[Senate Hearing 113-255]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 113-255

 
                   THE BUDGET AND ECONOMIC OUTLOOK: 
                       FISCAL YEARS 2013 TO 2023

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

                                HEARING

                               before the

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 26, 2013

                               __________

                                     
                                     

            Printed for the use of the Committee on Finance


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                          COMMITTEE ON FINANCE

                     MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West         ORRIN G. HATCH, Utah
Virginia                             CHUCK GRASSLEY, Iowa
RON WYDEN, Oregon                    MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York         PAT ROBERTS, Kansas
DEBBIE STABENOW, Michigan            MICHAEL B. ENZI, Wyoming
MARIA CANTWELL, Washington           JOHN CORNYN, Texas
BILL NELSON, Florida                 JOHN THUNE, South Dakota
ROBERT MENENDEZ, New Jersey          RICHARD BURR, North Carolina
THOMAS R. CARPER, Delaware           JOHNNY ISAKSON, Georgia
BENJAMIN L. CARDIN, Maryland         ROB PORTMAN, Ohio
SHERROD BROWN, Ohio                  PATRICK J. TOOMEY, Pennsylvania
MICHAEL F. BENNET, Colorado
ROBERT P. CASEY, Jr., Pennsylvania

                      Amber Cottle, Staff Director

               Chris Campbell, Republican Staff Director

                                  (ii)
?



                            C O N T E N T S

                               __________

                           OPENING STATEMENTS

                                                                   Page
Baucus, Hon. Max, a U.S. Senator from Montana, chairman, 
  Committee on Finance...........................................     1
Hatch, Hon. Orrin G., a U.S. Senator from Utah...................     4

                               WITNESSES

Holtz-Eakin, Douglas, Ph.D., president, The American Action 
  Forum, Washington, DC..........................................     7
Greenstein, Robert, president, Center on Budget and Policy 
  Priorities, Washington, DC.....................................     9

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:
    Opening statement............................................     1
    Prepared statement...........................................    35
Elmendorf, Douglas, Ph.D.:
    Prepared statement with attachment...........................    39
    Responses to questions from committee members................   119
Greenstein, Robert:
    Testimony....................................................     9
    Prepared statement...........................................   128
    Responses to questions from committee members................   139
Hatch, Hon. Orrin G.:
    Opening statement............................................     4
    Prepared statement with attachments..........................   152
Holtz-Eakin, Douglas, Ph.D.:
    Testimony....................................................     7
    Prepared statement...........................................   159
    Responses to questions from committee members................   170

                             Communication

Center for Fiscal Equity.........................................   175

                                 (iii)


       THE BUDGET AND ECONOMIC OUTLOOK: FISCAL YEARS 2013 TO 2023

                              ----------                              


                       TUESDAY, FEBRUARY 26, 2013

                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 10:07 
a.m., in room SD-215, Dirksen Senate Office Building, Hon. Max 
Baucus (chairman of the committee) presiding.
    Present: Senators Wyden, Schumer, Stabenow, Cantwell, 
Nelson, Menendez, Carper, Cardin, Brown, Bennet, Casey, Hatch, 
Grassley, Roberts, Enzi, Cornyn, Thune, Burr, Isakson, and 
Portman.
    Also present: Democratic Staff: Amber Cottle, Staff 
Director; John Angell, Senior Advisor; and Mac Campbell, 
General Counsel. Republican Staff: Chris Campbell, Staff 
Director; and Aaron Taylor, Professional Staff Member.

   OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR FROM 
            MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

    The Chairman. The committee will come to order.
    President John F. Kennedy once said, ``The solid ground of 
mutual confidence is a necessary partnership of government with 
all of the sectors of our society in the steady quest for 
economic progress.''
    In the close to 4 years since the end of the recession, 
steady progress has been made in our economic recovery, but a 
feeling of uncertainty nevertheless continues to spread across 
the Nation.
    The dysfunction of our government is degrading confidence 
in our economy and creating uncertainty for families and 
businesses. It is preventing families from planning for the 
future, dragging down investment, and leaving businesses 
sitting on the sidelines and holding back our economy.
    Like many members of the committee, I just returned from a 
week at home--in my case, Montana--talking with the people I 
work for. I heard from small business leaders in Billings, I 
met with law enforcement in Missoula and Bozeman, and I talked 
with the commander of Montana's Army National Guard based in 
Great Falls. As part of our traditional, what I call work day, 
I worked early shift at Wheat Montana Bakery in Three Forks. I 
started at 7 a.m. I cleaned tables, served coffee, and greeted 
the customers taking a break from their weekend travels.
    At each stop in every corner of the State, I heard one 
thing over and over: the people we work for need certainty. It 
is time Washington started listening, they say. They are tired 
of being jerked around from one crisis to the next. They want 
us to work together and get our act together.
    They make tough decisions every month to keep their budgets 
in the black, and they deserve a Congress and a President that 
can work together and do the same. In the coming days and 
weeks, we must confront a number of fiscal challenges facing 
our Nation.
    Just 3 days from now on March 1st, across-the-board budget 
cuts, known as the sequester, will hit. Eighty-five billion 
dollars in Federal spending will be sliced from thousands of 
programs, including Medicare, rural development, and early 
education.
    The repercussions will ripple through every sector of our 
economy. In Montana, more than 800 civilian employees at 
Malmstrom Air Force Base and the Army and Air National Guards 
will face up to a 20-percent reduction in pay. These are not 
just numbers, these are real people with bills to pay and 
families to care for.
     Cuts to national parks hit home in our State, because 
64,000 Montana jobs depend directly on outdoor recreation.
    Nationwide, the Department of Justice's Office of Violence 
Against Women will lose $21 million. That means fewer grants to 
support the very critical work of the folks I met with in 
Missoula and in Billings--folks doing heroic work to help 
prevent violence against our mothers, sisters, and daughters. 
These are impressive people undertaking these programs, I can 
tell you. And cuts to the Community Oriented Policing Services 
(COPS) grants program could mean fewer police officers on the 
streets keeping our communities safe.
    The uncertainty over how these and other cuts will play out 
is weighing heavily on businesses like Wheat Montana, and those 
I have met with in Billings. The nonpartisan Congressional 
Budget Office predicts the sequester cuts could slow economic 
recovery and result in another year of sluggish growth and high 
unemployment.
    Yes, we need to cut our debt and get our fiscal house in 
order. We know there are some places to trim the fat. But we 
need to take a scalpel to waste and inefficiency, not allow a 
hatchet to hack into American jobs. We have a plan on the table 
to bridge the sequester and still cut $110 billion from our 
debt without putting working families and American jobs in 
jeopardy. The proposal is not perfect. I have concerns about 
cuts to programs family farmers rely on, but I understand the 
alternative of doing nothing could be far worse for agriculture 
and the rest of our economy.
    That is why I secured a compromise that will extend the 
Supplemental Revenue Assistance Payments (SURE) program and 
give farmers a bridge between direct payments and the next farm 
bill. This includes livestock disaster assistance for ranchers 
recovering from the worst drought in decades. That too is 
important. So, while this plan is not exactly how I would have 
designed it on my own, I recognize that compromise is necessary 
to get something done.
    My hope is that my colleagues will support this plan or 
offer their own to stop the sequester. We can then work 
together to prevent these indiscriminate cuts from causing 
lasting economic damage.
    Our economy will be put to the test again in just weeks 
when the continuing resolution expires on March 27th. We face 
the threat of a government shut-down. On the horizon, the 
Federal borrowing limit will be reached in late May. That will 
require another extension of the debt ceiling.
    This is no way to run a country. Congress has been lurching 
from one fiscal show-down to the next, leaving the Nation with 
uncertainty. The only way we will be able to get past these 
budget battles is by working together. It is a truism, but, 
like a lot of truisms, it is true. We can start right here in 
this committee. We need to take a balanced approach as we 
tackle these issues and work together to cut the debt.
    Over the past 2 years, we have made real progress cutting 
deficits and the debt. In 2011, we passed $1.4 trillion in 
spending reductions. Last month, Congress passed legislation 
that reduced the deficit by another $600 billion.
    Together, with interest savings, these actions will cut the 
deficit by $2.5 trillion over the next 10 years. Add to this 
the savings from winding down the wars in Iraq and Afghanistan, 
and our deficit reduction will reach almost $3.5 trillion over 
10 years.
    As the Nation's economy continues to recover, the long-term 
budgetary outlook has changed. CBO's forecasts for Medicare and 
Medicaid spending have dropped significantly. Current 
projections for the programs' costs through the end of the 
decade are $200 billion less than in March 2010.
    CBO also forecasts decreasing deficits in a stable debt-to-
GDP ratio over the next several years. It projects the 2013 
budget deficit will be a full third lower than it was in 2010, 
and it will be cut in half by 2015. CBO notes that there will 
be a slight uptick at the end of the decade, so we must 
continue to attack the deficit head-on.
    The unemployment rate is still unacceptably high. American 
families' budgets are being pinched: skyrocketing gas prices, 
rising food prices, and stagnant wage growth are making it 
harder for families to make ends meet. More must be done to 
strengthen our country's economy.
    Today we will discuss how we can enact additional balanced 
savings to further reduce the deficit, give families and 
businesses certainty, and protect economic recovery. As we do 
that, I would like this committee to focus on three goals.
    First, job creation. Twelve million people are actively 
looking for work but cannot find a job. An additional 8 million 
Americans are stuck working part-time, and they would like to 
work full-time. Job creation must be the top priority of the 
administration, this Congress, and this committee.
    Second, we must simplify our tax code for America's 
families and businesses. It has been close to 30 years since 
the last major overhaul of America's tax code. In that time, 
our world has changed dramatically. Back then, China was our 
18th-largest trading partner. China is now our 2nd-largest. 
Over the past 30 years, exports as a share of GDP have nearly 
doubled.
    Our tax code is antiquated and acting as a brake on our 
economy, especially when compared with our overseas 
competitors. We need a pro-growth tax code that gives America's 
businesses the certainty they need to compete globally and plan 
and expand operations, instead of living and hoping for a 
continuation of temporary tax breaks.
    Finally, we must make it a priority to return stability and 
confidence to our economy. We have to get off this roller 
coaster of a ride, going from one fiscal crisis to the next. We 
must give families and businesses certainty. We must agree on a 
balanced, comprehensive plan to cut the debt that includes both 
more revenue and spending cuts. The math will not work any 
other way.
    A long-term, balanced plan will bridge the budget battles 
and make real progress solving our deficit problem. A balanced 
plan will also encourage businesses to invest and enable 
investors to return to the markets with confidence and, most 
importantly, put Americans back to work.
    Expert witnesses are here today to help the committee 
examine the progress of America's economic recovery, as well as 
our economic outlook for the next decade. I look forward to 
hearing from each of you as you provide this committee with the 
necessary insight to take on the tough challenges ahead.
    I also hope today this committee can complete its review of 
three individuals nominated to key administration posts. I urge 
the committee members, when we have a quorum, to support the 
nominations of William Schultz, to be General Counsel at the 
Department of Health and Human Services; Christopher Meade, to 
be the General Counsel at the Department of the Treasury; and 
Jack Lew, to be the Secretary of Treasury.
    As we will discuss today, our Nation faces a number of 
great challenges. We need bright and dedicated individuals like 
these three nominees to work with us to find solutions.
    So let us listen to the facts about our budget from our 
experts. Let us work together to make tough decisions and do 
the hard work and face the great responsibility before us. As 
President Kennedy understood, let us recognize that our 
economic progress in fact depends on the solid ground of mutual 
confidence. Let us embrace this opportunity to restore 
certainty and get America back on track.
    [The prepared statement of Chairman Baucus appears in the 
appendix.]
    The Chairman. Senator Hatch?

