruce Lesley, Director, First Focus............................475, 478
Michael Linden, Managing Director for Economic Policy, Center for
American Progress............................................278, 282
Adam Looney, PhD., Senior Fellow, Economic Studies, The Brookings
Institute....................................................297, 300
David R. Malpass, President, ENCIMA Global, LLC................140, 142
Tara Marks, ADA, OHIO............................................ 7, 10
Allan H. Meltzer, PhD., Carnegie Mellon University Professor of
Political Economy, Tepper School of Business 4, 756............
David Muhlhalusen, PhD., Research Fellow in Empirical Policy
Analysis The Heritage Foundation.............................520, 522
Patrick Murray, Arlington, VA....................................14, 16
Len. M. Nichols, PhD., Director and Professor Center for Health
Policy Research and Ethics, College of Health and Human
Services, George Mason University............................630, 634
Magaret Nimmo Crowe, Interim Executive Director, Voices for
Virginia's Children..........................................508, 510
Kavita Patel, MD, MS, Fellow and Managing Director, Engelberg
Center for Health Care Reform, The Brookings Institute.......652, 655
Hunter R. Rawlings, III, PhD., President, Association of American
University...................................................100, 102
Russell Roberts, PhD., Research Fellow, Hoover Institution,
Standard University..........................................245, 247
Honorable Polly Trottenberg, Under Secretary for Policy, U.S.
Department of Transportation...................................92, 95
Baker Spring, F.M. Kirby, Research Fellow in National Security
Policy, THe Heritage Foundation..............................583, 585
Chad Stone, PhD., Chief Economist, Center on Budget and Policy
Priorities...................................................741, 743
Lawrence H. Summers, President Emeritus and Charles W. Eliot
University, Professor, Harvard University....................346, 348
Honorable Robert O. Work, Chief Executive Officer, Center for a
New American Security........................................568, 570
Robert L. Woodson, Sr., President, Center for Neighborhood
Enterprise.....................................................50, 52
Mark Zandi, PhD., Chief Economist, Moody's Analytics...........724, 726
THE IMPACT OF FEDERAL BUDGET DECISIONS ON FAMILIES AND COMMUNITIES
----------
WEDNESDAY, FEBRUARY 13, 2013
United States Senate,
Committee on the Budget,
Washington, D.C.
The committee met, pursuant to notice, at 10:31 a.m., in
Room 608, Dirksen Senate Office Building, Hon. Patty Murray,
chairman of the committee, presiding.
Present: Senators Murray, Stabenow, Sanders, Whitehouse,
Warner, Coons, Baldwin, Kaine, Sessions, 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. Good morning. This hearing will come to
order, and I want to thank our witnesses today, who I will
introduce shortly. I want to again welcome my Ranking Member,
Senator Sessions, and all of our colleagues who are joining us
here today.
Yesterday, we heard from the Congressional Budget Office
Director, Dr. Doug Elmendorf, on the budget and economic
outlook. His testimony and answers to our questions provided an
extremely helpful look at the issues facing this community at
the macro level. And based on what he said about our fragile
economy, it is very clear to me the highest priority of this
committee should be broad-based economic growth and job
creation as we work to responsibly tackle our deficit and debt
challenges.
But as we work to put together our pro-growth, pro-middle
class budget resolution over the coming weeks and months, I
feel very strongly we cannot just limit ourselves to
discussions of numbers and charts and trajectories, though
those are important. We need to make sure we are hearing from
the families and communities across the country who are
impacted by the decisions that we make here in
Washington, D.C. They need to have a seat at the table.
Their values and priorities need to be represented and their
stories need to be heard.
That is what today's hearing is about, and I am going to
work every day over the coming weeks and months to make sure
families across our country are heard loud and clear in a
budget process that is too often limited to politicians and
bureaucrats.
But before I ask others to share their stories today, I
wanted to start off by sharing mine, not because my story is
unique--it is not, similar stories are told by millions of
families across our country--but because it has shaped who I am
and how I approach this issue, and I think stories like it have
a place in this conversation.
I was born and raised in a small town, Bothell, Washington,
in a big, loving family with six brothers and sisters. I was
one of the oldest and we were all very close. My dad ran a
small five-and-dime store on Main Street and everyone in my
family worked and helped out at that store. We did not have a
lot, but we never felt very deprived.
But when I turned 15, things started to change
dramatically. My dad, who was a World War II veteran, was
diagnosed with multiple sclerosis. In a few very short years,
his illness got so bad that he could not work anymore, and my
mom, who had stayed home to raise seven kids, had to take care
of him, but she also needed to get a job so she could support
our family. She found some work, but it did not pay very much,
and not enough to support seven kids and my dad, who had
growing medical bills, and suddenly we found ourselves as a
family having fallen on very hard times.
Now, fortunately for all of us, we lived in a country where
the government did not just say, tough luck. It extended a
helping hand. Because our nation honored the commitment it made
to the veterans who had served it, my dad got some of his
medical care through the VA. But for some time, for a few
months, my family had to rely on Food Stamps. They were meager,
but they kept food on our table at a very critical time.
To get a better paying job, my mom needed some training.
Fortunately, at the time, there was a government program that
helped her attend Lake Washington Vocational School, where she
worked very hard and got a two-year degree in accounting and
eventually a better job.
My twin sister, my older brother, and I were able to stay
in college through all of that because of student loans and
support from what later came to be called Pell Grants. And all
of us kids were able to stay in school because we were lucky
enough to have strong local public schools.
My family got by with a little bit of luck and we pulled
through with a lot of hard work. And while I would like to say
we were strong enough to make it on our own, I do not think
that is really true. Today, my family may have been called
takers, not makers. Others may have said the programs we used
to keep our heads above the water were immoral. Presidential
candidates may have told their donors we were in the 47 percent
who could not be convinced to take personal responsibility or
care for our lives.
But I know the support we got from our government was the
difference between seven kids who might not have graduated from
high school or college and the seven adults we have grown up to
be today, all college graduates, all working hard, all paying
taxes, and all of us contributing back to our communities. In
my book, the taxpayers got a pretty good return on their
investment.
Now, I do not think government can or should solve every
problem. People do need to take responsibility for their
actions. Families need to take care of each other. Private
businesses need to drive our economy. And communities and
religious organizations need to play a strong role.
But America has always come together as a nation to stand
with families like mine, to invest in our people and our
communities, to plan for the future and to build the most
robust middle class the world has ever seen.
So that is the prism that I view our nation's budget
through and it is what guides me as I work in the Senate and on
this committee to impact the choices that we make. I rely on my
story, my experiences, and the experiences of people in
communities across the country, people like Katyanne Zink, a
young woman who is in this room today. I just had a chance to
talk with her a few minutes ago. She grew up in low-income
neighborhood in New Hampshire with parents who did not go to
college themselves but who desperately wanted the best for
their children. She had a great public school teacher who
helped guide her into a TRIO program, and only because of Pell
Grants and student loans was she able to go to college, earn
her degree in nursing, and give back to her community as an
urgent care nurse in her home State. She is a proud homeowner,
as well.
Our witnesses today also have stories to share with this
committee about the impact of Federal budget decisions. Tara
Marks will be sharing her story about the support she received
to get back on her feet after circumstances pulled her and her
son out of middle class life.
Patrick Murray is an Operation Iraqi Freedom veteran who
will tell us about the opportunities he was able to access
after he sacrificed so much for our country.
Also, Robert Greenstein from the Center on Budget and
Policy Priorities will share his expertise on how budget
decisions impact the lives and the opportunities of families
throughout our country.
And Senator Sessions will introduce his witnesses in a
minute. He is invited to make his opening statement. But I also
want to thank Secretary Gary Alexander from the Pennsylvania
Department of Public Welfare and Robert Woodson, Senior, from
the Center for Neighborhood Enterprise for joining us here
today.
Two weeks ago, I also rolled out an online platform called
``My Budget'' for members of the public to share their stories
and ideas and priorities with me and the committee. I have
already received over 2,000 responses, and I encourage everyone
watching today to go to our site at budget.senate.gov/
democratic to weigh in, because as we work to write our pro-
growth budget resolution, I am going to make sure it represents
the values and priorities of the people we represent. That is
the most important thing we can do here on this committee.
When I go back to my home State of Washington, my
constituents tell me they want a budget that works for people
like them. They want their government to be there when they
need some support and to help make sure they have the
opportunity they deserve to succeed and do better for
themselves and their families. In other words, they want what
my family had, what Katyanne and Tara and Patrick and millions
of others had.
Yes, our constituents want us to take responsibility and
tackle our deficit and debt, and they certainly do not want to
hand the bill to their kids. But they want that to be done in a
balanced and fair way that does not sacrifice jobs and
opportunity and broad-based economic growth. And at a time when
so many families are still fighting their way back from the hit
they took in the great recession, when so many workers are
still struggling to find work, stay in their homes, and put
food on the table, and when our tax code remains riddled with
loopholes and giveaways for the wealthiest Americans and
biggest corporations, I think most families agree that while
every program should be examined and made more efficient if it
is not working as well as it should, and we certainly should
make sure we are weeding out fraud and abuse in defense as well
as domestic programs, it does not make sense to focus
exclusively on slashing programs that help the neediest,
especially the ones that have expanded to support struggling
families and that will shrink to their historical norms once we
get this economy back on track. And I think Americans agree, it
is absolutely wrong to call on the middle class and seniors and
most vulnerable families to bear the burden of deficit
reduction alone.
That is how I view this issue, as we work to replace
sequestration in a balanced way over the coming days, and I
have to say, it was disappointing this morning to hear from a
number of Republicans that they did not want to replace
sequestration and avoid those devastating cuts that are coming
at us. So I hope that we can change that and work to replace
those cuts at a time when our country is really struggling
financially.
This is how I am approaching the pro-growth, pro-middle
class budget resolution that we will be working on in the weeks
ahead, and I think this committee hearing will be very
instructive in that.
So I thank again all of our witnesses and Senators who are
here today, and 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. It is a
delight to be with you and I appreciate your leadership.
This is an important hearing. I am glad we are having it.
We need to take another opportunity now, since 1996, to review
our safety net programs and see how they are working and see if
we can make them better. We know that welfare now makes up 83
programs that amount to as much as $750 billion a year. That
larger than Medicare, Social Security, and the Defense
Department budgets.
I would just say on the question of sequestration, half of
the cuts fall on one-sixth of the Federal budget. That is the
Defense Department. That is the hardest hit agency by far. I
think it is doing damage to that Department. Republicans in the
House have twice passed legislation--to alter the sequester,
find other areas of the budget that received no cuts, and fix
it. So we favor fixing the sequester, but we do not favor
increasing spending or increasing taxes. We just raised taxes.
We have a great American tradition of helping those in
need, but we also have a great American tradition of self-
reliance and independence and we want to encourage both of
those, and Federal policy should do both of those.
So we are going to hear from Secretary Alexander from
Pennsylvania who really has a first-hand experience as a
manager in the various Federal welfare programs and he will
show how we have drifted away from the reforms in 1996 to now a
complex welfare bureaucracy that tends to penalize work and
promote dependency.
Bob Woodson from the Center for Neighborhood Enterprise
came down to one of Alabama's poorest counties with his group
and had some fabulous ideas to help poor people improve their
lives. Thank you for your contributing to Alabama, Dr. Woodson,
and I was pleased to have a visit with you when you were there
and get your understanding. And I know how deeply you care
about poor people, how deeply you care about helping them
advance and move out of poverty and dependency and we look
forward to hearing you and appreciate your lifetime of service
in that regard.
In his State of the Union Address, the President suggested
last night again that Republican policies are focused on
protecting the rich and not sufficiently on helping those in
need, but I do believe that his policy agenda is not being
helpful. I believe his policy agenda has the tendency to not
create the kind of growth and upward mobility that we
absolutely must have in America. He talked again and again
about helping people, suggesting that we should extract more
wealth from the economy and hand it to people and that this
would somehow help them. Sometimes, as you indicated, Madam
Chairman, this is critical. People's lives are in turmoil. They
are in danger. They have problems. And it can be a life-saving
event for them to have Federal benefit programs. But I do not
think it amounts to an economic stimulus. I do not think it
amounts to the kind of growth we want. It is a temporary
assistance that is part of our tradition and we will continue.
So our goal is to rescue Americans that are being entrapped
in the world of dependency. That is happening today. Some
people might deny that, but I think anybody that works in this
area and really cares about poor people have seen this
tendency. It was lessened with the 1996 Act, but it is
returning full force.
Our goal is to help more of our fellow citizens find good-
paying jobs sos that they can support themselves and their
families, jobs that will allow them to progress, advance, and
get themselves promoted. Our goal is to strengthen human
networks of family, charity, and community.
In 1965, economist James Tobin wrote, quote, ``It is almost
as if our present programs of public assistance had been
consciously contrived to perpetuate the conditions they are
supposed to alleviate.'' If there is much truth in that, and I
think there is, that is a real serious charge. History, I
think, has proven him too correct.
Since President Johnson's Great Society, the Federal
Government has spent $15 trillion on the War on Poverty, yet
poverty remains largely unchanged and has even increased during
the last several years. During the last several years, we have
also seen an historic surge in Federal poverty spending.
Welfare is now the single largest item in the budget.
It is time to return, I think, to the moral principles of
the 1996 welfare reform. That reform was guided by the
principle that, over time, unmonitored welfare programs were
damaging not merely to the Treasury, but to the recipient.
Today, like 1996, opponents of reform labeled any attempts to
change the way these programs operate as cruel, uncaring, as
dangerous. But what is actually cruel and uncaring is to oppose
reforms that will help lift millions of Americans out of
poverty.
Consider the results of the 1996 reform. There were so many
dire predictions at that time. But Ron Haskins of the Brookings
Institute reported this. ``Until the mid-1990s, never-married
mothers seldom worked outside the home, had poverty rates of
over 60 percent, and were at least five times more likely than
married couples to be poor. Between 1996 and 2000, after the
passage of the bill, the percentage of never-married mothers in
jobs increased by about a third, while the poverty rate for
those mothers and their children declined by about a third. For
the poorest of the poor, this large improvement based on their
own efforts was unprecedented. Since then, two recessions have
reduced these gains somewhat, yet even in the worst recession
since the depression, more are employed and they are less poor
than they were before the 1996 law.''
So, unfortunately, the gains in 1996 have been slipping
away from us. Welfare spending has increased every year,
regardless of whether the economy was growing or declining.
Welfare spending has continued to go up. Based on CBO data,
welfare spending is projected to increase 80 percent over the
next decade. Let me repeat. Spending on means tested Federal
aid will increase another 80 percent over the next ten years.
Including State contributions, we already spend a trillion
dollars a year on Federal means tested poverty programs, more
than any other program in the Federal budget.
Converted to cash, if you spent that money--we spend enough
money on welfare to mail every household in poverty a check for
$60,000 a year. Can anyone honestly say this huge sum of money
is all being wisely and effectively spent, that no improvements
are needed?
Spending on Food Stamps has more than quadrupled since
2000, and the Federal Government actively promotes Food Stamps
to those who say they do not need them. The USDA created a
Spanish language radio ad in which an individual is pressured
to enroll against her will. She protests, ``I do not need
anyone's help. My husband earns enough to take care of us.''
Eventually in the video, she succumbs and signs up.
This is only one of many controversial promotions where
individuals are pressured, actually, to enroll, even if they
insist they do not want or need the program. One recruitment
worker was even given an award for overcoming ``mountain
pride'' and had language to use to try to encourage people who
say they do not need it to overcome their pride and get them to
accept these benefits.
The agency laments that communities loose out when people
do not choose to go on Food Stamps. Quote, ``Each five dollars
in new SNAP benefits generates almost twice that amount in
economic activity for the community. Everyone wins when people
take advantage of benefits to which they are entitled.'' Well,
it does not increase the economy like that. I mean, how silly
is that? We could just give everybody everything and the whole
economy would boom, I suppose.
So, clearly, we need to think more about the social and
economic consequences of encouraging people to accept welfare
if they do not want it and do not need it. If they need it, we
want them to have it. No longer can we measure and should we
measure compassion by how much we spend on poverty, but how
many people we lift out of poverty. I think that is what Mr.
Woodson has given his life to.
One consequence of the massive surge in welfare spending
has been the creation of a growing penalty for working. Experts
have dubbed this the welfare cliff. Welfare recipients reach a
point, actually reach a point where every additional dollar
earned can result in more than a 50 percent reduction in net
income through lost benefits and taxes. CBO estimated that for
every dollar in additional earnings through work, many
households on welfare stand to lose 50 cents to either taxes or
lost Federal benefits. With a high penalty to earning more by
working, CBO finds that a strong incentive is created to,
quote, ``put in fewer hours or be less productive.''
A paper presented to the American Enterprise Institute by
Secretary Alexander, from whom we will hear, found that because
of the stacking of welfare benefits, many individuals receiving
welfare stand to lose financially by increasing their income.
That is an actual analysis that we need to examine. In one
example, a study demonstrated how a single parent with two
children earning $29,000 would have a net income, including
welfare benefits, of $57,000. Therefore, the individual would
need annual earnings to jump from $29,000 to $69,000 pre-tax to
maintain the same standard of living.
Madam Chairman, I grew up in the country. I recently had
some work done on the little house I grew up in. It had 900
square feet. It seemed bigger at the time. It never had central
air and heating. The fireplace was where we had our heating. My
father ran a country store and later struggled with a small
farm equipment dealership. I was taught to work hard. They did
their best. Pell Grants did help me in college. I grew up with
people who did not get to go to college, had less money than we
did, and I think I understand something about human beings who
work hard and try to do the right thing and how to help them
improve.
So I guess I just would say, let us work together, bring
our values to the table, and see if we cannot make this system
work better for America.
Chairman Murray. Thank you very much.
We will now turn to our witnesses and then we will turn it
to questions from our Senators.
I am going to begin with Tara Marks, if you want to share
your comments.
STATEMENT OF TARA MARKS, ADA, OHIO
Ms. Marks. Good morning, Chairwoman Murray and Senators of
the Budget Committee. I want to thank you for allowing me to
speak about the impact Federal programs have had on my family.
I know from personal experience the importance of SNAP and
other Federal programs that provide a safety net. SNAP and WIC
were there for me and my son Nathan when we needed help. I
never thought I would need to ask the government for help
putting food on the table. I am thankful that these programs
were available so that I could focus on getting us out of
poverty.
While I was pregnant with Nathan, his dad and I decided I
would be the stay-at-home parent. The arrangement was working
well until his father abruptly left me and my eight- month-old
baby. He took everything. I knew that I needed to go back to
school so that I could someday provide for the two of us and
raise Nathan not in poverty. Student loans, Pell grants made
that education possible.
We lived on credit cards and the grace of God for many
months. I started having trouble affording food. The trips to
the grocery store became a game of what can I afford. I only
had a few dollars per trip, so I began eating smaller portions
so that Nathan could have nutritious meals. This was not a
question of availability of food, but affording it. I did not
live in a food desert, I lived in a food mirage.
One weekend in particular was just awful. That was the
weekend I knew I had to ask for help. I picked Nathan up from
day care, and as I was driving home, I thought out loud, what
is for dinner? I knew the pickings were slim, but I did not
realize how little we had in the house. When we got home, I had
to ration food. I realized I had just enough in the house for
Nathan. Nathan ate and I did not.
I was studying for an exam, but was distracted by my
hunger. I had not been eating well for months, so the absence
of food that weekend caused me to pass out. Come Monday
morning, I was so lightheaded that I had trouble maneuvering
through rush hour traffic. I cried the entire car ride. Once we
arrived at the day care, I swallowed my pride and asked for
help. I was put in touch with a local food pantry. I was told
that I should apply for SNAP benefits because I had no income.
The first time I applied for SNAP, after waiting for hours,
I was urged by the caseworker to withdraw my application. I
felt as if the message was, I did not deserve food.
I continued to receive food from the local pantry. I was
very grateful. But the food was very limited and I could only
receive it twice a month. I managed, but wanted to pick out
ingredients for recipes given to me by my grandmother. I wanted
Nathan to grow up enjoying Sunday dinners like I did as a
child.
One day at a parenting meeting, a woman from Just Harvest,
a local anti-hunger organization, spoke to us about SNAP. She
offered to help me with the application. I went back to DPW and
this time I was given SNAP benefits. I cannot put into words
the feeling of relief that came over me. I felt like a more
responsible mom. I knew I could now provide meat and fresh
produce for Nathan.
I still remember that first trip to the grocery store. I
was able to hand-pick tomatoes, apples, bananas, and other
produce. Because of SNAP, I was a part of the regular food
purchasing economy once again. I could shop just like other
mothers. I am immensely grateful for SNAP, but I have to agree
with the recent Institute of Medicine study. SNAP benefits are
crucially valuable, but not enough to get most families through
the month.
I was able to lift Nathan and myself out of poverty by
finishing school. SNAP was a critical factor in my success.
SNAP benefits allowed me to focus on school. I no longer
stressed over purchasing food. I graduated from community
college, went on to receive my Bachelor's and Master's degree.
I worked for Just Harvest as a Co-Director of Policy and
Communications. I am married today with a wonderful supportive
husband and three healthy children, Nathan, 12, Christian,
eight, and Tatum is four. My husband is working and I am
currently a law student in Ohio. Through the help of Stafford
loans, I plan to graduate in 2015.
I do not like thinking about those earlier days. For the
longest time, I would not tell anyone that I went hungry or
that I received SNAP benefits. When I told Nathan I did not eat
to ensure that he would not go without, he hugged me and said,
``I would have shared my food, Mama.'' I asked him if I could
share our story. He nodded his head and said, ``No mama should
ever go hungry.''
I know that my experiences of hunger and poverty are not
unique. There are many who fall on tough times and rely on SNAP
to put food on the table.
In conclusion, I am very thankful that SNAP was there for
us. I urge the committee and the Congress to take stories like
mine into account as you put together your budget. I ask the
Congress to continue to invest in life-saving programs that
families like mine all across the country can get the support
they need to get back on their feet, back on track, and back
into a job. They were there for me when I needed it most and
they should not be cut now when so many others are struggling
in this tough economy.
I am here to keep my promise to Nathan. I am asking you to
fund SNAP and protect it from cuts so that no other mama,
child, dad, or grandparent goes hungry.
On behalf of my family and many other families, I thank you
for your time and consideration.
[The prepared statement of Ms. Marks follows:]
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Chairman Murray. Thank you very much.
Pat Murray.
STATEMENT OF PATRICK MURRAY, ARLINGTON, VIRGINIA
Mr. Murray. Chairman Murray, Ranking Member Sessions,
members of the committee, I would like to thank you for the
opportunity to share my experience and concerns as a retired
Marine and student veteran.
I grew up in Rhode Island and joined the Marines at 19
years old while going to the University of Rhode Island. I had
two goals in life that both revolved around service, to join
the Marines like my grandfather and afterwards to become a
firefighter like my father. I had taken all the certifications,
passed all the tests, and gotten hired on the North Kingstown
Fire Department for their January 2006 class. That would have
to wait, because I was deploying to Iraq in December 2005.
On September 4, 2006, while on patrol in Fallujah, the
vehicle I was in hit an IED. I was severely wounded in the
blast, resulting in the amputation of my right leg above the
knee. I spent the next year recovering from my injuries and
learning how to perform day-to-day tasks with a new prosthetic
leg at Walter Reed Army Medical Center. At Walter Reed, I
quickly realized that my career as a fireman was over before it
had even begun.
While in the hospital, I met a peer mentor, Bob Nillson.
Bob is a former Marine who served in Vietnam, so we quickly
bonded through our shared experiences. He helped me realize
that I had to change my direction in life and guided me towards
a career with Turner Construction Company, where for the next
five years I was part of the team that built the Fort Belvoir
Community Hospital.
Turner also gave me the opportunity to occasionally visit
Walter Reed as a peer mentor myself. This experience helped me
realize what I really wanted to do. I was fortunate to have
enough help and assistance in overcoming my difficulties after
losing my leg. I wanted to help veterans in similar
circumstances, and in order to do that effectively, I was going
to need a college degree.
I always had the itch to go back to college and finish my
undergraduate degree, but before the Post-9/11 G.I. Bill, it
was not financially possible. I had to stay near
Washington, D.C., because this is where I had access to my
prosthetic care. As some of you may know, changing doctors is
difficult. Changing prosthetists is even harder. I understand
other programs would have helped me get through school, but
without the Post-9/11 G.I. Bill living stipend, I could not
afford to live independently in this area and focus on
finishing my degree full time.
In September, I started classes at Georgetown University
and made the Dean's List in my first semester. My second
semester has just started and I am on track to graduate in
about two years, where after that I could pursue a career in
veterans' advocacy.
So why is my story important to the Budget Committee? I am
here today as an example of a veteran whose life plans were
changed because of my military service. But thanks to a variety
of programs available to me, I was able to adapt and overcome.
I can return to school in order to better myself and those
around me.
When I arrived at Walter Reed, I knew my life had changed
forever. Fortunately, thanks to programs funded through this
committee, whether through the National Defense Authorization
or the VA military construction budget, transitioning service
members in situations like mine have the tools to succeed and I
have the opportunity to sit here before you today and share my
story.
Offering veterans the tools to properly transition back to
civilian life, furthering their education, and ultimately their
careers, is a benefit not only to the individual veteran but to
our country as a whole. Continuing to make these programs a
priority fulfills our commitment to the men and women who
volunteer to serve in harm's way. Do not get me wrong. We
understand the risks associated with serving in the military
during a time of war. But knowing that the country is prepared
to care for us when we come home is critical to morale and the
overall welfare of our voluntary military.
I want to go beyond the cliche that these programs are a
cost of war. Nobody denies that. But these programs are also an
investment into proven leaders. Just look at my grandfather's
generation. The late Senator Inouye wanted to become a surgeon,
but lost his arm saving his buddies in World War II. The
country invested in veterans like him who overcame life-
changing injuries and found other ways to serve the country
they loved. I am confident that my generation can do the same.
But as our troops come home from Afghanistan, we have to
continue to support them in every way possible.
I recognize this committee has difficult decisions to make
on the fiscal future of our country. We need to continue
investing in programs like peer mentorship, physical and mental
health care, and education programs like the Post-9/11 G.I.
Bill. I also recognize there is room for improvement in some of
the existing services. There needs to be a serious upgrade in
the quality of VA employees that are providing service to our
veterans, and there needs to be significant improvement in the
military and VA's recordkeeping system.
Chairman Murray, Ranking Member Sessions, members of the
committee, thank you for this opportunity. I look forward to
answering any questions you may have.
[The prepared statement of Mr. Murray follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Murray. Thank you very much. We really appreciate
it.
Bob Greenstein.
STATEMENT OF ROBERT GREENSTEIN, PRESIDENT, CENTER ON BUDGET AND
POLICY PRIORITIES
Mr. Greenstein. Thank you. Good morning.
The Bowles-Simpson Report made it a core principle that
deficit reduction should not increase poverty or harm the
disadvantaged and largely shielded core programs for the
disadvantaged from the cuts it recommended. The Gang of Six
plan did so, as well.
Our current system of supports for low-income families
surely is not perfect and can be strengthened, but it does a
great deal of good. The best data from the Census Bureau show
that the safety net cuts poverty nearly in half compared to
what it otherwise would be.
Recently, a comprehensive review was conducted by a number
of the leading scholars in the field of all of the research on
the impacts of safety net programs. It took into account
behavioral effects, such as impacts on work. And it found that
one of every seven Americans, more than 40 million people,
would be poor without the safety net, but are lifted above the
poverty line because of it. For example, Census data showed
that the Earned Income Credit and the Child Credit lift nine
million people in low-income working families above the poverty
line, including five million children.
Two questions often asked are the impact of the safety net
on work and on our long-term fiscal problems. The major piece
of research, the leading review of the research in the field
that I just mentioned, reviewed the impact of the safety net
programs on work and found that while it is not zero, it is
small and was far outweighed by the big reduction in poverty
that resulted.
This is not unrelated to the fact that over the last
several decades, we have had a big change. The U.S. has moved
heavily towards what analysts call a work-based safety net.
Cash welfare assistance for families without earnings has
diminished dramatically. Support for the working poor has
increased. Over 90 percent of all Federal spending on
entitlements today goes for people who either are not expected
to work because they are elderly or disabled or people who are
members of working households. And most of the other nine or
ten percent is for things like unemployment insurance and
Social Security benefits for widows and children who have lost
a parent.
There is also the question of cost. Senator Sessions cited
high figures for low-income programs. Those figures are
dominated by health care. We all know that we have rising costs
for all health care programs, including Medicaid, as a result
of the aging of the population and rising health care costs.
But let us examine costs for all other means tested
programs outside of health care. When we look at that, we find
the following. In 2011, total health care costs for means
tested entitlements outside health care equaled two percent of
GDP. Now, that was 50 percent higher than the average over the
previous 40 years. But that increase was a result of the
recession and temporary increases, which are expiring, enacted
in the Recovery Act.
So let's look at the new CBO report that just came out. It
shows that costs for means tested programs other than health
care will decline all the way back to the prior 40- year
average of 1.3 percent of GDP by 2020, and that is just
entitlements. Low-income discretionary programs are slated to
decline as a share of GDP. Total means tested spending outside
health care, mandatory and discretionary combined, will decline
over the course of the coming decade to a share of GDP below
its prior 40 percent--40-year average.
I would also briefly note that I think the $60,000 figure
Senator Sessions mentioned is really not meaningful. Half of
the money that goes into producing the $60,000 estimate is
payments to doctors, hospitals, and nursing homes for health
care. A lot of this is payments for people in nursing homes who
are not counted as poor because the poverty count does not
include people in institutions. All of that money is taken and
divided by households who are poor to push up the number.
Similarly, a lot of that spending is for people who are hard
pressed but are above the poverty line, including people lifted
out of poverty. All that money is then divided by people left
below the poverty line. We have actual Census data on the
average assistance per family of people who are poor, what they
really get, and it is far, far below $60,000.
Finally, it is important to look at some of the research on
the impacts of these programs beyond income and poverty. A
strong body of research finds, for example, that the Earned
Income Credit substantially increases work, and the research
finds that the expansions of the EITC in the 1990s had as large
an effect in inducing single mothers to go to work and leave
welfare as the changes in the 1996 welfare law.
Important recent research finds that programs that
supplement the income of low-income families, like the Earned
Income Credit and the Child Credit, boost children's school
achievement and are associated with increased work and earnings
in adulthood. New research on Food Stamps finds that children
who had access to Food Stamps in early childhood and whose
mothers had access during pregnancy had improved health
outcomes as adults years later, and that the women who had
access to Food Stamps as young children did better in
employment, poverty status, and high school graduation later in
life. And the landmark study on Medicaid, co-led by a former
member of President George W. Bush's Council of Economic
Advisors, found very substantial health impacts from Medicaid.
And another study examining Medicaid expansions in three States
found reductions in mortality.
So there are major effects here. They affect school
achievement, earnings, health care. And I would urge the
committee to follow the Bowles-Simpson and Gang of Six
principles and the Hippocratic Oath of doing no harm as you
face the difficult task of deficit reduction.
[The prepared statement of Mr. Greenstein follows:]
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Chairman Murray. Thank you very much.
Secretary Alexander.
STATEMENT OF HONORABLE GARY D. ALEXANDER, SECRETARY,
PENNSYLVANIA DEPARTMENT OF PUBLIC WELFARE
Mr. Alexander. Thank you, Madam Chair, Ranking Member
Sessions.
I would like to start with a quote from the Concise
Encyclopedia on Economics. ``The United States welfare system
would be an unlikely model for anyone designing a welfare
system from scratch. The dozens of programs that make up the
system have different, sometimes competing goals, inconsistent
rules, and overlapping groups of beneficiaries. Both the hidden
and known cost of the system, which lacks the reciprocity of
earned benefit social insurance programs like Social Security
and Medicare, places unsustainable burdens on the Federal
budget and is creating a fiscal migraine for the States.
Welfare programs represent a complex web of multiple Federal
agencies acting in a manner that are rarely coordinated.
Moreover, welfare recipients are not generally well served.
Yes, advocates for specific programs will always find isolated
examples of a person or household in need and make a case for a
particular assistance program. However, if we take a more
informed view beyond the immediate emotions of selected
anecdotes, for the majority of families and individuals, we
will find a system that entraps parents and children in
dependency while not improving their overall well-being. The
system needs reform.''
Like many other States, the Commonwealth of Pennsylvania is
struggling with the unprecedented growth of Medicaid and other
public welfare expenditures which constitute increasingly
larger portions of the Commonwealth's budget. Today, that cut
is at 43 percent of the State's budget, and at its current
growth rate, it will be over 50 percent of the State's budget
in the next ten years, crowding out other important programs
like education and other needs like transportation.
Look at one specific program, for example. A common
misperception is that economic conditions were solely
responsible for the dramatic increase in the Food Stamp
caseload. Empirical data shows otherwise. The percent of the
United States population on Food Stamps has grown despite a
reduction in employment prior to the last recession. The forces
at work are policy and statutory changes that were made, one
being the farm bill in 2002, which expanded categorical
eligibility well before the recession.
The expansion of any program, whether Food Stamps or
Medicaid, also increases the opportunity for fraud and abuse.
Please hear what I am saying. Not every recipient on welfare
cheats. However, benefit systems run by bureaucracies attract
certain people, both on the provider side and the recipient
side, who will find ways to fraud and abuse the system.
For example, in 2009, 178 convenience stores in
Pennsylvania were banned from the Food Stamp program, and we
have estimated that more than a quarter-billion dollars in Food
Stamp payments that should not have been made over the last few
years.
What does this translate to? In Pennsylvania today, every
1.8 privately employed persons supports one person on the
welfare system.
Let us move to outcomes. It has long been understood that
the welfare system can trap recipients in poverty. The model
presented today here is based on the actual rules of receiving
benefits in Pennsylvania. Other States will have similar
results because these are driven by Federal rules. Sample runs
of the model demonstrate that when welfare assistance benefits
are added onto net income, not one but several welfare cliffs
emerge. A welfare cliff is defined as a point along the range
of increasing gross income where the sum of net income and
welfare assistance benefits decrease. These are points where a
household would be worse off financially if that household were
to increase its gross income. Worse off financially is measured
by the sum of net income and welfare assistance benefits.
For example, as Senator Sessions said earlier, a welfare
recipient with two children earning gross income of $29,000
would receive the sum of $57,327 in net income and welfare
assistance benefits if you count the value of the Housing
Choice Voucher, Food Stamp, day care subsidies, and medical
assistance. The same household would have to earn a gross
income of $69,000 with a net income of $57,000 to enjoy a
comparable standard of living. In other words, if the welfare
recipient were earning a gross income of $29,000, the household
would turn down an opportunity to earn a gross income of
$30,000 because the benefits begin to fall off, making that
household financially worse. Therefore, the recipient gets
trapped at the gross income of $29,000. A scenario like this
might make a hard-working American making a median gross income
of $50,000 per year think about applying for welfare benefits.
Where do we go from here? The only way to solve the problem
is to reconstruct and redefine the entire Federal means tested
welfare benefit program system. There is no other way. States
need flexibility, either through more block grants or through
waivers where they can combine programs, braid funding, so that
the welfare cliff is moved in an upward slope and that
individuals will be incentivized to work instead of staying on
the system.
Thank you very much.
[The prepared statement of Mr. Alexander follows:]
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Chairman Murray. Thank you.
Mr. Woodson.
STATEMENT OF ROBERT L. WOODSON, SR., PRESIDENT, CENTER FOR
NEIGHBORHOOD ENTERPRISE
Mr. Woodson. Thank you, Madam Chairman. Senator Sessions,
it is good seeing you.
Like you, Madam Chairman, I am from Philadelphia and my dad
died when I was nine, leaving my mother to raise five children
in a very troubled neighborhood. Because my father died from
war-inflicted wounds as a veteran, we were entitled to
government assistance. But I dropped out of high school at age
17 and went into the military and completed my GED and then
went to college on the G.I. Bill of Rights. Then I got involved
in the Civil Rights movement, leading demonstrations in my
native Philadelphia and the surrounding area.
I realized that many of the people who suffered and
sacrificed most for civil rights progress did not benefit from
the change because their problems were not just race, but also
poverty. I began to work at a juvenile jail as a correction
officer and also as a trained social worker in the child
welfare system. It was there that I realized how we were
beginning to injure people with the helping hand.
Yes, there are people who are poor and who just need a hand
up, like your parents and the other witness. But otherwise,
their attitudes and values are intact, and they use the welfare
system as it was intended, as an ambulance service and not a
transportation system. But for those who are poor because of
the chances that they take and the values that they exercise,
spending on them can injure with the helping hand.
In a recent article in the New York Times, many politicians
on both sides were shocked to learn that parents of Appalachian
children were refusing to send their children to literacy
classes because they would lose $600 in SSI payments. So the
future of the children was sacrificed for the short-term
interests of the family.
Colbert King, certainly no conservative, writing in the
Washington Post recently said the solution to the poor is not
to integrating and funding more programs, but creating a civic
infrastructure focused on building stronger families, fathers
living at home married to mothers of their children.
In other words, Washington, D.C. leads the nation in 21
separate categories of poverty expenditures, and yet we are
dead last when it comes for outcomes for children. So we cannot
equate how much we spend on the poor in terms of how much we
help the poor. We must reform some of these programs that are
really discouraging people from moving forward. A member of my
own family is an example.
Before welfare reform, my niece, who was in her 30s, had
been on welfare for many years. I spent thousands of dollars
trying to discourage her dependency and give her an opportunity
to move toward self-sufficiency. I obtained an apartment and a
job for her in Arlington, Virginia, and I went to pick her up
in this very dangerous public housing project in Philadelphia.
My nephew, told me, who was a police officer, told me not to go
up in there because it is so dangerous. But I went to pick her
up and at two in the afternoon she was in a nightgown with a
beer can in her hand. She would not leave because she knew that
she could depend on welfare. She could depend on daycare for
her child. Unfortunately, many years later, I was on a juvenile
justice panel with a judge who informed me that he had
sentenced her son, and my great-nephew, to prison. So she and
others like her are trapped in this system. We have other
programs, again, well intended, but noble intentions cannot
always lead to noble outcomes.
My organization supports 2,500 grassroots groups living in
39 States. These are the people who are providing moral
guidance and character coaching to people who are poor, because
for many of them, redemption and moral revitalization is a
prerequisite to being helped. It is important to support
structures like this.
But instead, we support programs like the one in Colorado
and other places that we call "Bunks fo Drunks." Homeless
alcoholics are put in these fine hotels at a cost of $4,000 per
person per month and they can drink in their rooms. But this is
because we are looking at it as a medical problem.
We are also injuring people in foster care and adoption.
For instance, we spend $75 billion on children who are in
foster care where there are disincentives for them to reunite.
Many of these providers will not reunite children with their
parents because it would injure their cash flow. There are
endless other examples of how we are injuring people with the
helping hand and rewarding behavior that is self-destructive.
My recommendation is that we support institutions like we
did in Alabama, Lowndes County, where we were instrumental in
the development of two industrial parks. They now have the
county's first daycare and recreation center. So it is really
not just aiding individuals but also supporting structures that
produce jobs and providing incentives so people are not
discouraged from work because they are getting rewarded.
Thank you.
[The prepared statement of Mr. Woodson follows:]
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Chairman Murray. Thank you very much. Thank you to all of
our witnesses today, and I will begin with my questions. We
will each have five minutes and we will go in order of
appearance and I appreciate everybody keeping to their five-
minute time limit.
Ms. Marks, I want to start with you. Thank you so much for
being here today. I know it is not easy talking about facing
some of the challenges like the ones you have seen, and when I
hear stories like yours, it makes me very concerned about the
direction some of our members of Congress want to take us in.
House Budget Committee Chairman Ryan last year released his
budget that would have reduced Federal support for SNAP by 17
percent, which could lead to more than eight million people
being removed from the program. I wanted to ask you where you
thought you would end up if that Federal safety net had not
been there for you when you needed it so badly.
Ms. Marks. I would still be in poverty, ma'am.
Chairman Murray. You would still be in poverty?
Ms. Marks. Yes.
Chairman Murray. Do you think you would have finished
school?
Ms. Marks. No. No, because I knew that I needed to be
there, but I was not able to be able to afford it outright
myself. So I was very much dependent on student loans and Pell
Grants to get me through.
Chairman Murray. Mr. Greenstein, what sort of effect would
a cut like the one Chairman Ryan proposed have on American
families and communities and the economy, and what do you think
about the idea of block granting programs like Medicaid and
SNAP and housing?
Mr. Greenstein. Well, with regard to Medicaid and SNAP in
particular, there is both the effect on the individual
families, but there is actually also a significant adverse
effect on the overall U.S. economy. The reason is that those
programs are automatic stabilizers. They automatically grow
when the economy turns down and put more purchasing power into
the economy and they come back down when the economy recovers.
The Congressional Budget Office actually noted in a report
a couple years ago that increases in Food Stamp benefits during
economic downturns were, along with unemployment insurance, the
two most effective forms of stimulus in terms of bang for the
Federal buck because virtually all of the money is then spent.
In terms of the impact on the families, I would be
extremely concerned. I remember the period in the late 1960s
when each State set its own rules in Food Stamps. Some States--
South Carolina--cut off people at 50 percent of the poverty
line. It was in that period that, on a bipartisan basis, we had
a team of medical researchers that went into Appalachia, the
Deep South, and elsewhere, and they found in a report that
shocked the nation rates of childhood hunger and malnutrition--
incidents of child hunger and nutrition-related conditions akin
to those of some third-world countries. They then went back ten
years later, after we went to national standards in Food
Stamps. It was President Nixon who led that effort. And they
found dramatic improvement.
So I think it would be a major step backward to move from
the kinds of national standards that have served us well since
President Nixon's day.
Chairman Murray. Thank you.
Ms. Marks and Mr. Murray, I have to say I was really
impressed by both of your stories and your testament. You
mentioned something that I often hear from people who have a
government investment in them that helps them get out of
poverty and into middle class and that is giving back again to
the community that helped you when you needed it the most. And
I imagine that most taxpayers would look at both of you and
think that they received a pretty solid return on their
investment.
Can either of you talk a little bit about how you have been
able now to contribute back because of the investment the
Federal Government has given to you? Mr. Murray.
Mr. Murray. Ma'am, thanks to the military health care
system and significant upgrades in prosthetic technology
through added funding, I was able to quickly transition back to
somewhat of a normal lifestyle. When I got out of Walter Reed,
like I said, I went to work for Turner Construction and got to
be part of a great team that then built another hospital for
our soldiers and sailors, airmen and Marines coming home, down
in Fort Belvoir. Without the ability, without the technology to
get around as well as I can, that would not have happened for
me and I do not think it would have been possible.
Chairman Murray. Ms. Marks.
Ms. Marks. You are asking me about the investment--
Chairman Murray. And how you contribute back now because of
that investment.
Ms. Marks. First of all, I just want to say thank you to
anybody and everybody who ever had anything to do with any
Federal program that helped me in the time when I needed it.
The investment, I hope, was well worth it, and I would have to
say, yes, that it has worked for me.
I was able to go back into the workforce and to be able to
be a productive member of society, of taxpaying and all that
good stuff that I was very happy to be able to do so. And also
that I have this firm belief that people need help, and I know
that from firsthand, and so I tried to give back as much as I
can when it is my turn to be able to help people.
Chairman Murray. Okay. Well, thank you to both of you. My
time is up and I will turn it over to Senator Sessions for his
questions.
Senator Sessions. Thank you.
Ms. Marks, you benefit from the program like it is supposed
to be, our design and vision for it. I think what Mr. Woodson
is saying, that for a lot of other people, somehow, it can
become a trap and a dependency. It actually hurts their morale,
their independence, and their ability to be successful, and we
do not want that to happen.
I know, Mr. Greenstein, you tend to suggest that all
spending is good, that no--well, you praised the committee for,
what did you say, shielding poverty programs from any cut.
Medicare, Medicaid, Food Stamps got zero reductions, zero. It
has increased 300 percent in the last 11 years. So I just would
say that we have a program that has been surging and I think it
is not wrong to examine them and see if we cannot make them
work better.
Secretary Alexander, you have administered these programs.
I see that last year, Secretary Vilsack claimed the Food Stamp
error rate is less than 3.5 percent and the fraud rate is less
than one percent, a historic low. As a young Federal
prosecutor, I prosecuted stores that sold liquor and other
things, non-food items, misdemeanor cases. Now, I guess I have
observed this situation for a long time. What would your
feeling be, as someone who has administered this program, about
fraud and abuse, people who just do not qualify for the
benefits they are receiving?
Mr. Alexander. Well, first of all, I believe that if we
create a vast system like we have with many, many bureaucracies
and Federal agencies that trickle down to the State and local
level, you are inviting more fraud and abuse, whether it is
from recipients or from, potentially, providers. People do not
necessarily want to cheat the system, but if it is available to
them, they will take advantage of it.
In regard to the Secretary's claims of the error rate, it
sometimes can be a bit misleading, because if the individual is
not providing the right information a lot of times, sometimes
it is very difficult for State administrators or workers who
are seeing sometimes upwards of over a thousand clients in
their caseload to be able to keep track of all of these things.
So I think that--
Senator Sessions. But just fundamentally, right there, if a
person comes in and says they have five children, they say they
have a certain amount of income, there is no way most State
agencies who administer that program are going to go out and
investigate, send the FBI out to verify that, right? They take
basically what they are told.
Mr. Alexander. We have very few investigators. The workers
do the best job they possibly can on the front line. And they
try to check. But, for example--I will just give you an
example. In the TANF program, when the law was being passed in
the 1990s, there was talk of a national database so that we
could check across State lines. We do not have that ability
today in real time to be able to do that. I think the
government, whether it is State or Federal Government, is
looking at increasing its technology capabilities. However, we
certainly have a long way to go. And the fact that the Federal
Government is so vast and complex and that the rules that are
set forth here in Washington overlap, are inconsistent, they
are inconsistent sometimes just between programs.
So, for example, in Medicaid, States operate multiple
Medicaid waivers with competing service definitions, rules,
regulations, reporting requirements. These are very, very
difficult for States to administer. And because of that, it
trickles down to the recipients we serve. We are not creating a
round wheel for administrators at the State or local level to
operate so that we can, as individuals come into the system
that are able-bodied, we are able to get them off of the system
very quickly.
Yes, there are examples of individuals who are self-
motivated, but the majority of our recipients need to be helped
and we need to incentivize them. The current system
incentivizes nobody, as we saw with the welfare cliff. But in
addition to that, there is no motivation for individuals to
really better themselves. We would be much better off taking
the vast amounts of money that we put into some of these
programs and redirecting that towards a jobs program or toward
technical training, vocational training for a lot of these
individuals. They could achieve more, become more mainstream,
get into the middle class, and become real taxpayers and lifted
out of poverty.
What we are doing, Senator, is we are essentially providing
them with a plethora of benefits, and yes, they are important,
but if we were to teach them how to fish rather than providing
them with the fish, these individuals would make it off of the
system more.
We cannot continue to keep the status quo. We have to look
at these programs critically. We have to start to braid funding
and we have to start to create a continuum of care to get
people off of the system.
Senator Sessions. Thank you, Madam Chairman.
Chairman Murray. Thank you.
Senator Sessions. I would just say, I did talk to a lady
who manages a sewing plant and I asked her how she was doing
with employees. She said, ``We are doing pretty well, but we
compete against the government every day,'' and I think that is
what you are saying. That is a sad thing.
Mr. Alexander. If I could offer just--
Chairman Murray. And I would just say, we have a number of
Senators who want to--
Mr. Alexander. Okay.
Chairman Murray. --and you will have time to respond.
Mr. Alexander. Okay. Thank you.
Chairman Murray. Senator Warner.
Senator Warner. Thank you, Madam Chairman. Thank you for
this hearing and the powerful testimony.
I know you both made mention, both you and Senator
Sessions, of personal stories. I am sure we all will make some
mention. I put myself in a category of the first and only
member of my family to graduate from college. I would not have
been here if there had not been a student loan program.
I also want to say a personal thanks to Bob Greenstein, who
through my journey around these issues is somebody who falls
very much on the deficit side, has--and concerns about that,
pushed me hard on issues. And, Senator Sessions, I will tell
you, Bob Greenstein has been out there on a number of reforms
and, I can assure you, taken a good set of grief from many
colleagues on this side of the aisle for being willing to point
out areas where we have to get our debt and deficit under
control. So I really want to thank him--
Senator Sessions. He has been a valuable witnesses before
here, too.
Senator Warner. He has the scars to prove it, I can assure
you.
I also want to just reiterate, as Bob has mentioned and
others, that many of us have cited the Simpson-Bowles report as
a guideline that, while not perfect, set out meaningful deficit
reduction. The Gang of Six had built upon that. And I again
just want to reiterate that even in those reports, there was
that philosophical goal to maintain parts of the safety net
that are important and valuable.
So, for example, even though we put forward Social Security
reforms, there was a bumping up of the bottom quintile of those
recipients on Social Security to make sure they at least got to
a poverty level, to make suer that those folks above 85 who may
have run out of their private pensions got a bump-up, as well.
And while there are areas, particularly on the SNAP program,
where we can do better enforcement, it was the consensus not
only of Simpson-Bowles but of the Gang of Six that the SNAP
program, net-net, was a good value for the investments we have
made, and Ms. Marks' comments, I think, reflect that.
But I have also got to say that, you know, at $16.5
trillion in debt that goes up $3 billion a day, if we were to
have interest rates at anything close to historic levels
already, we would see interest costs alone on that debt
outcourse Medicare at this point. So the idea that we do not
need to rethink and find better efficiencies is something, even
though we may have different philosophical views of the role of
government, there ought to be at least some space here for
common ground.
I would simply add--and there will be a question at some
point on this, but--
[Laughter.]
Senator Warner. --say as a former Governor--I think about
my good friend, Governor Kaine--former Governor--as well--there
are times when this myriad of Federal programs restrict the
ability for States to do the kind of value and protections, but
the kind of approach that we have had as, at least I can say,
as a Governor, having those maintenance of efforts requirements
so that you can try to deliver a better product without simply
then being able to dramatically cut back on the benefits that
people receive, finding better ways to deliver those at a
better value is something that we don't get enough attention.
And, quite honestly, we kind of hear on a one-off basis.
The National Governors Association does a fairly good job,
but I have been amazed in my relatively short time here, in
four years, how rarely we see how best practices are taken from
State levels and then built into Federal programs. And I think
that ought to be a part of our discussion on a going forward
basis--not decreasing efforts, making sure that folks still get
the need in an appropriate way that they should receive, but
making sure that where there are examples, and I would take one
exception with Secretary Alexander. On one hand, you say you
complain about the myriad of Federal regulations, but one of
the ways that is, you have to give flexibility with waivers. A
waiver system is still, as long as there is that maintenance of
effort, something that I think that we need to look at and how
we get that best practice system better in place.
I am down to 20 seconds. Bob, if you want to make a
comment. I think one of the things you may want to simply
reiterate, EITC and Child Tax Credit, while we can talk about
some of the programs, these have been initiatives that, again,
with some broad-based, I think, bipartisan support really have
been very successful. You may want to comment.
Mr. Greenstein. Well, they are only for people who work.
You have to have earnings to qualify for them. And in the EITC
and the Child Credit, actually, in both of them, they have a
structure where the credit goes up as you earn more, from very
low levels, which is really the reverse of a number of other
programs. And the research is very clear that they have quite
powerful effects in bringing more people into the labor market
and increasing earnings.
What is new and we did not know before is the new research
finding that the increased income they provide_apparently by
stabilizing family circumstances so they are not so poor_is
actually linked to increased performance by the children in the
families in school, which then pays off later in life in terms
of earnings and employment.
So this is, I think, an area where, while not perfect, we
have actually come up with very good programmatic designs that
are really yielding positive results.
Chairman Murray. Thank you very much.
Senator Johnson.
Senator Johnson. Thank you, Madam Chairwoman.
Mr. Murray, thank you for your service.
Ms. Marks, I am sure I share everybody's feelings here that
we are so glad that your story has a happy ending here.
As we move forward in this hearing and as we try fixing
these very serious problems facing our nation, I hope we do not
question each others' motives. I mean, I truly believe we share
the same goal. I think we are a compassionate society. We want
a strong social safety net. We want to help individuals that
cannot help themselves. We want to help people help themselves.
I think that is the bottom line.
The trick is, how do you design that social safety net so
that it does not incentivize people into bad behavior. So I
just want to--I am an accountant, so I like figures. I would
like to ask Mr. Greenstein, when you take a look at Census
Bureau information on some pretty serious societal metrics--
number of people in poverty, poverty rates, out-of-wedlock
birth rates--in 1959, which is when the first good information
became available on poverty rates, there were 34 million people
in poverty. By the time we embarked on the War on Poverty, the
$16 trillion War on Poverty, that had actually declined to 23
million. Today, it stands at 43 million. It has actually
increased.
Now, you can say, okay, the population increased. So let us
look at poverty rates. In 1959, the percentage of Americans in
poverty was 19.3 percent in 1959. It had dropped to 12 percent
by 1966, and today it stands at 14 percent, so it has actually
increased. Again, all of our wonderful intentions on the War on
Poverty, poverty rates have increased according to the Census
Bureau.
And then out-of-wedlock birth rates. In 1940, they stood at
four percent. By 1966, they are up to eight percent. They
doubled, and people like Democratic Senator Patrick Moynihan
was writing eloquently on his concern about that as a societal
metric. Today, overall, that stands at 41 percent.
So, again, the question--again, I am very fact-based. I
mean, we embarked on this $16 trillion War on Poverty, which
just happens to, coincidentally, equal our national debt. We
have not had those metrics turned down. It has not improved. I
mean, do you have any explanation on maybe all those good
intentions, how they could have actually contributed to the
upward turn in those metrics?
Mr. Greenstein. With all due respect, Senator, and a number
of people use the metric, but the poverty metric example you
just did, it really is not valid. Let me explain why.
Senator Johnson. Well, then--
Mr. Greenstein. Let me--
Senator Johnson. No. Then deal with out-of-wedlock birth
rates. I do not want to--
Mr. Greenstein. No, no, no, no--
Senator Johnson. Let us do one that is really solid, out-
of-wedlock birth rates, because it is--
Mr. Greenstein. Let me try to do both.
Senator Johnson. Okay.
Mr. Greenstein. It is very important. The official poverty
rate only counts cash benefits. It does not count Food Stamps.
It does not count the Earned Income Credit. It does not count
the Child Credit. It does not count any of the things that
expanded. It does count the cash welfare benefits, which went
down.
Senator Johnson. Okay, good. Now comment on--
Mr. Greenstein. Apples and oranges--
Senator Johnson. Now comment on out-of-wedlock birth rates
that have gone from eight percent to 41 percent.
Mr. Greenstein. Out-of-wedlock birth rates have gone up.
They have gone up not only among the low-income population or
the minority population. They have gone up broadly throughout
U.S. society.
Senator Johnson. I know. Forty-one percent is average, and
the minority population is far worse.
Mr. Greenstein. I do not have the specific figures in my
head. The point that I am making is--
Senator Johnson. Mr. Woodson, do you want to--
Mr. Greenstein. --the research suggests that this is not
primarily a result of the way particular social programs are
structured, and the single program that was viewed as having
the biggest adverse effect, the old welfare program, was
dramatically changed in 1996. This is a larger question of
societal-wide changes in mores and values.
Senator Johnson. Okay. Mr. Woodson, would you comment on
that.
Mr. Woodson. Yes. In the black community, as you know, it
is about 70 percent. But it is interesting, in the years 1930
to 1940 in the black community, when we had no representation,
when our poverty rates were much worse, we had a higher
marriage rate than the white community. Even up until 1960,
before the War on Poverty, 82 percent of all black families had
a man and a woman raising children. And now, since the War on
Poverty, that has gone up to about 70 percent.
So I think we have a series of policies that, first of all,
discredits any moral influence institutions. But, also, we have
provided disincentives for people to marry. As it has often
been said, if you became pregnant out of wedlock, drop out of
school and you can get more benefits. There are just endless
examples in the black community of how we are being destroyed
by these perverse incentives. And that is why I think benefits
ought to be associated with personal responsibility.
All the witnesses that testified here, my colleagues on
this panel, they all worked hard. They had a positive, life-
affirming attitude. They were not where they were 20 years ago
because of their own personal initiative, their own values.
But we discount this when it comes to addressing poverty.
We never discuss the moral choices that people make and what
are the institutions indigenous to those communities that help
people to make better choices, to bring about redemption and
transformation. We do not look at these as factors in our fight
on poverty. We act as if poor people are the agents of
incentives and disincentives rather than moral people whose
attitudes and behavior are influenced by the chances that they
take and the choices that they make.
Senator Johnson. Thank you very much.
Chairman Murray. Senator Kaine.
Senator Kaine. Thank you, Madam Chair, Mr. Ranking Member,
colleagues, and to our witnesses today.
This committee will write a budget and we need to get it
through the Senate by mid-April. A lot of the discussion has
been a helpful discussion about kind of program design, and I
think everyone around the table could agree, we want programs
to be designed well. We want to minimize fraud. We want to
minimize abuse. We want to minimize overlap. And your insights
can help us do that. But the primary task of this committee is
to write a budget.
Just real quick, I mean, I am new to the body, but I have
done a lot of work on budgeting in the private sector and also
as a mayor and Governor. We had a presentation yesterday--you
are following a presentation from the CBO Director Dr. Doug
Elmendorf, and his basic position in laying out historical data
was that, right now, we do have a budgetary problem. We are
spending more as a percentage of GDP than historical averages.
And we are taxing, taking in revenue, less than historical
averages. We all understand basic math. If you spend more than
historical averages and you have taxes and revenue that are
less than historic averages, you are going to have a challenge.
And I just wanted to kind of throw it to all of you and
just announce to my colleagues, my basic belief about budgets
is you cannot fix a balance sheet without fixing both sides of
the balance sheet. If we are spending more than historic
averages and our revenues are less than historic averages, then
we need to fix both sides of the balance sheet. We can say,
well, we just let taxes go up. We cannot do it again. We can
say, we just cut spending, so, of course, we cannot do it
again. But the way I look, and I just would love your thoughts,
the only way we are going to be able to find a better budget
path forward is to find smart ways to reduce spending, but also
to have more revenue and trying to get this more toward
historic averages and more in concert, and I would love any of
your thoughts on that. Mr. Greenstein.
Mr. Greenstein. I agree with that. I think there is even
another formulation you could look at. You could say that the
main focus could be on spending, but that that ought to include
spending in the tax code as well as spending on the outlay side
of the budget. We have $1.1 trillion a year in tax
expenditures. President Reagan's Chief Economic Adviser for a
number of years, Martin Feldstein, has called tax expenditures
the least efficient, most wasteful part of spending in the
Federal budget and the first place to look at to restrain
spending.
I had the honor of being on the Deficit Commission, the
Kerrey-Danforth Commission in 1994. Alan Greenspan testified
before us and he said, tax expenditures are really tax
entitlements and you ought to look at entitlements on both the
spending and the tax side of the ledger.
It is also interesting when you look at the distribution.
So the bulk of spending entitlements go to middle- and lower-
income families and the bulk of tax expenditures go to the
upper end of the range. So I think you could put together a
package that was a balanced mix of changes on the spending side
and changes on the tax expenditure, tax entitlement side, and
come up with a package that does not hit hard while the economy
is still weak, but you enact it now and it phases in over a
number of years and it stabilizes the debt over the course of
the decade.
Senator Kaine. Other thoughts on the fix both sides of the
balance sheet? Sir, please.
Mr. Alexander. States have to balance their budgets, as you
know as a former Governor.
Senator Kaine. Yes.
Mr. Alexander. And with revenues growing--
Senator Kaine. I have a lot of scar tissue on that one.
Mr. Alexander. Well, me, too.
[Laughter.]
Mr. Alexander. With revenues growing at a little over two
percent and the programs that we operate growing at eight-plus
percent, nine percent, some double-digit percent, year over
year, other priorities in the State budget are crowded out--
education, which is extremely important to make investments in,
transportation so that we can create more and more jobs. And
States do not have the luxury of waiting for the Federal
Government to fix its own budget crisis. States have to fix
them year after year after year, and at the point of spend we
are at right now, as I said earlier, we are, in Pennsylvania,
projected to spend over 50 percent of the State's budget in the
next decade on these programs.
So they are important, but we need relief from Washington,
flexibility from Washington, whether it is block grant and
waivers, so that we can operate these in a much more simple
fashion to be able to serve the people we need.
Senator Kaine. Mr. Woodson.
Mr. Woodson. Yes. One example is that we can invest in
social interventions that have the consequence of changing the
risky behavior of people. In the City of Milwaukee, Wisconsin,
for instance, during the last five years we have been engaged
in a program with the school system. We have young adults
advisors in the schools and we were able to reduce violence by
25 percent in the first three months, which means fewer police
calls--
Senator Kaine. Do what works.
Mr. Woodson. Do what works.
Senator Kaine. Secretary Alexander mentioned job training
is an excellent example of something we should be investing in.
Mr. Woodson. We have the data that shows that when you
invest in interventions that alter people's behavior. The
police are not called and fewer kids are being killed. That is
the kind of intervention that we ought to be investing in.
Senator Kaine. Right. The last thing I will just say to Mr.
Murray, I was at the hospital that you built Monday, and you
have every reason--you and your colleagues--to be extremely
proud. That is a wonderful facility.
Mr. Murray. Thank you very much.
Senator Kaine. Thank you, Madam Chair.
Chairman Murray. Thank you.
Senator Ayotte.
Senator Ayotte. Thank you, Madam Chair.
I want to thank the witnesses who are here. I also want to
thank my constituent, Katyanne Zink, for her terrific story of
success, and thank you so much for being here today. We really
appreciate it and I am inspired by reading what you have done.
Thank you.
I wanted to follow up, because I certainly would like to
get the advice of our panel on how we could better improve what
we are doing, because I think that, as Senator Warner pointed
out, one of the issues we have is if you look at the CBO
projections on if we continue on the trajectory that we are on
in terms of interest payments, basically, it would take--crowd
out and cover all of the spending we are doing as a safety net.
I mean, there are certain pieces you could include, but the
bulk of the spending that we would do. So if we do not come up
with a deficit reduction plan, obviously, we are not going to
be able to make the choices we would like to make for a safety
net, our military, whatever the choices we want to make for our
nation. So I think that we all recognize the urgency of doing
this.
But some of you had mentioned--first of all, I want to
thank Mr. Murray for his service. Thank you very much. You
mentioned that you had some recommendations of how we could
improve the experience you had at the VA, including upgrades to
VA employees and also how we can improve recordkeeping, and I
just wanted to get your advice on that.
Mr. Murray. Ma'am, the VA medical records are somewhat
still paper. There was $126 million put into trying to upgrade
the system. It came back last week that because the DOD medical
record system is not necessarily compatible, it is very
difficult for the VA to even transition to get those same
records. Medical files being lost is delaying claims being
processed. It is adding more work for the VA employees and a
lot more headache for some of the veterans. That just adds to a
lot more of the stress and turning people away from looking to
get help.
Senator Ayotte. Okay. I appreciate your advice on that, and
I may follow up with some additional questions for you just so
that I can understand fully how we could be better effective
for the VA in both delivery and also electronic records, so I
appreciate your testimony on that.
Secretary Alexander, as I understood what you had to say,
that right now, for example, if you're receiving benefits in
Pennsylvania, Federal benefits, there's no way to connect up to
a national system so we could determine whether, for example,
someone is defrauding the system and also seeking to obtain
them in Arizona or some other State. Is this something you
think is an important measure for us to take?
Mr. Alexander. As long as the Federal Government is
involved the way it is, I think that Washington should be
monitoring, doing oversight on programs, providing broad
performance measures for States to hit so that States can
compete and innovate, and one of the things that they can do is
establish that national database in real time so that States
know if somebody is receiving benefits in another State. It
takes us an enormous amount of time to be able to contact
States to find if the person actually accesses benefits, and
the Federal Government--I would see it as one of the duties of
the Federal Government to be able to do something like that to
help States out.
Senator Ayotte. Also, I would like to ask Mr. Greenstein, I
appreciate your being here. You said in your testimony that
there are a number of reforms we should make, and I believe
that Senator Warner said that you have been a champion of some
reforms that we could make to better improve our safety net,
our delivery systems. What are those? What recommendations
would you make for us, because knowing the fiscal challenges
that we face, we want to, of course, make sure that--I really
agree with, certainly, what Mr. Woodson is saying, of create
opportunities for people so that certainly our panelists and my
constituent can have the type of success they have had. But
also, if there are ways that we can improve our system to more
efficiently deliver to make sure that those that need it the
most get it and that we eliminate fraud, I would certainly
appreciate your advice on that.
Mr. Greenstein. Well, I think what Senator Warner was
referring to were particularly things he and I and others have
talked about in the context of deficit reduction. And I think
on the spending side, it's pretty clear that the program that
one would look at to make the single largest contribution to
deficit reduction at this time is actually Medicare. And I
think there are a variety of things to look at in Medicare.
On the provider side, I think there are some further
savings to be had in Medicare Advantage and on drug pricing. On
the beneficiary side, I think we can ask affluent beneficiaries
to pay somewhat higher premiums. I think there are some things
that can be done to restructure deductibles, cost sharing, and
Medigap, so long as we do it in a way that does not impede
access to care for, low income individuals, such as elderly
widows at $15,000, $20,000 a year. There are other things in
other programs, but in terms of the dollars, probably the
single area at this point, if one is doing a budget plan, where
one could in a careful way get the dollars is Medicare.
In the long term, we are going to need to find more ways to
slow the growth of health care costs systemwide and that would
yield benefits for Medicare, Medicaid, and other areas. There
are hopeful signs in the degree of slowdown of health care
costs in the last few years. Medicare costs last year rose only
four-tenths of one percent per beneficiary. That is remarkable.
But we do not know if it will last and we have to find ways
systemwide to be reforming the delivery of health care that
yield significant savings across Medicare and Medicaid and
other programs.
Senator Ayotte. So we need to reform it to preserve it,
obviously. I think there is--just based on the sheer numbers.
Mr. Greenstein. Excuse me?
Senator Ayotte. We would need to reform Medicare just to
preserve it, based on the sheer numbers and the actuarial
analysis--
Mr. Greenstein. Yes, but we do need to be careful. There is
a lot we do not know yet. So we want to do the things we know
we can do now without reducing the quality of care now, and
they will fall well short of the savings we need for future
decades. And as we learn more over the next several years with
the big changes that are going on in health care delivery now
in the private sector as well as demonstration projects and
research, some private, some publicly funded. I think by later
in the decade, we will be in a position to come back and do a
second round of things that are perhaps a little more related
to the structure of how the whole U.S. health care system
delivers care.
Senator Ayotte. And Mr. Greenstein--
Chairman Murray. I hate to interrupt, but--
Senator Ayotte. I know my time is up--
Chairman Murray. --but we do have Senators who have been
waiting, so thank you.
Senator Ayotte. Thank you.
Senator Sessions. Could I just say, Madam Chair, that in
our analysis of the numbers I have used, Medicare was not
included. We are talking about the means tested poverty
programs.
Chairman Murray. Senator Whitehouse.
Senator Whitehouse. Thank you, Madam Chair.
Thank you to all of the witnesses, particularly Patrick
Murray of Rhode Island. I am delighted that you are here and I
thank you for your wonderful service to our country and I hope
that, if you are lucky, maybe some of those Georgetown credits
can be honored at the University of Rhode Island so you get a
good URI degree.
[Laughter.]
Mr. Murray. It was actually the other way around.
[Laughter.]
Senator Whitehouse. Well, I am delighted to have you here
and I appreciate it.
Just to follow the conversation, there are, I think,
inevitably, hard and necessary choices that have to be made
when there is not enough money to go around. There are also
tragic choices that have to be made when you make a bad
decision and you miss an opportunity because of it. The hard
things, you can understand. The tragic stuff would be really a
shame. And I am worried that we are headed for tragic choices
on Medicare and Medicaid if we do not appreciate, Mr.
Greenstein, what you were saying, which is that you cannot cut
Medicare and Medicaid enough to solve the problem of the
underlying explosive cost growth of our health care system.
We cannot long manage a successful competitive enterprise
in the United States of America in which 18 percent of our
nation's Gross Domestic Product gets burned up by our health
care system when the most inefficient other country in the
world that competes with us is at 12 percent. We cannot
continue to pay a 50 percent inefficiency penalty and ignore
that problem and instead look at Medicare and Medicaid simply
because that is where the real problem happens to touch the
Federal budget and then whack the elderly on Medicare, the
families with disabled kids on Medicaid, while we are ignoring
the real underlying problem, and I think that is a fight that
we really need to clarify, because, among other things, we
should have Common Cause in the fight for a more efficient
health care system.
Senator Ayotte is from New Hampshire. Some of the best
evidence about the opportunities in improving our health care
system comes out of the Dartmouth studies, which are famous in
this area. They show this huge variation in our country between
States that deliver relatively low-cost, high-quality health
care and other States that deliver very high-cost, low-quality
health care. And when you drill down even further to cities,
there are amazing differences in cost per capita, even adjusted
for demographics. Al Franken represents Minnesota, which is a
particularly high-quality, low-cost State, so he is always
complaining about why they have to carry other States along
that do a lousy job of providing decent health care.
The other great thing about addressing that problem, the
real problem, is that what we have discovered is that the
solutions are win-win solutions. And over and over again,
private organizations that deal in this area--Kaiser,
Intermountain in Utah, Gunderson Lutheran in Senator Johnson's
home State of Wisconsin, Geisinger in Pennsylvania, and Rhode
Island is a leader, as well, on this--when you improve the
quality of care, you lower the cost. When people have a real
working electronic health record that is integrated, it
improves the quality of care. When you are not giving people
hospital-acquired infections, which are now, I think, killing
more Americans than, I forget, is it breast cancer and car
accidents combined? I mean, it is a massive cost on our system,
and you can be rid of them. We are virtually rid of them in
Rhode Island because of work that we have done in our intensive
care units.
We have to focus, I think, relentlessly on that, and I am
going to use every opportunity I have to speak in this
committee and anywhere else that I can, when we are talking
about Medicare and Medicaid benefits being cut to solve this
problem, we are looking at the wrong problem. We are
misdiagnosing the problem. If we get it right on delivery
system reform and can save $700 billion a year in this country,
as the President's Council of Economic Advisers says, $750
billion a year, as the Institutes of Medicine say, a trillion
dollars a year if you believe the Lewin Group and George Bush's
Treasury Secretary, that is where we have to put our energy.
I am sorry, I am not going to ask a question because I
spent all my time saying that, but it is immensely frustrating
to have this conversation over and over again and have it be
Groundhog Day on cutting Medicare benefits when we are not
addressing in a meaningful way the most wasteful health care
system in the world.
Chairman Murray. Senator Sanders.
Senator Sanders. Thank you, Madam Chair.
Mr. Murray, thank you very much for your service to our
country, and I thank all the panelists for being here.
I want to put this discussion in a broader context than
just Federal Government policies. The United States is the only
country in the industrialized world that does not guarantee
health care to all people as a right. Some 45,000 Americans die
each year because they do not get to a doctor when they should.
Secretary Alexander, my understanding--correct me if I am
wrong--but according to the Kaiser Commission on Medicaid and
the Uninsured, in the State of Pennsylvania, and I only pick
out Pennsylvania because you are sitting here, there are
232,000 children who have no health insurance at all and there
are 1.1 million adults who have no health insurance at all. Do
you believe that all people should be entitled to health care?
There are 50 million in America who have no health insurance.
And what happens to a family making $25,000 a year who has no
health insurance and has some kids?
Mr. Alexander. Senator, you bring up a good point. I would
say that all individuals should have access to quality health
care. If a family, as you say, making $25,000 a year does not
have access to health insurance, they will, if they need health
care, go to an emergency room, which is very costly.
Senator Sanders. Good.
Mr. Alexander. Okay. I want to just--
Senator Sanders. But let me just interrupt you, if I
might--
Mr. Alexander. Yes.
Senator Sanders. --because your point is exactly correct.
Mr. Alexander. Yes.
Senator Sanders. My understanding is that going to,
depending on location, going to an emergency room, you agree
with me, is not the way to do primary health care.
Mr. Alexander. Absolutely not.
Senator Sanders. Okay. And it will cost ten times more than
going to a community health center.
Mr. Alexander. Correct.
Senator Sanders. That is my understanding.
Mr. Alexander. Yes.
Senator Sanders. Continue.
Mr. Alexander. Oh, okay.
Senator Sanders. But your answer--we talk about government
policy. You are not suggesting that the solution is we should
have the hundreds of thousands of kids in Pennsylvania flock to
the emergency room when they have the flu.
Mr. Alexander. No, absolutely not, and that is why in my
Governor's budget this year, he has invested more money in the
CHIP program, which, as you know, was, I think, founded in
Pennsylvania, and it is a very efficient program- -
Senator Sanders. All right, but my--
Mr. Alexander. --to be able to--
Senator Sanders. I am sorry.
Mr. Alexander. --to be able to ensure that children have
access to care.
Senator Sanders. I certainly agree with that.
Mr. Alexander. What I would say is that we are operating an
inefficient system--
Senator Sanders. Yes.
Mr. Alexander. --that is causing us to have to spend all of
this money, and because of that, we cannot afford to provide
more access to care. So to go back to--
Senator Sanders. But in terms of inefficient, my
understanding--and certainly Senator Whitehouse and I have been
working on this issue--he and I understand that, as a nation,
we spend almost twice as much per person on health care as any
other, and you know why? Because all the other countries have
universal national health care systems. Are you an advocate of
a universal national health care system?
Mr. Alexander. Not a Federal-run system.
Senator Sanders. A Federal-State system, where everybody in
America--
Mr. Alexander. Not--the private sector would have to be
involved, and so--
Senator Sanders. If the private sector is involved, my
guess is you are not going to cut the cost.
But let me ask you this. Anybody else can pipe in.
Mr. Alexander. If--
Senator Sanders. I am sorry. I do not have a whole lot of
time.
Mr. Alexander. Oh, okay. Sorry.
Senator Sanders. I would love to dialogue.
Mr. Alexander. Yes.
Senator Sanders. Five minutes is not a long time.
Mr. Greenstein, we talk about--and Secretary Alexander
raised this, Senator Sessions had raised this issue in a broad
sense--one of the great welfare beneficiaries in this country,
of course, as we know, is the Walton family, the wealthiest
family in America. That one family owns more wealth than the
bottom 40 percent of the American people, and yet one of the
reasons they are so rich is the wages and benefits they provide
to their workers force many of those people to be on Medicaid,
housing programs, and Food Stamps. Do you think we should end
the welfare program to the wealthiest family in America by
raising the minimum wage and by asking them, in one form or
another, to provide decent wages and benefits to their
employees?
Mr. Greenstein. I am very much in favor of raising the
minimum wage. I was glad to hear the President propose it last
night. Raising the minimum wage is not going to be sufficient.
Its impact on reducing poverty is significant, but well short
of what we need.
But if I could take this into a related area, we have had a
lot of discussion today about discouraging people from working,
marriage penalties and the like. One of the most important
steps to make progress, not a full answer, just one important
step, is actually the Affordable Care Act, because today, if a
family is on Medicaid and maybe the mother gets married and the
income goes up or the family's income rises, the parents lose
eligibility, and if their employer does not offer coverage,
they are uninsured. That is part of the poverty track.
Changing the law so that people who are lower-middle
income, moderate families, above the poverty line, go to work
and get coverage, whether the employer offers it or not,
removes, eases that part of the poverty trap and it also
reduces inefficiency, because one of the inefficiencies you and
Senator Whitehouse are talking about is all the cost shifting
that goes on to deal with uncompensated care for the uninsured.
Senator Sanders. Right. Let me just say to Mr. Murray, one
of the proposals that is being contemplated, which I vigorously
oppose, along with the AFL-CIO, every veterans' organization,
every senior organization, every disability organization, is
the so-called chained CPI. That is a recalculation of how you
determine what a COLA is. It would impact people on Social
Security and it would impact disabled veterans.
Madam Chair, what I would like to do is introduce into the
record a letter from the American Legion in opposition, and
virtually every--all of the veterans' organizations, opposition
to the chained CPI. Under the chained CPI, a disabled veteran
who started receiving benefits at age 30 would have their
benefits reduced by $1,425 at age 45, $2,300 at age 55, and
over $3,000 at age 65. I do not believe that is the way you
treat disabled veterans in this country and I would like to
introduce the American Legion letter to the record.
[The letter from the American Legion follows:]
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Chairman Murray. Without objection, and thank you, Senator.
Senator Stabenow.
Senator Stabenow. Well, thank you very much, Madam Chair,
for this very important hearing and bringing the voices of real
people who have experienced the issues and the programs that we
are working on. Thank you very much.
I first want to say I agree with Senator Whitehouse, and
Senator Sanders mentioned, as well, about inefficiencies in the
health care system. Michigan started something called the
Keystone Quality Initiative, which is in health reform, which
has shown very specifically how we can address cost.
And, also, I think it is important, Mr. Greenstein, as you
talked about in health reform, we begin--we are beginning the
process of bringing down the rate of growth, and so on Medicare
Advantage, I believe, last year, the premiums went up--were
actually reduced seven percent because of changes that we have
been putting in place, and we definitely want to get folks out
of emergency rooms and into what will be a public-private
sector system starting in January, where the private sector is
involved in a competitive way.
I would like to go back with my hat on chairing the
Agriculture Committee, since we have been deeply involved in
looking for ways to address waste, fraud, and abuse throughout
that system, including the nutrition programs, and Mr.
Greenstein, thank you for your input as we look for ways to be
able to do that. Certainly, whether it is the Crop Insurance
Program, which is a safety net for farmers during times of
disaster, or nutrition programs, which are a safety net for
families during times of disaster, we have been looking at all
of that.
Could you speak to what I know is actually the error rate
in the SNAP program? It is my understanding, correct me if I am
wrong, that the error rate on overpayments is actually 2.9
percent, which we found to be less than anything else under the
jurisdiction of the Agriculture Committee. But could you speak
to what is actually the error rate as we look at this program
and we want to make sure it is going to the families that need
it?
Mr. Greenstein. Yes. There has really been very strong
progress here. The error rate, as you said--the combined rate
of payments to people who are ineligible and overpayments to
people who are eligible, the two combined are now only about
three percent of total program payments. That is maybe a fifth
below the error rate in the tax code, for example.
I would have to disagree with something Mr. Alexander said
earlier in response to a question from Senator Sessions. He
questioned whether the error rate was really that low because
he talked about how difficult it was for caseworkers to check
all of this information. The error rate does not come from what
caseworkers do. The error rate is computed under very strict
rules under which a national sample of something like 50,000
households is chosen, and not caseworkers but trained
investigators spend an average of something like 12 hours per
family. They sometimes go to their homes. They check the
automatic wage records. And then after those reviewers come up
with the error rate, Federal investigators take a sample of
what the State looked at and further review it, and if they
find that the State investigators underestimated the error
rate, they adjust it up.
So, yes, the figure is not perfect, but it is one of the
most rigorous set of analyses of error rates we have in any
program. If we did something as rigorous in the tax code, you
would not want to know what the result would be.
So this is not perfect. More progress can be made. But it
is significant progress and it is a quite low error rate for a
program of that size.
Senator Stabenow. And in the five-year farm bill we pass in
the Senate, we did even more by looking at areas where there
have been abuses. In my State of Michigan, we had two people
who won the lottery that were able to continue on food
assistance. We eliminated that and looked at a variety of other
things to tighten up the system and to actually create more
savings. And so I am actually very proud of the collective work
that we have done to focus on waste, fraud, and abuse.
