[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











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                                                        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:] 


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    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:] 


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    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.] 


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 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:] 


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    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:] 


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    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:] 


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    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:] 


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    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:] 


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    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:] 


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    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:] 


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    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:] 


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    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:] 


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    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:] 


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    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:] 


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    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:] 


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    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:] 


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    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:] 


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    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:] 


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    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.] 


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 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:] 


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    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:] 

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    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:] 


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    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:]


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    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.]

                                 
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