           OPENING STATEMENT OF HON. ORRIN G. HATCH, 
                    A U.S. SENATOR FROM UTAH

    Senator Hatch. Well, thank you, Mr. Chairman, for holding 
today's hearing. I want to welcome our witnesses and thank them 
for their willingness to appear here with us today.
    This is an important hearing. Given that we are currently 
in the midst of a national debate over our country's fiscal 
future, it could not be more timely. Anyone who takes a careful 
look at our Federal finances should be very nervous. We have 
had 4 consecutive years with deficits above $1 trillion, and it 
looks like we are into the 5th now.
    By the end of this fiscal year, CBO projects that the debt 
held by the public will reach the largest percentage of GDP 
since 1950. It only gets worse as time goes on. After a 
temporary lull in the growth of debt in 2018, CBO projects that 
the debt will rise for the remainder of the 10-year budget 
projection window, measuring 77 percent of GDP by the end of 
2023.
    Now, according to the CBO, ``Along such a path, Federal 
debt held by the public will equal a greater percentage of GDP 
than in any year between 1951 and 2012 and will be far above 
the average of 39 percent over the 1973 to 2012 period. 
Moreover, it will be on an upward trend by the end of the 
decade. Debt that is high by historical standards, and heading 
higher, will have significant consequences for the budget and 
the economy.''
    Now, these negative consequences of our growing national 
debt will include higher interest costs, lower national 
savings, more borrowing from abroad, less domestic investment, 
lower incomes, lesser abilities of policymakers to respond to 
unexpected challenges like natural disasters, and a greater 
likelihood of a fiscal crisis.
    While some will try to argue that the coming debt crisis 
can be blamed on a lack of sufficient revenue, nothing could be 
further from the truth. With the tax increases included as part 
of a fiscal cliff package that passed on New Year's Day, the 
Federal revenue as a share of our GDP is on a path to exceed 
the average of the last 40 years. So, despite some adamant 
claims to the contrary, it is clear that our government has a 
spending problem, not a revenue problem, and it is our problem.
    Another common claim we have heard from the White House and 
from many here in Congress is that, over the last year and a 
half, we have already cut spending dramatically. This is also 
untrue. By any measure, spending has increased, and there is no 
use in kidding about it. It has increased significantly under 
this administration.
    For starters, Federal outlays in fiscal year 2012 are well-
above 2009 levels. Now, some have argued that it is not fair to 
hold the Obama administration entirely accountable for all of 
the outlays incurred during 2009, so for now let us consider 
fiscal year 2010. When you compare Federal outlays in fiscal 
year 2012 with those of fiscal year 2010, you see an increase 
in spending of over $82 billion. At the same time as the 
economy has sluggishly recovered, Federal revenues have 
increased. In fiscal year 2012, they were up by more than $286 
billion compared to 2010.
    So, between 2010 and 2012, the deficit went down by just 
over $204 billion, and literally no part of that reduction can 
be attributed to spending cuts; it is all due to high revenues. 
Despite these facts, the President continues to resist any real 
spending restraint and calls for even more tax hikes, even 
though he just raised taxes less than 2 months ago.
    He also refuses to entertain serious structural changes to 
our entitlement programs, even though everyone agrees that 
entitlement spending is the main driver of our debts and our 
deficits. As far as I am concerned, any conversation about 
reducing our deficits that does not focus on shoring up and 
reforming our entitlement programs is a missed opportunity.
    In the more immediate future, we face the indiscriminate 
spending reductions that are scheduled to begin on March 1st 
under the so-called sequester, which CBO says will reduce 
actual outlays in fiscal year 2013 by around $44 billion, or 
just over 1 percent of total Federal spending.
    The debate over the sequester appears to be headed down the 
same path that all of our recent fiscal debates have followed, 
with the President and his allies here in Congress insisting 
that, in lieu of actually cutting spending, we raise taxes on 
the so-called ``rich.'' Once again, none of the tax hike 
proposals we are hearing about was considered by this 
committee. Instead, they have been drafted somewhere else 
behind closed doors.
    Today we will hear more about these and other fiscal 
challenges facing our Nation. In addition to discussions about 
our long-term budgetary problems, I expect we will hear 
recommendations about how to deal with short-term spending 
reductions scheduled under the sequester.
    I assume we will also continue to hear grand claims of 
deficit reduction that measure progress using selective 
baselines and include only promises to reduce spending in the 
future. Once again, by any measure, spending has not been cut 
to date. We have promises for future cuts in spending, but 
nothing really has been realized.
    I hope today's hearing will, among many other things, help 
us to get to the bottom of some of these claims and clarify for 
the American people how much Congress has actually done to 
reduce the deficit in recent years.
    Now, Mr. Chairman, I want to thank you again for holding 
today's hearing, and I look forward to hearing from the 
witnesses. I will speak right now rather than later. I may 
reserve some rights to speak later, but I will speak right now 
on the Lew nomination.
    In addition to the budget hearing, I also want to take a 
few minutes to comment on the committee's consideration of the 
nomination of Jack Lew to be Secretary of the Treasury. At the 
outset, let me say that I intend to vote today in favor of Mr. 
Lew's confirmation. I believe the President is owed a fair 
amount of deference in choosing people to work in his 
administration. Though I would have chosen a different person 
for this particular post, I intend to defer to President Obama 
with regard to the Lew nomination.
    That said, I do have serious reservations regarding Mr. 
Lew. I like him personally very much. He certainly has a lot of 
experience in this town. But I have reservations regarding Mr. 
Lew that have not been assuaged through the committee's 
consideration of this appointment.
    In the end, I hope that he will prove me wrong. For 
example, I strongly disagree with Mr. Lew on some significant 
policy issues, most notably his decision to backtrack from the 
administration's previous position on the need for entitlement 
reform and his belief in the need for higher taxes.
    Ultimately, I hope we end up with the Jack Lew of the 
Clinton administration, not just another acolyte of the Obama 
White House. I hope we get a Treasury Secretary willing to work 
with the other side of the aisle to put our Nation first in 
order to confront the challenges facing us today. If Mr. Lew is 
that kind of Treasury Secretary, then I think we can work 
together to accomplish some great things for our great country.
    But, if Mr. Lew is committed to playing the same partisan 
games that have gone on for the better part of the last 4 
years, then we are going to have serious difficulties in 
getting anything done. I hope that will not be the case.
    In addition, as my questions during the hearing 
demonstrated, I believe that Mr. Lew has been less than 
forthcoming about his time at Citigroup and NYU. Indeed, after 
extensive questioning, we still know very little about these 
areas of his record. This is problematic, and I plan to go into 
these concerns more fully when the nomination is debated on the 
floor.
    Furthermore, I am deeply concerned about the general lack 
of responsiveness from the Obama administration to legitimate 
questions that I and other members of this committee have 
asked. Sometimes we get no answers at all, and that is entirely 
unacceptable, as I have said all too many times from this very 
spot.
    Mr. Chairman, I expect the committee will report the Lew 
nomination today, and, once again, I intend to vote in favor of 
doing so. However, as I stated, I have significant concerns 
that I hope will be addressed by greater responsiveness and 
transparency from the administration. I hope you will continue 
to work with me to address these concerns, and I believe you 
will because of our relationship. I want to thank you, Mr. 
Chairman, for the work that you do.
    The Chairman. Thank you, Senator.
    [The prepared statement of Senator Hatch appears in the 
appendix.]
    The Chairman. A quorum is present. I thank my colleagues 
for their attendance. We will now interrupt the hearing to 
conduct some business.
    [Whereupon, at 10:26 a.m., the hearing was recessed, 
reconvening at 10:40 a.m.]
    The Chairman. We will now resume the hearing.
    I would like to now introduce our witnesses. Our first 
witness is Douglas Holtz-Eakin, former CBO Director and 
president of the American Action Forum; next, Bob Greenstein, 
who is president of the Center on Budget and Policy Priorities. 
Thank you both very much for coming.
    We will start with you, Dr. Holtz-Eakin, then proceed to 
Mr. Greenstein. We ordinarily give 5 minutes. You might take a 
couple more if you want, but not many more. We have full 
attendance here, so do your best. Thank you.

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

    Dr. Holtz-Eakin. Well, thank you, Mr. Chairman, Ranking 
Member Hatch, and members of the committee, for the privilege 
of being here today to discuss the budget and economic outlook. 
I have really three points to make in my oral remarks. I did 
submit a written testimony for your reading.
    The first is that we face a very sobering fiscal and 
economic picture in the United States. The second is that 
controlling the debt that we have and are projected to 
accumulate is consistent with better economic growth and job 
creation, not at odds with it, as is often portrayed. The third 
is that the current reliance on the sequester and the budgetary 
caps in the Budget Control Act is not as fruitful a strategy as 
a comprehensive tax and entitlement reform would be to deal 
with these problems, and I would like to elaborate on each 
briefly.
    The first point is simply the sobering outlook presented in 
the most recent CBO budget and economic outlook. The outlook 
has the virtue of looking forward. It is starting from the 
point where we find ourselves and depicting what happens if the 
fiscal position is left on auto-pilot. If one looks at that, we 
start with a position of $16 trillion in gross Federal debt and 
would accumulate $7 trillion more in deficits over the next 
decade.
    This would leave us in a situation where gross Federal debt 
would exceed GDP each and every year and end the decade in that 
position, a benchmark that I want to return to as an important 
one in its implications for economic growth.
    The deficit and debt in the hands of the public, a more 
conventional measure, might decline briefly but will be rising 
both in absolute terms and as a percentage of GDP toward the 
end of the decade. This all occurs despite the recent efforts 
to close the deficit by raising $600 billion in new taxes at 
the turn of this year.
    The economic outlook is no more promising, with subpar 
economic growth this year projected at 1.4 percent, and to me a 
more troubling aspect being the long-term growth rate marked 
down from 2.5 percent last year to 2.2 percent per year in the 
most recent economic outlook.
    This is indeed a troubling projection for the United States 
over the next decade. Controlling the debt imbedded in this 
outlook is not at odds with robust economic growth and job 
creation. The result of research led by Carmen Reinhart, Ken 
Rogoff, and others shows that countries with the U.S.'s 
situation, situations where the gross debt exceeds 90 percent 
of GDP--and we are at 100 percent and will remain so in this 
outlook--those countries tend to grow more slowly, about a 
percentage point more slowly each year, than do comparable 
countries that are less burdened by debt.
    That price that we are paying right now, the growth 
penalty, would translate into about a million jobs a year at 
this point in time--something desperately needed by Americans 
who are out of work--and lower incomes that could total as much 
as $10,000 per median family over the next decade or so.
    So this is a situation which is harming the U.S., and it 
makes sense that high debt burdens inhibit economic growth, 
something I would be happy to elaborate on in the Q&A, because 
of the potential they raise for higher taxes and fiscal crises. 
So, being serious about controlling debt is a way to be serious 
about growing more rapidly.
    But another lesson of the literature that has displayed the 
price you pay for high debt is that there are better and worse 
ways to deal with it. The playbook that has emerged is one in 
which the best approach to dealing with large debt and bad 
growth is one that keeps taxes low and reforms them to be more 
pro-growth.
    I want to echo the call of the chairman for pro-growth tax 
reform. I know this committee has worked on this over the past 
year. I hope you get pro-growth tax reform over the finish 
line; it is desperately needed in the United States.
    On the spending side, restraint must be displayed in order 
to control the level in growth and debt, but not all spending 
is created equal. It is important to preserve core functions of 
government--national security, basic research, infrastructure, 
education--and instead cut transfer programs.
    In the United States, that means less reliance on things 
like the sequester and Budget Control Act discretionary caps 
and, instead, entitlement reform, which is the bulk of the 
spending in the Federal budget and is the place where the 
largest growth is projected over the next decade.
    These reforms, I might point out, would also be a good idea 
in and of themselves. At the moment, the ``plan'' for Social 
Security is to keep it actuarily solvent on the government's 
books by cutting retirees' benefits 25 percent across the board 
2 decades from now. That is not a particularly good way to run 
a retirement program.
    Medicare at the moment is running a $300-billion-a-year 
cash flow deficit, the gap between premiums and payroll taxes 
and spending going out. We get 10,000 new beneficiaries every 
day. That is a program that is alone responsible for a quarter 
of all the Federal debt outstanding since 2001. Given its 
current State, it will fall under its own financial weight 
unless reformed.
    Medicaid, similarly, has financial problems, and is a 
program where its beneficiaries end up in emergency rooms for 
ordinary care at twice the rate of the uninsured. So, these are 
programs that are hardly doing well at the moment and merit 
reforms on the basis of their services to beneficiaries. And 
reforms are what is needed to control the debt and the growth 
in debt and to grow more rapidly as a Nation. So I look forward 
to the conversation today. I would be happy to answer your 
questions and look forward to strategies which would improve 
our performance and lower the future debt. Thank you.
    The Chairman. Thank you very much, Dr. Holtz-Eakin.
    [The prepared statement of Dr. Holtz-Eakin appears in the 
appendix.]
    The Chairman. Mr. Greenstein?