Could you also speak, though, Mr. Greenstein, and maybe you
did earlier, but just because the food programs follow the
economy, and certainly as all of these programs do, when we
have more crop disasters, Crop Insurance goes up. It goes down
when we have fewer disasters. In the area of SNAP, it is my
understanding the CBO number that we have received, the new
number we are working with as we write a new farm bill is that
the food programs are actually going to be down over the next
ten years by $11.5 billion because the economy is getting
better, people are going back to work, and they, frankly, do
not need to have the help. Could you speak to that more?
Mr. Greenstein. Yes. SNAP is one of the most responsive of
all programs to the economy. The CBO projections are that by
about 2019, SNAP spending as a share of the economy will be all
the way back to its 1995 level. It has gone way up--
Senator Stabenow. Nineteen-ninety-five?
Mr. Greenstein. As a share of GDP. It is also--there has
been a little bit of misunderstanding. Some people look back
just ten years and say, look at how big the increase in SNAP
was. But ten years ago was an unusual low point. What happened
is that following passage of welfare reform in 1996, something
unintended occurred in the initial implementation which was
lots of people leaving welfare for work lost their Food Stamps,
as well, which then lessened the incentive to go to work. There
was a bipartisan agreement that this should be addressed and it
was. And we had ten years ago a remarkably low percentage of
eligible working poor families getting Food Stamps. You do not
want a situation where everybody on welfare gets something and
the working poor do not. So that has been corrected and that
contributed to the expansion of the program.
But even with that, the CBO estimates show that by 2018, we
will be back to levels of many years ago in terms of SNAP
expenditures as a share of GDP. And if a program's costs are
not rising over future decades as a share of GDP, then it
cannot really be said to be contributing to the long-term
fiscal problem.
Senator Stabenow. Thank you.
Chairman Murray. Thank you very much.
We have run out of our time here, and I want to really
thank the participation of all our colleagues on the committee.
I especially want to thank all of our panel members today,
particularly Tara Marks and Patrick Murray. As I said at the
beginning of this hearing, I am really committed to making sure
that your stories are heard and your families and communities
have a seat at the table as we discuss these really important
issues, and today's hearing was a small but important step in
making progress on that.
As a reminder to all of my colleagues, additional
statements and/or questions for any of the witnesses from
today's hearing are due in by 6:00 p.m. today, to be submitted
to the Chief Clerk in Room 624.
I do plan on the committee holding one or more hearings the
week we return, the week of the 25th, and we will have more
information to your offices on that in the next several days.
With that, again, thank you very much to all of our
witnesses and I call this hearing to a close.
[Whereupon, at 12:17 p.m., the committee was adjourned.]
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THE IMPACT OF FEDERAL INVESTMENTS ON PEOPLE, COMMUNITIES, AND LONG-TERM
ECONOMIC GROWTH
---------- -
- -
TUESDAY, FEBRUARY 26, 2013
United States Senate,
Committee on the Budget,
Washington, D.C.
The Committee met, pursuant to notice, at 10:31 a.m., in
Room SD-608, Dirksen Senate Office Building, Hon. Patty Murray,
Chairman of the Committee, presiding.
Present: Senators Murray, Wyden, Whitehouse, Warner,
Baldwin, Kaine, King, Sessions, 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. Good morning. This hearing will come to
order, and I want to thank all of our witnesses who are here
with us today, who I will introduce in just a few minutes, as
well as our Ranking Member, Senator Sessions, and all of our
colleagues who are joining us here today.
The Budget Committee is a place where some of the most
important questions facing our Nation are asked and hopefully
where we can come together in a responsible way to answer them.
Many of those questions will be about how we can tackle our
debt and deficit challenges responsibly, and while this is
important, it is not all this Committee is about.
A budget is a reflection of our values and priorities. It
is a vision for what we believe creates economic success and
broad-based national prosperity. It outlines our short- and our
long-term economic policies. It is where we make decisions
about what kind of Nation we want to be now and where we lay
down the foundation for accomplishing even more in the years
ahead.
This last point is what we will be discussing in today's
hearing--the role and impact of Federal investment on people,
communities, and long-term economic growth. And it is going to
be a critical part of the pro-growth, pro-middle-class budget
resolution we are working to write, because there is no
question getting our debt and deficit under control is a
challenge we have to confront.
But we have many other challenges we cannot ignore. We need
to repair our crumbling roads, bridges, and highways. We need
to ensure our students receive an education that offers them
the opportunities they deserve and ensures our Nation has a
skilled workforce for the 21st century. And we need to fight to
maintain our edge in research and innovation because the next
Apples or Microsoft or Google should be started right here in
the United States.
These are the kinds of investments that make us stronger,
and as any businessperson will tell you, when you have a budget
problem, the last areas you want to cut are those that will
help you grow. Slashing R&D or capital investments may allow a
business to look like they are lean and efficient in the short
term, but only by undermining their competitive advantages over
the long run.
The same is true for the Federal Government. Both parties
used to understand this.
Strong Federal investments played a key role in the broad-
based economic growth that carried millions of families into
the middle class in the 20th century.
The Simpson-Bowles Commission report stated that one of its
guiding principles and values was to invest in education,
infrastructure, and high-value research and development to help
our economy grow, to keep us globally competitive, and to make
it easier for businesses to create jobs. But that bipartisan
consensus seems to have eroded.
Recently, more and more lawmakers here in Washington, D.C.,
have focused on shrinking short-term numbers, regardless of the
impact on jobs and economic growth. This has led to attempts,
too often successful, to choke off the investments today that
could make all the difference down the line.
The fact is that if we slash our investments in
infrastructure like roads and bridges, we are not really saving
money at all. We are making things worse. We are weakening our
basis for private investment and economic growth; we are
putting public safety at risk; and congestion is taxing
families times with painfully long commutes and health-
threatening pollution.
Roads are going to need to be fixed eventually. Bridges
will need to be strengthened at some point before they
collapse, and waiting will only make the work more expensive
when we eventually do it. And what will happen in the meantime?
When a bridge deteriorates, at some point it is no longer
safe for heavier traffic such as emergency vehicles or large
trucks. When roads fill with potholes, it makes traffic worse
and driving more dangerous. So our families are less safe, our
businesses cannot move their goods quickly, and all just to
save money in the short term. It is short-sighted and does not
make sense.
The American Society of Civil Engineers released a report
card for America's infrastructure back in 2009. Our country got
a D. More than 70,000 of our bridges across the country have
been deemed ``structurally deficient.'' We are not keeping up
with the repairs and have not for years, much less accounting
for the growth of our country's population.
This is an area where you see agreement from the U.S.
Chamber of Commerce, major labor groups like AFL-CIO, and
economists and policy experts across the political spectrum.
Investing in infrastructure creates jobs today, makes our
families safer, and lays down a strong foundation for long-
term growth.
We are going to be hearing more about transportation
infrastructure investments from one of our witnesses, the Under
Secretary for Policy at the U.S. Department of Transportation,
Polly Trottenberg. But this is a clear case where investment
cuts make our short-term budget deficit look better on paper,
but cost us more in the long run and make other deficits
worse--in this case, our infrastructure deficit.
But it is not the only one. When we slash investments in
our schools, Pell grants, or worker training programs, we
increase our skills and education deficit. This is not good for
our students and workers, and it is devastating for our economy
over the long run. 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 those
with a high school diploma or less are more likely to be
unemployed, to be among the long-term unemployed, and earn
substantially less than their counterparts. And according to
the Bureau of Labor Statistics, workers with a college degree
can expect to make about $1 million more over the course of
their career than those with a high school diploma.
But this is not just a problem for the people and families
directly affected. It is a challenge for our Nation. If our
workers do not have the skills they need to fill the jobs of
today and tomorrow, our economy and our businesses pay the
price, too. 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 our economy needs.
One of the witnesses we will hear from today, Tony
Carnevale, the director of the Georgetown University Center on
Education and the Workforce, has estimated that by 2018 nearly
two-thirds of U.S. jobs will require some education or training
beyond a high school diploma.
We know these investments pay off. In my home State of
Washington, for example, a study found that the return on
investment is 7:1 for the resources put into serving dislocated
workers, 13:1 for the postsecondary professional and technical
education offered through the Perkins Act, 87:1 on Perkins
funding at the secondary school level, and an astounding 91:1
on apprenticeship programs.
We simply cannot expect our economy to grow in a way that
creates broad-based prosperity if we continue allowing our
skills and education deficit to increase. If our businesses are
going to be creating 21st century jobs, we need our students
and workers to have 21st century skills.
Today we will also be hearing more about the role of
Federal investments in research and innovation from Hunter
Rawlings, the president of the Association of American
Universities. These investments have led to private sector
growth in areas from pharmaceuticals to the Internet to GPS and
much more. They have led to new industries, new drugs, new
interventions, and new jobs. They have led to private sector
growth in areas such as pharmaceuticals, the Internet,
communication technology, products that keep our troops safe,
the development of alternative energy sources and improved
energy efficiencies, and much more. They have led to new
industries, new drugs, new interventions. They have provided
jobs. They have expanded our economy. Today 40 percent of U.S.
GDP, $6 trillion, comes from companies that did not exist 30
years ago.
Innovation is beneficial for the economy overall but also
for families. A recent review by the Hamilton Project described
how innovation improves life expectancy, makes technology
affordable, and improves standards of living.
The United States has been a leader in this area for
decades, and we cannot afford for countries that understand the
value of these long-term investments to overtake us. Cutting
these investments off would help our budget deficit in the
short term, but only at the expense of long-term increases in
our research and innovation deficits, and that does not make
sense.
Although the role of Federal investments is an important
issue for us to address in the context of the pro- growth
budget resolution we are currently working to write, this
conversation is especially appropriate as we head toward the
March 1st sequestration deadline.
I remain hopeful that we can find a balanced and bipartisan
replacement to sequestration in the next few days, but if we
cannot, investments in people, communities, and innovation
would be hit hard. According to the White House, Title I
education funding would be eliminated for more than 2,700
schools, cutting support for nearly 1.2 million students and
putting thousands of teacher jobs at risk. Head Start would be
eliminated for approximately 70,000 students, and over 7,000
special education staff would lose their jobs. The National
Institutes of Health and the National Science Foundation would
have to delay or end scientific projects and make hundreds
fewer research awards, which would mean an estimated 200,000
fewer jobs across America. And the FDA's Center for Drug
Evaluation and Research would face cutbacks which would cause
delays on new drug approval.
This, of course, would come alongside the hundreds of
thousands of jobs lost, major cuts to defense and nondefense
programs, and the economic impact that could be devastating to
our fragile economy.
Even for people who think that investments need to be cut,
sequestration is an awful and short-sighted way to do it. And I
hope Republicans join us soon and work with us to replace it
with a balanced mix of responsible spending cuts and new
revenue from those who can afford it most.
Now, I already mentioned the three witnesses that were
invited by the majority, and Senator Sessions will introduce
the witnesses he has invited, but I want to thank David Malpass
and Stephen Ferguson as well for taking the time to be here
today.
And I am looking forward to hearing more from all of our
witnesses about the role of Federal investments and the impact
of automatic cuts. This is going to be an important issue for
us as we work on our budget resolution here in the Senate.
We absolutely need to tackle our debt and deficit. We need
to cut spending responsibly. And of course, for Government
investments to truly pay off, we need private industry to
succeed and innovate and create jobs.
I believe smart Federal investments will create jobs and
help the middle class right now, they will help lay down a
strong foundation for long-term and broad-based economic
growth, and they will help position our country and our economy
to compete and win in the 21st century global economy.
Recent Republican budgets have moved away from these
critical national investments, but I am really hopeful that the
bipartisan work can continue to make sure we leave our children
a stronger country than the one we received. And I am looking
forward to engaging the American public in this debate that is
so central to their economic future.
And with that, I will turn it over to Senator Sessions for
his opening statement.
OPENING STATEMENT OF SENATOR SESSIONS
Senator Sessions. Thank you, Madam Chairman, and I
appreciate this hearing, which deals with an important
subject--Government spending, and long-term economic growth. It
provides an important opportunity to address the economic harm
that is caused by excessive Federal spending and debt.
We will examine studies showing that the expansion of the
Federal Government can actually depress economic growth,
hurting all Americans, especially those who work their way out
of poverty.
The truth is that growth and prosperity is furthered by a
lean, responsive, limited Government that can sustain itself,
not an ever-growing, debt-incurring, amorphous entity like the
Great Blob.
Madam Chairman, you mentioned that 40 percent of businesses
did not exist 10 years ago. I would doubt that any of those--
what is that?
Senator Whitehouse. I am sorry. I did not hear the Ranking
Member. Did he say ``the great block'' or ``the great blob''?
Senator Sessions. I said ``the Great Blob.''
Senator Whitehouse. ``Blob,'' okay.
Senator Sessions. Metaphorically suggesting that ever-
growing Federal investments can turn into a Federally financed
Great Blob.
So those businesses for the most part, I am sure, had
no knowledge whatsoever of Washington, D.C., participating
in their creation. And we do need to deal with cutting spending
responsibly, but what we are seeing today is nothing is
responsible. Every cut in spending is resisted as being fatally
damaging to the Republic.
And I do not think slowing the growth in spending--which is
what we are talking about. Indeed, we are projected to increase
spending in the next decade by $10 trillion. The cuts in the
Budget Control Act would have allowed that increase to go up 8
instead of 10.
Tomorrow will mark 1,400 days since the Senate held a
budget, but hopefully we can work our way through this year and
get us a budget. I think it will help us.
But today we will hear from two witnesses who will explain
the human consequences of large Government and surging
deficits. David Malpass, a writer who writes for Forbes and the
Wall Street Journal, a former staffer on this Committee for tax
policy and many other such positions in his background, will
review the growing body of evidence about excessive spending
and how large debt suppresses growth, job creation, and
lowers--keeps higher wages from occurring.
Steve Ferguson, chairman of the Cook Group, a private
entity, a business, will talk about how the President's health
care law and its new taxes are hampering medical innovation and
research that could save thousands of lives.
We remain on an unsustainable debt course, and one major
reason for that is the lack of honesty in evaluating the cost
of new spending programs and the benefits, which are
exaggerated. Invariably, the projected costs are
underestimated--good politics maybe, but not good policy.
A new Government report dramatically proves that the
promises made assuring the Nation that the largest new
entitlement program in history since Medicare, the President's
health care program, would not add a dime to the long- or
short-term debt of America was false. Just this morning, the
nonpartisan Government Accountability Office released a report
I requested regarding the deficit impact of the President's
health care law. The results of this brand-new report confirm
everything critics and Republicans were saying about the cost
of this bill and reveal the dramatic falsehoods that were used
to push it to passage.
At the signing ceremony for the Patient Protection and
Affordable Care Act, the President claimed that his law would
``lower costs for families and for businesses and for the
Federal Government.'' The President went on to say, ``It is
paid for. It is fiscally responsible.''
On her website, then-Speaker Pelosi said the bill is ``the
great deficit reduction effort in two decades.''
Speaking before a joint session of Congress in 2009, the
President had this to say: ``And here's what you need to know.
First, I will not sign a plan that adds one dime to our
deficits, either now or in the future. I will not sign it if it
adds one dime to the deficit, period, now or in the future,
period.'' Pretty much like ``Read my lips.''
But the GAO's investigation reveals these claims to be
false. According to GAO, under a realistic set of assumptions,
the health care law will increase the deficit by seven-tenths
of 1 percent of GDP or roughly $6.2 trillion over the next 75
years--$6.2 trillion unfunded liability of the United States.
In other words, the GAO reveals that the big tax increases in
the bill come nowhere close to covering the even more massive
spending. Again, $6.2 trillion is only a fraction of what the
bill will spend, but that number is how much new deficit
spending, excluding interest costs, will result despite
trillions in new taxes.
The Big Government crowd in Washington manipulated the
numbers in order to get the financial score they wanted, in
order to get their bill passed and to increase power and
influence. The goal was not truth or financial responsibility,
but to pass the bill. This is how a country goes broke. It is
also how the economy and jobs are destroyed.
Economic research by a wide spectrum of organizations has
discovered harmful economic impacts from excessive levels of
Government debt. When total Government debt rises near or above
90 percent of GDP--and our gross debt now is over 100 percent--
the economy slows, resulting in fewer jobs, smaller paychecks
for working Americans.
Using this research, Dr. Salim Furth from Heritage
estimated that even ``a two-tenths of 1 percentage point drop
in the annual GDP growth over the next 10 years would cost
Americans $1.9 trillion in income.'' He further estimates that
from 2009 to 2011, 3 years has already cost Americans $200
billion in foregone growth, which is nearly a full year of
normal GDP growth.
At this point in history, the key to producing greater
economic growth is returning Government spending to responsible
levels. Attempting to combat the debt drag through higher taxes
just will not work.
First, the Federal debt is projected to grow by $9 trillion
over the next decade, and there is no tax hike large enough to
stem that tide.
Second, raising taxes would produce the same economic harms
as high debt. It drains wealth and weakens the private job-
creating sector.
The problem is spending is growing faster than the economy,
which is what Mr. Elmendorf told us at the last hearing. There
is no free lunch. Nothing comes from nothing. Everything
consumed will be paid for sooner or later. Reforming and making
more productive failing Government programs is not only an
economic necessity but a moral necessity. Raising taxes instead
of reforming Government means turning a blind eye to the
colossal waste of taxpayers' money that too often occurs.
I am not aware of any serious leadership effort from the
President or his top officials to systematically reduce waste
and abuse and to save money, as we have seen from Governors and
mayors and families all over America that continues daily. I
know Senator Warner is working on a bipartisan effort, and I
understanding that.
So how can anyone contend that eliminating waste, fraud,
duplication, and abuse is bad for America? A leaner, more
productive, more competitive American Government is certainly
good for America and American workers. It almost seems the
President believes all spending is stimulative to the economy
and no spending, even wasteful spending, should be cut. Raising
taxes instead of reforming Government means hurting the very
people who need it the most, need help the most.
For too long, Washington has defended the bureaucracy at
the expense of the American people. Until this National
Government gets serious about containing runaway costs and
establishing efficient management programs, the American people
should not even consider sending one more dime to this
Government. The budget process provides us with an opportunity
to right that wrong and to restore growth and opportunity to
the Nation.
And we do believe in infrastructure, but I would just note
that in the stimulus bill that spent over $800 billion, only 4
percent went to roads and bridges and less than 1 percent of
our total spending each year goes to roads and bridges. So when
we talk about spending, we are not talking about cutting only
highway funds, many of which are productive and help us make
our Nation healthier.
So, thank you, Madam Chairman, for your leadership. I look
forward to working with you throughout this budget process.
Chairman Murray. Thank you very much.
With that, I am going to turn to our witnesses. We do have
a vote at noon, and I want to make sure everybody has a chance
to ask questions, so I am going to ask you, if possible, to
limit your statement to 5 minutes for us today, and we will
begin with Ms. Trottenberg.
STATEMENT OF THE HONORABLE POLLY TROTTENBERG, UNDER SECRETARY
FOR POLICY, U.S. DEPARTMENT OF TRANSPORTATION
Ms. Trottenberg. Chairman Murray, Ranking Member Sessions,
members of the Committee, thank you for inviting me here today
to testify on behalf of the Obama administration about the
importance of transportation investments to our Nation's
economy, our States and local communities, and the traveling
public.
From waterways to railroads, highways, airways, and
transit, our transportation system has been critical to our
Nation's economic success, providing remarkable mobility and
opportunity to our citizens and their families, and fueling the
prosperity of our businesses, factories, and farms.
Transportation is one of the largest sectors of the U.S.
economy, with transportation-related goods and services
representing nearly 10 percent of the Nation's $15.6 trillion
GDP.
The transportation sector is one of the largest generators
of high-paying jobs, accounting for 11.4 million jobs in 2011.
The transportation sector has helped generations of Americans
secure a middle-class life for themselves and their families.
But our transportation system is aging. Much of it was
built more than 50 years ago, and in some cases more than 100
years ago, and it is in need of investment, innovation,
increased efficiency, and new technologies.
Our economic competitors in Europe and Asia continue to
invest significantly more in maintaining, modernizing, and
expanding their transportation networks. In 2012, the World
Economic Forum rated the competitiveness of U.S. infrastructure
as 14th in the world, below Canada, the United Arab Emirates,
and Korea.
Beginning with the State of the Union address 2 weeks ago
and continuing with his proposal released last week, President
Obama called for $50 billion in increased infrastructure
investment to create jobs and spur economic growth. The
President proposed a ``Fix-It First'' Program that would direct
$40 billion towards reducing the backlog of deferred
maintenance on highways, bridges, transit systems, and airports
nationwide, along with $10 billion for innovative
transportation investments.
The President also proposed a Partnership to Rebuild
America to attract private capital to upgrade what our
businesses need most: efficient roads, rails, mass transit
systems, waterways, and ports to move people and goods, and
safe, modern energy, water, and telecommunications systems.
The proposals that the President recently made build on the
Administration's work over the past 4 years to strengthen the
Nation's transportation infrastructure. The administration
worked with Congress to pass the American Recovery and
Reinvestment Act in 2009. And it is true, Senator, it was a
small portion on transportation, but it was the most
significant transportation public works program since the New
Deal. The Recovery Act funded in the transportation sector
15,000 transportation jobs across the country and created tens
of thousands of jobs.
We are also grateful that Congress recently passed the
Moving Ahead for Progress in the 21st Century Act (MAP-21). It
has provided predictable surface transportation funding for
States and localities, and it has been a major priority for the
Department. The bill makes great progress in improving safety,
especially in transit, expanding the TIFIA credit program to
get more private sector involvement in our transportation
system, focusing on freight policy, better planning, and moving
us towards a more performance-driven system.
While we are implementing the bill, we also know that part
of how we ensure we have the best infrastructure is improving
how we do project delivery. The Department is working with
States and localities to produce better economic analysis to
ensure that every public dollar is well spent.
We are working with our sister agencies to reduce the
Federal permitting review process timeline by 50 percent for
project sponsors, giving them tremendous savings of time and
money. We are also encouraging cost-effective innovation and
creative new approaches to construction, operations, and
project delivery.
On the aviation side, the Federal Aviation Administration
is moving forward aggressively with the NextGen satellite
navigation program, which will provide tremendous economic
returns by improving the safety, efficiency, capacity, and
reducing the environmental impacts of travel.
MAP-21 and NextGen are important first steps in rebuilding
and modernizing our transportation system, but the demands on
our Nation's infrastructure will only increase in coming years.
By 2050, the U.S. population is expected to grow by
approximately 100 million people. Many of them will live in
already congested metropolitan areas.
Last year, the Highway Trust Fund collected only $40
billion in revenue but spent close to $50 billion. This is not
a new problem. The Highway Trust Fund has had a funding
shortfall every year for the last 5 years.
By the end of MAP-21 in 2014, Congress will have
transferred almost $54 billion in general funds into the
Highway Trust Fund to keep the surface transportation program
afloat. This is of growing concern as we seek to address our
Nation's fiscal challenges.
As Federal dollars have grown scarcer, many States and
localities have attempted to make up the shortfall, often by
taking on significant debt.
We clearly need political consensus on how to sustainably
fund surface transportation in this time of severe budgetary
challenges. The President has proposed to pay for our
investments in surface transportation through savings from
winding down our contingency operations overseas. We believe
this is the right course because it will allow us to move
forward with critical investments in transportation
infrastructure now while working together on a bipartisan basis
to address the longer-term fiscal challenges the Highway Trust
Fund faces.
Thank you and I am happy to answer any questions you have.
[The prepared statement of Ms. Trottenberg follows:]
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Chairman Murray. Thank you very much.
Dr. Rawlings.
STATEMENT OF HUNTER R. RAWLINGS III, PH.D., PRESIDENT,
ASSOCIATION OF AMERICAN UNIVERSITIES
Mr. Rawlings. Chairman Murray, Ranking Member Sessions,
members of the Committee, it is a pleasure and an honor to be
here to talk to you about this important challenge facing
America. My name is Hunter Rawlings, president of the
Association of American Universities, who are 60 of the leading
research universities in the United States.
We believe the sequester is terrible policy in the short
and the long term, and that is what I would like to speak with
you briefly about this morning.
We need to address budget deficits, as you all have said,
and our long-term debt. But so far, discretionary funding,
especially nondefense discretionary spending, which represents
only 17 percent of the budget, has borne the brunt of the cuts.
It includes vital investments in education and innovation as
well as infrastructure. The sequester will force additional
cuts, equivalent to nearly 10 percent for the remainder of this
year and more in future years. This is the part of the Federal
budget where our future lies. It is not the way to solve the
Nation's deficit problem. It is very stupid policy.
Faculty members and the next generation of researchers are
already feeling the effects of the sequester as agencies hold
back funds for concern about the sequester's effect. The
sequester could cause vast problems in our research enterprise
and could also cause a low-income undergraduate student to lose
up to $876 a year in Federal financial aid. It will cut work-
study and other financial aid and increase student loan
borrowing costs. Why penalize young students working their way
through college? What kind of message does that send? It is not
a message of opportunity.
All of these cuts will have even greater impact on the
longer term, the economy, and the Nation that we leave to our
children and grandchildren.
The Federal Government invests approximately $29 billion in
research at the Nation's colleges and universities, mostly in
basic research. Private sector R&D is primarily for the purpose
of developing products; businesses cannot afford riskier, long-
term basic research. That is why there has long been a
bipartisan consensus that this is primarily a responsibility of
the Federal Government, and the Federal Government has made
great decisions in the past to support research, which has led
to enormous economic advantages for this country.
As Senator Lamar Alexander and I wrote in an op-ed very
recently, scientific research is a high-yield investment.
Economists estimate--and this is a critical fact--that at least
half of GDP growth since World War II has come from
technological advances, almost none of which would be possible
without federally funded innovation. This research gave us the
technology behind Google, as the Chairman noted, Cisco, and
Genentech and entire new industries. And the NIH's Human Genome
Project has spurred not only advances in human health but
nearly $800 billion in economic growth. That is an enormous
return on investment.
Why is this so important? Well, let me just hold up a
smartphone. Every one of you has one of these, and you use it
now constantly. It is wonderful that we have companies that
make these fantastic instruments. But they would not work, they
could not be built, they would not have been thought of without
federally funded research.
Why is that? Because the GPS that guides you to your
destination was made possible by the federally funded research
that produced the atomic clock. The touch screen came directly
from innovation funded by the National Science Foundation. The
liquid crystal display, the LCD monitor used on these phones,
came from research funded by NIH, the National Science
Foundation, and the Defense Department. The rechargeable
lithium ion batteries that run these phones came out of basic
research funded by the Department of Energy. The integrated
circuit, which you find in practically all electronic equipment
today, benefitted from federally funded research. And, finally,
the Internet and the World Wide Web, which we spend so much
time on with these devices, are results of federally funded
research along with private sector innovation.
Why would we reduce the part of the Federal budget that
generates these returns in science, innovation, and economics
just at the time when the rest of the world is investing
heavily in precisely those areas? I do not want the next Google
to come from China. I want it to come from here. And the only
way to make sure that is going to happen is if we continue to
be the leader in science and technology internationally.
We face a challenge, a big challenge to our leadership in
these fields today. It is not an exaggeration to say that the
Chinese and other countries are now borrowing our model,
spending heavily on research as we reduce research. Why would
we cut when they are increasing their investment?
To conclude, the sequester is dangerous. Please do not let
it happen. Universities have repeatedly urged Congress and the
President to stop the sequester and address our fiscal problems
in a balanced, sensible way that preserves investment in the
future.
Thank you for this opportunity.
[The prepared statement of Mr. Rawlings follows:]
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Chairman Murray. Thank you.
Dr. Carnevale.
STATEMENT OF ANTHONY P. CARNEVALE, PH.D., DIRECTOR AND RESEARCH
PROFESSOR GEORGETOWN UNIVERSITY CENTER ON EDUCATION AND THE
WORKFORCE
Mr. Carnevale. Thank you, Madam Chairman and Ranking Member
Sessions, for inviting me here. I have a fairly simple story to
tell, and that is that in these times, and really beginning in
the early 1980s and moving toward these times, we have become a
Nation where, if you are going to get a good middle-class job,
you have to have some kind of postsecondary education and
training, not necessarily a B.A. or graduate degree but some
kind of postsecondary education and training. And that was not
always so. A lot of people find this difficult to understand
because they remember an economy where that was not true. I do.
And it was not that long ago.
In 1973, at the end of the great American post-war boom, 72
percent of American workers had high school or less; 35 to 40
percent were high school dropouts. When we look at those people
retrospectively, we find that the majority of them, almost 65
percent, earn more than $35,000 a year in current dollars and
on up from there. It really was a high school economy,
especially for blue-collar males.
What changed was somewhat mysterious at first. Actually, in
the 1970s, the value of a college education went down relative
to the value of high school, and everybody was worried about
that. Books were written, one by a famous economist called
``The Overeducated American.'' We were all worried. And then in
1980-81, we had the Volcker recession, which crashed the
economy and reduced and all but killed off inflation. And after
that, the economy began to reorganize very rapidly. What drove
it was computer-based technology. And what happened and has
been happening ever since is that computer-based technology
automates any task in a job that is repetitive, and more and
more it automates whole sets of tasks.
As a result of that, the tasks that were left over were
nonrepetitive and required higher skill. In America, the only
way we could get higher skill, because the only institution we
had available was higher education or postsecondary education--
it could have been done otherwise. But here, when we wanted
more skill, we shifted demand upward to higher education. The
population went first. Economists debated for a decade about
what was going on. But Americans started going to college in
very great numbers, such that between 1983 and 2002 most
analysis agrees that the supply of college-educated workers
went up by about 1 percent, the demand by employers went up by
3 percent per annum.
As a result of that, we created a huge wage premium for
college. It went all the way to 74 percent, advantage for
people with some college or better.
As a result of that as well--this is a major part of the
story about the growing income disparity in America, apart from
minimum wages and all the rest of it--we are really divided now
into a Nation of postsecondary haves and postsecondary have-
nots.
There are two things that have come from this that are very
clear. One is the increasing value of college. As you said in
the beginning, if you go to high school, you will make about
900 grand over a career. If you get a high school degree, you
will make about a million three. If you get an A.A. degree, you
will make about a million seven. If you get a B.A., about
$2,300,000. If you get a graduate degree, you can make anywhere
from $3.1 million to $3.7 million. So the demand for college
grew, and the cost of college grew.
But there was a second effect that is even more important,
I think, from a policy perspective, and that is, the variation
in the value of degrees grew even more. So it is now true that
a worker with a certificate of one year in heating,
ventilation, and air conditioning can make more than 25 percent
of people with B.A.s. Thirty percent of people with associate's
degrees make more than people with bachelor's degrees. Forty-
four percent of people with bachelor's degrees make more than
people with graduate degrees.
What that is telling us is that the field of study is what
is driving the value of education, not the degree level, not
the institution. And so the system is now driven by a
relationship between college majors, fields of studies, and
programs, and the access they give individuals to occupations.
And so in the end, what this says to me and it said to many
others is that we need to begin to make the higher education
system more transparent. We need to let students know,
administrators know, and policymakers know what the value of
different degrees are, give them choices, in the hopes that
ultimately it will increase efficiency in the system, because
beyond the sequester, what we are going to need is efficiency
in policy with whatever money we have left over.
Thank you.
[The prepared statement of Mr. Carnevale follows:]
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Chairman Murray. Thank you very much.
Mr. Ferguson?
STATEMENT OF STEPHEN L. FERGUSON, CHAIRMAN, COOK GROUP, INC.
Mr. Ferguson. Thank you, Chairman Murray and Ranking Member
Sessions and members of the Committee. We appreciate the
opportunity to testify here today. My name is Steve Ferguson. I
am chairman of the board of Cook. I am pleased to be
representing and speaking on behalf of the medical device
industry today.
My message is not just about a company. It is about
employees, jobs, and patients.
I have nearly five decades of experience in the medical
device industry. Recently, I was approached by an employee who
said, ``Your company has now saved two lives in my family.''
She told me her father had been diagnosed with an aortic
aneurysm and traditional surgery was not an option. However,
the new stent graft saved her father's life.
She then spoke of her step-daughter who benefitted from a
device which stops the bleeding of mothers after birth. The
doctors said the device saved her step-daughter's life.
When someone tells you personal stories about medical
technology that saved lives, it drives home how important our
mission is at Cook and how important our industry is to the
people of this country.
In 1963, our company started in the spare bedroom of Bill
and Gayle Cook's apartment with those two as the only
employees. Cook is the largest family-owned medical device
manufacturer in the world today. We have manufacturing
facilities in Indiana, Illinois, Pennsylvania, North Carolina,
and California. We also have plants in Ireland, Denmark, and
Australia.
While 57 percent of our sales are outside the United
States, more than 80 percent of our 14,000 products are
manufactured in this country. We employ about 7,500 in the
United States and 10,000 worldwide.
The U.S. medical technology industry has been a global
leader in the medical revolution that has taken place over the
last 50 years. That has led to increased longevity and
treatments for conditions and illnesses that were not even
dreamed of in my father's generation.
We are an industry of thousands of companies; 98 percent of
them have fewer than 500 employees. The industry is directly
responsible for 2 million American jobs and generates $5.4
billion in trade surplus.
As chairman of Cook, not a month goes by without a
representative of a foreign nation coming to Cook headquarters
to recruit jobs to their country. The device excise tax has
been the latest recruiting tool.
Our company, like nearly all medical device companies, is
facing road blocks to growing jobs in the U.S. The most
significant barrier to future job growth is the 2.3 percent
medical device excise tax that became effective January 1.
While this does not seem like much, it is a tax on gross
revenue. It comes off the top, not on earnings, and it is huge.
Whether a manufacturer makes a profit or not, it pays the
excise tax.
For a company like ours, which pays about 33 percent of our
U.S. earnings in Federal and State corporate taxes, the excise
tax will increase our effective rate to more than 42 percent.
This is more than a 25-percent increase. Ernst & Young projects
that the Federal tax liability of the medical device industry
will increase 29 percent as a result of the tax.
Policymakers on both sides of the aisle have stated a key
component to turning our economy around is to invest in high
technology and manufacturing, and they are is right. To create
jobs you would not impose a special tax on the fastest-growing
and most innovative industry. The med tech industry is the type
of industry we want to stay in this country.
In order to offset big expenses like the excise tax, a
company can only look to reduce employees, research and
development, and capital investment. Those are your three big
items. Everything else is minor, the cost of materials, et
cetera. Cook has never had a layoff in 50 years, and we do not
intend to start now. However, we must make hard choices. Cook
will start important new projects outside the United States as
we already have employees there. Our previous plans to open
five new manufacturing facilities in American towns are now on
hold.
The impact of this tax falls squarely on patients and
employees. Make no mistake about it. Cuts in research and
development will adversely impact patient care. The tax will
drive manufacturing outside the United States. It is a shame
that potential Cook employees who can compete with any place in
the world based on their productivity are now going to be
denied the chance because of Government action.
Fortunately, Congress can act to repeal the tax. We hope
that you deliberate further about ways to encourage innovation
and investment in long-term economic growth and that you will
support the repeal of the medical device excise tax. The
country needs your leadership. We must do everything we can to
create an environment so that the next Bill and Gayle Cook can
begin their journey to improve patient care in the United
States.
Thank you very much.
[The prepared statement of Mr. Ferguson follows:]
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Chairman Murray. Thank you very much.
Mr. Malpass.
STATEMENT OF DAVID R. MALPASS, PRESIDENT, ENCIMA GLOBAL LLC
Mr. Malpass. Thank you, Chairman Murray, Senator Sessions,
and members of the Committee. Thank you for the invitation to
discuss the impact of Federal spending on economic growth.
I welcomed the Chairman's introduction on the need to
tackle the debt and deficit and to cut spending responsibly.
That is the spirit of my statement today, which I will
summarize.
By way of background, my company is Encima Global. We
provide economic research to a variety of financial firms.
My view is that reducing the path of Federal spending would
cause faster economic growth and more jobs. To have a positive
impact on growth, it is important to convince the private
sector that the Government will create a continuous process of
spending restraint and downsizing. The best way to convince the
private sector is to make a responsible reductions now.
The debt limit should be rewritten, in my view, to install
a lasting limitation on the U.S. marketable debt-to-GDP ratio,
which, if exceeded, forces Washington to cut spending.
A process to restrain spending growth is all the more
urgent because the economic recovery continues to be much
slower than normal. The unemployment rate is still 7.9 percent,
and the growth in the Nation's prime working-age population has
stalled. I am going to refer to a few of the graphs in my
prepared statement.
On the graph on page 2, we can see that we have fewer
workers in the prime working-age population. Apart from
recessions, 2012 was the weakest nominal growth rate since
World War II. The real median household income--and there is a
graph of that on page 3--has fallen over the last 13 years, and
especially in the last 5 years. Current policies, which I will
characterize as spending more, raising taxes and relying on the
Federal Reserve to provide the funding, are simply not working,
as shown in the graph on the top of page 3.
CBO has had to repeatedly lower its forecasts, at the
bottom of page 3, and the Federal Reserve, on page 4, has also
had to lower its forecasts repeatedly as the effect of the
policies became clear on the economy.
In my view, the inability to control spending is hurting
growth. That includes the expansion of entitlement spending;
the lack of a Senate budget in 2010, 2011, and again in 2012;
the routine sidestepping of the PAYGO scorecard; and the
decision not to offset spending increases with restraint
elsewhere in the budget. Those have slowed GDP growth and job
creation. The result is a policy that will require much higher
future debt and taxes, discouraging business investment.
Government spending causes the private sector to expect
more taxes and Government debt issuance. That causes it to
reduce investment and hiring. The converse is also true. A
convincing reduction in the long-term growth of Government
spending would encourage private sector investment and hiring,
and I will refer you to the graph on page 6 to show the
problem.
CBO's projections of spending are that in the out-years
they go up faster than the economy. That is daunting to the
private sector. It looks at that graph, spending going up even
faster than the economy, and decides not to invest, and that is
what we have been facing.
The picture facing the private sector is even worse than
the CBO baseline because it is based on two rosy assumptions.
CBO is assuming that interest rates stay very low by historical
standards despite the high levels of debt; and they are also
assuming--and I refer you to the graph on page 7--that
discretionary spending plunges from 8 percent of GDP now down
to 5.5 percent of GDP by 2023. It is highly unlikely that we
will see that level of spending restraint, nor would that be
beneficial to economic growth if we did that. And yet that is
the baseline assumption that CBO is operating on.
In making budget decisions, one of the confusing issues is
whether austerity is bad for growth. The confusion is that
austerity or ``fiscal consolidation'' encompasses two separate
economic policies: Government downsizing on the one hand, which
I think causes more growth; and private sector downsizing on
the other hand, which causes recessions.
Many of the reform programs underway in Europe are harmful
because they are built on austerity aimed at the private
sector. In general, the unsuccessful programs provide minimal
reductions in the size of Government, few labor reforms, and
minimal asset sales. The Greek Government, for example, sold no
assets in 2012 despite the austerity that they were under.
I see my time has expired, so, in conclusion, I would like
to emphasize the urgency of this Committee's work in
restraining spending growth and making decisions on a better
composition of spending. Private sector investment is very
responsive to future Government spending and taxation, so
cutting Government spending, downsizing Government, helps
growth by encouraging private sector investment and hiring.
Thank you very much, Madam Chairman.
[The prepared statement of Mr. Malpass follows:]
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Chairman Murray. Absolutely, and thank you to all of you
for your testimony. We will now go to 5-minute rounds for all
of our Senators for asking questions.
Ms. Trottenberg, I want to start with you. There has been a
steady stream of studies in recent years highlighting a
perceived investment gap in the Nation's transportation
infrastructure. Certainly the public is very sensitive to the
worsening congestion on our roads and at our airports and
throughout our infrastructure.
Can you talk a little bit about what the economic
consequences associated with an aging infrastructure are?
Ms. Trottenberg. Yes, there have been a lot of studies in
that regard, and at DOT we put out a Conditions and Performance
Report every few years, and we have seen that just to maintain
the current state of good repair--which is essential for our
economy to function efficiently--we would need in both the
highway and transit context to basically double what we are
investing now in capital investments.
If we look at our economic competitors, I think they are
doing a better job of the economic analysis of looking at where
investments will bring us the highest return, and we have
started to do more of that at DOT. The TIGER grants gave us a
really good opportunity to start that process. And I will just
mention a few areas where I think there are tremendous economic
returns to be realized.
I will start with NextGen. We are still using a 1950s
ground-based navigation system. This gentleman held up his
smartphone. We need to get to a satellite-based system. The
economic returns on those investments are tremendous. They
modernize our aviation system. They will save airlines fuel
costs. They will make more capacity in our skyways. They will
have tremendous benefits.
There are a lot of key areas like that. We discovered in
TIGER, in our freight system in particular, there are a lot of
areas where, with a good combination of very modest public
sector investment, you can leverage a lot of private
investment, 5, 6, 7 times as much public investment, and get
tremendous public and private benefits.
Chairman Murray. Thank you.
Let me ask all of our panelists a broader question. America
has always been known for building large projects-- Hoover Dam,
Interstate Highway System, investing in innovative
technologies, as Dr. Rawlings talked about, producing the
Internet and communication industries, educating our students,
working to support these efforts.
You know, historically, investments in education,
infrastructure, and research and development have really had
strong bipartisan support. Eisenhower built our highways.
Republicans in Congress worked with President Roosevelt on the
Montgomery GI bill. The COMPETES Act passed Congress on a
bipartisan basis. It was actually signed into law by both
President Bush and President Obama.
I am worried about some signals on the horizon. Last year,
after very long negotiations with the House, we were only able
to pass a two-year transportation bill instead of a five-year
bill. The Elementary and Secondary Education Act, and the
Workforce Investment Act, both have not been reauthorized.
I wanted to ask all of you what you think is behind that
trend and what are the long-term consequences of failing to
invest in these programs.
Ms. Trottenberg. I can start on the transportation front.
Chairman Murray. Great.
Ms. Trottenberg. It is true MAP-21 was only a 2-year bill.
We are grateful that Congress did come together, and obviously
it was a bipartisan bill, led by Senators Boxer and Inhofe here
in the Senate.
I think on the transportation front, we have had an
extraordinary tradition in this country of bipartisan
consensus. In part that is because, the funding mechanism we
have used for the past 60 years, the Federal gas tax, has risen
pretty regularly, and Congress has actually only had to raise
it a few times. And because of the amount of mileage that
Americans are driving has increased every year, we had a pretty
good stream of revenue, and that enabled us, to build a stable
program and achieve political consensus.
Obviously, now we have not had the gas tax raised in 20
years, and we have been searching for a way to achieve
consensus on how to fund the program going forward. We have put
a lot of general funds into the program, something that we
started doing about 5 years ago and had not done prior to that
at all. Obviously I think a lot of us worry that that is not
fiscally and politically sustainable. As Senator Sessions was
saying, that is adding to the debt future generations are going
to have to pay to keep the program going.
So for us, we clearly need consensus on a long-term,
sustainable funding path.
Chairman Murray. How about on the education and research
side?
Mr. Rawlings. What I would cite there is the following: NIH
has great bipartisan support. Republicans and Democrats support
NIH, and that is terrific. It has helped us build great
biomedical research in this country.
But because of what has been happening to the budget, with
the steady squeeze on the domestic discretionary side of the
budget, appropriations for NIH actually decreased over the last
two years. Down, not up. And in terms of its purchasing power,
it is down 20 percent over the past 10 years. That is a big
number. It affects the University of Alabama at Birmingham,
which is a great research institution in biomedical research.
It affects the University of Washington, another great one.
Both stand to lose tens of millions of dollars because of NIH
reductions, which are already occurring, because NIH, worried
about the sequester, is holding back research grants.
So the estimate at Birmingham is a $25 million loss. At UW
it is $75 to $100 million. And the new president at Birmingham,
Ray Watts, devoted most of his first public address to the
danger of the sequester specifically for his institution in
Alabama. So that is how it hurts.
Chairman Murray. Okay. Unfortunately, I am out of time. I
am going to keep us all to 5 minutes, so I am going to turn to
Senator Sessions at this point.
Senator Sessions. Thank you. We are proud of the University
of Alabama at Birmingham, and they get about $300 million from
the Federal Government, and that is so important to a lot of
the good work they do. And a $25 million reduction is
significant, and it is a bit troubling through the sequester
where the cuts falls are not as smart as they need to be. We
did double NIH funding in the early part of 2000, but it is an
important matter.
With regard to highway funding and the sequester, the
sequester does not impact Federal highway spending, does it?
Ms. Trottenberg. Correct.
Senator Sessions. So we hear a lot of talk, you know, they
go around and poll, I guess, and figure what is most important
to the American people. They like roads and bridges. They like
improved transportation. And we sort of imply that roads are
getting cut, and in this program it is one of the things that
is exempt, as is food stamps, as is Medicaid, as is many of the
Pell Grant programs that are entitlement programs.
Mr. Ferguson, you mentioned something I have seen from
talking to real business people, and you are one of those. You
were actually solicited to move some of your manufacturing out
of America to foreign countries because you could avoid the
increase in the medical device tax. And that was an argument I
guess some of the people asking you to consider that made. Do
you think other companies may succumb to that argument?
Mr. Ferguson. Well, I think you can see by the reports and
releases that companies are making that decision every day to
move outside the country.
Senator Sessions. So as a result, this tax would accelerate
job loss in America.
Mr. Ferguson. Yes. The answer to that question is yes.
Ireland, Canada, and other nations constantly recruit U.S.
companies to come locate in their countries.
Senator Sessions. Well, thank you for sharing that real-
life perspective.
Mr. Malpass, with regard to the debt and Government size
and spending, this is really important. I think all of us have
to be honest. It is not all win-win, that somebody comes up
with a plan and they say it is going to produce al these
benefits, and if we would just tax a little more or borrow a
little more and fund this program, it is going to make America
better. But you are raising the question that it is not always
so.
Would you share a little more with us on that?
Mr. Malpass. Yes, Senator. As the debt grows, the private
sector has to assume that that debt is going to be paid. So as
the Government spends more, the borrowing has to come from the
private sector or else taxes come from the private sector.
To the Chairman's point about why is it that we are having
trouble making long-term investments, I would answer that we
have so much debt, and each time you do a budget, you find that
the entitlements and the annual spending are, in effect,
crowding out. If you have a budget horizon that is 10 years and
you say, well, the first thing we have to do is fund all the
entitlements and then we have to fund the necessary
discretionary expenditures, it does not--
Senator Sessions. Well, second, we fund the interest on the
debt.
Mr. Malpass. Yes, the interest on the debt, it does not
leave much room for the longer-term projects that are going to
create future growth. So, in my view, the best way to address
that problem would be to make choices on all of these areas
starting now, meaning you have to make spending choices,
responsible spending choices, today.
Senator Sessions. Well, we know that recovery is slow. They
are saying it was because there was a financial recession and
other excuses. However, just a few years ago, 2, 3 years, after
we were coming out of the recession, after we were out of it,
the projections for economic growth that were expected last
year and this year and next year made a couple of years ago are
not being met. Is that not correct?
Mr. Malpass. That is right. And I think we have tried the
idea of having the Government spend more money to see if that
causes growth, and we have the answer definitively. It
absolutely does not cause growth. And Japan tried this. Japan
has tried over and over again to have big spending increases
and see if it gets the economy going. And each time the private
sector reacts by reducing investment, which hurts jobs.
Senator Sessions. Well, it is so important, and I
appreciate your testimony. My time has expired.
Chairman Murray. Thank you.
Senator Baldwin?
Senator Baldwin. Thank you, Chairman Murray and Ranking
Member Sessions. Today's hearing is especially timely given the
across-the-board sequestration that is scheduled to take effect
this Friday. These arbitrary and indiscriminate across-the-
board cuts will reduce, according to many economists, expected
GDP growth by as much as half at a time when we need to be
focused on growing our economy. And it is another in a series
of what I would describe as ``self-inflicted wounds'' that
congressional gridlock is really responsible for.
We have to do better. We have an obligation to come
together to find a balanced solution to avoid sequester and get
back to the regular order of annual budgeting.
Our budget is about choices, and it is about values. And
this week the Senate Democrats will offer a balanced solution
to remove the sequester for a year by safeguarding investments
that we need to grow our economy and cutting spending and
closing tax loopholes that we can no longer afford.
Here are some of the choices that I see as we move forward.
In my home State, do we kick 900 Wisconsin children out of Head
Start? Or do we close oil and gas tax loopholes for one of the
world's most profitable set of companies?
Do we ensure that 23,000 Wisconsinites continue to get job
search assistance to get them back on their feet? Or do we
continue with tax breaks for companies who ship American jobs
overseas?
Do we provide nutrition assistance for our most vulnerable
Wisconsin seniors? Or do we continue with billions of dollars
of wasteful direct payment subsidies to large corporate
farmers?
These are just some of the choices that we are facing that
demand our action.
I want to focus my questions on two areas-- infrastructure
investments and workforce development--and I would start with a
question about ports for Ms. Trottenberg. Wisconsin is home to
one of the largest ports on the Great Lakes, the port of
Duluth-Superior, and I had some time this past week to visit
with residents of Superior, Wisconsin, about the topic of
harbor maintenance.
As you may know, Senators Levin and Isakson have introduced
the Harbor Maintenance Act, which would ensure that all fees
charged to shippers through the Harbor Maintenance Trust Fund,
which amounted to $1.7 billion for fiscal year 2013, are spent
on harbor maintenance and operations. Presently, only half that
amount is actually spent on those activities. And I am happy to
say my colleague from Wisconsin and I are both cosponsors of
this legislation.
Ms. Trottenberg, could you discuss what kind of economic
impact the doubling of investments we make in harbor
maintenance would have on communities like Superior, Wisconsin?
Green Bay also has a big harbor.
Ms. Trottenberg. Yes, I would be happy to, Senator Baldwin,
and certainly ports is another area where at the Department we
get a lot of interest, and they are clearly a key focus for our
administration in terms of investment.
Again, having to do four rounds of the TIGER grant program,
we were able to put investments into 25 ports around the
country. It was pretty unprecedented. And with a lot of those
projects, the economic analysis showed benefits that greatly
surpassed the investments. And, again, a lot of these projects
were public-private partnerships where there was a lot of
private investment being leveraged. Clearly, there are a lot of
ports around the country that are interested in accessing more
of the Harbor Maintenance Trust Funds. There are great dredging
needs. There are great both port infrastructure needs and
transportation needs linking to the ports-- roadways, railways,
et cetera.
There is no question, through the economic analysis our
Department has done, there is great economic value to be
unlocked in investing in our Nation's ports, and clearly, as we
anticipate less of an issue in the Great Lakes but certainly in
the southeast as we anticipating the widening of the Panama
Canal, our Department is right now undertaking an analysis to
see exactly what the potential impacts of that are going to be
and how we can best target investments to make sure our country
remains competitive in the global economy.
Ms. Baldwin. Thank you.
Chairman Murray. Thank you.
Senator Johnson?
Senator Johnson. Thank you, Chairwoman Murray.
The Chairwoman in her opening statement said that the goal
here is to help our economy grow and keep us globally
competitive. I just want to ask any member of the panel, is
there any tax increase that you know of that helps our economy
grow or keeps us competitively globally? Any? Anybody want to
volunteer? I will take that as a no.
Mr. Ferguson. Well, I would say that the device tax, makes
it more difficult for the U.S. to compete globally.
Senator Johnson. Exactly.
Mr. Ferguson. And the private side exceeds the public side
in investment in R&D. And so when you have a tax and businesses
have only three places to cut--employees and R&D and captial--
and this tax has a strong impact.
Senator Johnson. I think my point has been made. There are
no tax increases that are going to help our economy grow.
We have also heard a number of times--and really over the
number of weeks--people talking about the sequester devastating
our economy; $85 billion on $16 trillion, or sixteen thousand
billion, is about 0.5 percent. Is a 0.5-percent reduction in
spending by one component of the economy going to be
devastating to any economy? Is that an accurate term?
Mr. Malpass. I do not think it is devastating. I think it
is correct to say this is not the best way to make your
spending decisions. So as the Chairwoman opened the hearing,
the goal is to find responsible ways to restrain spending, and
that would be very pro-growth.
One concern I have on the sequester itself is this. If it
is perceived as a one-time cut, then it will not have the
positive impact that you would get from a continuous process of
spending restraint. The private sector has seen one-time
temporary tax cuts. For example, in May of 2008, there was a
Bush tax rebate that did not work. And in 2011 and 2012, we had
the payroll tax cut that, again, did not provide stimulus. We
have seen the economy actually slow.
So it is the same with the sequester. If it is perceived as
a one-time cut rather than a continuous process of cutting, I
do not think we will get the benefits that we would get from
continuous spending restraint.
Senator Johnson. Okay. I believe the whole point of
sequester is to lower the baseline and that is why you would
get about 1.2 trillion.
Dr. Rawlings, you asked why would we possibly want to
reduce this. You know, quite honestly, I do not want to reduce
infrastructure spending or basic science and research. But here
is why we have to reduce something in the Federal Government,
is because we have taken 65 percent of our Federal budget off
budget, so that all of these cuts are falling on a very small
sliver. And the other reason we have to do this is from 1970 to
1999 the average interest rate we paid on our debt was 5.3
percent. We have been keeping that interest rate artificially
low. If we revert to that average when global competitors say
we are not going to loan you this money, not at that rate, we
could add $600 billion per year to our interest expense. That
is 60 percent of discretionary spending. That is why we have to
address this.
Dr. Carnevale--
Mr. Rawlings. Could I just say something?
Senator Johnson. Sure.
Mr. Rawlings. Those are very good points, Senator, and I
certainly do not disagree. The problem here, of course, is that
all the cuts are falling on this tiny piece of the budget where
we--
Senator Johnson. So don't you think we need to expand and
take a look at all of the budget? And that is part of the
problem. You know, certainly on this side of the aisle, we
actually want to save those other programs for future
generations. It seems like the other side is always taking them
off the table, and that is the real problem here, all these
cuts are disproportionately falling on a small sliver of--
Mr. Rawlings. I think that is a big part of the problem,
and it does seem to me that we need a much better balanced
approach.
Senator Johnson. Yes. But the balanced approach, if you
increase taxes, it is going to harm economic growth, so the
balanced approach you are talking about then was why don't we
actually address Social Security, Medicare, other mandatory
spending programs that are really the bulk of our long-term
deficit drivers. Correct?
Mr. Rawlings. If we protect the vulnerable, which I
strongly believe in, then it seems to me that people like me
could indeed suffer--
Senator Johnson. And we all want a strong social safety
net. We are a very compassionate society.
Dr. Carnevale, you mentioned the escalating costs of higher
education. I agree. In the 1960s, room, board, and tuition of a
4-year college was about $1,000. Had that just grown by the
rate of inflation, today college room and board for a year
would be about $7,400. But, in fact, it is about $18,000.
Can you explain what is so different about higher education
that it would grow in its cost at 2.4 times the rate of
inflation and make, quite honestly, higher education less
accessible?
Mr. Carnevale. In the end, a lot of the growth really is--
and I understand your point. You are right. The cost of higher
education has gone up. But a fair amount of it is quality. The
question is: Can we afford the quality? That really is--and can
we afford spending 18 to 20 grand a student for 65 percent of--
Senator Johnson. In business, all the time, quality has
dramatically improved. I mean, we pulled this thing out.
Quality is dramatically improving as the price is decreasing.
So, again, so what is it? What is higher in quality in
education that you cannot also squeeze out economies?
Mr. Carnevale. Oh, sure, you can squeeze out economies. I
agree with that completely. Not only that, we are going to have
to squeeze out economies. I do not think there is any
alternative here. We simply cannot educate 65 percent of us at
the postsecondary level at the current productivity rate in
higher education. It is not possible.
Senator Johnson. We have enticed our children to incur
collectively $1 trillion of debt in higher education. Fifty
percent are unemployed or underemployed recent college
graduates. And we have poured Federal support into those
programs. I guess I am just kind of wondering if maybe that is
one of the reasons higher education has increased 2.4 times the
rate of inflation, the money we have poured into it?
Mr. Rawlings. If I could just respond quickly, what is
happening is a really dire problem, and part of it is because
States have cut so much back on their support for public higher
education. So, in Oregon, for example, repeated cuts in State
funding have led, as you say, to increases in tuition. We
cannot just keep doing that, and the result is that right now
budgets just keep going down, down, down. So--
Senator Johnson. But the cost has gone up, up, up--
Chairman Murray. Senator Johnson--
Senator Johnson. I am sorry.
Chairman Murray. I hate to interrupt you, but we have a lot
of Senators and a vote coming.
Senator Warner?
Senator Warner. Thank you, Madam Chairman.
I do want to follow up, though, from where Senator Johnson
was. I agree that entitlement reform has to be part of the mix.
One of the things I find interesting, though, is, you know, our
revenue as a percent of our GDP is at a historic low. Having
been involved in a variety of the effort to try to find that
common ground, all of them have had substantial amounts of
revenue increases to try to get us back towards our historic
levels, what we did on New Year's Eve was less than half of
what everything from Simpson-Bowles to every other plan had out
there.
So the notion that we are going to somehow do this without
having revenues as part of the mix, as somebody who has read--I
will match my capitalist credentials against anybody at this
dais and job creation credentials against anybody on this dais,
you know, and can read a balance sheet, you know, it has to
have a balance.
I do want to come back to the sequestration issue, which I
have been running back and forth, along with some of my
colleagues, with Chairman Bernanke downstairs, you know,
everybody concurs, you take this hit, and in a way that was set
up to be the stupidest way possible, you are going to have at
least a 750,000 job hit.
What I pressed Chairman Bernanke on was how deep was your
analysis, was it just, you know, taking this much money out,
this many jobs, and he acknowledged that is only as deep as it
went. It did not go to the point of where--and I think the
American public will be even more outraged as we kind of go
down the line. How stupid this was set up where in many cases
we will be costing the taxpayer money under the guise of
savings. Let me cite three examples, and one, Dr. Rawlings, I
would like your comment on, where like any volume purchaser we
buy more tanks, bullets, guns, planes, you get a volume
discount. We will be breaking volume discount contracts because
of this--taking the Navy, 975 separate line items. They are not
all of equal value to the taxpayer, but they are all going to
take a whack.
The idea of furloughing a meat inspector or a poultry
inspector, where you can take that cost of that individual's
job, what has not been factored into the analysis is what
happens when not as much food gets to the marketplace and,
consequently, food prices go up overall?
And, Dr. Rawlings, I had--my good friend Tim Kaine has one
of our university presidents in today, and I have heard this
from a number of them, as well as folks at NIH, where-- and you
may want to comment on this--where because of this kind of
arbitrary, non--and I agree with actually Senator Toomey, lack
of discretion, and even with discretion you are still going to
have bad outcomes, you will have cases, isn't it true, where
you may have multiple years of research where you need that
last year to finish the research to get valid results, where
you will not be able to issue that last year contract and
consequently will literally flush from a scientific standpoint
the prior year workings. Is that not correct, sir?
Mr. Rawlings. That is correct, and with that scientific
loss goes something else. Think of most of these researchers on
NIH grants as running small businesses-- because that is what
they do. They are not like me. I teach ancient Greek. I do not
have a small business. I do not drive the economy. But these
researchers on NIH grants do. So some of them have four-person
companies. Think of it that way. Some of them have 12-person
companies, some of them have 25-person companies doing grant
work.
So what do you do when you get this cut in the fourth or
fifth year of your research? You let go your workers because
you cannot pay them any longer. So the grad students and the
post docs fall off the research team, and the research team
cuts back. But worst of all is not knowing.
I had one professor tell me that his lab is now suffering
from sequester fatigue before the sequester begins because NIH
has held back on the grants.
Senator Warner. Well, again, my point being that I very
much believe you have to have a balanced approach, revenues, I
do believe entitlement reform has to be part of this mix. But I
think when we look at this kind of top-line number, we are
looking at the top-line number as if it was as rational set of
cuts, when in effect this was set up to be the most
irrational--I use the ``Blazing Saddles'' analogy when the
sheriff comes up and puts the gun to his head. You know, no
rational group of folks would allow this to happen, yet we are
3 days from allowing this to happen.
I know I am down to 35 seconds. I want to move to another
subject, Ms. Trottenberg. There are a number of us,
bipartisan--Senator Kerry and Senator Hutchison, who have since
moved on to other careers, but Senator Lindsey Graham and I
looked at the notion of how you better leverage our declining
revenues for infrastructure, on any historic basis, again, our
percent of GDP investing in infrastructure is pitifully small.
So we have looked at a public-private combination of an
infrastructure investment bank, and with my few remaining
seconds, I would like to get your comments on that.
Ms. Trottenberg. Yes, and--
Senator Warner. And let me add, one that on the Senate side
did not have direct loans but--did not have direct grants, but
was much more loans, loan guarantees, married a model much
after the Export-Import Bank, which has never lost a public
dollar ever.
Ms. Trottenberg. And we have sort of a prototype model of
an infrastructure bank right now at USDOT, which is the TIFIA
loan program, which Congress greatly increased the funding we
have for that program in MAP-21. And I can tell you, the
program has been very, very successful. It does leverage
tremendous amounts of private dollars. I think it brings a lot
of private sector efficiencies into transportation investments.
It requires project sponsors, I think, to do the kind of due
diligence that, particularly when you have some real skin in
the game, you see very good work there.
There is one thing we have to acknowledge, though. Those
types of programs do require some sorts of revenues to pay back
the loans, and typically in transportation that has been
tolling or a sales tax or something like an availability
payment, which is a guaranteed revenue stream from a State or
local government.
So I think those bring tremendous efficiencies and can
unlock all kinds of private capital that is waiting to get into
the infrastructure investment space. But they do need some sort
of a revenue stream, obviously, to pay back the loan.
Senator Warner. Thank you.
Chairman Murray. Thank you very much.
Senator Ayotte?
Senator Ayotte. Thank you, Madam Chair.
I wanted to ask Mr. Ferguson, I have been very concerned
about this medical device tax. In fact, in New Hampshire, we
have approximately 50 medical device companies employing almost
3,800 people, and that was just in 2008. It has really been a
growth industry for me. I have visited many of them, both when
I campaigned and also since I have been a Senator. And I know
you are a larger company, Cook. What does this do to startups,
the medical device tax?
Mr. Ferguson. It hurts them very badly. There is a startup
that I know in Warsaw, Indiana, called OrthoPediatrics, which
builds orthopedic devices for kids and makes them able to walk
when they cannot. They have about $19 million in revenue. They
are not profitable. This tax drops to the bottom line. They had
to cut two R&D projects that would have helped kids walk.
Senator Ayotte. Is that because this tax is also a tax on
revenue as opposed to profit and, therefore, when you are a
startup, you do not generally make a profit so your revenue is
reinvested in research and running your company?
Mr. Ferguson. It does, for what you say, since it is a
gross tax, it drops directly to the bottom. You have to
remember, out of the public companies that are publicly traded,
over half of them lost money last year. So it is dropping
directly to the bottom, and they are having to make decisions
between employees, and R&D, and capital. So it is not just the
small companies. It is big companies, too.
Senator Ayotte. Who is ultimately going to pay this tax?
You know, we are really concerned about health care costs
increasing. What does this do to health care costs?
Mr. Ferguson. I think patients pay the price for this tax,
because they will not have the latest technology. I think U.S.
employees and R&D will pay the price. Ultimately patients will
pay the buggest price. I think that is where it falls.
Senator Ayotte. Will it ultimately drive up health care
costs as well? I mean, these costs--you can only sustain so
much in terms of what you can--what will not be able to pass--
will some of it be passed through to the consumer?
Mr. Ferguson. Well, you know, in our cases, you raise wages
4 percent, you have a 10-, 13-percent increase in health care
costs, you had other expenses every year. The hospitals are
under tremendous pressure. The GPOs are saying you cannot pass
it on to us. We have a lot more expenses than we could possibly
pass on, so we have to look at the other side, which is how to
reduce your costs, and that is the reason I say it is going to
go to the employees and patients.
Senator Ayotte. You were going to open up five new
facilities or plants, as I think you described in recently
testimony, here in the United States. What kind of jobs were
you talking about there?
Mr. Ferguson. We had just opened a plant in Canton,
Illinois. We started out--and it was interesting. Our new
Representative, the Congresswoman from that area, took a tour,
and she introduced herself to our employees. One young lady
stood up and said, ``You know, before Cook I was on welfare. I
could not get married because I could not give up the benefits.
I was living in subsidized housing. Now I have health care. I
just bought a house. I got married,'' et cetera.
We had 1,000 people apply for the first 30 jobs. We are
going to have 300 employed there. We wanted to build five more
plants like that so we could employ 300 per plant, about 1,500
more people who are productive, who work, who want to work, who
need the jobs, and we want to do it in the United States.
Senator Ayotte. And also, do you see this, if this tax
remains in place, that we will see more investment in medical
device innovation overseas?
Mr. Ferguson. Absolutely. I think you can see that right
now by what is happening. I hope that you act quickly to try
and turn this. You know, we are an American company. We want to
stay here. We want to build jobs. I think this industry does,
too. But you are going to have to take action quickly to keep
the momentum.
Senator Ayotte. Mr. Malpass, I wanted to ask you, is there
another way we could grow revenue other than increasing taxes?
What will the growth in economic--growth in the private sector
in terms of growth there do to increased revenue to our
Government?
Mr. Malpass. Yes, I think we can grow revenues. In 1986 we
lowered the rate and broadened the base, and that was very
stimulative to the private sector. The private sector sees that
coming and begins to invest more.
The same happened in 2003 and 2004 with the Bush tax cut,
which was very successful in terms of causing more revenues to
come into the Government, even though the rates were lower.
As you look at tax provisions, tax reform that makes the
code more logical or less illogical would be a big step
forward. This medical device tax, by taxing gross revenues, is
a stupid tax. We are using that term about the sequester, but
we are doing it also on the revenue side. It is a bad way to
raise revenues.
Senator Ayotte. Thank you all for being here. I appreciate
it.
Chairman Murray. We have four Senators remaining: King,
Toomey, Kaine, and Wyden. Senator King?
Senator King. Thank you, Madam Chairman.
Madam Chairman and Ranking Member, this has been a very
interesting hearing, and I want to thank you for setting it up.
Mr. Malpass, a couple of questions. I was fascinated by
your testimony. I think one of the issues that really has not
come out explicitly in this hearing is that all Federal
spending is not created equal, and that there are areas that
certainly need to be cut and restrained, and there are other
areas that are legitimate investments. Would you agree that
that is the case?
Mr. Malpass. Yes. I think what is important is that the
United States be perceived as a Government that has a process
to restrain spending and to make logical choices. I was
listening with interest to the other statements today and
agreed with most everything. The projects that are put forward
sound like good projects. Within the same Departments, for
example, the Department of Transportation, it would be very
useful to have areas of restraint where there is a process that
the business community can see, the private sector can see, and
that would spur growth.
Senator King. Well, one of the ironies about the
sequester--and Senator Johnson pointed this out--is that it is
aimed at the areas of the budget which, if you look
historically, are flat or actually declining. Nondiscretionary
difference is at the lowest percentage of GDP it has been in
about 40 years. And the real driver of the deficit over time is
health care. And there is nothing in the sequester or--I mean,
we have to talk about health care, we have to talk about
entitlements, because that is the long-term driver. So I agree
with Senator Johnson on that.
One other sort of mega question, and I do not have an
answer to this, I am interested in all of your answers, but
particularly you, Mr. Malpass, because you are talking about
it. By the way, when I first heard your name, I thought it was
``Malthus,'' and I thought how ironic.
Mr. Malpass. I have tried to live that down.
Senator King. That is too poetic for the Federal
Government, I think.
What is the appropriate level of Federal spending as a
percentage of GDP? Historically, it has been between 20 and 22
percent. What is the appropriate level of taxes, revenues, as a
percent of GDP? Historically, it has been between about 17 and
18 or 19. What is the right number? If we can figure out what
those numbers should be, then it gives us targets that we can
then talk about in terms of budgets and revenues. Do you have a
theory about where that number should be?
Mr. Malpass. My view is that there is no one magic number,
but the ranges you cited would be very pro-growth. So if this
Committee decided that that was going to be the objective, to
have spending in the historical range, you would see businesses
across the country begin hiring workers.
The problem is, as I showed in the graph, the CBO baseline
has much more spending than that. It has tax revenues going up
to nearly 20 percent of GDP, which we have never been able to
achieve. So there are already plenty of taxes in the budget,
but just way too much spending, and so the private sector
responds negatively.
Senator King. Well, I would point out that revenues right
now are about a point below the 40-year average in terms of
percent of GDP, so there is some upward space for revenues.
Mr. Malpass. And CBO has that in the baseline that revenues
we go up. The assumption in the current law baseline is that
revenues are going to go up and actually exceed historical
averages with the current taxes. So there is no real room for
more taxes. There is room for less spending.
Senator King. Would you distinguish between raising--I
notice you like the 1986 act because it lowered rates and
broadened the base. If we are talking about revenues, shouldn't
that be where we are looking, tax expenditures, broadening the
base, rather than rate increases? Simpson-Bowles says we can
actually lower rates if we significantly cut back on tax
expenditures.
Mr. Malpass. That is true, and I think, again, if the
Committee in forming a budget were to seek that as a goal, that
would cause immediate reaction in the private sector with
people hiring. It would mean that the U.S. Government has a
goal of having tax reform, which streamlines the Tax Code, is
less horrible than our current Code, with lower rates and a
broader base. The private sector reaction would be huge to
that.
Senator King. I would agree with that. I think the most
stimulative thing we could do is make a deal, a long-term,
sustainable deal.
Mr. Malpass. And in my testimony, and 2 years ago when I
testified here under the same circumstances, the key point is
to make some small cuts now on the idea that there is a desire
to have restraint. The impression across the country is that
Washington wants to have more spending and more taxes, and so
that is what is holding back the business community. There is
plenty of cash out there, but people just are not investing it
under these conditions.
Senator King. And we need to unleash that.
Mr. Malpass. Yes.
Senator King. The only other, the final--I realize I am
over time, but the percentages, going back to whether the right
number is 20 or 21 or 22, we also, when we are figuring that
out, have to take into account the effect of the aging of the
population.
Mr. Malpass. That is right, and that actually is a very
tough question. And Senator Wyden is an expert. I showed
earlier in my testimony the demographics changing. Even if you
went to the high end of those ranges that you specified, that
would still be a huge surprise to the country and would be very
pro-growth if it were achieved.
Senator King. Thank you very much.
Chairman Murray. Thank you very much.
Senator Toomey?
Senator Toomey. Thank you very much, Madam Chairman.
Just to follow up on this, my own perspective on the
question that Senator King posed is that the optimal size of
Government depends in part on how much growth you want to have.
I think the evidence is overwhelmingly clear. Societies that
have government expenditures smaller as a percentage of their
economy have a higher standard of living. They have higher
growth, higher income, higher wages, and greater wealth. And
countries that have the government occupying a larger segment
of the economy, they have slower growth, fewer jobs, lower
standards of living, and lower incomes. So a big part of this
comes down to how much prosperity do we want. If we want more,
we will spend less. And it makes sense not only because the
Government spends money through a political process that is not
following the kind of economic incentives that the markets use,
but also it has to be paid for. This spending always ultimately
gets paid for by confiscating it from the more productive
private sector, which brings me to the sequester, which I just
want to stress for the record that, despite the description,
the apocalyptic descriptions about this, this is really small
in the context of total spending and the economy, where the
Federal Government has doubled its spending in the last 10
years, and we are talking about a 2.5-percent reduction in
spending from that 100-percent growth. And, by the way, that is
budget authority. Actual outlays for this year, it is about 1-
1/4 percent. That is one-quarter of 1 percent of GDP. This is
not some kind of severe austerity plan.
Now, I think it could be done more wisely, and I wanted to
see if there was any disagreement on the idea that since the
current law forces the across-the-board cuts with no
opportunity to exercise any discretion with respect to those
spending areas that have more merit and those that have less,
could you comment on whether you think it makes sense for us
to, in the event that the sequester goes forward, grant to OMB
and the Defense Department in their responsive areas the
flexibility to make these cuts in a more thoughtful fashion?
Does that make sense to anybody?
Mr. Malpass. The short answer is yes, very much so, and I
think the private sector response would be huge because it
would show Washington trying. Rather than trying to maximize
the damage from the sequester, it would be trying to reduce the
damage or make it less onerous than Washington has made it out
to be.
Senator Toomey. Any other thoughts on that?
Mr. Rawlings. Yes, I would disagree with that comment
because, while it sounds better to make flexibility, in fact,
if what it means is we are going to stick with the cuts at the
level of the sequester and then leave it up to NIH and NSF to
make the cuts in a slightly better fashion, they can do that.
But if that becomes the new baseline, all you have done is
succeeded in cutting NIH and NSF, letting them figure out--
Senator Toomey. Let me just interrupt for a second because
it is not--depending on how you formulate this, it is not
necessarily the case that NIH per se has to take the cut.
Mr. Rawlings. Right.
Senator Toomey. If the administration has the discretion
across all nondefense categories, they might decide that,
building new taxiways on a seldom-used airport somewhere should
be a lower priority than NIH.
Mr. Rawlings. The problem is it is going to look like a
good solution, everyone is going to say, great, now they can
make their own decisions. But the bottom line is going to be
cuts in the areas where we need investment because our
competitors are investing and we are reducing.
Senator Toomey. Okay. But that sounds like an argument that
we cannot cut anywhere, and when we have had a Government that
has doubled in size in the last 10 years, to think that we
cannot find, a little over one penny on every dollar anywhere
throughout this Government strikes me as not very appropriate.
Let me ask a specific question, if I could, of Mr. Ferguson
because I know you touched on the medical device tax, and as
you may know, there is bipartisan concern that this is a really
egregiously, badly designed tax. That happens to be my view, in
part because it applies to sales, irrespective of whether a
company is making any money. And if I understood your testimony
correctly, am I right in understanding that because of the
medical device tax and if it stays in effect, you will forgo
expanding production in the United States of medical device
manufacturing?
Mr. Ferguson. Yes, and our future growth will have to be in
Ireland or Denmark or Australia.
Senator Toomey. So this medical device tax, in your view is
this a pretty direct incentive to go overseas, go offshore,
create jobs somewhere else?
Mr. Ferguson. When combined with other issues, the answer
is yes, it is the straw that broke the camel's back. But the
other thing is it falls directly on R&D because when you look
at the size of this type of tax and it is an expense, then the
only places you have to cut are employees or R&D, or you have
to go look for cost savings someplace else.
Senator Toomey. Thank you very much.
Chairman Murray. Thank you very much.
Senator Kaine?
Senator Kaine. Thank you. Just three quick follow-ups.
We built a Federal Interstate Highway System largely off of
a Federal excise tax on gasoline. Do any of you believe that
that tax and the way it was spent was harmful to economic
growth? Would you all agree that the construction of an
Interstate Highway System was helpful to economic growth?
Mr. Ferguson. Absolutely.
Senator Kaine. All right. Thank you.
The second question I want to ask is a follow-up on Senator
Warner's discussion. As he indicated and as did Senator King,
we are now--we have a balance sheet problem. That is what we
are wrestling with as a Budget Committee. We spend more than
historic averages. We are taking in less than historic
averages.
To the new guy on the block, it seems like there are three
ways we can fix it: we can fix it all on the revenue side, more
revenue; we can fix it all on the expense side, cut expenses;
or we can find--and the details are important_or we can find
some kind of a balanced approach that looks at expenditure
reductions and revenues.
Which of you favor fixing it all on one side of the balance
sheet, either all through expense reductions or all through
revenue increases?
And which of you feel like we need to fix it by, if we are
going to fix the balance sheet, trying to find some fixes on
both sides of the balance sheet?
Okay. The last thing, I worry about this medical device
tax, too, and I want to drill into it a minute to find out what
is the right contour of the fix. The first piece, talking about
the international competition, it was my understanding that the
device tax does apply to foreign manufactured devices that are
sold in the United States. So a foreign manufacturer gains no
edge over a U.S. manufacturer. If they are selling devices in
the United States, the excise tax applies to those sales as
well. Is that right, Mr. Ferguson?
Mr. Ferguson.It increases their ability to compete with us
because they are starting with a lower base and cost. For
instance, coming from Ireland, the Federal tax rate is 12.5
percent versus 35 percent in the U.S., plus we have State taxes
on top of it. So when you look at it, what this has done is
just exacerbated the difference between being an American
manufacturer and manufacturing overseas.
The thing to remember is a lot of times people say that the
problem is because personnel costs. That is absolutely not
true.
Senator Kaine. So the differential between the countries is
not the excise tax, which gets applied regardless of where the
device is manufactured, but it is other tax policies that
create a differential?
Mr. Ferguson. Well, it is really the excise tax that makes
the differential. When you add a 30-percent bottom-line tax in
this country, then it makes the differential. And so it is the
marginal differential that this tax imposes that makes the
international versus the U.S. tax such a large--
Senator Kaine. So just the real simple question, because I
have to make sure I am right on this. The excise tax is applied
to foreign manufactured items if they are sold in the United
States.
Mr. Ferguson. Yes, it does.
Senator Kaine. Okay. The other questions, I just want to
make sure, for medical device manufacturers, many of the
revenues that come into medical device manufacturers are
revenues that come in through Medicaid or Medicare
reimbursements. Isn't that correct?
Mr. Ferguson. Yes, indirectly, but through our customers.
Senator Kaine. Okay. I do not have any other questions,
Madam Chair. Thank you all very much.
Chairman Murray. Senator Kaine, thank you very much.
A vote has been called. Senator Sessions and I need to go
vote.
Senator Wyden wants to return to ask his questions, so I am
going to leave the hearing open and put us in a small recess
and let him close this out today, if you all would not mind
staying. Senator Sessions, if you do not object to that.
I would just let all of our colleagues know that I think
this was a really good hearing, and I want to just say I am
really committed to a budget that reflects the values and
priorities, and today's hearing I think was really important in
helping us create a path to future successes.
I would remind all of our colleagues that additional
statements need to be in today by 6 o'clock p.m. Senator Wyden
will gavel us out shortly as soon as he returns, and with that
I will just put us into a short recess.
Senator Sessions. Well, could I just thank the panel? It
was, I think, a very good discussion. We learned some things,
and it helps us wrestle with the great choices we are being
forced to make. When you are borrowing 36 cents out of every
dollar you spend, you are on an unsustainable course. We have
to confront that and make the tough choices. So thank you for
helping us.
Chairman Murray. Thank you. I agree. Thank you very much to
all of our panelists, and we will give you a moment's respite
here, and Senator Wyden will return in just a minute.
[Recess.]
Senator Wyden. [Presiding.] Thank you all very much for
your patience. This is a hectic day, even by standards
of the United States Senate.
I have questions for each of you. Let me start with you,
Dr. Carnevale, and I will profess right at the outset to have
long been an admirer of your work and the scholarship you have
done in the education field. I would like to ask you a question
in a sense about where we are in terms of higher education
policy because I believe we are in something of a fork in the
road. Higher education policy has always been about access, and
I certainly do not take a back seat to anybody in terms of
access, and particularly ensuring that our young people can get
access to Pell grants and Stafford loans and the array of
programs that ensure that they get in the door, that they can
actually get into college.
I think, however, that we are now moving to a day when we
are going to look at a policy that I in effect call access plus
so that we also say it is extraordinarily important that
students get more value for their education, because this is
going to be, after buying a house, their second biggest
expenditure. And Senator Rubio and I have introduced a
bipartisan piece of legislation. There are other approaches
that in many respects are similar. And we have been able to get
support across the political spectrum, from very progressive
groups to conservative organizations. And my understanding is
you are a long-time advocate for transparency. We have said
young people should be able to find out about graduation rates
and remedial education and particularly be in a position to get
some sense of what they would be likely to earn when they got a
degree from a particular school.
In advocating for transparency, what have you seen as the
primary opposition over the years, and what are the principal
arguments to counter that?
Mr. Carnevale. I agree with you we have hit a fork in the
road here. Part of it has to do with fiscal constraint_that is,
we do not have any money--and the other part has to do with the
fact that the role of higher education has changed. It is now
our workforce development system. And that has a real economic
history, beginning in 1983, when it all began to accelerate
very rapidly.