STATEMENT OF ROBERT GREENSTEIN, PRESIDENT, CENTER ON BUDGET AND 
               POLICY PRIORITIES, WASHINGTON, DC

    Mr. Greenstein. Thank you. Let me start by partly agreeing, 
but partly disagreeing, with my colleague, Doug. I agree that 
we are on an unsustainable fiscal course and we need to act. On 
the other hand, I think the statement or the notion that we are 
already in a danger zone because gross debt exceeds 90 percent 
of GDP and that this is already costing jobs is not one most 
economists would agree with.
    Most economists, and CBO, have long said that the best 
measure is the publicly held debt. That is the amount of debt 
we have to go and borrow in private credit markets. The 
difference between the publicly held debt and the gross debt, 
the additional debt, is that one part of the Federal Government 
owes another part because of the Social Security and Medicare 
trust funds. That is not money we go and borrow in private 
credit markets.
    Reinhart and Rogoff did find a correlation between debt 
persistently being above 90 percent of GDP and slower growth, 
but those observations were based on European countries where 
what is called gross debt in those countries is essentially 
what we call publicly held debt here, because those countries 
do not have trust funds where one part of the government owes 
money to another. Their gross debt is money you go and borrow 
in private credit markets, like our publicly held debt.
    So the moral of the story, I think, is that the lesson we 
should derive from Reinhart and Rogoff is that the U.S. will be 
in a danger zone if our debt climbs to, and remains above, 90 
percent of GDP--the publicly held debt. We are not there yet, 
but, if we do not take any action, over time we will end up 
there, and that will be a problem.
    So where does this leave us? Based on the latest CBO 
projections, policymakers could stabilize the public debt as a 
share of the economy over the coming decade with $1.5 trillion 
in additional deficit reduction. That is the minimum policy, in 
my view, that policymakers should pursue.
    To do that would require significant action that phases in 
as the economy recovers, and it would mean, if we stabilize the 
debt at about its current level--which is about 73 percent of 
GDP--for the coming decade with $1.5 trillion in deficit 
reduction, policymakers would then subsequently need to enact 
additional deficit reduction for the long term due to the aging 
of the population and rising health care costs, especially as 
we learn more about how to control the growth of health care 
costs throughout the U.S. health care system.
    Now, let me add that a greater amount of deficit reduction 
would be desirable if policymakers can design it without doing 
harm in other areas, meaning deficit reduction really needs to 
be designed in a way that does not impede or slow the current 
economic recovery; does not jeopardize future productivity 
growth by providing inadequate resources for education, 
infrastructure, and basic research; does not increase poverty 
and inequality, which are already wider here than in most 
western nations; and does not increase the number of Americans 
who are uninsured or sacrifice health care quality.
    In short, it is not just the quantity of deficit reduction 
that matters, it is the quality of the deficit reductions that 
are chosen that matters as well. This is particularly true in 
the health care area, where there are things we can and should 
do now, but where knowledge about effective ways to slow health 
care cost growth 
system-wide without risking the quality of care or jeopardizing 
access to needed care is not at the level that we need, and 
where such knowledge is likely to be significantly greater in a 
few years than it is now.
    So let me note a few principles I would recommend for the 
design of deficit reduction. First, CBO says it will take at 
least 4 more years before the economy fully recovers. CBO's 
estimate that sequestration, for example, would lead to the 
loss of 750,000 jobs by the fourth quarter is an indication 
that we want to enact deficit reduction now, but you want to 
design it so it phases in as the economy recovers rather than 
taking a big whack out of the economy right now.
    Number two, the Bowles-Simpson report made it a core 
principle that deficit reduction should not increase poverty or 
harm the disadvantaged, that it largely shield the programs for 
the disadvantaged from the cuts it recommended.
    Bowles and Simpson, just last week, stated, ``Broad-based 
entitlement reforms,'' which they recommend, ``should either 
include protections for vulnerable populations or be coupled 
with changes designed to strengthen the safety net for those 
who rely on it the most.'' The Gang of 6 followed a similar 
course, and I would recommend that.
    I would also note, as you think about these areas, some 
important new research quite relevant to this committee because 
of your jurisdiction with regards to the Earned Income Tax 
Credit. We have known for a long time from extensive research 
that it significantly increases work among single female 
parents, and the research suggests it had as large an effect in 
increasing work and reducing welfare receipt as the 1996 
welfare law. The two actually reinforced each other.
    The new research finds that the receipt of the EITC by 
families, particularly with young children, leads to improved 
test scores and educational attainment in school and increased 
earnings and employment in adulthood. I think this is quite 
important.
    Finally, the last point in this big debate: taxes, 
spending, a mix? How should we do deficit reduction? I was 
struck by a Wall Street Journal column last week by Martin 
Feldstein. He observed, ``Republicans want to reduce the 
deficit by cutting government spending. Democrats insist 
raising revenue must be part of the solution. Yet,'' Feldstein 
continues, ``the distinction between spending cuts and revenue 
increases breaks down if one considers tax expenditures.''
    If I buy a solar panel for my house, the government pays 
me. But, instead of sending me a check, it gives me a tax 
credit or a tax deduction. I am hoping there might be a 
bipartisan process on the notion of focusing on spending, but 
spending in the tax code and spending in the outlay side of the 
budget as well.
    Feldstein has written that tax expenditures are one of the 
first places policymakers should go to restrain spending. 
Douglas Elmendorf, in testimony earlier this month on the House 
side, said, ``Many economists agree that tax expenditures are 
really best viewed as a form of government spending.'' Alan 
Greenspan summed it up when he said that ``tax expenditures 
should be reviewed as tax entitlements and looked at along with 
spending entitlements.''
    Let me just close with an example to illustrate what I am 
trying to say. The example involves child care. So a parent 
with low or moderate income may be able to obtain a Federal 
subsidy to help defray child care costs, and it comes through a 
spending program on the spending side of the budget. But a 
parent higher on the income scale also gets government 
subsidies to reduce child care costs. Those are delivered 
through the tax code via a tax credit or an exclusion from 
income.
    Now, there is a significant difference here. The main 
difference is the low- or moderate-income parent may fail to 
get a subsidy because the spending programs in question are 
capped. They only serve as many people as the funding allows. 
Only about 1 in 6 eligible low-income working families with 
children gets a Federal child care subsidy.
    By contrast, the child care tax-based subsidies for middle- 
and upper-income households operate as open-ended entitlements. 
Everybody who has it and takes it on the tax return gets it 
and, unlike with the working poor families who get the child 
care spending subsidies, most of the higher-income families who 
get a child care subsidy through the tax code could afford 
child care without the subsidy anyway.
    I bring this up just to make the point that spending occurs 
on both sides of the ledger, and it would not make sense, as 
you seek deficit reduction, to put tax code subsidies off-
limits for deficit reduction while putting program-side 
subsidies on-limits. I would urge you to look at both.
    Thank you.
    The Chairman. Thank you both very much.
    [The prepared statement of Mr. Greenstein appears in the 
appendix.]
    The Chairman. I would like to focus a bit on health care, 
health care costs, Medicare. I think you, Dr. Holtz-Eakin, 
mentioned that 10,000 people turn 65 ever year.
    Dr. Holtz-Eakin. Every day.
    The Chairman. Excuse me. Every day. Ten thousand people 
turn 65 every day. I saw somewhere that 60 percent of health 
care cost increases in Medicare and Medicaid are due to just 
demographics: more people. The other 40 percent are because 
health care costs are just going up. Could you focus a little 
more on how we can address short-term/mid-term health care 
costs in this country and what it means for Medicare and 
Medicaid?
    I am going to ask you, Mr. Greenstein, to do the same 
thing. I would just like to focus on how we get control over 
health care costs in this country, because that is going to be 
one of the biggest challenges and most important efforts we can 
undertake.
    Dr. Holtz-Eakin. I think, obviously, this is a difficult 
area, and a broad one. Let me just say a couple of things. 
Number one, I think that delivery system reform and health care 
reform in the United States begin with entitlement reforms. It 
is the case that Medicare and Medicaid and new Affordable Care 
Act programs mean that the government is the majority payer of 
health care bills in the United States.
    The way it pays bills matters a lot for practice patterns, 
so, if we do a better job in the entitlement programs, we will 
in fact enact broader health care reforms.
    The Chairman. What would be some examples there of 
entitlement reform?
    Dr. Holtz-Eakin. So, first, stop doing the wrong thing. We 
know fee-for-service medicine leads to no emphasis on quality, 
an emphasis on quantity, and has been the source of a lot of 
bad practice of medicine in the United States. So, no fee-for-
service, please.
    The Chairman. Right. That is one.
    Dr. Holtz-Eakin. Number two, do not rely on provider cuts 
and other kinds of price controls, the SGRs, the living example 
of bad health care policy that comes back to haunt the Congress 
every year. Do not do it again. We saw most recently CMS, in 
the recent rule on Medicare Advantage, cutting payments that 
are just going to preclude services to beneficiaries, cause 
them to change their provider networks, and harm health care as 
a whole in the United States.
    The Chairman. All right. That is two. Three?
    Dr. Holtz-Eakin. The other thing I would recommend is, put 
these programs on budgets. People make bad decisions with other 
people's money. It is a deep economic insight. Unlimited access 
to other people's money is a recipe for bad decisions, so let 
us put Medicare on a budget, let us put Medicaid on a budget, 
and say to the providers and the beneficiaries as a collective, 
here is your taxpayer money for the year, go do something of 
high quality and benefits with it. Stop giving them an 
unlimited draw on the U.S. Treasury to the tune of $300 billion 
a year and rising. None of that is going to promote good health 
care in the United States.
    The Chairman. Mr. Greenstein?
    Mr. Greenstein. The big issue in Medicare and Medicaid--
obviously, one part is demographics. Older people have higher 
average health care costs than younger people, and the 
population is aging. But the other is, it is not as though 
health care costs are rising more rapidly in Medicare or 
Medicaid than in private sector health care. They are rising 
system-wide. They have actually been rising a little more 
slowly of late in Medicare and Medicaid.
    On the one hand, there has been a big slow-down in health 
care cost increases. If you compare the current CBO 10-year 
forecast to where CBO was, say, in August 2010 while Bowles-
Simpson was meeting, the Medicare costs over the next 10 years 
are down $500 billion, and Medicaid, $200 billion.
    Well, we hope some of that will endure. We do not know yet 
for sure. What that reduction in Medicare and Medicaid largely 
reflects is a slow-down in health care cost growth throughout 
the U.S. health care system. We need to find the ways to 
promote that.
    Now, I think there are some reforms that can be looked at 
now in Medicare, ranging from more use, for example, of 
competitive bidding in purchasing medical equipment. There are 
still some over-payments in Medicare Advantage. We can get 
better prices for drugs. I think we can expand both the scope 
and the size of 
income-related premiums.
    I think you can look at restructuring cost-sharing, 
catastrophic care, Medigap, that whole part of Medicare. If you 
do all of those things, you can get a few hundred billion 
dollars in savings over the next 10 years, but ultimately we 
are going to need more than that. To get significantly more 
than that, it really turns on changes in the overall U.S. 
health care system. If the current slow-down in cost growth 
proves to be enduring, we will be a significant part of the way 
there, and we need to build on that.
    It is very important for us to learn in the years ahead 
from what has happened in the last few years to better 
understand why the cost growth has slowed, how can we build on 
that, to learn from various demonstration pilots now going on, 
some publicly funded, some entirely----
    The Chairman. Do either of you disagree with what the other 
said, or do you both agree with what the other said?
    Dr. Holtz-Eakin. I think Bob said this, but I would 
emphasize it, that the recent slow-down in national health care 
cost growth is something you cannot rely on. I mean, this is a 
picture I would be happy to share which shows the history of 
these slow-downs. We have had them before. It happened in the 
1990s when the budget got better. It went away. It has happened 
before. I would not count on that, particularly when we are 
about to expand coverage next year dramatically. When people 
are covered, they spend more, so I would expect this to reverse 
quickly, and I am nervous about relying on it.
    The Chairman. My time is about up, Mr. Greenstein. Very 
quickly, very quickly.
    Mr. Greenstein. While I would not count on it as a 
guarantee, I do not expect it to reverse quickly. I have talked 
to health care experts: Bob Reischauer, Peter Orszag, Henry 
Aaron. All of them think there are growing signs that some of 
this slow-down is likely to endure. We cannot count on it, but 
we should look for that.
    Where I disagree with Doug is, I do not think one can 
artificially put some cap on Medicare and Medicaid expenditures 
separate and apart from total health care expenditures, public 
and private sector, throughout the U.S. health care system.
    The Chairman. All right. Thank you.
    Senator Hatch?
    Senator Hatch. Dr. Holtz-Eakin, your testimony says it 
would be sensible to reduce debt such that the ratio of gross 
debt-to-GDP is below the 90-percent threshold that economic 
research has identified as a threshold above which the debt is 
associated with about a 1-percent reduction in economic growth. 
Now, you offer an example of getting gross debt-to-GDP down to 
85 percent, which you say would require around $4 trillion of 
additional promised debt reduction over 10 years.
    Now, if we were to set a goal of $4 trillion in debt 
reduction over the next 10 years, and, if we hold spending at 
levels envisioned in CBO's most recent budget outlook, let me 
ask you three things. I will just read through the list, and 
then you can respond.
    First, do you have any sense of what tax rates on upper-
income earners, which would encompass many flow-through 
businesses, would be necessary to obtain the $4 trillion of 
debt reduction if we put tax hikes on the middle-class off-
limits?
    Second, how high would we have to set taxes on the middle 
class to facilitate the existing spending path if all taxes 
were raised?
    Third, what might a more balanced way of doing things look 
like, in your mind, and do you think it ultimately has to 
involve entitlement reforms?
    Dr. Holtz-Eakin. Thank you, Senator. Four trillion dollars 
in tax increases is obviously an enormous impact on the 
economy. If you tried to pull that out of the top rates, you 
would have to have it exceed the 80-percent marginal rate. We 
can get you an exact number, but my guess is it is going to be 
north of 80 percent. It is extremely punitive.
    Right now, if you look at taxpayers as a whole, the typical 
weighted average tax rate is something like 23, maybe 25 
percent at tops. It would have to go close to 40 percent. 
Again, I can get you precise numbers. These are dramatic tax 
increases, a near doubling of all taxes.
    Obviously, a more balanced approach is what would come out 
of the literature, which says that it is important to do tax 
reform so that you support economic growth, that tax reform 
would give you a more efficient tax code and might raise more 
revenue in the process, but the reliance would be on reforming 
the spending programs which, in the U.S., are these large 
entitlement programs.
    As I mentioned in my opening statement, it is important to 
do those for economic growth reasons. It is important to do 
this for budgetary reasons, but I also think it is very 
important to do that on behalf of the beneficiaries. These 
programs are not going to serve them well and not survive to 
the next generation of seniors and low-income Americans.
    Senator Hatch. Well, your fellow panelist argues that much 
of the leg work on deficit reduction has already taken place 
with the promises of future fiscal restraint embedded in the 
legislation enacted over the past several years.
    Mr. Greenstein also argues, as I view it, that $1.5 
trillion in additional deficit reduction would stabilize the 
debt-to-GDP ratio over the coming decade and that such 
stabilization would be the minimum appropriate budget policy.
    Now, do you agree that, if we enacted legislation promising 
an additional $1.5 trillion in future deficit reduction, we 
would then have stabilized the debt-to-GDP ratio in the coming 
decade at a safe level, and do you agree that $1.5 trillion of 
added future promised deficit reduction would be sufficient to 
avoid substantial risks to the economy from our debt?
    Dr. Holtz-Eakin. I will spare the committee the geeks' 
fight over gross debt versus debt in the hands of the public. I 
use gross debt just because that is what the research used, and 
I wanted comparability. As I said, it indicates we are at too 
high a level, so reducing deficits by only $1.5 trillion in the 
next decade does not get us out of what I view as the danger 
zone. It might stabilize debt in the hands of the public, but 
it would stabilize it at a dangerously high level. There is no 
reason why one should cement, as a matter of objective, a 
policy that leaves us with subpar growth.
    I believe we are growing poorly and that we can understand 
the reasons for that, and which leaves us constantly on the 
edge of the potential for a crisis. If you look at the recent 
budgetary travails of Congress and the administration, we are 
constantly in crisis. I think that is not a great future for 
the economy. If world capital markets decide to join the chorus 
of people who think we are, in large amount, on the edge of 
trouble, that would be a very troubling decade.
    So I think a much more aggressive approach would take us 
out of the danger zone, would more than just stabilize debt at 
a high level, and would actually set the debt trajectory on a 
sensible level and relieve us of the poor economic performance 
and the threat of constant crisis.
    Senator Hatch. My time is up, Mr. Chairman. I have some 
questions for Mr. Greenstein.
    The Chairman. Thank you very much, Senator.
    Senator Wyden?
    Senator Wyden. Thank you, Mr. Chairman. Mr. Chairman, I 
want to echo your comments with respect to health care costs. 
For our witnesses, in this week's Congressional Quarterly, the 
cover page says, ``A Crisis in Plain Sight: As Washington Does 
Nothing, the Challenge of an Aging Population is Quickly 
Overwhelming the System.''
    That is why I would like to turn to Medicare to get a 
reaction from both of you. The longer I go on--and of course, 
the program has changed pretty dramatically since my Gray 
Panther days, and I think I have talked about this with both of 
you--the ball game to a great extent is those with multiple 
chronic conditions.
    Seventy percent of Medicare costs go for those with three 
or more multiple chronic conditions, so, to a great extent, if 
we can find ways to ensure that those folks get quality care 
that is more affordable, we are going to go a long way toward 
fixing Medicare.
    Now, I think there generally is bipartisan support for 
approaches that integrate services, that move away from this 
approach where someone who, say, has diabetes or pulmonary 
health issues just goes and gets services physician by 
physician and ends up without a care plan and eventually goes 
to the hospital emergency room. The Accountable Care 
Organizations go, certainly, in the right direction in this 
regard, but it seems to me that considerably more has to be 
done.
    I would be interested in your views on this question of how 
we are going to deal with what I think is really the heart of 
an effective reform strategy with Medicare, and that is dealing 
with those with multiple chronic conditions. Either one of you 
can go first.
    Mr. Greenstein. I think you are absolutely right, Senator. 
This is just the sort of thing I had in mind when I said we do 
not have all the knowledge we need right now to write a piece 
of legislation that mandates how to do the care integration. We 
have more to learn. Some of the innovations going on in the 
private sector are hopeful.
    As you know, there are individual examples of individual 
medical systems that do it better and save money. There also 
are a whole array of State-run demonstration projects that are 
starting up this year, particularly focusing on integrating 
care better for the dual-eligibles. We need to rigorously 
pursue these, and rigorously evaluate these, and try to set 
ourselves a goal that, as we learn how to do this in ways that 
both improve quality and save money, as you suggest, then we 
need to adopt them and implement them in Medicare and Medicaid.
    Sadly, we do not have the silver bullet or know exactly how 
to do it yet, but, as you say, it is one of the most important 
things for us to learn and adopt as we find the answers.
    Dr. Holtz-Eakin. Again, it is a very important problem. The 
Medicare system was designed for an era of acute care as the 
primary medical expense. We now have chronic care as its 
leading problem, with multiple co-morbidities as the typical 
expensive Medicare patient. So moving the focus on that and 
integrated care is very important.
    I would say a couple of things. Number one, I have started 
an organization called The Partnership for the Future of 
Medicare with Ken Thorpe, a bipartisan effort to guide reforms 
that are sustainable for Medicare. We have put out some ``guard 
rails,'' do's and don'ts on Medicare reform, which I can 
provide to you and would be happy to.
    One of the things going forward is, we need more options 
that provide the integrated care. We are concerned about the 
cuts to Medicare Advantage because it is an integrated 
platform. You may or may not like that. I do not want to get 
into a debate over Medicare Advantage, per se, but having less, 
not more, is a mistake. You need patient buy-in. You cannot 
simply litter the landscape with smart health innovations and 
expect the world to change. Patients have to buy in both 
personally and financially to get----
    Senator Wyden. Can I interrupt you on that point? Because 
Senator Portman is here, and he and I have introduced the first 
bill that essentially would reward those who stop smoking, 
lower their blood pressure, lower their cholesterol. It is 
really based on the work that was done at the Cleveland Clinic 
and Oregon Health Sciences Center. I gather that you feel that 
those kinds of behavioral changes, it is time that that would 
be part of the program.
    Dr. Holtz-Eakin. Yes. I do not know the specifics. I would 
be happy to look at it.
    Senator Wyden. Mr. Greenstein, are you all right with that? 
Because I think, and Senator Baucus might remember, that in the 
Affordable Care Act we began to start to integrate those 
preventive incentives. Senator Carper did some particularly 
good work on that, as I recall, for those under 65, but we have 
not begun to build that in in terms of those over 65. I think 
Oregon Health Sciences and the Cleveland Clinic kind of provide 
that model. I think it is time for those kind of behavioral 
changes, and I appreciate both of you being interested.
    My time is up, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Grassley?
    Senator Grassley. I have a very general question at the end 
of a statement and some charts I am going to put up here. 
Obviously America faces no greater threat to our growth and 
prosperity than out-of-control national debt, $16 trillion 
today. As we move forward, we have to discuss spending. So I am 
trying to promote a thoughtful conversation that focuses upon 
where our Federal spending most calls for containment.
    So, pay attention to the chart. This CBO chart details non-
interest spending as a percentage of GDP. We already know the 
significant role health care spending plays in our budget. Over 
the next decade, the Federal Government will spend over $7 
trillion on Medicare and $4.5 trillion on Medicaid. Together, 
these two programs account for one-fourth of the entire Federal 