The opposition to the notion of transparency, of telling
people, as your bill says, giving people the right to know
before they go what the outcome is likely to be of their
program, the opposition comes at a value level, a normative
level, and it is the most difficult piece of it because higher
education leadership sees itself as an institution that is
supposed to help people live more fully in their time, a very
broad goal. I doubt many of us disagree with that.
But the reality now is that in order to get a decent job,
you have to get some higher education, and whether or not you
get a decent job or how good the job is depends on what you
take. And given increasing prices and loans and all the rest of
it, I think we need to start telling people this.
In the end, my bias is that in this culture and economy you
cannot live more fully in your time if you are living under a
bridge and out of a shopping cart. That is, people need to know
that their education is going to give them gainful employment
at the end of the day. It does not mean they should not take
English or study the role of feminism in the French Revolution.
It just means that they need to know what they are going to do
with that after they graduate because they are going to be
doing that for the next 45 years of their life after breakfast
every day.
Senator Wyden. Well said. I would ask you more questions if
I had more time, but thank you again. We are going to be
working very closely with you, and staff is very appreciative
as well.
Ms. Trottenberg, welcome, and you will not be surprised
that I want to talk about infrastructure spending, and
particularly about new approaches that can support a bigger
role for the private sector. For literally a decade, I worked
with a number of Republicans to put in place the Build America
Bonds program, and the night of the debate about the Recovery
Act, Senator Grassley and Senator Baucus, who I think as much
as anything had heard me talk about this so often, they said,
well, let us look at this because Ron has been bringing this
up, you know, for eons. They said, ``Well, so what is going to
happen with Build America Bonds?'' I said, ``Well, we have
maybe a year and a half. We might generate $4 or $5 billion
worth of investment.'' And everybody said, ``Oh, my goodness.
We have never done bonding at the Federal level before. And you
think this will get $4 or $5 billion worth? That sounds
terrific.''
As you know, Build America Bonds in a year and a half
generated $180 billion worth of investment, a 30-fold increase
beyond anything that was projected. And I just think that given
the fact we have all of this work that needs to be done, and
you cannot have a Big League period of economic growth with
Little League transportation systems, that we are going to keep
coming back to what are the effective ways to fund
infrastructure.
Now, Senator Hoeven and I have teamed up on an approach
that really is quite similar. We call it ``TRIP bonds'' to, in
effect, have Federal tax credit bonding to leverage private
dollars for investment in infrastructure. And I do not know of
any other approach that will drive down the costs more and
increase the private sector role in transportation than this
particular concept. And we have talked to you all many times,
and I am encouraged that you all seem to be moving in that
direction as well.
The American Fast Forward Bond program it seems to me sort
of tracks the bipartisan efforts up here in terms of trying to
look at these kinds of approaches. Am I reading this right or
what is your sense of it?
Ms. Trottenberg. Absolutely. Thank you for your leadership
on the Build America Bonds. As you pointed out, it was wildly
successful and brought in an enormous new class--
Senator Wyden. I think that, by the way--excuse me for
interrupting. I think Alan Krueger deserves a lot of credit for
this because, as you know, there was a lot of pushback early
on, and he really prosecuted the case. Excuse me for
interrupting.
Ms. Trottenberg. And brought in, tremendous new classes of
investors who could not benefit from traditional municipal
bonds.
We in the Department now have several programs which are
somewhat along those lines. We have the private activity bonds
where essentially we use them to incentivize the private sector
to develop projects which have very clear public benefits. We
are looking for ways to increase the use of that program, and
as Congress has given us the expanded TIFIA funds, we are
finding more and more that project sponsors are coming to the
Department wanting to make use of both of those programs in
concert. We are well familiar with your TRIP program, Senator
Wyden, and I think we are very keen to work with you, and we
are thrilled there is so much bipartisan support here in
Congress on how we can continue to broaden the pool of
investors that want to come in and invest in infrastructure.
Obviously, from the Treasury's point of view, make sure we do
it in the way that is the most efficient, and I know that is--
you know, one question that we have is how we set the
subsidies, the interest rates, whatever it would be, so that we
are using the taxpayer dollar as efficiently as possible. But,
clearly, we are going to need to bring in much greater private
sector investment and participation to close the gap on what we
need in terms of infrastructure.
Senator Wyden. Well, I am going to look forward to
following up with you, Ms. Trottenberg, on it because I think
particularly when you look at something that can attract
private sector support, it has significant support from labor
union groups, Doug Holtz-Eakin, as you know, has said dollar
for dollar he thinks this is the attractive approach in the
transportation field. Given the President's comments in the
State of the Union--and I thought he was spot on in terms of
talking about infrastructure and roads and bridges and rails--I
really hope that this is an area that can become a prime focus
of your work because I may be missing something, but I just
look around and there are no rallies outside my office calling
for increases in the gas tax, you know, for example. It is
going to be increasingly difficult to find approaches that are
substantively sound and politically viable. And I think that
this concept that we are talking about in terms of trying
particularly to look at tax credit bonding is something that
holds the tariff down on the Federal side--and I noted your
comments earlier with respect to infrastructure--and is the one
that the private sector is saying looks flexible and appealing.
So I am anxious to work with you on it.
Let me talk a little bit about health care and taxes, and
we will kind of go into your area, Mr. Malpass, and I have
followed your comments as well. Suffice it to say the debate
about the sequester, when you really strip it down, has largely
been because there has not been agreement in health care and
taxes. Those are the two kind of driving kinds of areas. And my
sense is--let us take them separately. I just came from the
Finance Committee where we were talking mostly about the health
care issue, and I may be able to get back to talk about tax
reform. But, again, there are some opportunities to bring
people together.
For example, the latest evidence on Medicare--which the
costs have gone down a little bit here recently, we are pleased
to see, but I think we all understand the demographic tsunami
that we are dealing with--70 percent of the Medicare spending
goes to treat those with three or more chronic conditions. So
you get into a strategy that will promote quality of care that
the seniors deserve with a strategy that will hold down costs.
You go a long way to trying to address the agenda for Medicare
reform.
The accountable care organizations are clearly a step in
the right direction. We had them in our part of the world long
before anybody thought about them at the Federal level. But
what is your sense in terms of particularly looking at chronic
care as a key element of Medicare reform and also creating
incentives for those on the program for holding costs down as
well?
Mr. Malpass. Thank you, Senator. I am not going to be able
to respond as an expert on the chronic care issue, and will
look to colleagues on the panel for that if they have comments.
Your point is excellent about how do we find a way to make
reasonable choices within the Medicare program and that it has
a massive impact on the budget.
Right now we are in this impasse where we end up with a
sequester. Republicans are not claiming invention of that idea.
You have been a leader in trying to find ways to work across
the aisle, to find a way to break the impasse.
My own view is that we are at a point where there needs to
be some spending restraint, some agreement that there could be
some spending restraint, and that might then break the logjam
on taxes and on revenues and on health care. But right now the
Nation is waiting for Washington to find a single program that
it thinks could be downsized. That would be the starting point
for the debate and discussion.
Senator Wyden. Let me do this, because staff tells me that
we have to wrap up and get out the door here. On tax reform, I
will pose this to you in writing. One of the things that we are
asking experts in the field is to identify the tax
expenditures, which is, of course, spending in any kind of
literal sense, that they think ought to be either altered or
removed altogether as a way to generate the opportunity for tax
reform. I have had an approach with Senator Coats and Senator
Begich and Senator Gregg and others over the years. I think we
all understand, after what we were dealing with in terms of the
special committee and also Bowles-Simpson, that much of this is
the challenge of modernizing what a big group of Democrats and
Ronald Reagan agreed to in the 1980s. It created millions of
jobs and psychologically gave a big boost to the economy.
So I would ask you more questions if time allowed, but I
will put in writing to you a question asking you on the basis
of your expertise to identify the tax expenditures that you
think ought to be changed.
Mr. Malpass. And if I may, just one point. If any savings
on the tax credits could be used to reduce the overall rate,
let us say, on the corporate side, if that were proposed and
became a concept, it would be hugely pro-growth.
Senator Wyden. Very good. With that, the Budget Committee
is adjourned.
[Whereupon, at 12:31 p.m., the Committee was adjourned.]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
REDUCING THE DEFICIT BY ELIMINATING WASTEFUL SPENDING IN THE TAX CODE
---------- -
- -
TUESDAY, MARCH 5, 2013
United States Senate,
Committee on the Budget,
Washington, D.C.
The Committee met, pursuant to notice, at 10:31 a.m., in
Room SD-608, Dirksen Senate Office Building, Hon. Patty Murray,
Chairman of the Committee, presiding.
Present: Senators Murray, Wyden, Stabenow, Sanders,
Whitehouse, Warner, Merkley, Baldwin, King, Sessions, Grassley,
Crapo, Johnson, 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. This hearing will come to
order.
I want to thank all of our witnesses, who I will introduce
in just a moment. And Ranking Member Senator Sessions and all
of our colleagues who are here today, thank you for joining us.
Over the next few weeks, both chambers of Congress will be
debating fundamental choices about our country's direction and
what kind of nation we will leave to our next generation. We
will lay out proposals that reflect very different approaches
to the many challenges we face.
One central question that we are looking at is: How can we
bring down our debt and deficits while putting the middle class
and broad-based economic growth first? Today's hearing will
focus on how cutting wasteful spending from our Tax Code can
help us meet this challenge.
As we have looked for ways to reduce our deficits and debt,
we have heard a lot of outrage about waste and excess in
Government programs. My Republican colleagues, in particular,
tend to focus on cutting programs the most vulnerable families
depend on to get back on their feet. They say spending on food
stamps is out of control and we cannot afford so many education
and job training programs and unemployment benefits are driving
up the deficit.
Now, there is no question that we do need to look at
Government programs carefully so we can make fair, responsible
cuts that put families and our economy first. But a big source
of spending, and one that deserves to be just as closely
examined, is expenditures in our Tax Code. While we do not
often think of tax expenditures as a form of spending, they
require us to make the same kinds of tradeoffs that other forms
of Government spending would, and lots of them.
Tax expenditures have grown over the last 20 years to
become one of the largest impacts on our deficits and debt.
Just this year, the Treasury will lose $1.3 trillion to tax
expenditures. That is more than we will spend on either Social
Security or Medicare.
But unlike funding for Government programs like Pell grants
or Head Start or road repairs, which is limited and reviewed
regularly, tax expenditures have flown largely under the radar.
Since they generally do not need to be reauthorized, they
receive much less scrutiny than programs that do need to be
reauthorized. That is why Alan Greenspan once called them ``tax
entitlements.''
But here is a big difference: When we think of
entitlements, we typically think of Social Security and
Medicare, which keep our promises to seniors, or nutrition
assistance for families who have fallen on hard times. These
programs allow our country to fulfill its part of the bargain
with those who have already done their share and enable us to
give those most in need some relief.
However, for the vast majority of tax expenditures, about
70 percent of them, it is the other way around. For that 70
percent of tax expenditures, the higher your income, the more
you benefit. So the wealthiest households benefit the most
while middle-class families receive much smaller benefits, and
many of our most vulnerable do not qualify at all. The less you
need, the more you get. And we all pay for it.
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 tax expenditures. But middle-class families received
an average benefit of only about $3,500, which means that when
we talk about big Government welfare, maybe we should not
always jump to cut spending for those who are most in need.
Maybe we should think about what we are spending on those who
are least in need.
The skewed nature of tax breaks like these has helped drive
the amount the wealthiest Americans pay in taxes to
historically low levels as a share of their income. IRS data
show that the effective tax rate for the 400 wealthiest
taxpayers has fallen from almost 30 percent in 1995 to only
19.9 percent in 2009. This is less than the rate paid by many
middle-class families. And meanwhile, over the same time
period, the average income for the 400 wealthiest taxpayers
rose five-fold. That is probably why some tax expenditures are
often called ``back-door spending'' or ``special-interest
earmarks'' for the largest corporations and wealthiest
Americans.
Of course, not all expenditures in the Tax Code are
wasteful. Many help hard-working families reach goals like
sending a child to college, which helps them, their child, and
the economy. But many, too many, are inefficient and unfair.
There is no good reason, for example, that taxpayers
currently subsidize millionaires more when they purchase a
second home or a yacht than they do middle-class families
purchasing their first home. And why should a hedge fund
manager pay a lower tax rate on his income than a soldier or a
police officer or a teacher?
We have some clear opportunities to cut wasteful spending
and make our tax system work better for middle-class families.
And at a time when there is far too much we disagree on in
Washington, there does seem to be some acknowledgment by
leaders on both sides of the aisle that we should seize these
opportunities.
Senator Tom Coburn said, and I quote, ``Masquerading as tax
cuts, many of these programs are no different from any other
Federal program that spends taxpayer money.''
Speaker Boehner recently proposed to raise $800 billion in
new revenue by closing what he termed ``special-interest
loopholes and deductions.'' Even House Budget Committee
Chairman Paul Ryan has noted that many preferences in our tax
system are ``patently unfair'' and ``mainly used by a
relatively small group of mostly higher-income individuals.''
I appreciate Senator Coburn, the Speaker, and Chairman Ryan
for making these arguments and pointing out that these
loopholes help special interests succeed, but do very little to
help middle-class families succeed. I, like many of my
Democratic colleagues, would like to know when Republicans will
be willing to sit down with us and start looking strategically
at which wasteful provisions we can eliminate.
Experts across the political spectrum have also proposed
eliminating wasteful spending in our Tax Code as a way to
reduce our deficit. Discussing options for major deficit
reduction, Ronald Reagan's chief economist Martin Feldstein
recently said, ``The distinction between spending cuts and
revenue increases breaks down if one considers tax
expenditures.'' Today we will hear from experts who have
studied this issue at length.
Professor Edward Kleinbard has noted that we spend twice as
much on tax expenditures as we do through discretionary
investments, like education, infrastructure, and research. But
many of these subsidies are both poorly targeted and skewed to
unfairly benefit high-income Americans more than low-income
Americans.
Economist Jared Bernstein recently explained that by
reducing unfair tax expenditures we can essentially raise
revenue by cutting spending. That sounds like a form of deficit
reduction Democrats and Republicans should be able to agree on.
I look forward to hearing their testimony, as well as the
testimony from Mr. Roberts of the Hoover Institution, who
Senator Sessions will introduce.
If we agree there is wasteful spending in the Tax Code_and
I think it is clear there is--the next question is: How should
those savings be used?
Many of my Republican colleagues would prefer to use every
dollar of new revenue to dramatically lower tax rates rather
than making critical investments in our competitiveness or
paying down the debt. But that approach is more of the same.
It would very likely make it easier for the wealthy to get
even further ahead of middle-class families while making paths
to opportunity for the middle class, through student loans or
workforce training or job-creating research and innovation,
more narrow.
If the goal of our budget plan is to strengthen the middle
class and work towards broad-based economic growth, finding
savings from unfair tax provisions is an opportunity to
responsibly reduce our deficit and invest in our future.
And let us remember that all of the bipartisan groups--
Simpson-Bowles, Gang of Six--agreed. They all recommended using
a significant portion of the revenue from eliminating tax
breaks to reduce the deficit.
As Democrats and Republicans both know, responsible deficit
reduction is essential to our long-term prosperity. But that is
not all we have to do.
Just as we have to bring down our deficits and debt, we
have to make sure we are educating our workforce for the 21st
century. We need to repair our roads and bridges and airways so
businesses can move their people and products efficiently. And
we need to invest in research and development so we can
continue growing new industries in the United States rather
than ceding those new industries, and the jobs that come with
them, to China or India.
That is why proposals from nonpartisan experts include new
revenue for deficit reduction and point out the need to
continue making investments in our long-term economic well-
being. The Simpson-Bowles plan, for example, described
infrastructure, higher education, and research and development
as ``high-priority investments America will need to stay
competitive.''
And we have seen time and time again that the American
people agree. The American people think we should get rid of
inefficient, unfair tax breaks skewed towards the wealthiest
Americans and corporations. In fact, a recent poll showed 57
percent of respondents strongly agreed we should eliminate the
loophole that allows hedge fund managers to pay lower tax rates
than the middle class. Fifty-eight percent strongly agreed with
closing loopholes that will allow wealthy Americans and
corporations to shift income overseas. And Americans want to
see that new revenue used to lower the deficit and make crucial
investments in our future rather than lowering tax rates for
those who are already doing just fine.
I am looking forward to today's conversation because it
seems that cutting wasteful spending in our Tax Code would help
us move forward on a number of challenges.
We know there is wasteful spending in our Tax Code.
Chairman Ryan was absolutely correct; much of it is skewed
towards the wealthiest Americans.
So at a time when we absolutely must cut where we can,
looking at ways we can close special tax breaks that are not
targeted to help the middle class or the economy makes sense,
especially when, by making those adjustments, we can stop
giving an unfair advantage to those who are already doing far
better than most Americans, and instead focus on making crucial
investments in our future while cutting our deficit in a fair
way.
So, again, I want to thank all of our witnesses and
colleagues who are here today. I hope this can be a very
productive discussion. And with that, I will turn it over to
Ranking Member, Senator Sessions.
OPENING STATEMENT OF SENATOR SESSIONS
Senator Sessions. Thank you, Madam Chairman. I will offer
my written remarks for the record and would note that the title
of the hearing, ``Reducing the Deficit by Eliminating Wasteful
Spending in the Tax Code,'' really suggests how much disconnect
we have as we analyze the problems facing America today.
When you allow a person to keep money that they have earned
because of a certain deduction for charitable or mortgage or
health care payments, I do not believe that is spending by the
United States Treasury. It is not spending. And we certainly
have problems in our deductions, and there are some loopholes
which are abuses of legitimate deductions, and there are things
we can do to make our Tax Code flatter and simpler and more
growth-oriented. Senator Crapo, Senator Warner, and others have
worked really hard on some excellent ideas to try to move in
that direction, and it is not so that Republicans have not sat
down with Democrats to discuss these issues. They have spent
months--years, working on these issues.
We are facing a real debt crisis, a very real debt crisis.
John Cochrane, a University of Chicago professor, wrote in the
Wall Street Journal yesterday about the surge in interest we
will be paying. He reminds us that the resumption of normal
interest rates by the Federal Reserve, which Professor Cochrane
said was all but inevitable in the next few years, this
resumption of normal rates ``could raise this Government's
outlays for interest on the debt up to $900 billion per year,''
or twice current levels, more than the Defense Department, more
than Social Security, more than Medicare.
So I think we do have a serious crisis. Dr. Elmendorf, CBO
Director, testified just a couple of weeks ago that we cannot
continue to sustain spending increases at a greater rate than
the economy grows. You cannot have spending increase at 6
percent a year while the economy is growing at 2 and 3 percent
a year. That is unsustainable. That is the very definition of
unsustainability, and that is why spending is the critical
factor. It has to be in line with the growth we can expect in
the economy.
Actually, David Malpass last week noted that the slow
growth that we are having now proves that the stimulus that we
have gone through has not been effective.
So I think we just need to return to common sense and
analyze our financial situation in a fair way. And, look,
eliminating tax exemptions is a tax increase. You cannot spin
it any other way. And I have heard it said recently-- and it is
troubling to me--that, well, we can pay for the sequester, we
will not have to have these cuts in growth, we will not have to
have that happen, because we will just eliminate these
loopholes. But that is not going to happen, colleagues. You
need to know this. That will not happen, it cannot happen,
because we agreed in August of 2011 we were on a path to
increase spending over the next 10 years from $37 trillion to
$49 trillion. We agreed to reduce that growth to $47 trillion
by raising the debt ceiling $2.1 trillion and reducing spending
over 10 years $2.1 trillion. There were no tax increases in
that. The President signed that. Many of you voted for it.
Senator Reid voted for it, and the House and Senate both passed
it. And that was the agreement. So we are not now going to
raise taxes in order to increase spending above the baseline
that we are now on, which would be still a substantial increase
in spending over the next 10 years. That is what we are talking
about. It is just not going to happen and should not happen. It
would be a retreat from the promises we made to the American
people.
We said, American people, we voted to raise the debt
ceiling, but we promise to cut spending over the next 10 years
by $2.1 trillion. And the President, of course, got a tax
increase in January, some $650 billion to the Treasury.
So this is not going to happen. I hope it will help--we
have to get this straight as we discuss the difficult choices
we face.
Now, the CRS sent us a report in December that lists the
so-called tax expenditures or tax deductions that are out
there, and they list the top ten:
Exclusion for employers for Medicare payments, $109
billion, the largest one;
Second was exclusion of contributions to retirement plans,
the fact that that is not taxable, that is the second biggest
one, $105 billion.
Reduced tax rates on dividends and long-term capital gains,
instead of taxing at earned income rates, you get a less rate
for dividends. That is $90 billion.
The fourth one is mortgage interest, $77 billion.
Earned income tax credit for the poor, $59 billion.
Exclusion from Medicare benefits--that is an exclusion.
Medicare should be really income. They do not pay income tax on
it.
Child tax credit is next, and so forth.
There are about $750 billion in the top ten expenditures,
about 70 percent of those expenditures.
So I just would say to my colleagues, I doubt that we are
going to agree to eliminate all of that. And if we do, we have
to ask ourselves, Can the economy sustain such a massive
sucking out of its wealth? Should not it be part of what
Senator Crapo and Senator Warner and the Debt Commission talked
about--reducing rates and simplifying the Tax Code and not just
using this money to increase spending? And if we do increase
taxes, should not we be absolutely sure that that money goes to
paying down the deficit, not funding new spending programs, as
the President has repeatedly asked?
Professor Roberts, thank you for being with us. He is from
Stanford's Hoover Institution, and he will talk to us about the
importance of a better functioning tax system. We can agree on
that. We can improve fairness, and we can improve growth.
So let me just conclude and say we cannot--I do not feel
like I can sit silent while this Committee describes tax
deductions which allow people to keep wealth that they have
earned as wasteful Government spending in the Tax Code. So we
have a disagreement on that. But there is potential for
agreement, Madam Chairman. I thank you for having the hearing.
This is a very important issue. If we work at it, I am sure we
can learn something today and maybe reach some agreements in
the future.
Chairman Murray. Thank you very much.
With that, I am going to turn it over to our panel.
Professor Kleinbard, we are going to start with you and just
move across.
STATEMENT OF EDWARD D. KLEINBARD, PROFESSOR OF LAW, UNIVERSITY
OF SOUTHERN CALIFORNIA GOULD SCHOOL OF LAW
Mr. Kleinbard. Thank you for inviting me to testify.
You know, actually, I agree with the Ranking Member that
the long-term fiscal policies of the United States are
unsustainable. Something must be done. But I have reluctantly
concluded that this ``something'' means higher taxes.
Personally, I do not want to pay higher taxes every year,
but there is no practical alternative. But as it turns out,
there is a way to do this that actually leads to smaller
Government, not a bigger one.
I emphasize tax revenues for five reasons:
First, our budget deficits over the next decade are mostly
the result of forgone tax revenues. As a result of the Great
Recession, we lost about $2 trillion in tax revenue relative to
our historic rate of tax collections. And looking forward, the
fiscal cliff tax deal with reduce tax revenues by an additional
$4 trillion. To a large extent, both sequestration and the 2011
budget caps are efforts to recoup on the spending side monies
that have been forgone on the revenue side.
Second, in the short term, there is no crisis in financing
the national debt; Treasury borrowing rates are at near-record
lows. The short-term crisis is about jobs. Yet the CBO projects
that further cuts to Government spending through the sequester
will put 700,000 more Americans out of work.
Third, our biggest spending problem is health care. The
United States today spends much more on health care-- public
and private combined--per capita than does any other developed
country in the world. If we were to spend per capita what
Norway, which is the second place country, does on health care,
our aggregate health care spending would immediately decline by
some $880 billion a year. But our citizens' expectations and
our health care delivery institutions are built around current
policies. Change must be phased in slowly.
Fourth, nondefense discretionary spending is modest by
world norms, and both defense and nondefense discretionary
spending already are on a path to reach their lowest levels in
50 years. Even if we were to eliminate the entirety of our
nondefense discretionary spending, the CBO projects that we
would still run deficits in 2023.
And, fifth, the number of Americans age 65 or older will
increase by more than one-third over the next 10 years. This
has obvious adverse implications for Government spending.
These points imply that revenue, not spending, must be the
driver of medium-term deficit reduction. Whatever the long-term
world we transition to, we will need to finance the costs of
getting there, and that in turns means higher tax revenues. We
therefore have no practical choice but to raise the level of
tax collections in the medium term to the range of 21 percent
of GDP rather than the 19-percent level currently projected.
Fortunately, the United States is an extraordinarily low-
tax country by world norms. In fact, in 2012, we were the
lowest taxed country in the OECD as a percentage of GDP, and
that includes Federal, State, and local combined. The United
States can afford to increase the total taxes it collects. A
little more than a decade ago, we ran budget surpluses and
enjoyed a robust economy and job growth while tax collections
exceeded 20 percent of GDP.
Now, ironically, the smart way to raise revenues actually
is to cut spending, but a special kind of hidden Government
spending baked into the Tax Code, which is to say tax
expenditures. Of the $1.3 trillion of annual tax expenditures,
I believe that the most important to address first are the
personal itemized deductions. These subsidize homeownership,
charitable contributions, State and local taxes, and the like.
They are extraordinarily costly Government subsidy programs of
personal expenses, about $250 billion a year in forgone tax
revenues in subsidizing personal consumption decisions. They
are inefficient in that they lead to major economic
misallocations. They are poorly targeted in that the subsidies
go to individuals who would have behaved the same without them.
And they are unfair in that they are upside down. They
subsidize high-income Americans more than low-income ones.
I therefore recommend that we replace the personal itemized
deductions with 15-percent tax credits. My preliminary estimate
is that by doing so, we could raise as much as $1.5 trillion in
revenues over the next 10-years. A 15-percent credit preserves
about one-half the aggregate current economic value of personal
itemized deductions, but does so in a way that adds to the
progressivity of the Tax Code.
Look, I fully recognize that the home mortgage interest
deduction and the other personal itemized deductions invariably
are described as ``sacred cows.'' But they are sacred cows that
we simply can no longer afford to maintain. Either we corral
these sacred cows or we will allow them to stampede over us.
[The prepared statement of Mr. Kleinbard follows:]
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STATEMENT OF JARED BERNSTEIN, PH.D., SENIOR FELLOW, CENTER FOR
BOARD OF GOVERNORS AND POLICY PRIORITIES
Mr. Bernstein. Thank you for the opportunity to testify
today.
These are uniquely challenging times for fiscal policy. Our
national economy continues to face a series of self-imposed
fiscal deadlines in the forms of cliffs, ceilings, and, most
recently, sequestration. This latter automatic cut, if it
remains in place, is estimated to shave half a percent off of
real GDP growth this year and cost the labor market over half a
million jobs.
While I understand that there are often principled stands
behind these deadlines, operationally they have consistently
and needlessly damaged an economic recovery that needs your
support, not the fiscal drag and uncertainty that they are
causing.
In that spirit, my testimony argues that repealing or
reducing some of our tax expenditures offers a promising way
forward.
First, compromise on a deficit reduction package is clearly
blocked by seemingly intractable disagreements about the
composition of such a package. Republicans argue for a
``spending cuts only'' approach while and Democrats and the
President argue for a package that balances spending cuts and
tax increases.
Tax expenditures sit astride both of these categories
because while they are administered through the Tax Code, many
serve the same function as spending programs. For example, Pell
grants and subsidized child care are both spending programs
that help low- and moderate-income families afford college and
child care. But 529 accounts-- those are tax-deferred savings
accounts for college--and the child care tax credit are tax
expenditures that serve the same purposes for higher-income
families. Thus, if you believe we have a spending problem, you
should also believe we have a tax expenditure problem.
At the same time, since tax expenditures currently forgo
over $1 trillion in revenue each year that would otherwise be
in the tax base, their reform offers significant contributions
to a balanced deal. Such balance is essential.
Chairman Murray has pointed out that the original Simpson-
Bowles plan and the Senate's Gang of Six plan had ratios of
spending cuts to tax increases of roughly 1:1. But given the
spending cuts legislated in the Budget Control Act and the tax
increases in the fiscal cliff deal, that ratio today stands at
$2.30 of spending cuts for every $1 of tax increases.
Now, of course, every spending program should not be cut,
and neither should all tax expenditures be repealed or reduced.
I recommend three criteria to evaluate the utility of tax
expenditures: revenue forgone, efficiency, and fairness.
Members will not be at all surprised to find that it is far too
easy to find many tax expenditures that are trifectas. They
forgo significant revenue, induce inefficiencies, and return
most of their benefits to the wealthiest households, boosting
after-tax inequality and failing on the fairness criterion.
For example, the carried interest loophole allows equity
fund managers to pay taxes on their earnings at half the normal
rate, violating the fairness criterions. Far more revenue is
forgone through the ability of multinational corporations to
defer taxation on profits earned by foreign subsidiaries, a
privilege domestic firms lack. Since most firms with overseas
operations can hold their profits abroad for as long as they
want without paying U.S. taxes, this break gives them a strong
incentive to both reinvest their income abroad and/or shift
their operations, or at least their profits, to low-tax havens.
Deferral in this case violates all three criteria. It is
inefficient for firms to make investment and location choices
based on tax savings versus production or sales efficiencies.
Considerable revenue is forgone, and since small businesses and
domestic firms do not face this option, it provides
multinationals with a strong comparative advantage over
domestic firms and, thus, fails on fairness grounds as well.
Of course, no matter how reasonable the criteria, picking
which tax expenditures should be curtailed amounts to a huge
political challenge. In that regard, capping most deductions at
a lower rate--the President has suggested 28 percent--for
taxpayers above a certain income level also scores highly on
the three criteria noted above: raising significant revenue,
reducing both inefficiencies and the upside down subsidies
embedded in the current system.
In sum, tax expenditure reform offers an excellent option
to reduce wasteful spending through the tax system while
helping to meet our fiscal challenges in ways that will
simultaneously improve our deficit outlook, increase economic
efficiency, and add much-needed fairness back into the Tax
Code.
Thank you.
[The prepared statement of Mr. Bernstein follows:]
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STATEMENT OF RUSSELL ROBERTS, PH.D., RESEARCH FELLOW, HOOVER
INSTITUTION, STANFORD UNIVERSITY
Mr. Roberts. Chairman Murray, Ranking Member Sessions, and
distinguished members of the Committee, I am wildly
enthusiastic about eliminating wasteful spending in the Tax
Code.
Our tax system should be more transparent, simpler, and
fair. We should get rid of special exemptions for the rich, for
parents, farmers, homeowners, and all the other ways that the
Tax Code panders to special interests.
But how we finance Government--the structure of the tax
system and the mix between taxes and borrowing--is rarely as
important as whether Government spends money wisely. It is not
just that we spend more than we take in. We spend too much, and
much of it we spend poorly. Raising taxes does not solve that
problem.
In recent years we have ignored the size of Government
spending because it is tempting to believe that all spending
stimulates the economy during times of recession. But
economists do not agree on the effects of the 2009 stimulus
package. Even the Congressional Budget Office has conceded it
is unable to separate out the impact of Government spending
independently of the changes that occur at the same time.
And it is tempting to see Government expanding as an
inevitable force for good--more help for children, the
disadvantaged, the poor, and the elderly. Who is against
helping children, disadvantaged, the poor, and the elderly? No
one.
The problem is that a lot of spending goes to people who
are merely politically important--rich financial executives,
rich farmers, rich old people who do not need a Government
retirement program. And much spending is ineffective because it
is spent poorly. Sometimes less is more.
What would happen if Government actually got smaller? Not
just a reduction in the rate of growth, but real cuts? There
would be more private spending. But we do not just spend our
own money on ourselves as consumers buying more stuff. We are
also givers. We give our time and our money to causes and
communities that we cherish.
Consider the Harlem Children Zone--a $75 million charitable
organization that has transformed the lives of 10,000 children.
Roughly two-thirds of their money comes from private donations.
Those donations have been made because the public programs we
are forced to pay for through taxation have failed those
children. We need more Harlem Children Zones. But they are not
easy to reproduce. They cannot be replicated from the top down
simply by spending money, even if that money goes to the same
activities.
Great organizations have to be grown. The incentives are
the soil that allows them to thrive. The freedom people have to
donate to organizations that work and to stop donating to
organizations that do not. The founder and head of the Harlem
Children Zone is Geoffrey Canada. To keep his organization
alive, he has to make the case he is doing a good job with his
donors' money. He earns the money that people give him.
When Government gets smaller, you create more room for
private organizations to thrive, for civil society, for schools
that actually educate the poor, programs for the elderly that
give meaning to their lives, training programs that work, soup
kitchens that do not just feed the homeless but find them jobs.
If Government spent less, great organizations would find it
easier to raise the money to do more.
The alternative to Government spending is not selfish
spending by our own individual selves. The alternative to
Government is voluntary cooperation instead of forced
cooperation through the tax system.
As the Hayek character says in ``Fight of the Century,'' my
rap video on the stimulus debate written with John Papola:
``Give us a chance so we can discover, the most valuable ways
to serve one another.'' Let entrepreneurs of all kinds emerge
from the competition for investors and donors, entrepreneurs
who get others to cooperate and produce something so much
greater than themselves, not just entrepreneurs like Steve Jobs
or Jeffrey Bezos, but social entrepreneurs like Geoffrey
Canada.
The Talmud says, ``In a place where there are no men,
strive to be a man.'' To put it in modern language, in a place
where people have no principles, remember yours. In a place
where everyone is a coward, be brave. Principles and courage
are scarce here in the Nation's capital. We have charted an
unsustainable fiscal course--our promises cannot be kept.
Brave men and women of principle of both political parties
need to stand up and chart a different course. We need to focus
Government spending on those activities Government does better
than the private sector, not just those activities that are
politically expedient.
So, please, stop spending our money on bankers and rich
farmers and rich retirees. But the world might be a better
place if you spent less on even the best of causes. Give us a
chance so we can discover the most valuable ways to serve one
another.
Thank you very much.
[The prepared statement of Mr. Roberts follows:]
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Chairman Murray. Thank you, to all three of you, for your
testimony.
We are now going to turn to opening rounds of questions,
and, Dr. Bernstein, let me start with you. As you noted in your
testimony, in general, tax expenditures are very regressive,
meaning, of course, that the benefit of these special tax
breaks flow to high-income individuals.
You also mentioned that by giving special tax treatment to
certain activities, investments and industries, our Tax Code
creates--and I am quoting you--``misallocation of capital,''
which you said is bad for economic growth.
As an economist, can you explain in layman's terms how this
misallocation of capital occurs and why exactly it is not good
for the economy?
Mr. Bernstein. Sure. Let me begin by referring those to
Figure 3 in my written testimony, which shows the distribution
of tax expenditures through the income code, and it is a point
that all three of us made, including Russ here to my left.
Mr. Roberts. Enjoy it.
Mr. Bernstein. You know what I mean.
Mr. Roberts. Yes.
Mr. Bernstein. Where 66 percent of the benefits of these
expenditures go to the top fifth and 26 percent go to the top 1
percent of households.
Look, because of these tax expenditures, the effective tax
rates on corporations, if you divide them into their
industries, range from about 14 percent to about 30 percent.
That is a very large range for effective tax rates, and right
there, Chairman Murray, you get a sense of the answer to your
question. We are clearly incentivizing investments in some
industries over others. Oil and gas faces an effective marginal
rate of something like 10 percent. Manufacturing faces an
effective marginal rate of something like 30 percent. When you
have those kinds of differences in the Tax Code, you are
influencing which industries investors will invest in because
their after-tax returns will be higher, not based on any
economic criteria, like we need more of this and less of that
to make the economy grow better, but because I will get faster
after-tax returns because my write-offs will be bigger in
Industry A versus Industry B.
Secondly--and I will stop after this point--as I mentioned
in my spoken testimony, because multinationals with foreign
subsidiaries abroad are able to defer the income that they
earn, relative to domestic firms, it is actually cheaper from
the perspective of the Tax Code to build a factory in Singapore
or China than it is in Illinois. And, again, those kinds of
location decisions made not because here is the best place for
me to produce geographically in an economic sense, but are
being made because here is the place where, if I produce there,
I can get the biggest tax breaks. That is the kind of
inefficiencies that undermines economic growth and creates
those differentials between industries.
Chairman Murray. Okay. And on another point, because our
Tax Code so often gives outsized subsidies to high-income
Americans as compared to families in the middle class, are we
not essentially providing tax breaks to folks who very likely
might engage in tax-favored activities even without an
incentive?
Mr. Bernstein. Very much so. I mean, again, if I may quote
my colleague Russ, perhaps somewhat surprisingly, he pointed
out that too much spending goes to people who do not need it.
Now, again, from a perspective of fairness, that is wrong.
But your point is well taken. From a perspective of
inefficiency, that is another big problem.
One of the things you do not want to do with subsidies_and
not all subsidies are bad. You named some, Chairman Murray, in
your introduction that actually score high on efficiency
criteria: food stamps; the earned income tax credit, which
incentivizes work; the child tax credit, which incentivizes
work. Those are tax credits that are very important to create
positive incentives for low-income people.
But when you give a subsidy to someone who would have done
it anyway, not only are you wasting much-needed revenue, but
you are overincentivizing a particular activity at the cost of
efficiency and optimal decision making.
Chairman Murray. Well, thank you. And I am going to retain
the balance of my time. We have a lot of members here and a
vote at 12:15. I want to make sure everybody has a chance, so I
will turn it over to Senator Sessions.
Senator Sessions. Thank you. Well, we certainly all believe
and share the view there is a great opportunity for
bipartisanship in simplifying this Tax Code and making it more
productive and creating more growth, creating, therefore, more
jobs and better wages for working Americans, who are not doing
very well and have not done well for some time, in my view.
With regard to the ``tax expenditures,'' a phrase I am not
comfortable with--however, it is used--we have the exclusion
for employer-provided health insurance, Dr. Roberts. That
represents 13 percent of that. Do not a lot of lower- and
middle-class families benefit from that?
Mr. Roberts. Sure, they do.
Senator Sessions. And with regard to lower- and middle-
class families, we had a witness here a couple of weeks ago
from Pennsylvania, their welfare system, that low-income people
receive as much as $29,000 a year from the Government in
support through multiple programs that benefit them. So it is
not really fair to say that poor people are paying in more than
their fair share or less than their fair share. I think we just
need to analyze the system and see how it all works out.
The home mortgage interest deduction is the second largest
or one of the largest. It is 9 percent of all expenditures.
Over 70 percent of the benefit goes to taxpayers with incomes
under $200,000. Eliminating that deduction would be a major tax
increase, Dr. Roberts, would it not, on middle-class America?
Mr. Roberts. Sure.
Senator Sessions. And is it not fair to say, Dr. Roberts,
that while we ought to simplify the system, the big question
for us is, if you eliminate some of the exclusions, deductions,
and loopholes that are out there, if you eliminate those, you
bring in a lot more revenue, you have created a tax increase?
And the question is: What do we do with it? Would you have a
suggestion that it should be utilized to fund more spending, or
should we utilize it in other ways that would be better for the
country?
Mr. Roberts. Well, it will definitely bring in more
spending. I think the challenge we have is, as you say, what do
we do with that extra opportunity. Do we allow people to keep
more of their money in more effective ways, say with lower
rates? Should we lower spending as a result to close the gap
that is still going to exist possibly after you have changed
that tax policy?
I think the biggest problem with tax expenditures we have
not talked about today--and although I use the phrase, I am
also a little bit uneasy with that phrase, but let us call it
``special deductions.'' Although I am uneasy with the phrase
``tax expenditures,'' ``special deductions''--maybe a better
phrase--have a different problem that we have not talked about,
which is it encourages people to come to you and ask for
special treatment. And it is a long line. And I think that is
lovely for you, but it is not so good for me.
Senator Sessions. It is not so lovely for us, really. But
it is true--
Mr. Roberts. Well, it has costs, I understand. It can be
frustrating and annoying, and it is hard to say no. But in
economics, we call it ``rent seeking.'' It is people trying to
get their share to get at the trough and elbow others aside.
And I think that is a terrible waste of resources, both the
time and energy, plus the behavior that then is incentivized by
the Tax Code is often not healthy, not good. We have named a
bunch of things that sound good. We talked about education.
Everybody here is in favor of education. But the question is:
Is the continual subsidy of education--which benefits me, by
the way--is that continual subsidy a healthy way to improve the
education system and the well-being of the people of the United
States? Are you at risk of creating another bubble like we had
in the housing market that is going to cause a very unhealthy
situation where people find themselves, first of all, unable to
find work to pay back their subsidized loans, the tuition rates
that have skyrocketed as a result of that subsidy, an
unintended consequence, which helps fund my salary? That is all
lovely for the education sector. It is not necessarily so good
for education.
So I think we have to be extremely careful when we take
specific examples of things that sound good but that in
practice turn out to be fairly destructive.
Senator Sessions. Dr. Roberts, is it not true that if these
deductions, exclusions, or whatever you choose to call them,
were to be eliminated, we would have a substantial tax increase
on the middle class? Middle-class and lower-middle-class people
would pay more in taxes to the Government?
Mr. Roberts. If we got rid of all of them, we certainly
would. And I think then we would have to have a choice about
whether we should then lower rates, which would be my personal
choice, but more importantly, to lower spending so that we
could afford what we actually do, which I think is the
responsible adult behavior that I wish we could do more of.
Senator Sessions. Well, thank you so much.
Madam Chairman, I think, if I could just have a second_do
we have this chart on the screen? I would like to look at this
chart when we talk about taxes. It was part of the front-page
article in Barron's a couple of weeks ago, and the three lines
represent this: the blue line represents what the debt would be
in 2043 under the CBO estimate; the second would be under the
CBO estimate, if the wealthy paid 50 percent, not the higher
rate that we just passed at 40 but go to 50 percent, if they
paid 50 percent; and then the third line was a CBO estimate
with the wealthy paying 50 percent and all the Bush tax cuts
were eliminated.
So I would suggest that this gives further credence to the
argument that we have a difficult--we are not going to get very
far, getting our way out of the unsustainable debt course by
raising taxes. It is just not there. The growth of spending is
greater than the growth of the economy, and spending has to--
cannot rise consistently higher than the economy grows.
Thank you, Madam Chairman.
Chairman Murray. Senator Wyden.
Senator Wyden. Thank you, Madam Chair.
Mr. Kleinbard, the lead story in this morning's New York
Times highlights what to me is a growing abuse in the Tax Code,
and that is the matter of tax-exempt bond finance. And if I
might summarize, I think there is a general kind of sense in
the Congress and in the country that tax-exempt bonds ought to
be used for projects like roads and bridges, but not
skyscrapers. And what this article essentially outlines in
great detail is that the really increasing use of these tax-
exempt bonds goes increasingly to these very powerful private
interests who seem to be straying from a public purpose.
What we do in our bipartisan tax reform bill--it started
with Senator Gregg and Senator Coats and Senator Begich and
myself--is more to a tax credit approach, so there would be a
role in order to try to promote these public investments. But
how serious an abuse is this? And would you favor something
like that?
Mr. Kleinbard. The private activity bond rules in the Code
today are fundamentally, in my view, inexcusable. They
represent Government subsidies for particular private
investments. They are the hand of Government distorting private
behavior in ways that are simply not justifiable on anybody's
theory of what the economy of the United States is all about.
And we are talking about tens of billions of dollars a year in
Federal subsidies to individual firms to build factories or
hotels, or whatever, that they would have done in any event. So
it is just wasted money delivered through the Tax Code in the
form of permitting these private firms to capture the benefits
of tax-exempt financing.
Senator, as you say, tax-exempt financing ought to be about
general obligation bonds. It ought to be about the needs of the
States to finance infrastructure and the like, and this is a
terrible distortion.
The second problem that we have with all tax-exempt
financing is that the object of the subsidy is or should be the
States and localities. It is about subsidizing the issuer, not
the investor. But there are so many tax-exempt bonds chasing so
many investors that high-income investors, in fact, are getting
a spillover of that subsidy. They are capturing part of the
subsidy that was never really intended for them, and that is
not right.
By switching to a tax credit structure, like the Build
America bonds, by switching to that kind of a structure, you
can target the Federal subsidy to the people you mean it to,
which are the States and local governments. So it is a much
more efficient way of delivering the same subsidy.
Senator Wyden. You have just delivered a teach-in on the
whole bond issue, and I thank you for it.
Mr. Roberts, let me ask you a question about the charitable
deduction, which I think was one of our big challenges in
putting together the legislation. And I have come to the
general conclusion that the charitable deduction is a lot more
of a lifeline than a loophole, and I want to ask you your view
about one particular point that we hear from philanthropists
quite frequently.
Philanthropists have basically told us that they believe
people do not make a contribution to charity just to get a
break. So you start with that as the proposition. But the
philanthropists often say that they think people are giving
more because there is the charitable deduction and the loss of
that would be harmful.
What is your sense of that?
Mr. Roberts. Well, it is half--I think what they say is
basically correct. Almost no one donates, quote, just to get
the deduction because you have to lose money to get the
deduction. You have to make an actual contribution. So it is a
question of how much more or less people would give if we got
rid of that deduction.
If we got rid of that deduction, the effective price of
charity for people in high tax brackets goes up quite a bit.
They would still give. They would give less, though,
presumably. And whether that extra amount less would be
decisive or important would depend on what charity you are in
and how it happened to your collections. I think we would raise
less money from the charitable deduction--for the charitable
sector if we got rid of the charitable deduction.
Now, I think the charitable deduction is one of the best
loopholes in the Tax Code, but I could argue equally well that
maybe it is not appropriate that you have to subsidize the
charities that I think are worth donating to. The return
argument is, yes, but then you subsidize mine and I subsidize
yours. That is not to me a very effective way to do things.
There is a great economic argument for the charitable
deduction. There is a great economic argument for almost every
deduction we have in the Code. Again, the question is how prone
are they to abuse once you open that Pandora's box to
skyscraper abuse and others.
Senator Wyden. My time is up, Madam Chair. I would just say
we are going to have to make some tough calls in this. I think
the kind of thing we saw on the front page of the New York
Times is a little bit different than a deduction to loaves and
fishes in Portland, Oregon, where we are trying to help seniors
who are walking on an economic tightrope. But we will be
working with you.
Thank you, Madam Chair.
Chairman Murray. Senator Grassley.
Senator Grassley. Let me say what I think is frustrating
about this whole issue of raising taxes either to spend more or
to reduce the deficit, whatever the motive is, particularly in
a time of such high unemployment we have now and the longest
period of unemployment I guess since the 1930s.
The President in 2008 ran on a platform of increasing
taxes. Before he was sworn in, he made an announcement that
during a time of such high unemployment--and it was not even 10
percent then; it eventually got to be 10 percent--you should
not raise taxes in that period of time. The only thing that has
changed since then, it is down to 7.9 now, but the President
re-emphasized not raising taxes at least twice since he has
been in office--not lately, of course, but in 2009 and 2010 he
said that the economy had not improved enough to increase--or
that we ought to increase taxes.
Now, obviously it is different now because there is a $612
billion tax increase that we voted as a result of his last
election. But it is kind of difficult for me to believe that we
are raising taxes to reduce the deficit because last week we
had the bill up by the majority to preempt sequester, and it
raised taxes. But I also believe that the bill added $5 billion
to the national debt instead of reducing the national debt.
So the frustration comes, after 4 years we still hear about
higher taxes because we need a balanced approach or we need a
fair share. But I never see any definition of what is balanced.
I never see any definition of ``fair share.'' And I think we
ought to start policy making, whether it is at the White House
or whether it is here in the Congress, based upon certain
principles of taxation.
Now, you may not like the principles of taxation that my
party has had for a couple decades, but it is that after 50
years, about 18 percent of the gross national product has come
in for us to decide how to divvy up, and the other 82 percent
has stayed in the pockets of the taxpayers because it turns
over in the economy more often than if Government turns it
over. You may not like that principle of taxation, but what is
the principle of taxation? What is the policy of other people
in this town of what the taxation policy is? Except just every
time there is a crisis here in town, we have to be fair and we
have to be balanced.
The principles of taxation ought to be spelled out for us
and then make a decision based upon the level of taxation on
what those principles are. But if you do not have a definition
of ``fair share'' or what ``balanced'' is, you really have
nothing except just on a whim we are going to raise taxes.
Well, when are taxes high enough to satisfy the level of people
in this Congress to spend money, or any Congress, for that
matter? So I beg for that sort of principle to be expressed.
I probably only have time for one question now, and that
would be to Mr. Kleinbard. I want to first express a concern I
have about the focus of the hearing as evidenced by the title.
There appears to be an assumption that tax expenditures are an
untapped revenue source that can be used to finance more
spending on other programs. This view could frustrate or
replace comprehensive tax reform efforts. Mr. Kleinbard, your
testimony correctly recognizes that our current corporate tax
rate is out of line with the rest of the world, and am I
correct in reading your testimony to say that reductions or
eliminate of corporate tax expenditures should be used to
reduce corporate tax rates and not as a source of new revenue?
Mr. Kleinbard. Yes, sir. I believe very strongly in
benchmarking of the U.S. against other countries as a general
matter. When you benchmark the United States, our statutory
corporate tax rate is well out of line. The corporate tax rate
needs to come down to the mid-20s. At the same time, our tax
revenues from business generally are on the low side because we
have so many tax expenditures, which are particularly
pernicious in the business world. We do not have Soviet-style
5-year plans for how to run the economy except through the tax
system where we do exactly that, where we favor this industry
or that industry.
So I believe quite strongly we should get Government out of
the business of business by reducing the marginal tax rate on
U.S. corporations to something in the mid-20s and to pay for
that through the elimination of business tax subsidies. And by
my estimates, in fact, the numbers work. You can do that.
So I see business as a separate silo from the individual
tax system, and the business tax reform, the lead item should
be corporate tax rates in the mid-20s, pay for that by getting
rid of the hand of Government that is distorting business
behavior, and let business be business.
Senator Grassley. Thank you, Madam Chairwoman.
Chairman Murray. Thank you.
Senator Whitehouse?
Senator Whitehouse. Thank you, Madam Chair.
Dr. Bernstein, let me take you through where I think we
are, and if you could double check the numbers for me so that I
am in the right place. As we try to solve a $4 trillion deficit
problem, we have looked at the spending side, and we have
already agreed to spending cuts of $1.7 trillion. We have
looked at increasing tax rates, and because we took back the
Bush tax cuts for families making over $450,000 a year and went
to Clinton era tax rates for families making over $450,000 a
year, we raised $0.7 trillion in new taxes if you count the
associated interest in both cases, which takes us to having
gotten $2.4 trillion towards solving our $4 trillion problem.
And by my math, that leaves $1.6 trillion that we still need to
agree on in order to get to that goal.
Now, we have looked at spending cuts. We have looked at tax
rates. The one place we have not looked at is tax expenditures.
And that is not a term we made up. That is Martin Feldstein's
term for this, Reagan's Economic Chairman. That is Republican
Alan Greenspan's term for this. This is tax expenditures. And
they add up, in my calculation, over a 10-year budget period to
$13 trillion, roughly--$13 trillion in a 10-year budget period.
So to the Ranking Member's point that we might
``eliminate'' all of that, we do not need to come close to
eliminating all of that. We could do the entire remainder of
what we need to do to get to $4 trillion out of this $13
trillion by only taking 12 percent of it back. And that
probably understates it, because when you include the corporate
piece in this, if you look at the personal side, the individual
income side, for every dollar that the Government actually
collects in revenue, it is about 99 cents that goes back out to
people through the Tax Code. It is about a one for one. When
you look at the corporate side, it is $181 billion that
actually comes through in revenue and $157 billion that goes
out to corporations through tax deductions, loopholes,
gimmicks, various things.
My understanding is that the 181 and the 157 do not count
the tricks that corporations use to hide offshore revenues. So
it is actually way worse than that in terms of corporate
collection, and Chairman Conrad used to show us the picture of
that house in the Cayman Islands that had, you know, 17,000
companies pretending to do business in it in order to hide
their revenue offshore. We have seen companies that have moved
their intellectual property to Ireland in order to hide it from
paying taxes, and as a result, corporations pay $1 in tax for
every $6 that human beings spend, and a couple of decades ago,
it was one for one. So they have really slipped out of the
taxpaying picture in America.
So I think those are the right numbers. You have been sort
of nodding and following me. Have I been on base with the
numbers so far?
Mr. Bernstein. Yes. In Table 1 of my testimony, we have
updated those numbers because the budget window has moved 1
year, but they amount to very close to what you said. At this
point it would take $1.5 trillion over 10 years to stabilize
the debt as a share of GDP.
Senator Whitehouse. Okay, not 1.6, so even less.
Mr. Bernstein. Correct.
Senator Whitehouse. So out of the $13 trillion in tax
expenditures, it is even a smaller percentage than I have
suggested. And when you look at some of the stuff that is in
this mess of tax expenditures, some of it, frankly, just seems
slimy. I mean, the idea that a hedge fund billionaire pays a
lower tax rate than a hospital orderly or a firefighter or a
bricklayer, that is just--I mean, you do not need to be looking
for revenue to find out that that is wrong. That is just plain
wrong on its merits. If you have big oil companies that I think
have made $1 trillion in profits in the last--I think it is 5
years, if I am not mistaken, maybe it is 10--$1 trillion in
profits, and they are still coming to the American taxpayers'
pockets for subsidies? There is something wrong with that
whether or not you need the revenue. And all the incentives for
American businesses to offshore all the tax incentives they get
when they move jobs overseas or hide revenue overseas, all of
that, that is just wrong. And you mentioned, the top 400
taxpayers. You know, it is not just--we heard about Mitt Romney
paying, what was it, 11 percent? He had to gimmick his taxes to
get them up to 13 percent. It is not just him, though. It is
the whole top 400 paying about 20 percent, which is about what
a bricklayer makes in Rhode Island. And it is about a third, if
I remember correctly, of people making over $1 million who pay
lower than what 10 million middle-class taxpayers pay.
So we have a huge problem in our supposedly progressive
health care system in that the lobbyists have been at it, the
special interests have been at it. They have carved all these
special interest loopholes in there. And so my position--I am
sorry. I have gone over my time. My position would be this is
stuff we should be cutting out of our Tax Code on moral and
fairness reasons anyway, and to use it to avoid cuts to Head
Start and special education and Medicare is a smart move.
Chairman Murray. Thank you.
Senator Johnson.
Senator Johnson. Thank you, Madam Chair.
You know, what is wrong is we have this monstrosity of a
Tax Code that costs $200 to $300 billion a year to comply with.
I will go on the record, I would like to scrap the entire
thing, rebuild the tax system on pretty basic principles: raise
the revenue you need, do no economic harm. We need to stop
socially and economically engineering through the Tax Code, but
we are a long ways from that. Right now we are just trying to
nibble around the edges.
Let me start with a basic question. What is the maximum
marginal tax rate that each one of you thinks the Federal
Government should charge on the next dollar of income? Maximum
marginal tax rate. Professor?
Mr. Kleinbard. The maximum marginal tax rate that I would
be comfortable with would be about 45 percent. That is what it
is in the U.K. now.
Senator Johnson. Okay. Good.
Dr. Bernstein?
Mr. Bernstein. Well, it is a good time to ask that question
because there has recently been research by scholars in the
field, recent papers by Peter Diamond and Emmanuel Saez that I
commend you--
Senator Johnson. Just give me a number.
Mr. Bernstein. Yes, so they come up with numbers that are
way above what Professor Kleinbard said.
Senator Johnson. Well, I am asking you.
Mr. Bernstein. 60, 70 percent. I am more comfortable 45,
55, in that range.
Senator Johnson. Okay. Dr. Roberts?
Mr. Roberts. I do not have an answer for you, but I would
say that if Government were the size it should be, meaning if
Government only did the things that it does better than the
private sector, I think it would be a fraction of its current
size, and the goal of the tax system is not to maximize how
much revenue we create, which a lot of these academic exercises
are about how big could it be and we would still collect a lot
of money. That is not my goal. My goal would be what is the
right size of Government, and the answer to that is what
Government does well, particularly what it does better than the
private sector, and then I would have a fairly flat tax system
with minimal deductions and minimize that compliance cost. And
my guess is that that number is somewhere in the 10 to 20
percent range for the tax rate. And I would have a broad base
rather than the system we have now, where millions of Americans
pay zero in income tax, and because they think their payroll
tax is saved for them for their retirement, they see extra
Government spending as being a free lunch. And that is a
destructive political incentive.
Senator Johnson. I just kind of have a common-sense notion
that the way you really strengthen the middle class is have a
strong economy, and you have businesses that have the incentive
to risk their capital. And I guess I am just kind of scratching
my head, when you have a top Federal tax rate of 40 to 50
percent, you are not allowing that entrepreneur, that risk
taker, much from the standpoint of keeping the fruits of their
labor.
Professor Kleinbard, you mentioned that we obviously have a
revenue problem. The fact is in the latest CBO estimate, the
spending over 10 years is 22.1 percent, which is 1.9 points
higher than the 50-year average up to 2007; whereas, revenue is
18.9, which is 0.8 points higher than the 18.1 percent. So the
problem is we are just spending a lot more than we ever did. So
I would just dispute that we have a tax problem.
And here is my point: In 68 years, from 1944 to the present
time, only 10 times have we generated revenue that exceeded 19
percent of GDP, 3 times over 20 percent. What makes you think
that we can actually generate--no matter what the top marginal
tax rate is--by the way, the top marginal tax rate during that
period was 91 percent, then 70 percent, then 50 percent. You
know, what makes anybody think that we can actually generate
more than that 18.1 percent?
Mr. Kleinbard. Oh, so I have a couple of answers to you. We
know we can generate more. We have generated more. We know--
Senator Johnson. Only infrequently.
Mr. Kleinbard. Because you have chosen to reduce rates. If
you, in fact, look at our OECD peer countries, we are the
lowest-taxed country. We are the best economy in the world; we
are the most flexible, robust economy in the world. But we have
the lowest rates. Those two are not necessarily causative, but
they do indicate that we can have a tiny bit higher rate, a 21-
percent rate, without destroying the economy.
Senator Johnson. Let me ask the question I asked during the
last budget hearing because you are all economists and, you
know, maybe can answer this question. Do any of you know of a
tax increase that is going to promote economic growth or that
will make us more competitive globally? Does it one exist?
Mr. Kleinbard. Sure. I can--
Mr. Bernstein. Yes.
Mr. Kleinbard. Well, you go ahead, Jared.
Mr. Bernstein. Well, I was just going to say, not an
increase in tax rates necessarily, but an increase in precisely
the kinds of base issues and revenue issues we are talking
about today. By lowering tax--by repealing or restructuring,
lowering tax expenditures that distort economic behavior in the
way we have discussed--they distort what people buy, they
distort what people invest in, they distort where people set up
their companies. Those would be both efficiency enhancing,
which I know you like because of where your question is going--
Senator Johnson. Just real quick--
Mr. Bernstein. --and revenue.
Senator Johanns. It was interesting. I saw Joe Scarborough
debating Paul Krugman, and they were basically saying that $1
spent in the private sector is the same as $1 spent in the
public sector. Do you actually believe that? Do you really
believe that Government is as efficient in allocating capital
as the private sector when it comes to investment?
Mr. Bernstein. I do not.
Senator Johnson. You do not?
Mr. Bernstein. No.
Senator Johnson. Anybody think Government is a good
allocator of capital?
Mr. Kleinbard. I think the Government is a terrific
allocator of capital in those places where markets fail.
Mr. Bernstein. Exactly.
Mr. Kleinbard. And markets fail all the time. It is not the
case that markets are perfect. Markets fail in education.
Markets fail in infrastructure. And those are the kinds of
things that, in fact, we finance through Government. We are the
lowest-taxed country in the world of any OECD country. It
cannot be the case that we cannot afford a little bit more
revenue to pay for the existing level of spending. The problem
with spending that the CBO projects is health care. And until
the Congress of the United States tackles health care in a much
more comprehensive way, we are going to need to raise more
taxes.
Senator Johnson. Well, that is because Government pays 50
percent of it.
Dr. Roberts, real quick.
Mr. Roberts. Yes, I was just going to say we are the lowest
of the OECD countries, but, of course, a lot of our taxes are
hidden because we have promised to raise taxes tomorrow, which
is what borrowing does. And I follow Milton Friedman's rule,
which is there are only two kinds of taxes, taxes today and--
two ways to finance Government: taxes today and taxes tomorrow.
Borrowing is just a way of hiding that fact.
I do not want to be like Norway. I do not want to be like
Greece. I do not think we should emulate them. And I think that
is the wrong path to go.
Senator Johnson. Thank you.
Chairman Murray. Thank you.
Senator Baldwin?
Senator Baldwin. Thank you.
We have had a little bit of discussion about the use of the
term ``spending'' in the Tax Code and ``tax expenditures'' that
I found interesting and the origins of those phrases. My friend
and colleague from Wisconsin, Paul Ryan, the Chairman of the
House Budget Committee, had this to say about tax expenditures
in the Tax Code in his previous budget. He said, and I quote:
``These distortions are similar to Government spending. Instead
of markets directing economic resources to their most efficient
uses, the Government directs resources to politically favored
uses, creating a drag on growth.''
He went on to say, ``Tax expenditures have a huge impact on
the Federal budget, resulting in over $1 trillion in forgone
revenue each year. To put that number in perspective, $1
trillion is roughly the total amount the Government collects
each year in Federal income taxes.''
And in this context, I wholeheartedly agree with Chairman
Ryan's statement, and I believe that spending in the Tax Code
must be a part of our discussions on deficit reduction, and
especially noting, as Professor Kleinbard did, that we have two
crises facing our country: the need to get our economic engine
back on track, job growth, rebuilding a strong and vibrant
middle class; at the same time that we responsibly tackle our
deficit and debt.
In terms of a focus on a strong and vibrant middle class,
Mr. Bernstein, in your testimony, written testimony, you noted
that the income going to top 1 percent was about 10 percent in
the late 1970s, but it now stands at 19.8 percent. I would like
you to just elaborate a little bit about how our Tax Code has
played a role in--I know there are multiple factors that do,
but how our Tax Code has driven income and wealth inequality in
America and, you know, which are the biggest drivers of that in
our Tax Code.
Mr. Bernstein. Well, part of our discussion today has
emphasized the increase in tax expenditures over time, and I
have a figure--I think it is Figure 3 in my testimony--that
shows the distribution of tax expenditures and how they
disproportionately go to those at the very top of the income
scale. I think 66 percent, two-thirds of tax expenditures go to
the top 20 percent, 26 percent of them go to the top 1 percent.
So if we are seeing more and more income over time fit the
category that Senator Whitehouse and others have talked about
that gets treated favorably through the Tax Code, so capital
income, dividend income, income from these corporate tax dodges
we have been describing, the ability of equity managers to pay
a rate that is half that of working persons in the middle
class, as long as more income keeps going to those categories,
it is just mathematics that that is going to lead to higher
income concentration once you apply the Tax Code to the income
distribution.
So just to simplify, we have a Tax Code that favors income
at the top of the scale. We have more and more of that type of
income. Automatically, that helps generate the inequality
result you cited.
Senator Baldwin. From an economic perspective, can you
distinguish Government spending from spending in the Tax Code
through tax expenditures?
Mr. Bernstein. In many of the examples that I have stressed
in my testimony, you really cannot. It is purely a delivery
mechanism. And I think this is an essential point. As I
stressed, again, if you believe--and many Members of the Senate
and the House believe that we have a spending problem. They
said it all the time: ``We have a spending problem.'' Then you
have to believe we have a tax expenditure problem, because if
you look at--I gave you the example of child care, which in
many ways is a perfectly venerable thing to subsidize. But we
provide child care through direct spending, and we provide
child care assistance through tax deductions. The difference is
simply delivery. The substantive function is the same.
Senator Baldwin. It is more of a blunt instrument in terms
of getting at a specific desired result.
Mr. Bernstein. Spending through the Tax Code.
Senator Baldwin. Yes. Thank you.
Chairman Murray. Senator Ayotte.
Senator Ayotte. I thank the witnesses for being here today.
Dr. Kleinbard, I wanted to ask you, Senator Grassley had
asked you about the corporate code.
Mr. Kleinbard. Yes.
Senator Ayotte. You recommended that we lower it to be
looking relative to where we are with respect to other
countries around the world. Do you believe that that rate does
have an impact on how much investment we have in this country
in economic growth?
Mr. Kleinbard. You know, I do. The marginal tax rates are
thought to distort the scale of investment decisions. By
bringing down marginal rates, you enable firms to enhance the
scale of their investment. You also make the United States a
more attractive environment for foreign investors to come in
and bring jobs, bring investment into the United States. You
know, this is a global economy, and what we forget all the time
when we talk about corporate tax and international tax is we
forget that the United States is a capital importer as well as
capital exporter. So we want to make the United States an
attractive environment.
And then if you have, in fact, a tax rate for corporate
that it is in the mid-20s and you finance that largely by
getting rid of all of these distortive subsidies, well, then,
capital will be allocated more efficiently in the United
States, which in turn leads to faster growth. Every time we
distort investment, what we are doing is we are taking it from
where it would be in a market economy and in doing so we are
impeding growth over the long term.
So from all those perspectives--and then to the point of
view of the small business person, the small business person
will incorporate to take advantage of the lower corporate tax
rates. So we are offering those lowers rates, in fact, to
everybody. Everybody can incorporate.
So it would make, I believe, a much more attractive
business environment for the United States.
Senator Ayotte. And where do you see--in terms of if we do
that, given it is a global economy, and we lower rates, would
not that system have to be consistent with what most of the
world has, which is a territorial type rate?
Mr. Kleinbard. That actually is a more complicated
question. Right now the territorial countries as a group are
undergoing massive second thoughts about territorial taxation.
You saw in the Financial Times the other day there was a letter
from the Finance Ministers of the U.K., Germany, and France, a
joint communique published as a letter, saying that they
recognized the extent to which there was massive international
tax avoidance and evasion, principally enabled by two things:
territorial systems outside the United States and by some
technical rules in the United States, including something
called the ``check the box'' rules.
So the EU member countries have become terribly concerned
about the ease with which territorial systems are abused. The
OECD itself has just put out a pamphlet on base erosion and
profit shifting, or BEPS, as they call it, saying, you know
what, we screwed up. Basically it says, you know, we have
enabled, we, the OECD, in how we have urged that the
international tax systems have evolved, have made it too easy
to avoid tax internationally.
Senator Ayotte. So are you against a territorial system?
Mr. Kleinbard. I am in favor of one of two solutions: a
territorial system with teeth that is one that has really
strong safeguards, which I believe is almost impossible to do
as a technical matter--this is a field I know a lot about,
having worked in the area for many years--or a worldwide system
but with a low rate. If our rate is 25 percent and the rate in
China and the U.K. and France and Germany are all comparable
rates, how can anybody complain that they are being treated to
an uncompetitive tax environment if our worldwide rate is the
same as the domestic rate of the countries in which we, in
fact, do business?
Senator Ayotte. As I understand it just from your
testimony, I am taking that our rate right now does make us
less competitive.
Mr. Kleinbard. Right now as an economic matter--and I do
not want to use too many technical terms. Right now, economists
would describe the international tax system of the United
States as ``all screwed up.'' And, you know, we have $1.7
trillion of money that U.S. firms keep outside the United
States. It is ultimately invested back because they are buying
U.S. Treasury bonds with it, so it is not like the dollar is--
Senator Ayotte. Thankfully, given how we are trying to
finance our own debt.
Mr. Kleinbard. Yes, exactly. We have figured out a way to
finance our debt through our crazy tax system. But our system
is massively screwed up today. A territorial system with teeth
could work. It is just technically much more difficult,
frankly, than the members might appreciate. A worldwide system
with a low rate--
Senator Ayotte. And I am sorry to interrupt you, but I have
only have a few minutes, and I wanted to get Dr. Roberts'
comments on this thought, on our corporate rate, our
competitiveness, what we should do in that regard. And also,
our rates, in terms of thinking about tax rates, do they impact
economic growth?
Mr. Roberts. Well, for sure they interrupt economic growth,
and most economists I think would argue that the corporate tax
rates should probably be zero, which is a political non-
starter. Most people argue that--most people like to think that
corporations pay their taxes, but, of course, they are really
paid for by their workers, by their consumers, their customers,
and some by their shareholders. But, of course, a lot of people
have their pensions and their shareholders. We like to think of
their shareholders as somehow fat cats. They are not. A lot of
them are everyday middle-class people. So I think the corporate
tax system is a very poor way of satisfying envy. I wish we
would pick a different method.
It is expensive, meaning it costs us growth and investment,
and that investment, of course, helps everybody. So I would
like to see more of that. So reforming the corporate tax system
to the extent that Democrats and Republicans could come
together to lower that rate and maybe do something else
elsewhere would be a good idea, like stop helping Wall Street.
How about that for a political deal? That would be good.
Senator Ayotte. Thank you.
Chairman Murray. Thank you.
Senator King?
Senator King. Well, I guess if we took the corporate rate
to zero, it would establish the fact once and for all that
corporations are not people.
[Laughter.]
Mr. Roberts. There you go.
Senator King. Because people have to pay taxes.
Mr. Roberts. Not all of them.
Senator King. It seems to me that this has been a
fascinating and important discussion, and there is an important
issue here that you guys can help us with, and that is, what is
the appropriate percentage of GDP for revenues and expenditures
in a 21st century First World country? Historically, we know it
has been--I think the Ranking Member said 18 percent, 18.5
percent. The question is: What is the effect of the retirement
of the baby boomers, the demands they are going to make on the
health care system? Which, as somebody pointed out, is where
the real growth in their budgets are. So if we could agree on
the right number, whether it is 19, 20, or 21, or whatever it
is, then all the rest of our deliberations become kind of
easy--not easy, but then we are just fighting about how to fill
in those numbers.
Go down the row. What is the right number?
Mr. Kleinbard. Senator King, I think that you have exactly
put the horse back where it belongs, in front of the cart. This
is the question. And I think that the right number for the next
decade is in the neighborhood of 21 percent of GDP, unless and
until health care is brought down to world norms.
You know, it is not just health care, just to be clear. The
other place where this country is an outlier--only two places
where we are an outlier in spending, and the other place, of
course, is military, where we spend 43 percent of the entire
world's spending on military. Now, I am not saying that is a
bad thing. I do not know whether it is a bad thing or a good
thing. But I know that if we choose that, we have to pay for
it.
So we have two places where we are outliers in spending:
health care, long term one would like to think we could get a
handle on; but in the meantime, if you just run the numbers,
that leads to 21 percent of GDP.
Mr. Bernstein. I also think this is a critical question,
and I think it is wrong to simply fall back on 50-year averages
and think you are saying anything about needs of today. In no
small part, the demographics themselves are different, much
more pressure from aging baby boomers, particularly in health
care. So you have demographic pressures, you have health cost
pressures.
Now, the reason this is hard to answer is because that
second part, the health cost pressures are a moving target. We
recently found out that if you look at the CBO projections for
Medicare spending over the next 10 years, just looking between
2010 projections and 2013 projections, they have come down $500
billion. That is very important and very good. There is a
little bit more budget oxygen in the air because we are doing a
bit better on controlling health care costs. We are nowhere
near out of the woods, but we are doing better.
However, because of the demographic pressures, because of
the health care costs, because of things like veterans care
that are going to be a greater pressure moving forward,
interest on the debt is going to be pressure moving forward, we
have things like climate and other pressures that we have to
plan for. The 50-year average is a mistake, and I very strongly
encourage members to not be susceptible to the tyranny of
averages that are not applicable today. My guesstimate is that
we are looking north of 22 percent say over the next decade.
Senator King. Mr. Roberts?
Mr. Roberts. Well, respectfully, I do not think it is the
right way to think about the question, to pick a particular
number.
Senator King. Gee, the first witness said it was a
brilliant question.
Mr. Roberts. Well, that is why we are here.
[Laughter.]
Mr. Roberts. Different opinions. Maybe we can learn
something from our disagreements. But we have a different
tyranny, Jared, which is we have a bunch of programs that we
put in place in the 1930s that we have not changed much and
that were passed at a time when demographics were very
different and our economic ability to take care of ourselves
was very different.
I do not know why I am going to get a Social Security
payment. I am 58 years old. I will be, quote, eligible for
Social Security retiring potentially soon. Why? I do not need
it. Yes, I paid in my money, but it did not get put aside for
me. It went out to pay for my grandmother, and I am glad she
got the money. But it is absurd that we have a retirement
system that takes money from everybody and gives it to
everybody. If we insist on maintaining that system and if we
insist on maintaining a system that allows people to buy their
health care with other people's money, we are going to face a
set of unpleasant choices: either a very high percentage--we
can try to get there, we can try to get to 22 or 26 or 27. But
my argument is I do not want to live in that world. I do not
want my kids to live in that world, because that is going to be
in a world where people are treated not as adults but as
children, they are not responsible for their own retirement,
they are not responsible for their own medical care, they are
not responsible for their own health. We do not take advantage
of innovations and technology that are coming that will allow
those programs to be dramatically cheaper. So I have no
particular goal that we should spend 22 or 25 or 18. I would
love to spend 12, either by shrinking the military or other
things that maybe I hope we will not need in 2043. But I know
we do not need to pay for my Social Security. If we insist on
doing that for romantic or emotional reasons, we are going to
handicap the rest of the economy and handicap people who
desperately need the opportunities that come from lower tax
rates, more private spending, and more innovation.
So, to me, the crucial question is not how can we raise 22
percent or how can we get to 23 or can we really get to 19
even, or whether there is a tyranny of the past. The question
is: What is the appropriate role for Government in these areas?
And I just do not see that, again, paying for everybody's
retirement is an appropriate goal. Let us pay for people who
cannot afford to make their own retirement provisions, people
who have bad luck. But why are you paying for me? I have been
blessed. I have a good salary. I have been prudent. Why are you
paying for me? Why are you taxing other people, poor people,
average people, to pay for higher-income people who have this
opportunity?
So I just think that is the central question as to whether
we can face that level of flexibility and stop doing the things
that do not need to be done and give people more freedom to do
the things that they can do and create the innovation that will
follow.
Senator King. I once asked my friend George Mitchell, who
is the smartest guy I know, that very question, and his answer
was very different from yours, and he said, ``If we start to
means-test Social Security, it immediately becomes a welfare
program.''
Mr. Roberts. It should be a welfare program. It is a
welfare program that is masquerading as a retirement program. I
am not going to--I am not counting on it as part--by the way,
most people under the age of 40 assume they are going to get
zero. I think they are wrong. I think they will get something.
But they do not expect to get what you promised them. And I
think they are realistic.
Mr. Bernstein. Can I make a comment here? Is it okay?
Senator King. Sure.
Mr. Bernstein. Listening to Russ, you would think that the
typical Social Security beneficiary's income is like his
income. In fact, it is not. The median is about $25,000. So we
have a guaranteed pension, a retirement security system that
helps economically vulnerable elderly, and that happens to
describe a lot more people than I think you would understand
from listening to Russ--
Mr. Roberts. But not you and me.
Mr. Bernstein. Let me finish, let me finish. Yes, and,
therefore, absent these programs, many of our economically
insecure elderly persons who have paid into these programs
throughout their working career would not only be worse off,
but would lack income and health care security in their later
years, something that I think would be quite devastating to the
social fabric.
Now, that does not mean that every high-income person
should get the same benefits they are getting now. We might
have an agreement that there could be some flexibility there.
But let us be clear about who we are talking about.
Chairman Murray. Okay. I am going to--I hate to interrupt
this conversation, but I am going to call on our last
questioner who I do not think is going to interrupt this
conversation. Senator Sanders.
Senator Sanders. Thank you, Madam Chair.
You know, sometimes in economics, we forget what I think
the real issue is, and that is, what is happening to ordinary
people. How do we create a vibrant economy which provides
decent jobs and decent benefits to people?
I wanted to start off with Dr. Bernstein. Right now in
America we have the most unequal distribution of wealth and
income of any major country on Earth. In English, what is
happening is the middle class is disappearing. Since 1999,
median family income has gone down by some $5,000. Real
unemployment today is over 14 percent. We have the highest rate
of childhood poverty in the industrialized world. Many of the
new jobs that are being created are low-wage jobs.
Meanwhile, the people on top are doing phenomenally well.
You have an absolutely beyond belief situation where, according
to the last study that I have seen, the top 1 percent is
earning more than 100 percent of all new income. You have the
bottom 99 percent losing ground. All of the new income being
generated is going to the top 1 percent. In terms of
distribution of wealth, you have the absurdity of the top 1
percent owning 38 percent of the wealth, the bottom 60 percent
owning 2.3 percent of the wealth.
So my first question--forget the morality of some people
having more wealth than they are going to spend in a million
lifetimes while the vast majority of people are struggling in
America to keep their heads above water. Forget the morality of
all that. Tell me about how you strengthen a strong economy.
Can you have a strong economy when so few have so little in
order to buy goods and services to create jobs when so few have
so much? Dr. Bernstein?
Mr. Bernstein. I have just been writing about this very
question, but I will try to be brief. It is very difficult to
do so. There is an interesting wealthy entrepreneur named Nick
Hanauer who writes about this very point, and he kind of puts
it in terms of, you know, I am just not going to buy that many
cars. So there is certainly a case to be made that if the
benefits of growth were more widely shared--and as you suggest,
they are intensely concentrated now--spending, consumption,
overall economic demand would also reflect that in ways that
would be positive for the broader economy, recoveries would not
only or perhaps be stronger but would feel a lot better to most
people who have been left out, as you have suggested, for
decades now.
Secondly, the thing that I found even more in my recent
research--and this is fairly new stuff--is that these high
levels of wealth and income concentration interact with money
in politics in a way that buys a set of policies that inflates
economic inequality--
Senator Sanders. Well, on that issue I think you do not
have to tell the people in this room up here. We know that very
well.
Mr. Bernstein. So it has those problems as well.
Senator Sanders. All right. Professor Kleinbard
Mr. Kleinbard. You know, when I think about this issue--
and, in fact, I am writing about it as well--I look around, and
what I see is market failure everywhere. I see opportunities to
invest that are not being taken advantage of, and the
opportunities that I see are the opportunities to invest in the
310 million Americans who are here.
We have 46 million Americans living today in poverty. They
cannot afford to go to college. They cannot afford to invest in
themselves. So the reason I disagree so fundamentally with Dr.
Roberts about how to think about these issues is that what I
see as market failure, I see a critical role for Government in
investing in the most unproductive resource in America, which
is our fellow Americans.
Senator Sanders. Good. I apologize, Dr. Roberts. I am going
to get to you in a second here. But let me ask this: The great
debate that is going on now on the budget is whether, in fact,
we bring in more revenue by closing loopholes, by asking the
wealthy, who are doing phenomenally well, to pay more, or as
many of my Republicans feel, we should cut Social Security,
Medicare, Medicaid, education, nutrition? In other words, do
you balance the budget on the backs of disabled veterans and
the most vulnerable people in this country, or do you ask
billionaires and very profitable corporations to pay more?
Let me ask Dr. Roberts and everybody else a simple
question. In 2010, Bank of America set up more than 200
subsidiaries in the Cayman Islands to avoid paying U.S. taxes.
It worked. Not only did Bank of America pay nothing in Federal
income taxes, but they received a rebate from the IRS of $1.9
billion that year. Citigroup, ExxonMobil, Chevron--all of these
and many other major profitable corporations invest their
profits in the Cayman Islands; they pay very little or nothing
in taxes in the United States of America.
Dr. Roberts, does that make any sense to you?
Mr. Roberts. I am deeply troubled by the interaction
between politics and economics that you referenced a minute
ago, especially with respect to the financial sector. And you
mentioned inequality. The financial sector is a major source of
that inequality. That is the bad kind.
The good kind is Jeff Bezos and Steve Jobs and Sergey Brin,
the people who created Apple and Amazon and Google, and I think
they should thrive because they thrive by making other people's
lives better.