Government spending over the next 10 years.
    But look very closely at the even longer-term projections 
of our spending. According to CBO, the middle graph--pay 
attention--Social Security as a percentage of GDP will remain 
relatively stable over the next 25 years. The same for non-
interest spending, the bottom graph. As a percentage of GDP, it 
will also remain relatively stable.
    Now take a look at the top graph. Over the next 25 years, 
spending on health care entitlements will basically double as a 
percentage of GDP. So, unless we take a serious look at health 
care spending, we are not genuinely acting to reduce our 
country's debt. Now, 25 years may today seem like a long time, 
but we know, as we have looked at these problems over a couple 
decades, it is not a long time. We need to be talking about 
health care spending right now.
    My question, and either or both can respond, is simple: do 
you think that we must take steps now to reduce the growth of 
our health care entitlements as a percentage of GDP over the 
next 25 years?
    Dr. Holtz-Eakin. Absolutely. There is no question that, for 
a long time, the long-term budget outlook has been driven by 
the mandatory spending, health spending in particular. You are 
not going to grow your way out of it. It has been clear for a 
long time you cannot tax your way out of it. This is about 
controlling spending.
    Senator Grassley. Mr. Greenstein?
    Mr. Greenstein. I think the key issue here is--and I think 
for years a number of experts from across the political 
spectrum have agreed on the following--over time we are not 
going to be able to sustain a rate of growth in Medicare and 
Medicaid costs per beneficiary that is substantially lower than 
the rate of growth of health care costs per beneficiary system-
wide and in the private sector. They are all linked. Our big 
challenge is slowing the rate of growth of health care costs 
system-wide.
    Now, Medicare is such a big player that it can help play a 
leading role. We have seen this in the past. As we learn ways 
to bring down costs to introduce efficiencies into Medicare, a 
lot of the private insurers pick it up because they want the 
efficiencies as well.
    There are limits at the present time, I believe, to how 
much we can enact in Medicare now because of our lack of 
knowledge of some of the system-wide issues that we are 
learning about, and because Medicare is actually not a wildly 
generous benefit package.
    If you look at seniors between one and two times the 
poverty line, $11,500 and $23,000 a year, they now spend 23 
percent of their budgets, on average, on out-of-pocket health 
costs, even though they have Medicare. So, we have some 
constraints there.
    Medicaid, I think, is a different issue. Medicaid pays 
providers very low rates. Medicaid, per beneficiary, costs 20 
to 25 percent less than private insurance for the same 
beneficiaries. These are poor people. We cannot ask them to pay 
large amounts. I think in Medicaid our savings really are 
dependent on slowing the rate of growth system-wide, and I 
would not look for going in right now and making big cuts in 
Medicaid.
    In Medicare, I think we should do those things that make 
sense now and really aggressively pursue all these 
demonstrations and private sector reforms and be prepared as we 
learn more to come back and continually make, over a number of 
years, a series of growing changes in Medicare.
    Senator Grassley. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator. I compliment you on your 
good staff over there. You were speaking with them. You had 
great staff work over there helping you out.
    Senator Grassley. Yes, I know. That is really nice of you.
    The Chairman. Senator Stabenow?
    Senator Stabenow. Thank you, Mr. Chairman. I was going to 
say the same thing. Next time you need a stick or something so 
you can do a more accurate job.
    But welcome to both of you. Thank you very much for your 
input. If I could talk just--I would like to continue the 
discussion on health care costs, because clearly this is a 
challenge for us. We have tackled it as we have looked at 
health reform. We have actually begun to see health care costs 
slow, which is good. There is so much more that needs to be 
done.
    We have seen Medicare Advantage premiums go down about 7 
percent last year based on not providing over-payments, and we 
have seen a number of things begin to happen, but there is 
much, much more to do. The challenge in health care, as we all 
know, is that it is not optional.
    I mean, as human beings, people are going to get sick. We 
cannot control when or where. The question is, how do we get 
care? What kind of care? How do we get care? How do we not use 
emergency rooms inappropriately but get preventative care?
    So I would ask, Mr. Greenstein, specifically, there have 
been proposals that would cap spending through block-grants or 
other kinds of caps that really just shift costs from the 
Federal Government to States, ultimately to families.
    Then we have what we are beginning, which is to provide 
expanded help under Medicaid which gets people out of emergency 
rooms and into a doctor's office. In Michigan, our Governor has 
supported expanding Medicaid because the recent estimates in 
Michigan show that we will save about $351 million over 10 
years by getting people out of emergency rooms. All of us then 
will not be paying for it through higher rates.
    Could you talk a little bit more about the differences in 
how we approach Medicaid and the impact of proposals to block-
grant or cap Medicaid, what it would do to hospitals, 
communities, ultimately families?
    Mr. Greenstein. Yes. In Medicaid, as I noted a minute ago, 
the studies show that, on average, it costs already about 20 
percent less per beneficiary relative to private insurance for 
adult, non-
elderly, disabled beneficiaries, and about 27 percent less for 
children, primarily because Medicaid pays providers 
significantly lower rates.
    So, if there is a big cost shift to States and they do not 
have enough funding, their choices are really, to cut the 
provider rates even more, limit eligibility, which would result 
in more people being uninsured, or have a benefit package that 
makes people under-insured rather than fully insured.
    People talk about managed care. It should be noted that all 
but a handful of States already contract with private managed 
care companies to run their Medicaid programs for people other 
than the elderly and disabled. We hope that, over the next 
number of years, as a result of a series of demonstration 
projects now starting, State-run, federally supported--these 
are demonstration projects to try to find ways to improve the 
quality of care while saving money for the dual-eligibles, the 
people who get both, the elderly and disabled on both Medicare 
and Medicaid--if those pilots find successful ways to do that, 
then that ought to be an avenue for savings.
    But we have to follow the Hippocratic Oath and do no harm. 
We do not know yet how to do it. In fact, when the super 
committee asked CBO about various proposals on the dual-
eligibles, CBO's response was, it would not score them as 
saving money because we do not know yet how to do it to save 
money. But that is the kind of approach we should pursue.
    Senator Stabenow. That is the kind of thing we should be 
doing.
    Mr. Greenstein. Rather than just arbitrarily limiting the 
money for States and then, if there is a flu epidemic, if there 
is a new disease--hopefully there will not be--like HIV-AIDS, 
or maybe there is a breakthrough on Alzheimer's or heart 
disease, and there is a new set of drugs that at least 
initially has higher costs but saves lives, you do not want to 
be in a situation where we are denying those to poor people, 
but higher-income people get them.
    Senator Stabenow. Right.
    Mr. Greenstein. We do not want to be a country where health 
care is based on your income.
    Senator Stabenow. Very quickly, if I might just ask, when 
we look at the $2.5 trillion that has already been put into 
place in deficit reduction and, if sequester is going to take 
effect, how much of the total deficit reduction since 2011 will 
be in cuts to services to middle-class families as opposed to 
asking those at the top to do a little bit more?
    The Chairman. If you could keep your answer very short.
    Senator Stabenow. Yes.
    The Chairman. Time is over here.
    Senator Stabenow. Yes.
    Mr. Greenstein. Well, simply on a spending versus tax 
basis, over the period from 2013 to--we are now moving into 
another 10-year period--we have about $1.5 trillion in cuts in 
discretionary programs, about $600 billion in revenues. If the 
sequestration goes into effect, we will have a total of about 
$2.5 trillion in spending cuts, not counting interest savings, 
to the $600 billion in revenues.
    Obviously there will be impacts on many people. Spending 
programs on the spending side of the budget primarily benefit 
middle- and low-income people, who are the bulk of the 
population. Spending programs on the tax side of the budget--
tax entitlements, tax expenditures, use what term you will--the 
data show, heavily benefit people in the upper part of the 
income scale.
    The Chairman. Thank you very much.
    Senator Thune?
    Senator Thune. Thank you, Mr. Chairman.
    The Chairman. I might say, Mr. Greenstein, your point about 
dual-eligibles is one this committee feels very strongly about. 
Melanie Bella, who is heading the program on the pilots, has 
been before this committee a couple of times, and we are trying 
to focus very much and help her out with those pilots. Thank 
you.
    Senator Thune. Thank you, Mr. Chairman.
    I would like to get Dr. Holtz-Eakin's reaction--maybe this 
has been discussed a little bit already--to Mr. Greenstein's 
statement in his opening statement about gross debt versus 
publicly held debt and the impact correlation between economic 
growth and indebtedness. Debt-to-GDP is the standard that is 
used. I have read the book ``This Time Is Different.'' Reinhart 
and Rogoff make that correlation based upon a great deal of 
research of modern economies, primarily in Europe, as well as 
more ancient economies as well.
    Mr. Greenstein drew a distinction between those and that 
the European example is different because they characterize 
their debt differently than we do in this country. It seems, to 
me at least, either way we have a big debt problem which I 
believe is impacting economic growth in this country. But would 
you care to just react to that, your thoughts with regard to 
the comparison there?
    Dr. Holtz-Eakin. Point number one, we have a lot of debt. 
The CBO outlook, which is a forward-looking document, says we 
are going to have around $7 trillion in deficit over the next 
10 years. So, we are going to have more. So that is point one.
    Point number two. It is not rocket science that this harms 
the economy. One option is, we do nothing and we run straight 
into what Erskine Bowles has characterized as the most 
predictable crisis in history. That cannot be a pro-growth 
policy to say we are going to run into a financial crisis. Or 
we could just raise taxes, as I did in that example for Senator 
Hatch.
    If a businessman or anybody who is looking at a country 
that is going to double its tax rates over the next 10 years as 
its strategy for dealing with and avoiding a financial crisis, 
they are not going to expand, not going to hire, not going to 
locate in that economy. It is simply not sensible tax policy.
    That leaves you with the reality that you have to control 
spending, and that is a reality that has been very hard for 
people to come to terms with. We have raised taxes, cut taxes, 
and reformed taxes in this country. We have never cut spending. 
It is visible this week how hard it is to cut even $85 billion 
in budget authority, which will turn into $44 billion in actual 
outlay reductions. This is trivial stuff compared to the 
problems we have.
    In terms of gross debt versus debt in the hands of the 
public, I like debt in the hands of the public. I understand 
the economics of it. It is what I would choose. But when I 
talked with Ken Rogoff about his research and how I should 
think about it, he emphasized the only way to be correct in 
doing the comparisons is to use the gross debt measure.
    The gross debt measure says we are over the danger line 
where you pay the price of slower growth and a higher 
probability of financial crisis. That is where we are, and the 
outlook says that is where we stay every year for 10 years.
    I think it is a disservice to all the people whom these 
programs serve--the poor, the elderly, those who have health 
problems--to put them in an economy that is chronically growing 
too slowly and buffeted by the potential for crisis. That does 
not serve them well, so we need to actually do better on that 
front. Being sensible about entitlement reform is a way to do 
that.
    Senator Thune. Now, in coming back in on this correlation 
between debt and growth, this is the weakest economic recovery 
we have seen since World War II. We are growing roughly 2 
percent, a little under. There has been some research done by 
the Republican staff of the Joint Economic Committee which 
suggests that, if you had economic growth that was equal to the 
average economic growth of the past 60 years since the 
beginning of this recovery, that you would have cut last year's 
deficit in half.
    I guess I would like to get your reaction, both of you, to 
the idea that long-term economic growth rather than short-term 
stimulus measures ought to be our focus if we are really 
interested in improving our fiscal condition. Do you agree 
that, if we lowered rates across the board and, in tax reform, 
broadened the tax base, it would be an effective way to 
increase economic efficiency in long-term growth? First, long-
term growth versus short-term stimulus; second, tax reform as a 
way to get long-term growth.
    Dr. Holtz-Eakin. Yes. Absolutely. There is a place for 
counter-cyclical policy. At the end of 2008, beginning of 2009, 
we were falling like a rock. I understand why it is necessary 
to step in. This recovery dates from June 2009. We are now 
closing in on the fourth year of poor economic growth. This is 
not a cyclical problem, this is a bad long-term trend growth 
problem. We need policies that improve the long-term trend 
growth, and that should be the focus, there is no doubt about 
it.
    Tax reform is central to that. There is no doubt about the 
benefits of having a more efficient tax code so that we do not 
waste scarce resources on unproductive investments, on 
uncompetitive tax codes, that harm our most efficient global 
companies. There is a great place for that.
    I think one of the lessons of the Bowles-Simpson Commission 
is, if you want a route to higher revenue, do not try to use a 
broken tax code; do the tax reform. So that should be central. 
This committee, I know, has done a lot of work on that. I think 
that is very important.
    Mr. Greenstein. Let me quickly note, I think the key 
finding of Reinhart and Rogoff is that financial crises, 
recessions resulting from financial crises, are deeper and have 
much slower, longer recoveries. This is the only recession we 
have had in decades that comes out of a big financial crisis. 
That is the key reason why the growth is so slow.
    Second, yes, debt is a long-term problem. The idea that the 
current debt is reducing growth right now to me does not really 
compute, because the way debt slows growth over the long term 
is by competing for capital and pushing up interest rates, but 
interest rates--real interest rates--are close to zero now, so 
we are not seeing that effect right now.
    I think the policy right now should be what Peter Orszag 
has referred to as the barbell. We actually should be doing 
more to stimulate the economy right now, like infrastructure, 
on a purely temporary basis, coupled with enacting deficit 
reduction that grows as the economy recovers and has the 
biggest impacts in future decades.
    The Chairman. Thank you very much. I appreciate that. Thank 
you, Mr. Greenstein.
    Senator Cardin?
    Senator Cardin. Thank you, Mr. Chairman.
    Mr. Greenstein, I am going to follow up on the point that 
you were just talking about, that we have to do this deficit 
reduction plan in a way sensitive to economic growth. I was 
recently at the National Institutes of Health, talking to our 
workforce there. It is not just the direct impact of these cuts 
on the Federal workforce which has an impact on our economy--
there is no question about that--but it is the related impact 
it has on those companies that depend on the basic research at 
NIH and the grants that are given, et cetera, and the impact of 
these cuts to our economy is very clear. We need more people 
working. When we cut those types of programs, we are just 
adding to the unemployed and adding to the difficulty of our 
economic recovery.
    I also want to emphasize a point, Mr. Chairman, that you 
made. I met with small business leaders yesterday, and they 
said the same thing that your constituents in Montana told you, 
and that is: make a decision here. Get some predictability 
here. We would rather have a policy that we do not like but we 
know it is there than no policy at all. These short-term 
extensions are not helping us, and we need to deal with a game 
plan that we all agree on and implement for the future of our 
economy. I look forward to that type of a discussion.
    But I think, Mr. Greenstein, the point that you made that 
we really need to look at the mandatory side--yes, the 
mandatory side includes the health care issues, and that has 
certainly been dominant. But it also includes the tax code and 
tax expenditures. I think you raise a very good point.
    The people who are getting the benefits--you pointed out 
child care, but we could use housing, we could use health care, 
we could use so many different energy areas, where there are 
programs that people qualify for and are entitled to without 
any cap that we really have not evaluated.
    I think of the work that was done before I got to Congress 
in the 1986 tax reform. That was an effort to try to evaluate 
the efficiencies of our tax code, and progress was made. But 
since 1986, there have been a lot of individual tax provisions 
that have been put in the tax code where their efficiency 
really is questioned. We do not have a process to evaluate the 
efficiencies of those tax expenditures. So, yes, we call it tax 
reform.
    Can we not look at tax reform and, through that, help 
reduce the deficit through reducing the amount of tax 
expenditures and, I would say, encouraging economic growth? But 
do you have any advice for us as to how we can evaluate the 
programs in our tax expenditures versus the efficiency factors 
that we may have in other parts of the Federal spending code? 
Is there some material out there that could help us in trying 
to evaluate the efficiencies on the tax side?
    Mr. Greenstein. Well, of course this is compounded by the 
difficulty that some of the spending programs that are in the 
same area, and some of the tax expenditures, are under 
different committees. Nevertheless, given the central role of 
the Finance Committee, I do think it is something this 
committee could try to look at. It is interesting. I am 
unfortunately going to have to leave here in a few minutes, 
because I am moderating a Hamilton Project panel.
    The panel I am moderating is a series of papers of people 
from both Republican and Democratic backgrounds, top analysts, 
looking at some specific tax expenditures and their economic 
efficiencies and inefficiencies and better ways to do it to 
both save money and increase efficiency, and make the tax 
incentives more effective at the same time. It is kind of 
analogous to what we talk about in health care. How do we 
deliver better quality for less cost?
    I think these areas, in the area of housing, in the area of 
retirement savings, in the area of health expenditures, all 
warrant looking at. I also think there are a number of 
individual provisions that have crept in over the years that 
usually go below the radar.
    Yes, there has been a lot of attention in recent years, 
say, to carried interest, but you also want to look at things 
like the like-kind exchange rules, valuation discounts, all of 
these things that tax attorneys and accountants have come up 
with that arguably reduce efficiency, lose a lot of money; they 
would not be affected by some kind of global limitation on 
deductions. They are really different. They are in their own 
area, but they really warrant looking at.
    The last thing I would note is, when CBO and the Joint Tax 
Committee, several years ago, looked at the economic impacts of 
things like the tax cuts enacted in 2001, their assessment was 
that, while the rate cuts would improve growth, over the long 
run they were more likely to reduce growth than increase it 
because of the negative impact on the deficit.
    My point being, yes, all else being equal, a broader base 
and a lower rate is positive for the economy. But the single-
biggest threats to long-term economic growth are the deficit 
and debt issues we are talking about. On both the spending and 
the tax side, the single best thing we can do for the economy 
is find sensible, efficient ways to make changes that 
contribute to deficit reduction, both on the revenue side and 
on the spending side.
    Senator Cardin. Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Bennet?
    Senator Bennet. Thank you, Mr. Chairman. Thank you for 
holding this important hearing, and thank you for your 
testimony.
    The columnist David Brooks has a piece today in which he 
observes that ``the future has no lobby.'' The longer I am 
here, the more I think that is true. When I hear these 
numbers--$2.5 trillion in spending cuts on the discretionary 
side, the $600 billion in revenue on the revenue side--none of 
these pieces are being done together, all of them being done in 
these short-term deals, none of them addressing the main issue. 
It makes me think he is right about that.
    If we do not do something about this, we are going to 
drastically fail to invest in the future of this country. I 
detected a difference in opinion at the beginning of the 
conversation about how urgent the problem is. I do not know the 
answer to that. But what I would suggest to both of you and to 
people who have been working, people of good will, on these 
issues, is, whether you think it is urgent or not, the longer 
we delay this, the harder it is going to be to solve.
    We have to find a way to come together. There are enough 
moving parts here for us to actually do this in a meaningful 
way, to send the capital markets and our competitors around the 
world a message that we are serious about this. We have not 
done that. This Congress has not done that.
    I would encourage both of you to think about how we could 
work together on this with a sense of urgency, simply because 
matters will only get worse if we do not do it. I wonder if you 
have a reaction to that before I have a health care question.
    Dr. Holtz-Eakin. I am beside myself with urgency. I think 
this is a big problem. I think it is a tremendous disservice to 
the next generation. I mean, we can fight about the fairness of 
raising one person's taxes, cutting somebody's spending 
program, whatever it may be. All of them pale in comparison to 
the fundamental immorality of what we are doing to the next 
generation. That is point one.
    Number two, the way the budget is structured makes that 
worse. We are letting the legacy programs of the past, the 
mandatory spending programs, crowd out our ability to do 
discretionary spending, which is all about the future. So we 
are building a trap to really do a disservice to the next 
generation.
    The third, and the reason I think it is so urgent, is, with 
all due respect, nothing has been done yet.
    When people talk about $1.2 trillion in discretionary 
spending cuts, those are basically the caps in the out-years 
which are promises--``honest,'' ``really''--that like never 
before we are not going to spit the bit and we are really going 
to spend less. It has not happened. Nothing has happened on the 
spending side. So, yes, I think it is really urgent, because 
right now this town is in a frenzy, and there is $85 billion, 
and it is not even----
    Senator Bennet. Well, you do not have to say ``with all due 
respect'' to me. I think what we have engaged in is the lowest 
common denominator partisan politics. It is putting our 
children in an incredibly precarious position.
    Dr. Holtz-Eakin. Yes.
    Mr. Greenstein. I agree on the urgency front. I think we 
need to distinguish a few things. Sometimes people think 
urgency means we need to start putting the cuts into effect 
this moment, even though the unemployment rate is close to 8 
percent. I know that is not what you mean or what I mean. 
Urgent, in terms of reaching a deal and enacting it now, but 
designing it so the cuts phase in as the economy recovers.
    I think an argument for going sooner rather than later is--
for example, we saw in the presidential campaign, neither party 
wanted to talk a lot about changes that would affect current 
beneficiaries in Social Security and Medicare.
    When the 1983 Greenspan Commission legislation was enacted, 
it raised the Social Security retirement age starting in 2000, 
17 years down the road. So anything we enact in some programs 
is probably not going to start for a while and phase in slowly, 
which adds to your point of, do it sooner rather than later.
    The last point, though, is, I actually think it is 
counterproductive when people say, well, within 2 years the 
financial markets will implode. Then, when they do not, that 
leads people who think it is not urgent to say, see? So we are 
seeing a lot of quotes now of Simpson and Bowles having said 2 