There is another group of people who thrive by taking money
from the rest of us. Please stop coddling them. Stop giving
them breaks. Stop giving them bailouts. And if you do, do it in
a way that punishes them. None of them--very few of them went
out of business, and the people who lent them the money that
allowed them to make the lousy bets, they got all their money
back 100 cents on the dollar. That is a horrible--
Senator Sanders. So am I hearing you say that you think it
is not a great idea that Bank of America is allowed to have
hundreds of subsidiaries in the Cayman Islands?
Mr. Roberts. I am not an expert on international corporate
taxation. I do know that Bank of America gets too many
privileges relative to what they produce for the rest of us.
And the only other thing I would say is that there is a lot of
market failures in our system, Professor Kleinbard. The
question is: How good is Government doing in investing in our
people, those causes that you care about and that I care about
as well? And I would like to see a civil society, a private set
of voluntary ways of helping poor children who are being
horribly educated by that system that we have thrown billions
of dollars at and lost two generations--
Senator Sanders. Thank you, Dr. Roberts. I apologize.
Dr. Bernstein and Professor Kleinbard, that question.
Mr. Bernstein. The Congressional Budget Office is always
very, very careful to be very nonpartisan, which is a very good
thing, and to typically avoid making policy recommendations.
But in this very area, I stress the issue of the ability of
these foreign subsidiaries to defer income. So here is a quote
from CBO that is in my written testimony: ``...eliminating or
curtailing deferral of U.S. taxes on income earned
abroad...would dampen incentives to shift investment or
reported income on the basis of concerns about tax liability.
As a result, those options would generally lead to more
economically efficient business investment and increase
corporate tax revenues from firms that remained incorporated in
the United States.''
Okay? So that is a nonpartisan analysis of this question.
Not only would ending these practices undermine an injustice
that you are describing, but it would improve economic
efficiency and revenue. I mean, this is a great deal.
Senator Sanders. Well, I would point out that we have
introduced legislation, Madam Chair, to do just that. It would
bring in $590 billion over a 10-year period.
Professor Kleinbard, briefly.
Mr. Kleinbard. I am, in fact, an expert on corporate
international taxation, and as I said to Senator Ayotte, there
are only two possibilities. One is that you design a
territorial system that cannot be gamed. I do not think that is
possible as a technical matter. We do not have time to go
through why it is so difficult as a technical matter. That
leads to the alternative, which is true worldwide tax
consolidation so that the foreign income is treated exactly the
same as domestic income and coupling that with a lower
corporate tax rate, which in turn makes the United States a
much more attractive environment in which to do business.
So I come out thinking that a worldwide tax system is the
right place, and then people will not need Ugland House, with
its thousands of Cayman Islands shell companies.
Senator Sanders. Thank you very much.
Thank you, Madam Chair.
Chairman Murray. Thank you. We just have a couple minutes
left, and Senator Sessions has asked to ask another question.
Senator Sessions. Well, thank you, and I really do not
believe that there is no waste, fraud, and abuse in the Federal
Government, and a sequester or BCA reduction of 2 or 3 percent
in the growth is not going to--is poor management by the people
who run this Government if children are being starved as a
result of that, and I reject that.
But one question, Dr. Kleinbard. You talked about I believe
you favor reforming the corporate Tax Code, eliminating
loopholes or deductions that are not justified, making it more
growth and productive and honest. But if you use--and to do
that to reduce the rate, so if you close corporate loopholes
under your theory, that would not be money to pay down the debt
with, it would be used to create a simpler, more productive
corporate tax rate. Is that right?
Mr. Kleinbard. Yes, sir. I see the business tax environment
as needing that kind of reform. There just are not enough
dollars to go around to have a lot of dollars left over for
deficit reduction. We cannot have the United States with a 35-
percent corporate tax rate in the craziest international tax
system in the world and call that a reasonable platform when
other countries have their corporate rates in the mid-20s. So I
think that that is a sensible package.
I think, on the other hand, there are trillions of dollars
of poorly targeted spending programs on the individual side
where that money can be used for deficit reduction. So I make
that distinction between the two silos in my thinking.
Chairman Murray. All right. Well, thank you to all of our
colleagues for participating today, and I especially want to
thank our witnesses for a very productive discussion.
As I said at the outset of this hearing, we have a debate
ahead of us, which will include a variety of approaches to our
many challenges. Today's hearing really was an opportunity to
highlight some wasteful spending in our Tax Code as one
approach. And as a reminder to my colleagues, additional
statements and/or questions for any of these witnesses from
today's hearing are due in by 6:00 p.m. today to our chief
clerk. And I again thank all of our witnesses for traveling
here today and for participating, and all of our Senators as
well.
With that, this hearing is coming to a close.
[Whereupon, at 12:09 p.m., the Committee was adjourned.]
SUPPORTING BROAD-BASED ECONOMIC GROWTH AND FISCAL RESPONSIBILITY
THROUGH TAX REFORM
----------
WEDNESDAY, MAY 22, 2013
United States Senate,
Committee on the Budget,
Washington, D.C.
The Committee met, pursuant to notice, at 2:35 p.m., in
Room SD-608, Dirksen Senate Office Building, Hon. Patty Murray,
Chairman of the Committee, presiding.
Present: Senators Murray, Wyden, Whitehouse, Kaine, King,
Sessions, Grassley, Portman, and Johnson.
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. I want to
thank Senator Sessions and all of our colleagues for joining me
today to explore the ways in which tax reform can support
broad-based economic growth while helping us tackle our long-
term debt and deficit challenges.
And I really want to thank all three of our witnesses who
are here today. We will be hearing from Michael Linden, the
managing director for economic policy at the Center for
American Progress; Adam Looney, senior fellow in economic
studies at the Brookings Institution; and Veronique de Rugy,
senior research fellow at George Mason University's Mercatus
Center. We really appreciate all of you coming and sharing your
expertise on these issues.
I am pleased that the possibility of broad reform to our
Tax Code has gained some momentum in recent months. With a Tax
Code that we all realize is complicated, inefficient, and too
often skewed to benefit the well-off and well-connected, there
is much to improve.
And reforming our Tax Code also offers opportunities to
make progress on major challenges that we face today, like the
need to grow our middle class and make sure we can compete in
the 21st century global economy and restore our Nation's long-
term fiscal health.
So I want to take this opportunity today to discuss a key
principle, reflected in our Senate budget that we passed
earlier this year, which should guide any tax reform effort.
Tax reform has to be fair to the middle class, and that
means we will need more revenue from those who can most afford
it, both to reduce the deficit and to make the necessary
investments in our future economic strength, because expanding
and supporting our middle class in the 21st century global
economy is going to be a challenge.
And to make sure we can do it, we have to focus on what the
original Simpson-Bowles report called ``high-priority
investments''--those in education, infrastructure, and
research.
Our schools need to prepare our workers--of all ages--to
compete for 21st century jobs. Our roads, bridges, airports,
and airways should be able to transport people and products
quickly and reliably so that companies that want to invest here
and hire American workers will. And we need to maintain our
edge in research and development so that the innovations that
drive future economic growth take root at home rather than
overseas.
At the same time, our Nation has made promises to millions
of Americans that we absolutely must uphold. Current and future
seniors, who have worked hard all their lives, deserve to know
that Medicare will be there when they need it. And in the
United States, we have always worked to help those struck by
hard times get back on their feet.
These commitments, to our future and to those who need and
deserve our support, must be met.
If sequestration is not replaced, we will see deep cuts to
these kinds of investments--so much so that even the House
Republican appropriations chairman called this ``an austere
budget year.'' This would hurt us in the short term, at a time
when we should be focused on creating jobs and boosting the
economy.
Slashing these priorities even further would ultimately
make us a very different country--one that has a weaker economy
in the long run, and one I think most of us here would agree we
do not want to be.
Also, while recent CBO analysis shows that we will run
lower deficits in coming years than we expected, I think we
also recognize that we have to get our long-term debt and
deficits on a sustainable path. And we need to do this in a
responsible way that allows us to confront the urgent need to
create jobs and boost our country's competitiveness.
As Mr. Linden will discuss, this is why reducing the
deficit with a combination of new revenue from tax reform, as
well as smart spending cuts, is the fiscally responsible
choice.
Democrats are not alone in making this argument. Bipartisan
groups have consistently included revenue for deficit reduction
in their tax reform plans. Simpson-Bowles and the Senate Gang
of Six each proposed more than $2 trillion.
That is significantly more than the $600 billion in new
revenue from the wealthiest that we have raised in deficit
reduction efforts over the last 2 years. In fact, measured over
the same time frame, Simpson-Bowles and the Senate Gang of Six
each proposed more new revenue than what we got from the year-
end deal and what we proposed in the Senate Budget combined.
Let us remember that reform will require eliminating
wasteful and inefficient tax expenditures that are unfairly
skewed towards those who need them the least--like special tax
breaks for corporate jet owners and hedge fund managers, and
loopholes that allow multinational corporations to shift jobs
and profits offshore.
These kinds of special tax breaks are just spending by
another name, and they often do little to support our economy
or our middle class.
So if you really think, like many of my colleagues do, that
our fiscal problems are the greatest long-term threat to our
Nation's future, why wouldn't you want to take some of the
savings from ending inefficient and unfair tax breaks and use
it to tackle our debt and deficit? Especially if, in doing so,
you could also continue to prioritize the kinds of investments
that make our country great and allow more Americans a shot at
success.
Unfortunately, some of the plans we have seen from the
other side of the aisle take a very different approach. My
Republican colleagues have put forward plans that prioritize
dramatic reductions in tax rates while bringing in no new
revenue for deficit reduction.
The tax reform plan outlined in the House budget is a prime
example. Experts have found that to remain revenue neutral, the
House budget would cut taxes on those earning $1 million or
more by an average of $245,000 while raising taxes on families
with income under $200,000 by an average of $3,000.
In other words, the only way the House budget's tax reform
plan could avoid raising taxes on the middle class would be to
dramatically increase the deficit.
At a time when we need to be thinking about how to secure
both our long-term fiscal health and our economic leadership,
we really do not need an expensive tax break paid for by
shifting tax burdens onto the middle class. That approach would
be deeply unfair. And it simply is not an option.
As we will hear today from Mr. Looney, it is very difficult
to see how tax reform can dramatically lower rates, help to
reduce our deficit, and protect the middle class and most
vulnerable from paying more, all at the same time.
I believe we need to focus on what is best for the middle
class by ensuring that any tax reform effort helps more
Americans share in and contribute to our economic strength and
helps reduce our deficit.
Only once we have met these goals does it make sense to
look at lowering rates.
Until then, I think it would be very difficult to explain a
plan to middle-class Americans that asks them to sacrifice but
gives the wealthiest Americans and biggest corporations a pass,
and does nothing to invest in our future or our fiscal health.
So as we continue this debate, I encourage my Republican
colleagues to be open to working with us on tax reform that
puts the middle class first and our economic and fiscal
strength first.
Some leading Republicans have acknowledged in the past that
there are opportunities for this kind of balanced approach.
Speaker Boehner proposed raising $800 billion for deficit
reduction by closing what he called special interest loopholes
and deductions.
So I really hope there is some room for agreement here,
because even though this is not going to be easy, tax reform
offers substantial opportunities to make our Tax Code work
better for families and our economy.
If we do this the right way--meaning the fair way--tax
reform has the potential to make our tax system simpler and
more efficient, to ensure that those who invest here in the
United States and play by the rules see the benefit, and to
encourage the kind of long-term, broad-based economic growth we
saw back in the 1990s.
So we should do everything we can to move this forward.
And before I turn it over to Senator Sessions, I do want to
note that any significant change to our Tax Code will have very
real consequences for families and businesses across the
country, and it will be very difficult to enact any changes
without the taxpayers' full trust--which is one reason why I,
along with many, was appalled at the recent revelations about
practices at the IRS, which indicate completely unacceptable
and wrong-headed behavior.
The Federal Government, and particularly the IRS, should
maintain the highest ethical standards and should be held fully
accountable for any failure to do so. I know that my colleagues
on both sides of the aisle are working with President Obama to
make sure that those involved are held responsible and that
such a breach of public trust cannot occur again. And I really
want to thank them for doing that crucial work.
I am looking forward to what I think will be a very
productive conversation at this hearing today. I do again want
to thank all of our witnesses for being here, and with that, we
will hear from Senator Sessions.
OPENING STATEMENT OF SENATOR SESSIONS
Senator Sessions. Thank you, Madam Chairman, and I thank
our witnesses. This is a good panel, and we have a very
important subject today that impacts policies that we will be
setting for the United States in the years to come, and we
value your opinions.
We all agree that public policies need to support strong
economic growth that benefits all Americans--middle-class
Americans, working Americans--whose incomes have not kept up,
whose unemployment rates are persistently high, who have
dropped out of the workforce in record numbers, whose salaries
are not keeping up with inflation for several decades.
There is a growing consensus that one of the barriers to a
strong growth is a badly broken tax system. I do reject your
characterization of the House tax plan. I do not think they
would turn out the way you project. But we all need to be
talking about how to improve our tax system.
Our broken Tax Code is but one expression of the burden bad
fiscal policy places on the economy. Excessive, non-productive
spending and the consequently high and growing national debt
hurt the pace of economic activity. We need to adopt sensible
fiscal policies to get our budget under control and allow the
economy to grow more rapidly. That is why I am so pleased to
have Dr. Veronique de Rugy with us testifying today. She is a
widely recognized expert on how developed countries have
attempted to stabilize their debt and bring their budget, both
spending and taxes, under control. Some countries have done
this well, others have not, and Dr. de Rugy is here to tell us
what works and what does not from the studies she has examined.
There can be no more appropriate time than now to consider
the role of tax and spending policies in facilitating higher
levels of economic growth. If the fiscal situation is to
significantly improve in the near term, then the pace of
economic activity must improve very soon. This improvement,
however, may be hard to achieve. This economic recovery remains
the slowest since the end of World War II. The National Bureau
of Economic Research dates the end of the Great Recession in
June of 2009. Since then, the economy has grown an average of
only 2.1 percent. That is significantly less than the rate of
previous recoveries after 15 quarters.
The U.S. economy is 8.3 percent larger today than when the
recession ended, which is a little less than half the average
increase in the size of the economy after the previous 15
quarters following a recession. So this economic sluggishness
comes with great human cost. There are fewer jobs today than
when the recession started. Total non-farm employment in April
of 2013 was 2.3 million below its level in December of 2007.
The overall unemployment rate is 7.5 percent, also higher than
it should be this far from the end of the recession. And key
unemployment rates for important demographic segments are even
higher. The rates for Hispanics stands at 8.4 percent, for
blacks at 12.8 percent, and for teenagers at 24.1 percent.
These high rates and a surprising workforce dropout rate have
reduced personal income and, thus, Federal revenues.
Add to this lost revenue and estimated outlays associated
with unemployment being higher than it should be at this point
in the recovery, and the total harm to our underachieving
economy to the Federal budget is nearly $90 billion this year
alone.
Policymakers will note that this amount roughly equals the
2013 fallback sequester reductions. Not all of this lost
income, however, is due to unemployment. Some stems from people
simply dropping out because the Government benefits are
generous and it does not pay them to actually work.
I am increasingly concerned by how well-meaning public
policies are creating incentives for otherwise able-bodied
workers to stay out of the labor force. The truth is that the
generosity of program benefits has grown faster than inflation
or wages since 2007.
A paper published by the National Bureau of Economic
Research found that between 2007 and 2009, the value of means-
tested benefits available to the average non-elderly unemployed
worker grew from $10,000 to $15,000. More people but more
benefits, higher benefits per each individual at a time when
our deficits are soaring.
As more people become eligible for increasingly generous
benefits, the penalty for working if unemployment increases.
This is especially true for workers who qualify for multiple
means-tested programs.
The CBO found that households with incomes just above the
poverty line or between $23,000 and $29,000 for a family of
four in 2012 can experience a disincentive to work, and that is
like a tax rate of up to 60 percent. That is, for every dollar
in additional earnings a person might make through hard work or
additional work, the households stand to lose a total of 60
cents in both increased taxes and lost Federal benefits. With a
high penalty to earning more by working, many low-income people
choose either not to work or, as CBO finds, to ``put in fewer
hours and be less productive.''
In my view, the key to stronger economic growth rests with
removing burdens we impose on work, savings, and investment. In
accomplishing that task, the Tax Code needs to be clearly in
our sights.
The economic effect of increased taxes is one of the most
widely understood effects in the economic literature. We know
what increased taxes do. Increases in marginal tax rates
discourage work, discourage savings and investment. Taxes are
only effective and efficient if the Government can better spend
and allocate the resources than individuals in the market does.
Money does not sit under someone's mattress but is instead
spent or saved so that taxes again remove money from the
economy. Rather than increasing tax rates, we should take a
lesson from the tax rate reductions of the 1920s, 1960s, and
1980s. These reductions led to increases in employment, higher
returns for stocks, increased investment growth, and have
generally promoted economic growth.
There are limits on what reduced taxes can achieve. We are
not in a position to sustain large tax reductions now, but I do
believe that we have seen historically that good results can
come from a lower take of the Federal Government from the
economy.
The reduction in taxes on income encourages people to work
more because they get to keep more of their pay. A reduction in
capital gains taxes increases future consumption because
investors receive higher rates of return.
Finally, I do not want us to repeat the mistakes made by
some governments of increasing taxes when the real problem is
excessive spending. Economists have shown that countries have
been able to successfully reduce their debt while improving
economic performance when the focus of the policy is on
reducing government spending. At the same time, tax increases
can damage the chances for success. This is a critical choice
we are facing, and we need to honestly review it.
So, Madam Chairman, let us be sure we adjust our leading
public policies in a way that reduces the burden and makes our
Government leaner and more productive while demanding less from
the fragile public sector.
Thank you for this important hearing, and I look forward to
participating.
Chairman Murray. Thank you very much, Senator Sessions.
We will turn to our witnesses. Again, thank you all for
coming and joining us today. Mr. Linden, we will begin with
you.
STATEMENT OF MICHAEL LINDEN, MANAGING DIRECTOR FOR ECONOMIC
POLICY, CENTER FOR AMERICAN PROGRESS
Mr. Linden. Thank you very much. Good afternoon, Chairman
Murray, Senator Sessions. Thank you so much for inviting me to
be here today. My name is Michael Linden. I am the managing
director for economic policy at the Center for American
Progress where my work focuses primarily on Federal fiscal
policy.
First, allow me to commend the Committee for considering
the important issue of tax reform and for doing so explicitly
within the context of broad-based economic growth. Coming out
of the Great Recession, we face some daunting economic
challenges which we can meet and overcome, but only if public
policy is properly calibrated.
Now, the Tax Code is by no means the only tool available to
the Federal Government to support broader and faster economic
growth, but it is a very important one. And that is why tax
reform must be designed to help address the larger economic
challenges that we face.
To that end, tax reform should begin with the basic
understanding that the middle class is a critical driver of
economic growth and that rising income inequality is a drag on
that growth.
A strong middle class provides the Nation with its most
important source of stable demand for goods and services, it
incubates the next generation of entrepreneurs, and it supports
the inclusive political institutions that are most likely to
reinvest in precisely the kinds of public investments that
produce future economic growth and innovation.
We often think about the middle class as an outcome of the
economy, but, in fact, we now know that is backwards. The
middle class is an input to the economy. The stronger it is,
the stronger the economy will be. And, therefore, tax reform
must seek to strengthen the middle class, and it can do so in
three ways.
First, tax reform must make the code fairer for the middle
class.
Second, tax reform must make the code simpler for the
middle class.
And, third, and most importantly, tax reform must ensure
that the code is generating enough revenue to pay for the
investments and protections that are critical to the success of
the middle class.
First, making the code fairer to the middle class means
doing more to reduce rising income inequality. Three decades
ago, a household in the richest 1 percent too home about ten
times as much as a household in the middle class. By 2007, that
ratio had nearly tripled. And while the Great Recession was
certainly not kind to anyone, those at the top have rebounded
far faster than everyone else. In fact, the entire gain from
the economic recovery so far has flowed exclusively to those at
the top.
Now, while the Tax Code cannot by itself fully address this
alarming trend, it can do much more to help. Since the
beginning of the 1980s, changes in tax policy have generally
made the code less effective at reducing post-tax income
inequality. In fact, the Tax Code in 2007 was about one-third
as effective at reducing income inequality as it had been three
decades prior. And while we certainly have taken some steps
since 2007 to improve the Tax Code in this regard, the sheer
magnitude of the increase in income inequality suggests there
is much more to do.
Second, tax reform should seek to make the code simpler for
the middle class. Making our tax system simpler means
streamlining the code to clear out the dense thicket of tax
expenditures that have grown up in the last few decades. Not
only do many of these tax expenditures add enormous compliance
costs, but they also open up massive opportunities for tax
avoidance. And, of course, most of these opportunities are not
available to middle-class families. They are only utilized by
those who have the resources to hire expensive accountants.
Making the code simpler does not, however, mean reducing
the number of tax brackets. The complexity of tax filing has
nothing at all to do with how many brackets there are. There
could be one or five or ten or a thousand, and it would not
make any difference at all to how long it takes or how
complicated it is to determine one's tax liability. In fact,
Congress should be very wary of proposals that shift the tax
bill from the rich onto the middle class in the name of
simplicity.
Finally, and most critically, tax reform must strengthen
the middle class by ensuring that the code generates adequate
revenues to pay for the foundational public investments in
middle-class protections. The primary task of any tax system is
to generate revenue, sufficient revenue, and right now our
system is failing at that. Because our tax system is generating
inadequate revenues, we have been forced to cut the very
investments--education, transportation infrastructure,
scientific investment, economic development--that are most
likely to spark future growth and prosperity. As a result, by
2016, and even without sequestration, our total share of
national resources that are going to fund those investments
will decline to its lowest levels since 1964.
Going forward, we cannot afford to keep making that
mistake. Middle-class families and those who aspire to the
middle class rely on the public investments that complement
those of the private sector. They depend on the protections
afforded them by Medicare and Social Security and Medicaid. And
they expect the public sector to provide the foundations for a
middle-class lifestyle, such as basic transportation networks
and educational opportunities for their children. To maintain
those middle-class foundations, we will need additional
revenue.
Now one common objection to this is that it means
generating more revenue than we have on average over the last
40 or 50 years. But this objection is misleading. It is not at
all apparent why revenue levels from the 1960s or 1970s should
determine what our country needs in the 2020s or 2030s. Our
needs change over time. We raised far more revenue in the 1960s
and 1970s than we had in the 1910s or 1920s. And given the
aging of the population and the dramatically higher costs of
health care today, it is not at all surprising that we will
need a slightly higher level of revenue than we did in the
past.
Indeed, every bipartisan plan put forward to address future
budget deficits has incorporated this basic observation into
their approach. The budget plans offered by Alan Simpson and
Erskine Bowles, by Alice Rivlin and Pete Domenici, all called
for revenues above the historical average. In fact, both
Simpson-Bowles and Rivlin-Domenici called for revenue levels
above those in either the President's budget or in the Senate's
budget resolution.
Tax reform is an important and necessary goal. With the
economic head winds we are facing, we cannot afford to have a
Tax Code that is not precisely designed to meet the needs of
the middle class. To meet our economic challenges, we need a
code that is fairer to the middle class, that is simpler for
the middle class, and, most importantly, generates sufficient
revenue to invest in the middle class.
Thank you very much for this opportunity, and I look
forward to your questions.
[The prepared statement of Mr. Linden follows:]
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Chairman Murray. Thank you very much.
Dr. Looney, we will turn to you.
STATEMENT OF ADAM LOONEY, PH.D., SENIOR FELLOW, ECONOMIC
STUDIES, THE BROOKINGS INSTITUTION
Mr. Looney. Thank you very much. Chairman Murray, Ranking
Member Sessions, and members of the Committee, thank you for
inviting me here to share my views on the role of tax reform in
supporting broad-based economic growth and fiscal
responsibility.
The United States faces a daunting outlook for budget
deficits, an increasingly challenging global economy for many
American workers and businesses, and rising income inequality.
Improvements in tax policy could help address these
challenges by making our tax system more fiscally sustainable,
more efficient, and more fair. Indeed, any tax reform will
ultimately be evaluated based on how it affects each of those
three criteria.
But improving on all three dimensions simultaneously is
increasingly difficult because of tradeoffs between competing
goals of efficiency, revenues, and equity.
Today's long-term budget outlook means that we are likely
to need higher tax revenues in the future. And rising
inequality means that changes in policy are going to be
increasingly scrutinized for how they affect the progressivity
of the tax schedule. But a tax reform that devotes revenues to
deficit reduction and retains our progressive system would have
much more difficulty achieving other goals, such as lowering
tax rates.
In my testimony today, I want to describe some of these
tradeoffs and some potential paths forward.
Much of the energy surrounding tax reform focuses on the
model of the Tax Reform Act of 1986. In that reform, tax rates
were lowered substantially, and the lost revenue was restored
by cutting tax breaks, tax deductions, and other so-called tax
expenditures. In the 27 years since then, however, the economic
context has changed, making such a reform much harder to
achieve.
First, we face a much more challenging long-run budget
outlook. Most believe that putting the budget on a sustainable
path is going to require contributions both from spending cuts
and from revenue increases. Many hope that tax reform can help
produce those revenues.
That makes tax reform just a lot more difficult to achieve
because revenues allocated to deficit reduction are revenues
that cannot be used to lower rates, and vice versa.
Moreover, raising revenues and cutting rates at the same
time is a really tall order. At first glance, the list of tax
expenditures is projected to add up to $1.4 trillion in 2015.
But that figure dramatically overstates the likely revenues
that are available from cutting tax expenditures.
Most of these tax expenditures serve substantive goals.
They remain on the books because they were too difficult to
eliminate in 1986. And as you know, they are backed by very
popular constituencies. Because of these and other
considerations, the Congressional Research Service warns that
``it may prove difficult to gain more than $100 billion to $150
billion'' a year from reducing tax expenditures.
And just to put that number in perspective, in order to be
revenue neutral, the tax plan included in House Budget
Committee Chairman Ryan's budget would require eliminating
roughly $450 billion a year just to balance out on the
individual side. And the plans initially developed by Domenici-
Rivlin and Simpson-Bowles likely require reductions in tax
expenditures of a similar or even larger magnitude.
And so that gap between the reductions in tax expenditures
that are required in these plans and those that could be likely
agreed upon just illustrates the challenge of formulating a
plan that simultaneously achieves both goals of lower rates and
higher revenues.
And, of course, a second consideration is the issue of
rising income inequality and its relationship to the Tax Code.
Income inequality has increased dramatically, particularly at
the top, and changes in the tax system have tended to
exacerbate these inequalities. The very people who have
received the biggest income gains in the past three decades
have also seen the largest tax cuts.
Concerns about income inequality were much less salient the
last time we did tax reform in 1986. Back then, the phenomenon
of rising inequality had yet to be fully understood or
discovered. The technical expertise to measure how the tax
system affects inequality had yet to really be developed.
Today not only are such concerns about how progressive the
tax schedule is, you know, those concerns are much more
heightened today, but so is our ability to measure how taxes
affect those different income groups, and that raises the level
of scrutiny directed to tax reform but also illustrates a
substantive tradeoff: Not only must any changes in tax rates
and tax expenditures balance out to yield whatever revenues are
required, but they have to balance out within income groups in
order to retain a progressive tax structure.
In a series of papers, colleagues at the Tax Policy Center
and I have analyzed some of these tradeoffs by examining a
hypothetical tax reform with the stated goals of maintaining
revenues, lowering marginal tax rates, and ensuring a
progressive tax system. We estimated revenue losses due to
lower rates and then tried to pay for those revenues losses by
eliminating tax expenditures. Overall, the available tax breaks
were enough to offset revenue losses from lower rates. But the
resulting tax schedule was less progressive. Even when we tried
to implement the most progressive possible way of reducing the
tax breaks, there was simply not enough revenue from the breaks
in the top brackets to offset the revenue losses from lowering
marginal rates. This was true even when we incorporated revenue
feedback, not just according to the standard dynamic effects,
but also have incorporating additional feedback effects from
potential economic growth.
And so the implication is that such a tax reform must give
up on at least one of its stated goals: either higher-income
taxpayers would receive a tax cut and middle- and lower-income
taxpayers a tax increase; the deficit would have to go up;
preferences for savings and investment would have to be
reduced; or marginal tax rates would need to be higher.
Of course, these considerations do not rule out tax reform;
indeed, many experts have put forward plans that provide more
incremental reforms that simultaneously achieve efficiency
gains, higher revenues, and a more progressive system. But such
plans require substantial compromises.
For instance, certain plans achieve their distributional
goals by eliminating preferential rates for capital gains and
dividends or curtailing other savings and investment-related
tax breaks.
Other incremental reforms propose improving the efficiency
by cutting inefficient tax expenditures. A common thread is
that all of these proposals enhance economic efficiency, raise
revenues, and do so in a progressive way.
That concludes my prepared remarks, and I look forward to
your questions. Thank you.
[The prepared statement of Mr. Looney follows:]
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Chairman Murray. Thank you very much.
Dr. de Rugy?
STATEMENT OF VERONIQUE DE RUGY, PH.D., SENIOR RESEARCH FELLOW,
MERCATUS CENTER AT GEORGE MASON UNIVERSITY
Ms. de Rugy. Chairman Murray, Ranking Member Sessions, and
members of the Committee, it is an honor to appear before you
today to talk about fiscal responsibility and economic growth.
My name is Veronique de Rugy. I am a senior research fellow at
the Mercatus Center at George Mason University where I study
tax and budget issues.
Last week, the Congressional Budget Office released numbers
showing that the U.S. short-term fiscal situation has improved
over the last few months. While this is a welcome development,
it also shows that our long-term budget outlook is still
extremely worrisome.
As the CBO noted in its report, not only are high and
sustained levels of debt an impediment to economic growth in
the long term, but it also makes it very hard for the Federal
Government to prevent and respond to future financial crises.
And one of the reasons the CBO adds is that it makes the use of
monetary and fiscal stimulus extremely difficult. In other
words, the long-term improvement in our deficit outlook should
not distract Congress from addressing our long-term debt
problem.
However, in the pursuit of debt reduction, Congress ought
to be very careful. While most of the recent discussions about
debt reduction have focused on size, what researchers show is
that actually it is more what the debt reduction packages are
made of that matters. So debt reduction can be achieved by
cutting taxes--by cutting spending, sorry, by increasing taxes,
or by doing a mix of both. However, each of these policies has
a very, very different outcome on level of debt and economic
growth.
So today I will show, based on the research I have done and
looking at the way other countries have addressed their debt
problems, I want to show that spending cuts are more likely to
reduce debt levels than tax increases; and, two, that spending
cuts are less likely than tax increases to produce recession
and more likely to produce economic growth in the short term
and in the long term.
So let us start. When thinking about debt reduction, one of
the important questions is to ask: What kind of debt reduction
packages is the most effective at cutting the debt? The general
consensus among academics working on this issue, including ones
from the IMF and the OECD, is that fiscal adjustment packages
based mostly on spending cuts are far more likely to lead to
lasting debt reduction than those based on tax increases. These
findings hold true no matter how fiscal adjustments are
measured.
The second question is this: Which is more likely to harm
economic growth in the short term--spending cuts or tax
increases? And just as there is a lot of debate about the
short-term economic impact of spending increases on economic
growth, economists do not have a definitive answer on the
short-term impact of spending cuts on the economy. However,
through this debate a few lessons have emerged.
The first one is that tax increases hurt the economy more
than spending cuts. Extensive research by Harvard University
economist Alberto Alesina as well as by economists at the IMF
has shown that fiscal adjustments achieved through spending
cuts are less recessionary than those achieved through tax
increases. I think the case of Europe is a powerful example of
this.
Contrary to the common perception, European governments
have seldom cut spending, and when they have, these cuts have
been overwhelmed by large tax increases. As a result, these
countries have mostly failed to reduce their debt, and many of
them are sliding back into recession.
Second, while expansionary fiscal adjustments based on
spending cuts are possible, they are more likely to occur when
they are accompanied by growth-oriented policies such as
structural labor market reforms and/or monetary easing.
Third, while cutting spending may not always result in a
short-term economic boost, there are long-term fiscal reasons
for pursuing them since they will help prevent future debt
crises.
Finally, I would be remiss if in a hearing about economic
growth and tax reform I did not mention that most economists
believe that lower taxes are associated with higher economic
growth. Keynesian models, for instance, emphasize the short-run
benefits of tax cuts, stressing that they put money in the
pockets of consumers and in the accounts of businesses, which
then boost aggregate demand. On the other end of the spectrum,
the real business cycle school of thought focuses on the longer
run and emphasizes that lower marginal tax rates tend to
increase people's incentive to work and save, increasing
aggregate output.
Real-world experience validates the academic case for low
taxation. Macroeconomists Christina and David Romer, for
instance, examined 60 years of U.S. data, and they found that a
tax cut of 1 percent of GDP increases real GDP by about 3
percent over the short term and by about 1.8 percent over the
medium run. But while Romer and Romer focused on the short and
medium term, there are a lot of other studies that have focused
on the long-term impact of low taxes. For instance, Nobel Prize
winner Ed Prescott has actually looked at the change in habit,
in work habit in different countries, in particular between
Europe and the U.S., and one of the things that he has found is
that this change in work habit can mostly be attributed to the
difference in tax rates in those countries.
So, for instance, one of the things that he found is that
when the U.S. had higher marginal tax rates than Europe in the
1970s, Americans worked much less than Europeans back then. And
when this has been the reversed, the impact on work habits have
changed.
This is even more pronounced in countries where the welfare
state is more beneficial. So, I mean, there is a lot of work on
the impact and the benefit of a low level of taxes on the
economy.
On this I will end, and I am looking forward to your
questions. Thank you.
[The prepared statement of Ms. de Rugy follows:]
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Chairman Murray. Thank you very much.
Chairmen Camp and Ryan in the House have made rate
reduction their number one priority in tax reform. They have
set a goal of reducing the top individual and corporate tax
rates by about one-third to 25 percent. Along with that rate
reduction goal, they also are saying they are going to repeal
the alternative minimum tax and the Affordable Care Act. All
together, those policies would reduce tax revenues by more than
$5.7 trillion.
Now, experts have told us that in order to keep this tax
reform plan from increasing deficits, the tax base would have
to be broadened to such an extent that the plan on net would
actually cut taxes on millionaires and raise taxes on filers
making less than $200,000. In other words, the wealthiest
Americans would receive the lion's share of the benefits of
lower tax rates while experiencing a proportionally smaller
reduction in the current tax breaks, and the opposite would be
true for our middle-class families.
Clearly, there is a tension between lowering tax rates,
maintaining revenues, and pursuing the current levels of
progressivity in the tax system. That is, of course, why the
Senate budget was very clear that before we set out to lower
tax rates, we would first make sure that tax reform generates
the revenue that we need to reduce the deficit and invest in
our economic future and maintains or increases the
progressivity of the Tax Code.
So, Dr. Looney, let me start with you. You talked a little
bit about this, but could you talk about the tension between
lower tax rates, revenues, and progressivity?
Mr. Looney. Sure. Thank you very much. Thank you for that
great question. It is a central question to evaluate and
understand in these tax reform plans. And just to give you some
context, we took a look at a tax reform plan that proposed
cutting the top rate from 35 percent to 28 percent, retaining
preferences for capital gains and dividends and other savings-
related tax incentives. And we asked whether it is possible to
achieve all the goals of tax reform, keeping a progressive tax
system, maintaining tax revenues at a then historical level,
and also cutting rates.
And what we found is that if we wanted to achieve the goals
of revenues and lower rates and protecting preferences for
savings and investment, then we would have to give up on
another goal, for instance, having to enact a net tax cut on
high-income taxpayers financed by tax increases on lower- and
middle-income taxpayers.
Chairman Murray. Okay. Last week, the CBO released
projections, and it showed that, absent any changes in law,
revenues will average about 18.9 percent of GDP over the next
10 years. Our Republican colleagues have pointed to those
estimates which show revenues rising above their 40- year
average of about 18 percent of GDP to support the contention
that additional revenue is now off the table. But this argument
really ignores several key factors.
First of all, spending has not been below 18 percent of GDP
since 1966, and, in fact, over the course of the last three
Republican administrations, spending has averaged more than 21
percent of GDP. So if we are going to be realistic with
ourselves, I think it is very clear that revenue levels must
rise considerably above their historical average if we are ever
going to balance the budget. And, also, the last five times we
have had a balanced budget, revenues have ranged between 19.5
percent and 20.6 percent of GDP. That is significantly higher
than CBO's recent projections. And I think, Mr. Linden, you
mentioned the challenges we face today that are drastically
different than 20, 30, 40 years ago with the baby-boom
generation, and that is going to have a significant impact on
our budgets here as well.
So, Mr. Linden, let me start with you. Do you agree with
the Senate budget--and, actually, I think every bipartisan
group that has examined the budget situation-- that we cannot
spend responsibly, address our long-term fiscal challenges with
spending cuts alone?
Mr. Linden. Yes. Simply put, yes, I agree very much. One of
the things that citing the historical average for revenues
often misses is that for most of those years we ran deficits.
So if we want to run smaller deficits or we want to even
balance the budget, we cannot look at the historical average
because we ran deficits during most of those years. And, in
fact, if you look closely at those numbers, you will find that
in the years when there were lower deficits or balanced
budgets, as you pointed out, Chairman, we had higher-than-
average revenues. So if we want fiscal sustainability to be a
goal, the very data, the very historical data that opponents
often point to, to say we cannot have more revenues, actually
supports the contention that we will need higher revenues to
have fiscal sustainability, because that is what we needed in
the past. And as you pointed out, that was before the
retirement of the baby-boom generation, and that was before
health care costs have risen as much as they have.
Chairman Murray. Okay. Thank you very much, and I have run
out of time. I want to make sure all of our Committee members
have an opportunity to ask questions, so, Senator Sessions, I
will turn to you.
Senator Sessions. Thank you. It is hard to figure all of
that, but as revenues and the economy grows and people are
making more money, they pay in at higher rates and in higher
brackets than the percentage of GDP would tend to grow, it
seems to me. It is hard to figure all these numbers.
Mr. Linden, I think you and others seem to believe that the
income gap that is out there that is troubling is to be closed
by just taking more money from those who are already paying
higher taxes and just redistribute that to people who are not
doing as well. And I believe the right approach is to figure
out why it is that we are not having enough growth in the
economy, create more growth, and allow the middle-class workers
and others to find jobs at higher pay which be my fundamental
analysis of how to get this economy going in the right
direction.
Ms. de Rugy, critics have suggested that austerity in
Europe has not worked. We hear that a lot. Their argument is
that economies have cut spending and they have had slow growth.
But it does seem to me, based on your testimony, we have a
little bit of a different situation. You are saying that their
spending cuts have been exaggerated in the media in the minds
of most of us in public life in the United States and their tax
increases have been underestimated and underappreciated. Would
you tell us a little more about that?
Ms. de Rugy. Sure. Thank you, Senator, for this question.
It has been one of the many frustrating things about the debate
over austerity in Europe, is this misconception. Very often
when people talk about austerity that took place in Europe, it
is assumed that what took place is savage spending cuts. In
fact, I mean, I use these words because these words have been
used. But when you actually look at what many of the countries
we talk about, even England, which has been talked about a lot,
France, Italy, Spain, what you realize is that many of these--
most of these countries have not certainly savagely cut
spending. Some of them have not even cut spending. What has
been often overlooked is the dramatic increase in taxes that
all of these countries have implemented.
I have a list here for you, if you are interested--and I am
happy to send it over--of many of these countries' tax
increases. I guess one of the common denominators, Europe has
seen a really large increase in the value-added tax, sometimes
by 2 or 3 points. This is probably the main culprit of the
problems in Europe. But there has been also a lot of increase
in income tax in the form of higher marginal rates, taxes on
capital, and this is often overlooked.
And what is happening in Europe actually is extremely
consistent with what we have seen, what the academic research
shows, and that is that first 80 percent of the studied attempt
by countries to reduce their debt-to-GDP ratio are made mostly
of tax increases, and these packages tend to fail not only at
reducing the debt-to-GDP ratio but also at boosting growth.
Senator Sessions. So you say that 80 percent of their
attempts at reducing deficit amounts to the tax increases and
only 20 percent to spending cuts?
Ms. de Rugy. Yes, and so the successful--this is where the
data comes from, looking at what are the countries who have
successfully reduced their debt-to-GDP ratio have done. And
when you look at the kind of things they have done, you realize
that they have adopted packages that are mostly made of
spending cuts. And the ones that have failed have actually
mostly adopted debt reduction packages that are made of tax
increases.
Senator Sessions. Can you give us an example of--
Ms. de Rugy. Well, I guess we do not have to look very far
or very--back in time. We can actually look at Canada. In the
1990s, the Canadian Government was facing a debt-to-GDP ratio
that was very close to ours. It was 69 percent. And in the
course of the last 10 years, it adopted a large amount of
spending cuts, not cuts to the growth of spending but actual
reduction in spending, meaning that their government was
spending less tomorrow than they spent the year before, and
adopted the type of fundamental tax reform that we are talking
here, closing loopholes and--and what has happened is a
dramatic reduction in debt-to-GDP ratio from 69 percent to 29
percent, and without slowing down of their rate of growth and
without increasing unemployment. That is one of the models that
I can think about. We can look at Germany in the 2000s and
Sweden--
Senator Sessions. Please explain.
Ms. de Rugy. Germany implemented large reform of their
structural transfers and large reform of their labor market.
They cut spending. And I think economists mostly agree that
these reforms that were implemented in 2004 and 2005--and, by
the way, they also reduced marginal tax rates--were responsible
for the way actually that Germany sustained itself economically
and with much lower unemployment rates than other European
countries during the financial crisis.
Senator Sessions. Well, thank you. Thank you very much, and
obviously you suggest the choice of reducing deficit between
cutting spending and raising taxes, the better choice is to
reduce spending.
Chairman Murray. Thank you.
Senator Kaine?
Senator Kaine. Thank you, Madam Chair. Good to be together
with you. I will try to be quick. I would like each of your
opinion on whether widening income inequality hurts economic
growth. Can I just go in order?
Mr. Linden. I guess that puts me first. I think it does. I
think not in every case and not in every situation, but that
the levels that we have seen in the United States over the last
30 years, there are reasons to be concerned. More and more of
the academic research has been showing that income inequality
can be a drag on growth for a number of reasons, including it
reduces trust in public institutions; it hurts human capital
development. And, of course, as I mentioned in my testimony,
the middle class is the very important source of stable demand
for goods and services.
Senator Kaine. Dr. Looney?
Mr. Looney. Thank you. So I think that you are right to be
concerned about that issue. Another perspective on that is just
that if you look at the forces behind widening income
inequality, they arise from things like globalization,
technological change, you know, the fact that the United States
participates in a very vigorous form of capitalism. And I think
the Tax Code is a way that protects our citizens from the
downsides of that, ensures that in some sense we are all in it
together, and allows for those who are not as fortunate in the
turmoil of the economy to still participate and to get ahead.
Senator Kaine. Dr. de Rugy?
Ms. de Rugy. Senator, this is not my area of expertise, but
one of the things that I think we should focus on is more
income mobility. I think income mobility is what makes this
country great. This is living the American Dream.
The good news is actually research by one of your
colleagues, Scott Winship at the Brookings Institution, has
shown that income mobility is doing better than we think. But
there is some work to be done for lower-income men in America,
and this is something we should focus on.
Senator Kaine. I completely agree on the income mobility,
but do you not have an opinion about whether widening--
Ms. de Rugy. You know, this is really not my area of
expertise.
Senator Kaine. --income inequality inhibits growth?
Ms. de Rugy. I could not--
Senator Kaine. Next question. Dr. de Rugy's testimony I
think lays it out pretty plainly. Debt reduction can be
achieved by cutting spending or by raising taxes or by adopting
a mix of spending cuts and tax increases. To each of the three,
cut spending, raise taxes, or a mixture? And I would love it if
you could just answer in a sentence.
Mr. Linden. I will answer in a word. Mixture is the right
way.
Senator Kaine. Dr. Looney?
Mr. Looney. I would say a mixture as well.
Senator Kaine. Dr. de Rugy?
Ms. de Rugy. Well, I think the mixture usually does not
work because one of the forces that are at play is--
Senator Kaine. So, I mean, but you--so you think no
mixture, just cut taxes?
Ms. de Rugy. No, I think that what the data shows is
roughly 85 percent--and obviously it is not an exact game, but
what they show is that successful fiscal adjustment ended up
being roughly 85 percent of spending cuts and the rest in tax
revenue, not necessarily--the tax revenue could have been the
product of increasing growth. For instance, take Canada--
Senator Kaine. But can I just--
Ms. de Rugy. Canada implemented a package--
Senator Kaine. Do you have an opinion, just on the three
answers--cut spending, raise taxes, a mixture? If you could
just answer one of those three, what is your preferred approach
to reducing the deficit?
Ms. de Rugy. Cutting spending.
Senator Kaine. Okay. You have an example--you mentioned
Germany and Sweden. Do you know what their top marginal tax
rates are?
Ms. de Rugy. They are much higher than ours.
Senator Kaine. 47 percent in Germany and 56 percent in
Sweden, and those are the examples that you used.
The last thing I will ask is this: With respect to tax
policy--
Ms. de Rugy. Europeans are very regressive taxes overall
compared to the U.S. in spite of their high marginal tax rates.
Senator Kaine. Indeed, and they are held as an example. And
the last one, on the effective tax policy, does it make a
difference if you are trying to get additional revenue whether
you raise rates or reduce tax expenditures?
Ms. de Rugy. Yes, it does make a difference.
Senator Kaine. And what is the preferred way to do it?
Ms. de Rugy. The better way is to close loopholes.
Senator Kaine. Great. Thank you, Madam Chair.
Chairman Murray. Senator Grassley?
Senator Grassley. Dr. de Rugy, during the budget hearings
in March on tax expenditures, I asked the Democrat witness,
Professor Edward Kleinbard, about tax reform. I asked if
corporate rates should be reduced if we eliminate corporate tax
expenditures. He replied that revenue from closing business tax
expenditures and loopholes should be used to pay down the
corporate rate.
Do you agree with Professor Kleinbard that increased
revenue from corporate tax rates should be used to lower
corporate tax rates? And, second, what do you think the
economic impact would be of eliminating tax expenditures to
support more Government spending?
Ms. de Rugy. So the corporate income tax in the U.S. is
extremely punishing. The U.S. is one of the highest corporate
income tax rates in the OECD countries, but also has a
worldwide tax system, which means that companies competing with
foreign companies abroad, they are subjected to a much more
punishing system. So any reform that would lower the rates of
the corporate income tax would be a welcome move for the U.S.
I would welcome making the Tax Code fairer and simpler and
having a more unified base, but certainly not if the revenues
is meant to go to pay for more spending. If we are talking
about reducing the debt, that would be something, except that
history tells us that this is rarely the way additional
revenues are used.
Senator Grassley. Again to you, under current law CBO
projects that tax revenue will exceed the 40-year average of
17.9 percent of GDP in 2014 and remain near 19 percent of GDP
through 2023. At the same time, spending is expected to grow,
reaching 22.6 percent of GDP in 2023, well above the historical
average of 21 percent.
This may seem like a simple question, but don't these CBO
projections indicate that spending is the problem and will
become an even bigger problem at the end of the 10-year window?
Further, if we increase taxes by $975 billion, as the Senate
budget would do through tax reform to support this level of
spending, how will that affect economic and job growth?
Ms. de Rugy. Well, I think you are totally right that we
have a spending problem, and we have an even bigger spending
problem going forward if you look at CBO projection, and the
driver of spending and, hence, of our future debt are program
like Social Security, Medicare, and Medicaid.
As to the question of whether we could be raising much more
revenue, it is hard to tell because we have not actually done
in a sustained way raised much more significant--we have not
raised 21 percent of taxes, tax revenue as a share of GDP in a
sustained way. We have not done it under the current tax
regime.
I would argue that it is probably because when marginal
rates are increased, people find ways around it, but also in
important ways because Congress has a tendency when it raises
taxes to also carve the tax base. I mean, I think we have seen
it in the fiscal tax deal where Congress proceeded to increase
marginal tax rates but also to give a lot of--to extend a lot
of the tax extenders to corporate businesses. So I think that
is a problem.
And as I have said, I think the academic literature is very
clear. There is a strong support for evidence that shows that
lower level of taxes are associated with higher level of
growth, and the reverse is true.
Senator Grassley. Okay. Now, let us go back to Europe. You
spoke about that. I want to zero in on a couple countries. You
have done a lot of work studying the impact of taxes there and
economic growth there. Many of my colleagues use the economic
turmoil in Greece and Spain as a reason to support increased
spending and tax hikes to address our own sluggish economic
growth and our growing debt. The austerity measures enacted by
Greece and Spain differ greatly from the measures enacted by
Germany and Estonia and have had much different results.
So, to you, what can we learn from comparing the fiscal
plans of Estonia and Germany with those of Greece, Spain, and
Italy?
Ms. de Rugy. Well, I think these two sets of countries are
very representative of what the overall literature shows. In
the case of Greece and Spain, both of which have implemented
some small level of government spending reductions, they have
also implemented really large and often overlooked--I mean, one
of the things that really surprises me, Keynesian economists in
this country should be screaming loud and be very displeased
with what these countries are doing by raising taxes because it
actually goes against Keynesian policy. They have increased
taxes tremendously, and, hence, we should not be surprised that
their economy are not growing.
On the other hand, Estonia, and Germany before it,
Estonians have actually cut spending. They have also
implemented some fundamental tax reforms. They have refrained,
and so has Sweden, in using spending as a form-- as a tool to
stimulate the economy. And so I think they should be our model
rather than Spain and--
Senator Grassley. Thank you. Thank you.
Chairman Murray. Senator King?
Senator King. Dr. de Rugy, this is your lucky day because
Senator Sanders is not here.
[Laughter.]
Senator King. So I may channel him a bit. You mentioned
that Germany lowered their taxes. From what to what?
Ms. de Rugy. I cannot remember now, but I would be happy to
send you the data.
Senator King. But it was somewhere in the 50s to the high
40s?
Ms. de Rugy. Yes.
Senator King. Okay. And our top rate is now at least 10
points below that. Is that correct?
Ms. de Rugy. Yes.
Senator King. Okay. You also mentioned that Canada had an
overall budget package. What did that consist of, roughly, in
terms of cuts versus--
Ms. de Rugy. $8 in spending cuts for $1 in revenue
increases.
Senator King. Okay. So that was the overall package that
they--
Ms. de Rugy. Over time.
Senator King. You mentioned that we have a spending
problem, and it was interesting, in the next phrase you
mentioned Social Security, Medicare, and Medicaid. I would
argue we do not have a spending problem; we have a health care
problem. We have a health care cost problem, because all of the
growth in the Federal budget over the next 20 years that is
based on all the projections I have seen is based on growth in
health care costs. And the Federal Government is a big consumer
of health care and, therefore, it affects the budget.
I am afraid that this whole discussion is--we are talking
about growth in Federal spending, and we are hitting the wrong
target, because the growth in Federal spending is not Pell
grants or National Park guides or even food stamps. It is
health care costs. And if we cut all those other areas and do
not do something about the overall health care expenditure, we
are never going to solve this problem.
Would you agree in general with that proposition?
Ms. de Rugy. Yes, you have no debate with me. I think it is
important to put this country on a sustainable fiscal path that
we address the explosion in spending, in particular in Medicare
spending.
Senator King. Would it surprise you to know that non-
defense discretionary spending is now at the lowest percentage
of GDP in 50 years?
Ms. de Rugy. No, and it probably as a share of the budget
is going to go down because of our increased interest payment
and the increased spending on mandatory programs is going to
lead to a smaller share of these programs.
Senator King. It seems to me that a way to discuss this is
to try to identify what is the sweet spot in terms of
percentage of GDP for both revenues and expenditures. Is it
17.5 percent, 18, 19? In terms of the economic effect, is there
any data that shows that, for example, 19 percent is better
than 18 percent? Because here is the problem: We are facing a
demographic explosion, aging, it is just going to happen, plus
the cost of health care. Those two things, it seems to me, make
it very hard to say we should maintain ourselves at 17 or 18
percent if, in fact, everything else is flat, those two things
are going up, and we have no choice but to either cope with
them or cut everything else essentially almost to zero.
Ms. de Rugy. I mean, I think what you are saying is
correct. I think we should not be starting with a certain
percentage that we are trying to achieve. One of the things
that we need to do is to address the cause of the explosion of
spending, which will drive our future debt. But, I mean, it is
very hard to pinpoint first the moment where the country has
gone too far and there is very little we can do. And in the
same way, it is very hard for me, or I suspect any other
economist, to tell you what is the exact level of equilibrium
that you should be reaching. For instance, there may be
instances where actually deficits are fine at a certain level.
But I am not the--I cannot tell you this. There are so many
factors that I cannot be the one telling you which level is
exactly the appropriate one.
Senator King. Well, I would agree with you that the real
thing--we should be focusing on what is causing the deficit
problem, which is health care. Demographics we cannot do much
about. Health care we can do something about. My concern is
that by using this explosion of Federal expenditures based on
health care to cut things like defense and nondefense
discretionary spending is like attacking Brazil after Pearl
Harbor. We are going at the wrong target.
Ms. de Rugy. Well, one of the things that is interesting,
actually, looking at the successful fiscal adjustment packages
and looking at what they have actually cut, one of the things
that you find is that these countries have engaged in more
structural reforms. They have reformed their transfer payments.
That is, in the American context, entitlement. And this is the
thing I agree with you we should be focusing on. And one of the
reasons is because if we do not, for those of you who care
about the lowest-income people in America, they are the one who
are going to be the most penalized when the crisis hit.
Senator King. I realize I am almost out of time, but my
only disagreement with that would be if we only focus on the
entitlement Medicare, then all we are going to do is shift the
growing health care cost to somebody else, either seniors or
States or somebody else. We really have to be talking about
health care generally so it goes down for everyone--
corporations, individuals, Medicare or Medicaid. Because if we
only focus on, you know, we are going to send Medicaid back to
the States, block grant it, all you are really doing there is
saying, okay, the excessive cost of health care growth is going
to be picked up by the States.
It has to be a broad conversation about the whole subject,
it seems to me.
Ms. de Rugy. You are right that we should be addressing not
only Medicare but Medicaid and Social Security, and everything
ought to be on the table, including defense spending.
Senator King. No, no, no. You are missing my point. We
should be talking about health care spending generally for
everybody, not just those programs you mentioned.
Ms. de Rugy. I think what the Government can only concern
itself with is the part of its budget that it spends on
health--that itself spends.
Senator King. Well, that is another discussion.
Thank you, Madam Chairman.
Chairman Murray. Senator Portman?
Senator Portman. Thank you, Madam Chair.
I would say to my colleague from Maine that, at the risk of
getting him in trouble, it sounded like he was channeling Tom
Coburn more than Bernie Sanders.
Senator King. I will accept that.
[Laughter.]
Senator Portman. Focusing on health care. I think you made
a really good point that if we do not get our health care costs
under control, it is unlikely that our fiscal condition can be
saved. And it is because of the Federal connection, of course,
with Medicare and Medicaid, but those reflect, if you look at
the data, broadly speaking, the increasing costs in health care
being the biggest payer.
This is a hearing on tax reform, and I appreciate the
testimony from all of you about the fact that we need tax
reform. I think that should be stipulated. Each of you said
that, and I think all of you think we should broaden the base.
Some of you think we should lower the rate more. Some of you
think we should not. But since we are talking about percent of
GDP and, you know, what ought to be the right level of revenue
and what ought to be the right level of spending, and it was
just talked about in terms of is it 18 or 19 percent, let me
ask a question, if I could, of you, Dr. Looney, to give Dr. de
Rugy a little break, and that is with regard to really the
question that Senator King raised, you know, what is the right
level.
Here is where we are now. We have a projection from the
Congressional Budget Office, as you know, showing that our
revenue as a percent of GDP is up above the historic levels.
Within a couple years, they say by 2015, we will be at about 19
percent. The historic average, closer to 18 percent; 18.3 I
think since World War II is the average. So revenue as a
percent of the economy is going up, relatively low now,
relatively high in a couple years. And if the economy picks up
more quickly, it will go up higher.
It is the spending that is obviously unsustainable, and I
say that because they say that over the next three decades our
spending goes from the 22-, 23-percent level up to 25, 30, 35,
and in the third decade it gets to 39 percent. And that is
where they sort of stop and say, you know, this is not
sustainable, so we are just going to stop there.
So let us say 39 percent. So when you talk about a balanced
approach with more revenue and more spending, what are you
talking about? Are you talking about in a few decades from now
a spending level based on current projections--which, by the
way, has certain projections on health care I think that are
even conservative compared to what we have seen over the last
decade. But let us say 39 percent. You have revenue at 19
percent. Do you split the difference? Is that what balance
means? Is it 29 percent? Or if you assume that there will be
savings on interest on the debt because you have this higher
revenue, maybe it is not 29 percent, maybe it is 27 percent,
and if so, where do you find the revenue for that? Certainly
our current income Tax Code could not provide it. We would have
to look back historically, and there is no record of ever
having raised these kind of taxes. We have to double your
income tax rates, at least, probably triple them to get there,
according to CBO.
So what does balance mean? And when people like me say we
have to deal with the spending side and specifically the health
care side, that is what we are looking at. So what is the right
balance?
Mr. Looney. Well, thank you, Senator, a very interesting
set of issues. When I was a grad student, I used to live large
on $15,000 a year. Now that I have a wife and two kids and a
mortgage, that just does not pay the bills and, you know,
things change. And I think that in our budget, the thing that
has changed is that we have an aging population and we have
rising health care costs. And I think that that makes that
historical comparison, which includes periods when we did not
even have the Medicare program, where we had not enacted the
Disability Insurance program. It is just not a perfect
comparison to what we are facing in the future.
How much does that mean we should target for revenues
versus spending? I think that is a broader and more challenging
question, and I think there are tradeoffs involved there. I
think it is probably true that we could support a higher level
of revenues. At the same time, it is clear that the level of
spending and the costs of health care are going to rise well
beyond what we could sustain in the Tax Code or through the
deficit. And so that has obviously got to be reined in as well.
Senator Portman. Dr. Linden or Mr. Linden, any response?
Mr. Linden. I broadly agree with Dr. Looney. You know, I
think the discussion has turned a little bit toward health
care, which I think is appropriate, but there is some really
good news on that front. Over the last two CBO projections, the
costs of health care--the amount of money the Federal
Government is projected to spend on Medicare and Medicaid has
been reduced in the last two CBO outlooks by a combined $550
billion. To put that into perspective, that is more than twice
as much as what you would get by raising the Medicare
retirement age. And if that continues, a lot of the problems
that we are talking about here will be much easier to solve.
And I think that is an important trend that we should keep a
close eye on. Obviously we do not know exactly how much of the
recent slowdown in health care costs is because of the economy
and how much is structural, although there have been some
recent studies that suggest at least a substantial portion of
it, if not all of it, is structural. So that is really good
news. And I think that if we are talking about reducing
spending, which we should be, as well as raising revenues, that
is where we should be focusing on. What are we doing right in
health care that is bringing down the growth in health care
costs? And how can we improve on that? I think that is the
place where we should be focusing in addition to raising a
little bit more revenue.
Senator Portman. My time has expired, but you are right, we
have seen some reduction in the projections. We are still above
inflation, of course, and we still are, based on all the
projections, at an unsustainable level. And I appreciate both
your responding to it honestly saying that we need to reduce
that spending level. But you believe we can sustain higher
taxes, and I would just suggest that the statement that
spending is the problem is an objective statement if you look
at it as a percent of GDP. If you assume that we need to spend
more because you think health care costs cannot be contained,
then I guess you have a different answer.
Thank you, Madam Chair.
Chairman Murray. Thank you.
Senator Whitehouse?
Senator Whitehouse. Thank you, Chairman, and I am delighted
that this discussion has turned to the health care issue, and
the one thing I would add to that before I turn to my questions
is that there is plenty of objective evidence that there really
are enormous savings that can come out of our health care
system if we treat our health care cost problem as a health
care system problem and not just look at the Medicare or
Medicaid portions and starve those. All that means is that
businesses and seniors have to pick up the slack. We have not
solved the problem. We have just squeezed the balloon and
forced the problem elsewhere. And when we are spending 18
percent of GDP on health care and the least efficient other
industrialized country in the world is only spending 12 percent
and getting better health care results for it, that is a pretty
strong signal that this is an area where we should be able to
work together in a bipartisan fashion to make health care
better and less expensive across the board, for businesses, for
seniors, for people on Medicaid, for everyone. So I am
delighted that we have turned this way.
But let me ask a different question because we are here on
tax reform, and I think most of us are on board with the
general notion, that our individual and corporate Tax Codes are
riddled with nonsense; that people who have clout in Washington
have been able to manipulate the Tax Codes to their advantage
against the ordinary people; and that there is room to bring
down the nominal top corporate rate of 35 percent, which
virtually nobody pays because of all the loopholes--it is a
Swiss cheese system.
But here is my question: Let us say that we want to bring
the corporate tax rate down from 35 percent to 25 or 28
percent. And let us also say that there are wonderful companies
like CVS in Rhode Island, headquartered in Woonsocket, Rhode
Island, great national company, pays near the full 35 percent,
like most big retail companies do. Then you have companies like
Carnival Cruise Lines, which pays 0.8 percent tax rate, last
time I checked. We just had a hearing on Apple, hiding immense
revenues offshore, paying 0 percent on those revenues. GE
famously on all of its earning has as a profit center its tax
department and paid negative tax rates during very profitable
years.
So should we also be looking at trying to get rid of these
folks who are gaming the system and paying no tax whatsoever,
or virtually no tax whatsoever, and try to, as we are bringing
the top rate down, also try to improve--there is a nominal
corporate AMT that raises virtually nothing. How do you bring
the corporate tax rate up at the bottom so the true tax cheats,
scofflaws, whatever you want to call them, who are paying
nothing--not because they had a bad year but because they were
playing games with the Tax Code. What is the best way to try to
make sure that there is, I do not know, a 2-percent, 3-percent,
5-percent, 8-percent, some minimum that people are actually
paying when they are truly profitable?
Mr. Looney. I will try to take a stab at that, Senator.
Thank you.
Senator Whitehouse. Do you, first of all, agree that that
is a problem that is worth addressing, that if there are
gimmicks in the Tax Code that are keeping entities from paying
taxes, we should try to solve that and not just bring down the
top rate?
Mr. Looney. I agree. I think that is one of the biggest
sources of inefficiency in the corporate code, the fact that
there are some companies--you mentioned CVS, but it is clear
that there is a distribution of tax rates that apply to
different companies, domestic retailers that cannot benefit
from things like international provisions offshore and cannot
benefit from things like accelerated depreciation because they
are not a capital-intensive business, cannot benefit from other
things. They get a raw deal, in effect, in comparison with
industries that can take advantage of them. And that is not
just unfair in some sense. That is bad economic policy because
it distorts the way the economy grows, and it suggests that--
Senator Whitehouse. There is no economic rationale to
having CVS, a prominent drug store chain, pay a 50 times higher
tax rate than Carnival Cruise lines, correct?
Mr. Looney. Yes. And more than that, it basically says to
businesses that we should have more Carnival Cruise Lines and
fewer CVSes, and it is not really clear that the Government
should be in the business of--
Senator Whitehouse. And it also says to the businesses, you
should put more of your money not into productive activity but
into more accountants and more lawyers to play games with the
system and to restructure yourself through corporate mechanisms
rather than engage in productive work, because there is a huge
reward for that. Correct?
Mr. Looney. There is a huge reward right now for engaging
in a lot of these avoidance schemes.
Senator Whitehouse. Thank you.
Chairman Murray. Senator Johnson?
Senator Johnson. Thank you, Madam Chair.
I will answer both your questions. The way we start
controlling health care costs is we reconnect the consumer of
the product with the payment of the product. If you take a look
at history, what really happened in terms of rising health care
costs--
Senator Whitehouse. Good luck with the unconscious
consumer.
Senator Johnson. Well, what really happened in terms of
rising health care costs is the third-party payer system,
whether it is through rising insurance, first-dollar coverage
as opposed to high-deductible plans, and then, of course, the
Government involvement in it.
So you are right, Mr. Linden, that the--I believe what is
restraining health care costs is the structural changes, and
that was occurring prior to the passage of the health care law
as the evolving of growth of HSAs did reconnect the consumer of
the product with the payment of the product. And as a result,
companies like CVS, Walgreens, and Walmart responded to the
marketplace, and they opened up walk-in clinics where you could
get, for example, a child's ear infection checked out by a
nurse practitioner for $35 rather than an emergency room for a
couple hundred bucks. So the marketplace is a marvel that
actually works.
In terms of, you know, how do we capture corporate income,
I would suggest--I am glad that Senator Wyden is here--the way
to do that is treat all corporate income as pass-through
income. In other words, tax corporate income at the shareholder
level. It works great for LLCs, Subchapter S's. We would not
have to--I was part of that Apple hearing. You have real
problems in terms of allocating a profit between different tax
jurisdictions, so the way to do it just tax the income at the
shareholder level like pass-through income, and I would love to
work with Senator Wyden on that tax idea.
Mr. Linden, you mentioned 2007, an interesting year,
because that was really the record in terms of the top 1
percent paying 40.4 percent of the income tax. That same year,
the bottom 95 percent of taxpayers paid 39.6 percent. So a
unique year, a record year. The top 1 percent's income was
around 20 percent of total income. They paid double that in
terms of the share of the income tax.
At what point do you actually start considering the top 1
percent as paying their fair share?
Mr. Linden. 2007 was a banner year for income inequality,
which is why you saw such a huge share of the taxes being paid
by the top 1 percent. They were making a huge share of the
income. So when you allocate taxes based on income--we do not
do a per head tax; we do it based on income, broadly speaking,
with the income tax--you end up with those who have the most
income paying the most in income taxes.
It is worth also pointing out--
Senator Johnson. So, again, you think it is fair for the
top 1 percent--by the way, the top 1 percent is always going to
have the larger share, no matter what it is, and there is some
mobility. Do you think it is not fair that if they are making
20 percent of the income and they are paying 40 percent of the
income tax, that is not fair enough yet for you?
Mr. Linden. I think it is interesting that you are ignoring
payroll taxes and State and local taxes--
Senator Johnson. Well, we can take a look at that, too, but
that also--
Mr. Linden. But if you put that all together, if the put
the entire tax system together, the top 1 percent is actually--
was not paying, is currently not paying much more a share of
the taxes than the share of their income. It is actually pretty
much in line. And, in fact, if you look at the very, very high,
the very, very top, the system--you know, our overall system is
actually progressive, you are right. It does take more from
people--
Senator Johnson. Let me ask the question I generally ask
people in this situation. What do you think is the top_what
should be the top marginal tax rate?
Mr. Linden. Current top marginal rate is 39.6--
Senator Johnson. No. What do you think it should be?
Mr. Linden. --and I think that is a reasonable place for it
to be. It certainly does not need to be any lower. I do not
think it needs to go very much higher. I think the place where
we should be looking for more revenue is in reducing these tax
expenditures that do generally primarily benefit those at the
top.
Senator Johnson. You know, Mr. Looney or Professor Looney,
are you aware of the fact that in 63 years, regardless of the
top marginal tax rate, regardless of how much we are trying to
punish success, we have only raised revenue that exceeded 19
percent of GDP 13 times? Are you aware of that statistic?
Mr. Looney. I am.
Senator Johnson. What gives anybody any confidence that no
matter what we try and do, try and extract more than, let us
say, 19 percent out of the economy that we would have any
success doing it?
Mr. Looney. I think we have had experiences where we have
raised that much. I think if you look at the combination of
Federal, State, and local, we have raised much more than--
closer to 30 percent of GDP, and then, of course, an
international comparison, we are actually very low. So I am not
saying that those are comparisons that we necessarily want to
make, but I do not think that there is-- I think that those
historical levels reflect political decisions and the
democratic process rather than some real hard economic law.
Senator Johnson. Mr. Linden, you made an interesting
comment when you were talking about why economic--or income
disparity is so harmful to economic growth. You said one of the
reasons is because it reduces trust in public institutions. I
just have to ask you, why would increased trust in public
institutions increase economic growth?
Mr. Linden. Well, public institutions I think have an
important role to play, certainly not the only ones. I mean,
the private sector obviously needs to be the ones who are
driving economic growth. But certainly investment in public
goods, things that most economists would tell you the public
sector has the role to play--transportation, education, basic
scientific research. These are things that before a few years
ago were pretty commonly understood to be the role of the
public sector. Now, we can debate the level that that should be
played, but no matter what, we do expect the public sector to
play some role in the economy, and we would like to trust the
Government is doing so in a way that is not unfairly
benefitting those at the very top.
Senator Johnson. Okay. Thank you.
Thank you, Madam Chair.
Chairman Murray. All right. Thank you.
The last questions go to Senator Wyden.
Senator Wyden. Thank you, Madam Chair. I want to commend
Senator Whitehouse on this point with respect to efficiency in
the health care system. This is clearly an area where I think
Democrats and Republicans can work together. You look, for
example, at chronic care, which is responsible for 70 percent
of the Medicare bill in this country, and it is so fragmented
and so poorly coordinated. This ought to be an area where we
can work together, and I want to work with the Senator. And I
think the Senator from Wisconsin knows I am also interested in
this idea of involving the consumer. Let us just make sure we
do not put at risk the vulnerable and the low-income, and we
will talk about that.
I want to ask about this issue of revenue, and Senator
Murray is absolutely right on this point, that with $1 trillion
of tax expenditures--and that is really the only way to
describe them_they are spending. This is a place where clearly
we ought to make some changes, and that will be beneficial to
our country and to, I think, a more rationale set of
priorities.
I want to ask about something else in the Tax Code, though,
with respect to generating revenue, and you at Brookings and at
CAP have helped me a lot on tax reform essentially all of the
last decade. I think if you go back through your history, Rahm
Emanuel and I introduced a bill where we could not even get a
Republican on the bill. You all stayed with us, and others, and
finally the former Ranking Member, Senator Gregg, worked with
us for several years, and we were able to get that bill in.
One of the key features we picked up along the way is that
central to reform and generating more revenue in a consumer-
driven economy is the role of the middle class and the middle-
class person, because that middle-class person, who right now
is hard-pressed in terms of getting by, is the person who goes
into the economy, makes a decision, for example, about
remodeling their place, buys goods and services--it is the old
Henry Ford argument. He wanted to do well, but for him to do
well, his people had to be able to buy his cars, and those
kinds of purchases helped our economy and helped us create a
middle-class way of life in our country and helped Government
and generated revenue and allowed us to fund our priorities.
In that regard, we have been able to get bipartisan
support--bipartisan support--for the idea of tripling the
standard deduction, which means in effect if you are making
$60,000 in the economy today, we are putting off limits
$30,000. Essentially we are putting $3,000, somewhere in that
vicinity, of permanent tax relief into the pockets of the
middle-class person.
Both of your organizations--and, ma'am, I have not had a
chance to work with you in the past. I do not want you to feel
that I am ignoring you just for any other reason. We have
worked with these two organizations in the past. Talk a little
bit about how expanding opportunities for middle-class people
in an economy where the consumer is driving about 50 percent
plus of economic activity can help us create jobs and generate
the additional revenue, which our Chair, Senator Murray, has
correctly identified as something we ought to focus on doing.
So either of you gentlemen, in particular, and I would be
happy to have you add a thought as well, but your
organizations, since you assisted us in the past, we will try
to get your thoughts this afternoon.
Mr. Linden. Thank you, Senator. That is an excellent
question, and I think it hits it right on the head, that if we
want to see broader economic growth, we want to see faster
economic growth, which will then generate more revenue, we have
to focus on the middle class. That really is where the drivers
for economic growth come from. And I mentioned in my testimony
all the different ways the middle class is really integral to
economic growth.
So when we consider tax reform, we should really think
about ways in which we can make the code more efficient for the
middle class and also for those who aspire to get into the
middle class, people who are working to get into the middle
class. How do we build those ladders up into the middle class
and improve on economic mobility? Because I agree very much
with my colleague that economic mobility is a very important
factor here.
So the Center for American Progress, for example, put out a
tax reform plan in December--
Senator Wyden. A very good one.
Mr. Linden. Well, thank you very much. We had some
impressive co-authors, including Bob Rubin and Larry Summers
and John Podesta and Neera Tanden. And so that proposal
included something similar. We proposed a very large standard
credit--
Senator Wyden. Right.
Mr. Linden. --to do something similar, which is remove a
whole portion of income from people--from taxation. We prefer
the credit system rather than the deduction system because
deductions are by their nature upside down. They benefit those
at the top more than people in the middle.
So things like that that move the system to consider
middle-class needs I think is where we should go.
Senator Wyden. Well said.
Mr. Looney?
Mr. Looney. Thank you, Senator. So you started your
question with a discussion of tax expenditures, and I think
that is a great place to start as well. That is an issue where,
to paraphrase Martin Feldstein, if Republicans want to cut
spending and Democrats want to include a mix of revenues and
spending cuts, then tax expenditures are a great place to
start. They are spending that occur through the Tax Code. There
is a lot of them. There is opportunity to rein them in. And
there are probably opportunities to do it in a way that
simplifies the Tax Code, gets people off the--from filing
complicated returns, just as raising the standard deduction
would. And so I think it is a very promising approach, and I
hope we would pursue it.
Senator Wyden. Very good.
Thank you, Madam Chair.
Chairman Murray. Thank you, and I want to thank all of our
colleagues who participated today. I especially want to thank
all of our witnesses for your excellent testimony today. And as
I said at the outset of this hearing, there is much to improve
in our very complicated and inefficient Tax Code, and I believe
that our Senate budget does lay out a vision for tax reform
that can reduce our deficits and strengthen the middle class
and grow our economy in a broad-based and sustainable way.
I think today's hearing was a great step forward in
furthering that discussion, so I really thank everybody for
participating.
As a reminder to all of our colleagues, additional
statements and questions for our witnesses from today's hearing
are due in by noon tomorrow.
And with that I will call this hearing to a close. Thank
you. [Whereupon, at 4:05 p.m., the Committee was adjourned.]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
THE FISCAL AND ECONOMIC EFFECTS OF AUSTERITY
----------
TUESDAY, JUNE 4, 2013
United States Senate,
Committee on the Budget,
Washington, D.C.
The committee met, pursuant to notice, at 10:32 a.m., in
Room SD-608, Dirksen Senate Office Building, Hon. Patty Murray,
chairman of the committee, presiding.
Present: Senators Murray, Wyden, Nelson, Whitehouse,
Baldwin, King, Sessions, Grassley, and Johnson.
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.
But before we begin, I just want to take a moment to
remember Senator Frank Lautenberg. He was a very passionate
public servant who was not afraid to fight and vote for what he
believed in, and I think it is important to note this morning
that he was Ranking Member of this committee from 1997 to 2000
and helped negotiate the Balanced Budget Act of 1997, which
produced the first balanced budget in decades. Frank made tax
relief and support for middle-class families a priority
constantly, and he promoted a responsible approach to our
deficit and budget challenges.
Frank was somebody who gave everything he had to public
service, and those who served with him know that that is what
gave him satisfaction constantly. He will be missed by all of
us, all of us on this committee in particular, and I think I
join with all of my colleagues in letting his family know he is
in our thoughts and prayers.
Senator Sessions. Madam Chairman, thank you for making
reference to our friend, Frank Lautenberg. He was a great
Senator, a good friend. I really liked him. He understood, of
course, as a highly accomplished businessman, he understood the
economy and how the system worked in an extraordinary way.
And a lot of people might not know that he landed on D-
Day. I used to say that he would correct it every time because
he landed about three weeks after the Normandy invasion and he
did not want to claim that he was there at the beginning, but
he was there, and the last, I guess, surviving World War II
veteran that we had.
So a real patriot, a man of great accomplishment, and thank
you for making reference to his fine service.
Chairman Murray. Thank you very much.
With that, let me thank my ranking member, Senator
Sessions, all of our colleagues who are joining us here today,
and all the members of the public who are here and watching
online.
I want to begin by thanking our witnesses, Larry Summers,
former Treasury Secretary under President Clinton and NEC
Director under President Obama, and now Charles W. Eliot
Professor at Harvard University.
We also have Simon Johnson, Ronald A. Kurtz Professor of
Entrepreneurship at MIT Sloan School of Management and a Senior
Fellow at the Peterson Institute for International Economics.
And we have Salim Furth, who is a Senior Policy Analyst for
Macroeconomics at the Heritage Foundation.
I really appreciate all of you coming today and sharing
your expertise.
The topic of today's hearing is ``The Fiscal and Economic
Effects of Austerity.'' This is a subject that has received a
lot of attention recently, and it is important for those of us
here on the Budget Committee to understand it as we work with
our colleagues across the Senate to negotiate a budget deal
between the House and Senate, replace sequestration, write and
pass spending bills for the next year, and make sure we are
making the investments we need in jobs and long-term economic
growth.
I have long believed that the case for austerity during
times of economic weakness has been fundamentally flawed. When
demand falls off in the private sector and millions of workers
are losing their jobs, I think the last thing government should
do is make things worse by slashing spending and causing
aggregate demand to drop even further. When the economy is
struggling, government should act to make things better for the
middle class and most families by investing in jobs and
economic growth that not only boost demand in the short term,
but also lays down a strong foundation for long-term and broad-
based growth for years to come.
That was the theory behind the Senate budget we passed that
put jobs and the economy first. It is one shared by the vast
majority of economists across the political spectrum. and it is
one of the many reasons I believe the House budget is wrong for
our country and our economy.
In recent weeks, however, it has been made clearer than
ever that the case for short-term austerity is not just the
wrong way to go, it is flat out wrong. A very specific claim in
an academic paper cited frequently by many of my Republican
colleagues on this committee to make the case for short-term
austerity was found to be flawed, and recent changes in deficit
projections have made it clear that despite the claims of some
of my colleagues, there is no short-term debt or deficit
crisis.
We have serious long-term deficit and debt challenges that
we need to tackle. We certainly do not want to leave our
children and grandchildren with an unmanageable pile of our
bills. But we have made significant progress recently when it
comes to our short- and medium-term deficits. And now the focus
should be on creating jobs, preserving our fragile recovery,
long-term deficit reduction, and setting the conditions for
economic growth built from the middle out.
Since the Simpson-Bowles Commission's report in 2010, we
have worked to reduce the deficit by $2.4 trillion,
disproportionately through spending cuts, and to be clear, that
$2.4 trillion is the amount of deficit reduction before
counting the $1.2 trillion in savings that will come from
either sequestration or, as proposed and passed by this
committee and the Senate in March, an alternative approach that
replaces the damaging automatic cuts with a responsible and
balanced mix of spending cuts and new revenue.
A few weeks ago, the Congressional Budget Office released
its latest baseline, which gave us an updated view on our debt
and deficits. These revisions show we have made more progress
on reducing our short- and medium-term deficits than we had
thought. CBO now estimates that the deficit for 2013 will be
over $200 billion less than its February projection. This means
that in the two years from 2011 to 2013, CBO expects the
deficit will have been cut in half.
That is welcome news. And again, it makes clearer than ever
that now we need to focus, above all else, on our fragile
economic recovery and that the case for austerity in a time of
economic weakness is simply wrong.
History has shown us that austerity is not the right way to
boost economic growth in the short term, especially during
times when the economy is still recovering, as it is right now.
Our experience as a country following the Great Depression in
the 1930s showed us how turning to austerity too quickly can
have serious consequences for economic recovery after a time of
crisis, and Europe's recent adoption of austerity policies has
yielded similarly negative results. Countries across Europe
have experienced economic downturns that have exacerbated or
been prolonged by austerity policies.
Right now, we are seeing how the indiscriminate and
irresponsible cuts from sequestration are hurting our economy.
When I was back home in my home State of Washington last week,
I heard story after story after story about the impact they are
having on families and communities.