years ago, we only have 2 years. I think it was a mistake for 
Erskine and Alan to say that. You do not need to say that to 
say we have a mid-term and a long-term problem and we should 
act now.
    Senator Bennet. That is my point. Actually, I do think if 
we were able, tomorrow, to say we have reached a broad-based 
bipartisan agreement that is balanced on the revenue side and 
on the spending side, that we would be shocked at how fast the 
$2 trillion that is sitting on balance sheets in this country 
would actually be invested in this country's future.
    But my point is, you do not need to agree with that to 
agree that acting now is going to be much easier than acting 
later, and certainly much easier than acting on the back end of 
an economic crisis, if that is what we have.
    Dr. Holtz-Eakin. If I could say, briefly: the reason why 
entitlement reform is so important is, think of Social 
Security. It is a system that merits getting fixed for the 
reasons that I mentioned at the outset. If we were to fix it, 
it would have no near-term austerity effects whatsoever. It 
would take 10 years for anything to show up. It would send a 
signal to international capital markets that we can take on an 
important part of our spending problem, doing entitlement 
reform, some things that have been traditionally the third rail 
of politics. Why not do that?
    The Chairman. Senator Roberts?
    Senator Bennet. Thank you.
    Senator Roberts. Well, thank you, Mr. Chairman.
    I see here that the CBO is estimating an $845-billion 
budget deficit, and I would add, only if current law is not 
changed. Now, the President asked for 43 new programs in his 
State of the Union address. That current law base line does not 
include the tax extenders passed by this committee, the doc 
fix, likely other spending. You could have another Sandy. We 
certainly hope that is not the case, but we will have forest 
fires, we will have a drought in Montana and Kansas. I do not 
know about the gentleman from Utah.
    The Chairman. Excuse me. I understand Mr. Greenstein has to 
leave now to chair that panel. Thank you very much, Mr. 
Greenstein. You have a few minutes?
    Mr. Greenstein. I have a few more minutes.
    The Chairman. You can answer Senator Roberts' question.
    Senator Roberts. Well, I have not asked a question yet, 
that is the problem. [Laughter.]
    You have SSI climbing to 1 out of 15 Americans, you have 
food stamps doing the same thing. I do not see where the $845 
billion is an accurate number, if current law is not changed, 
and it is going to be changed. This assumes also we are going 
to have the sequester. We just had some very good remarks by my 
distinguished predecessor.
    I hope we can get that done, but the chances of that 
happening are--I do not know. We are talking about $85 billion, 
``b,'' that is bravo. You are indicating that the first step we 
ought to take is $1.5 trillion, ``t,'' for tough. I do not know 
if we are going to get that done.
    I also wonder about the CBO prediction that the Federal tax 
revenue will increase by 25 percent. This is based on the 
prediction for economic growth. Well now, if you have the 
Affordable Care Act out there and small businesses trying to 
figure out how they can work around it, businesses with 50 
employees, so having people going down to 48, changing 
employees from business to business, and the part-time 
employees and a lot of people who have just given up in regards 
to looking for work, plus the official 7.9 percent 
unemployment, you are looking at 12, 13, 14 percent in regards 
to real unemployment.
    Then, if we do not reach an accord on the sequester or even 
the $1.5 trillion, which I wish we could do, or 2.5--I do not 
know. I just think that these estimates--that is a glass half-
full. I am sort of a glass half-empty guy. I do not know if you 
want to comment on that, either one of you.
    Mr. Greenstein. Well, my only comment is, on the one hand, 
when you talk about all these numbers, the $85 billion, as Doug 
has noted, is a small percentage.
    It is a small percentage of the total. On the other hand, 
the CBO estimate is that the sequestration, by the 4th quarter 
of this year, will take six-tenths of a point off GDP and 
result in 750,000 fewer jobs than we would otherwise have.
    Senator Roberts. Well, I know that. Listen, I serve on a 
lot of committees, and everybody else here does. So the people 
who understand that who serve on the committee--and I am semi-
senior, so I am somebody--they come in, and everybody has 
pressed the hot-button.
    The commandant of the Marine Corps. I am the senior Marine 
in the Congress. My God, my God, look what is happening to the 
Marine Corps! That was a pretty dumb thing we did. I think it 
was done on purpose to really single out the military, but we 
ought to do it when every agency comes in and then makes their 
own discretionary cuts so that this loss that you are talking 
about would not occur, or at least it would be less 
devastating.
    So, everybody is talking about that. My Lord, we had the 
Secretary of Agriculture saying we were going to cut off all 
the meat inspectors, shut down the packing plants. Every cowboy 
in Kansas has been in touch with me saying, ``What in the hell 
am I going to do with my cow herd?'' They have already been 
devastated by a drought.
    So I do not know what that answer is, but rest assured I 
know that all the hot-buttons have been pushed. Let me push 
mine. I said in regards to the nomination of Mr. Lew, who is 
already approved, the sub-regulatory guidance documents--
bulletins, guidances, posting on the website, FAQs, so on and 
so forth--everything that goes out from the Federal Government, 
and more particularly I am talking about Medicare, is in regard 
to the sub-
regulatory guidance. Who knows about these things?
    My question to you, since we have people leaving and not 
paying any attention, basically, is there some way you can 
estimate regulatory costs? I will promise the chairman I will 
not go into my regulatory rant, but there has to be some cost 
to all the regulations, because what we are doing in terms of 
Medicare, over 50 percent of the doctors are not serving 
Medicare patients, and our hospitals, our community hospitals, 
are hanging on by a thread.
    The rural health care delivery system is threatened. Every 
provider I know out there is hanging on by a thread, very 
worried about the fact that they are guilty as opposed to 
innocent, being fined, so on and so forth. There has to be a 
cost to the regulatory process. That affects every 
manufacturer, every business, every segment of our economy.
    Do you have any comment on how on earth we would measure 
that?
    Dr. Holtz-Eakin. Yes. At the American Action Forum that I 
run, we have a section devoted to regulatory issues, and we 
total up the regulatory costs. They are $500 billion in new 
regulatory costs since 2008. We keep track of the Affordable 
Care Act, we keep track of Dodd-Frank, we keep track agency by 
agency, the EPA. I could not do justice to our efforts to 
measure regulatory costs and look at impacts in the economy in 
this brief time, but I would be happy to sit down with you, and 
I would be happy to bring those numbers to your attention.
    Senator Roberts. Thank you.
    The Chairman. Thank you, Senator.
    Senator Portman?
    Senator Portman. Thank you, Mr. Chairman. Thank you and 
Senator Hatch for having this hearing. It has been fascinating. 
I have so many questions and so little time. I was going to 
give Bob the chance to respond to some of these. But Doug, it 
is great to have you here, and I appreciate what you said.
    Senator Roberts just talked about growth, really. Senator 
Bennet talked about the $2 trillion on the balance sheets. I 
think one thing I was going to ask Bob about is, I think that 
is not part of the Rogoff and Reinhart study in a sense, 
because I think we have an unusual situation now in this 
country.
    I spoke to the CEO of a major company in the last week and 
a business round table of small business folks, and they all 
said the same thing, which is, they are not taking that capital 
off the sidelines and investing it. Even though the earnings 
are good, the employment is bad. A lot of it does relate to the 
uncertainty over the debt and deficit.
    You talked about tax reform. I appreciate Bob's support of 
that, and the chairman and ranking member have both been way 
out front on pro-growth tax reform that broadens the base and 
lowers the rates. There is $1.8 trillion locked up overseas 
alone. So, that is another huge opportunity for us to give the 
economy a shot in the arm.
    I have a question for you that relates to the CBO report 
you talked about, and it was sobering. I think that is a good 
way to put it. A lot of it is because of the low economic 
growth because of the debt and deficit. But in a sense, as I 
look at it, I think what they are saying is that entitlement 
costs and the resulting higher interest on the debt accounts 
for 100 percent of our rising long-term deficits.
    So, in other words, discretionary spending as a percent of 
GDP actually goes down, and tax revenue actually goes up from 
the historic level, about 18 percent, to over 19 percent. So 
you could say, I think--tell me if I am wrong--that 100 percent 
of our rising long-term debt is due to entitlement costs, to 
three entitlement programs--very important but unsustainable--
and interest on the debt. Is that accurate?
    Dr. Holtz-Eakin. Yes. It is the fundamental problem of the 
Federal budget.
    Senator Portman. And let me ask you something else with 
regard to what is going to happen in the future. As I look at 
that report, discretionary spending, which is about 27 percent 
of the budget 10 years from now, goes up about 10 percent in 
nominal dollars. The entitlements, as I look at it, go up about 
100 percent. They go from $1.5 trillion to $2.9 trillion.
    So, instead of up 10 percent in the discretionary 
entitlements, Medicare, Medicaid, and Social Security alone go 
up 100 percent. They become almost 50 percent of the budget. 
Other entitlements go up about 39 percent. Interest goes up, by 
the way, 284 percent.
    The question I was going to ask Bob was, is he taking into 
account those interest payments which are going to be so 
substantial, that go up 284 percent, along with this 
entitlement increase? Again, it is 100 percent of the problem.
    Dr. Holtz-Eakin. It is not quite fair, since Bob is not 
here. But I mean, we have looked pretty carefully at strategies 
like $1.5 trillion. I understand Bob does not want to touch a 
lot of things. We have had this discussion, and I get it.
    But waiting is dangerous, and not touching things is 
dangerous, in part because that kind of an estimate is a hair-
trigger estimate that needs the growth. If we do not get 
growth, we fall way short, and the debt does not stabilize. It 
relies on low interest rates.
    If we get anything like a more rapid normalization, or God 
forbid an above-average normalization of borrowing costs, 
again, those stabilization trajectories fall apart quickly. So 
I think the prudent thing to do is to be more aggressive, and 
that is one of the reasons I went with the strategy I did.
    Senator Portman. Doug, let me ask you quickly, if I could, 
about Medicare Advantage. Over a third of the seniors in Ohio 
rely on it. The administration has come out with some new 
rulemakings with regard to reimbursement in Medicare Advantage. 
Talk to us a little about that. Is this going to push more 
folks into Medicare fee-for-service as you talked about earlier 
and the problems associated with that? Richard Foster, a 
recently retired actuary, has talked about this. What are your 
thoughts on it? What should we be doing on Medicare Advantage?
    Dr. Holtz-Eakin. Well, number one, I think an 8-percent 
year-over-year cut is a sharp cut. It will unambiguously reduce 
plan offerings in Medicare Advantage. I do not see any way 
around that. That means people currently in Medicare Advantage 
will have to leave their provider network. It is never good to 
change providers, and that often interrupts episodes of care in 
a detrimental way. It will move people from an integrated plan 
to fee-for-service, which is the opposite of what we need to be 
doing as a broader health care strategy.
    It is typical of what has been a strategy of trying to 
impose provider cuts--whether they are MA plans, hospitals, 
doctors, or whatever it might be--as a strategy for controlling 
the budget costs that ultimately does nothing to improve the 
quality which we need and backfires in terms of really getting 
the spending problem under control, because fee-for-service is 
worse than almost every other alternative.
    Senator Portman. I asked about Medicare Advantage and, 
generally, about Part D as well, because I think that, per the 
chairman's good question about health care, it is a critical 
issue. If it is not solved, we cannot solve this bigger 
problem. In some respects, right before us there is an example, 