I met with a man named Elliot Gregg in Kitsap County in my
State who runs the Kitsap Credit Union. Elliot's credit union
has been part of that community for decades, and it has grown
with the thousands of Navy families who call Kitsap home. Even
though sequestration has been just in effect for a few months,
he is seeing dramatic impacts. Families hoping to buy their
first home or purchase a car are telling him, with furloughs
and layoffs looming, they cannot take out loans they might not
be able to pay back. They do not understand why Congress would
continue along the path of deep and indiscriminate cuts, and
frankly, I do not, either.
During this time when our economic recovery is real but
remains fragile, experts agree we should be instead investing
in job creation and economic growth and continuing on the path
to austerity right now would weaken our economy and do serious
damage to job creation and growth.
Not only is austerity bad for short-term economic growth,
but it also hurts our ability to lay down a foundation for
long-term broad-based growth and prosperity. As a country, we
have to continue to invest in the programs we need to compete
globally in the 21st century economy, the kinds of investments
that make our country stronger.
In fact, the bipartisan Simpson-Bowles Commission
highlighted the importance of, and I quote, ``investing in
education, infrastructure, and high-value research and
development to help our economy grow, keep us globally
competitive, and make it easier for businesses to create
jobs.'' Investing in infrastructure, like roads and bridges,
creates jobs today, but it also makes our families safer and
lays down a strong foundation for long-term economic growth.
I, in fact, saw this firsthand at home in my home State,
where on Friday a week ago, I saw the devastation that was
caused by an entire section of Interstate 5 which collapsed
into the Skagit River. This is the kind of disaster that we can
expect when our roads and bridges have outdated designs or fall
into disrepair and it should certainly be a wake-up call that
we need to invest in repairing our crumbling roads, bridges,
and highways. And, by the way, that is not just having an
effect on the highways. It is having an effect on every
business surrounding there, where they have seen a tremendous
loss of business because of the collapse of this bridge.
Thankfully, by the way, no one was seriously injured. We
are beginning work on a temporary and a long-term repair, but
our families have been seriously disrupted by this and it is
really a wake-up call to all of us about what we need to be
focusing on.
By strengthening our transportation systems, we are helping
to connect people across town and across the country, and this
will create a more productive environment for American
businesses to grow over the long term.
Now, the same is true for our investments in people and
schools. Investment in education through programs like Pell
Grants and worker training are some of the smartest the Federal
Government can make to boost our economy in the long term. If
our businesses are going to be creating 21st century jobs, we
need our students and workers to have 21st century skills. And
in order to maintain our edge in innovation, we need to keep
investing in research and development. These types of
investments have led to private sector growth and they have led
to new industries and new drugs and new inventions and new
jobs.
If we fail to maintain these important investments, we
could lose our position as a global leader in research and
technology. But taking the path of austerity would cut these
national investments in infrastructure and education and
research that help make sure we leave our children a stronger
country than the one we received. And it would weaken our
economy in the short and long term.
Now, this debate can sometimes seem academic, but it has
very real implications on policy decisions that we make here in
Congress. I am extremely frustrated that some Republicans here
in the Senate are blocking us from moving to a bipartisan
budget conference where we could work together to move away
from the constant lurching from crisis to crisis and get back
to regular order my Republican colleagues have claimed they
wanted. But even though we do not yet have a budget agreement,
over the next few weeks, our Appropriations Committees are now
beginning to make some key decisions about our discretionary
spending for fiscal year 2014 and they are going to face this
choice between a path of austerity or an approach that
maintains critical investments in our families and communities.
Senate Democrats believe the path of austerity that long-
term cuts from sequestration lead toward is not the right
direction for our country. That is why we are going to continue
to work to replace sequestration with a balanced mix of
responsible spending cuts and revenue from those who can afford
it the most, and that is why the Senate Appropriations
Committee, led by Chairwoman Mikulski, will maintain a $1.058
trillion cap during this process, the amount of discretionary
spending that we agreed upon in the bipartisan Budget Control
Act.
House Republicans, on the other hand, will be writing their
spending bills at the overall level that assumes sequestration
will continue, $967 billion. And to be clear, House Republicans
are not keeping to the bipartisan Budget Control Act. They are
violating it by shifting funds from non-defense programs in
order to keep defense spending at pre-sequestration levels.
We all know sequestration was never intended to be
implemented, so we should be focused on replacing it, not
trying to make an unworkable policy just a bit less bad. The
difference between $1.058 trillion and $967 billion may seem
abstract, but we are going to continue to see the very real
impact that spending cuts and sequestration are having on our
veterans, our students, our seniors, and our families, not just
today, not just tomorrow, but for years and years to come.
Already, House Republicans are recognizing the impact this
approach has on our ability to maintain important national
investments. Their own budget places severe restrictions on
spending levels for critical programs like our national
defense, education, and health care spending, and so they are
taking funding from some parts of the budget to pay for others.
Robbing Peter to pay Paul is not the right way to set our
priorities as a nation. It is a gimmick, and as we will see
over the next few weeks, the House Appropriations Committee is
going to be highlighting the fact that even they know their
budget levels, which are worse than sequestration, are not
practical and not sustainable. My colleague, the Republican
Chair of the House Appropriations Committee, said, and I quote,
``This is clearly an austere budget year,'' and he did not mean
that in a good way.
As we continue in this appropriations process, I hope we
can all keep in mind a clear vision for what will create
economic success and broad-based prosperity in the short term
and over the long term. So I am very glad that we are having
this very timely discussion today. We owe it to the American
people to come together around a responsible vision for
building a foundation for growth and restoring the promise of
American opportunity, and I look forward to hearing from all of
our witnesses today about this important subject in just a few
minutes.
With that, I would like to turn it over to my Ranking
Member, Senator Sessions, for his opening statement.
OPENING STATEMENT OF SENATOR SESSIONS
Senator Sessions. Thank you, Madam Chairman.
This is a good panel and it is dealing with a critically
important issue, and that is how to get our economy growing and
how to get out of the debt situation that we are in that every
expert has told us is unsustainable. We cannot continue on this
path. We can have some short-term, and hopefully will have some
short- term improvements in our deficits, but with the
entitlement programs the way they are today and the way they
are projected to be, we are going to be in a situation of
unsustainable debt again in the years to come.
So, I believe it is important beyond words that we deal
with this rhetoric about Europe and the recession and the
difficulties there and that they made this classical colossal
mistake of austerity, and that they cut spending and that this
has made Europe so poor and broke and just the wrong thing to
do.
But we are going to hear from Dr. Salim Furth. He is going
to talk to us about what happened in Europe, and what basically
happened is the austerity we talk about is raising taxes. That
is what they did right off the bat. The U.K. had a big tax
increase right at the time of the recession and it did not help
circumstances. And the data and studies show that the way to
get a country who is out of control with its debt under control
is better done with reducing spending than increasing taxes. It
just is.
And we are not, you should all know, going to come away
from the Budget Control Act spending limitations that we
passed, Congress passed, the President signed, and went into
law. That is not going to be eliminated. You can just forget
that. It is $2 trillion in reduction of the growth of spending
over ten years. We raised the debt ceiling $2.1 trillion. We
reduce the growth of spending by $2.1 trillion over ten years.
We have already hit the debt limit again. We have spent and
added almost $2.1 trillion to the debt now. And so are we going
to walk away from those modest spending reductions?
For example, how much was that? If we kept spending at the
current rate when we passed the Budget Control Act, we would
have spent $37 trillion over ten years. But on the CBO
baseline, we were projected to increase spending to $47
trillion over ten years, and the BCA would make that $45
trillion over ten years, a substantial increase.
And the House budget does not cut spending. The House
budget increases spending three percent a year and still
balances the budget within ten years. We do not have to cut
spending to balance the budget. We can allow spending to
increase.
And what do we have from the President and what do we have
from the Democratic Senate budget? Raise taxes a trillion
dollars. Raise spending a trillion dollars. The taxes are not
used to pay down the debt. The taxes are used to fund new
spending above the current baseline. That is not the way to get
our country in the right circumstances, in my opinion.
This is a good panel. Dr. Summers, we are delighted to have
you. We respect you. You have wrestled with these issues for a
long time. It is an honor to have you here.
Dr. Johnson, it is good to have you again and I appreciate
some of your willingness to ask some tough questions about
financial maneuverings in our country.
And, Dr. Furth, thank you for being here. I know you have
done original research. You have looked hard at the European
situation. You can give us some information, I think, that will
help us form our judgment.
And what is the big dispute that we are in today? What is
it that we want? My Democratic colleagues want to tax more and
spend more. They are not using the tax increases to reduce the
deficit. They are using tax increases to fund new spending, and
we need to ask if that is the right thing to do, and can we not
reduce spending more? We can in certain areas, that is for
sure.
The reduction in spending in the Budget Control Act was a
good number, a reasonable number. It is not a dramatic
reduction in spending overall, but it did impact fairly
dramatically the military, and I think they can, as one- sixth
of the budget, they take half of the cuts.
So I believe that it is right for us, Madam Chairman, to
ask, can we spread out some of those cuts to areas that had
zero reductions in spending? Huge chunks of our government got
zero reductions in spending. Can we not spread that out and
maintain the commitment that we made to the American people? We
told them, we are going to reduce the growth of spending by
$2.1 trillion over ten years and we would raise the debt
ceiling by $2.1 trillion. We need to honor that commitment.
I would just note that this issue continues to be hot and a
matter of big discussion. At the ministerial meeting on May 29
of this year, the Organization for European Cooperation and
Development adopted a surprisingly upbeat tone for Europe. The
Secretary General of OECD, Angel Gurria, concluded, quote,
``The fiscal adjustment of the last few years is beginning to
pay off. Several countries are close to stabilizing their
government debt-to-GDP ratios and ensuring a gradual decline in
indebtedness over the long run.'' ``Stay the course,'' the
Secretary General said. ``You are almost there.''
Earlier in the week, Bundestag Bank President Jens Weidmann
argued for a continued commitment to fiscal consolidation,
spending constraint, and a rejection of the demands by some,
including our own Secretary of Treasury, Jack Lew, who presided
over the largest deficits in the history of the United States
and claimed his budget would end deficit spending when it
certainly did not, he claimed that they should stop these
programs. So those are the kind of things that are going on.
We are in a big debate about how to handle this financial
situation. It is clear to me--and Dr. Summers, you have
discussed it--I believe that one thing we should be able to
agree on is that with the unsustainable growth of our
entitlement programs, that proper constraint in that growth
path could do something we could agree on on a bipartisan
basis. It would reduce spending more as the years go by than
immediately today and put our country on a long-term financial
path, and I look forward to discussing these issues with you
today.
Chairman Murray. With that, we will turn to our panelists,
and Dr. Summers, we will begin with you. And again, thank you
to all three of you for being here.
STATEMENT OF LAWRENCE H. SUMMERS, PRESIDENT EMERITUS AND
CHARLES W. ELIOT UNIVERSITY PROFESSOR, HARVARD UNIVERSITY
Mr. Summers. Chairman Murray, Ranking Member Sessions,
members of the committee, it is an honor to have the
opportunity to testify before you.
I, like you, Senator Murray, had the great privilege of
working with Frank Lautenberg. He was an extraordinary public
servant, extraordinary in his dedication to using budgets to
make lives better for people. He saw them not as financial
abstractions, but as vehicles of positive change, and I hope
that spirit can infuse all of us, whatever our particular views
as debates on budgets go forward.
I would like to do three things in my testimony this
morning: First, indicate why I have become relatively
optimistic about the U.S. economic outlook; second, speak about
your central subject today, the economic impacts of austere
budget policies and distinguish sharply between their impacts
in good times and in difficult times like the present; and
third, offer some observations on what I regard as most
productive paths going forward.
I am as optimistic, probably more optimistic about the
future of the U.S. economy than I have been at any time in the
last 15 years. Fifteen years ago, we faced rising bubbles in
the Internet and stocks. Those bubbles collapsed, leading to
recession, leading to deflationary threats. Before long,
bubbles arose. Those bubbles were a matter of concern. And
then, of course, in 2007, the current financial crisis and
economic downturn began.
Recovery, inevitably, perhaps, has been relatively slow, if
real and sustained. And there is now, I believe, a basis for
hope that recovery will accelerate. That comes from the
substantial turn in housing. It comes from the substantial
investments that appear to lie ahead in the energy sector. It
comes from improvement in consumer balance sheets. And it
comes, very importantly, from the fact that unless further
steps are taken, the adverse impact of austerity measures on
economic growth will have largely played out by the end of
2013, reducing a headwind and, therefore, leading to the
possibility of acceleration in economic growth going forward.
There are, of course, risks to the forecast from the global
economy, other risks, as well. And, certainly, the productive
potential of the economy has been diminished by what has
happened. But I think there is a real prospect of accelerating
growth as we move to the end of this year and into 2014 and
2015.
What about the underlying economic principles for budget
policy? As Treasury Secretary in 1999 and 2000, I was proud to
have the opportunity to preside over the Federal Government's
intervening in the debt market to recover, redeem, and repay
outstanding Federal debt as a consequence of the surpluses that
we were able to run at that time. Those surpluses reflected
strong economic growth and they reflected a bipartisan
commitment in a balanced way to reduced budget deficits through
both measures to contain spending and to enhance revenue
collections. They were, in my judgment, very salutary at that
time. Indeed, we were able to set off a kind of virtuous circle
in which reduced budget deficits led to increased confidence,
which led to more growth, which led to reduced budget deficits,
and the cycle moved on.
Ultimately, our goal has to be to restore such economic
performance. In the short run, however, circumstances in the
United States today are very different than they were at that
time. Very substantial numbers of people remain unemployed.
Interest rates are at zero and cannot be further reduced. And
the global economy is weak.
In such circumstances, measures that maintain and increase
demand are essential. Measures which operate to cut demand back
further are counterproductive with respect to economic growth
and may even be counterproductive in terms of reducing debt
burdens because slower economic growth leads both to larger
budget deficits and to a lower level of GDP and, therefore, a
higher debt-to-GDP ratio.
This is not the time for austerity or further cutbacks. It
is the time to make plans for the medium and longer term. For
the medium and longer term, we do absolutely need to recognize
and take long-run steps, many of which would be desirable even
in the absence of budget problems, such as containing the
growth of health care costs, reforming the tax code where tax
subsidies distort economic activity and reduce the economic
efficiency of our economy, as well as costing the government
revenue.
It is also an appropriate moment for us to look at crucial
expenditures which the country will have to undertake at some
point and undertake them now at a moment when the cost of
borrowing will be uniquely low, at a moment when their
productivity and employing people will be uniquely high because
of high unemployment. Particularly important in that regard is
the need to maintain and upgrade our country's infrastructure,
an investment need we will face at some point, and we will
reduce burdens on our children by meeting that obligation today
rather than bequeathing it to them.
A balanced approach that focuses appropriately on
supporting demand in the short run while containing long-run
budgetary pressures in a balanced way for the medium and long
term will best promote growth, best increase confidence, and
best offer us the prospect that again, as in the 1990s, we can
be in a position to start paying down the Federal debt.
[The prepared statement of Mr. Summers follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Murray. Thank you very much.
Dr. Johnson.
STATEMENT OF SIMON JOHNSON, RONALD A. KURTZ PROFESSOR OF
ENTREPRENEURSHIP, SLOAN SCHOOL OF MANAGEMENT, MASSACHUSETTS
INSTITUTE OF TECHNOLOGY, AND SENIOR FELLOW, PETERSON INSTITUTE
FOR INTERNATIONAL ECONOMICS
Mr. Johnson. Thank you very much, Senator, for the
opportunity to be here today, and members of the committee.
I share Professor Summers' optimism on the U.S. economy,
and I hope that he is right on these points. I would, though,
like to emphasize the risks that we still face from the global
economy. I would then like to speak briefly about the effects
of the uncertainty generated by our current fiscal policy and
come back to some of the longer-term budget issues that Senator
Sessions has already touched on.
The European economy remains very unsettled. There is a
serious problem within the Eurozone currency area. There are
associated sovereign debt problems, and their financial sector
is, frankly, in very bad shape. All of these pose risks to our
outlook and we need to be careful. It does give us this ironic
advantage in the sense that we are seen as a stronger safe
haven relative to other investments because the Europeans have
made so many mistakes in recent years. But we must be aware
that the international environment can turn against us quite
suddenly and we should plan accordingly.
Now, the interesting contrast between European fiscal
policy, in fact, fiscal policy in most other industrialized
countries and what we do in the United States, is that we have
relatively weak so-called automatic stabilizers and relatively
more importance for discretion in fiscal policy. So instead of
it being the case that when you hit a major financial crisis in
a large recession, in most other countries, most of the fiscal
countercyclical effect is done by automatic falls in tax
revenue, automatic increases, for example, in unemployment
benefits. You on Capitol Hill, in our situation, have to make a
lot of decisions.
And I testified to this committee for the first time in
November 2008, and I testified again at the beginning of 2009--
I think Senator Sessions was in those hearings--and I was
really struck and impressed by the bipartisan spirit of those
hearings, and there was the agreement, not perhaps on all the
priorities, but the agreement that this was a major crisis. It
was unprecedented in our lifetimes and it required a fiscal
response of some kind, with different opinion between how much
you want to put on tax breaks versus spending increases. I also
went back and looked at the testimony from the Heritage
Foundation in those months and years and it was running very
much along these lines.
Now, of course, we have reached the difficult phase, which
is exactly as you laid it out, Senator Murray. Where do we make
the choices going forward regarding spending and taxes? And I
am rather on your side in terms of the Senate Democratic
budget, in terms of where you put that weighting. And,
obviously, we are going to disagree about that today, but, I
think, more than anything, I would stress the unfortunate
effects of uncertainty.
And I would recommend to you again--I think I have spoken
to this committee before, also--about the work of Nick Bloom at
Stanford University and his colleagues, who have studied the
effects of all the different kinds of uncertainty that we have
had at the macro level in recent years. And the one thing that
stands out in their work as having made people more uncertain
and then, presumably, less willing to invest--and I am talking
about the private sector--it was that debt ceiling fight in the
summer of 2011. And it was also, just to some degree, what
began to happen at the beginning of this year, but fortunately,
there was a backing away from another confrontation over the
debt ceiling.
So I would really echo and reinforce your point, Senator
Murray, that we should move away from the sequester. Putting in
place that kind of automatic cut is not a good way to deal with
the fiscal issues. You emphasized education and infrastructure.
I would second that and I would add public health. The Head
Start program, for example, which is a combination of public
health and education, is being cut, and the last data I have
seen suggests that 70,000 children will not participate in Head
Start this year because of the sequester. Those children are
gone. They are only in that critical, vulnerable age group once
and then they are lost. Then we have lost the human capital. We
have lost the productive ability. And we know that these early
childhood education and health interventions are very
effective.
So the sequester is not a good way to proceed. The debt
ceiling confrontations, other confrontations, when they
generate more uncertainty unfortunately, have a big negative
effect on the private sector. And as a Professor of
Entrepreneurship, I spend a lot of time with private sector
people who believe in the United States, who actually look
around the world at opportunities and say the United States is
a good place to invest, exactly as Professor Summers was
saying. But when there are big fights about fiscal policy, that
is a disincentive.
My third and final point is about the long-term budget
issues. I think we agree completely, Senator Sessions, that
looking out 20, 30, 50 years, there are important issues that
need to be confronted and I think there has to be a
conversation about Social Security. That is part of, I think,
what you were flagging for us, and I agree with that
wholeheartedly. And I wrote a book, White House Burning, that
deals, in part, with this topic.
But I would also stress the importance and centrality of
health care spending in that discussion. But it is not just
about Medicare and other government-funded parts of the health
care system. It is also about health care spending and our, to
date, limited ability--perhaps the latest information is a bit
more encouraging--but over the last couple of decades, we have
demonstrated a very limited ability to control health care
spending.
If you take that health care spending from the public
sector and say, all right, government is out of this business.
It is now all a private responsibility through insurance, self-
insurance, or insurance you are going to buy, according to the
Congressional Budget Office, that will push up our health care
costs as a percent of GDP. You have less buying power as
individuals and as small groups than the government has when
the government buys health care for roughly 100 million
Americans, as it does today.
So I think we should have exactly that conversation,
Senator Sessions, talk about the aging of the population, talk
about the social insurance programs that we want and that we do
not want in that context.
I testified to the Joint Economic Committee of Congress
recently alongside Senator Judd Gregg and I was very struck by
his thoughtful statements along these lines and his
inclination, actually, to allow taxes, tax revenue at the
Federal Government level, to rise over the medium term,
reflecting the costs of social insurance and, I think,
presumably, reflecting the reforms that he would want in how
those programs are operated. But he was talking about taxes
relative to GDP rising above 20 percent--perhaps 21 percent,
perhaps 22 percent--we should let him speak for himself on
that--but I thought that that reflected exactly the kind of
compromise and seeking of the middle ground that we need if we
are going to put the longer-term budget issues on a sustainable
footing at the same time as maintaining our essential
investments, particularly in more vulnerable lower-income
Americans today.
Thank you very much.
[The prepared statement of Mr. Johnson follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Murray. Thank you very much.
Dr. Furth.
STATEMENT OF SALIM FURTH, SENIOR POLICY ANALYST IN
MACROECONOMICS, CENTER FOR DATA ANALYSIS, THE HERITAGE
FOUNDATION
Mr. Furth. Thank you. My name is Salim Furth. I am a Senior
Policy Analyst in Macroeconomics in the Center for Data
Analysis at the Heritage Foundation. I thank Chairman Murray,
Ranking Member Sessions, and the rest of the committee for the
opportunity to testify on the impact of austerity. The views
expressed in my testimony are my own and should not be
construed as representing any official position of the Heritage
Foundation.
I heartily agree with the panelists that real sustained
economic growth is the main point. But we need to put aside
this term ``austerity,'' which is really too broad to be
helpful. Distinguishing among the elements of austerity, we
need to distinguish between tax increases, spending cuts, and
structural reforms, all of which have been called austerity at
different times in the past.
So, today, I am going to talk about unbundling austerity in
that way. I am going to revisit policies that have been pursued
in the last five years, discuss the sequester for a moment, and
then look forward to potential policies the U.S. can pursue.
The most proven and fiscally sound and long-lasting
policies under the austerity umbrella to help achieve growth
are structural reforms. Structural reforms emphasize making
markets more competitive. On the fiscal side, structural reform
can be identified, as compared to merely cutting spending, by,
I think, two criteria. In the first case, it should be a
systematic and ongoing spending cut. And in the second,
incentives for economic activity should be improved by the
reform.
So a simple example of structural reform might be to raise
the Social Security early retirement age from 62 to 65. Another
might be to cut subsidies for industrial farms or, with
apologies to my fellow panelists, to cut subsidies to big
ticket private universities.
Lower government spending can bring debt under control and
it can promote investment and subsequent growth. Empirical
research by Giavazzi and Pagano; Alesina and Perotti; Von
Hagen, Halite, and Starch; Lambertini and Tavares; Ardagna; and
researchers at the OECD and the IMF, among others, has
unanimously found that reducing deficits through spending cuts
is more successful than doing so through tax increases. Higher
tax rates slow the economy immediately and depress future
growth.
In addition, economic harm done by the tax increase
automatically increases government spending on unemployment
insurance and poverty programs. I expect this is why most tax-
based attempts at deficit reduction have failed to shrink debt
and have substantially increased the odds of a recession.
The 2013 budget sequestration was poorly designed policy.
However, its artlessness does not outweigh the fact that it is
a step in the right direction on spending. Pier Carlo Padoan,
Chief Economist of the OECD, emphasized in his speech last week
that the U.S. should make the spending cuts of the sequester
less harmful by incorporating them into a credible, permanent
fiscal consolidation.
Since taking effect in March, sequestration has had no
discernible impact on overall growth or employment numbers nor
on financial markets. Where sequestration policies are
particularly perverse, straightforward legislation can improve
the content of policies while remaining revenue neutral. There
are many places in the Federal budget where small savings can
be found at little economic costs. In fixing sequestration,
policy makers should restore government investment at the
expense of the government wage bill and transfer payment
growth.
Going back to the experience of recent years, since 2007,
few governments have pursued anything like a comprehensive
austerity agenda. Most have spent more and some have taxed
more. Spending cuts, on the other hand, have been rare outside
Europe's crisis countries. Only three of 28 OECD countries have
policies that would lead to a budget surplus in a strong
economy, let alone in the current stagnation. And 18 countries
have instead expanded their deficits.
Transfer payments, such as Social Security, Food Stamps,
and unemployment insurance, have risen 16 percent in the
typical OECD country and 14 percent in the U.S. That occurred
despite a research consensus that transfers must be contained
or cut in order to have successful deficit reduction. Now, I am
not saying that we ought to be slashing transfers right now or
that countries should have done so over the last five years.
But the fact that they have been instead growing indicates that
this narrative that there has been vicious austerity in Europe
simply is at odds with the facts.
In an economic downturn, one expects that the ratio of tax
revenues to GDP, the revenue rate, will fall. That is what we
expect. Instead, 13 OECD countries have raised their revenue
rate since 2007. In ten of those countries, higher taxes funded
higher government spending. Only Greece, Italy, and Hungary
have pursued both tax increases and spending cuts.
So there has been a very wide variety--I go through this a
little bit more in my written testimony--of specific fiscal
policies that different countries have pursued. We can
certainly talk about that variety. But throwing it all into a
basket and calling that basket austerity is not helpful.
My fellow panelist, Dr. Summers, coauthored a recent
paper--he discussed it slightly here and more in his written
testimony--which presents a novel and valuable idea. It is
interesting and worthy of further study, how the effects of a
recession can echo through into the long term. I agree
wholeheartedly with DeLong and Summers that more consideration
should be given to the long-term effects of short-term
policies.
However, I think that policy makers should put greater
weight on concerns which are founded in more substantial and
longer-run research agendas. We have more research showing that
structural reform that contains entitlements and increases
competition is a proven method of raising labor force
participation and is more proven than borrowing and spending
and other potential policies that have been mooted.
Coming back, there is no substitute for private sector
economic growth. Although government can easily boost its own
portion of GDP, it can only indirectly have a positive impact
on private consumption and private investment, which are the
cornerstones of material well-being, present and future.
Concluding, Angel Gurria, Secretary-General of the OECD,
last week laid out a mandate for structural change, saying,
"moving to best practice across a number of policy areas would
raise per capita incomes by some 20 percent in the median OECD
country. This is huge. So our call continues to be, go
structural."
Thank you very much.
[The prepared statement of Mr. Furth follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Murray. Thank you very much to all three of you.
We really appreciate it.
And I wanted to start with the issue of sequestration.
These across-the-board cuts were actually never supposed to go
into effect. They were really imposed in order to push
Democrats and Republicans to come together to compromise, and I
think we all agree they are not the right way to achieve
deficit reduction, particularly because they fall
disproportionately on the discretionary accounts. So that means
our investments that are so important to us that I talked about
and some of you did are really being impacted by this.
CBO has now estimated that sequestration will lower
employment by 750,000 jobs this year alone, and that is not
just a big number, it is a threat to the well-being and
opportunity for families across our country and really is
unacceptable when so many people are fighting so hard today to
get back on their feet.
As I mentioned, I was back home in Washington State last
week, as all of our colleagues were in their home States, and I
heard about this issue constantly and consistently, no matter
where I was, from people who were experiencing the real and
very devastating effects of sequestration. Many of the
furloughs have just been announced. They are just taking
effect. So families are trying to figure out how they are going
to deal with as much as a ten percent pay cut over the next
four months, let alone the sequestration that occurs for the
next eight to nine years.
Kids in Head Start that you talked about, Dr. Johnson,
teachers are right now telling parents they are not taking any
more kids in Head Start. We will start seeing the impacts of
that, short and long term. Workers, again, facing furloughs and
deep effects.
So my first question to all of you, really, then, is on the
broader fiscal and economic impacts of the sequestration.
Lowering spending may reduce the deficit in the short term, but
I want to ask how it affects prospects for future economic
growth and fiscal sustainability and could it actually make it
harder to solve our budget challenges in the longer term, and I
would like to start with you, Dr. Summers.
Mr. Summers. I believe sequestration at current magnitudes
is counterproductive at three levels. First, it reduces demand
and growth in the economy, which impacts adversely the level of
income in the short run and casts a shadow forward onto the
economy's future potential. Indeed, as I calculate in my
testimony, the CBO estimates imply that the debt-to-GDP ratio
at the end of this year will be no lower than it would have
been if sequestration had not been adopted, that the fact that
we will have a slower growing economy and, hence, a lower GDP
at the end of the year just about offsets the direct benefits
of sequestration.
Second, sequestration reduces investments that are crucial
for the economy's future potential. We have stressed the
example of Head Start, but there are others, as well--
investments in basic research and development and the like--
that have an adverse impact on our economy going forward.
Third, in many cases, expenditures reduced by sequestration
are only postponed and magnified. We will be paying more for
prison because of the cutbacks in Head Start as a country. It
is much cheaper--it would have been much cheaper to have fixed
that bridge in your State than it is to build a new one. And so
the microeconomic consequence of sequestration cuts is often
likely to be an increase rather than a reduction in future
deficits.
There certainly is a role for spending reduction in any
comprehensive approach to our long-run budget issues, but the
current sequestration program is not the right way to implement
that role.
Chairman Murray. Thank you very much.
Dr. Johnson.
Mr. Johnson. I agree. I think that the one very bad and
costly way to do fiscal adjustment is to not invest, to not
repair bridges. And when you have a large, complex, relatively
advanced country like the United States, there are many such
cuts that you can make, and then your bridges will fall down,
which is an absolute disaster. And, of course, as the political
pressure is expressed, you get more pressure to keep the FAA
running in terms of its current operations and to keep meat
inspectors on the job and to do other things that are of
relatively high profile, something else has to give. What is
that? It is all of the investments.
So you are really and completely undermining-- obviously,
not intentionally, it is not what you want to do, but the
outcome is you undermine the country's future. It is a real
shame. And when you talk to people from around the world, they
absolutely cannot believe that this is where U.S. public policy
stands today.
Chairman Murray. Dr. Furth.
Mr. Furth. I agree with the panelists that the cuts in
government investment are probably the worst way that the
policy could have been implemented. I think that the fiscal
impact, the amount of spending cuts, is really necessary.
To go to your original question, you asked whether these
spending cuts would only help the deficit in the short run or
if they would help in the long run more, and I do think they
will help a little in the short run, but they will help more in
the long run. The confidence that Dr. Summers talked about will
return. Private sector economic growth over time tends to
replace government spending that goes away as resources are
moved to more efficient uses over time.
So I think there are longer-term benefits to these spending
cuts. I absolutely agree that the cuts should be moved away
from the investments and towards the government wage bill and
transfer payments, which are what the previous research has
shown are the most efficient and growth inducing places to make
cuts.
Chairman Murray. Well, thank you. My time is up, but I just
want to mention that at some of my meetings in my State last
week, it was police chiefs and sheriffs who were arguing most
compelling to us to not cut Head Start because the vast
majority of people in their jails--and I am talking local
sheriffs and police--70 to 80 percent of the people in their
jails were high school dropouts and they directly link that to
our investments in early childhood education that we were
losing out on.
Senator Sessions.
Senator Sessions. Thank you. Well, the sequester was part
of the Budget Control Act. That is what we did. And the amount
of reduction in spending over ten years, a rather modest
reduction in that growth, was agreed upon. It is in law and it
has been signed by the President and it is not going to be
changed.
What is open and what definitely needs to be done and what
the House has done is to look for ways to find other wasteful
spending that does not add to our productivity and spread these
cuts around in areas that were not touched, in my opinion.
With regard to roads and bridges, I have to push back a bit
on that. In the stimulus, the $850 billion stimulus bill, only
about four percent of it went to roads and bridges although we
were constantly told it was going to rebuild our
infrastructure. And we spend now about one percent, one-and-a-
half percent, of our total Federal revenues on roads and
bridges. So the excuse for tax increases is not to use that
money for our infrastructure. If I saw a proposal that would do
that, I would be more interested in it.
And, you know, Dr. Johnson, Judd Gregg is very thoughtful.
We do have to confront our long-term entitlement spending
programs and I think you could see some revenue increases occur
as a part of a fix of that. But at this point in history, I
think there is not support to raise spending--raise taxes for
increasing general spending, and that is what the President's
budget does and that is what the Senate budget does. It raises
taxes for more spending, not to reach our debt or stabilize our
entitlements.
Briefly, just, Dr. Summers, try to get on the same page
here. Would you agree that tax increases are a form of
austerity as well as spending cuts?
Mr. Summers. Certainly, they can be. It would depend on the
precise form they took. If they took a form that was likely to
depress spending substantially, then they certainly would be a
form of austerity. If they took the form of broadening the tax
base in ways that represented the kind of structural reform
that Mr. Gurria from the OECD advocated and that increased
economic efficiency, then I would be less likely to label those
as austerity policies.
But, yes, absolutely, the basic principle of you want to be
increasing demand rather than reducing demand in a time of
recession applies both on the spending policy side and on the
tax policy side.
I might say, also, if I could, that I think you pointed
towards what would be a very productive way forward in one of
the comments that you made. It seems to me that it would be
desirable for the country to embark on a ten-year program of
renewing the infrastructure, fixing the roads and bridges and
the like, with the understanding that revenues to pay for it
would kick in at such point as that was macroeconomically
appropriate, when the overall national unemployment rate had
fallen below some threshold, as long as if the inflation level
became excessively severe, some set of macroeconomic triggers.
But it seems to me we would be much better off approaching
infrastructure in a long-run way and then using thresholds to
determine how the timing of payments was managed to help
support sustained economic growth. That, I think, was implicit
in your suggestion and I think it is a very wise one.
Senator Sessions. I think that bipartisan support for a
serious plan to enhance our infrastructure, but the American
people need to know how little of our actual revenue is going
to that.
Dr. Furth, you studied the European situation. It seems to
me that the U.K., for example, immediately raised taxes and has
had not that much spending reductions. We were in Estonia and
the cabinet people took 40 percent pay cuts. The doctors in the
health care system took big pay cuts. One of the cabinet
members said his wife was really unhappy. But it seems to me
Estonia added almost nothing to their debt during that time and
now has one of the highest growth rates in Europe. Would you
share a little bit more about this fundamental question of
austerity and how to get our debt and growth back on track.
Mr. Furth. Sure. Yes, I absolutely agree about the U.K.
They raised their Value Added Tax from 17 or 17.5 percent to 20
percent. That is a tax on everything that is produced. And so
what the U.K. has had is despite having more people enter the
labor force, their economy is shrinking. They have been hard
hit by some local factors, such as the decline in finance in
London. That is a very big industry there. But they are having
a very hard time even when they are successful in getting
people back to work. They are taking so much out of the economy
in taxation, and that form of austerity, that way of trying to
close the budget deficit, is preventing a fulsome economic
recovery in the U.K.
Senator Sessions. Thank you.
Chairman Murray. Senator King.
Senator King. I was reading the Budget Control Act. It is
interesting to me how the discussion of the Budget Control Act
and the sequester has evolved, because as I recall, and I went
back and I was just reading the statute and read it back this
winter, the sequester was designed to be stupid. It was
designed to be unacceptable as an alternative, therefore
forcing the Super Committee and the Congress to come to a more
reasonable alternative.
What I was just looking at was a provision of the Budget
Control Act at the end that clearly contemplates that revenues
could be part of the solution. The idea was to find another
$1.5 trillion of savings, somewhere. And the statute clearly
contemplated that revenues could be part of it. That did not
happen, unfortunately. It is with a great sense of regret that
I read those provisions, because that Super Committee had
amazing powers and it is something that- -it was a missed
opportunity. But, in any case, here we are. But to say that the
sequester is now the baseline, it seems to me, is a misreading
of the history of the Budget Control Act.
I guess the question for you, Mr. Johnson, and you have
talked about this, as I look at the overall fiscal situation of
the Federal Government, the real drive is health care and
everything else is flat. I mean, as you probably know,
discretionary spending, non-defense discretionary spending
right now is at the lowest percentage of GDP in about 45 years.
Defense is relatively flat relative to GDP.
So when we talk about controlling growth in spending, what
we are really talking about, if we do not do anything about
health care, is allowing health care to squeeze everything out,
everything else out. My question to you is, what can the
Federal Government do as a major consumer of health care to
affect the overall growth of health care in the economy? I have
some ideas no that, but I would like to hear yours.
Mr. Johnson. Well, Senator, you are absolutely right, that
if you look out 20, 30, 40 years, health care does not just eat
the Federal Government budget, it eats the economy. Now,
presumably, that is not going to happen. I do not think we will
let that happen, but the question is, what are the policies
that will turn it around?
And if you look at the IMF's tables on the back of the
publication called the Fiscal Monitor--they put it out every
six months--they have comparisons of projections of health care
spending across countries. So this is very much looking at the
data, looking at who has a better grip on these costs on a
projected basis, and it is a hard thing to do, but all those
economies that have better projections than ours have some form
of single-payer system with something like universal coverage.
Now, I am not saying that is what we are going to get in the
United States. I am just saying, from a fiscal control point of
view, from a budget deficit management over the medium term
point of view, that is what strikes, I think, anyone who looks
at the cross-country comparative available data.
Senator King. But would you agree that what we have to have
is a conversation about health care costs generally, not just
those as applied to the Federal Government? If Medicare says,
we are going to have limits, all that does is shift the
payments to the seniors or to the States, the same with
Medicaid. Professor Summers.
Mr. Summers. I would agree very much with the thrust of
your last remark, Senator. I have spent some time in the last
month or two learning more about this subject than I did
before, and what struck me as I read the literature and spoke
with experts was that if you ask the question, U.S. health care
costs are much higher than in most other countries. How much of
that is because Americans are getting more colonoscopies, more
treatments in the months before they die, more stuff, and how
much of that is because a given procedure or a given type of
hospitalization costs more in the United States? It is much
more the latter than the former, which suggests that measures
directed at reimbursement reform and purchase more efficiently
should be put at a premium, and measures directed at getting
people to seek less care should be given lower priority.
Now, as your question suggests, I believe such measures
need to be applied universally. It would be a tragedy if we
turned Medicare into a program in which a large fraction of
doctors withdrew, which would be the risk if we sought only to
reduce payments for the public sector programs and engaged in
no cooperation with the private sector around cost control.
But I believe coalition of payer initiatives, such as have
been raised in a number cities in the United States, that
orient towards payment for results and involve cooperation
among all those who pay our providers offer the best prospect
for containing the growth of health care costs, and I think
that very much will require taking a focus, as you suggest, on
overall health care costs, not simply the costs coming from the
public sector programs.
Senator King. Well, Mr. Johnson, I remember when I was
Governor, health care was 12 percent of GDP and we said, oh, it
cannot go much higher than that, and it is now approaching 20.
So just saying it cannot happen does not mean it will not
unless we do something affirmative.
My closing comment is that as I assess Federal spending,
cutting spending generally without dealing with the health care
cost is like invading Brazil after Pearl Harbor. It is a
vigorous response, but it is the wrong target. Thank you.
Chairman Murray. Senator Johnson.
Senator Johnson. Thank you, Madam Chair.
In terms of BCA, I remember the primary goal there is to
reduce the deficit by about $2.1 trillion. We did, by the way,
get a more than $600 billion tax increase, the fiscal cliff, so
there is--I think we have got that balance that people talk
about, not a balance I particularly agree with.
We utilize the word ``investment'' a lot, I think pretty
loosely. Coming from the private sector, I utilize the word
``investment'' as hard infrastructure spending, you know,
things that are going to last a long period of time. Certainly,
in the government, we have got bridges and roads. That is hard
infrastructure. We have got other investment, I suppose you can
make the argument, that will have long- term implications,
things like education. And then you have just basic
consumption.
The question I have, and I do not want a real philosophical
argument but just the basic percentage or number, does anybody
know, out of a $3.6 trillion a year budget, what would you call
investment out of there? Dr. Summers.
Mr. Summers. I would have to study it. It is certainly less
than half.
Senator Johnson. It is way less. I mean, do we not have
basically two-thirds of our budget is mandatory spending and
entitlement spending, which is basically consumption? So you
have maybe got a trillion dollars of discretionary spending.
How much of the trillion dollars would be investment?
Mr. Summers. That was really what--I was really addressing
the--I misunderstood your question and I was addressing the
discretionary spending. But I think it is--
Senator Johnson. So to clarify, you agree two-thirds is
already consumption. So pretty much all--
Mr. Summers. I do not know how to think about--I think of
national defense as an investment in keeping the country
secure.
Senator Johnson. There again, that is the discretionary
side.
Mr. Summers. But I could see how somebody could regard that
as not investment in the same sense that a private business
would. But I think it is--you are certainly right that most of
the entitlement program spending, I do not think, would be
prudently viewed as investment. Yes, I agree with that.
Senator Johnson. Dr. Johnson, you have been thinking about
this. Do you have a number in terms of--out of $3.6 trillion,
how much is really investment? Let us start with the
infrastructure. Do you have any idea about infrastructure, I
mean, hard roads and bridges, what most Americans would really
view as investment?
Mr. Johnson. I think that is a great question, Senator. We
are obviously spending some hundreds of billions on investment,
including education, which is a critical part of it. But it is
a small part of total Federal spending, without question.
I would stress, though, that what you are running and you
are calling consumption is part of social insurance programs.
That is not insurance that is readily--or was not readily
available through the private sector. Private--
Senator Johnson. By the way, would that not be an automatic
stabilizer? You said we do not have very good automatic
stabilizers in our economy, but yet two-thirds of the budget
that is off-budget and on automatic pilot, would that not be an
auto-stabilizer?
Mr. Johnson. Yes, to some degree, it is, but the point is,
our Federal Government is--and our government--
Senator Johnson. And that is $2.6 trillion worth.
Mr. Johnson. It is smaller than other countries, Senator.
That was the point I was making.
Senator Johnson. Two-point-six trillion dollars?
Mr. Johnson. So we have automatic stabilizers, but it is
smaller relative to our economy than it is in other
industrialized countries.
Senator Johnson. We--
Mr. Furth. Senator--
Senator Johnson. No, we just had a release of the
Department of Energy in terms of their loan program, their
green energy jobs programs, $26 billion of loan guarantees,
about 2,300 jobs created, long-term jobs, at a cost of about
$11.5 million per job. As economists, do you recognize any
difference between the effectiveness of public spending, public
investment, versus private sector investment? Dr. Summers.
Mr. Summers. Oh, I do not think there is any question that
the private sector is a better venture capitalist than the
government. That does not mean that there are not appropriate
instances where government can be catalytic, and where the
private sector will not step up, government should not take a
role. But, in general, one would expect in spheres like venture
capital that private investment would be much more effective.
But if I could just come back on one thing, because I do
think it is important to be fair here, investment, in my
dictionary, refers to expenditure today for future benefit. A
relative of mine is soon going to undergo heart surgery that
offers the prospect of substantial life extension--
Senator Johnson. Right--
Mr. Summers. --that Medicare is going to pay for. I do not
think it would be--I understand why that is quite different
from investment as a private sector business would use the
term, but I also think it is quite different from consumption
as that term is used, and it very much is an expenditure today
for future benefit. So I think we have to be a bit careful as
we use these categories of consumption and investment, and some
of what government does does not fit naturally into the private
sector concepts of either consumption or investment.
Senator Johnson. But based on your earlier comment in terms
of private sector investment being more effective and efficient
than the public sector, you would basically agree with Dr.
Furth, then, that we should really be looking at how do you
incentivize the private sector and get more of the dollars
flowing to the private sector for economic growth, which
everyone agrees is the number one component of the solution
here, correct? We need to juice the private sector, the
productive sector--
Mr. Summers. Private sector growth is enormously important,
and where we can, at limited cost to the government, juice
substantial private sector investment, we absolutely should.
That is why, for example, I worked hard during my time at the
NEC to include the provisions that provided for expensing of
small business investment in the Economic Recovery Act. It
included a number of provisions--
Senator Johnson. But, of course--
Mr. Summers. --directed at spurring private investment, and
even--and I recognize how controversial they are, and there
certainly are legitimate questions that can be raised at them,
but even the energy subsidies that you raise, Senator, if you
look at those programs, the government money is catalytic and
the amount of total money invested is very substantial--is a
significant multiple of the amount of public money invested. So
it is exactly juicing the private sector in the sense you
suggest--
Senator Johnson. But, of course--
Mr. Summers. You know, whether those programs are ideally
designed, you can certainly--that is certainly a totally
legitimate area for debate.
Senator Johnson. But, of course, the $26 billion came from
somewhere. It was taxed out of the private, the more productive
sector, or borrowing, which creates all that level of
uncertainty because of very bad fiscal policies. So it comes at
a huge cost and a very ineffective use of money. Thank you.
Chairman Murray. Senator Baldwin.
Senator Baldwin. Thank you, Chairman Murray and Ranking
Member Sessions, for convening us today.
You know, in my view, our country faces twin challenges,
stabilizing our debt and deficit without shortchanging our
future and continuing to move our economic recovery forward,
and I think that is something that all of us here can agree on,
but there is real disagreement on how we tackle these twin
challenges. In my view, I do not believe this can be an either/
or proposition. We cannot have all stimulus or all austerity.
We need to have a balanced approach.
However, right now, we are seeing the effects of
sequestration and I think that is anything but balanced. This
year alone, the Congressional Budget Office estimates that
sequestration will cost our economy about three- quarters of a
million jobs and we fear that the consequences of sequestration
will continue to compound over time. We are cutting away at
things like education and scientific research and innovation,
which have previously provided a strong foundation for our
economic growth and global competitiveness.
Indeed, over the past half-century, more than half the
growth in our nation's GDP has been rooted in scientific
discoveries. This is the kind of fundamental mission-driven
research that is done at places like the Great Lakes Bioenergy
Research Center, which I had the chance to visit last Friday.
This center is a Department of Energy funded consortium of over
400 researchers and innovators researching advanced biofuel
technologies that will help to support an economy that is built
to last.
In addition, I had the chance to sit down with and talk to
researchers from across the University of Wisconsin- Madison
campus who rely on Federal investments, especially research
grants from the National Institutes of Health and the National
Science Foundation. This entire group talked about their
worries, their worries that there will be an entire missing
generation of scientists. They explained that diminishing grant
opportunities and intense competition are putting the brakes on
innovation at a time when we need to be stepping on the
accelerator.
The potential for future employment and economic growth
opportunities in science, technology, engineering, and
mathematics related fields is huge. In my travels around the
State of Wisconsin, the question is, will we be able to educate
enough young Americans to fill these positions? And, indeed,
there is a consensus between business and educators on the need
to increase STEM programs in our K through 12 education to meet
this demand. At the same time, the Federal Government is
pressing the pause button on research and innovation at the
highest levels.
Dr. Summers, in your testimony, you talk about the
difficulty that recent college graduates have in getting onto
career ladders. The researchers I met with at the University of
Wisconsin-Madison shared a very similar perspective. From a
competitive standpoint, can you speak a little bit about what
happens when we begin narrowing the pipeline of young
scientists and engineers who are working on basic and applied
research.
Mr. Summers. If we--it is like prospecting. Some of the
holes come up dry, but when you hit a good one, it is
enormously valuable. If we less scientific research, we are
doing less prospecting. It is less likely that the next
semiconductor will be invented here. It is less likely that we
will be the center of the action in biomedical research.
There was a time when Oxford and Cambridge in England were
the centers of global scientific research. Over time, as
England struggled, there was less support, and while great
universities, they lost some of what was special in terms of
their capacity to support scientific research. That benefitted
the United States very importantly during the 20th century. And
the question that history will judge us on, I believe, is
whether we allow a transition like that to happen with respect
to U.S. scientific leadership or whether we do not.
The 20th century was, in many ways, a century of physics,
with the Manhattan Project, the semiconductor, the personal
computer, ultimately, the Internet. And our leadership in it
was central to our leadership in the world.
I believe the 21st century is going to be a century of the
life sciences, with revolutionary understandings that
contribute to a cure with tremendous things happening in
bioengineering. And it is going to be very important for the
position of the United States in the world to what extent we
are leaders of that. We are set up to be leaders because of the
institutions that we have, but others know how important that
is, as well, and the decisions we make about supporting
scientific research will guide the choices of our most talented
young people and that will have a profound effect on the future
of the country.
Senator Baldwin. If the Chair will indulge a brief
response, your painting the picture of the last century is very
meaningful to me. I was raised by my grandparents and my
grandfather was U.S.-born but got his Ph.D. in biochemistry at
Cambridge University, and at the onset of World War II returned
to the U.S. and spent a year at Harvard, seven years at
Columbia, and then the rest of his career at the University of
Wisconsin-Madison. And I remember when he used to be on grant
panels listening to how many were putting in, and even as much
as a decade ago, there would be 100 new post docs applying for
grants and 25 percent of them might have a chance of getting
them.
My research scientists that I talked with last Friday on
campus said there were probably half the number putting in for
grants and maybe five percent getting awards and that this is
having--there will be a lost generation of U.S. scientists.
Mr. Summers. Just a very quick response, if you will
indulge me. When Jim Watson did the work that identified the
structure of DNA that set the basis for modern biology, he was
27. Today, on average, when you get your first NIH grant if you
work in those fields, you are in your early 40s, and there have
just got to be a lot of people who would be in that field if
they thought they could get independent support at the ages
when they were most likely to be brilliant and creative, and it
is increasingly becoming more and more difficult for young
investigators. And it is not because they do not have the
talent. It is not because there are not important problems. And
it is not because the problems are not solvable.
Chairman Murray. Senator Nelson.
Senator Nelson. A fascinating discussion about the life
sciences.
I want to return to the budget. In the opinion of this
Senator, there is good news and bad news. The good news is that
existing circumstances, the deficit will be reduced over a ten-
year period to somewhere between $3.6 and $3.8 trillion, not
too far off from the $4 trillion goal that we had back in the
crisis of 2011.
The bad news is, in the opinion of this Senator, that we
are going to have a crisis again come this fall, just like we
had in 2011, over the raising of the debt ceiling so that the
government can pay its bills, and all the pressures that come
in as a result thereof--passing a budget, passing
appropriations, the tax revenue and spending questions, tax
reform, entitlement reform. Everything is going to come
crashing in, in my opinion, this fall, whenever we reach that
limit of the debt ceiling. I would like to have the experts
reflect upon that.
Mr. Summers. Let me first say, Senator, that I think a
default, even for ten minutes, would be catastrophic and would
have consequences that go forward for a long time. My son is
here sitting behind me. We discuss from time to time his
expenditures in college. If I am uncomfortable with his
expenditures, one option is that he pays. Another option is
that I pay. We do not as a family regard stiffing Visa as being
a viable option for working out our difference of opinion.
And in the same way, it seems to me that repudiating our
debt should be off the table. And it seems to me that for a
great nation to be debating the order in which it is going to
pay its creditors or the order in which it is going to pay
creditors and those counting on Social Security benefits or
those counting on NIH grants is to be having a tragically
misguided debate.
So it is absolutely right that there be a requirement of
Congressional authorization and appropriation before debt is
incurred, and that takes place with respect to every dollar
that is obligated for spending by the Federal Government. But I
do not believe that using the debt limit and the possibility of
default as leverage for action, whether the particular action
in question is an action I favor or an action I oppose, is an
appropriate tool. It seems to me that if history teaches
anything, it is that those who carry the view that their end
justifies extreme means are usually on the wrong side of
history, and that applies very much with respect to the threat
of default.
Senator Nelson. I agree with you, but I am afraid that is
where we are headed.
Dr. Johnson.
Mr. Johnson. Senator, I also agree that may be where we are
headed and it concerns me greatly. It does not actually matter
so much what the economists and the experts think will happen.
We should look at what the private sector thinks about these
debt ceiling confrontations. And I mentioned before the
research of Nick Bloom and his colleagues that shows clearly
that of all the very difficult circumstances we have
encountered in the past five or ten years in the United States,
the one that really jumps out as having scared the private
sector and discouraged investment by the private sector was the
fight over the debt ceiling in the summer of 2011. And the idea
that we would repeat that or some version of that, I think, is
really unappealing and makes no sense. It is purely defeating
everything that all of you want to achieve, which is a stronger
recovery based on a more vibrant, more confident private
sector.
Mr. Furth. It is very clear that the U.S. needs to not
default, and obviously, we do not want to get close to that. It
is very good news that the budget situation is better than
thought and that Congress has a few more months to work this
out before we get close enough that markets start to really get
worried.
What we need, obviously, is a long-run plan that comes in
gradually, that makes the kinds of entitlement cuts that do not
slam into the economy in one year, that grow over time, that
change things in 2050 much more than they change things in
2015. And, yes, we need that compromise. The research on other
countries shows that plans that work in stabilizing economic
growth and stabilizing debt are those that cut entitlements, do
so gradually, transparently, with rules such that there is a
very clear path that the plan is going to follow. What we do
not want is to lurch from one unexpected sequester to another.
It will really benefit the economy if the politics can be
brought together in such a way that we have a clear plan to
take us through the retirement of the Baby Boomers. Thank you.
Chairman Murray. Senator Nelson, there is a solution to
this, to not get to your crisis, and that would be for our
Republican counterparts to allow us to appoint conferees, for
the House to appoint conferees, and to put us in a room and
have us make a decision before we reach that crisis point.
Senator Nelson. You are absolutely correct.
Senator Whitehouse. But that would mean following the
regular order and--
Chairman Murray. It would, actually.
Senator Sessions. Well, the regular order calls for the
bringing up of the House budget on the floor and 50 hours of
debate.
Chairman Murray. Which has never occurred before.
Senator Whitehouse. Which has--exactly.
Senator Sessions. Well, it may not have occurred before,
but that is the regular order.
Senator Whitehouse. Yes. We are fighting regular order.
Senator Sessions. You are correct fundamentally, Madam
Chair. Thank you.
Senator Nelson. As I said, I think we are going to have a
problem this fall.
[Laughter.]
Chairman Murray. Senator Whitehouse.
Senator Whitehouse. Thank you, Madam Chair.
What brings us to this hearing is some history. The history
is that the Republican party fought through the fiscal meltdown
for an austerity solution. Spending cuts, spending cuts,
spending cuts. Europe actually tried the austerity solution.
The results are in and the results in Europe are calamitously
bad when you look at measures like unemployment and GDP growth
compared to where we are. We may not love where we are, but I
had some Rhode Island colleagues who are of Portuguese
extraction in town last night and we had dinner with the
Portuguese ambassador. Portugal has an 18 percent unemployment
rate, and they look good by comparison to Greece and Spain,
which have 27 percent unemployment rates. Across the EU,
economies are not growing slowly like ours. They are actually
shrinking. Greece, down 6.4 percent. Portugal, down 3.2
percent. It is a really bad tale, which creates a problem,
which creates a problem.
What is the solution? The solution is that the recent
Republican witnesses have come in and suggested that the
problem with European austerity is that they did not really do
spending cuts. It was really about tax increases. And so the
lesson that you are supposed to draw from the European disaster
of following the austerity recommendation is avoid tax
increases. And you look at some of the data and, frankly, it
does not add up.
Dr. Furth, I am very concerned about your testimony and I
would like you to take some time when you have some time and
write back to us and explain yourself, because when I look at
the graph, for instance, on page eight, which you sourced to
the OECD, if you actually look at what the OECD says about
spending cuts versus tax increases, they have actually written
what the numbers are, and here is what the numbers actually are
according to the OECD. I will start at the top.
Slovenia, 100 percent spending cuts, zero tax increases.
That is hardly a solution that counted on tax increases.
Iceland, 72 percent spending cuts, 28 percent tax increases.
United Kingdom, 69 percent spending cuts, 31 percent tax
increases. Spain, 67 percent spending cuts, 33 percent tax
increases. Ireland, 66 percent spending cuts, 34 percent tax
increases, and on and on until you actually get to the country
that the Ranking Member mentioned, Estonia. Estonia had the
lowest spending cuts. It was 26 percent spending cuts, 74
percent tax increases, compared to the U.K., which was your
comparison, which was 69 percent spending cuts, 31 percent tax
increases. And these are OECD numbers. That is their percentage
number.
Dr. Furth, I am concerned that your testimony to this
committee has been meretricious and I want an explanation. I
want you to sit down and do it in writing so that we have
plenty of time, that there is no question about any shortcut
that you might have taken or there was not time for this
discussion. And I want you to explain how this OECD data that
shows that the majority, by OECD's own terms, over and over
again of their austerity plan was spending cuts turns out into
the data on this graph.
And, I mean, I want to know how you got to that data. I
want the explanation. I do not want a lot more talk about
economic theory. I am contesting whether you have given us fair
and accurate information and I want you to have the opportunity
to explain why you say, ``Source: OECD'' on the bottom of that
graph. And I am going to run out of time, so let us not have
this discussion now--
Senator Sessions. Well, I think--
Senator Whitehouse. Write it down carefully, because I
think this is--
Senator Sessions. Give him a chance.
Senator Whitehouse. He can answer--
Senator Sessions. I think he--
Senator Whitehouse. I will give him a chance to respond.
But I do not want him to be in a situation where he did not
feel he had enough time to respond. I want--I think it is very
important that we in these committees get honest testimony
here, and I can turn this every which way but up, but when you
look at the actual balance between spending cuts and tax
increases that the OECD uses itself to describe what took place
in Europe, I cannot connect that to where you come out.
The closest that I can get is the pretense in your
testimony that there has been an increase in transfer payments.
The best I can tell from what we have actually seen is that you
say, in Spain, transfers are up 19 percent, in Ireland, 20
percent, in U.K., 12 percent, and in Estonia, 22 percent. As
best I can tell, those programs were not increased at all. What
happened is that the transfer payments went up because people
lost their jobs. People went broke. They had to go onto relief.
You are not improving the economy when you lose your job and go
onto relief. So if that is the way you have maneuvered these
numbers, I just do not think that is legitimate. I do not think
that is honorable. I do not think that is fair.
So, please respond, but I know that this is a contentious
subject. But now twice in a row, we have had Republican
witnesses say that austerity was really all about tax increases
and if you just lay off on the tax increases, we will not go
that way. And the OECD information is exactly the contrary.
They have actually done the math. It is their own information.
So when you cite to their information, I have a real problem
with that and I think the committee is entitled to an
explanation.
Mr. Furth. I would be happy to provide one. Very briefly, I
can address one of your concerns here very simply. As I stated
in my oral testimony, we do expect transfer payments to go up
in a recession. I did not claim that that was a change in
policy. I said that the fact that they have all gone up
indicates that there has not been brutal cutting. There have
been some cuts in some places. The ones, for instance, in
Greece, it has gone up not at all. And I mentioned in a
footnote in my written testimony that that does include
programmatic cuts.
Senator Whitehouse. So if a government scientist gets laid
off because of a spending cut and has to go onto a transfer
payment, as far as you are concerned, that is not a harmful
situation.
Mr. Furth. That is not what I said.
Senator Whitehouse. I have gone beyond my time.
Senator Sessions. Well, if the witness would like more
time, I think he should be given it. He simply said that the
spending went up. It was not reduced. The spending went up by
the government. But maybe--you have been very harsh and I think
he deserves an opportunity to have a little time to respond to
your long discussion.
Senator Whitehouse. I am happy to have him have that time,
but I do want to get this in writing and get this sorted out
because I just--
Senator Sessions. Well, it is--
Senator Whitehouse. --think it is very important that we be
given proper, honest data, and I cannot for the life of me
correlate the presentation that this witness has made with the
data that the OECD itself has put out in very clear terms--69
percent, 67 percent, 53 percent, 44 percent--
Senator Sessions. Well, the time is up--
Chairman Murray. Dr. Furth--
Senator Sessions. --but I would just say this. You are
raising--you have raised this point. It is a fundamental point,
I acknowledge it. What do we do to create growth and get our
debt under control? Is it just raise taxes or is it reduce
spending? So this is a fundamental issue and it is important.
Chairman Murray. Dr. Furth, I assume that you will respond
to this committee in writing.
Mr. Furth. I would be happy to do so.
Chairman Murray. Okay.
Senator Sessions. Well, I would just--he had less than a
minute against about eight minutes, so if he had any more to--
Mr. Furth. I do not think that the tenor here is conducive
to having further productive discussion.
Chairman Murray. Okay, Dr. Furth. Then we will look forward
to your response in writing. Thank you.
With that, we have one final questioner, Senator Wyden. I
do have to get to the floor. I am going to turn over the gavel
to Senator Wyden for his final comment. At the close of his
comment, this hearing will close, and I just want to remind all
of our colleagues that additional statements from today's
hearing are due in by 6:00 p.m. today. And I do truly want to
thank all of our witnesses for coming, for your testimony. I
think this has been a very productive session. Thank you very
much, and Senator Wyden.
Senator Wyden. [Presiding.] Thank you, Senator Murray.
Dr. Summers, as you know, the flip side of austerity is
growth, and you have had a lot of important papers and comments
over the years with respect to consumer demand and particularly
consumer demand in our economy. And as you know and have
written, consumers are responsible for about 70 percent of the
economic activity now in our country.
You look at the numbers that we saw last month, which were,
by and large, pretty encouraging, you know, housing starts, the
employment numbers. But one that was a little troubling was
that question of the consumer being, again, a little bit
tentative in terms of their spending.
One area where we made some bipartisan progress on has been
in the tax reform area as part of the legislation that I have
had over the years with Senator Gregg and Senator Coats, in
particular. We have had bipartisan support for approaches that
could really help us grow the economy by stimulating demand,
particularly by tripling the standard deduction for middle
class people, so that, in effect, if you had $60,000 in annual
income, we would put $30,000 off limits from the taxation side
and so middle class people would get some serious tax relief,
and we have been able to offer that in a bipartisan way.
Could you spend a minute or two outlining some of the other
areas where you think it might be possible as we kind of
compare austerity and the growth that you have talked about,
which is a view I happen to share strongly, what are other
possibilities that we ought to be looking at in order to
particularly bring that middle class person back into the
economy, buying the goods and services that, as we know in
America, lift a lot of boats?
Mr. Summers. Senator Wyden, I think there is a legitimate
question that does have to be faced, which is given the
increased pressures that will come on the Federal budget,
increased pressures that will come because of an aging society,
increased pressures that will come because whatever the merits
of any past debate, we have accumulated more debt, increased
pressures that will come because the relative price of many of
the things that government buys--I think, for example, of
health care and higher education--has increased very
substantially compared to the price of other things in the
economy--I think of a television set or a personal computer--
and so for all those reasons, we are going to face a
substantial pressure on the scale of the Federal budget. And I
am not sure that we can afford as a country large-scale tax
cutting, whether it is oriented to the middle class or whether
it is oriented to some other group.
And so I very much believe that tax reform has substantial
potential, but I believe that the best tax reform would be
either revenue neutral or, ideally, would provide for some
revenue increases.
Senator Wyden. The striking part about it, Dr. Summers,
because we have had it scored, the initial bill has been scored
as revenue neutral. What you do, though, is when you eliminate
some of those special interest breaks and come back to target
to the middle class people, the fact that we get them back into
the economy, buying the goods and services--
Mr. Summers. I think if--
Senator Wyden. --remodel jobs and the like, that is what--
Mr. Summers. I think, if we are successful in identifying a
range of special interest provisions and subsidies that should
be scaled back, then there is a question as to what to do, and
I think that an attractive part of the strategy could be yours
of supporting the middle class families through reductions in
the standard deduction. Alternative approaches, which I think
also have merit, would involve reducing marginal tax rates,
which might also have incentive effects.
But I very much share your view that part of propelling
consumer demand here is going to be making sure that anything
we do is fair and equitable in the sense of having its benefits
concentrated on the middle class where the propensity to spend
is likely to be greatest.
Senator Wyden. No, your point is very well taken, and
obviously, in this kind of fiscal climate, you cannot just
promise and promise some more and not have a revenue source,
and that has been the point of what a number of conservative
Republicans have worked on with me over the last five years.
And I think what I would like to do, because you are
writing and your recent work has been so helpful on this point,
is why do we not hold the record open and I would like to get a
sense, because I thought that tax reform was a possibility,
well-targeted transportation initiatives--as you know, we had
the Build America bonds program that came out of the Finance
Committee, all worked with us on that for many, many months--I
would just like to hold the record open--
Mr. Summers. I will submit something in writing with a
longer list of growth-promoting programs.
Senator Wyden. Very good.
As per Senator Murray, we are now adjourned, and--
Senator Sessions. Could--
Senator Wyden. I think, Senator Sessions, I was not here
for the previous discussions. Senator Murray indicated that we
are adjourned. I am going to stick around and visit with you
privately. Thank you.
Senator Sessions. Very good. All right. Thank you.
[Whereupon, at 12:11 p.m., the committee was adjourned.]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
INVESTING IN OUR FUTURE: THE IMPACT OF FEDERAL BUDGET DECISIONS ON
CHILDREN
----------
WEDNESDAY, JUNE 26, 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, Whitehouse, Kaine, King,
Sessions, Crapo, and Johnson.
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 come to
order.
Let me just say that my Ranking Member Senator Sessions
will be joining us shortly. He is on the floor, and I want to
thank him and all of our members who will be joining us off and
on throughout this Committee hearing today, as well as the
members of the public who are here and all those watching
online.
I particularly want to thank our witnesses today. We have:
Bruce Lesley, president of First Focus; Margaret Nimmo Crowe,
the acting executive director at Voices for Virginia's
Children; Shavon Collier, a parent from the Edward C. Mazique
Parent Child Center, and her daughter, Sakhia Whitehead, who is
with her today; and, finally, David Muhlhausen, a research
fellow in empirical policy analysis at the Heritage Foundation.
Thank you all so much for being here for this important
conversation.
As I have often said, despite what you sometimes hear
here in Washington, D.C., our budgets are about a lot more
than abstract numbers and political winners and losers. They
are about our country's values and priorities. And they are
about our visions for how Government should be serving its
citizens today and for generations to come.
As we move forward with our budget negotiations, it is
critical that we keep in mind the individuals and families
across the country who are impacted by the decisions that we
make. Their values and priorities need to be represented, and
their stories need to be told. And there is one group in
particular whose voices are not heard often enough when it
comes to the Federal budget process, and that is our Nation's
children.
They may not be walking the halls of Congress--or calling
up their Senators--or strategizing with lobbyists about how to
protect funding for their programs; but they deserve a seat at
the table, even if they need a booster seat to get there.
As First Focus noted in a recent report, our Federal
Government funds over 180 different children's programs, from
health care, to education, juvenile justice, and nutrition.
Their analysis found that spending on children makes up about 8
percent of the Federal budget. So I am glad we are having this
important discussion today about a key group impacted by the
budget decisions we make here in
Washington, D.C., especially because, in recent years,
children have been particularly affected by our economic
conditions and our fiscal policies.
In the wake of the Great Recession, millions of families
lost their jobs, their homes, and their livelihoods, and the
most vulnerable among us, including our children, were among
the most impacted. And now, at a time when our economy is
recovering, but far too slowly, and when too many American
families are struggling with unemployment and underemployment,
the automatic cuts of sequestration are hitting children and
their families hard in communities across the country.
They are being asked to bear a large share of spending
cuts, despite the fact that children clearly did not cause our
debt and deficit challenges. And I think that is just simply
wrong. In fact, I think it is a national embarrassment and we
need to fix it.
We cannot and should not solve our debt and deficit
problems on the backs of our children. It is wrong for our kids
and it is not good economic policy.
Our children are the next generation of scientists,
teachers, inventors, and leaders. If we cut out investments in
them, we diminish our ability to lay down a foundation for
long-term growth and prosperity and risk our position as a
global leader in the 21st century economy.
When I worked with my colleagues on this Committee to write
the Senate Budget that passed just 2 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 for years to come. And I cannot think
of anything more critical to that goal that protecting our
investments in the next generation.
As a former pre-school teacher, I know that investments in
our children are some of the smartest the Federal Government
can make with some of the highest return on investment,
especially when it comes to early childhood education.
Just ask Shavon, who is here with us today, about her two
children who have been on the honor roll since graduating from
their Head Start program. Or the single parent that I met at a
Head Start facility in Seattle earlier this year. He was able
to enroll his young daughter in Head Start, and the results
were incredible. Within just a few weeks, he told me, she was
more engaged and eager to learn.
Children in high-quality early education programs are less
likely to be held back in school, require special education,
engage in criminal activity, or use social safety net programs
later in life. They are more likely to graduate from high
school and have higher earnings as adults.
So if you are looking for an investment that is going to
pay off, quality early childhood education is one of the best
places you can put your money. We should be investing more in
our children, but sequestration right now is really taking us
in the wrong direction.
Hundreds of thousands of children across the country will
lose access to these vital Head Start programs if those
automatic cuts continue. For those reasons, and for 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. It prioritizes education, including
expanding early learning programs, so that we are not unfairly
hurting the children that we should be investing in.
The House Republican Budget takes a very different
approach. It does not simply accept sequestration; it makes it
worse. In order to keep defense spending at the pre-sequester
level, it simply shifts the entire burden of the cuts onto
children, families, and communities.
Their recently released spending levels for education
programs come in at 18.8 percent below sequestration levels.
And that does not make sense to me. In fact, I think it is
pretty shameful.
As Secretary Arne Duncan, who testified in front of this
Committee last week, said, and I quote, ``America cannot win
the race for the future without investing in education.''
We should be investing in and supporting our future leaders
so that we can compete and win in the 21st century economy, not
slashing funding for programs that help them learn and grow.
It is not just education either. We need to make sure that
our kids are getting other kinds of support they need to grow
up to be healthy, successful adults.
I know firsthand what a huge impact a strong safety net can
have on children when their families fall on hard times,
because when I was growing up, my dad was diagnosed with
multiple Sclerosis; he had to stop working. My mom, who had
stayed home to raise seven kids, had to take care of him, but
she also had to get a job so she could support our entire
family. She found some work, but it did not pay enough to
support all of us and a husband with growing medical bills. So,
without warning, our family fell on very hard times.
And I know that the support we got from our Government was
the difference between seven kids who might not have graduated
from high school or college and the seven adults we have grown
to be today, all college graduates, all working hard, all
paying taxes, and all doing our best to contribute back to our
communities.
Because our Government was there to help my family through
a very hard time, those seven kids grew up to be: a
firefighter, a lawyer, a computer programmer, a sports writer,
a homemaker, a middle school teacher, and a United States
Senator. I think that was a pretty good investment.
Now, I know my family is not unique. Similar stories are
told all over this country, from coast to coast, in small towns
and large towns. So it is critical that we maintain investments
in other key safety net programs, like those that provide
health care, nutrition, energy, and housing assistance to low-
income families and children.
That is exactly why our Senate budget builds on the reforms
of the Affordable Care Act, which mandates that children can no
longer be denied health insurance based on pre-existing
conditions and requires health insurance coverage to include
pediatric services.
And the Senate budget protects programs like the
Supplemental Nutrition Assistance Program and the Special
Supplemental Nutrition Program for Women, Infants, and
Children, which prevent hunger and malnutrition and provide
healthy food and nutrition education to children and families.
Our budget also increases funding for the Low-Income Home
Energy Assistance Program and protects housing assistance
programs to make sure all children have access to safe and
stable housing. Research has shown that children who have
access to programs like those during their formative years are
less likely to have health issues, go hungry, or be at risk for
developmental delays.
The across-the-board cuts of sequestration make deep cuts
to safety net programs, and the House budget takes those cuts
even further. If they had their way, low-income children would
be left more hungry and in less stable home environments, the
number of Americans without health insurance would rise, and
the most vulnerable families in our country would be put at
greater risk.
I do not think that is fair or right. These are exactly the
kinds of programs that are critical for our children,
especially those who are hit hardest by the economic recession.
Now, while I share many of my colleagues' goals of reducing our
debt and deficit and reducing our debt-to-GDP ratio over the
next 10 years, I do not share their beliefs that indiscriminate
cuts are the answer.
We cannot ask our children, especially our most vulnerable
children, to bear the burden of our spending cuts. The
decisions that we make today about our Federal budget policy
will have huge impacts on the next generation.
And to make the right choices for our children, I feel very
strongly that we have got to stop lurching from crisis to
crisis. The managing of our budget policy by crisis has not
worked; it needs to end. And that is especially true when it
comes to decisions that impact our kids.
We should not have to wait here in Congress until the last
minute to sit down at a table, find common ground, and work
something out. And that is why now that the House has passed
their budget and the Senate has passed ours, Democrats have now
gone to the floor 14 times to ask consent to go to conference
so we can work out our differences and come to a deal.
Democrats are willing to make some tough decisions to find
savings across the Federal budget, as long as it is done
responsibly and fairly. If we end up headed toward another
manufactured crisis this fall, the situation is only going to
be made worse for our children and grandchildren.
As a mother and a proud grandmother, I know that I want to
leave my kids and grandkids a better country than the one I
received. We owe it to all our children to come together to
find some fair solutions that help our economy grow and tackle
our deficit and debt responsibly--solutions that call for
responsible, sustainable spending cuts and that call on those
who can afford it most to pay their fair share.
America has always been a country that strives to build a
stronger country for the next generation, through investments
in infrastructure and innovation and education and research. We
know our future will be defined by the scientists who come out
of our schools, by the businesses that we create, and the
technologies that we invent. And that starts with investing in
our children.
And at the very least, right now it starts with replacing
sequestration and reversing the devastating cuts that are
hurting children across the country as we speak.
So I look forward today to hearing from our witnesses about
this important subject, and I really do appreciate all of you
coming here to testify.
With that, I will turn it over to my Ranking Member Senator
Sessions for his opening statement.
OPENING STATEMENT OF SENATOR SESSIONS
Senator Sessions. Thank you, Madam Chair. You have
firsthand experience in education, having been engaged as a
teacher in an elementary school and, I guess, a pre-school
teacher. You understand these issues.
I had one year of teaching sixth grade, but I learned a lot
about education during that. My wife was an elementary school
teacher, taught second grade, for a number of years. A lot of
our best friends are teachers and have taught throughout their
lives, and education is really important to us. So we are glad
you are here, and we want to see if we can do a better job of
utilizing the resources of the United States to improve
education in America.
I thank all of our witnesses, and I look forward to hearing
from you today. I am involved in the debate on the floor. We
will have some votes a little later, and I had to speak this
morning, and I came directly from there to here. I am sorry,
Madam Chair, to be late. I respect your time, and I am sorry I
could not be here at that beginning.
The impact of our present budgetary situation on children
is an issue that we need to talk about. What we have learned is
that over the years many of the programs that are intended to
help low-income children and others in poverty have not had the
positive impact we would like them to have. Indeed, the welfare
reform act of the 1990s was said to be most damaging to
children and others, but after it passed, poverty went down.
Children living in poverty were reduced, and we had some
positive advances from that, and it actually was done with less
cost to the taxpayers in the process.
America spends $1 trillion today on welfare and poverty
programs if you count the contribution that States make. Our
Federal Government is well over $700 billion a year for these
programs. That is larger than Social Security or our Defense
Department, yet poverty is now increasing. And so something is
wrong. We must start defining compassion and helpfulness, not
by how much money we spend but how many people we actually help
to remove themselves out of poverty, how many people we can
help be lifted out of poverty.
Of the $1 trillion spent on Federal welfare, there is $780
billion alone spent in the Federal budget on 83 different
programs that provide benefits for low-income families. That is
a great deal of money, and we need to ask ourselves and spend
some real intensive effort on how we can do better with the
money we are spending at a time of serious budget deficits.
Now, the sequester does impact certain programs, but
virtually all the larger welfare programs that provide benefits
to families with children are exempt from the sequester. They
are not being cut under the sequester. These programs include
the Children's Health Insurance Program, child nutrition
programs, the National School Lunch and School Breakfast
Programs, Medicaid, food stamps. All have no reductions in
their appropriations from the sequester. In fact, the sequester
will reduce welfare spending in 2013 by less than 1 percent,
about eight-tenths of 1 percent. And when we look at the
effectiveness of some of the programs under review, we discover
that even for the success stories that occur for individual
families and children, overall programs themselves too often
fail the children that they serve and do not produce the
benefits we would like them to produce.
The Department of Health and Human Services in December of
2012--produced a report in October, but they revealed it on my
birthday, in honor of my birthday--it just happened to be
Christmas Eve when people were not paying much attention to it.
Perhaps that was why they chose that date, not my birthday, to
release the report. But what it found was that after a thorough
evaluation, in December 2012, by the Department of Health and
Human Services under President Obama's leadership, they found
that the program does little to improve academic outcomes of
the children it enrolls. So that is something that ought to
cause us all to think. We have a great program. It spends lots
of money nationwide, and we have little academic improvement.
So we will hear today from those who will suggest that
programs like Head Start can help them to succeed, and I am
sure that is true. Many people have been benefitted from this
program. But, unfortunately, too often that is an exception.
So I encourage the exploration of ways to improve our
situation. I would note that good reading programs like in
Alabama based on scientific studies of reading actually improve
reading scores at the level the Nation has never seen before.
Other States are using that program. It does not cost much
money at all. It is just a different method of teaching.
I note today's AP story for Philip Elliott, U.S. tops
global list in spending for education: ``The United States
spends more than other developed nations on its students'
education each year, with parents and private foundations
picking up more of the costs than in the past, an international
survey released Tuesday found.'' So we are spending more--the
average in the OECD advanced nations is about $9,000 per
student. In the United States, it is about $15,000, counting
college, at the same level, the report says.
So the question is: Can we do more with the money we have
and get better improvement?
Thank you, Madam Chairman, for the expertise you bring to
this, and I look forward to the hearing.
Chairman Murray. Thank you very much.
We will now turn to our witnesses, and, Mr. Lesley, we will
start with you and just move across the table.
STATEMENT OF BRUCE LESLEY, DIRECTOR, FIRST FOCUS
Mr. Lesley. Thank you very much. I would like to thank
Chairwoman Murray and Ranking Member Sessions for holding this
hearing focused on the impact of Federal budget decisions on
children, and I would also like to thank Senator Johnson,
Senator Kaine, and Senator King for being here.
Chilean educator, poet, and Nobel Prize winner Gabriela
Mistral wrote: ``We are guilty of many errors and many faults,
but our worst crime is abandoning the children, neglecting the
fountain of life. Many of the things we need can wait. The
child cannot. Right now is the time his bones are being formed,
his blood is being made, and his senses are being developed. To
him we cannot answer `Tomorrow.' His name is `Today.'''
Certainly, there is a clear and personal aspect to her
sense of urgency. Parents and families are primary in the lives
of children. And yet there is also an imperative for a strong
public interest in ensuring children have the opportunity to
achieve their full potential and a prosperous future or we will
pay for our negligence.
So how are we doing? Last fall, First Focus and Save the
Children, at the behest of Senator Chris Dodd, sought to do a
comprehensive analysis by looking at a number of indicators
across all domains of child well-being. Although there is some
good news, including the fact that passage of the bipartisan
Children's Health Insurance Program in 1997 has helped spur a
dramatic drop in the number of uninsured children in this
Nation so that today 91 percent of our Nation's children now
have health coverage, a 47-percent reduction ion the uninsured
children in this country, the news for children is far from
positive across the board.
More than 8.5 million children lived in households where
one or more child was food insecure, 1,560 children died due to
abuse and neglect, and 1.1 million children were identified as
homeless. Our Nation has the second worst infant mortality rate
among industrialized nations, and a shocking 22 percent of our
Nation's children live in poverty. In fact, child poverty now
stands at its highest level in 20 years, and the effects of
child poverty are lasting and deeply damaging.
At the Federal level, it is often said that our Nation's
Federal budget is a reflection of our Nation's values and
priorities. If so, children are faring quite poorly. According
to our analysis in the soon to be released Children's Budget
2013, and on the first slide in the back of my testimony, it
shows that since a peak in 2010, total spending on children has
fallen by $35 billion after adjusting for inflation, a 16-
percent drop. Total spending on children has now declined for 3
years in a row. As a result, children now receive less than 8
percent of the Federal budget.
With respect to discretionary spending, where Congress
makes decisions every year, that has been cut by more than $11
billion, a drop of almost 13 percent. It is estimated that this
year alone sequestration will cut a total of $4.2 billion out
of funding for children, particularly in the areas of
education, early childhood, and housing.
Though sequestration is a major reason for the drop in
discretionary investments, it is making an alarming trend that
began several years earlier become worse. As a result of
sequestration, schools districts have been forced to lay off
teachers and drastically reduce support services to needy
students and students with disabilities. Some schools have
eliminated athletics and all extracurricular activities as well
as some bus routes, making it more and more difficult for
children to get to school. Head Start programs have had to
close weeks early or kick children out. One program in
Columbus, Indiana, literally held a lottery drawing to decide
which family would lose their seat. That is a contest no parent
wants to win.
If sequestration remains in place, the pain is only going
to get worse. As Chairwoman Murray noted, the House of
Representatives passed a 302(b) allocation for their
discretionary spending priorities that makes sequestration
worse. Compared to pre-sequestration levels, the House
allocations cut an additional 22 percent in the Labor, HHS
bill, where most discretionary investments for children are
made.
Over the long term, because of sequestration and other poor
policy choices, additional budget analysis by the Urban
Institute--and the Brookings Institution in the past--in their
report entitled ``Kids' Share 2012'' finds that: interest on
the national debt will eclipse our investments in children by
2017 and exceed investments in children by 50 percent by 2020;
and also, if things do not change, the share of spending for
kids as a share of GDP will drop by 24 percent over the next
decade.
Moving forward, there are dramatic differences in the
vision as to the extent of making investments or substantial
budget cuts to children's programs. First Focus has analyzed
both of the budget proposals that passed the House and Senate
and has found that the budget produced by the Senate to be far
superior for kids.
In every policy area, the Senate budget clearly places a
much higher value on America's children and protects
investments critical to them, while the House budget would make
enormous cuts. And in our testimony, we highlight some of those
impacts and various policy issues.
In addition to the recent Federal budget cuts, there are
dramatic cuts at the State level that are compounding the
problem, and some of those cuts both in early childhood and in
early education are also highlighted in our budget. In fact,
for the first time in decades, overall spending on public
education has dropped.
So how does the public feel about these trends? According
to recent polling, Americans are dismayed by our failure to
address the needs of kids. By a nearly 3:1 margin--56 to 20
percent--Americans believe the lives of children have become
worse over the last 10 years and are deeply pessimistic about
their future. The group most concerned was Republican women,
who believe that things have become worse over the last 10
years for children by a 74-10 percent margin.
Chairman Murray. Mr. Lesley, if you can wrap up.
Mr. Lesley. Wrap it up? Sure.
Chairman Murray. Unfortunately, we have votes at 11:30, so
I am trying to keep tight timelines.
Mr. Lesley. Absolutely.
As we look at the myriad of challenges facing children, it
is also important to examine whether funds are spent in the
most efficient way possible. In our testimony we highlight a
lot of the things--
Chairman Murray. And all of that will be put in the record.
Mr. Lesley. --about the positive impacts. So here just to
conclude, continued cuts from sequestration will only make the
numbers fall even further. With support so low and outcomes as
poor as they are, children should no longer be an afterthought
in Federal budget and policy decisions. Our children cannot
wait any longer.
Thank you.
[The prepared statement of Mr. Lesley follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Murray. Thank you very much.
Ms. Nimmo Crowe?
STATEMENT OF MARGARET NIMMO CROWE, INTERIM EXECUTIVE DIRECTOR,
VOICES FOR VIRGINIA'S CHILDREN
Ms. Nimmo Crowe. Good morning. Thank you so much for the
opportunity, Chairwoman Murray and Ranking Member Sessions and
members of the Committee.
Voices for Virginia's Children is a nonpartisan, privately
funded child advocacy organization in Virginia. We have been
working since 1994 with Republicans and Democrats, primarily at
the State level, to pass commonsense solutions for the problems
that face Virginia's children.
I would first like to give you a snapshot of how kids are
doing in Virginia. We are the Annie E. Casey Foundation grantee
in Virginia for the KIDS COUNT data, which just came out on
Monday, and this shows that we rank 11th in child well-being
overall in the country. That is consistent with the fact that
Virginia is eighth in per capita income. So you can see that,
relatively speaking, children are doing very well in Virginia,
and we are proud of that. And some of that is due to the action
of our previous Governors, as well as our current Governor--
Senator Sessions. Take a bow, Senator Kaine.
[Laughter.]
Ms. Nimmo Crowe. Senator Kaine, when he was Governor, put a
particular focus on pre-K. Senator Warner had a particular
focus as Governor on enrolling children in health insurance.
And both of those indicators, education and health, we have
improved in Virginia.
What is really worrying to us as child advocates in
Virginia is the child poverty rate. Although our economy is
starting to recover, the child poverty rate has been going up
every year since 2005. We now have 280,000 children in Virginia
who live below the poverty line, and the overall percentage is
15.6 percent, one in six kids. And that does not sound so bad,
but that masks the fact that there are areas of Virginia which
have a much higher poverty rate. Largely the rural Southside
and southwestern Virginia have a rate of one in four children
living in poverty, and in the relatively prosperous Richmond
region, the city of Petersburg has a rate above one in three
children living in poverty. So I just wanted to give you a
picture of what that is like in Virginia, and the reason that
we are so focused on the child poverty rate is because research
has shown that, long term, children who spend a lot of time in
poverty growing up have much poorer outcomes in terms of
chronic health problems, including mental health problems,
academic failure and dropping out of school, as well as they
are much more likely to have lower-paying jobs as adults.
So I want to make two points to you today about the effects
of the sequester and Federal budget on Virginia's children.
The first is that our economy is improving, but investments
in children are still below where they were at the beginning of
the recession. So this is despite the fact that we have more
children in poverty every year.
Lower investments in kids have a double effect on our
economy. They actually cut jobs currently for our current
workforce, and they mean that our workforce of the future is
not getting prepared in a way that they should be. I want to
give you two examples.
The Head Start Association in Virginia predicts that this
fall they will cut 112 jobs at Head Start programs and 647
children will lose their slots.
You also may not be aware that Virginia has the highest
number of students who are eligible for Impact Aid. This is for
primarily military children in Virginia. They predict $1.76
million in cuts from three school systems that have a large
percentage of kids in military families. Prince George County
school system is one of those. Since 2009, they have lost 41
jobs, including instructional staff, and this is while they
have gained 150 students in their school system.
The second point I would like to make about the sequester
cuts is that it is not just the cuts themselves, but those cuts
are compounded at the State level. I want to tell you what
Virginia's General Assembly has done over the last few years.
For the last two General Assembly sessions, on top of our rainy
day fund, the General Assembly has set aside $50 million to
hedge against the sequester cuts. On the one hand, this is a
very prudent thing to do. On the other hand, it reduces the
already diminished pot of general fund dollars by $50 million.
These are funds that go to K-12 education, social services, and
health care.
A very concrete way that this has affected kids in Virginia
is through the Early Intervention Program, which is part of
IDEA, the special education law. This serves kids 0 to 3 who
have developmental disabilities and delays. We are facing a 52-
percent increase in the number of children identified for this
service and a State funding gap of $8.5 million in the coming
year. We have been advocating very hard about this at the State
level, but we were still not able to make up that gap.
This affects kids like Tommy Mellett in Chesterfield, who
had a brain hemorrhage before he turned 6 weeks old. He has
been receiving physical therapy and occupational therapy to
recover from this brain injury. If we cannot find the State
funding to replace the dollars that are lost, his therapy is
going to be cut in half. Not only is this bad for him and his
family, but it is really shortsighted from a policy perspective
because one in five children who receive early intervention
services actually graduate from the program before they turn 3.
They never need money spent on them in special education. And
the remainder of those children catch up to their full
potential, whatever that may be.
So, in conclusion, I would just like to make the point that
the effects of the sequester are not hypothetical. They are
very real, where the rubber meets the road. And they are
affecting both our current and future workforce. We are very
alarmed by the cuts in the House budget that would come on top
of that, and we appreciate the fact that the Senate budget is
preserving those investments in children.
Thank you very much for your time.
[The prepared statement of Nimmo Crowe follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Murray. Thank you very much.
Ms. Collier.
STATEMENT OF SHAVON COLLIER, PARENT, EDWARD C. MAZIQUE PARENT
CHILD CENTER, INC.
Ms. Collier. Chairwoman Murray, Ranking Member Sessions,
and members of this Committee, thank you for holding this
hearing on investing in children and for the opportunity to be
here today. I want to tell you about my journey as a parent
with children who have graduated from a local Head Start
Program, the Edward C. Mazique Parent Child
Center here in Washington, D.C. I have one child in the
program currently and two who are Head Start graduates now
thriving in elementary school. You will also hear from my
daughter, Sakhia, today, an honor roll student at Garrison
Elementary School.
I found out about the Head Start program at the Edward C.
Mazique Parent Child Center through a friend of mine. I was
looking for child care for my daughter, but I could not find
any options that were affordable with my income. My daughter
was able to get enrolled, and I was able to continue working.
But not everyone I know has been so lucky. Because there are so
few affordable child care
options in Washington, D.C., there are 181 children on the
waiting list; and people are turned away throughout the year.
To put it in perspective, the Mazique Center serves 106 Head
Start children and 166 Early Head Start children.
The program is high in demand because it is more than just
a safe place for children while parents are at work; Head Start
provides comprehensive child health and development to get them
ready for kindergarten and lifelong learning. I could see the
impact quickly. After only a few months in Head Start, I saw a
tremendous gain in my children's learning skills and ability to
focus. They were learning new words, and the two who are Head
Start graduates were both able to spell by age 4. It also
helped my children build social skills. My son, for example,
was a bit withdrawn at the time, but after only a few months,
he was playing and interacting with his classmates.
In addition, the Head Start staff demands that parents are
invested in their child's education and have the tools at home
to provide the best possible learning environment. They also
helped me with developing a number of parenting and job skills
like public speaking, healthy cooking, reading budgets,
creating budgets, and how to best interact with my children. I
have served on the Mazique Center's Policy Council, and I am a
National Head Start Association board member. Without Head
Start I would not be able to be here and speak with you today.
After graduating the Head Start program, my two older
children arrived at kindergarten excited, prepared, and eager
to learn. They were much better prepared than many of their
classmates. Entering kindergarten already knowing how to read
and write, they were also able to sit in a group and focus--
something that is not easy for many of us, especially 5-year-
olds. Today they are thriving, building on what they have
learned and both still on the honor roll.
Head Start also helped to identify a developmental delay in
my youngest daughter when she was very small. I was able to get
speech therapy for her and the comprehensive services that she
needed. Now she is also spelling her name and speaking a lot
clearer than before. She will be ready for kindergarten, too,
and I have no doubt she will one day be an honor roll student
with her siblings. Without Head Start's ability to address a
wide variety of needs, I do not know where my child would be
today.
There are decades' worth of academic research that shows
how Head Start positively impacts the lives of children and
their parents. In fact, studies show that for every $1 invested
in a Head Start child, society earns at least $7 back through
increased earnings, employment, and family stability, as well
as decreased welfare dependency, health care costs, crime
costs, grade retention, and special education.
But I do not need these studies to tell me what I already
know--that Head Start has given me and my children an
opportunity to build a better life, and I am so grateful for
it. I hope this Committee will continue to support this
investment in our children. And now I would like to turn to my
daughter, Sakhia, for her own story.
[The prepared statement of Ms. Collier follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Murray. Thank you.
Sakhia?
STATEMENT OF SAKHIA WHITEHEAD, STUDENT, AGE 10, EDWARD C.
MAZIQUE PARENT CHILD CENTER, INC.
Miss Whitehead. Chairwoman Murray, Ranking Member Sessions,
and members of this Committee, thank you for inviting me to
speak to you today. My name is Sakhia Whitehead. I am 10 years
old and just finished fourth grade at Garrison Elementary
School.
I graduated the Head Start program at the Edward C. Mazique
Child Center 5 years ago, but I do remember how much I liked
it. I remember them teaching me how to read and write my name.
I also remember sometimes seeing the doctor there to get a
checkup.
Head Start helped me get prepared for kindergarten. When I
got to kindergarten, I already knew how to read and write. But
my new classmates did not. So kindergarten was pretty easy for
me.
I tell my brothers all the time how much I loved Head
Start. I tell them it can help them in school, because I know
it helped me to be the honor roll student that I am today. I
have been on the honor roll since I started elementary school,
and I am very proud of that. I want my brothers to follow in my
footsteps.
Today my favorite subject in school is math, which not many
people enjoy. But when I grow up, I want to be a teacher so
that I can continue to teach children like myself and help them
to succeed.
Thank you again for listening to me today.
[The prepared statement of Miss Whitehead follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Murray. Excellent. Thank you so much, Sakhia.
Dr. Muhlhausen.
STATEMENT OF DAVID MUHLHAUSEN, PH.D., RESEARCH FELLOW IN
EMPIRICAL POLICY ANALYSIS, THE HERITAGE FOUNDATION
Mr. Muhlhausen. Thank you. My name is David Muhlhausen. I
am a Research Fellow in Empirical Policy Analysis in the Center
for Data Analysis at The Heritage Foundation. I thank
Chairwoman Patty Murray, Ranking Member Jeff Sessions, and the
rest of the Committee for the opportunity today to testify on
the effect of sequestration on children. The views I express in
this testimony are my own and should not be construed as
representing any official position of The Heritage Foundation.
My testimony is based on my recently published book titled,
``Do Federal Social Programs Work?''
Two types of Federal social programs--early childhood
education and youth job training programs--are the focus of my
testimony today. Some argue that sequestration cuts the budgets
of domestic programs too deeply. For example, President Barack
Obama has claimed that over 70,000 young children will be
kicked off Head Start due to sequestration. The clear
implication is that 70,000 children will somehow be harmed by
not attending Head Start. This would be true if Head Start was
an effective program that benefits the children it serves.
Calling for more spending on programs may seem morally
compelling, but continuing to spend taxpayer dollars on
ineffective programs is morally indefensible. Using evidence
from scientifically rigorous evaluations of national programs,
my written testimony makes the case that real reductions in
spending on early childhood education and youth job training
programs will not produce harm.
I will begin by briefly reviewing the effectiveness of two
early childhood education programs. The first is Early Head
Start, a program that serves low-income families with pregnant
women, infants, and toddlers up to age 3. The results of a
multi-site experimental evaluation of Early Head Start are
particularly important because the program was inspired by a
local program previously thought to be effective. By the time
Early Head Start participants had reached age 3, Early Head
Start had beneficial impacts on only a few outcome measures for
child cognitive and socio-emotional development. However, by
the time these children reached the fifth grade, all those
effects had disappeared. The program had no lasting impact.
Perhaps the most well known early childhood education
program is Head Start. Head Start is intended to help
disadvantaged pre-school children catch up to children living
in more fortunate circumstances. The Head Start Impact Study
found that almost all the benefits of participating in Head
Start disappeared by kindergarten. Similar results occurred
when the children were assessed in the first and third grades.
Moving on to youth job training programs, the Federal
Government has spent decades trying to improve the earnings of
disadvantaged youth through various programs. While my written
testimony covers several youth job training programs, I will
focus on Job Corps.
In 2011, then Secretary of Labor Hilda Solis claimed that
``Job Corps program has a long history of preparing
disadvantaged youth for a successful transition into the
workforce.''
Fortunately, we do not have to rely on Secretary Solis'
personal opinion about the effectiveness of Job Corps. We have
a multi-site experimental evaluation. The evaluation found that
Job Corps participants were less likely to earn a high school
diploma; they were no more likely to attend or complete
college; and the ones that actually found jobs, they earned
only 22 cents more per hour compared to similar youth who did
not have access to the program. Job Corps does little to boost
the skills of job training participants.
While we all agree on the importance of children having a
solid foundation when entering school, this belief, no matter
how noble, does not change the fact that Federal early
childhood education programs have been found to be ineffective.
The same holds true for youth job training programs.
Thus, concerns over the effects of sequestration on
children are unwarranted. Reduced funding for ineffective
programs will not harm children because these programs largely
do not work in the first place.
Given the enormous amount of debt that Congress has
accumulated. reducing Government spending now will likely
decrease the financial burden that we are already leaving our
children.
Thank you.
[The prepared statement of Dr. Muhlhausen follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Murray. Thank you very much to all of our
witnesses. We are going to rounds of questions, and, again, we
have votes at 11:30, so I am going to hold everybody to 5
minutes here.
Let me just start with Ms. Nimmo Crowe and Mr. Lesley. You
testified a little bit about sequestration. I am very concerned
that this management from crisis to crisis has really put us in
a bad place and sequestration is really harming our young kids.
You talked a little bit, Ms. Nimmo Crowe, about the impacts of
that. You gave us some good numbers. Tell us a little bit about
how you see the effects of sequestration in the future if we
continue to take things away from kids today. You talked about
one child with disabilities and the costs later. Broaden that
out and talk a little bit about some of the other costs you
see.
Ms. Nimmo Crowe. Thank you. Well, I think that what we see
is that demand is going up. Certainly with the increase in the
number of children in poverty, the 52- percent increase in the
number of children identified as needing early intervention
services, the demand for the services that we are talking about
is not going down. And so if sequestration is to continue, it
does two things. It is whatever the percentage cut is that is
passed down to the States and to the localities, but it is also
going to be that ripple effect that State governments have. You
know, we have to balance our budget at the State level, and we
have to plan. Our sessions are short. We are not in session all
the time. So in January and February of every year, our
legislators have to make their best guess in terms of what is
going to be available for these programs in the future. And in
Virginia, we have a wonderful record of being very fiscally
conservative, and so we are going to hedge on the side of
pulling aside more money. And while that is smart on the one
hand, on the other hand we are pulling services away from the
very children who need them right now who are in front of us.
I think the other piece of that that comes out is the
difficulties that, you know, this is all very nice when we are
talking about it at a hypothetical level, but when you are a
local program that is trying to serve families in need and
children in need, it is very difficult to do your planning.
There is an example of an organization, a nonprofit
organization in Williamsburg and in James City County that
serves vulnerable young children and their families, Child
Development Resources. CDR was telling me about the juggling
act that they have where, 2 years ago, State funding was cut
for their evidence-based home visiting programs for vulnerable
families that are for health promotion and also child abuse
prevention and neglect prevention. And so those programs all
went away.
Then the Federal Government came forward with new home
visiting money, which is wonderful, and they have been able to
start up those programs again. But at the same time they are
starting up those home visiting programs, they are pulling 12
slots out from their early Head Start families, and their child
care subsidies vanished months ago.
So it is a constant juggling act. It is very hard to plan,
and vulnerable families are falling through the cracks right
now and we know will continue to do that if these cuts
continue.
Chairman Murray. And, Mr. Lesley, if you could just really
quickly, because I want to get to a couple other questions, and
I just have a short amount of time. For the record, if you
could give us your information, but just quickly in 20 seconds,
if you could tell me the top sequestration impact you have
seen.
Mr. Lesley. Absolutely. The big cuts thus far have been,
you know, we have seen the cuts in Head Start and these
lotteries and the loss of slots. But in the long term, we are
also seeing that there are now cuts in military education,
Indian health clinics--I used to work for Senator Bingaman, and
those are devastating in States with Native American
populations. And then in the fall, we are going to start seeing
those impacts on public education, and those are going to be
devastating, and because Federal money is predominantly to low-
income programs like Title I and other things, what you are
going to see is major disproportionate hits on schools that
have high need and low resources.
Chairman Murray. And if you can get that to us in writing,
I would appreciate it.
Mr. Lesley. Absolutely.
[The information follows:]
/ COMMIT
Chairman Murray. Sakhia, I just wanted to ask you really
quickly, thank you so much for your courage in coming and
talking to us. Do you think the extra help that you got early
on in Head Start would have assisted your classmates that you
see that did not have it perhaps be on the honor roll?
Miss Whitehead. May you repeat that again, please?
Chairman Murray. So you got the advantage of having Head
Start, and you are on the honor roll today. You have friends in
your class who did not get Head Start that you probably know.
Do you think Head Start would have helped them, too?
Miss Whitehead. Yes.
Chairman Murray. In what ways?
Miss Whitehead. Because I am on the honor roll, maybe I
could help them get on the honor roll.
Chairman Murray. Okay. Well, I really appreciate your
coming, and I just have a few seconds left. But, Mr. Lesley, I
just have to ask you--I am sorry. Mr. Muhlhausen, I read your
testimony and you criticized all of us in Congress who listen
to people at hearings who, in your words, and I quote, ``come
hat in hand'' and express their ``self-serving personal
opinions,'' and you question about personal observations or
experience being useful. I happen to think that as a
legislator, it really makes a difference when I go home and
hear from families in my communities about the impacts that the
Federal Government has on their lives, and I think it is really
important that we listen to those kinds of people. You just had
an opportunity to hear from two here, and I am just curious: Do
you think what we heard from Ms. Collier and Sakhia was not
worth it for us to hear today?
Mr. Muhlhausen. Well, when you look at the effectiveness of
programs, whether they work or not--
Chairman Murray. Do you want to turn your mic on?
Mr. Muhlhausen. --which are funded on a national level,
programs that are funded on a national level, the Federal
Government does not just operate a program in a single
location. It funds programs all over the country. And you have
to look at the national effect, whether these programs actually
work or not. And you can always find somebody who is going to
praise the program, but Congress never invites anybody to say,
``Well, you know what? I do not know if the program works or
not or the program does not work.'' Congress never invites
those people, because the idea is always they find people who
are going to praise the program and ask for more money--
Chairman Murray. But do you think--
Mr. Muhlhausen. --and right now we have a huge debt that we
just cannot afford.
Chairman Murray. Do you think the perspective of Sakhia who
lived through this program is important for us to hear?
Mr. Muhlhausen. Well, I think it is important, but you
cannot judge the national effectiveness of a particular program
based on one person's opinion. You need to look at the
scientific research.
Chairman Murray. Well, I would just say to you I am not
trying to judge the entire program. I just think when I go home
and hear people from all different kinds of walks of life,
which is what every member of the legislature does, and we have
the opportunity to hear from them today, it is important for us
to hear. So I just wanted to clarify that. I was kind of
offended by your remarks in your testimony.
Senator Sessions. Well, thank you, and thank you, Sakhia,
for your testimony, and I am glad you are doing well in school.
Congratulations and keep it up. We are not doing what we should
do in math, and you are particularly to be congratulated for
being good in that. And if you were a math teacher, you would
have a lot of people who would want to hire you to go to work
because we have a shortage of those in America today.
I am concerned--now, I will ask Mr. Muhlhausen and Mr.
Lesley this question--well, first, Ms. Crowe, with regard to
Virginia and the importance they placed on fiscal management,
your remarks talk about the danger of reductions in spending.
But based on your study, have you concluded that many of the
programs that are operating could be operated better, that
there could be better State-Federal coordination, that there
might be activities that could produce better results than the
current way we are doing it for even less money on occasion?
Ms. Nimmo Crowe. Well, I think that is a great question.
Thank you. I think that there are ways in Virginia that we are
looking at how programs are run. I think that is happening all
across the country. I think continuous quality improvement and
those types of initiatives are very important. I can tell you
that in Virginia we have been funding evidence-based home
visiting programs for a very long time, and I was just talking
about those. The new Federal funding that has come out, the
MIECHV funding for home visiting, includes very specific
performance targets for those programs that are getting the
funding. They can only go to particular areas that have a very
high level of need. We welcome that in Virginia. That is what
we have been doing.
I think we are looking at implementing coordinated care in
Medicaid in Virginia and ways that we have not in the past, for
example, in the behavioral health services. So I think there is
certainly always room to be looking at how these things are
working.
I think when it comes to being fiscally prudent and
responsible at the State level, it is always a balancing act.
And I do not pretend to have all the answers. I am merely a
child advocate. But it is my job to be here today to let you
all know that there are real consequences to these very
difficult decisions, and oftentimes I am the only one in the
room in Virginia who is pointing that out. So thank you for the
opportunity to do that today.
Senator Sessions. Well, I thank you, and Governors Warner
and Kaine and King work hard to deal with the budget issues
that they face. And I can say I think without being
contradicted that States are on a regular basis advancing new
and better ideas to get results for the amount of money they
spend. And the real truth is that the Federal Government is
just continuing the programs that we have, basically sending
the same money out. Maybe now it is going to be reduced some
because of our financial crisis. But I just want to say the
Federal Government, Madam Chair--and this hearing has some
potential for us. We need to see if we cannot do better with
the amount of money we spend, because the reality is we are not
going to have large increases, and the reality is that even as
a percentage of GDP, we are one of the highest nations in the
whole world on--I think only Denmark maybe has a higher
percentage of GDP on education than we spend. So we need to use
every dollar wisely and try to get the most bang for the buck.
I am concerned, and I think we need to think about-- maybe
I will ask Mr. Lesley and Mr. Muhlhausen to answer, just give
thoughts about it, because our time is short. This study that
was produced by Health and Human Services, not by an
independent group but their own Department, determined that by
the end of the third grade, regarding Head Start, there were
very few impacts. And in any of the four domains of cognitive,
social-emotional health, and parenting practices of children
granted access to Head Start during the period of the study.
And it ultimately found that few impacts were found that showed
a favorable or unfavorable impact on the children.
So I guess my first question is: We invest a lot in Head
Start. Can we make it better to get the improvements that we
would like to see in that area? Mr. Muhlhausen and Mr. Lesley.
And I do not have much time. I am sorry--
Mr. Muhlhausen. Well, I would say that one of the things--
you are talking about the National Head Start Impact Study, and
it really found that most of the cognitive benefits disappeared
by kindergarten. So the effect of the program quickly faded
away. And I am not sure if the Federal Government can run a
program effectively from
Washington, D.C. I would say that a more effective program
would let the States take the lead, let local governments take
the lead. Let them raise the money to run their programs and
have those programs live and die on the success the local
perceive or find their programs to be operating. I think that
is the best model. It allows for the greatest variation and
experimentation to find out what actually works.
Senator Sessions. Thank you.
Mr. Lesley?
Mr. Lesley. Thank you, Senator Sessions. I think it is
important to point out with respect to Head Start that the
numbers actually do improve in the short term, and there is a
fade-out in terms of standardized testing, but in a lot of
other areas, there is longitudinal data that shows that Head
Start has been very effective in terms of less use of special
education and, you know, graduating from high school, and in
the long term things like employment have also been very
positive effects of Head Start. And I also think we need to be
a little bit careful about drawing the wrong conclusions. In
terms of the fade-out, one of the things there is that in
elementary school there are interventions that take place, like
you had family members who are early education teachers, and
there is enormous investments also that the Federal Government
makes in terms of interventions. So while the Head Start kids,
you know, as our witness testified, come to school reading in a
better way, what happens is the kids that were behind then
catch up because there are these interventions in terms of
reading programs and other things.
So I think that the catch-up shows that Head Start works
and that then K-12 actually kicks in and there is some catch-
up. So the catch-up is an important thing to think about, and I
do not think it says that Head Start does not work. I think it
shows that Head Start worked and then K-12 then moves in and
takes it, you know, into effect and then catches people up.
Senator Sessions. Well, thank you, and we have an absolute
duty to serve the children effectively, and we need to make
sure every dollar we spend is wisely used to get a good result.
And I am confident we have a long way to go from our Federal
Government.
Chairman Murray. Senator Kaine.
Senator Kaine. Thank you, Madam Chair. And to the
witnesses, it is great especially to have Margaret Nimmo Crowe
here from Virginia. I appreciate your great work with Voices. I
have a comment and then a line of questioning.
I think the testimony of the witnesses--and maybe
especially the written testimony--sheds some light on one of
the challenges, Madam Chair, that we are having about trying to
get the Senate budget into conference with the House. And this
is not a comment about any of the members of this Committee. We
all worked on a budget, and we amended it, and we might have
voted yes or no. But when we passed it in March, I think it was
with all of our expectation that we would go into a conference
with a very different House budget.
Page 4 of Mr. Lesley's testimony and page of Ms. Nimmo
Crowe's testimony talks about some of the comparisons between
the House and Senate budget. And I think they really illuminate
why a handful of Senators do not want the budget in conference,
and that is not any of the members of this Committee. These
Committee members are not standing and trying to block that
budget from going into conference on the floor. But the handful
it is, I am convinced are trying to block the budget from going
into conference because the differences between the budgets,
especially on issues like this affecting children, are so vast
that they do not think the comparison will help their point of
view and their House colleagues.
But I am glad that you have illuminated those differences,
and I hope, Madam Chair, we might do some more things to
illuminate the differences if that blocking of conference will
continue. But, again, page 4 of Mr. Lesley's testimony and page
2 of Ms. Nimmo Crowe's testimony is helpful.
Ms. Nimmo Crowe, you and then Ms. Collier talked about an
issue that I am really interested in, which is the reduction of
funding for young kids with developmental delays, what that
means. The reduction of funding to focus on children with
special needs has an immediate effect on those children, and we
are seeing those reductions very sizably based on sequester;
and if the House budget were to go into effect, they would have
a significant effect as well.
But both of you sort of from a statistical standpoint, and,
Ms. Collier, from your own experience, you kind of shared the
notion that it is also sort of penny wise and pound foolish if
you reduce money for young kids with developmental delays, you
block their ability to get that assistance at a young age and
then basically get right back on the on ramp and be right where
the rest of their colleagues are.
I learned that again and again in working on early
childhood education issues in Virginia that just a little bit
of early intervention for youngsters who have a developmental
delay might mean years where they are not in special education
classes when they are in the K-12 system that is both great for
them and also saves us a lot of money.
So I would love it if you would each talk about it maybe a
little bit from the system standpoint. And maybe, Ms. Collier,
I will start with you. You just shared the story that, you
know, one of your youngsters was identified with a
developmental disability, and Head Start helped them get right
back on track when they moved to elementary school.
Ms. Collier. The child that we are speaking of, she is
still in Head Start, but she is reading--well, she is not
reading now, but she is spelling her name, and without the
services that she did get in Head Start, I do not think she
would be able to do that. She has gotten speech therapy and
also other therapy that helped her, and she is now on the level
that she should be with the services that she got in Head
Start.
Senator Kaine. And your feeling today is that when she
starts kindergarten she will be--
Ms. Collier. She will be ready.
Senator Kaine. First, at a level with her colleagues, but
in a place that she would not have been had she not had that
assistance and that diagnosis of the developmental--
Ms. Collier. Exactly.
Senator Kaine. Great. Thank you.
Ms. Nimmo Crowe?
Ms. Nimmo Crowe. And I would just add to that, we cannot
escape the fact that the first 5 years of brain development are
absolutely critical for children. And so when we miss that
window, we have missed a huge opportunity. And certainly the
types of disabilities and delays that children have in early
intervention run the gamut from horrible problems that are
never going to be fully remediated, but those children can
still live up to their potential to fairly minor but very
troublesome problems that can easily be corrected with a little
bit of physical therapy or occupational therapy that can then
get that child right back on track to where they need to be.
And you are exactly right, it is important to remember that
Part C, the Early Intervention Program, is part of IDEA, the
special education program. So at age 3, those children transfer
into Part B in the school system, and that is more Federal,
State, and local money that we are spending on those kids, and
that is the lifetime from age 3 until they graduate that we are
spending that we could have in many cases ameliorated right
before they turned 3.
Senator Kaine. Ms. Nimmo Crowe, I also appreciate about
your testimony, and you were talking with Senator Sessions
about this, that you are not coming and I do not view any of
you as coming to this Committee and just saying, hey, you know,
it is just all about more money. You are interested in the
management and the effectiveness side, too. You have a part of
your testimony about fragmentation of Federal funding and how
that can create gaps and inefficiencies in the system. We saw
that at the State level, too. We ought to be committed to
investing in our kids, and we ought to be committed to making
sure that the investments are done the best possible way. We
ought to be a culture of continuous improvement, always wanting
to be better tomorrow than we are today. And I appreciated that
your testimony offered us some ideas about how we can not only
invest the right amount but then get better about how we make
the investments.
Thank you, Madam Chair.
Chairman Murray. Thank you.
Senator Johnson?
Senator Johnson. Thank you, Madam Chair, and I want to
thank all the witnesses, particularly Sakhia. We are all proud
of you. You should be proud of yourself, and we certainly hope
that you go on to great things. We love the fact that you are
also interested in math. We need a lot of that. So, again,
congratulations.
We are a compassionate society. I think all Americans want
a strong social safety net. I think all Americans certainly
understand that education is vital and we have got to get the
kids and provide them a good education.
But to a certain extent, we are whistling past a graveyard
in terms of our financial situation in this country. We are
talking about sequester. It is part of the Budget Control Act,
which was, unfortunately, a minimal response to what is going
to be over 30 years maybe $100 trillion worth of deficit
spending. You know, my concern is if we do not address that, if
we do not impose that fiscal discipline on ourselves, the
markets will do it.
From 1970 to 1999, the average interest expense or interest
rate the Federal Government paid was 5.3 percent. We have been
paying about 1.5 percent. If we revert to that average, that is
going to add another $600 billion per year to our annual
interest expense. Of course, CBO is estimating we will be at
that 5.3 percent.
So, you know, Mr. Muhlhausen, I agree with you. You have to
look at the empirical evidence, and I have actually got the
last 4 charts in my PowerPoint presentation I give all over
America that kind of addresses this. So let us look at a little
facts and figures.
You know, again, America is a compassionate society. In the
mid-1960s, because we saw poverty rates too high, the number of
people in positive too high, quite honestly it had actually
been declining by the mid-1960s, but it was still too high, and
unfortunately, out-of-wedlock birth rates had gone from 4
percent in the 1940s and doubled to 8 percent. So, again,
America, very compassionate. We want to be able to help people
help themselves. We embarked collectively on what has turned
out to be a $16 trillion War on Poverty.
What were the results? Next slide.
We went from 23 million to 43 million Americans in poverty.
You can say, well, the population grew, so let us take a look
at poverty rates. They went from 12 percent to 14 percent. It
is varied--and, Mr. Lesley, you remarked that we are at the
highest level of child poverty today. Well, maybe, just maybe,
on that very last metric, maybe all of our good intentions
solved that problem. Let us check out--no, we went from 8
percent to 41 percent.
I think we have to start asking ourselves in this Nation
the very hard questions. Have all the spending, have all the
Government's intrusion into our lives, have they actually
worked? I think you can argue--I think you need to consider
maybe all of our good intentions have had some very harmful
negative consequences.
And I will tell you what. If we do not get our debt and
deficit under control--and sequestration is not a good way of
doing it because Congress refuses to prioritize spending. We
want to spend money on everything.
So, Mr. Lesley, I just want to ask you, do you acknowledge
the danger in terms of our budget deficit and how harmful $600
billion of additional interest expense would be in terms of
every Government program? Does that not concern you?
Mr. Lesley. Yeah, no, absolutely. In my testimony, I talked
about--I am sorry. In my testimony I talked about how interest
on the debt will actually exceed all Federal spending on kids
by 2017, so I do believe that deficit reduction is a children's
issue and something that is very important.
But I also note that what is happening is in these cuts,
the share of spending for kids--kids are 25 percent of the
population, and we are spending less than 8 percent of our
funding on them. And so when we do across-the-board cuts,
disproportionately those cuts are falling on kids. We exempt
other areas, and so--
Senator Johnson. Yes, because two-thirds of the budget is
off budget. It is on automatic pilot. It is not subject to
appropriations, so the only thing that Congress can have any
effect on is a very small slice, you know, a third of the
budget, $1 trillion, which is difficult.
Mr. Lesley. Right, which is disproportionately kids.
One chart in my testimony also to point to is on page 10 of
the appendix. In my testimony what we show is the poverty rates
for seniors from 1966 to 2010, and kids--
Senator Johnson. It has declined and poverty rates for--
Mr. Lesley. --have not. And it is the difference between
what Social Security means for seniors and what TANF does not
mean for kids. And--
Senator Johnson. Okay. Before I run out of time, Ms. Nimmo
Crowe, you are operating at the level that I think we really
ought to be trying to solve these problems, the State and local
levels. I would like you to just speak, you know, to your
concern about the Federal mandates and the costs that the
Federal mandates impose on the States. And how big a factor is
that in terms of the States trying to grapple with these very
serious issues?
Ms. Nimmo Crowe. Federal mandates on particular programs or
just across the board?
Senator Johnson. Education--well, it is across the board,
but particularly on education.
Ms. Nimmo Crowe. Well, I think that the Federal mandates
are certainly something that the States grapple with. What I
mostly hear, though, is frustration that there are mandates
coming down from the Federal level to the State level or the
State level to the local level without the appropriate funding
to go with them.
Senator Johnson. Because we do not have the money to fund
them.
Ms. Nimmo Crowe. Understandably. But it is a catch-22 if
you are the person stuck trying to implement whatever the
program is. So I think that that is certainly a concern. I
think that we need to look broadly. There are obviously some
decisions that have to be made, but I think Bruce is right that
when we look at the disproportionate share of the burden that
children are taking in terms of budget cuts, in terms of rising
poverty, those are facts that simply cannot be ignored.
Senator Johnson. Well, I have a great deal of faith in
individuals, in local governments, State governments, local
teachers, school administrators. We see the Federal Government
has not been particularly effective at it, so, again, thank you
for what you are doing, and, again, I thank all the witnesses.
Ms. Nimmo Crowe. Thank you.
Chairman Murray. Okay. The vote had been called. We have
two more Senators with time. Senator King?
Senator King. I will try to be very brief.
Mr. Muhlhausen, I am very interested in your testimony
because I, too, believe programs should work. And we are
spending the taxpayers' dollars, and we should be sure that
they are effective.
Do you believe that there is a possibility of an effective
pre-school education, early childhood education program?
Mr. Muhlhausen. I certainly do believe it. I just think
that it is hard for the Federal Government to implement an
effective program on a national scale. I think you can probably
find throughout the country some small-scale local programs
that are doing a wonderful job. But when you look at the
programs on a national level in the Federal Government and say
that--when the Federal Government created Early Head Start, it
was based on the Carolina Abecedarian Project at a small-scale
randomized experiment found to be effective. Well, we know that
Early Head Start does not work today. So the Federal
Government--
Senator King. Excuse me. Is it all Early Head Start
programs or is there a variation between programs?
Mr. Muhlhausen. Well, you are going to have a variation,
but when the Federal Government did an analysis of several
Early Head Start programs across the country, they found that
the program largely did not work. And so the Federal Government
has a lot of trouble scaling up local--
Senator King. But what I am trying to get at is what do we
draw from that: that programs cannot work or that this
particular one in the aggregate did not work, but where there
are successful ones--I am interested in improvement, not
elimination.
Mr. Muhlhausen. Well, it is very hard for the Federal
Government to take a small-scale program and blow it up on the
national scale and have it be effective. Since 1990 there have
been about 20 large-scale randomized experiments of Federal
social programs. Only one of those evaluations finds a positive
consistent effect, and that was welfare reform. All the other
job training programs, the early childhood education programs,
the various multitude of other programs that were looked at--
housing vouchers--all failed the test of being effective.
The Federal Government has a hard time taking an effective
idea done at the local level and blowing it up on the national
level.
Senator King. What if it simply provides funding and allows
the local levels to determine how the program worked?
Mr. Muhlhausen. Well, I think in many cases the Federal
Government is doing that, and the problem is that when we
assess the--we need to assess the effect of whether it works or
not. We need to actually go in there and evaluate it and see if
it works. And there are far too many programs today that are
operating that do not get assessed. We maybe have some real
good programs that we do not know about because we have never
evaluated them. But the thing is, when we do do a national
large-scale evaluation of Federal social programs, we almost
always find disappointing results.
Senator King. But I get back to the idea of is the concept
good but the execution not good, assuming--I am assuming, by
the way, the validity of the study, and I think there are
questions about that study and what the more persistent grounds
are that do not necessarily get picked up in various kinds of
tests. But assume that if the--I mean, I cannot believe you
would testify that early childhood education does not matter.
Mr. Muhlhausen. Let me say--let me give you a good example
of a good concept. In the 1980s, Minneapolis experimented with
mandatory arrest for people who were committing domestic
violence. What they found in Minneapolis, Minnesota, was that
when they made a mandatory arrest, the offender was less likely
to commit future domestic violence crimes in the future.
Everybody was amazed. They replicated that policy across the
country. And when they evaluated it in other sites, they found
in some sites across the country the offender--and this is
horrible--said, well--he had some sick logic where he ended up
beating his spouse or girlfriend even more because he knew he
was going to get a mandatory arrest, and he was going to spend
the night in jail.
So a good idea that actually reduced harm in Minneapolis
did not work in other localities. So sometimes programs work
for specific localities because the circumstances are right.
The people who are running the program are the best at doing
it. The local conditions are right. So you are going to find
success. But taking that idea and dropping it into other
communities does not mean we are going to have the same
success. And sometimes we have failure.
Senator King. Let me make a general point I have made at
this Committee before. The problem with the debts and the
deficits is not Head Start. It is not Pell grants. It is not
the national parks. It is health care, period. The driver of
the Federal deficit over the next 25 years, with all these
charts that show it going up, is health care. And I said this
at a Committee before. Attacking Head Start when the real
problem is health care is like invading Brazil after Pearl
Harbor. We really should be talking about what is the real
problem driving Federal debts and deficits.
Now, having said that, I do not disagree that we need to
hold programs that we fund to a standard of effectiveness. And
I think we need to continue to study them and continue to try
to improve them. But to say because a study says we cannot find
a numerical result from Head Start, says let us forget about
Head Start, I just think defies common sense.
Do you have children, Mr. Muhlhausen?
Mr. Muhlhausen. No, I do not.
Senator King. Well, I have five children and five
grandchildren. You cannot tell me that all the hours I spent
reading to those kids when they were 1 and 2 and 3 years old
did not matter. I know it matters. Early childhood education is
probably one of the best investments we could make. The
challenge, it seems to me, is not to say we should not do it
but that we should do it better.
Thank you, Madam Chair.
Chairman Murray. Thank you very much.
And, Senator Whitehouse, you can wrap up.
Senator Whitehouse. Thank you very much, Chairman.
Let me focus on Job Corps for a second, and, Mr.
Muhlhausen, let me ask you about your testimony. About three-
quarters of people who enroll at Job Corps, when they get
started, before Job Corps kicks in, when they show up, when
they first enroll, about three-quarters of them are high school
dropouts. On average, they read at an eighth-grade level. Most
have never had a full-time job. Do you believe that when a
child first shows up at Job Corps they are facing more
challenges, equal challenges, or fewer challenges than their
peers?
Mr. Muhlhausen. Well, I think they are facing a lot of
challenges, but--
Senator Whitehouse. A lot of challenges, right?
Mr. Muhlhausen. Well, the research that I use in my
testimony took Job Corps applicants who wanted to participate
in the program. They all had similar backgrounds. They randomly
assigned some of the students, some of the kids to be in Job
Corps, and other students could not be in Job Corps. Then they
looked at the success, whether the program worked--
Senator Whitehouse. But you will concede--
Mr. Muhlhausen. --and they found the program does very
little.
Senator Whitehouse. You will concede that a child showing
up for Job Corps is in a different set of--facing a different
set of challenges than their age group peer?
Mr. Muhlhausen. Well, when I say ``peer,'' when I think of
peer, I mean a similar--
Senator Whitehouse. Well, I am asking the question--
Mr. Muhlhausen. --someone with a similar background.
Senator Whitehouse. --so that the way I say ``peer,'' which
means that their peers in their age group, the common
definition of the word.
Mr. Muhlhausen. All right. But when you look at
effectiveness, we are comparing them to kids with similar
socioeconomic backgrounds.
Senator Whitehouse. I am not asking you about
effectiveness. I am asking you about--
Mr. Muhlhausen. Well, of course.
Senator Whitehouse. --this question.
Mr. Muhlhausen. That is why we have the programs for
disadvantaged kids.
Senator Whitehouse. Bingo. And when you describe Job Corps
participants in this data, you are including folks-- the kids
who never made it through Job Corps, correct? You are counting
the ones who washed out and did not complete the program?
Mr. Muhlhausen. No. We are counting kids who were not
granted access to the program. It was a randomized experiment
where--
Senator Whitehouse. Now, when you say somebody is a Job
Corps participant--right?--you are included people who
participated but did not complete the program. Correct?
Mr. Muhlhausen. I am talking about--when I saw Job Corps
participant, I am talking about individual kids who participate
in the Job Corps evaluation--
Senator Whitehouse. But did not necessarily complete the
program, correct?
Mr. Muhlhausen. I would have to get back to you on that.
Senator Whitehouse. Okay.
[The information follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Senator Whitehouse. Ms. Nimmo Crowe, you did not talk about
Job Corps in your testimony, but I suspect you deal with it in
Virginia. Do you have any thoughts about how Job Corps works
for kids who face it? And, by the way, greetings from Elizabeth
Burke Bryant of Rhode Island, who is your colleague at Rhode
Island KIDS COUNT.
Ms. Nimmo Crowe. Thank you.
Senator Whitehouse. We love her and her program.
Ms. Nimmo Crowe. Thank you. She does an excellent job. I
would love to tell you that I did know something about Job
Corps, and I am sure that we have it in Virginia, but I
personally have not had any experience with it, so I cannot
answer that question.
Senator Whitehouse. Mr. Lesley?
Mr. Lesley. We do a little bit of work on that, but it is
not--I could get back to you in writing with some--to answer
your question.
Senator Whitehouse. I think it would be helpful to have a
more balanced record on this.
Mr. Lesley. Absolutely.
Senator Whitehouse. Thanks very much.
I think we have to leave for the vote, so I will yield back
my time.
Chairman Murray. We do. Thank you very much.
I want to thank all of our witnesses for being here today,
Sakhia, especially you. You did a great job, and I think we owe
her a round of applause.
[Applause.]
Miss Whitehead. Thank you.
Chairman Murray. As a reminder to my colleagues, additional
statements or questions for any of the witnesses from today's
hearing are due in by 6 o'clock today to be submitted to the
Chief Clerk, and with that I will call this hearing to a close.
[Whereupon, at 11:47 a.m., the Committee was adjourned.]
THE IMPACT OF SEQUESTRATION ON NATIONAL SECURITY AND THE ECONOMY
----------
TUESDAY, JULY 23, 2013
United States Senate,
Committee on the Budget,
Washington, D.C.
The Committee met, pursuant to notice, at 10:32 a.m., in
Room SD-608, Dirksen Senate Office Building, Hon. Patty Murray,
Chairman of the Committee, presiding.
Present: Senators Murray, Whitehouse, Warner, Kaine, King,
Sessions, Crapo, and Wicker.
Staff Present: Evan T. Schatz, Majority Staff Director; and
Eric M. Ueland, Minority Staff Director.
OPENING STATEMENT OF CHAIRMAN MURRAY
Chairman Murray. This hearing will now come to order, and I
want to thank my Ranking Member, Senator Sessions, and all of
our colleagues who are joining us here for this Committee
meeting with me today.
I also want to thank all of our witnesses: Bob Work, who is
CEO of the Center for a New American Security; Mark Klett,
president and CEO of the Klett Consulting Group; Jennifer
Green, a secretary at Madigan Army Medical Center in my home
State of Washington; Baker Spring, F.M. Kirby Research Fellow
in National Security Policy at the Heritage Foundation; and Tom
Donnelly, co-director of the Marilyn Ware Center for Security
Studies at the American Enterprise Institute. Thank you all for
coming today and joining us for this very critical discussion
on the impact of sequestration on our economy and our national
security.
Sequestration is having serious impacts across the Federal
budget, but today we are going to focus on the automatic cuts
and future spending reductions that impact defense spending
specifically.
As the daughter of a World War II veteran, I believe we
have a sacred obligation to keep the promises we have made to
our men and women in uniform. They deserve our support while
they serve, as well as when they come home.
But, unfortunately, the indiscriminate cuts from
sequestration are threatening our fragile economic recovery, as
well as our national security.
At a time when too many Americans are struggling to find
work, civilian defense employees are being furloughed, and
small businesses are struggling to stay afloat, our economic
recovery and our military preparedness is suffering.
While I believe there are responsible spending cuts to be
made in defense programs, the current across-the-board cuts and
future arbitrary spending reductions over the next 8 years as
part of sequestration are not the answer.
Especially during this time of global uncertainty, we need
to maintain a strong national defense that allows us to meet
today's international threats and be prepared for those of the
future. And we need to be investing in job creation and long-
term economic growth--not causing furloughs that in turn hurt
our families and the economy, as well as small businesses and
service members alike across our country.
Defense sequestration is hurting small businesses like Mr.
Klett's, who is here today, which does work on critical areas
like cyber security and the new aircraft carrier. As he will
tell you, his company has lost a substantial portion of its
income and has been forced to lay off 30 percent of their
staff. He has even reduced his own salary so he is now one of
the lowest paid employees in his company in order to keep his
workers on the payroll as long as possible. Even though his
company is a service-disabled veteran-owned small business, and
even though they do work important to our national security
efforts, they are not protected.
Sequestration is also impacting people like Ms. Green. She
is dealing with furloughs and the loss of at least 20 percent
of her income for the rest of this fiscal year, while still
doing her own work as well as filling in for a second full-time
position in another department. On top of this, she is a single
mother and a full-time college student dealing with high health
insurance premiums, college costs that are not all covered by
her Pell grants, and daycare on the base for her son that,
because of sequestration, cannot stay open late enough.
Mr. Klett and Ms. Green, you are both sacrificing immensely
and doing your best to get through some very difficult times.
And we thank you and admire you for your determination and
really appreciate your being here today, especially Ms. Green,
who has come all the way across the country to share her story.
I hope that all of our colleagues take note of your
examples, because there are other parents, students, and
business owners struggling to make it through in every one of
our home States. And if sequestration continues next year,
there are going to be a lot more stories like the ones we hear
today.
Now, sequestration is not just impacting individuals and
their families. Those cuts will also have a serious national
and international consequence if they are allowed to continue.
Earlier this month Secretary Hagel sent a letter to the
Armed Services Committee describing some of the expected
impacts if sequestration happens in fiscal year 2014 and DOD is
forced to cut another $52 billion. For DOD personnel, civilian
employees would face continued furloughs or layoffs, and a
hiring freeze would remain in effect. For military members,
involuntary separations, a freeze on promotions, and other
actions would be required.
Training, which keeps our forces the most capable in the
world, would see dramatic cuts. For instance, earlier this
year, the Air Force was forced to ground a third of its
squadrons. They just managed to redirect some funds to get
those squadrons flying again, but under a fiscal year 2014
sequester, that work would be undone, and an even larger
percentage of Air Force squadrons would be grounded.
Critical research and development of new tools to maintain
our technological advantage and better protect our service
members would also be cut dramatically--all while our
competitors around the world increase their investment to try
to reduce the advantage we now have.
Secretary Hagel stated that, if sequestration continues,
``The Department will have to make sharp cuts with far-reaching
consequences, including limiting combat power, reducing
readiness, and undermining the national security interests of
the United States.'' And he called on Congress to, ``Pass a
balanced deficit reduction package that the President can sign
that would replace these deep and arbitrary cuts in fiscal year
2014 and in future years.''
Secretary Hagel also noted that this kind of comprehensive
replacement would help not just DOD but many other agencies,
including those with a role in supporting our troops and
veterans. So I really hope that we can come together to address
this in a bipartisan way. It is simply wrong, and it does not
make sense, as our world remains a complex and dangerous place.
With the end of the war in Afghanistan approaching and the
rebalance to Asia beginning, this is not the time to allow
irresponsible defense cuts to impact our security.
In Secretary Hagel's letter he warned that if sequestration
remains in place for fiscal year 2014 and beyond, ``The size,
readiness, and technological superiority of our military will
be reduced, placing at much greater risk the country's ability
to meet our current national security commitments.''
Now, it is critical to understand that we are only just
beginning to see the impacts of these cuts. And as we all
remember, they were never intended to be implemented.
Sequestration was meant to be so terrible that both sides would
come to the table and compromise.
Democrats and Republicans spent a lot of time over the last
2 years talking about how devastating these cuts would be. A
number of our Republican colleagues traveled around the country
to talk about the ways that sequestration would ``hollow out
the military.''
And Republican members of this Committee joined Democrats
in saying that the cuts from sequestration should be reexamined
by Congress. But despite all of our efforts, and despite
Democrats' willingness to make some tough decisions to find
responsible savings to replace sequestration, we have not come
to an agreement yet. And if sequestration is not replaced, the
effects on our economy and our national security over the long
term will only get worse.
Cuts to other parts of our budget also make us less secure.
For example, our international trade not only helps the
economy, but it also creates stability around the world. But
sequester cuts to commerce and agriculture put that in
jeopardy.
Cuts to foreign affairs hurt critical work to build
stability, create good will towards America, and defuse
conflict. Ultimately, as experts like General Mattis have
testified, and as we will hear more about today, that retreat
from the world will make us more vulnerable.
House Republicans say they are adhering to the BCA with
their budget, but we all know they are doing the opposite and
replacing sequestration only for defense.
Senate Democrats, on the other hand, have said if we
replace sequestration for defense, we also have to protect the
Departments of Veterans Affairs and Homeland Security, the FBI
and other law enforcement agencies, and vital efforts to ensure
our competitiveness through investments in education,
innovation, and infrastructure from deep, unsustainable, and
often arbitrary cuts over the next 8 years.
Both the House and Senate appropriation allocations require
a replacement of sequestration to prevent another round of
across-the-board cuts.
So I hope my colleagues on both sides of the aisle are
ready to work together to address this and end this arbitrary
system that really hurts our prosperity, because we all know we
can replace these cuts with smarter choices that are better for
our national security and long-term growth, as well our fiscal
health.
And it should be clear that we need to work together to
invest in keeping America strong and secure and to keep the
promises we have made to our veterans that their country will
be there for them when they come home.
We owe it to the American people to come together around a
real and comprehensive solution to this problem that is hurting
our economy, is hurting our national security and our families
and communities. We cannot afford to keep these cuts around for
10 more years. And we cannot keep governing from crisis to
crisis.
I especially appreciate the views of members like Senator
McCain and so many others on the other side of the aisle who
have joined us in that simple request, that we return to
regular order, start a bipartisan budget conference, and work
together to tackle the challenges we face.
There is bipartisan agreement that sequestration is the
wrong way to cut spending, and a bipartisan agreement needs to
be made to fix it. So there is absolutely no reason for us to
get closer and closer to October 1st--and closer and closer to
another manufactured crisis--before we come to a solution on
this.
It is not going to be easy, but the families we represent
are looking to us to end the constant artificial crises and
political brinksmanship that is threatening our fragile
economic recovery and our national security, and work together
to replace sequestration responsibly.
So I am very glad that this Committee is having this
extremely important discussion today, and I thank all of you
for being a part of this conversation.
I want the members of our Committee to know that I am going
to have to step out. My THUD bill is on the floor, and I have
to manage that. Senator Warner has agreed to chair the
Committee in my absence, but I just think this is so important
and really appreciate everybody being here today. These are
critical issues, and we need everyone's perspectives. So I look
forward to this hearing and the testimony, and I will turn it
over to my Ranking Member, Senator Sessions, and I want to
thank Senator Warner for helping me out this morning.
Thank you very much.
OPENING STATEMENT OF SENATOR SESSIONS
Senator Sessions. Thank you, Chairman Murray. I know you
are always here first, but you also have a bill on the floor,
and you have to be there, so we fully understand that.
I join you in welcoming our distinguished panel to discuss
the impact of sequestration on our national security. It is a
very serious matter. We are here for reasons that I have a
different view of than the Chairman, and we have got to deal
with the realities of where we are. And I take it very, very
seriously.
The matters that we are facing today have been made
substantially worse by the fact that the President has blocked
defense planning to make this happen. Sequestration was passed
in August of 2011, yet this year, 2013, all the cuts occurred
in 7 months. And I asked General Dempsey, the Chairman of the
Joint Chiefs, just a few days ago at the Armed Services
hearing, how that happened and didn't it make it worse. He said
it did make it worse. And I said, ``How did that happen?'' And
he said, ``We were told basically from the White House not to
start planning and not to start phasing in the reductions.''
And I have heard from many people that the furloughs that may
be necessary to some degree could have been avoided in many
instances, but it was determined to do the furloughs, I
suppose, as a way to politically drive the issue.
So we have not done a good job of this, and I believe the
Commander-in-Chief of the United States of America has a high
duty. He promised in a debate during the last election that
this would not happen, and all he has proposed is eliminate
sequester and pay for it by raising taxes which is what we know
would not happen, and it is not going to happen. He raised
taxes in January $600 billion, but we agreed as part of deficit
reduction to reduce spending by $2.1 trillion in that Budget
Control Act.
So we have got a difficult situation, and we are not having
any leadership. I am beginning to wonder if the President is
not quite happy to see the Defense Department take this much
cuts. If he was sincerely worried about it, why isn't he
providing more leadership to confront it? I know a lot of his
supporters are quite happy to see the Defense Department take
these cuts.
In August, Congress and the President came to an agreement
that $2.1 trillion needed to be cut from our projected growth
in spending. And we must stick to that agreement. We need to
spread the spending cuts around. Under the agreement, spending
would increase from the then level of $37 trillion over 10
years to $45 trillion over 10 years rather than a projected
growth to $47 trillion over 10 years. Why then is there so much
intense turmoil about this issue?
First, it is important to realize that spending on national
defense is not the root cause of our financial difficulties.
Secondly, the Department of Defense has already contributed
to the Nation's deficit reduction efforts by cutting its
proposed spending by nearly $500 billion over 10 years to
accommodate the initial round of budget control caps.
So now, even before one considers the impact of
sequestration, we have defense spending that is lower as a
share of the budget and a share of the economy than it has been
in the past and it is continuing to go lower.
As a share of the Federal budget, just 17 percent of
Federal spending will go to defense this year. Just 50 years
ago, defense spending made up 46 percent of all Federal
spending. As a share of the economy, spending on defense will
average 3 percent over the next 10 years, which is down from
the post-World War II average 7 percent. 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 World War
II low of 2.4 percent of GDP.
Now, defense spending, which is already on the decline and
makes up only one-sixth of the entire Federal budget, is being
required to take another $500 billion in cuts due to the
sequestration provisions, and this drawdown is not occurring in
an era of peace and stability but a time that General Dempsey,
Chairman of the Joint Chiefs, has said is ``actually more
dangerous than the era we are just leaving.''
In fiscal year 2013, we saw $40 billion in across-the-
board cuts to national security spending, $37 billion of which
came out of the Department of Defense through the
sequestration. As a result, our troops and the men and women of
DOD's civilian workforce are paying a price. The uniformed
leadership of our military have expressed dire consequences on
training and readiness arising from these reductions.
General John Campbell, Army Vice Chief of Staff, said,
``The reality is that if sequestration continues as it is, the
Army simply will not have the resources to support the current
defense strategic guidance, and we risk becoming a hollow
force.'' Others have said the same, and I think that is an
honest evaluation.
As for the civilian workforce, we are all aware of the
budget pains they are personally feeling as over 650,000 have
received furlough notices, taking away 11 days of work from
July until the end of the fiscal year. These men and women, who
are critical partners for the troops, deserve better.
After two consecutive budget submissions from this
administration, with no credible plan to turn off
sequestration, we are headed on a dangerous path of an
additional $52 billion in cut for fiscal year 2014 and similar
cuts in subsequent years to the Department of Defense budget.
These reductions that Secretary Hagel has said would reduce the
size, readiness, and technological superiority of our military
need to be reexamined.
Next year will be the worst year as we deal with this for
sure. As we move forward, let us work together to stave off
these unwise levels of cuts to defense spending. It is
important that we hold to the reasonable reductions in the rate
of spending growth as set forth in the Budget Control Act.
However, Congress should modify the mechanism to ensure shared
sacrifices. Too many agencies were not required to tighten
their belts at all. They were allowed to continue to grow
without restraint.
It is time for the Commander-in-Chief to provide certainty
in the defense budget and explain the dangers of these large
defense cuts. The Commander-in-Chief should do that.
It is also time to examine the large protected programs
that have outpaced DOD in spending by many times. Food Stamps
have increased 4 times in just 11 years, from $20 to $80
billion, and Medicaid has increased at a rate nearly twice DOD
increases in recent years. Yet those programs and others were
not required to even minutely control their rate of growth.
It is time to adopt a balanced approach, as my colleagues
say, to deficit reduction. Remember, half these sequestration
cuts are falling on one-sixth of the Federal budget. That is
the Defense Department. They are having more cuts than anyone
else.
Chairman Warner, I am just looking at the numbers, and all
of us should--I hope you would join me in considering what is
happening. When they laid out the 5-year budget plan for the
Defense Department in fiscal year 2012, we projected to spend
$571 billion in fiscal year 2013. What actually occurred was
$495 billion was spending. That was $76 billion off the
projection. It was a growth path, but that is what was
projected. But it is even worse next year. Next year, we were
projected to spend $586 billion; whereas, the cap would bring
us down to $475 billion. So that is a $111 billion reduction,
and that is where we are hitting an unsustainable situation
that is just difficult to absorb. And if you look at the
numbers over time, they begin to go back up from next year. But
for the next 2 years, we are having a very serious, unwise
reduction in spending that does more damage than should occur.
Thank you.
Senator Warner. [Presiding.] Thank you, Senator Sessions. I
would simply add that while these cuts are remarkable on the
defense side, they are equal to some of the cuts on the
domestic discretionary side that took place even before the
BCA, and I will come back to that in my comments. But I would
like to get to this panel, because I think what we are going to
see is--I would say what Chairman Murray said. It is even
worse. Sequestration was set up to be so stupid that no
rational group of people would ever let it happen. Yet it is
happening. And I think we are going to hear from this panel
that this is stupidity on steroids and that we are going to
actually see that,in many cases under the guise of ``cutting
spending,'' we are actually costing the taxpayers more money.
So I am anxious to get to this panel. I appreciate everyone
being here.
Senator Sessions. Mr. Chairman, we will work with you to
see where we can find other areas that the budget can be
tightened, and I think that is the approach.
Senator Warner. And I have put forward some of those
approaches in past efforts, as you are aware, on both sides of
the ledger.
We are going to start with Mark Klett, who is from the
Commonwealth of Virginia. He was Small Businessman of the Year
back in 2011. He will speak to the questions of the effect of
sequestration to his business.
We are going to then hear from Bob Work, who is the Chief
Executive Officer of the Center for a New American Security,
and a former Under Secretary of the Navy. He will testify about
the strategic level impacts of sequestration.
Ms. Jennifer-Cari Green, who is a civilian employee from
Washington State, will talk about some of the direct impacts
some of these furloughs and others will have on her family.
Mr. Baker Spring, the Kirby Research Fellow in National
Security Policy at the Heritage Foundation, will talk about the
strategic impact of these cuts.
And, finally, Tom Donnelly, co-director of the Marilyn Ware
Center for Security Studies at AEI, will talk about the
strategic impact.
Mr. Klett, if you could start, and then we will go down the
line.
STATEMENT OF MARK N. KLETT, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, KLETT CONSULTING GROUP, INC.
Mr. Klett. Thank you, Senator Warner, and good morning to
all the great Senators here in the room today. It is a distinct
honor for me to be able to address you on this critical issue
of national security and our economy from a small business
perspective.
I have been in business for over 11 years. We have had some
very good growth years in our company, and I have got some
tremendous employees. Over 60 percent of our employees are
veterans. Most of them are subject matter experts. Most of them
have advanced degrees. We have developed a national resource in
our company where we do work in cybersecurity, information
assurance, and have worked on some very sensitive programs that
help our national security.
In the last couple of years, 2011, 2012--well, 2013,
because of the continuing resolutions, because of
sequestration, the funding and the planning just has not been
there that is needed on some of these critical programs. The
result is for the small businesses that are out there, as we
have--it is stop and go, it is herky-jerky, if you will, to try
to get the funding to keep personnel working.
In the last year, for example, I have had to put 30 percent
of my personnel, critical personnel, to programs not because
anyone wanted them to be there on the bench, but they have had
to sit on the bench and not be able to follow our model. The
best way to predict the future is to create it. We have not
been able to do that in some critical programs, in command and
control for cybersecurity. We have had to go in for 90 days to
120 days, come off and do it. And who pays for those folks to
sit on the bench? That comes out of our company overhead. And I
gladly pay that because they have bills to pay, and that has
reduced our profit margin, which I call ourselves a nonprofit
company anyways, although we are not, but that is what you have
to do. You have to maintain your people and your core
capabilities, because it is a national resource. And that is
what you do as a small business.
We do not have any pink paper in our company. Okay? There
are no pink slips.
Sequestration creates inefficiencies and delays.
Sequestration--and Senator Sessions very eloquently described a
whole bunch of numbers, a lot of percentages of things.
Sequestration only reduces our budget--or its intention is to
reduce our budget 2 percent. Two percent. But the majority, it
is defense and national security centric. Most of that 2
percent is in the Defense Department, as I think all of you
well know. So it is critical that it is affecting our national
defense and our national security. That is where most of the
cuts are. That means when we have large programs that cannot be
started or continuing, like building new aircraft carriers,
which we are intimately involved in, in integrating all those
systems, ensuring their information assurance programs are like
they need to be, doing some of the cybersecurity things that we
are intimately involved with in many programs, some of those
things are new. They cannot be funded or turned on when you
have to stop and you do not have a budget and you do not have
approval for appropriations. That is what a budget and a plan
does to make sure the appropriations start on 1 October. They
do not start on 1 October. This year they started in April.
Now, from April to September, now you have it.
What happens then? A lot of people have to sit on the
sidelines waiting for that money to drip out of the different
program offices so that people can do the work that needs to be
done. That is the process. And who gets hurt? Large companies,
mid-sized companies, and small companies--in all agencies. I am
not just talking DOD. All agencies. And then what happens, we
have not seen the impact of all that yet because the furloughs
just started. And we are going to see our economy go down. We
are going to see other things happening.
These are serious problems. I know you all work extremely
hard together to try to get a budget put together. I know you
all work very hard to try to do the jobs that you are trying to
do. But in business, it is all about relationships. If you do
not have relationships with other people--because no one
company can do everything, no one company can do all those
things. Work on your relationships with both sides, with the
House, and get things done. And that is what I do to be
successful, and I ask you all to do the same.
Thank you.
[The prepared statement of Mr. Klett follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Senator Warner. Thank you, Mr. Klett.
Mr. Work?
STATEMENT OF THE HONORABLE ROBERT O. WORK, CHIEF EXECUTIVE
OFFICER, CENTER FOR A NEW AMERICAN SECURITY
Mr. Work. Senator Warner, Ranking Member Sessions,
distinguished members of the Committee, thanks for the
opportunity to be with you today and speak about the potential
effects of sequestration.
It is hard to imagine improving upon the two opening
statements or Secretary Hagel's letter, so what I would like to
do is just try to put what is happening into context and
explain why sequestration could potentially be so damaging.
Sequestration is part of the fifth defense drawdown since
World War II. Each of the four previous drawdowns had their own
unique character, and this one will be no different. This
drawdown comes on the heels of the longest sustained defense
buildup since World War II.
In hindsight, Secretary Gates' efficiency effort during the
formation of the fiscal year 2012 budget was an attempt to get
ahead of the inevitable downturn that occurs after wars.
However, just as the efficiencies drill ended, the Department
was levied a last-minute $78 billion cut, which was
incorporated in the final fiscal year 2012 budget, and this
budget thus marked the start of the drawdown.
Now, preparation of the 2013 budget was focused on
accommodating the cuts that were addressed from the 2012 Budget
Control Act, which ultimately came to about $489 billion
apportioned over 10 years. I believe this effort was generally
well led and executed. The output, as outlined in ``Sustaining
US Global Leadership: Priorities for 21st Century Defense,''
published in January 2012, is in my opinion one of the more
cohesive and coherent documents published by DOD since the end
of the Cold War.
Now, this was followed by the year-long ``debate'' over
sequestration. We were told not only from the White House but
all of the signals from Congress and the Office of the
Secretary of Defense was that sequestration could and would not
happen because it was indeed stupidity on steroids. But as a
result, for better or worse, we did not plan, and it was
implemented, which will cause another $520 billion apportioned
over the next 10 years to cut.
So with this as background, what might be the effect? First
and foremost, for Congress, these cuts are certain to cause a
further alteration to our basic national military policy and
force-sizing construct. From 1993 through 2012, our stated
policy was to have a joint force size and ready to fight two
regional wars in overlapping time frames. This policy helped to
underwrite our conventional deterrent. However, ``Priorities
for 21st Century Defense'' announced a future joint force would
be sized to fight only one major contingency while
simultaneously denying the objectives of-- or imposing the
unacceptable costs on--an opportunistic aggressor.
Now, one might have expected this important change to spark
a serious debate in Congress because of its national security
ramifications. But it did not happen. In my view, right now
maintaining the policy we have now, fighting one major war and
denying an opportunistic aggressor, is the absolute minimum
requirement for a global superpower. But sequestration is
undoubtedly going to make this very difficult to achieve this
minimum standard. And if it could not, I would hope that
Congress and this body would carefully consider the strategic
ramifications.
Second, sequestration's associated defense cuts will likely
result in a less capable future joint force that is less ready.
The problem, in my view, is not necessarily about the overall
size of the cuts, however painful they may be. It is the
mindless way they are being apportioned. The problem begins in
2013. When the timing came late in the year, the services were
forced to cut maintenance, training, and slow buying parts.
This started a downward spiral in readiness that continues to
play out. This spiral will continue through 2014 and 2015 as
the Department's scrambles to hit the $52 billion sequestration
marks. Manpower is exempted from sequestration. And in any
event, in an all- volunteer force, you do not get savings in
the year that you cut the people primarily because you likely
have to buy them out or have early retirements, which may
actually cost money in the near term. This means that services
will inevitably have to go to research and development,
procurement and military construction, and all of these will
make the force less capable. But more problematically, they are
going to have to cut operations and maintenance further. The
cuts in 2013 will roll into 2014. The cuts in 2014 will roll
into 2015. We will continue to dig a very deep readiness hole.
What will happen is we will prioritize the forces that are
deploying, but all of the forces that back them up, our so-
called surge forces, will be less resilient and less ready,
which will be very problematic in the case of a crisis.
There is also not a lot of freedom of action for DOD. DOD
needs a BRAC. It needs to get a handle on personnel costs. It
needs to get a handle on health care costs. We need to be able
to give DOD those flexibilities.
Now, I have personally been involved in three drawdowns. As
a young second lieutenant in 1975, I arrived on Okinawa at the
very tail end of the Vietnam drawdown. I saw firsthand its
debilitating effects. I lived through the entire fourth
drawdown and started the fifth as the Under Secretary. My worry
is that what is the worse effect of sequestration is it will--
the readiness effects it will have in 2014 and 2015, and I urge
this Committee and Congress to at least give DOD flexibility in
those 2 years.
Thank you.
[The prepared statement of Mr. Work follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Senator Warner. Thank you, sir.
Ms. Green?
STATEMENT OF JENNIFER-CARI GREEN, SECRETARY, NEUROSURGERY AND
PLASTIC SURGERY SERVICES, MADIGAN ARMY MEDICAL CENTER,
REPRESENTING THE AMERICAN FEDERATION OF GOVERNMENT EMPLOYEES
Ms. Green. Mr. Chairman, members of the Committee, thank
you for the opportunity to testify today about the impact
furloughs at the Department of Defense will have on my family's
budget. My name is Jennifer-Cari Green. I am 26 years old. I am
the divorced mother of a 6-year-old boy.
I have worked at Madigan since 2007 where I serve as a
secretary for the neurosurgery service. I study full time at
Pierce Community College and hope to earn my associate's in
2014. My ex-husband does live in the area but was terminated
from AAFES in 2010, so his employment since then has been
intermittent and part-time, likewise with his parental
involvement and financial support.
My current budget is already stripped to bare bones, but we
have been making it. Before furloughs, my finances were already
such that I have to rent a small apartment in a not so great
part of town. The car I drive and rely on to get to and from
work, college, and my son's school or daycare is financed
through a loan with a relatively high interest rate. I pay
almost $360 a month for a 2011 Chevy Aveo. It is not a luxury
vehicle by any means.
I live without luxuries. I do not have cable in my home. I
do not go get my nails done or eat out frequently or any of the
things that people think of that they will have to cut back on
when times are tough. For my family, times have already been
tough for quite a while. My salary has been frozen for the last
3 years, and because of the hiring freeze at DOD, I have been
expected to do the work of two positions for over a year.
However, I have been able to provide a life for my son and
myself without depending on others or public assistance, and
that is something I have always been proud of.
I keep hearing 20 percent as the size of the pay cut that
11 furlough days creates when people talk about DOD furloughs.
But that is really a misrepresentation of what being on
furlough will mean for my household, and I am sure I am not the
only one.
Based on a furlough calculator distributed at work, I will
actually be losing 32 percent of my take-home pay because most
of the deductions from my paycheck do not change just because
my earnings go down. My take-home will go from $1,477 per month
to $1,008 at a 32-percent reduction. So I will be losing--or I
will be at least $215 short for monthly budget expenses that I
cannot control. I do not know where I will make up that cost at
this time let alone find room for anything extra. And by
``extra,'' I do not mean entertainment costs or gifts or
leisure activities. I mean car maintenance, medical
prescriptions, school supplies, household goods. This furlough
will likely cause me to slip below the line into poverty, and
it feels punitive, and I worry that it will make me become a
beggar. I am afraid that I will be forced to seek handouts,
Government assistance, or food bank donations.
I have attached a chart to illustrate the impact that the
furlough will be having on my budget. My gross will go down by
$580 per month. That is the 20 percent that everyone talks
about. The only reductions that go down with my salary are
taxes and FERS. Everything else stays the same. So everything
becomes a bigger percentage of my pay, and that is how I have a
personal loss that is greater than 20 percent.
Even before furloughs, I have only been able to save $25
per pay period for TSP, which is not enough to receive maximum
employer match, but it is what I can afford. So before
furloughs, I was not able to fully participate in FERS either.
I often hear people talk about tightening your belt. I
looked into dropping my medical insurance, but was told that I
could not do that in the middle of a plan year. I cannot get to
work without my car, and selling it for a cheaper car has other
costs associated with it. I cannot find less expensive child
care, although I have tried. I earn too much for my son to be
eligible for free or reduced lunch or food stamps. I already
declined to participate in employee- pay-all ``benefits'' like
vision and dental insurance. There is really very little I can
do to close the gap between what I earn and my expenses.
It is extremely difficult to come to work and to do justice
to this job, to care for our patients with the level of
compassion and concern and courtesy they deserve when you know
you do not even have enough money to buy bare necessities as a
working adult. To know that your efforts at being hardworking
self-reliant, and dependable are for naught, to know that you
had an implicit contract, a promise to receive a certain level
of pay for your work, and that you accepted a job under those
conditions, and then to spend all day away from your child,
struggling against seemingly impossible odds to meet a mission
and provide quality care in less time than seems fair.
To overextend yourself, to try to be helpful and as
understanding as possible, and to make the patients are not the
ones who suffer when so much of what determines their fate lies
far beyond your own control. And at the end of the day, you
still have to worry about whether or not your lights will be
shut off or if you even have enough gas to make it to pick up
your child and to take him home for supper.
And the mission only gets harder. Providing the type of
care we are expected to provide and indeed owe to our service
members and their families becomes almost impossible, surely
improbable. I am trying to--and pretending like it is not is
stressful.
Again, I thank you for this opportunity to testify. I ask
you to end the austerity budgeting that led to sequestration
and ultimately these furloughs. I am just one example of
hundreds of thousands of Federal employees whose lives are
being drastically damaged by these policies. We and service
members who rely on us are the victims of these budget
policies, and I ask you to remember that when you vote on
policies that make it impossible for us to support ourselves
and our families.
[The prepared statement of Ms. Green follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Senator Warner. Thank you, Ms. Green, for your story.
Mr. Spring?
STATEMENT OF BAKER SPRING, F.M. KIRBY RESEARCH FELLOW IN
NATIONAL SECURITY POLICY, THE HERITAGE FOUNDATION
Mr. Spring. Senator Warner, Senator Sessions, it is an
honor for me to testify before the Senate Budget Committee on
this pressing topic of the impact of sequestration under the
Budget Control Act of 2011, which is currently in effect, on
the ability of the Government to meet existing national
security requirements and, finally, its impact on the economy.
The views I express in this testimony are my own and should not
be construed as representing any official position of The
Heritage Foundation. With your permission, I will summarize my
testimony. I have made my full statement available to the
Committee pursuant to its rules, which the Committee may use as
it sees fit.
I believe Congress at this point realistically has three
options for future defense budgets. Unfortunately, all three
would impose significant damage on the Nation's defense
posture. This is because even the highest level of funding
among the three options would shrink the portion of the economy
committed to defense, shrink force structure, reduce the number
of people serving in the military, impose slower increases in
military compensation, reduce the scope of training and
maintenance, and deprive the military of significant portions
of the new weapons and equipment it needs. Most importantly,
the budget reductions would result in a military of
insufficient overall strength to meet the established security
commitments the Federal Government has made to the American
people and U.S. friends and allies around the world.
Let me go into the scope of these reductions under the
three options.
I think that the three options that are available to
Congress start with the Obama administration's fiscal year 2014
defense budget proposal: about a $100 billion reduction over 10
years from the spending caps imposed on defense under the BCA.
The second is something that is roughly equivalent to what
the Senate has approved in its budget resolution, which I
calculate as being in the neighborhood of a $300 billion
reduction over 10 years from the spending caps imposed by the
BCA.
And, finally, the sequestration level itself, which, as has
been pointed out before, is roughly $500 billion over 10 years.
For practical reasons, however, I am going to limit my
comparisons to the remaining period covered by the BCA-- fiscal
year 2014 through fiscal year 2021--because this is the best
means of comparison for Congress as it drafts legislation on a
defense program in the course of this year.
The following are the funding levels for the total defense
program under the three options for the 8-year period. That
includes overseas contingency operations and mandatory as well
as the discretionary.
Option 1 would be $4.865 trillion, Option 2 would be $4.684
trillion, and Option 3 would be $4.489 trillion.
Accordingly, Option 2 provides about 4 percent less for
total defense program than Option 1, and Option 3 provides
about 8 percent less than Option 1.
It is important to understand, however, that the defense
reductions have been going on for several years at this point.
Even Option 1 in 2014 is more than 11 percent below what the
Nation spent on defense in fiscal year 2010.
Let me speak about the economy here briefly.
Defense spending, like all Federal spending, imposes a
direct burden on the economy. On the other hand, it provides
essential indirect support for the economy both domestically
and globally by providing the secure environment necessary for
productive business activity. Further, as I described before,
defense absorbs a relatively small share of the economy, and
the share is expected to shrink in future years even under the
best of circumstances. Unfortunately, this does not stop the
critics of the defense program from asserting that the burden
it imposes on the economy is intolerably high, and they are
only too happy that the sequestration imposes a
disproportionately high share of funding reductions on defense.
This circumstance leads directly to the question: If
defense expenditures impose an intolerably high burden on the
economy, how is it possible to explain that entitlement
expenditures do not do so at an even much greater degree? In
reality, defense is not now and in the future will not become
the source of Federal Government's fiscal woes.
I believe that Congress needs to go back to square one,
which is to establish a strategy first defense program based on
the upcoming Quadrennial Defense Review, and through a
strategy-drive approach, arrive at the proper funding figures
which I think would be higher than all three of these options,
and if put in the proper context, allow for U.S. economic
growth.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Spring follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Senator Warner. Thank you, sir.
Mr. Donnelly?
STATEMENT OF THOMAS M. DONNELLY, RESIDENT FELLOW AND CO-
DIRECTOR OF THE MARILYN WARE CENTER FOR SECURITY STUDIES,
AMERICAN ENTERPRISE INSTITUTE FOR PUBLIC POLICY RESEARCH
Mr. Donnelly. Thank you very much, Senator Warner and
Senator Sessions. It is an honor to be here. I say that as
somebody whose previous congressional service was on the other
side of the Hill, so I will try to bury my House hostility
towards the senior body for a moment or two, if I may.