which is Part D and the cost estimates which were in the $600-
plus billion range from Richard Foster and other actuaries, 
$400-plus billion from CBO, that ended up coming in below that.
    Dr. Holtz-Eakin. And mine was?
    Senator Portman. Well, I am not sure.
    Dr. Holtz-Eakin. Three hundred ninety-five billion dollars, 
roughly.
    Senator Portman. Yes. I am not sure if you were responsible 
for that estimate. But my point is, we have an opportunity here 
to look at a competitive model where you have the private 
sector working, competing for the business of seniors. Do you 
think that is something we should be looking to for the future?
    Dr. Holtz-Eakin. I think Part D is our most successful 
entitlement program. I remember working with the chairman a lot 
on it. We should try to make all of our entitlements look more 
like Part D and not the reverse, that is for sure.
    Senator Portman. All right. Thank you, Doug.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Carper?
    Senator Carper. Thanks, Mr. Chairman.
    Dr. Holtz-Eakin, how are you doing? Do you think if your 
parents had known you were going to be testifying before all 
these congressional committees for all these years, that they 
would still have hyphenated your name and made it so hard for 
guys like me to pronounce?
    Dr. Holtz-Eakin. You have opened an enormous can of worms, 
because they did not, and they will never forgive me because I 
did. [Laughter.]
    Senator Carper. Well, we are glad you are here.
    Dr. Holtz-Eakin. Thank you.
    Senator Carper. I have been urging our chairman and ranking 
member to do what they have done so many times in the past, and 
that is to provide real leadership for us on this committee, 
and for this committee to provide real leadership for the 
Senate and for the Congress and for the country, to figure out 
how we get better health care results for less money. We have 
been talking about that today. I just spoke about that on the 
floor, and spoke on behalf of the nomination of Chuck Hagel a 
few minutes ago.
    One of the things I said on the floor was, we spend more 
money for defense as a Nation than I think the next five or 
six, maybe seven nations combined. If we cannot find ways to 
provide for our defense and maybe at the same time save some 
money, shame on us. We also spend, as you know, way more money 
for health care than any other advanced nation in the world. I 
think the next closest nation is Norway, and they spend 52 
percent or so less than we do, and they get better results, and 
they cover everybody.
    You have given us a lot of good advice in the past. Where 
do you think the sweet spot lies for Medicare reform that is 
actually going to be likely to give us better results for less 
money? If you will, just think of a bunch of concentric 
circles, where they overlap. The edges where they overlap are 
where Democrats and Republicans can find agreement and actually 
pass something that does provide better health care results for 
less money. You have spoken to some of it, but just give us a 
couple of highlights and headlines, please.
    Dr. Holtz-Eakin. Just as a brief aside, on the defense 
front, one of the things that is poorly appreciated is that a 
big part of the defense budget is a health care problem and a 
pension problem. It has all the same problems the budget as a 
whole does, but smaller. I think reform of the defense health 
programs is just as important in many cases as Medicare and 
often gets forgotten.
    Senator Carper. That is a good point. Thank you.
    Dr. Holtz-Eakin. That is really, really important.
    On Medicare, Medicare's problem is that it has Part A that 
pays hospitals, B pays some doctors, C pays some insurance 
companies, D pays drug companies. There is no beneficiary to be 
found in there anywhere. It is not coordinated, it is not 
integrated. It rewards volume, and you have to move away from 
that.
    So there have been some suggestions which are sensible 
first steps on integrating the Part A and B co-pays and 
deductibles to turn them into a more sensible insurance policy, 
such as reforms of Medigap so that we do not have seniors 
completely insulated from the health care decisions that are 
made either by them or on their behalf.
    So, these are not rocket science. These are sensible first 
steps. There is now, I think, a bipartisan recognition that 
practice patterns driven by legal liabilities ought to be taken 
out of the system so we have practice patterns driven by 
medical decisions, and a sensible tort reform would be a good 
thing that has not yet been accomplished.
    So not everything has to be radical and new. I think there 
are some very sensible steps that can be taken and should be 
taken. I guess my biggest concern about the discussions that go 
on often in health care is that Republicans and Democrats agree 
more about delivery system reform than anything else. They 
agree on the diagnosis of lack of coordination, lack of 
prevention, too much acute care, not enough chronic disease. 
You go through the list, they are there.
    Then they say, let us go study it and have a demonstration. 
My personal view is that the road to health care failure is 
paved with demonstrations. We have had demonstrations and 
pilots for decades in Medicare, and they do not turn into the 
program itself. We need to be more aggressive about making 
actual changes in the program and not going to do more 
demonstrations, because the baby boom is now retiring, the debt 
is very high. We have given up our cushion and our lead time, 
and we have to move more quickly.
    Senator Carper. All right.
    Among the drivers in health care that have been just raised 
with me, literally in the last week, with folks whom I met with 
mostly in Delaware, number one is obesity. We are eating 
ourselves to death and at the same time just choking our 
Medicare program and our budget.
    Number two is care for folks who have dementia. I used to 
think, before I became Governor--actually, before I became a 
Congressman, I used to think that we spent most of our money in 
Medicaid for poor families, mostly single women and children. 
That is not true. We spend most of our money in Medicaid, as 
you know, for folks who are old, elderly, and a lot of them 
have dementia. We spend a ton of money for dementia, trying to 
figure out, how do we get someplace? I just met with the 
leadership of Johnson and Johnson earlier this week to see what 
they are doing, what they suggest. But number one, obesity, 
number two, dementia.
    A third one--and Bill Frist, God bless him, our former 
majority leader here, a collegue from Tennessee, has raised his 
voice of late and said it is about time for us to again look in 
a humane and caring way about end-of-life care. For us to 
continue to ignore that, I think we do it at our own peril. But 
those are at least three of the things that have been raised to 
me as items that we ought to focus on.
    Do you want to just respond to any of those three?
    Dr. Holtz-Eakin. I do not have a lot to say about obesity. 
I think it has been widely recognized. On the dementia, this is 
an example of a genuinely very hard problem that has been left 
unaddressed, which is how we finance long-term care in the 
United States. I mean, the problem is simple. There will be 
rising demands for aides for daily living assistance, and, as 
the population ages, there will be diminishing supplies because 
most of it is done by daughters and wives.
    Most of them are now working in a way that they did not in 
the past, and it is just not going to hang together. We do not 
have a good solution. So, I am here to tell you we do not have 
a good solution. I wish I did, but it is going to be a very 
large deal. It ought to be integrated with the delivery of 
medical services, probably in a home setting. So, that is a 
great challenge. I think there is no question about that.
    Senator Carper. All right.
    Am I out of time, Mr. Chairman?
    The Chairman. Take whatever time you want.
    Senator Carper. Thanks a lot.
    Could you just, as a compassionate person, give us a word 
on end-of-life care? It is a really tough issue for everybody.
    Dr. Holtz-Eakin. That is enormously hard. One of the 
reasons that I have favored health care reforms that put the 
dollars closer to the beneficiary and the family is this issue, 
because, in my view, the American public is simply not going to 
let an insurance company make these decisions. They are not 
going to let the government make these decisions. In the end, 
the only place that is ethically well-suited for this decision 
is with the beneficiary and their family. They ought to have 
the monies close to where the decision-making is going to be 
made.
    Having said that, they are not socially or intellectually 
equipped to make these decisions at this point. This is at odds 
with the way we have done business. We need to change it so 
that it is less at odds, to educate the people who are in fact 
going to be relied upon to make these decisions, inform them 
about their options more carefully. That is going to take a 
long time. That is not a 2013, 2014, 2015 initiative, it is a 
change in the way we think about this problem. It is very 
important.
    Senator Carper. All right.
    Mr. Chairman, I just want to say to you and to Senator 
Hatch, this has been a terrific hearing. This is terrific and 
so timely, so timely, as we face the sequestration issues at 
the end of this week and try to figure out how, by the end of 
the fiscal year, we can actually put in place a comprehensive 
balanced deficit plan. This is just very helpful, and I thank 
you and both of our witnesses for their testimony.
    The Chairman. Thank you, Senator, very much.
    Dr. Holtz-Eakin, I wonder if you could help me a little bit 
here. The big problem in Washington is it is dysfunctional. It 
cannot get together, it is partisan. Neither side trusts the 
other, especially on economic matters. We have Bowles-Simpson 
who had a stab at it, Gangs of 6, Gangs of 8, lots of gangs. 
Bowles-Simpson was bipartisan at one level.
    But I am wondering--and maybe it is not going to work, but 
you are a very good economist--if you could give some thought 
to maybe putting a couple or 4 economists together, two 
definitely ones whom Republicans listen to more than others, 
two whom Democrats will listen to more than others, and the 
four would get together with a plan. It is just an idea. We 
have to keep trying. We need to keep working on different 
ideas. On the surface that might sound a little stale because 
they are just four economists. On the other hand----
    Dr. Holtz-Eakin. A desperate appeal to economists to save 
the Nation is unusual, I will say. [Laughter.]
    The Chairman. Right. Right. But if you have two on each 
side whom each side tends to listen to, that might work. 
Anyway, I urge you to think about it.
    Dr. Holtz-Eakin. Thank you.
    The Chairman. And maybe if there are three others you can 
think of that you could team up with.
    I have no further questions. Actually I do, but I do not 
have time.
    Senator Hatch. Mr. Chairman, one of the witnesses raised 
the topic of tax expenditures. There is a lot of discussion 
about those expenditures that I think sometimes can confuse 
issues.
    Now, to listen to some, you would think that policies that 
incentivize desirable behavior, like charitable giving and 
retirement savings, are somehow akin to potentially wasteful 
government spending and they should be removed or scaled back 
to shave down deficits so Federal outlays do not have to be 
cut. Well, I do not agree with that.
    Now, I delivered a series of floor speeches in the summer 
of 2011 which discussed myths about tax expenditures, and I 
would ask that they be placed in the record at this point.
    The Chairman. Thank you.
    [The information appears in the appendix on p. 155.]
    The Chairman. We have a little bit of a dilemma here. There 
is a roll call vote. We have one more witness. It would be my 
thought--the other witness is Doug Elmendorf--that Doug, you 
could come back at a later date. Otherwise, I do not want to be 
rude. It does not give you the justice that you deserve when we 
are running off to a vote. I am not sure how many can come back 
after the vote, frankly. So I would just suggest that you come 
back at a later date.
    Dr. Elmendorf. Whatever suits you is fine.
    The Chairman. Well, I would just say at a later date to 
give the committee a better opportunity to ask you a lot of 
questions.
    Senator Hatch. I know it is hard to concede that point, 
Doug, but we sure would like to have you back when we have 
enough time to really ask you all the questions that we would 
like to ask.
    The Chairman. All right. Thanks, everybody. Thanks to all 
members, and thanks to the witnesses.
    The committee is adjourned.
    [Whereupon, at 12:05 p.m., the hearing was adjourned.]


                            A P P E N D I X

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