I would also like to deviate a bit from my prepared
testimony and try to bring together some of the themes that I
have heard in some of my colleagues' testimony.
I would begin with the observation that even though
sequestration makes the problem much, much worse and late
sequestration in 2013 doubled that effect and, as Bob Work
said, will ensure that it extends for a year or more to come,
the problem began before sequestration. One thing I hear
particularly from Jennifer's testimony and Mr. Klett's
testimony was that they were not exactly living the high life
before sequestration happened. He described his business as a
nonprofit, and it is clear from Jennifer's story that she was
not exactly mailing it in at her job either. And I think that
observation can be made broadly about the Defense Department.
The taxpayer has received extraordinary value for the cost of
the U.S. military, and so the idea that there is a lot of
waste, fraud, and abuse that will allow us to make cuts in an
easy way without consequences I think is disproved by the
testimony of both Mr. Klett and Ms. Green.
The other point I would like to make is to pick up on a
subject that Bob raised about the genuine strategic effects,
and I think he is quite right to observe that the President's
defense guidance did represent the crossing of the Rubicon for
this country in the years actually going back before World War
II.
To be a global power, to play the role the United States
has played since that time, requires us to be able to do two
things at once, to fight two major campaigns at once. And it is
not surprising that back in the late 1930s the Congress passed
the Two-Ocean Navy Act. Two is the right answer for a global
power. We have crossed that threshold again, as Bob observed,
with that debate. And we see the consequences of not only the
strategic change in course that has been made, but by the
steady erosion in the ability of the U.S. military to execute
the strategy that has long been accepted by Presidents of both
parties. We see it every day in the headlines from the Middle
East where the U.S. withdrawal is precipitate, and the absence
of American power is probably the most important influence on
events that are happening there. It is also true particularly
in Southeast Asia but in East Asia more broadly. Bob mentioned
the Pacific pivot. The United States has been less and less
present in the Pacific, particularly since the late 1980s when
we withdrew from the Philippines. It took a long time. We had
established a genuinely durable peace and set of security
arrangements there that has allowed for the economic
transformation of that region and to the benefit of both
America and the rest of the world. But now it has become a
contested area as the Chinese elbow their way back across the
South China Sea and begin to intimidate not only our partners
out there but our treaty allies in the region.
So I would argue we already see the consequences not just
of what sequestration has done. That will be visible, it is
already visible in small businesses, in Madigan Hospital,
certainly on the training ranges where small units should be
doing their business. I had recently visited Fort Carson in
Colorado Springs, and I was appalled to see soldiers flipping
burgers in the chow hall again. I had not seen that since the
late 1970s. So these effects have opportunity costs as well as
strategic costs as well.
But there is no way that the world is going to stay the
same if the United States plays a lesser role in the world. It
will be more violent, it will be less secure, it will be less
prosperous, and it will be less free.
Sequestration is the first problem to fix, but only the
first problem to fix. And if we fixate on the trees rather than
looking at the forest, we will miss the larger picture of which
sequestration is only a slice.
Thanks for your time.
[The prepared statement of Mr. Donnelly follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Senator Warner. Thank you, Mr. Donnelly, and I think you
did a good job of hiding your House biases in those comments.
[Laughter.]
Senator Warner. Let me start by acknowledging that I think,
like most of us, I agree we need to get rid of sequestration. I
believe that it is going to require revenues and entitlement
reforms. I believe there are smarter cuts that can be made. And
while today I think the appropriate focus is on the defense
side of the house, I think it is also just as important for the
record to remind my colleagues and others that, in the
aggregate, cuts since the beginning of this Presidency on the
domestic side have been equally large. As a matter of fact,
Senator Sessions cited defense at 17 percent spent, domestic
discretionary at 16 percent. And if we were ever to adopt the
House plan, which takes that 16 percent down over a little over
past a decade to around 4 percent, I simply ask, not as a
Democrat or Republican, but as a former business investor,
would you ever invest in a business that spent less than 5
percent of its revenues on training and educating its
workforce; staying ahead of the competition in research and
development; and investing in its plant and equipment; which as
a Nation is our infrastructure? That is a bad business plan for
America. So I do hope, as all of us said, that we can find some
common ground here.
I want to start my questioning with Mr. Klett on the
question of how stupid this is in terms of operations. We are
running the largest enterprise in the world on 30-, 60-, 90-day
continuing resolutions. And I guess what I would ask you to
speak to a little bit, Mr. Klett, is, you know, what kind of
added bureaucracy is there in this starting and stopping of
your workforce? What kind of additional paperwork do you have
to submit? What kind of inefficiencies are being built into
your processes without having any kind of ability to predict
when you are going to receive the revenues you need to operate
your business?
Mr. Klett. Yes, sir, Senator, a very good question.
Although we are a small business, we have a number of prime
contracts with a number of the large agencies, and sometimes we
can--and most of the time they are renewed annually. However,
sometimes they cannot renew them annually. Sometimes they fund
them for 6 months. When we have subcontracts with large
companies, we have to redo things from the very get-go. I mean,
these are the reasons why I have to put people on the bench for
2 weeks to 2 months, because the paperwork comes to the large
companies, then we have to put somewhere between 50 to 60 pages
of paperwork that they already have, but these are requirements
of the bureaucracy. Unintended consequences, this is not
anything that I think anyone in this room or in Congress or
anywhere_but you have to start all over again.
Senator Warner. I think that this question of starting and
stopping, the added costs that that has added in--and one of
the things we have not been able to get is a good handle on
that.
I guess the other thing I would like to ask Mr. Work, Mr.
Spring, and Mr. Donnelly on this, I actually believe this
undermining of readiness is almost a cancer inside. And, again,
if we can speak to that on a cost basis, the notion of what it
would take to kind of get Navy pilot Senator Kaine and I met
ith down in Oceana, to kind of get their skill level back up if
it has decayed is going to cost more than maintaining it on a
regular basis. Do you want to speak to that comment?
Mr. Work. Yes, sir. As I said, I was a marine second
lieutenant in 1975 right at the end of the Vietnam War
drawdown. I was assigned--my first barracks was infested with
rats and vermin. We did not have enough money to train. Our
equipment was in a shambles.
Once things started getting better in the early 1980s, I
think as a battery commander later, it probably took until 1985
for the force really to dig itself out of the hole. And it is
hard for me to imagine that things would get as bad as they
were in 1975, but because of the way sequestration is
triggered, where you start in a hole in 2013 and start digging
deeper in 2014 and start digging deeper in 2015, as you said,
pilots start to lose their quals on a carrier after a week. And
after 90 days, it takes a long time to get those skills back.
So the cost of maintaining readiness is far less than the
danger of putting a non-ready force in combat.
Senator Warner. I want to get one last question in. I
apologize. And I think Senator Sessions mentioned this. I think
actually what I keep hearing--and in many ways, Virginia is
ground zero on this issue because we have such a high
preponderance of defense, whether it is civilian workforce or
others_ they just cannot believe we will allow this to
continue. So in many ways, fiscal year 2013, people have been
kind of covering their bets and moving around, the last little
amounts, as you pointed out, 2014 is exponentially worse than
13 because there is nothing left.
The last comment, I just simply want to ask maybe Ms.
Green, what is the effect beyond this it is having in terms of
your livelihood? What is effect is this having not only on you
but the many other folks you work with in terms of morale?
Ms. Green. Well, we have already lost a lot of staff when
sequestration passed and they announced that furloughs were
going to be happening. A lot of the staff either retired, if
they were eligible to do so, or just simply quit and looked for
employment elsewhere. And personally I love my job, I love
working at Madigan, but my supervisor has already come to me
and said, ``If you need a letter of recommendation, I would be
more than happy to give you one, although I would be very upset
to see you go because we cannot ask you to stay with this
burden.'' And so that is probably what I would be looking at
doing.
Senator Sessions. Thank you. Well, Admiral Mullen said the
greatest threat to our national security is our debt, and I
think one of the things he was anticipating was that we would
be in a situation where we unnecessarily and improperly reduce
our defense spending, leaving us more vulnerable than we should
be. I think that it is a very serious matter we are dealing
with.
There are some things, I think, Senator Warner, that we
could do. I do believe the most important thing you suggested
was in the next 2 years if we can avoid the more dramatic cuts
that the private businesses and all are having to take.
As I look at the numbers over 10 years, here is what they
are: for 2014, as I noted, we were projected to spend $586
billion. That was projected spending in the 2012 FYDP. We will
actually spend, unless something changes, $475 billion. So that
is $111 billion less. That is a dramatic reduction. If you had
to reduce any private business' expenditures by 20 percent in
one year, it would be in trouble. I am upset about the White
House. They have told the military not to plan for these cuts.
They have directly told them not to. We asked them in
Committee, ``What is your plan?'' We tried to pass legislation
to mandate that they produce a plan, and we still have not
really gotten that.
But then in 2015 it goes up from 475 to 488; in 2016, 499;
2017, 511; and so on. It goes on up. But over net, in
inflation-adjusted dollars, my Budget Committee staff concludes
that it is a net reduction of 11 percent in the Defense
Department. And then we also had some residual benefits, I
suppose, from the OCO spending that will be gone shortly.
Remember, now, for anyone listening, the costs we are
talking about do not include the war costs. That is entirely
separate, funded by emergency spending. And, in fact, one thing
we might could consider, Mr. Chairman--you are Acting
Chairman--$4 billion is OCO money, is hammering the Defense
Department at this time, too. Maybe we could all agree that
that ought to be funded as we have the rest of OCO and not out
of the base defense budget. But that is just one of the things
that could add together to put us in a place where we could get
out of such dramatic reductions.
Mr. Donnelly, I am of the view that there is some ability
to reduce spending in the Defense Department without reducing
our ability to provide our global role. But I believe these
reductions are too great. But I thank you for sharing this
fundamental question that we have to wrestle with: What will be
the role of the United States in the world to come? Are we
going to continue this leading from behind or this reduction of
our presence? And sometimes I think so. Sometimes I think maybe
we are too engaged. But then, again, a vacuum of leadership
from the United States you believe, you have expressed, could
impact the stability, the prosperity of the world.
Mr. Work, would you comment on Mr. Donnelly's comment in
that regard?
Mr. Work. Well, I do not believe that we have crossed the
Rubicon yet. As I said, I believe that the ``Priorities for
21st Century Defense'' was a very cohesive and coherent
document. But I agree with my good friend Tom that a global
superpower needs to be able to respond to two crises
simultaneously. We are at that level right now. I consider it
to be the minimum standard.
Sequestration I think will make it more difficult to
achieve that, but I agree with you that I think that further
cuts could be taken, responsibly, provided we had some time to
really prioritize and think about the cuts and keep from
digging a readiness hole that we simply would take too long to
dig out of. So I believe there are--
Senator Sessions. Well, let me just--a couple things.
First, I believe our first responsibility, Senator Warner,
would be to see what we can do about the next 2 years and see
if there are not some ways that we can work together to lessen
the irrational impacts that would happen.
Second, Mr. Work, do you have a number in your mind about
where we ought to be.
Mr. Work. I agree with Baker that it really should be
driven by a strategy, so we have the QDR first. Then I would be
able to answer that question intelligently.
I personally believe that the $520 billion would be a
really difficult swing, but I think it should be developed by
strategy, and that should inform how much we should spend to
implement that strategy.
Senator Sessions. Mr. Spring, I guess my time is up. I
would ask you to respond. If you had a brief comment, maybe the
Chair would let us do that.
Mr. Spring. Let me say that--
Mr. Spring. It should be driven by the strategy, and that
number, in my judgment, will be significantly higher than even
what the President has proposed as the first option that I
described. But we also need to do look at this from a fiscal
policy perspective--this is the Budget Committee, after all--
and what is the effect on the economy. In my judgment, I think
the United States can easily afford up to 4 percent of GDP for
defense. But we are on our way to basically 2.5. So that I
think that the economic argument that defense is the source of
our fiscal problems is really wrong. What we need to do--and I
have a slightly different opinion than Admiral Mullen. Clearly
the debt is a really serious problem, but I would still outrank
the future expected growth in the entitlement programs to be
the greatest threat to the U.S. national security.
Senator Sessions. Thank you.
Senator Warner. I would simply add, Senator Sessions, I
would concur that maybe the defense planning for sequestration
was not that good. I have to say I do not think the domestic
agencies did much better planning because I think there was
this great hope that perhaps--again, I just recall the
discussions back when this took place. This was such a bad
option that no rational group of people would ever let it
happen.
Senator Sessions. I just talked to an agency person, I
said, ``Will you be having layoffs?'' They said, ``No. We
planned early, and we are not going to have to have layoffs.''
So some of the layoffs and furloughs are a result of lack of
planning. There is no doubt about that.
Senator Warner. Senator Whitehouse.
Senator Whitehouse. Thank you. Yes, I think for those who
say that Congress cannot get anything right, the sequester
certainly disproves it. It was intended to be stupid, painful,
and damaging, and sure enough, it has been stupid, painful, and
damaging. What we did not foresee was that there would be a
hard-edged group of people in Congress who wanted cuts at any
price, cuts at any cost, and were willing to allow the
sequester to go into effect. And there is still work going on.
I know that Chairman Levin and Senator McCain, who are two of
the defense experts in this, are trying to continue to work
towards a way to fund an end to the sequester. It probably will
involve raising taxes. That should not come as a surprise
because Domenici-Rivlin, Simpson-Bowles, all of the independent
groups that have taken a look at the debt problem, have had
revenues built into that. But we want to be pretty clear about
what we are looking at. What we are looking at mostly is, for
instance, the offshoring of revenues so that companies hide
revenues overseas. That has been the subject of the Levin-
McCain effort.
I am from Rhode Island. CVS is a great American
corporation. It pays a 35-percent tax rate. Carnival Cruise
Lines hides its revenues overseas and pays a 0.6- percent tax
rate. Why we need to be defending a 50:1 discrepancy in
corporate tax rates and preventing the sequester from going
forward makes no sense.
Hedge fund billionaires pay often a lower tax rate than a
Rhode Island brick mason. I mean, literally you are making $1
billion a year, and you are paying a lower tax rate than a
brick mason? That does not make any darn sense.
So what we have got to remember is that the Tax Code is not
just rates. It is also riddled with loopholes and with special
favors that people have carved out for themselves over time.
And if we cannot even look at those, yeah, then the sequester
is going to continue. But when Rivlin- Domenici, when Simpson-
Bowles, when every independent person that has taken a look at
this has said revenues have to be a part of it, when the
revenues that you are protecting are lower tax rates for
billionaires than for brick masons, and continued rights for
certain corporations to cheat on taxes and disfavor the
American corporations that pay their taxes here by hiding their
revenues overseas, pretending that their intellectual property
is in Ireland, all those gimmicks and games, I mean, we have
got to be willing to look at that, I think, if we take this
problem seriously, and if it is, in fact, the number one issue
that we have got in this country that the debt is too high.
Well, if that is the number one issue, then protecting
those things presumably is a number two or a number three or a
number 250 issue and should yield to the number one issue.
We see this in Rhode Island right now happening. This past
weekend was the Save the Bay's annual swim across Narragansett
Bay, and because we could not use Naval Station Newport, we
could not swim across Narragansett Bay. So they went out and
back around buoys instead.
We have canceled the annual air show at Quonset. Water Fire
brings huge crowds to Providence and is a wonderful, wonderful
civic event. Canceled in many cases because of the Army Corps'
inability to play their role in it. The National Guard Leap
Fest, which is a parachuting display and competition, also
canceled. But as Ms. Green pointed out, you know, these
symbolic things take place and are very visible effects of
sequestration.
But when it hits home with a 20- to 30-percent reduction in
your take-home and you have got expenses and you have got a
family to take care of, that is really where the rubber hits
the road. We have seen 90 layoffs among the top ten defense
contractors in Rhode Island just March to July. I do not know
that they are all sequester, but I strongly suspect that the
timing would indicate that.
We have got 4,200 civilians at Naval Station Newport now
subject to furlough, and the whole darn thing is unnecessary.
I want to appreciate particularly Ms. Green's testimony
because she really made it so clear how, when it comes right
down to people, this is really hurting people. We deal with
statistics very often here, Ms. Green, and sometimes they are
nowhere near as compelling as a personal story. Yours was
really valuable, and I appreciate it. I appreciate all the
witnesses' testimony and the agreement we have that the
sequester has indeed been stupid, painful, and damaging. Now
let us hope that we can get beyond it.
But if one party is going to draw a bright line and say,
no, billionaires paying lower tax rates than brick masons is
more important than solving the sequester, that is a sticking
point. If they are going to say that corporations should be
able to offshore their income places and pay a 0.6-percent tax
rate, yeah, that is going to be a sticking point, because we
have got to be able to look at those inequities and be
reasonable about this.
So I thank the witnesses, and I appreciate the Chairman for
the hearing.
Senator Warner. Thank you, Senator Whitehouse. I did not
ask the question, but I am sure Ms. Green did not get a
sequestration discount from daycare, car payments, or rental
payments.
Senator Kaine?
Senator Kaine. Thank you, Mr. Chairman, and to all the
witnesses, thank you for being here for your testimony and for
your agreement on the proposition that we need to be strong as
a Nation and we need to have that national defense that is both
strategic and funded at an appropriate level.
I think that still is a bipartisan view among folks in this
building in both chambers. How we get there is a challenge, and
I just want to begin by saying, you know, some of--I have a
polite difference of opinion with my friend Senator Sessions
about where the blame in this lies and with at least one of the
witness' written testimony.
It would be comforting to say that the President and the
administration is to blame for this. It would be comforting as
a Member of Congress to put the blame on the administration for
sequester. But it is squarely on the shoulders of Congress.
The Budget Act of 1974, it is the Senate and the House that
pass the budget. It does not even go to the President for
signature. It is a resolution. We have not passed one for a
number of years.
The role of the Congress in appropriating money, it is a
congressional role. There is not an appropriations bill that
gets to the President's desk if Congress has not passed it. And
so if the funding levels are not what they ought to be or if
the budget is not what it ought to be, it is not the
President's fault.
I could find instances of leadership where I think the
President should have done more to force this, but the
President cannot make an ill-behaved Congress behave. He does
not have that power and no President has that power. We are the
first of the three branches in the Constitution. We are the one
that was meant to be the most powerful. And we have fallen down
so badly on this budgetary job that while it would be
comforting to put the blame on somebody else, I do not think we
can.
We had a February vote in the Senate to avoid the sequester
completely. It got more than 50 votes in the Senate, but
because of the choice of the minority, which was their choice,
to use filibuster procedures, a majority was not enough in that
instance to turn off the sequester.
We had a budgetary vote in March that restructured the
sequester to much better effect, and the budget passed in the
Senate for the first time in 4 years.
We had a markup of an NDAA in the Armed Services Committee
in June, and a unanimous Committee vote in that instance that
the sequester was a bad thing for national defense and should
be replaced.
And we are currently in a battle. We are in a battle about
compromise. About compromise. There is a House budget, and
there is a Senate budget. If you know nothing about either of
these budgets, let me tell you one thing. The Senate wants to
go into a budget conference, to sit down at a conference table
with our House colleagues, to bring our budget to the table and
have them bring their budget to the table, and to listen to
each other and see if we can find compromise.
The House does not want to go into a conference, and they
have used what a few Senators have described themselves in the
Senate--we are a handful of Senators who are blocking a
conference, and they are blocking it at the request of their
House colleagues. If you knew nothing about the two budgets,
House and Senate, and all you knew is that one side wanted to
go into a conference room and sit down in a conference and find
an answer, and one side did not, that should tell you
something. And what it should tell you is that one side has a
confidence in their position and in their budget and they are
open to finding an answer, and one side lacks the confidence in
their position and they are afraid of sitting down at a
conference table where there will be a spotlight shining on
both budgets that the American public can see in a way that
will then produce an outcome.
The right answer for this problem is dialogue and
compromise. Mr. Klett, you said that. You said, look, this is
what we do in business; you need to do it in conference. That
is the right answer for this problem. We ought to be having a
budget conference. We ought to be sitting down and listening to
one another, just as all Senators did a week ago tonight. We
got in a room when we had a tough problem, and we listened to
each other, and we found a solution that we might not have
known we would find when we walked into the room.
We need to listen. We need to compromise. A side that is
unwilling to conference is unwilling to listen. A side that is
unwilling to conference is unwilling to compromise. We need to
listen and we need to compromise.
I believe that the right answer is an answer budgetarily
that will involve us making targeted cuts to deal with our
budgetary challenges, those mentioned by other Committee
members, including reforms to entitlement programs, that will
do, as Senator Whitehouse suggested, close unnecessary tax
loopholes and that will make investments to grow the economy.
But we are not going to get to the right answer, we are not
going to get to a mediocre answer, we are not going to get to a
wrong answer, if we cannot sit down as two Houses and listen to
one another and compromise.
So while it would be comforting, I think, to say as a
Member of Congress that this big sequester problem is something
I can point a finger at the Executive and say, ``It is your
fault,'' I just think that is a hollow argument. It is on us.
We have got to show a willingness to listen to each other and
compromise. And it is my strong, strong hope that the members
of this Committee, that the Members of the Senate, will
eventually convince the House that that is the right way to
proceed.
Thank you, Mr. Chairman.
Senator Warner. Senator King.
Senator King. Thank you, Mr. Chair. Thanks to all the
witnesses.
At one point in this room today, there were a majority of
Senators who were also on the Armed Services Committee, so
nothing you were saying was news.
This whole situation as a newcomer is extraordinary. I have
not yet heard anybody say a good word about the sequester in
this building for the past 6 months, but we still have it. It
is like we are all standing out in a rainstorm and everybody is
looking at each other and saying, ``Have you noticed this
rain?'' ``Why, yes, it is raining. But nobody puts their
umbrella up or goes inside. You know, what is it? You do not
have sense enough to come in out of the rain.
Well, you know, I would slightly disagree with the Chair. I
think the most--and Senator--I mean, Leon Panetta said this at
one of our hearings. ``The most serious threat
to national security today is the United States
Congress''-- because of our inability to pass a rational
budget. And the problem is, I think, worse than many of you
outlined, because you said this sort of in a little bit more
vague way. 2013 was relatively easy. There was low-hanging
fruit. There were unexpended balances. There were all kinds--
there was money that could be found.
2014 is going to be different. I heard yesterday from some
people at the Pentagon. Their calculation is it is more like 14
percent this year, and it is going to be--and we are paying a
national security price. And what bothers me is that this
institution is pretty good about laying the blame when
something goes wrong. Well, when something goes wrong in
national security and we have not adequately funded our
defense, we should look at ourselves.
A famous philosopher of the 1950s named Pogo once said,
``We have met the enemy, and he is us.'' And truer words were
never spoken. And it just seems to me--I want to echo Senator
Kaine's remarks. There has got to be a solution here. And I
guess I want to ask at least one question.
Mr. Spring, you are at the Heritage Foundation. The
Heritage Foundation is a very influential group in this city, a
conservative think tank, a lot of quality work. How do we get
out of this? I mean, you have told us that the sequester is
bad, but we have got to get out of this. Do you have a
strategy? Would you suggest to the Congress where we can--how
we could get to a place where we have compromise and we have a
solution so we are not continuously hollowing out our defense
as well as the rest of the Federal Government?
Mr. Spring. Yes, absolutely. I think--
Senator King. Microphone, please.
Mr. Spring. Yes, I think you have to do that on two levels.
The first one I described in my testimony, which is to have a
strategy-driven approach as to what you need for the defense
budgets.
Senator King. No, but I am talking about the overall
budget.
Mr. Spring. Overall, what you need to do is have a
comprehensive fiscal plan that we have spelled out, the
Heritage Foundation, called ``Saving the American Dream Plan,''
that includes tax reform because we agree with Senator
Whitehouse that you need to do tax reform.
Senator King. Does it include revenues from tax reform or
just a rate cut?
Mr. Spring. No--well, in terms of rates, no. What it does
is it says that we will lower the rates by closing the
loopholes.
Senator King. But that does not do anything for the
deficit. That is deficit neutral.
Mr. Spring. Right, and we think that the heart of the
problem is the future growth in entitlement spending. I mean,
we could--a decade or two from now, we could eliminate the
defense budget entirely, and you still would not balance the
budget.
Senator King. I agree with that, and I have said this
several times in this Committee. The problem with the Federal
budget is health care costs--Medicare, Medicaid, pensions,
health care costs across the board. It is not the defense
budget. It is not Pell grants. It is not national parks. It is
not Head Start. It is health care costs. And we are sitting
here talking about cutting the defense budget--and I have said
this before--it is as if after Pearl Harbor we invaded Brazil.
It is the wrong target. And we ought to be talking about health
care costs.
But to get back to the point, I have not yet figured out a
way you can make all these pieces come together without some
additional revenues, given the demographics of the country,
people getting older, aging, demands on Medicare. We can shift
costs out of Medicare, but they are just going to go to other
people unless we deal with health care costs.
But it just seems to me we need entitlement reform, we need
some revenues, we need cuts. And there is a package there, and
if we do enough tax reform, we could do both some revenues and
rate cuts, and that could be a deal. Is that something--is that
anathema to you?
Mr. Spring. Well, let me say I am not the expert on the
econometric modeling that was done at the Heritage Foundation.
I am a defense analyst, so I am not going to try and pretend
that I can answer that question in a direct and quantitative
way.
I do believe that there is a package there that reduces tax
rates, closes loopholes, imposes restraints on the growth in
entitlement spending, maintains a reasonable level of
investment in defense, and eventually balances the budget. When
I say we are not going to do that immediately, it is going to
be like a decade-long process. But, yes, we think that we can
do that, and in general terms, if I recall correctly from the
Saving the American Dream Plan, we are talking somewhere in the
neighborhood of a target for that, which I think is the easiest
way to do it, which is, as an percentage of GDP, somewhere in
the neighborhood of I think it is 18 percent in the Saving the
American Dream Plan.
Senator King. Well, that is the problem, because 18 percent
is not going to do it in an age of aging baby boomers. You
cannot make the numbers work unless you drastically reduce
defense and all the other areas of the Federal Government. And
when you talk about reforming entitlements, you are cutting--
you want to cut Medicare. But if you do not do anything about
health care expenses, you are just shifting those costs to the
States or to the seniors.
Mr. Spring. Well, again, the Saving the American Dream Plan
includes a comprehensive approach to health care, not just with
regard to Medicare and Medicaid alone. So that it involves, you
know, how people would actually obtain their insurance and so
forth and so on.
Again, I am a defense analyst, so I do not want to
misrepresent inadvertently something that is in that plan. But
obviously there is another element to this that is extremely
important, which is that we tie it to GDP because GDP can be
whatever. And so the economic growth is not the total answer to
the problem, but it is an essential answer to the problem.
Senator King. Of course it is.
Mr. Chairman, I appreciate your indulgence. I think just
one other point, to get back to defense. All the testimony we
have had at Armed Services is that this is the most complex and
dangerous world that any of our experts in the intelligence
community and the military have seen in their careers. And at
the same time, we are gutting our military and hollowing out
our readiness. I think it is a tragedy.
Thank you.
Senator Warner. Thank you, Senator King, and I want to call
on Senator Sessions for a quick comment. Then I will make a
quick comment, and then I will bring this hearing to a close.
Senator Sessions. Thank you.
Senator Warner. We have got a vote at noon.
Senator Sessions. Right. Well, I do agree that 2014 is
going to be a particularly problematic time because the cuts
come so fast that there is no real way to phase them in, and
you have to breach contracts that run up costs for private
companies, Mr. Klett and others. And you end up, Ms. Green,
with people like you having to take furloughs.
So this is not a healthy way to do business, and somehow we
can fix that. And then we will have to wrestle, Mr. Donnelly
and Mr. Spring, on what kind of defense level we can sustain.
Senator Kaine, with regard to the Budget Control Act, what
happened was, in 2011, in August, we hit the debt ceiling, and
we were on a path to spend $37 trillion over 10. But the
projected growth was to $47 trillion over 10. So the Congress
agreed, the President signed off on, that we would have this
mechanism that would reduce spending by $2.1 trillion and there
would be no tax increases unless the Committee somehow fixed
entitlements and whatever and did some tax increases. The
Committee did not perform.
So that is in law, and that is what the current baseline
is. And so the Republicans have been saying constantly, look,
there are a lot of areas in this Government that had no
reduction in spending, let us spread this out and it will not
fall so hard on the Defense Department. The President's view is
we eliminate the sequester and we raise taxes to pay for it.
Now, he got taxes in January, $600 billion. Not a dime of
that went to fix the sequester. So it does not seem to me that
the President is very interested in fixing the sequester.
So I would say, Senator Warner, that I do not believe this
sequester is going to be fixed with new taxes. I do not believe
the House is going to pass it, and I will oppose it. We told
the American people we will raise the debt ceiling $2.1
trillion, but we will at least reduce the growth of spending
that was going to be $10 trillion, we would only let it grow to
$8 trillion. And then we cannot find how to do that?
Now, of course, the Defense Department's numbers have been
not growing much in the last 3 or 4 years, even before the
sequester, at 3 percent or less for 3 or 4 years here. But
Medicare, Medicaid, and Social Security are increasing at 5, 6
percent a year, and that is where we are out of control. And
you know these numbers so well. Senator Warner has invested so
much time in wrestling with the reality of it.
Senator Warner. With not a lot of results.
[Laughter.]
Senator Sessions. You never know. The apple might fall out
of the tree if you keep shaking it, which you are doing.
So the growth there is such that interest on our debt will
pass the Defense Department expenditure by 2019 or so. Now,
this is unbelievable. And the means-tested Government benefit
programs, all 83, now net more than Defense Department, more
than Social Security, more than Medicare, $750 billion. We have
not dealt with those means-tested programs very well.
So we have a difficult challenge, and all of us have dug in
our heels pretty hard, certain things that will happen. So my
simple view is that sequester needs--and the reduction of $2.1
trillion needs to be there without more revenue, and if we need
more revenue, that fixes our entitlements and it reduces
deficits. That is what I would say. But others can have a
disagreement.
You are very patient. Thank you.
Senator Warner. Well, thank you, Senator Sessions. I would
simply, again, reiterate a couple of points.
One, you are right, interest payments could exceed the
defense budget. But since the defense budget already exceeds
the domestic discretionary budget, it will also exceed the
domestic discretionary budget. I 100 percent believe, Mr.
Spring, you have got to grow this budget. I do believe an
educated workforce, infrastructure, and research and
development, that unfortunately has moved more and more from
the corporate side onto the public side, are ways that any
country grows in a knowledge-based economy. And that undermines
that ability to grow.
I would add--I mean, I am a bit obsessed about these
numbers. I do think, Mr. Spring, I would simply point out the
last 13 years, when we were going from surpluses to these
remarkable deficits--and I would argue both sides bear a burden
here--we cut revenues $4.5 trillion over 10 years. That was
unsustainable when you take into consideration, as I think we
have here, we live in a very dangerous world. We have seen a
doubling of defense spending. We have gone to war not once but
twice, entirely on the credit card. Unprecedented in American
history. And we are all growing a lot older, which is a
blessing, but it does mean the math around our entitlement
programs is fundamentally flawed. Senator King pointed this
out. You know, when I was a kid, 16 people paying in for every
1 person on retirement, Social Security and Medicare. Now the
ratio is 3:1. Medicare and Social Security are the best
programs ever. The math does not work anymore.
So I respectfully believe that you cannot--and we did $600
billion on New Year's Eve. I agree with Senator Sessions. I say
there is no way to run this Government, even with entitlement
reform, on that revenue base. I say there is no way to run this
Government without reforms to the entitlement programs. There
ought to be a rational way to get here. What we have heard
today is what happens and the consequences if we fail to act.
What we are doing to our ability to maintain America's
preeminent role in an extraordinarily dangerous world, what we
are doing to Mr. Klett's business not only in terms of what it
does to his employees but what drives me as a former business
guy just crazy is the amount of money we are costing under the
guise of saving money by starting and stopping, and what we are
doing in the very human terms of people like Ms. Green who said
that she wanted to work with our military veterans and work
with folks helping out in a hospital that does not get- -you
said it correctly. You had an implied contract. If you did your
job, we were going to honor that contract. You entered into
obligations based upon that implied contract. You are not
getting a daycare discount or a car payment discount or a
rental discount. I can assure you--and I know Senator Kaine has
got--and I am sure Senator Sessions and Senator King has got as
well, the letters I am getting from people all across the
Commonwealth of Virginia, people most of whom served our Nation
in the military who feel like that basic trust has been broken.
And they look at us and say, you know, you seem to break into
red team/blue team when the relative amount of change on the
entitlement programs, on revenues, on a relative basis--I mean,
we have got to get about $2 trillion in additional deficit
savings over the next 10 years with the $2 trillion we have
done, putting sequestration aside, based upon Simpson-Bowles
and Domenici- Rivlin. The amount of revenue and entitlement
change--and the more rational approach on spending cuts, is so
small on a relative basis when you look at that $47 to $45
trillion number, that candidly shame on all of us if we do not
do a better job of that.
So I want to thank the witnesses for appearing here today,
for very provocative testimony, and as a reminder to my
colleagues, additional statements and/or questions for the
record for today's hearings are due in by 6:00 p.m. today.
Please have them signed and submitted to the clerk in Room 624.
And with that, again, my thanks to you colleagues and my
thanks to the witnesses. The hearing is adjourned.
[Whereupon, at 12:01 p.m., the Committee was adjourned.]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
CONTAINING HEALTH CARE COSTS: RECENT PROGRESS AND REMAINING CHALLENGES
----------
TUESDAY, JULY 30, 2013
United States Senate,
Committee on the Budget,
Washington, D.C.
The committee met, pursuant to notice, at 10:30a.m., in
Room SD-608, Dirksen Senate Office Building, Hon. Patty Murray,
chairman of the committee, presiding.
Present: Senators Murray, Wyden, Stabenow, Whitehouse,
Baldwin, Kaine, King, Sessions, Grassley, 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. This hearing will come to order. I
apologize to everybody for being a few minutes late. We had
votes and I am also managing the THUD bill on the floor and we
had to get that going, but I appreciate everybody's patience in
getting this hearing started.
I want to thank my Ranking Member, Senator Sessions, all of
our colleagues who are joining us here today, as well as the
members of the public here or who are watching online.
I also want to thank our witnesses for coming today, Dr.
Len Nichols, he is the Director and Professor at the Center for
Health Policy Research and Ethics at the College of Health and
Human Services at George Mason University; Dr. Kavita Patel,
who is a Fellow and Managing Director at the Engelberg Center
for Health Care Reform at The Brookings Institution; and Dr.
Joseph Antos, Wilson H. Taylor Scholar in Health Care and
Retirement Policy at the American Enterprise Institute. Thank
you all for coming and joining us today for this very important
conversation about health care costs in the United States and
the implications recent cost trends have on our Federal budget
decisions.
Almost five years now after the greatest economic crisis
since the Great Depression, our economy is recovering, but far
too slowly. Millions of workers are still looking for jobs.
Millions of families are still worrying about staying in their
homes or putting food on the table. We do have serious long-
term deficit and debt challenges we need to tackle, since we
certainly do not want to leave our children and grandchildren
with an unmanageable pile of bills. And we have serious short-,
medium-, and long-term economic challenges that we cannot
ignore.
But there has been some good news recently. The
Congressional Budget Office released its latest forecast, which
gave us an updated view on our debt and deficit. This latest
outlook shows we have made substantial progress when it comes
to our short- and medium-term deficits. It made clear that
there is no short-term debt crisis and the deficit reduction we
have done in the last few years, combined with the growing
economy, is making a difference.
Recent trends in the health care sector have played an
important role in this improved fiscal outlook. Medicare and
Medicaid are two of the three largest Federal budget items, so
trends in health care costs have major implications for our
nation's fiscal policy. Health care cost growth outpaces our
economic growth, and it also grows at a faster rate than
household incomes.
The cost of health care affects every kitchen table and
conference table conversation in the United States, as American
households and American businesses face the question of how to
pay for the health care coverage they want for their families
and their employees. It remains a huge challenge for our
businesses to stay competitive in a global market where their
competitors have lower health care costs and continues to limit
economic growth by reducing the investments businesses and
families can make, whether it is starting a new venture or
buying a new car.
But there has been some positive news on this front lately.
Over the last several years, health care costs have grown
slower than at any time in our history. CBO now projects the
Federal Government will spend well over $500 billion less on
Medicare through 2020 than it had predicted just a few years
ago. The recently released Medicare Trustees Report showed an
improvement in the Trust Fund, extending its solvency by two
years until 2026 due to lower projected spending. And as the
White House noted yesterday, consumer health care spending has
increased this year at the lowest rate in 50 years. That is
welcome news, and continuing these trends is going to be
absolutely critical.
There is an emerging consensus that the economic recession
is not the only reason for the slowing of cost growth, which is
also good news. There is evidence that structural changes in
the way health care is delivered are underway and appear to be
having an impact. And while the slowdown started before the
Affordable Care Act was enacted, the law has set clear
expectations for how health care will be financed and delivered
in the future, and importantly, health care coverage is
increasing at the same time and will continue to for the
future.
This is critical not only for families and communities, but
also for our economy. Lower health care costs mean families and
communities are getting care at a lower total cost to the
system, and it means lower deficits and debt. By enacting
comprehensive health care reform law, Congress took a critical
step towards improving our health care system. And as I
mentioned earlier, recent trends in the slowing of health care
cost growth suggest we are moving in the right direction.
But serious, long-term challenges remain. Right now,
Americans still spend far more per person on health care than
any other nation. But spending more on care has not made us any
healthier. Our current system focuses far too much on healing
sick people instead of prevention and wellness. This is not
just bad for patients. It is bad for our economy.
So we need to make sure we are moving towards a system
where we prioritize prevention and quality. Fortunately, there
are a number of reform ideas, many of which were included in
the Affordable Care Act, that can help us address these
problems and put us on track towards greater quality with lower
cost. And the work that providers across the country, including
my home State of Washington, are doing is making a difference.
Accountable Care Organizations, like the one run by
Polyclinic and the one being launched by Providence Health,
both in my home State of Washington, help ensure better
communication between providers. Patient-centered medical
homes, like the one run by Group Health in Seattle, aim to
combine the personalized approach of a family doctor with
innovative technology. And by creating fixed payments for all
the care a patient is expected to need during a period of time,
bundled payments could help incentivize coordination and
efficiency between providers. These reforms will help us move
towards a system where we are spending less on care and are
healthier as a country.
Increasing quality and encouraging efficiency and
transparency is going to take all of us, providers, policy
makers, and patients working together. But it is so important
for the well-being of our families across the country as well
as for the long-term strength of our economy.
Now, more than ever, we need to be thoughtful about the
reforms we are enacting and work together to ensure we are
laying down a foundation for future growth and prosperity, both
when it comes to enacting key health reforms and also when it
comes to future budgetary policy. That is especially true when
it comes to the complexities of health care and the
consequences of decisions we make when it comes to the future
of Medicaid and Medicare.
We cannot lower health care spending simply by shifting
these costs from the Federal Government onto seniors and States
and the most vulnerable families. Unfortunately, that is
exactly what the approach the House Republicans took in their
budget. If they had their way, seniors would immediately see an
increase in what they pay for routine doctors' visits, the
number of uninsured Americans would rise, and the most
vulnerable families would be put at greater risk. That is not
the right way to address our long-term challenges in health
care spending.
Now, Republicans claim that Democrats do not want to tackle
health care costs. That is simply not true. We agree--we
agree--we need to address this significant part of our Federal
spending. But we believe we need to do so by coming together
around a solution for real, lasting reform, not just by
shifting costs and shifting risks.
This is a complex issue and we should not have to wait
until the last minute now to sit down at the table and try to
find some common ground and work something out. And that is
why, now that the House has passed their budget and the Senate
has passed ours, I truly hope--truly hope--we can move forward
with going to conference and working together to solve these
major, complex issues that are facing our country.
As everyone in this room knows, we have tried many times
now to go to conference. Every time, we have been blocked. In
fact, the latest threat coming from my colleagues Senators
Rubio and Lee is that they want to actually defund health care
reform or they will shut down the government. Well, I do not
think that is a good solution and we do not want anybody,
including Tea Party Republicans, to push us into a crisis,
because if they do, they are going to cut off health care
coverage for 25 million people. They are going to end free
preventive care for our seniors. And they are going to cause
seniors to pay more for prescriptions.
Those political games might play well with a particular
base, but the reality is that not only is the Affordable Care
Act already helping millions of Americans stay healthy and
financially secure, but it is also helping slow health care
cost growth. Instead of fighting what is now the law, I hope we
could all be working together right now to make sure Obamacare
is implemented in the best way possible for our families and
businesses and communities. Continuing to manufacture crisis
after crisis is only going to make the situation worse for our
economy, whereas coming together to tackle these tough issues
will help create jobs and keep America on its path to economic
recovery.
So I am hopeful Republicans will join us at the table in a
budget conference under regular order and work with me and
other Democrats to address our long-term debt and deficit
challenges as well as our long-term health care challenges. I
just believe we owe it to the American people to come together
around some solutions that help our economy grow, tackle our
deficit and debt responsibly, and ensure we have a health care
system that delivers high-quality affordable care.
So I am very glad we are having this important discussion
today. I look forward to hearing from all of our witnesses on
this critical issue and really appreciate your being here and
all our members being involved in this important discussion.
With that, I will turn it over to my Ranking Member,
Senator Sessions.
OPENING STATEMENT OF SENATOR SESSIONS
Senator Sessions. Thank you, Chairman Murray, and I look
forward to the hearing this morning on an interesting topic, an
important topic, and welcome our guests today.
I would like to see us go to conference. We just have a
number on the budget, but we have a number of members who
believe that the debt limit should not be part of a conferenced
item. Senator Durbin said on the floor when I was there that he
did not think it could be. If that is so, why would you not
agree to not make that a part of any conference report and then
the conference would occur. That is apparently the disagreement
some of our members have.
This year, our country is projected to spend $2.9 trillion
on health care, almost 18 percent of our nation's economy. I
would note that we have the greatest health care in the world.
You simply cannot judge our health care only on life expectancy
and the choices people make, whether it is smoking or other
issues that cause earlier death in the United States than in
some countries. You go to any area of America, you can get
first class health care, heart surgery, lung surgery, kidney
surgery, cancer treatments, all over this country. It is a
fabulous health care system we have, but it is expensive.
Our hearing will focus on cost and the trends which brought
us here. Looking at the data, it is clear that while the
increase in health care costs, the rate of increase, at least,
has slowed significantly over the last decade, health care
costs will continue to rise, and today, for the most part, they
still outpace the growth of inflation.
Indeed, in the year 2000, health care costs increased 9.7
percent. They dropped every single year since then until when
President Bush left office it was 4.7 percent. It is now, in
2011, the latest numbers I have, the increase was 3.9 percent.
So we have had a real change in the increase, but I do not
think facts can justify any allegation that it is a result of
Obamacare, and we will talk about that as time goes by.
So, we are now looking at the economic recovery that we are
involved in. It is the slowest since the Great Depression. We
are just not growing fast enough and not creating enough jobs.
GDP growth last quarter was only 1.8 percent. It was 0.4
percent in the fourth quarter last year. It has averaged two
percent or less since the end of the recession in 2009, and
that is not a job creating growth rate.
After six years, since the beginning of the recession, we
still do not have as many jobs as existed in December of 2007.
Americans are working fewer hours, and the fastest growing type
of work today is part-time employment. Over 352,000 part-time
jobs were created last month compared to only 195,000 full-time
jobs. Last month alone--in May, at least, we lost 7,000
manufacturing jobs. In June, the June report shows we lost
6,000 manufacturing jobs.
It is clear that this health care law has had a job effect
and it is not for the better. There has been plenty of
anecdotal evidence about hiring concerns, and according to the
Federal Reserve's Beige Book, the health care law has been
cited as a job market concern.
Along these lines, this month's report from the Chicago Fed
District stated, quote, ``Several retailers reported that the
Affordable Care Act would lead to more part-time and temporary
versus full-time hiring.'' Folks are being held back from full-
time work due to this law. That is just a fact. We are hearing
it all over the country.
Last month, the President held up premium decreases in
States like New York as evidence that his health care law is
working. But as one fact checker put it, quote, ``He does not
make clear that that kind of premium decrease is likely to be
the exception rather than the rule among all the States.''
Actuaries estimate the monthly premiums in New York's
individual market after the health care law is in effect will
still be 37 percent higher than the national average. And what
the President does not say is that people in other States, like
my State of Alabama, will likely see their premiums skyrocket
once the law takes effect.
The President argued at the bill's signing that it would
bring all sorts of benefits, but when it comes to the topic of
this hearing, health care spending trends, it is fair to say
there has been no benefit from the President's health care
bill. After all, much of the decline took place long before the
President's policies and long before he was elected.
And actuaries at the Centers for Medicare and Medicaid
Services have looked at the impact of his health care law and
concluded that, to date, there is, quote, ``no discernible
impact of this legislation'' on aggregate health care spending
trends. That is obvious, I would think, but it needs to be said
because there has been a real attempt to try to suggest that
the decline in the rate of growth in health care spending is
attributable to the President's health care plan.
And looking into the future, its costs will be real while
the promised savings will be illusory, I am afraid. Against
claimed benefits, there are serious costs. If left unchanged,
the President's health care law could deal a devastating blow
to the Federal budget. Earlier this year, the nonpartisan
Government Accountability Office--just this year--released a
report which estimates that under a realistic set of
assumptions, the President's health care law will increase the
deficit by 0.7 percent of GDP, or roughly $6.2 trillion over
the next 75 years. That is almost as much as Social Security's
projected deficit over that period of time.
So we are just about to add a new program to the Federal
Budget of this country that will add almost as much unfunded
liabilities over the long term as the Social Security program
that we need desperately to be fixing. Adding more debt to a
government which already cannot pay its bill is how a country
goes broke, and it was hidden, basically, when this bill was
passed.
Addressing health care costs now, before this bill is fully
implemented, can save trillions of dollars in new debt to our
country and our people. That is a lot easier than having to
change an existing program that people have been depending on,
like Social Security and Medicare.
So, colleagues, I believe that we need to work as hard as
possible to head in a better direction, one that responsibly
corrals spending excesses in Washington and creates the
conditions for a more robust economic growth, helping people
recover from the economic damage of the last five years.
Blanket spending and risky programs will not meet the real
needs of our constituents. We need to go step-by-step, and
enact common sense health care reforms that lower costs and
that the American people can support, not a bill that is widely
opposed by the American people and will likely add trillions in
new debt.
I thank our witnesses for attending this morning and await
their testimony. This is a most interesting subject. Thank you.
Chairman Murray. Well, thank you very much, and I want to
turn to our panel. We will have time for questions after that.
Let me begin with Dr. Nichols. We will start with you.
STATEMENT OF LEN M. NICHOLS, PH.D., DIRECTOR AND PROFESSOR,
CENTER FOR HEALTH POLICY RESEARCH AND ETHICS, COLLEGE OF HEALTH
AND HUMAN SERVICES, GEORGE MASON UNIVERSITY
Mr. Nichols. Chairman Murray, Ranking Member Sessions,
other distinguished members of this committee, it is an honor
and privilege to offer my thoughts on health care cost growth
for your consideration as you seek to balance our vital
priorities as a nation.
My name is Len Nichols. I teach health policy and direct
health system research at George Mason University in Fairfax,
Virginia. I will answer the two key questions as quickly as I
can and spend the rest of my time on the remaining challenges
before us.
Question number one, is health care cost growth reduction
real? Yes.
Question number two, can the recent health care cost growth
slowdown be sustained? This is the key question. The correct
answer to this, I believe, is maybe, sliding into probably, and
I am going to tell you why I am optimistic.
The first point is, the slowdown in cost growth began
before the Great Recession and the ACA. The evidence is very
clear on this point. The evidence is also clear that post-ACA
Medicare payment policies and increases in private sector cost
sharing have also affected spending growth, along with lagged
GDP growth.
Point number two, the key to actually bending the cost
growth curve is to enable stakeholders to gain from reducing
cost growth, to align their incentives with the trip aim, and I
am optimistic about this because the private sector in every
State of our Union is adopting the same kinds of incentives
that are being tested by the Center for Medicare and Medicaid
Innovation, pursuant to the ACA. These incentives make sense
and it is the congruence between public and private efforts
that makes delivery system reform far more feasible than I have
seen in my lifetime of studying this system.
I included in my written testimony a map maintained by
America's Health Insurance Plans that makes the point worth a
thousand words.
I also describe three promising examples of individual
private health insurers which have combined creative incentives
with information and care management systems and they each
report positive early results. Massachusetts Blue Cross-Blue
Shield, Blue Shield of California, and CareFirst here in the
Mid-Atlantic area have each lowered cost growth and improved
quality enough that each is expanding their programs, in some
cases before definitive formal evaluation results are complete.
This is a market test that shows they think it is working. This
is the promise of health reform 2.0.
Even more exciting, we are starting to see multi-payer
payment reform experiments, some led by the public, some by
private payers, and some by clinical catalysts. This is great
news because you all know nothing holds back progress more than
conflicting incentives within the same clinical practice.
So, yes, slower cost growth can be sustained if we
encourage these kinds of arrangements.
I will now emphasize four of the seven challenges I mention
in my written testimony. Challenge number one: Tell the
American people the truth. The plain truth is, we can solve our
current fiscal woes without abandoning our commitment to our
most vulnerable citizens and to ourselves, but you would not
know it from watching TV at night or on Sunday mornings.
Health care cost growth, our most serious long-run fiscal
problem, is coming down and will stay down if we are smart and
disciplined about it. Not every payment model or pilot will
work perfectly. We can learn from failures. We always have. But
our country is large and diverse. We will need different models
to reflect different local values, conditions, and strengths.
But the evidence is clearly building. We can achieve the triple
aim in a number of cases and we should stop this loose talk of
draconian benefit cuts and ruinous tax rates.
Challenge number two: Enable clinicians to lead the
transformation we need. Compared to 20 years ago, way more
physicians, nurse leaders, hospital executives, and health plan
executives are actually eager to help reform our expensive
system. They know it is too expensive to maintain. But they are
frustrated by the familiar roadblocks that make the status quo
seem like the only operational choice, flawed though it is.
In my view, all these folks have essential parts to play,
but physicians need to be in the front of the reform bus, not
in the back. For physicians to drive this thing, four things
have to happen. The first two are relatively simple. You must
improve the malpractice environment, and you must remove the
scourge of SGR from our policy discourse. I do not really care
how, just do it. The price of SGR repeal is at an all time low
now and malpractice issues are not beyond your capacities.
Third, for physicians to lead, they must have access to
total cost of care data. Not all plans in our country are as
enlightened as the ones I named. In some States, the only way
to gather essential data is to require all payer claims
databases to be created and appropriately shared. Only 12
States have them now. I urge you to provide powerful incentives
to the other 38. Markets cannot and never have worked well
without transparent cost, price, and quality data. We should
give our health markets the tools they need over the objections
of those who profit from our ignorance today.
The fourth prerequisite for proper physician leadership of
our reform enterprise is to upgrade our sense of urgency and
make Medicare a true partner with them in health system reform.
Only three of those all payer claims databases have access to
Medicare data. Everyone should benefit from the lessons that
Medicare and private sector data together can teach, as
Senators Wyden and Grassley have recently argued. More
generally, we should turbocharge CMMI into something more like
the Manhattan Project, which, you may have read about, focused
our best scientific minds to produce an atom bomb before the
Germans got one. Like then, we cannot afford to fail, and like
then, we are kind of in a hurry. We need to harness our best
physician minds with a liberated CMS as a true partner to get
those incentives right systemwide in real time.
Challenge number three: Engage consumers and patients. I do
not know why we are so afraid of telling patients what they
know in their hearts. They have a huge role to play in their
own health and in making our system sustainable for all.
Provider organizations should be allowed to offer incentives to
remain with the group for a year. An honest discussion of
personal responsibility for behavioral choices might help
bridge some of our partisan divides.
Finally, I encourage you to focus health policy more on
communities and less on States and the nation as a whole. In my
experience these last few years of talking about health reform
in virtually every State in our country, red, blue, and purple,
communities are the one geographic area where people are able
to put politics aside and focus on what needs to be done to
make their own health system work where they live and work and
play and pray.
HHS and some States have made local data available and more
user friendly than ever before, and I am proud to say that the
National Committee for Vital and Health Statistics, on which I
serve, has been learning how some communities are using data to
promote local health improvements consistent with their own
priorities. I can think of no better example of democracy in
action.
But we could do much better and go way beyond all payer
claims databases. I sincerely urge you to ask HHS to think
creatively and expansively about how to use existing government
data and resources to empower communities to lead conversations
about health and health system improvements they want rather
than what some experts want or fear for them.
In the end, our political system is based on the principle
that the people are the experts who matter most, at least about
what they want their government to facilitate. We should think
more often about how government can help people inform and
empower themselves.
I thank you for the opportunity to be here this morning and
I welcome any questions.
[The prepared statement of Mr. Nichols follows:]
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Chairman Murray. Thank you.
Dr. Patel.
STATEMENT OF KAVITA K. PATEL, MD, MS, FELLOW AND MANAGING
DIRECTOR, ENGELBERG CENTER FOR HEALTH CARE REFORM, THE
BROOKINGS INSTITUTION
Dr. Patel. Thank you. Chairman Murray, Ranking Member
Sessions, and members of the committee, thank you for the
opportunity to offer my thoughts on the recent progress as well
as challenges ahead in containing health care costs. My name is
Kavita Patel and I am currently a Fellow and Managing Director
at The Brookings Institution as well as a practicing primary
care physician.
From 1965 to 2007, health care spending increased at an
average rate of 4.4 percent per year. Over that same period of
time, the Gross Domestic Product grew an average of about two
percent per year. This disparity in the rate of increases in
health care spending and increases in our Gross Domestic
Product have created an untenable situation which has eroded
our wage growth, diminished our ability to invest in our
children's education, and challenged our overall global
competitiveness.
In 1970, specifically, national health expenditures were
$74.9 billion, or 7.2 percent of the GDP. In 1990, total
spending increased tenfold to $724 billion, or 12.5 percent of
our GDP. It is worth noting that in the mid- to late-1990s,
there was a brief period of respite in cost growth when managed
care exerted significant cost controls, primarily in the form
of budget constraints. I bring that point up because those
efforts were short-lived, as all of us will recall, primarily,
as I posit, because we did not change the delivery system, a
very important lesson that we should learn from as we think
about how to move forward.
In 2013, our health care costs, as both of you have said,
consume 18 percent of our GDP at a $2.9 trillion price tag. But
there are promising signs. Amidst rapidly escalating prices,
the annual rate of cost growth has slowed in recent years.
Since 2009, costs have escalated by just 3.9 percent each year
and have been trending downward since prior to that, in 2002.
Explanations are greatly debated. Unfortunately, this debate
has broken down into absolutist arguments which take on a
partisan orientation. However, in all likelihood, the decline
is multi-factorial, as all things tend to be, part economy,
part policy interventions, and then part private sector
innovations which have taken place prior, during, and
immediately after the Affordable Care Act passed.
Given the relentless march of health care spending and our
demographic trends, the fact that we have actually engaged in
reforms with impact after four decades of little progress is a
very important milestone and something that we should stop and
acknowledge, which brings me to my first critical point. The
key to the future of health care in the United States is not
only how we budget for it, but how we change the delivery
system itself to become more productive and more efficient.
So I want to just highlight several Affordable Care Act
provisions. I have written more of this in my testimony, but I
did want to point out that there have been things that have
been potentiated, not just by what we have done in the
Affordable Care Act, but by the private sector, which has been,
as I had mentioned, not only matching the progress, but in some
cases outpacing it.
One is hospital readmissions. According to the Centers for
Medicare and Medicaid Services, one in five Medicare
beneficiaries discharged from a hospital is readmitted within
30 days. This amounts to about 2.6 million seniors and more
than $26 billion in what could be avoided if simple
interventions, such as coordinating care, were allowed right
after a patient was discharged.
One of the provisions within the Affordable Care Act set up
a partnership with patients so that programs which reach out
upon discharge and coordinate care with primary care doctors
such as myself are strengthened, amplified, and are currently
resulting in savings back to the Trust Fund in the amount of
hundreds of millions of dollars and are on target for expansion
to reach billions of dollars at the end of this decade.
The next program that has been directly impacting patients
has been around what was released from the White House
yesterday as well as past reports around decreased premiums.
Not only New York State, but 13 States in total have reported
around the country that their average of their lowest cost
plan's premium is 20 percent lower than the Congressional
Budget Office projections. We can all talk about whether or not
this is sustainable and what the impact might be, but this
really translates to dollars in patients' pockets, and there is
nothing more strong for our economy than actual translation of
these dollars in a way that patients can spend.
Point number two, all of these reforms lead me as not only
a physician but someone who studies health reform to bring to
you the fact that patients actually like having their care
coordinated. They like it when their doctors talk to each
other. They like it even more when they understand what has
happened to them. Our ability to invest in infrastructure, such
as health information technology and these coordination
programs like Accountable Care Organizations and patient-
centered medical homes, is of the utmost importance.
So, as we look to the future, I wanted to highlight more
opportunities. What is in front of the Senate Budget Committee
is not only the fiscal responsibility for the budget, but the
impact that that budget will have on the actual delivery of our
care. We have a great number of opportunities in many sectors,
and as we move--if you think about how a patient moves through
the health care system, we start with what we know best, our
primary care workforce, our Accountable Care Organizations,
which should be and can be strengthened in order to help allow
for more seniors to benefit from these programs. There is not
an ACO in the State of Alabama and there should be, and we need
to make sure that the program works so that that can happen.
The second point is around inpatient care. We still have--
as much progress as we have made with hospital readmissions,
any of us who have had a personal member of our family or a
loved one in the hospital understands that the system still
could use improvement. These improvements can come in the form
of better coordination between the inpatient sector and the
post-acute sector, which, unfortunately, gets that label of
post-acute but is everything from home health care all the way
through hospice care, and within each of these places, the
communities that our patients live in would like to see
stronger reforms in these areas.
And then a final area that I will touch on is around
transparency and information. Information is power. That is a
very basic consumer premise. But in health care, as Kenneth
Arrow and other economists have pointed out, in health care,
our information ability is misaligned and we do not have the
basic information and transparency to give us the power we need
as consumers. I would say as a caveat, though, giving and
making the data transparent alone is not enough. We must make
sure that these link back to the very reforms that I think have
helped us in slowing down the cost growth.
So my final point as you head to August recess, you are
going to hear stories from people who are confused in moving
through our chaotic health care system and you will also hear
stories of success from the private sector and the public
sector, as well as the invaluable workforce delivering this
care. Our challenge ahead of us is to make sure that we can
marry this and take this opportunity to put sensible policy
forward.
Thank you, and I welcome your questions.
[The prepared statement of Dr. Patel follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Murray. Thank you very much.
Dr. Antos.
STATEMENT OF JOSEPH ANTOS, PH.D., WILSON H. TAYLOR SCHOLAR IN
HEALTH CARE AND RETIREMENT POLICY, AMERICAN ENTERPRISE
INSTITUTE
Mr. Antos. Thank you, Chairman Murray, Ranking Member
Sessions, and other members of the committee, for this
opportunity. I am the Wilson Taylor Scholar in Health Care and
Retirement Policy at the American Enterprise Institute, but
previously, I was an Assistant Director of the Congressional
Budget Office and I am currently on the CBO's Panel of Health
Advisors.
For the past 50 years, spending for health care has grown
faster than the economy. In 1965, health was six percent of
GDP. Today, it is 18 percent and it is still rising. This year,
Federal spending for Medicare and Medicaid will be $860
billion. Over the next decade, Federal spending for those two
programs plus the new subsidies offered on the insurance
exchanges will exceed $13.3 trillion.
Any sign that the growth in health spending is slowing
would seem to be good news, but that depends on why the
slowdown occurred. I will make three points.
First, the recent slowdown in health spending is not likely
to last. Most of the decline is due to deteriorating economic
conditions, not structural changes in the health system.
Private health plans have, indeed, made their own reforms in
the way they pay providers and the way they deliver health
care, but the poor economy dominates the past decade.
Second, the Affordable Care Act, the ACA, did not
materially help slow health spending over the past decade and
its expansion of health insurance coverage will drive up
spending in the future.
Third, a responsible budget plan that begins to resolve the
structural defects in Federal health programs is needed. If we
do not take action, health spending will crowd out other policy
priorities funded through the Federal budget.
So, the health spending slowdown has, indeed, been
remarkable. In 2002, national health spending was growing at
9.7 percent a year. By 2009, the rate had dropped to 3.9
percent and stayed at that level for three years. Does this
mark a permanent structural change that will ease the burden of
rising health care costs into the future? Probably not,
unfortunately. When we finally return to a full-employment
economy, health spending will bounce back.
Now, poor economic performance at the beginning of the
decade contributed to the initial slowdown. This is something
that a lot of analysts tend to overlook. The deep recession
that ended in 2009 drove spending growth even lower. The slow
economic recovery since then has prolonged this dampening of
health spending. So, we have a decade of economic trouble and
it shows up in health spending. Obviously, when people lose
their jobs, they lose their health insurance and their ability
to pay for health services out of their own pockets also
declines. This is not how any of us want to get health spending
under control.
The ACA did not contribute to the slowdown in the past. The
President's health reform was enacted after most of the
slowdown had occurred. Moreover, the ACA focused on expanding
health insurance coverage, not reducing health spending. Giving
25 million people heavily subsidized insurance may indeed be a
good thing, but it will unquestionably increase health
spending.
The ACA includes provisions to reduce spending. I will
highlight two. The largest savings were from substantial cuts
in Medicare payment rates to providers. However, within a few
years, hospitals and nursing homes will be paid less than
Medicaid rates, which threatens seniors' access to services.
That cannot be sustained and Congress will eventually override
these formula-driven reductions.
Accountable Care Organizations attempt to replicate the
success of integrated health systems like Geisinger Clinic in
Pennsylvania and Intermountain Health Care in Utah. Decades of
work and investment made those plans what they are today. Such
capacity cannot be built overnight, and the departure of nine
of the original 32 pioneer ACOs from the program is evidence of
that.
On balance, the ACA will add about $500 billion to national
health spending over the next decade. The impact on Federal
health spending is even higher than that. This further strains
our ability to finance existing health programs and have the
resources available for other critical domestic and
international policy priorities.
Clearly, we need to rebalance our spending priorities. I
would recommend that we start with Medicare. Obviously, we need
to permanently resolve the SGR problem, but we also need to
find $139 billion to cover the cost. We cannot stop there.
Traditional Medicare should be modernized and simplified.
Replace the complicated benefit structure with a single
deductible and uniform copayment. Add catastrophic coverage,
something that modern insurance offers to everyone. Medicare
does not. Add catastrophic coverage to the benefit.
Limit first dollar Medigap coverage that promotes excessive
use of services that often are of little value to the patient.
Develop new payment methods that reward better care, not more
care. Many other changes are necessary, including proposals
mentioned by Dr. Patel, in order to make traditional Medicare a
more functional and less costly program.
However, the key to putting Federal health spending on a
sustainable path is market-based Medicare reform. We must
change the financial incentives of fee-for-service payment if
we are to bend Medicare's cost curve. By promoting effective
competition and informed consumer engagement, we can fulfill
our obligation to ensure that Medicare will be there for future
retirees without imposing a prohibitive tax burden on future
workers.
Thank you for this opportunity, and I look forward to your
questions.
[The prepared statement of Mr. Antos follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Murray. Thank you very much to all of our
witnesses.
I will begin, Dr. Nichols, asking you a question. In order
to achieve scorable savings, there are a number of proposals
that impose caps on how much the Federal Government's
expenditure on health care, Federal programs, can grow.
Proponents of that argue that other changes in their plans will
increase the efficiency of the market and lead to lower health
care costs.
I am concerned that if health care costs are not lowered
and Federal spending reaches that specific cap, the savings
will come at the expense of our States or seniors or most
vulnerable Americans, and those are the people who are going to
be left to pay more for health care because the Federal
Government would be spending less. So, although our Budget
Committee does not have direct control over Federal
expenditures, we cannot lose sight--we do have direct control
over Federal expenditures, we cannot lose sight of what happens
to our families and communities with health care costs.
So, I wanted to ask you to talk about the impact of caps on
Federal health care programs and what would be the possible
consequences for seniors and families and--
Mr. Nichols. Well, Chairman Murray, I think you laid it out
pretty well there, and the way I think about the impact of
these kinds of proposals, I think every, I will just say,
Medicare reform proposal has three elements we should focus on.
One is, what is the level of benefit that is implicit in it?
What is the rate of growth that you are assuming you are going
to achieve or target? And what is your enforcement mechanism?
Those three elements help you analyze, I think, every
proposal on the table, and what you are describing is a set of
proposals that typically have the level okay for a while but
reduce the level significantly over time, impose a cap to
achieve what Dr. Antos talked about, guaranteeing the Federal
Government's expenditure will not grow beyond X percent. But
then the enforcement mechanism is, in Dr. Antos' case and some
of these proposals' cases, the health plan basically saying
that is all there is, so we will have to figure out what to do.
To me, those proposals shift all the risk of failure to
achieve the targets onto beneficiaries and providers, who,
after all, are out there trying to basically serve patients
they typically have been serving a very long time, and they do
a lot of uncompensated care. So you are putting all the risk on
those two.
An alternative approach would be to say, look, we do not
think health plans can be the enforcer here because they do not
have enough market power in a world in which a lot of hospitals
actually have more market power than plans do. That is why
plans complain about hospital market power. I am sure you get
to have those conversations.
So, what other people think is what Dr. Patel was talking
about. Let us get at the actual incentives underneath the
system. Let us use Medicare buying power as one--in fact, the
largest insurer in the country. And let us improve the
incentives. And what is exciting is what I talked about in my
written testimony. What is exciting to me is that the private
sector payers have basically piggybacked onto that and now they
are working in tandem to create the very incentives that enable
the cost growth to be lowered over time, which reduces the
risk.
But the main thing, I would submit, to think about the
alternative approach, the ACA approach, if you will, versus the
fixed voucher approach, is that the risk is borne by the
society as a whole, by the taxpayer. You would have to decide
if we do not hit the growth targets. And, by the way, ever
since the ACA has passed, Medicare has grown less than the
targets that were put into the law.
So if we do not hit those targets, then you have got to
make a serious decision, and on the spot, your decision might
be in some years, you know what, we are just going to shift
those costs to beneficiaries because we cannot do anything
else. Other years, you might say, we are going to raise taxes.
Other years, you might say, you know what? What we are going to
do is change the way we implement the incentive effects that
are being developed around the country.
I believe the fact that the private sector is doing so much
like what the ACA has engendered suggests, just give it a
little more time. Make the targets clear. Make it clear you
intend to enforce that in the long run and the market will
react.
Chairman Murray. Okay. I just have a few seconds left, but
Dr. Patel, I wanted to ask you, we do know there are some
positive trends in the cost of health care. I mentioned them.
Several of you did. But we have some efforts underway right now
to change the way we deliver and finance health care. I
mentioned several examples of initiatives from my State. You
mentioned several. Is it more important to lock in some
substantial budget savings from health care programs today or
do we have some time to evaluate those efforts that are
underway and expand those that the evidence shows are working?
Dr. Patel. I think it is very important to actually not
only allow for time to evaluate so that we can actually, as Dr.
Nichols mentioned, we can reiterate and improve, since all
these programs are still kind of in flux and in practice. But
it is appropriate right now to take what we know from the
savings that we have seen thus far and actually apply those and
reinvest those into the very reforms that we still need to try
to think through and use the Centers on Medicare Innovation to
work through. So it is a little bit of both, and that is what
we have seen thus far.
Chairman Murray. Okay. Thank you very much.
Senator Sessions.
Senator Sessions. Thank you. I would yield to Senator
Johnson.
Senator Johnson. Thank you, Madam Chair and Senator
Sessions.
I will quickly throw in my two cents' worth in terms of
what has caused the slowdown, because I bought health care for
31 years in my manufacturing plant. And certainly as I watched
us go from zero deductibles to $100 deductibles to $250, $500,
institution of HSAs, a higher deductible plan, which is what
really insurance should be, we reconnected the consumer of the
product with the payment of the product. We began that process.
We brought free market competitive discipline back into the
health care market. That has constrained the cost explosion as
well as a poor economy. So, let me first get that on the table.
But I want to take a little bit different tack on this
discussion. Dr. Patel, there are about 16 million people
working in the health care industry. You work in the health
care industry. That is a pretty good employer, right, I mean,
from the highest skill level to some of the lowest. The health
care industry creates jobs, correct?
Dr. Patel. Yes, Senator, that is correct.
Senator Johnson. Dr. Nichols, I know we are all saying it
is a huge problem that we spend 18 percent of our economy on
health care. If we want to bring that down, what would be a
better product or service that American consumers should
consume versus the products and services that extend their life
and create better health for them? So, I mean, would a
snowmobile be better, or more beer? I mean, what would be a
better share of our economy if you could control it all, which
is what you want to do?
Mr. Nichols. You know, it is a great question and I would
answer it this way. The problem is not that, in fact, what we
buy extends our lives. The problem is that we are paying too
much for the value we are getting in health care_
Senator Johnson. And my explanation for that is because
government got involved in it.
Let me go back to the root cause. I am a manufacturer. It
is in my DNA.
Mr. Nichols. Okay.
Senator Johnson. In the 1940s, government instituted price
controls on health care, and so unions rationally said, well,
you know what? We cannot give increased wages. Let us give
something else. They started providing health care. That began
the separation of the consumer product from the payment of the
product. Back in the 1940s, in 1949, consumers paid 68 cents of
every dollar spent on health care. Today, they spend 12 cents.
So is that not really--if you really want to find a root
cause in terms of why health care spending has dramatically
increased, it is we have removed the free market out of it and
in its place, unfortunately--public opinion ratings of
Congress, which I say is of Washington, is about ten percent.
It is probably too high. But that is
because the public understands that Washington, D.C., the
Federal Government, is not efficient, is not effective, and is
not capable of controlling 50 percent of our health care
spending. Is that not really the root cause? The reason this is
a problem for the Federal Government is because the Federal
Government has taken over 50 percent of our health care
industry and they are totally incapable of doing it.
Mr. Nichols. Well, sir, I would point to the fact that, in
essence, if you go back to 1960, when GDP--we took about six
percent of GDP for health care, we did not cover over half of
the elderly in our country and they basically depended upon the
kindness of strangers, and some hospitals and doctors took care
of them and a lot of them could not afford to. So, when you
shifted resources to the Federal umbrella, what you did was you
made it available to more people.
You are unambiguously correct that the incentives we
imparted through third-party payment and some of our initial
government programs were not the best. In fact, they led to
cost growth. No question about that, sir. The question is, how
do we get from where we are now to a better place, and--
Senator Johnson. According to your testimony--let me just
make a couple--quote you.
Mr. Nichols. Okay.
Senator Johnson. You said one of the reasons health care
spending has decreased is because of the increase in private
sector cost sharing. You said--
Mr. Nichols. That is what you said, I believe.
Senator Johnson. No, that is what you said.
Mr. Nichols. Well, but I--
Senator Johnson. You said--
Mr. Nichols. We agree--
Senator Johnson. --we need to tell the American people the
truth. You said, we have to focus on communities, not on
States. I would add, not the Federal Government. The solution
lies in our communities. You said, HHS needs to have creative
thinking. Do you think that is possible? And secondly, you
said, people are the experts.
So what you are arguing for in your statements is what I
would argue for, what conservatives would argue for, is we need
to reintroduce free market competitive principles. Reconnect
the consumer of the product with the payment of the product.
The Affordable Care Act does not reconnect that. The Affordable
Care Act is going to have a total government takeover of the
health care system to disastrous results, is that not true?
Mr. Nichols. No. It is not true. It is not about taking
over the health care system. It is about freeing the health
care system to pursue the incentive realignments you are
actually in favor of. We are not that far apart here. The
question is, what is the impact of the law? What the law does
is incentivize delivering better value care for patients and
for payers, and what the law does is give us a bunch of tools,
including transparency.
Senator Johnson. Dictate--
Mr. Nichols. You know as well as--
Senator Johnson. Dictate--
Mr. Nichols. You know better than I do--
Senator Johnson. Dictated by the Secretary of Health and
Human Services in a top-down approach, the Federal Government
is going to tell people exactly what medical treatment they can
qualify for through the IPAB Board. I mean, is that going to
really work? Do you really believe that?
Mr. Nichols. Look at how the exchanges are actually
working. Look at the benefit package that the insurers are
actually offering. They are precisely what was offered in the
private market for--
Senator Johnson. You think this implementation is working?
James Hoffa, the National Treasury Employees Union, they are
not quite agreeing with you on that.
Mr. Nichols. Well, I would say that implementation takes
time, and I would submit to you that, in fact, incentives are
being improved. That is why health care cost growth has come
down. That is why so many private sector practitioners are
actually excited about these payment reforms, because they
would like to do the right thing--
Senator Johnson. You know, when they enacted Medicare back
in 1965, they projected it out 25 years, said it would cost $12
billion in 1990. In fact, it cost about $109 billion. I do not
think the Federal Government is particularly good at predicting
what this is going to be.
Thank you, Madam Chair.
Chairman Murray. Senator Wyden.
Senator Wyden. Thank you very much, Madam Chair. Madam
Chair, I am especially appreciative of the fact that you cited
those numbers at the beginning of your opening comments because
they are certainly encouraging and I think you cannot fudge
those numbers. They are indisputable. I am glad you cited them.
I also want to thank all our witnesses. I have had a chance
to work with all three of them and it has been an excellent
panel.
Let me start with you, if I might, Mr. Nichols, because of
your comments on transparency, and you noted the fact that
Senator Grassley and I have introduced this legislation to, for
the first time, open up the Medicare database so that all over
this country, we could see, in effect, what Medicare was paying
for various kinds of services and we could also learn a lot
about claims, utilization rates, for example. Why does one
area, in effect, bill more for MRIs or hip replacements than
another?
And my sense is that the day you publish the Medicare
database in this country, you would have, in effect, a new
baseline for health care in America. All over the country, if
somebody held an employer health plan, for example, or had an
HSA--Mr. Antos referenced that--people would look at what
Medicare was paying in their area for those particular services
and they would look at utilization and they would start making
that comparison and saying, why is what I am getting out of
sync in terms of costs or utilization? Is that pretty much your
take of where you would like to go in terms of transparency?
Mr. Nichols. You know, what is fascinating to me, Senator
Wyden, is how similar, actually, your vision is from what
Senator Johnson just described, and that is how do you make a
market work, and I do not know how you make a market work
without better transparency, and the Medicare data facts would
be huge improvements over where we are today.
I would also just add, what you really want to do is to
bring the Medicare data together with the private sector data,
and that is what some of these States are doing in these all
payer claims databases, because then precisely you can compare
what Medicare is paying. You can also look and see, what are we
in this community spending more on? Are we out of whack with
other places? No one knows that now, and you cannot know it
without access to the data. So I am totally in favor of using
data to add transparency.
Senator Wyden. Well, thank you, and I want to note apropos
of the kind of coalition that is out there. Some of the most
progressive voices in American health care want to do this, as
do some of the most market-oriented individuals. I appreciate
your making that point.
Dr. Patel, a question for you on chronic care, because you
have really been one of the authorities on this with respect to
primary care. I think the debate really starts, and it is a
point that Senator Whitehouse has touched on with respect to
the delivery system, is that Medicare in 2013 is very different
than Medicare when it began in 1965. We have got a lot more
cancer. We have got many more strokes. And we have a much
higher rate of diabetes. This is essentially more than 80
percent of the Medicare spending in the country.
So my question to you is--and Senator Isakson has been
particularly helpful in this area, but there are a number of
Democrats and Republicans who want to work on this--is it your
view, apropos of care coordination, if the incentives were
changed so that nurses, PAs, those who specialize in geriatric
medicine, were paid to specialize in, in effect, coordinating
chronic care, that that could help give us a downward push in
terms of holding down Medicare costs while, as Senator Isakson
says, beefing up the quality of care for those who are the most
vulnerable, while reducing costs? Do you think that is
plausible?
Dr. Patel. Thank you for that question, Senator. It is
definitely plausible. It is even less complicated than that.
You may not have to ask nurses or physicians assistants to
specialize in this. This is actually what most of us are
trained to do, but in our current fee-for-service system, we
actually cannot do this. If I want to coordinate care outside
of seeing someone in my clinic, it is increasingly cumbersome,
and, quite honestly, the incentives are not there to actually
allow for that.
So you are correct in that some way to coordinate care
better for patients with chronic conditions and actually
engaging--getting back to the point that both you and Senator
Johnson made of allowing consumers to be true consumers in
health care, it certainly applies to Medicare beneficiaries
with chronic conditions.
Most of my patients have four or more conditions and are on
six or more prescriptions, but it should not be that I have to
wait until they come into my office in order to start dealing
with those problems. From the time of enrollment at Medicare,
we should be engaging. And we started that in the Affordable
Care Act with the ``Welcome to Medicare'' visit, but we can
certainly specialize that for patients with chronic conditions.
Senator Wyden. My time is up, but I am glad you made that
point, and again, I think this is a unifying point. We just did
a chart, an analysis to look at how much of the country,
particularly rural areas, and Senator Sessions and I have
talked about it, really has few, if any, doctors. So if we were
to do what you are talking about with respect to chronic care,
is build in that bigger role for the nurses and PAs, again, I
think this would produce support across the political spectrum.
Thank you, Chair Murray.
Chairman Murray. Thank you.
Senator Sessions.
Senator Sessions. Thank you.
Dr. Antos, Dr. Patel mentioned the citation of lower
premiums than CBO projected, but it appears that the White
House has been using numbers of high-cost States. Other States
would likely have an increase under the ACA. Is that correct,
and why would that be so?
Mr. Antos. Well, yes, it is correct, Senator. The notable
example, of course, is New York State. I am originally from New
York State. It is the most regulated health insurance market in
the country. It is also the most dysfunctional health insurance
market in the country. When they implemented Guaranteed Issue
and Full Community Rating, that went even further than the ACA
in terms of community rating, what happened within a year was
that most of the insurers who are offering plans on the
individual market left. So that left, essentially, Blue Cross,
and rates skyrocketed. In fact, for New York, there may well be
a reduction in rates to the extent that the regulations from
the Federal Government take precedence over the State
regulations. But it will not be much, and I am suspicious of
that.
Other States, lower cost States, States that have less
regulation, appropriate regulation but less regulation of that
sort, will, of course, do worse. The common view in the health
industry is that premiums will rise at least 25 percent, and
there was a story in the Wall Street Journal that said possibly
rates would go up two to three times what is now available in
the market in some places.
Senator Sessions. Well, Dr. Nichols, today is the 48th
anniversary of Medicare.
Mr. Nichols. How about that.
Senator Sessions. And it is the seventh consecutive year,
unfortunately, that the Medicare Trustees were forced to issue
a funding warning in their annual report. My predecessor, Judd
Gregg, on this committee got language in that said if that
happens, they have to issue that warning, the administration
should lay out a legislative proposal to deal with it. Do you
think that warning would provide a good opportunity for the
Congress to participate with the President in confronting
Medicare difficulties if he submitted that proposal to
Congress?
Mr. Nichols. Senator, I definitely believe that that
warning was put there, as you said, by well intentioned--
Senator Sessions. Well, both parties--
Mr. Nichols. Exactly, both parties, precisely to provoke
that conversation. I do not know anything about what they are
doing there in the White House, but I will just say I am pretty
sure he would welcome a bipartisan group to come talk about
serious Medicare reform. I do believe it has got to be done on
a bipartisan basis. I do believe the time to do that is
yesterday. And I do believe that that warning was put there for
that precise purpose, to engender that. Yes sir.
Senator Sessions. Dr. Antos, with regard to this decline in
the increase in health care costs, is what we are talking
about, from 9.7 percent, according to the numbers I have, in
2002 to 3.9 percent today, is certainly good news in terms of
the pocketbook. And the President indicated in his State of the
Union Address earlier this year, already, the Affordable Care
Act is helping to slow the health care costs.
Well, first, they have not slowed much since he has been in
office for four years. Most of the decline began before that.
But others have questioned that, including the National
Journal. Do you think it is unfair to claim that the Affordable
Care Act is in any way responsible for the decline in the rate
of rise of the health care costs?
Mr. Antos. Well, Senator, of course, it has something to do
with politics. I think the American people are not paying
attention to much that is said on either side of this issue
right now. The fact is that the exchanges do not begin
operation until October 1, and so the theory that people are
paying--that the public is really paying attention to this, I
think, is wrong.
Certainly, looking at the past is going to be pretty
irrelevant. For the average person looking in October to buy
insurance, somebody who is on the individual market, somebody
who does not have insurance today, they are going to see, even
with the subsidies, a premium that they do not expect to see.
And for a lot of people, that is going to be very difficult to
pay for.
Senator Sessions. Thank you, Madam Chair. My time is up. I
appreciate all the panel for all the valuable comments you have
made.
Chairman Murray. Senator Whitehouse.
Senator Whitehouse. Thank you, Madam Chair.
Let me--I am going to ask about transparency and pricing
and all of that, but before I do, let me make the point that I
do think that although the consumer market is a concept of some
utility in health care, it is a long way from being a complete
answer. If you have had a stroke and you do not even know where
you are, you are not a good consumer. If you are elderly and
have seven conditions going on, you are not a good consumer.
This is not like buying a bicycle, where you say, I like
that. I know how it works. Here is how much it costs. I
challenge anybody in this room to explain to me what is in
their health insurance right now. If you want to have a market,
you have got to have a product and you have got to have a
price. I do not think anybody really understands what the
product is. They kind of buy what other people go. They go by
what has a good reputation and stuff like that, and nothing has
a better reputation than Medicare. And then they go by price,
and here is where I get to my question.
Two members of my family recently had minor health
episodes. One of them spent a night in the hospital for
observation. The other one just had to have a bunch of tests. I
do not have the billing sheet in front of me right now, but my
recollection is that each billing sheet basically said, here
are the charges. Here is what we paid. Here is what you owe.
And for one, rough numbers, it was, like, $10,800. That was for
the overnight in the hospital. What we paid was about $1,800,
and what I owed was about $40. The other one was about a little
under $4,000. What we paid was about $468. And what I owed was
$20. So--
Senator Sessions. Senator, what do you mean by what you
owed and what you paid? I did not quite understand.
Senator Whitehouse. Well, here is my point.
Senator Sessions. Yes.
Senator Whitehouse. The first number, the $10,000-plus or
the $4,000 was what the bill was. The insurance company paid 15
percent of it, and I had an extra little one or two percent
that I was supposed to pay for myself. Where did the rest of it
go? What is the price? We run a health care system in which
nothing has a price, as best I can tell. You bring your price
with you depending on who you are. If you are broke and have no
insurance, they will hunt you down for that $10,800. If you
have insurance, they will take the $1,800 from your insurance
company and say, super deal. You owe me $49. We are all done.
And depending on what kind of insurance you have, that number
moves around.
But how do you get real market pricing into this system?
Would it make sense to pick out a few things, one or two
durable medical equipment pieces, one or two tests, one or two
pharmaceuticals, and say, look, let us just see how it works if
you put a real price on it, where one person does not have to
pay ten times as much for the same thing as another person does
and try to narrow that. What is your-- how do you make this--
how do you try to put a price into this cloud of nonsense that
is now the pricing system in health care?
Mr. Nichols. Well, you have articulated the problem very
well, but I think I would start with what some States, some
hospital associations, and some insurers are doing, and that is
basically allowing you to test ahead of time, I am going to
have a baby, I am going to have knee surgery, I am going to
have whatever, what is this going to cost me given my condition
and how might it vary across the different providers that I
have access to? That is how you make a market work. Those tools
do exist, sir. You know. You invented some in Rhode Island. But
the truth is, they are not everywhere.
Senator Whitehouse. And you have to--
Mr. Nichols. And the truth is, they are doing--
Senator Whitehouse. You have to be able to bundle costs
together in order to do that--
Mr. Nichols. Exactly. Exactly.
Senator Whitehouse. and that is a developing strategy_
Mr. Nichols. And so some insurers, some plans. What ought
to happen as we roll out these exchanges is that kind of cost
calculator should be available on a broader basis. Again, some
States are doing it and that would be a really smart thing.
The--
Senator Whitehouse. So bundling is a key step.
Mr. Nichols. Bundling is a good thing, and letting
consumers know ahead of time what different packages are going
to enable you to do. And you can do that at the point of
purchasing insurance, as well. In particular, when you sign up
for a Medicare program, you know what drugs you are on. You
know what drugs Dr. Patel has prescribed. You look and see
which of these packages are better for me. We could do that. It
does require information systems that are essentially connected
and well developed and it is not in any way--
Senator Whitehouse. That is a whole another saga and my
time has just expired. But let me thank you, Chairman, for
holding this hearing. When we are burning 18 percent of our GDP
on health care and the least efficient country in the world
that is competitive with us is only burning 12, we have a
health care cost problem--
Chairman Murray. Certainly.
Senator Whitehouse. --and to masquerade it as a Medicare
problem, I think, disserves the problem that we face and
disserves the American public.
Chairman Murray. Thank you.
Senator Kaine.
Senator Kaine. Thank you, Madam Chair.
Thanks for the witnesses. Good testimony. And I am going to
have a follow-up question for the record that I will get to at
the end, but first, for my colleagues, we have a limited
bandwidth, and in some more limited than others--I will talk
about myself--and we are going to spend time on a lot of
different issues. And so there is a finite chunk of our time
that we are going to spend on this very important issue. It is
my sincere hope that we do not use that finite chunk of our
time for an endless battle for the 45th vote to repeal the
Affordable Care Act because it is not going to happen. So let
us be open to reforms and embrace reforms.
During the votorama on the budget, I cast a vote for
reform, which is to look for an alternative for the way to
assess the medical device. I thought the medical device tax on
gross receipts probably was not a good idea.
And I am open to reforming the Affordable Care Act and I
would hope everybody around the table would be open to
reforming the ACA or Medicare or Medicaid or anything else. But
if instead of talking about reforms we are going to be talking
about repealing the Affordable Care Act, you know, we are
wasting our time, because we are not going to repeal the
Affordable Care Act and we should not repeal the Affordable
Care Act.
The Affordable Care Act has done a number of things very
positive, and I know politically, everybody wants to say, if
they did not like the ACA, it has had no effect. They are just
wrong. We cannot over-claim its effects, but the 70,000 fewer
hospital readmissions in 2012 than 2011, the Affordable Care
Act has played a major role in that. Millions of Americans
getting rebate checks back because of that medical loss ratio,
that is because of the Affordable Care Act and that is
important.
And I have told this story to my committee members before,
but when I was a Senate candidate and for the first time in my
life did not have a full-time job, I did not have insurance and
we had to go out and buy insurance on the open market. And my
wife tried to buy insurance and she was told by an insurance
company that they would insure my wife and me and they would
insure two of our three children, but they would not insure our
third child because of a preexisting medical condition. Safety
note: Do not tell my wife that they will only insure two of our
three children.
[Laughter.]
Senator Kaine. Do not do that. My wife called the HHS
hotline. She has a different last name than me. Nobody knew who
she was. She calls in and says, ``I think this is against the
law.'' ``Who did you talk to?'' ``Here is the name and number
at the insurance company.'' That person at the HHS 800 line
called, and within half an hour, the insurance company called
back and said, ``You are right. We are wrong. We have to offer
you an insurance policy on your entire family.''
We are not going to repeal the Affordable Care Act, because
if we did, we would be saying to all of those kids, hey, you
are back at the mercy of this heartless preexisting insurance
company practice that we are putting in the rearview mirror. So
I hope that we will embrace reforms, and I think we need to
embrace reforms for all the reasons that have been said around
the table.
The question I want to ask--actually, what I would really
like to do is ask it for the record, and we will put it on the
record and I would love your responses back. The issue that
troubles me the most in the broad scale on the cost is the cost
growth rate of Medicare. Now, to pick up on Senator Johnson,
some of the cost increase is for good news. It is not all bad
news that we spend on health care. Health care is important.
And the cost growth rate in Medicare is partly a good news
thing. We are living longer. That is fantastic. The last I saw,
Medicare costs go up by three percent a year, even if there is
no inflation, and even if there is no increase in medical
utilization, just because of increases in the eligibility. So
that is a good thing, and yet it creates a serious cost
problem, and it is the Medicare cost growth and the size of the
budget that causes me the most concern.
So, the question that I am going to submit by record to you
is if you had to tackle giving us advice right now on smart
ways, consistent with your own approaches to this, to start to
deal more seriously with the cost growth on Medicare, what
would you do, how soon you would do it. I think Dr. Patel said
you may not want to do something right away. You want to see if
what we are doing now in the ACA is having some effect and
figure that out before you make suggestions. But I will direct
that question to each of you on the record and I appreciate
your testimony today.
Thank you, Madam Chair.
Chairman Murray. Thank you very much.
Senator Baldwin.
Senator Baldwin. Thank you, Madam Chair and Ranking Member,
for holding this hearing. I really appreciate the opportunity
to delve a little deeper in this topic.
I also just wanted to add some commentary to, you know, the
intangible costs of the political debate around implementation
of all of this. They are not tangible, but I cannot but help
but think that there is a real cost with the obstructionism we
have seen, and I have to recall serving over in the other
House, in the other body, during the debate on the Medicaid
Modernization Act, and that was politically contentious and
somewhat--I think that is an understatement--partisan. I did
not end up supporting that for a wide range of reasons. But
following the passage of that measure, I felt like the most
important duty we all had was to work together across the party
aisle and try to make this work for our constituents. And it
involved building State-based insurance exchanges and, you
know, trying to help our constituents understand some pretty
complicated choices. But, in any event, we are here now.
I want to also address this issue of transparency, data
availability on cost and price and quality. There was some
discussion of where the States are at in collecting and sharing
this data. In Wisconsin, we have our attempt at an all payer
claims database called the Wisconsin Health Information
Organization, and so providers, payers, and State agencies
subscribe to this database to help them assess and improve
their performance.
Right now, the organization holds about two-thirds of the
claim data Statewide for Medicaid and private payers. However,
current law, very specific details in the ACA, did not allow
this database access to the Medicare fee-for-service claims.
Now, I know that our fellow committee members, Senator
Grassley and Senator Wyden, have a rather large fix to this. I
have been working with Senator Bennet on a very specific bill
to make this more available by sort of amending the provisions
of the Affordable Care Act. But this, I think, would get our
State close to--we would be getting pretty close to full
claims.
And I guess I would ask why this is so important to the
foundation, to provide a foundation for larger delivery system
reforms, why you believe that the wider access to Medicare data
is essential, and then I have a follow-on question, and Dr.
Nichols, I would start with you.
Mr. Nichols. Well, thank you, Senator, and I appreciate you
mentioning Wisconsin's experience there because they are, as
you know, a leader in a lot of these areas.
Senator Baldwin. Right. Yes.
Mr. Nichols. First, I would say that the fundamental reason
you need Medicare in the picture is so that any given practice
and any given hospital system, any given health care provider
system, can look at the totality of what they are doing. You
cannot analyze total cost of care unless you have total cost of
care. And you need to see the difference between Medicare,
private, Medicaid. You need to be able to say, okay, what if we
incentivize the kinds of things Dr. Patel talked about? What if
we incentivized paying for care coordination, which is not now
paid for in most circumstances? We took a stream from here. You
would have to have all the data to figure out how to make that
business model work.
What transparency is about is making models work, actually
add up, and you cannot do it unless you have got everybody at
the table, so that is why it is so important.
Senator Baldwin. Yes. Dr. Patel, do you have anything to
add?
Dr. Patel. I will just briefly say, I can get more
information about how many megabytes of data I used on my cell
phone than I can about how much it cost my patients to get care
under me in the last month. So I think having access to the
claims data is just the first step. It is a huge and a very
important step. These databases are hard. It is not easy to get
these data claims together, and then on top of that, we just
need to make sure that we add to these important all-payer
claims databases a way to get the data back out to the very
people, patients, providers, and payers, who are making
decisions.
And there seems to be a lot of concern about doing that,
like, oh, if people can see how much it costs to see me versus
him, then there is going to be a big problem. But that is
actually exactly what we do need in our country.
Senator Baldwin. I think on that point, especially as data
becomes accessible to providers on a larger scale, it is not
just about price, obviously. This drives quality and this
drives--it is decision maker support. You know, that is
essential. It seems like we have come further, at least in my
State, in figuring out how to drive quality with providers than
we have what are useful ways to share this information with
potential consumers.
And I am wondering, as we--and I realize I am running out
of time--as we develop the marketplace that becomes available
online October 1, what sort of complementary steps forward we
can see for consumers that make this metadata really useful to
them in purchasing quality as well as looking at cost.
Mr. Nichols. Well, so we talked about setting up these cost
calculators, where you can look at, fundamentally, what would
it cost me. You can also put right there with the price the
quality ranking for that institution, and there are lots of
ways to do that and lots of, you know, methods. But those
things are being done in the best places in the country. We
just need to do in all the country what has been going on in
the best places in our country. It can be done, absolutely.
Chairman Murray. Thank you very much.
Senator King.
Senator King. Thank you, Madam Chair, and thanks for having
this hearing.
I want to start with a chart, and to me--I think I am going
to have this chart tattooed on my forehead.
[Laughter.]
Senator King. I mean, this is the whole deal. I was
watching a debate on the floor, and this chart actually belongs
to Senator Hatch. He was talking about it. I saw it on the
monitor and I said, I have got to have that chart. And my
friend, Lauren--my colleague, Lauren, got it.
But, basically, what it shows is the whole Federal debt and
deficit problem is health care and we have just got to focus on
that. And it is not the Federal expenditures on health care, it
is health care generally, and that is what is important about
this hearing. If we try to solve the Federal debt problem
simply by saying, Medicare is going to pay less, Medicaid is
going to pay less, all we are doing is shifting these costs to
somebody else.
Basically, what this shows is discretionary spending,
Social Security, other mandatory, projected out, essentially
flat. Health care is where all the expenditures are. So
shifting costs is not the answer. We need to talk about,
fundamentally, how to lower health care costs, and to say it
cannot be done is ridiculous because we pay almost twice as
much as anybody else in the world for results that are not that
good. So that is where we have got to go.
Now, that is my ridiculously big picture. The small picture
is, Dr. Nichols, I believe in ACOs. We have got three of them
in Maine. I like the idea of getting away from fee-for-service
and I think that you change the incentives. I think that is a
good deal. Here is what worries me, particularly in a rural
State. You create an ACO. You have basically created a regional
monopoly. Monopolies are not, historically, beneficent. How do
we deal with the problem of an ACO inherently being a local
monopoly?
Mr. Nichols. You know, it is a great question. It is a
problem not just in Maine, friend. It is a problem in
California and lots of other places, as well. So, essentially,
what I would observe is those hospitals that are the center of
the ACOs you are talking about, they were kind of monopolies
before. This is not really a change. What we have lost is an
opportunity.
Two things I can think of in the short run. One is what I
call domestic medical tourism. I know a surgeon, retired,
Denver, worked for a long time in that area, knew a mining
executive. After he retired, he called up the mining executive.
He said, ``You are paying too much for health care. I am bored.
Let me help you.'' He took the 15 most expensive conditions,
found the best place for those things to be treated, all over
the Upper Midwest, lowered PMPM--
Senator King. This is like Lowe's sending all their heart
patients--
Mr. Nichols. Bingo.
Senator King. --to Cleveland.
Mr. Nichols. The Cleveland Clinic. You can do that on a
regional basis, and that--
Senator King. Because I think, in response to Senator
Johnson, competition between insurers is not really the deal.
To me, it is competition between providers. That is_there are
only two ways to regulate price in our society. One is
competition. The other is regulation. I think competition is
better.
Mr. Nichols. It certainly is, and it can work if you have
good transparency. That is correct.
Senator King. Well, you know, we are the biggest health
care purchaser, Medicare. I do not understand, Madam Chairman,
why Medicare does not say, any hospital or provider that does
not publish their data by July 1, 2014, we do not pay anymore.
I mean, we have enormous market power as a customer, and I do
not think we use it very effectively.
The same thing with Electronic Medical Records. You know,
we have been talking about Electronic Medical Records since the
1990s, and we have got all these systems and they are
incompatible. I mean, Medicare ought to say, if you do not have
Electronic Medical Records that are interoperable by, you know,
July 1, 2014, we do not pay you anymore. I mean, all of a
sudden, it would concentrate the mind.
The other thing, Mr. Antos--Dr. Antos--are you a doctor?
Mr. Antos. I do not see patients. I see numbers.
[Laughter.]
Mr. Antos. I do not want to--well, never mind.
[Laughter.]
Senator King. You are a free enterprise kind of guy. Is
there any straightface argument for Medicare not bargaining for
drugs? Does anybody in our society who buys things in bulk not
get a deal?
Mr. Antos. I spent eight years regulating hospital prices
in Maryland. Maryland is the only State that does this. And
over my eight years, we did not save anybody a dime.
Senator King. No, but I am talking about bulk purchases.
Medicare buys all drugs by the gazillions.
Mr. Antos. Well--
Senator King. You could not get a deal--
Mr. Antos. So--
Senator King. --from a pharmaceutical company if you can
bargain? Be serious.
Mr. Antos. Well, here is the problem. Look at--
Senator King. You ever go to Sam's Club?
[Laughter.]
Mr. Antos. Sure. Look at what happened with Part D. Part D
was set up pretty well except that there were certain drugs
that people up here felt were very important, and those were
the drugs whose prices have gone up the most. It is not too
surprising. So if you have--if you--it is a question of
competition. It is not a question of centralizing the
purchasing. If it were simply centralizing the purchasing--
Senator King. Well, but--
Mr. Antos. --then why do we not just eliminate all the drug
companies--
Senator King. But it is already central. I mean, the VA
gets a deal. They buy in bulk. Medicaid gets a deal. They buy
in bulk. We have got this, to me, amazing law that says the
biggest purchaser in the society cannot bargain, and I do not--
Mr. Antos. Well, so--
Senator King. --understand why we do that.
Mr. Antos. So if the Federal Government were capable of
bargaining rather than mandating, I would begin, maybe, to
agree with you. But we have seen what bargaining means with the
Medicare program. It does not bargain. It dictates. And for
that matter, you know, a lot of good ideas that we are now
citing--you cited, is it Lowe's or somebody--
Senator King. Right.
Mr. Antos. --sending heart patients to the Cleveland
Clinic. You know, the Medicare program had that. I ran that
program and it was killed because it was too effective. So I am
not confident--
Senator King. Well, I am not for--
Mr. Antos. --I am not confident that the Federal Government
is actually capable of following through on good ideas. I am
much more confident that private plans with information, with
appropriate regulation, can do the job.
Senator King. Well, I just--I think if you buy something in
bulk, you can usually get a better deal, and it just strikes me
as it does not pass the straightface test that we could not get
a better deal on drugs that we are buying by the billions of
dollars.
Mr. Antos. So, Senator, why do we not start by allowing
mail order pharmacy in Part D. That saves a lot of money. You
do not have to walk into the drug store. It is convenient for a
lot of people. Virtually everybody under the age of 65 gets
their drugs through the mail. Medicare patients are not allowed
to because Congress would not allow it. So there are lots of
things we could do to improve what is going on here--
Senator King. And we should. I agree.
I see I am out of time, Madam Chair. Huge set of issues
here, but I think the government could be a lot better consumer
and could help with a lot of these delivery processes. But I
also agree with Senator Johnson that the public has to have a
stake in the game, and if, for example, they want to go to a
different hospital than the one that their insurance company
has bargained--if a customer--if an insurance company has a
deal with the Cleveland Clinic and it gets a good price and a
consumer wants to go somewhere else, they should be allowed to,
but they should pay the differential. And I think that would be
a reform--in my State, for example, you have to offer every
hospital, which means that insurance companies cannot
effectively bargain with the hospitals. So there are all kinds
of warping of the market here that I think we need to deal
with, information, a lot of the things we have talked about.
Great topic, Madam Chairman. Thank you for doing it. I hope
we can talk about this more.
Chairman Murray. Thank you. Thank you very much.
I think this was a really good discussion and I want to
thank all of our colleagues who participated today, and I want
to especially thank our witnesses for coming, for your
testimony today.
As a reminder to all of my colleagues, additional
statements or questions for any of the witnesses are due in by
6:00 p.m. today.
With that, again, thank you all for coming and this hearing
is closed.
[Whereupon, at 12:17 p.m., the committee was adjourned.]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
THE IMPACT OF POLITICAL UNCERTAINTY ON JOBS AND THE ECONOMY
----------
TUESDAY, SEPTEMBER 24, 2013
United States Senate,
Committee on the Budget,
Washington, D.C.
The committee met, pursuant to notice, at 2:36 p.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, Sessions, and Portman.
Staff Present: Evan T. Schatz, Majority Staff Director; and
Eric M. Ueland, Minority Staff Director.
OPENING STATEMENT OF CHAIRMAN MURRAY
Chairman Murray. Good afternoon. This hearing will now come
to order, and I want to start by thanking my Ranking Member,
Senator Sessions, and all of our colleagues who will be joining
us here today.
I also want to welcome and thank our witnesses, Dr. Mark
Zandi, who is the Chief Economist at Moody's Analytics; Dr.
Chad Stone, he is the Chief Economist at the Center on Budget
and Policy Priorities; and Dr. Allan Meltzer, Professor of
Political Economy at Carnegie Mellon University. We are all
very glad to have you here today to talk about the ways that
uncertainty in Federal policy making, especially when it comes
to our budget, has impacted job creation and economic growth.
Five years ago this month, our country was in the middle of
a growing financial crisis. Lehman Brothers had just filed for
bankruptcy protection. Our economy was spiraling downwards,
taking along hundreds of thousands of American jobs and
financial security. In September 2008 alone, we lost 459,000
jobs across the country and, as we all remember, the losses
grew from there.
Over the last few years, thankfully, our economy has begun
to rebuild. Many people are getting back to work. Crucial
sectors of our economy are regaining some strength. And even
though the long-term fiscal challenges remain, the short-term
deficit picture has improved significantly and we are now on
stronger footing.
But, as we will discuss here today, the recovery is still
fragile and not nearly as widely felt as it should be. Although
hiring has picked up, far too many Americans are still looking
or stuck in low-paying jobs that offer little short-term or
long-term economic security and even less opportunity to get
ahead. New Census data shows that the middle 60 percent of
American income earners actually have lost ground since the
recession ended. Real income for this group declined 1.2
percent over the recovery, while the top five percent of
earners gained five percent. So, even though we have come a
long way, there is still a lot we need to do to ensure American
families recover from the impact of the Great Recession and to
ensure strong middle class growth and economic security in the
future.
Families across the country are very focused on these
issues. Here in Congress, we should be focusing on them, too.
That is why what we have seen recently from a minority of
extreme Republicans is really deeply disappointing and harmful.
Again and again, some of the Tea Party Republicans have chosen
gridlock over compromise, brinkmanship over solving problems,
and partisan games over economic recovery.
They held the economy hostage over the debt ceiling in 2011
in an effort to, as Speaker Boehner admitted, create enough
chaos to force their ideological agenda through Congress.
During that debate, job growth and consumer confidence tanked.
The Dow dropped more than 2,000 points, and the debacle
ultimately led to sequestration, which, while doing relatively
little to improve our long-term fiscal condition, has imposed
brutal cuts that slowed growth. It has weakened our national
defense and it has slashed crucial programs that families and
seniors and our future economic competitiveness depend on.
The Congressional Budget Office estimated that ending
sequestrating through the end of next fiscal year could add up
to 1.6 million jobs. This is one of the many reasons that
Democrats have been trying to start a bipartisan budget
conference for the past six months now, since the Senate and
the House passed their budgets. A bipartisan budget conference
would have offered an opportunity for us to work together to
replace the harmful automatic cuts with more responsible
deficit reduction. But, rather than coming to the table, as we
now know, some of the Tea Party Republicans have stood up and
blocked these bipartisan negotiations between the House and the
Senate each of the 18 times we have now asked to get them
started, even though I know that many other Republicans agreed
with us that we should at least sit down together and try to
get a deal.
Many of us on both sides of the aisle wanted to get to work
before we were up against a deadline. We wanted to avoid the
uncertainty and governing by crisis that Americans are rightly
sick of. But just like in 2011, Tea Party Republicans thought
they would have more leverage in a crisis, and so now, here we
are today, days away from a possible government shutdown which
could affect hundreds of thousands of workers' jobs and disrupt
basic services, from Social Security payments to small business
loans, all because some Tea Party Republicans have decided once
again to try to defend the Affordable Care Act, a law, by the
way, that has already helped millions of Americans and is on
track to help many more.
If that is not enough, those same Republicans are, to quote
Speaker Boehner, ``trying to pick a whale of a fight over the
debt ceiling,'' even though economists warn that an
unprecedented default on U.S. obligations could throw us back
into a recession and devastate the global economy. The bottom
line is that when we should be thinking about how to create
jobs and how we can encourage growth, some Republicans are
letting the Tea Party minority push us from one crisis to the
next and their brinkmanship has very serious consequences for
our country.
Uncertainty about government policies has increased in the
last two years. In fact, the 2011 debate over raising the debt
ceiling created even more uncertainty in the economy than the
2008 collapse of Lehman Brothers. Economists and experts have
been very clear that we cannot afford more of this. Federal
Reserve Chairman Ben Bernanke said last week that current
Federal fiscal policy is, quote, ``an important restraint on
growth.'' The U.S. Chamber of Commerce, which, by the way, does
not often side with Democrats on fiscal issues, even sent a
letter to the House urging them to end their campaign to defund
health care reform, pass a continuing resolution to keep our
government running, and raise the debt ceiling in a timely
manner.
Many Republicans are sending the same message to their
party. Senator Burr has said repeatedly that trying to defund
the Affordable Care Act in the continuing resolution is the
dumbest idea he has ever heard. Senator McCain called
Republican debt ceiling threats, quote, ``shenanigans,'' and we
agree.
We want to pass a continuing resolution to keep the
government running and then let us get to work on a long- term
budget deal that puts jobs and the economy first, that replaces
sequestration fairly and responsibly, that does make smart
reductions in Federal spending and asks the wealthiest
Americans and biggest corporations to do their fair share, as
well.
We on our side continue to be ready to work with anyone who
will come to the table, willing to make some tough choices. But
as the President has made clear, we are not going to negotiate
over the debt ceiling and we are not going to accept bizarre
demands like defunding or delaying the Affordable Care Act. All
that would do is create more uncertainty for families across
the country, and believe me, they have had enough.
Americans have been fighting hard the last several years to
get back on their feet, to rebuild their retirement savings, to
find new jobs and restore their own financial security. The
last thing they need right now is Republicans putting our
economic growth, and with it Americans' jobs and retirement and
security, at risk.
You know, it really should go without saying that instead
of making it harder for families to find work or pay off their
debts or send their kids to school, to do the kinds of things
that we know strengthen our economy now and over the longer
term, we should be doing everything here in Congress to
encourage continued and stronger growth.
So, I really hope that Speaker Boehner and the rest of his
Republican leadership will stand up to the extremists on the
Tea Party minority that just seem to be committed to crisis and
stop the hostage taking, stop the political games that are
really threatening our fragile economic recovery. And again, we
extend the olive branch to sit down and work with us to find a
bipartisan balanced budget deal and move this economy forward.
And once we can do that, I am confident we can work towards
that bipartisan deal that the American people expect.
So, I am really looking forward to this discussion today.
It is an important topic. We want to hear from our witnesses
about what our priorities should be as we look at the needs of
the economy and middle class families, and again, I want to
thank all of our witnesses and our colleagues who are here
today for this important discussion.
With that, Senator Sessions, I will turn it over to you for
an opening remark.
OPENING STATEMENT OF SENATOR SESSIONS
Senator Sessions. Well, thank you. We do have a good panel,
Madam Chair. I would note that getting along and trying to have
a good positive agreement in the face of your opening remarks,
which are capable of being written by David Axelrod during the
height of a political campaign.
We have got a lot of problems in this country and we need
to be dealing with the fundamental problems in this country,
and this recovery is not a recovery at all. It is a very, very
weak recovery. Things are not going well with the American
people. The growth every year falls below what CBO and what the
Fed has projected that it would be. Why is this happening?
I suggest it is too many taxes, too much regulation, too
much Obamacare, and too much government. We need to have growth
in the private sector, and debt itself is pulling down growth.
I would just note, of the jobs that have been so touted this
year, since January, 77 percent of those jobs were less than
full-time, were not full-time jobs. That is clearly a direct
result of the Obamacare. And until we deal with these massive
government programs and regulations, we are not going to get
this economy growing in the right way.
Well, we are here because we have not resolved the large,
nagging policy differences that stand in the way of fiscal
improvements. The state of middle- and lower-income Americans
is worsening on every front. The slow growth of the economy,
the slowest economic recovery since World War II, is
restraining the normal upward movement and income that previous
generations have experienced, even after recessions. If you do
not have a job, you are twice as likely to only find part-time
as full-time work, if you can find any work at all. Middle-
class incomes have stagnated-- actually, fallen--and that means
that savings for college and retirement are at all-time lows.
Even after the recession, in this recovery period, these
numbers are still out there.
Young people are not marrying as early as they want due to
bad economic prospects. That means families are launching later
in life, which gives couples fewer years to pay down their
mortgage, create savings, and raise their children. Too many of
our public schools waste taxpayers' dollars while consistently
failing the children of hard- working parents.
Indeed, we are quietly downsizing the American dream. The
new normal really refers to the increasingly modest dreams
hard-working families allow themselves. It may be education
after high school, it may be retirement, it may be a paid-up
home and car when you stop working, but increasingly, not
certain and perhaps even likely.
The rapid growth of government debt has slowed the
economy--is slowing it now--as has the mounting concern that
Washington will ever bring its fiscal house in order. There is
a concern we are never going to get it into order. The real
uncertainty in the financial markets deal with our capacity to
address our short- and long-term fiscal and economic policy
problems--solving them, not just passing a CR as if that is
going to fix anything.
Businesses have been slow to expand their operations, thus
further weakening middle- and lower-income families. Fewer
people are working than in 2007. Get this. Just before the
recession hit in December of 2007, about 62.7 percent of the
population age 16 and above who were looking for a job were
working. If that same percentage were working today, we would
have 154 million jobs, but we do not. We have only 144 million
jobs and only 58 percent of the population is working. I think
that is the lowest since 1975. In short, we are missing 9.9
million jobs when we compare this economy to the one in 2007,
so we need to ask some questions here.
Here is another way to look at the problems in our job
market. In 2007, we had 363,000 discouraged workers, people who
had given up looking for work but had not yet disappeared from
view by the Employment Security offices. Today, we have
866,000. That is an increase of 140 percent.
Here is another barometer of the middle-class anxiety. We
have 1,988,000 fewer full-time jobs today than in 2007. We have
3,627,000 more in the total job population on part- time work
than we had in 2007--3.6 million. Our economy appears to be
much better at producing part-time jobs than full-time, which
is definitely worrisome.
Resolving this jobs crisis for working families will take
more than just passing a so-called continuing resolution or a
new process for adjusting the debt ceiling-- just borrow more,
as some have suggested. We need a comprehensive review of our
economic policies, and, I might add, even our welfare policies.
Obviously, our economic policies are not working very well.
Perhaps our welfare policies are exacerbating the trend, also.
Tax more, borrow more, spend more, regulate more, more health
care from the Federal Government side is not improving our
situation. QE3 at the Fed--has it really produced growth that
we normally see after the recession? It has not. Their
projections have been continually off.
So, let us take this period, this three-month period, to
debate the spending priorities and set some much-needed reforms
in motion that will actually deal with the problems of growth
in America and job creation. What will work to create jobs? Tax
more? Spend more? Borrow more? Regulate more? Is that going to
create jobs? I suggest to you it will never create jobs. It is
a guaranteed plan for failure.
If we can come out of these debates with evidence that we
have actually been fixing broken programs, confronting our
rising debt, investors will thank us by infusing the private
sector with new capital, and that is when working families
might begin to see some economic light at the end of a very
long tunnel.
I was United States Attorney when President Reagan was
President. The government was shut down in the early 1980s. It
is still here today, I understand. They shut it down in the
1990s. I think there were two or three shutdowns when Reagan
was President, some a little longer than others, some short,
and we are still here.
So, we do not need to be panicked about the difficulties
that are facing us, the need to reach an accord between our
parties that will actually create policies that create growth
and jobs, and we are not doing that now and the trends are not
good.
So, this is a good panel. I know we will have some
disagreements--we already have--but we have got to work on
these things. We have a difference of a view about, I think,
how to make this country better, and maybe we can learn
something today.
Thank you, Madam Chairman.
Chairman Murray. Thank you very much.
With that, we are going to turn to our witnesses, and Dr.
Zandi, we will begin with you. And again, thank you to all of
you for being here today.
STATEMENT OF MARK ZANDI, PH.D., CHIEF ECONOMIST, MOODY'S
ANALYTICS
Mr. Zandi. Thank you, Chairman Murray, Ranking Member
Sessions, and other members of the committee, for the
opportunity to be here today. I am an employee of the Moody's
Corporation, but the views I express today are my own, my own
views.
I would like to make three points in my oral remarks. The
first one is that political uncertainty has been a significant
weight on the economic recovery. Political uncertainty is
generated by brinkmanship here in Washington over the budget,
over the debt ceiling, over policy and regulation. All those
things combined have weighed heavily on economic activity.
I think that is most evident in terms of the decision
making of businesses, most clearly in terms of hiring. I have a
chart, see chart 1 of my written testimony.
insert zandi chart 1 here.This shows the number of hires
month by month back to 2001, when the data begins. This is data
from the Bureau of Labor Statistics. And you will note that
hiring collapsed during the recession, has made something of a
comeback during the recovery, but remains very, very low by
historical standards. Current hiring rates on a monthly basis
are somewhere between four and four-and-a-half million. In a
reasonably well functioning economy, it should be five to five-
and-a-half million. You can see that if you go back to the
previous recovery or the one before that. So, the political
uncertainty, I think, is key to the lack of hiring, the
unwillingness of businesses to take a risk.
It is also evident in entrepreneurship, which is also
critical to economic growth, short- and long-term, and you can
see that in the next slide, which shows job gains at new
establishments. And here, too, you can see the shortfall. It is
quite significant. Of all the things that I worry about with
regard to the economy--and I agree, the recovery has been very
subpar--this is it. Entrepreneurship is key to our long-term
economic growth. It is what makes our economy tick and why it
is such a dynamic economy, the most dynamic economy on the
planet. So, this picture has to change, and I think the reason
it is so depressed is, in large part, due to the political
uncertainty.
Just to give you further context, based on some work I have
done, since the uncertainty, political uncertainty rose
significantly with the Stimulus Act in early 2009, it has
shaved about $150 billion from real GDP, which translates into
a little over a million jobs and has increased unemployment by
seven-tenths of a percentage point. So if political uncertainty
had not risen to the degree that it has, the unemployment rate
today would still be high, uncomfortably high, but at 6.6
percent--we are currently at 7.3, it would be at 6.6--that
would make a meaningful difference to our economy's
performance.
So, point number one is political uncertainty has been a
very significant weight on economic activity during the
recovery.
The second point is that, at minimum, I think it is key
during the current budget battle that policy makers come to
terms in a timely way on funding the government--funding runs
out at the end of this week--and raising the debt ceiling. Just
to give you a sense of the impact here, if the government shuts
down for several days, four or five days, no big deal. If it is
a month, it will shave about a point and a half off of GDP
growth in Q4, which means growth will come to a standstill in
the fourth quarter.
If it goes on for six or eight weeks, that means that debt
limit is in play. We will probably breach it. In my view,
breaching the debt limit would be cataclysmic. It would mean
higher mortgage rates, higher borrowing costs for businesses,
lower stock prices, lower house prices, a full- blown
recession, and there would be no reasonable policy response to
it. The Federal Reserve would not know how to respond, and, of
course, by definition, fiscal policy makers would not be
responding. It would be a very, very dark scenario. So, it is
critical that you come to terms on this in a timely way.
Finally, my third point is while I think it is entirely
appropriate and desirable for you to address our long-term
fiscal challenges, and they are quite significant and there is
a lot of hard work to do on entitlement reform and tax reform,
I would not add to the near-term fiscal austerity. Under
current law, if policy makers do nothing, that is quite
significant. We do not need to add to it. The economy is still
quite fragile.
Thank you for the opportunity, again. I appreciate it.
[The prepared statement of Mr. Zandi follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Murray. Thank you very much.
Dr. Stone.
STATEMENT OF CHAD STONE, PH.D., CHIEF ECONOMIST, CENTER ON
BUDGET AND POLICY PRIORITIES
Mr. Stone. Chairman Murray, Ranking Member Sessions, and
other members of the committee, thank you for the opportunity
to testify today on the effect of political uncertainty on jobs
and the economy.
Businesses and households, of course, deal with uncertainty
of all kinds all the time in a dynamic market economy, and
politics ain't beanbag, so we should not be surprised that
people fight hard for their preferred policies. But political
gridlock over economic and budget policy, combined with
brinkmanship over must-pass legislation, has hurt economic
performance and job creation. Unfortunately, things seem to be
getting worse rather than better as we face yet another threat
to the economic recovery generated purely by politics and not
by economic events, per se.
I make two overarching points in my written testimony.
First, make no mistake, while a government shutdown would be
disruptive to the economy, a debt ceiling crisis that ends up
with a failure of the Federal Government to honor financial
obligations that it has already incurred, whether to bond
holders, government contractors, veterans, or a host of other
businesses and households, could be disastrous. Evidence from
the 2011 debt ceiling crisis suggests that debt ceiling
brinkmanship is costly, even if a last-minute deal is struck.
Second, resolving budget issues to avoid a government
shutdown or debt default is only half the battle. The specific
measures taken matter just as much. In particular, a budget
deal that hurts economic growth and job creation in the short
run, increases poverty or hardship, or savagely cuts important
government programs should not be acceptable.
Moreover, a stop-gap deal, or one that both sides are not
committed to seeing enforced, merely postpones the next
showdown. In 2011, hard decisions to address the challenge of
achieving longer-term fiscal stabilization were assigned to a
special committee. Sequestration was supposedly so unpalatable
to both sides that it would guarantee an agreement. But, here
we are, with sequestration, a possible government shutdown, and
a debt ceiling crisis.
There is a broader lesson here. Commissions or super
committees and budget rules cannot force unwilling policy
makers to make choices they see as unpalatable or to bridge
fundamental policy differences that leave little room for
compromise. We are a long way from the 1990s, when a strong
economy and policy makers' willingness to stick to realistic
discretionary caps and pay-go produced a balanced budget and a
declining debt.
In my written testimony, I discuss the broad recognition
among economists--broad, not universal but broad--that the main
factor holding back the economic recovery is weak aggregate
demand. If businesses were more confident of future sales and
households were more confident that they could expect to see
their incomes growing along with the economy and that finding
or changing jobs would be easier, we would see faster economic
growth and job creation. But we are stuck in a low-demand trap
where economic growth is too slow and unemployment remains too
high.
The economy has generated plenty of uncertainty on its own
in recent years, but policy squabbles over how fast to
implement needed long-term deficit reduction without harming
the economic recovery and over the appropriate mix between
spending restraint and revenue increases has exacerbated the
situation. Businesses, households, and financial markets had to
deal with uncertainty over policy decisions in the run-up to
critical fiscal decisions in each of the past several years--
2010, 2011, the big one, the 2012 fiscal cliff--but the
greatest uncertainty surrounded the showdown over raising the
debt limit in 2011 and how that would be resolved.
Evidence suggests that businesses, households, and
financial markets experience heightened uncertainty during such
times and that greater uncertainty acts as anti- stimulus,
weakening aggregate demand. Failure to resolve the underlying
issues or implementing policies that themselves restrain
aggregate demand continues the uncertainty and the drag on the
recovery.
But resolving the budget crisis with policies that have the
same impact or worse is no solution. Sequestration is the
poster child of misguided fiscal restraint. But, overall, the
pursuit of fiscal austerity policies at the expense of policies
aimed at stimulating immediate increases in economic activity
and job creation in a weak economy has held back the recovery.
The International Monetary Fund gets it right when they
say, "deficit reduction in 2013 has been excessively rapid and
ill designed. Sequestration exerts a heavy toll on growth. And
indiscriminate reductions in education, science, and
infrastructure spending could also reduce medium-term potential
growth. These cuts should be replaced with a back-loaded mix of
entitlement savings and new revenues along the lines of the
administration's budget proposal. A slower pace of deficit
reduction would help the recovery at a time when monetary
policy has limited room to support it further." That is the IMF
in its latest reassessment of fiscal policy in advanced
economies and its mission to the United States, its
consultation with United States policy makers.
My final words, raise, r-a-I-s-e, the debt ceiling, and do
it soon and cleanly. As I say in my testimony, do it like the
Danes and raise it so high that it is no longer a bone of
political contention. They are the only other country that has
anything like our debt ceiling, and they make sure politics
does not get involved.
Better yet, raze, r-a-z-e, the debt ceiling by getting rid
of it entirely. It has nothing to do with the normal budget
process, and the ratio of cost to benefits associated with
having a debt ceiling is almost infinite.
Thank you.
[The prepared statement of Mr. Stone follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Murray. Thank you very much.
Dr. Meltzer.
STATEMENT OF ALLAN H. MELTZER, PH.D., CARNEGIE MELLON
UNIVERSITY PROFESSOR OF POLITICAL ECONOMY, TEPPER SCHOOL OF
BUSINESS
Mr. Meltzer. Thank you, Madam Chairman, Mr. Ranking Member,
Senators. I am pleased once again to respond to questions from
the Senate committee about the reasons for the slow recovery.
The facts about the slow recovery are not in doubt, so I
will not dwell on them. We understand them. You both spoke
about them. We see unemployment is high. Poverty remains
higher. Failed efforts to lower the spread between upper
incomes and lower incomes have done the reverse. Policy has
really not achieved the nice things that people would like it
to achieve. Forecasts have been overly optimistic. Deficit
projections become more pessimistic. The debt-to-GDP ratio in
the long term, according to CBO, reaches 200 percent. Long
before that happens, we will be in crisis.
Why so much stimulus and so little recovery? Well, there
are lots of reasons. The Fed pumps out money, but the problems
are mainly non-monetary. My colleagues have talked about
uncertainty, and I certainly agree with them that uncertainty
is a problem. Uncertainty about the deficit and the debt
ceiling are problems. They are a problem. They are not, in my
opinion, the problem. The problem is the longer-term position
of how the United States gets back on the growth path, which
has been left since the Reagan and Clinton years to produce
growth, jobs, standards of living, incomes, and all that.
There are two overriding problems. One is unsustainable
budget deficits, especially underfunded entitlements. You all
know about that.
Second are the demands for higher tax rates, and decisions
to increase regulation raise current and expected future costs
and heighten uncertainty. Uncertainty is the enemy of
investment, and that is the main reason, in my opinion, why the
long-term growth rate is down.
There is no valid economic theory, no theory of any kind,
that advises short-term stimulus to consumer spending. John
Maynard Keynes is usually invoked. He always favored
investment. He never favored consumption. You could read his
work, as I have done, from beginning to end. You will not find
him in favor of consumption spending. He favored investment,
investment spending. Keynes' idea of stimulus is the Kennedy-
Johnson permanent tax cuts or the Reagan tax cuts. While he
favored deficit spending to finance investments in recessions,
he actively opposed permanent deficits, and I have a quotation
in my paper that I will not read.
In summary, there is no valid basis in economics for the
policies we have followed and they have not ended the recession
in almost five years, not surprisingly, and most forecasts that
I have seen call for subpar growth in the next few years. We
can do better. We should do better. And if we are going to
achieve the America that we want, we have to do better.
In searching through past recessions, there is only one
with slow investment and sluggish growth of employment similar
to the one. That is 1938 to 1940. You can see Table 6 in the
paper in my testimony. What President Roosevelt did is similar
to what President Obama has done. He called the businessmen
economic royalists. He tried to pack the Supreme Court. He
passed an excess profits tax. He ginned up the Antitrust
Division to go after businessmen. He got Congress to establish
the Temporary National Economic Commission, which was very
anti-business. He did a whole lot of things. He did them until
the war. He was a populist until the war. When the war came,
the businessmen that he was so despising of, he appointed
Knudsen of General Motors to be his economic czar. Populism
ended. The war was his triumph.
That is what we need to do now. We need to adopt policies
which look at the long-term objective of getting the economy
back on a stable growth path.
Let me read to you, not from econometric analysis but from
what real businessmen say. Professors Porter and Rivken of the
Harvard Business School asked 10,000 Harvard Business School
alumni--as you know, they run many of the major corporations--
about their decisions to locate plants. The respondents cited a
couple as problems--the U.S. tax code, an ineffective political
system, a weak public education system, poor macroeconomic
policies, convoluted regulation, deteriorating infrastructure,
and a lack of skilled labor--as reasons for not investing in
the United States. Most of the decisions were to move
investment out of the United States. That tells us something, I
think, which is critical.
Here is one example, one of many, many examples of
regulation which hurts our economy. Before Sarbanes-Oxley, half
of the world's new issues for corporations were made in the
U.S. market, namely, New York. After Sarbanes-Oxley, one in 12
instead of one in two. Brokers in London have the pictures of
Senator Sarbanes and Congressman Oxley in their office. That
tells you something about what regulation is doing to us. We
are over-regulated. You may think that there are good things or
bad things about the regulation. One can differ about that. But
regulation at the present time and high tax rates impede growth
and recovery.
[The prepared statement of Mr. Meltzer follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Murray. Thank you very much to all three of you.
Dr. Zandi, let me start with you. You stated that you
expect lawmakers to come together at the last minute because
the failure to do so would, and I quote, have dire economic
consequences, and I think that is a very sensible and rational
position for anybody to assume that those of us who are in
elected office and sent here to do everything we can to avoid
inflicting harm on our economy and on our constituents would do
everything we could to do that. But I just--I worry because
there seems to be a lot of dysfunction and unwillingness to
compromise here today, and I think many people need to really
understand what the impacts of that is.
And I wanted to ask you, really, the question that was
posed by this hearing, to talk about the uncertainty that we
create here, how it impacts people. So let us start with the
debt limit and what it would mean for the United States to
default, and for all of our viewers who are watching at home
here today, maybe if you could describe for them what a default
on our debt would mean to them and their families and what they
would see at home.
Mr. Zandi. Sure. If we breach the debt limit, and that
looks like, under reasonable assumptions, it will be in the
second half of October, in all likelihood, the Treasury would
continue to pay on the debt. They have the mechanism for doing
that and I would be surprised if they did not.
However, that would mean that the Treasury could not meet
all its other bills, and they are quite substantive. I will
give you an example. On November 1, there is a very large
Social Security payment that is due. The government would not
have enough cash on hand to make that payment. So, in all
likelihood, the Treasury would wait for a day, two, three,
five, six, seven days, whatever it took to raise the cash
sufficient to make the full payment to Social Security
recipients. And over time, if this would continue, the lag
between the bills that are coming in and the checks that are
being cut would increase.
Well, I think if we got into that kind of situation, I
think, immediately, there would be panic and bedlam. If Social
Security recipients are not going to get their checks, I just
think it would be cataclysmic. And, moreover, even global
investors who the Treasury said they are going to pay would
rightfully question whether that will continue. I mean, are we
going to pay global investors, half of whom are foreign
investors, before we pay Social Security recipients? Legitimate
questions that an investor would ask themselves. So financial
markets would be sent into turmoil.
What does this mean for the average American? Well, it
means it would be very difficult to get a mortgage. Mortgage
rates would rise. It would mean businesses, small businesses,
big businesses, would have trouble raising money to fund their
activities. The cost of funding would increase and become much
less available. It would mean house prices would decline. It
would mean stock prices would decline. And it would very
quickly mean layoffs and unemployment would surge.
And as I said in my oral remarks, there is no policy
response to that, none, as we all realize the Federal Reserve
is at the end of its rope. How would it respond? And, by
definition, you all would not be responding, by definition. So
it would be an incredibly dark situation and on par with the
Great Recession, maybe even worse, depending on how things
played out.
So, we just cannot go down that path. It is opening an
economic Pandora's box, literally.
Chairman Murray. Okay. Thank you very much for helping us
understand that.
The debt limit crisis is the most recent and perhaps the
most obvious example of uncertainty, but it is not the only
one. Over the last few years, Congress has repeatedly taken the
nation from one crisis to the next with brinkmanship. I mean,
the best example I have is the budget we passed out of here in
the Senate and the House passed their budget and we have been
waiting for almost six months now to be able to go to
conference to let the country know where our investments are
going to be made and what our priorities are and how we are
going to manage our budget.
I have to say that some of our Republican colleagues here
in the Senate have been pretty clear about why they are
blocking that. They oppose any compromise. They have said it on
the floor. They say they do not want to compromise even with
the House Republicans and they wanted this brinkmanship that we
have today on the budget and raising the debt limit. They seem
to believe that solving some problem by pulling the government
and the economy from one crisis to another is the way to go.
But I wanted to ask any one of you--Dr. Stone, let me start
with you--is not the problem Congress and sort of the one-two
punch of brinkmanship and austerity that threatens our economy
and economic recovery and jobs and global position?
Mr. Stone. Well, Congress has the power of the purse. They
have responsibility over the debt, over government borrowing,
and over spending and taxes, and so they are the ones who have
to make the decisions. And if the process is not working, it is
Congress that needs to make the decisions initially. The
President obviously has to go along, but it starts with
Congress.
Chairman Murray. Does anybody else want to comment?
Mr. Meltzer. Yes. You may be happy to hear, I do not blame
the Congress. You are elected by your constituents. What we
see--the division that we see in the country is a division in
the country. You are sent here, perhaps, to represent the
voters in Washington who want one thing. The others, the Tea
Party people are sent to represent people who want something
very different. And you know that your fate as an elector, as a
legislator, depends upon major issues, doing things that your
voters--that is where the split is. The split is in the public.
Neither side has been able to convince the public that they
have the truth.
Chairman Murray. Well, Dr. Meltzer, I would not disagree
that we come from different constituents. But my constituents
tell me consistently that they expect me to come here to sit
down with others who disagree with me and find solutions, and
that really is why I am so frustrated, is because I cannot do
that. I am not allowed to by a few who are holding the budget
hostage. So I think that is--
Mr. Meltzer. I certainly--
Chairman Murray. That is one of the reasons we are where we
are.
Mr. Meltzer. I certainly agree with you that compromise--
you know, I have been coming here, testifying before various
committees since about 1959, before many of the people in this
room were born. So I am familiar with governments which have
been governments of compromise and governments which fear
compromise. In my opinion, that depends on leadership.
Chairman Murray. Right.
Mr. Meltzer. The President is the leader of the country. It
is up to him to push for compromise. He does not do that. That
leaves the problem where it is.
I would like to say one other thing. I do not agree with
Mr. Zandi about the dire consequences of a default. The
consequences will depend on the size of--there will be
consequences, but the consequences will depend upon how long
the default goes on. It is not going to go on forever, and it
probably will arouse enough reaction from the public that we
will, if we do not get the agreement before, we will get it
after. And if you look at the previous examples--
Chairman Murray. My time is running short and I do want to
give Dr. Zandi a quick second to respond. Even the discussion
around, we may default, will that have an impact on our
economy?
Mr. Zandi. Sure. It already is. You know, just to be a
little bit esoteric here, looking at credit default swap
spreads on U.S. Treasuries, they jumped yesterday to 32 basis
points. For context, a week ago, they were at five basis
points. At the height of the July--August 12 shutdown, they
were at 80 basis points. So we are already on our way.
And I disagree incredibly strongly with the notion that
breaching the debt ceiling would not have major catastrophic
consequences. We had one technical default on Treasury debt
back in 1979. It was a mistake. It centered around a budget
debate, but it was a mistake. Some individual investors did not
get their money on time. The academic research clearly shows
that that has cost us tens of billions of dollars, that one
little mistake, and they got paid right back with interest and
were made whole. But because of that, it raised the interest
costs. So we are playing with real fire and it would not only
do damage to the economy, it would be very counterproductive
for the budget long-run, not just next year, but for decades to
come.
Chairman Murray. I have gone way over my time limit. I need
to turn it over to Senator Sessions.
Senator Sessions. Well, thank you.
Well, we have had these crises before and we bounced back
rather rapidly, Dr. Zandi. And I would note with regard to
debates, maybe Dr. Meltzer would recall, but it seems to me
that a showdown over the debt ceiling resulted in Gramm-Rudman
being passed. It resulted in the Balanced Budget Act of 1997.
It resulted in the Budget Control Act of 2011, all of which, I
think, had, over the long term, positive results for the
American economy.
And there are a lot of reasons out there that we have
uncertainty in our economy, and it is not because we refuse to
change--some of us want to change the debt course we are on.
That is not the only thing that is hurting the economy.
Dr. Meltzer, is it not true that the uncertainty over the
Obamacare health care thing is impacting employment and
businesses in a rather significant way in America today?
Mr. Meltzer. Yes. I mean, even the labor unions have
indicated that Obamacare is hurting the 40-hour week as it is.
I mean, as you pointed out in your opening remarks, a great
part of the jobs that are created are temporary jobs. One of my
children, a chef, was fired. Her employer said to her, ``We
like your work, we think you are great, but you are going to
put us over the ceiling, so we have to get rid of you so that
we will be below the ceiling.'' That is just one example. It is
happening every day to people in the real world.
Senator Sessions. Last week, the Environmental Protection
Agency announced dramatic new CO2 regulations that have been
interpreted to be the death of coal. Does that create
uncertainty, Dr. Meltzer?
Mr. Meltzer. And cost. It creates cost. The administration
does things that they believe are probably good things to do,
but that they increase the power of labor unions. That is a no-
no for businessmen. They may be right or wrong, but it has an
effect on the attitudes that they have.
I read you the list of things that the Harvard Business
School graduates who are in positions to make these decisions,
what they listed. They listed regulation as one of the main
things, uncertainty about tax rates. I mean, all those things
are--and the poor education system in the United States. Those
are things which we really need to do something about and we do
not do it.
Senator Sessions. Dr. Meltzer, in your long and very
distinguished career, do you think that the $1 trillion
extraordinary deficits we have been running for the last four,
five years are creating economic uncertainty?
Mr. Meltzer. Oh, of course. I mean, there may have been a
time in the past when people thought that deficits would be
self-financing in the longer term, but that time is long past.
So now, people see $1 trillion deficits, higher tax rates,
higher tax rates that fall on those people who have to invest.
And that is what was lacking in 1938 to 1940. That is what is
lacking now. It is the investment part of the economy that is
the slowest part of the economy. And to add to that, when they
invest, they invest in robotics, labor-saving technologies like
computing.
Senator Sessions. Well, thank you.
Dr. Zandi, the uncertainty out there, I know, has some
basis in fact and we need to work our way through the
difficulties that we have without breaching the debt ceiling
and without having to extend the CR, if it is at all possible.
But sometimes these events provide the only opportunity to get
a discussion going and to make changes of a significant nature.
We thought we had a real opportunity to fix long-term
entitlements in the 2011 Budget Control Act process. It did not
occur. But we did get, over ten years, a reduction in the
growth of spending from growing $10 trillion to growing $8
trillion, approximately, and I think that was long-term
positive for the country.
This chart up there is Stanford University's daily news-
based economic policy uncertainty moving average, and if you
look to the far right, where we are today, it is right at the
normal level, at 100 on that chart. We have had spikes
repeatedly, but it seems to come back down. So we have had some
spike and down and spike and down. It is preferable that we
reach an agreement and that we make some compromises.
And, Chairman Murray, I would just note that the President
has said he will not even discuss changing one tittle in his
health care law, and you can do anything--we can cut the--
Congress can fail to fund it and he will veto it. He will not
accept it. He will not talk about anything to avoid the debt
ceiling when, in the past, we made historic reforms leading up
to the debt ceiling. It seems to me that the President ought to
be leading, as Dr. Meltzer said, and helping us to reach an
accord on some of these issues where we can make some
improvements.
And everybody knows the health care bill is a train wreck.
It is not working. It is not going to work. We cannot even
discuss, have votes in the Senate, have our colleagues vote on
how to make it better to deal with at least some of the
problems? Slam the door. Harry Reid, the Majority Leader, none.
And so if there is a problem, I suggest it is on both sides.
Chairman Murray. Well, thank you, Senator Sessions. I would
disagree. The President has made it clear that he will work
with us on the law to make it better, but he is not going to
repeal it or not fund it.
Senator Kaine.
Senator Sessions. Well, he has not--
Senator Kaine. Thank you, Madam Chair.
Just for the witnesses, I kind of want to start with a
couple of what I think are simple questions. Maybe they will
not be quite so simple, but if I could just get each of you to
answer them quickly.
Regardless of the magnitude of the harm, would a government
shutdown, under current circumstances, be harmful to the
economy?
Mr. Zandi. Yes. Obviously, the longer the shutdown ensues,
the greater the damage.
Senator Kaine. Dr. Stone?
Mr. Stone. Yes.
Senator Kaine. Dr. Meltzer?
Mr. Meltzer. Yes, but if you look at the chart that was up
there a moment ago, you see the uncertainty goes up and it
comes down again very quickly. So if it is a short period, the
damage will be slight. If it is a long period, the damage will
be serious.
Senator Kaine. You have all indicated that--again, you can
argue about the magnitude of the harm, but that a shutdown
under current circumstances would be harmful.
Mr. Meltzer. Of course.
Senator Kaine. Is threatening a shutdown also harmful?
Mr. Meltzer. Not very.
Senator Kaine. Dr. Zandi?
Mr. Zandi. Yes. I think it adds to the uncertain economic
environment and it impedes hiring, investment decisions, and it
is a weight, a corrosive--I call it a corrosive on economic
growth, yes.
Senator Kaine. And Dr. Stone?
Mr. Stone. It is not as--it is harmful. It is not as
harmful as uncertainty leading up to a debt default. The
biggest spike in the chart is the debt discussions in 2011. And
just as a shutdown only going on for a little while, most of
the damage can be undone, a debt default, you cannot undo the
damage to the credit rating of the United States.
Senator Kaine. I want to get to debt default in a minute,
but just on government shutdown, you all agree that it would be
harmful under current circumstances, to some degree, and two of
the three of you agree that even threatening a shutdown has
some potential for harm.
So, let me go to default. Would a default on the Federal
debt under current circumstances, regardless of the magnitude,
be harmful to the economy? Dr. Zandi?
Mr. Zandi. That would be cataclysmic to the economy and to
our fiscal situation.
Senator Kaine. Dr. Stone?
Mr. Stone. Absolutely.
Senator Kaine. And Dr. Meltzer?
Mr. Meltzer. Of course, but, you know, you and I both know
that major negotiations, people never reveal their favored or
willing position until the very end.
Senator Kaine. Well, let me get to that, actually, as the
second part of the question. So, if a default would be harmful,
how about threatening default, threatening default on our
debts? Does that have some harm to the economy? Dr. Zandi?
Mr. Zandi. Significant negative consequences. I think it
already is having an impact. It has had an impact.
Senator Kaine. And Dr. Stone?
Mr. Stone. Yes. Estimates of the economic damage from the
2011 episode show a magnitude of possible damage equivalent to
estimates for what sequester is doing.
Senator Kaine. And Dr. Meltzer?
Mr. Meltzer. As you know better than I, the public does not
have a high opinion of the Congress--
Senator Kaine. I do know that.
Mr. Meltzer. --so this would just be one other example of
the malfunctioning of the legislative process.
Senator Kaine. And would you agree that lack of confidence
in an institution like Congress is going to have a negative
economic effect?
Mr. Meltzer. Long-term, yes. But if you looked at the
chart, you see it has not appeared yet.
Senator Kaine. Finally--
Mr. Zandi. Could I just make a quick point?
Senator Kaine. Yes.
Mr. Zandi. Look, I think it is reasonable to have debates
about lots of things, but the one thing we cannot debate, that
is sacrosanct, is we pay our debt on time. I mean, this was
established by Alexander Hamilton on day one of the country and
it has reaped enormous benefits for us. If that becomes
questioned in any way, that will cost us dearly for generations
to come. That has got to be rock solid.
Senator Kaine. So, all three of you agree that the default
would have harm on the economy--
Mr. Meltzer. Absolutely.
Senator Kaine. --magnitude depending upon the time, and
that two of the three of you agree that even threatening
default has a negative economic consequence.
The last thing I will ask you is, is the absence of a
budget deal in Congress between the two houses something that
has a negative economic effect? Dr. Zandi?
Mr. Zandi. Yes. Anything that adds to the uncertain
economic environment, and this would qualify, is a weight. It
is not something that matters in any given day, week, or month,
but over a period of time, certainly over the four years of
this economic recovery, it has added up to real dollars and
cents and real jobs and unemployment.
Senator Kaine. And Dr. Stone?
Mr. Stone. It is certainly a symptom. It is not showing up
in interest rates right at the moment, but it is a symptom. It
is a longer-run problem. It is not an immediate crisis.
Senator Kaine. And, Dr. Meltzer, absence of a budget deal
hurting the economy?
Mr. Meltzer. Absence of a long-term return to a stable
budget path. The current crisis is one thing. The longer- term
problem is the major problem facing the United States.
Senator Kaine. Okay.
Mr. Meltzer. That is what we should be dealing with.
Senator Kaine. Well, Madam Chair, then, just to conclude, I
want to be mindful of the Ranking Member's opening comments and
try not to be finger pointing in my conclusion, so let me say
it this way.
I do not know of a single Democratic member of the Senate
or House who either wants to shut down government or is
advocating or threatening a shutdown of government. I do not
know of a single Democratic member of the Senate or House who
either wants to default on America's debt or is advocating or
threatening a default on America's debt. And I do not know of a
single Democratic member of the Senate or House who has blocked
us from going to a budget conference, which we have been trying
to go to for six months ago yesterday.
And I will yield back.
Chairman Murray. Senator Portman.
Senator Portman. Thank you, Madam Chair, and appreciate the
witnesses today.
We have talked a lot about uncertainty and I concur
totally. In fact, I have been all over the State of Ohio in the
last couple months because of the August work period, talking
to people about uncertainty, and they talk about Obamacare a
lot, as you can imagine. They also talk about the national debt
and whether we are going to get this thing under control. I
think it is a wet blanket on the economy. They talk about the
proposals the President has for tax increases, and they do not
know if it will happen or not, but they are concerned about
additional tax increases, particularly on pass-through
entities.
And, of course, they talk about--in Ohio, particularly- -
about what is going on with the EPA because of the substantial
new costs we are going to have in terms of energy in our State.
We are a State that depends on coal for our electricity.
And, of course, uncertainty about the Fed. You know, is QE3
going to continue or not, and what are interest rates going to
be, and we have seen that with the market gyrations.
But I have another question for you and it is about
something maybe worse than uncertainty, which is the certainty
of something bad, and that can also have a negative impact on
the economy. And, again, I go back to the debt. We are asking
once again for Congress to vote on this debt limit, and I know
a bunch of my colleagues on the other side of the aisle think
we should not have that vote, that there just should be an
automatic increase in the debt limit.
And I would just make the observation that if we look back
over the past few decades, the only time Congress has ever made
any substantial progress on the debt or deficit--I found one
exception, it was for about $30 billion--but has come in the
context of a debt limit. And it is interesting. I mean, and the
Ranking Member talked about the--Senator Sessions talked about
Gramm-Rudman. Dr. Meltzer, it sounds like you were probably
there as a senior member of the economic team. But, I mean,
this is all that has worked, really. I think about the 1990
deal. I was at the Bush White House then. That was a debt limit
discussion, the Andrews Air Force Base discussion.
So, this notion that the President has that he refuses to
negotiate on the debt limit, I mean, it is not about
negotiating, it is about getting the votes for something that
is unpopular. Our constituents do not like the idea that we
keep raising the debt limit because they get it. It is like a
credit card to them and we have overspent on the credit card
and what are you going to do about it? We have to do something
on the underlying problem. And so I just think it is
irresponsible for the administration to take this position that
we are not even going to talk to Congress about dealing with
raising the debt limit to historic levels.
Anyway, it seems to me the certainty is as much a problem
as the uncertainty, and the certainty is, if we do not do
something about it, that we will find ourselves, as Erskine
Bowles said at that very table, in the most predictable
financial crisis that we have ever faced.
Let me ask you this. If Congress were to raise the debt
limit without--without--addressing the underlying problem of
spending, doing nothing on it, which is what a lot of folks are
recommending, including the President, would that make
businesses more or less confident about hiring and investing?
Mr. Meltzer. Less.
Senator Portman. Doctor?
Mr. Meltzer. What people want, what businessmen want, what
intelligent consumers want, is a long-term return to the growth
path, the stable growth path that we had, say, very nicely from
1985 to about 2003 and 2004. We met, by the way, at the Hoover
Institution. It is nice to see you.
Senator Portman. Oh, yes. Nice to see you again. You asked
me a tough question there, so I get to ask you a tough one.
[Laughter.]
Mr. Meltzer. That is fair enough.
Senator Portman. Well, look, I think--and I want to hear
Dr. Stone and Mr. Zandi on this, too, but I think that is the
question that we are kind of facing here on the debt limit. Are
we going to do anything? You know, it is not whether we are
going to do Simpson-Bowles. Unfortunately, we are beyond that
now. We are not looking at a grand bargain, but at least a
bargain or an agreement or something on the spending side--
Mr. Meltzer. That moves you in the right direction.
Senator Portman. Moves us in the right direction, and we
are living through the weakest economic recovery, really since
the 1920s, if you look at it in terms of GDP or jobs. I know
there are lots of reasons for that that have to do with the
global economy, but one of the reasons, in my view, is we are
not addressing this problem.
But, Dr. Zandi and Dr. Stone, do you want to address that
question? If we did nothing on spending but simply extended the
debt limit again for a year or two years, would that make
businesses more or less interested in investing and creating
jobs?
Mr. Stone. I do not think raising the debt ceiling with no
conditions attached would be more disruptive than continuing to
squabble over it. Congress has enacted--
Senator Portman. That is not the choice I gave you, though.
It is, do you do something on spending or not when you raise
the debt limit? Which would be better for the business
environment?
Mr. Stone. Raising the debt limit.
Senator Portman. And not doing anything on spending?
Mr. Stone. If that is the choice, yes.
Senator Portman. So you would not see any reductions in
spending as appropriate in the context of a $17 trillion- -
Mr. Stone. Well, I thought the choice was raising--
Senator Portman. CBO has sat at that very table and told us
that the health care entitlements alone are going to go up 100
percent in the next ten years, a hundred percent. Is that
sustainable?
Mr. Stone. I agree completely that we need to address our
long-term fiscal challenges, but they are not the issue right
now. The uncertainty around the debt ceiling--
Senator Portman. So does S&P, by the way, and when we had
the downgrade, what did they say? They said, you guys have to
deal with this. They said mid-term, but they also are concerned
about the long-term, obviously. But we have got to do something
about the underlying problem. And they indicated most recently,
and Fitch indicated, in the absence of an agreed and credible
mid-term deficit reduction plan that would be consistent with
economic growth, the current negative outlook is likely to be
resolved with a downgrade later this year, even if the debt
ceiling--
Mr. Stone. A deficit reduction--
Senator Portman. --even if the debt ceiling is averted.
That is Fitch.
Mr. Stone. A deficit reduction plan. But you did not give
me any deficit reduction plan. You gave me an ``only cut
spending'' deficit reduction plan--
Senator Portman. Yes. I said--
Mr. Stone. --and that is what you have to do, and--
Senator Portman. I said, reducing spending.
Mr. Stone. Well, that is--the deficit reduction could also
include increasing revenues judiciously, and that is what the
IMF was--
Senator Portman. Let me quote Mark Zandi on that in his
testimony today. Tax increases and government spending cuts
over the past three years have put a substantial drag on
economic growth. So, look, we have just raised taxes over $600
billion. We also have another trillion in Obamacare. And if we
do not deal with the spending problem, look, it is not
ideology, it is math, and CBO, again, has sat at this very
table and talked to us about this. We know that spending as a
percent of GDP continues to go up dramatically. We also know
that taxes as a percent of GDP levels off just above the
historic average, 19 percent.
So, anyway, thank you, gentlemen. I am over my time.
Chairman Murray. Senator Whitehouse.
Senator Whitehouse. Thank you. This is a lively hearing
with very different views being expressed.
I have to, I think, push back at the Ranking Member's
suggestion that everybody knows the health care bill is a train
wreck. I can assure you that if you are a parent of a child who
is coming up on 26 and is able to stay on your health care and
not be out there uncovered, that is no train wreck for you. If
you are a parent of a child who has got a preexisting condition
and you either could not get insurance for them or you could
never move your job, because as soon as you move, they would
become uninsurable and you would have to make them a ward of
the State or spend down to Medicaid in order to do that, for a
family like that, this is no train wreck at all. For a senior
who has saved, on average, over $1,000 by closing up the
doughnut hole, that is no train wreck for the seniors.
And, frankly, I think that when we get the insurance
exchanges up and going, that is just stuff that we usually
agree on, unless you put the name Obamacare on it. Then,
suddenly, it is controversial. But if you took the name off, we
agree on real markets. We agree on real prices in real markets.
We agree that the product should be transparent. We agree that
you should not get special deals. You should be able to sign up
for what is there. That is what this does. It creates an open,
transparent market in which you have to post your real price,
in which a small business can get the same deal as a big
business and it is not all done in the back room at the
insurance company. If you did not call that Obamacare,
everybody in this country would think that was a good idea.
So, I have to dispute the proposition that at least
everybody knows the health care bill is a train wreck. I
think--
Senator Sessions. Well, you responded. That was the
statement of the Democratic Chairman of the Finance Committee,
who worked with the bill. He is calling it a train wreck. And I
would just note that with regard to your view that it is
moderate reform, Harry Reid just recently said, the Majority
Leader, that this is the beginning of a single payer for health
care in America, and it is a big deal and the American people
do not favor it.
Senator Whitehouse. Well, I am a fellow who would like to
go to single payer, so that comes as no threat. But this is not
that. The single payer that we have now is the Veterans
Administration. We take the people we care the most about in
this country, we take the people who have put their lives at
risk for us, who have worn this country's uniform, who have
gone under arms under its flag and we give them the best we
have to offer, and guess what it is. It is single-payer
government-run health care. That is the best--
Senator Sessions. Well, I think it is good that you have
acknowledged that. The President, of course, has yet to
acknowledge that.
Senator Whitehouse. So, I do not think there is any shame
in a government-run health care program. I think we give it to
our best.
I also think it is a little bit unfair to say that we do
not want to do anything about the debt when we have put $2
trillion of spending reductions into law--$2 trillion of
spending reductions into law--and on the other side of the
aisle, people are still defending, on the revenue side, letting
hedge fund billionaires pay lower tax rates than brick masons,
letting oil companies get away with huge multi-billion dollar
subsidies that they visibly do not need because they are the
most profitable companies in the history of the planet, letting
companies still get tax benefits for offshoring jobs outside of
our country, and letting people at high incomes not contribute
into Social Security and Medicare the way regular families do.
So, you know, I think you have got to be a little bit
cautious about saying that we do not want to do anything about
it. I think we have given and given and given and given again
and find it hard to understand some of the things that the
Republicans will not put on the table.
Dr. Stone, you said that--in your testimony, and I think we
have sort of addressed this--experience from the 2011 debt
ceiling crisis suggests that debt ceiling brinkmanship is
costly, even if a last-minute deal is struck. By that, you mean
that once you take the debt ceiling hostage, there is harm in
just doing that. You do not actually have to shoot the hostage.
It is obviously worse if you shoot the hostage, but just taking
the debt ceiling hostage is bad, correct?
Mr. Stone. Yes. A hostage crisis creates the problem.
Senator Whitehouse. And you say, also, the idea that
cutting government spending in hopes of stimulating economic
activity, according to the IMF, so-called, what you called
``expansionary austerity,'' is invalid. Cutting spending in a
weak economy reduces output employment and the effects are
powerful. Could you--that is your own testimony, but could you
put it in the light of what we are seeing in Europe, where
austerity was applied, and in the light of the fiscal
multipliers that we have seen recently that show substantial
economic expansion beyond just the amount of the immediate
spending.
Mr. Stone. Right. The statement that you quoted is from the
International Monetary Fund and it was talking about how,
looking at what has actually happened--we had a debate a few
years ago about whether cutting the budget deficit in the
short-run was going to be good for the economic recovery
because of claims that uncertainty over the debt was the most
important thing rather than weak demand in the economy. And the
IMF's reassessment, based on the European experience, which is
even worse than ours, and on our experience, is that the
expansionary austerity argument in the context of countries
like the United States and the major European countries is--I
think the technical term would be ``bunk.'' I said ``invalid''
to be polite in the testimony.
And so in both cases, you have a problem with the monetary
authority not being able to do very much because interest rates
are so low, and, therefore, the multipliers are larger in a
positive and a negative direction. When you cut government
spending, the ripple effect through the economy is bigger than
in an economy with fuller employment or an economy in which the
Fed could cut interest rates to offset the effect. It is worse
in Europe, but it was bad here.
Senator Whitehouse. Thank you.
Chairman Murray. Thank you. Thank you very much.
Senator Baldwin.
Senator Baldwin. Thank you, Madam Chair.
I am very pleased that you are having this hearing and
apologize for my tardiness. One of the responsibilities of a
first-year Senator is to preside from time to time on the floor
and that is what kept me from hearing your opening remarks. But
a very similar debate, at least among the Senators, was
beginning to unfold on the floor of the Senate earlier today as
I was presiding and the debate on the continuing funding
resolution was beginning.
And, as I mentioned, I am a first-year Senator, so I just
got off a campaign trail in the last year, and I remarked over
and over again during that time in the State of Wisconsin about
just how hard the people in my State are working to recover
from the devastating recession, deep recession, and how much
harder they have to work because of these manufactured fiscal
crises, you know, so many working two jobs, so many happy to
have gainful employment at all, but it is not what they were
making before the recession hit. I mean, it is incredible grit
that I am seeing, and I wanted to come here and see us in the
Congress match that grit with a commitment to get out of these
situations like the one that is unfolding right now.
You know, I think certainty and predictability and
responsibility are also American values that we have got to
return to, and so against that backdrop and against the
commitment that I made to fight to strengthen the middle class,
regrow the middle class who has taken such a battering in
recent years, I wonder if you can talk a little bit--if you
feel expert enough to talk about how this impacts--this
uncertainty, the prospect of a shutdown, the prospect of a
default, the continuing weight of the sequester--impacts the
middle class, perhaps as distinct from the top one percent and
the working poor. Especially, I just ask that in light of
seeing how hard my constituents are working to recover from
such a difficult economic situation.
Why do we not go from right to left and start with you.
Mr. Meltzer. Thank you, Senator. You know, it is not hard
to see how a compromise could be reached. The President would
have to give up tax increase. The Tea Party would have to give
up the end of Obamacare. That would be the beginning of a
compromise. That is not so hard to realize.
Senator Baldwin. I guess I want to know, in terms of the
impact of a shutdown or a default, how it affects especially
our struggling middle class.
Mr. Meltzer. Not terribly, if it is short.
Senator Baldwin. Mr. Stone.
Mr. Stone. It weakens an economic recovery that has already
been weak and is not delivering for the people you are asking
about.
Mr. Zandi. Just to be specific, if the government shuts
down, you cannot get an FHA loan. Many middle-income households
are very reliant on the FHA in the current context to get a
loan. You cannot do it if the government is shut down. You
cannot get a student loan. Many middle-income households are
desperately reliant on student loans to send their kids to
college. You cannot do that. You cannot get an SBA loan, a
small business loan, and many middle Americans own small
businesses, right? In Wisconsin, many small businesses are key
to the middle class. Courts would be disrupted. Travel and
tourism destinations would be disrupted.
You know, in the grand scheme of things, it is no big deal.
But in the context of the hardship that these folks have been
struggling with, it adds up, right. I think the uncertainty
hurts so much in the current context because we have been
through the wringer, right? I mean, the recession has been
debilitating psychologically on everybody and we are nervous
and we are scared and we get spooked by even the little things.
And so if we start talking about defaulting on the debt, if
we start contemplating the possibility of not making Social
Security payments, Medicare, Medicaid payments, even if it is
not going to happen--and I cannot imagine you would allow that
to happen, I just cannot see that--that hurts. That scares
people. And, again, you know, because they have been put
through so much. So why go down that path when, at the end of
the day, we know what you are going to have to do? You are
going to have to raise the debt limit and fund the government.
There is no other option.
Senator Baldwin. Thank you.
Chairman Murray. Well, thank you very much.
I want to thank all of our colleagues who participated
today, but I especially want to thank our witnesses for your
testimony and your responses. I cannot think of a more
important topic, and as I said at the outset, we have to end
this constant uncertainty and governing by crisis. It really is
putting our economy at risk and our families and our businesses
and our communities, as you have outlined. So, thank you to all
of you for your testimony today, and--
Senator Sessions. Madam Chair, could I ask one question of
Dr. Meltzer on a slightly different subject?
Chairman Murray. If you can do it fairly quickly.
Senator Sessions. Dr. Meltzer, I believe we have a chart on
the Federal Reserve. You have written about the Federal
Reserve. You have been a student of it for longer than--
Mr. Meltzer. Forever.
Senator Sessions. --any other person. I notice that their
projections--this was in the Wall Street Journal. It is
something I have looked at with regard to the Congressional
Budget Office. They have overestimated growth. Here, this chart
shows that for every single report from the Fed beginning in
April of 2011, and then they projected an average of 3.9
percent growth for 2013, each year, they had to reduce downward
their projection for 2013 growth, and just September 18, they
came in at 2.15, almost half what they have projected.
I guess I will ask you two things. We in the Congress are a
bit intimidated by the Fed. We tend to accept everything.
People tell us we have to accept what they say is--
Mr. Meltzer. Do not do it.
[Laughter.]
Senator Sessions. Do not accept everything they say.
Mr. Meltzer. The Constitution gives Congress, that is, the
right--the concern for monetary policy. Article I, Section 8
makes you. They are your agent. You are the principal.
Senator Sessions. Well, and this chart, in 2011, April, I
mean, they studied the consequences. They knew what their
policies would be. They knew we were passing a stimulus bill
and so forth. But they missed it dramatically. They missed--
they were inaccurate. What--
Mr. Meltzer. Yes--
Senator Sessions. That causes me to wonder if they are as
smart as they pretend to be sometimes.
Mr. Meltzer. Yes. Briefly, I have written for many years,
and my presidential address to one of the associations,
economic associations, is all about the fact that economics is
not the science that gives you good and quarterly forecasts.
There is no such science. We do not know how to do that. Just
as weather forecasters do not know how to tell you what the
weather will be with great accuracy, doctors do not know how to
tell you who is going to get the flu, economists cannot tell
you what the next quarter is going to be with any great
accuracy. The Fed is about as good as anybody else, but nobody
is very good. The average error over time is about equal to the
average growth rate.
Chairman Murray. Dr. Zandi, do you want to respond?
Mr. Zandi. No. He is a legend. I am not going to respond.
Chairman Murray. All right. We will let it end with that.
All right.
Mr. Meltzer. Thank you.
Chairman Murray. Well, as a reminder to all of our
colleagues, additional statements and/or questions for any of
the witnesses from today's hearing are due in by 6:00 p.m.
tomorrow, to be submitted to the Chief Clerk.
And again, thank you to our witnesses for participating.
Mr. Meltzer. Thank you.
Chairman Murray. The hearing is adjourned. [Whereupon, at
3:53 p.m., the committee was adjourned.]