[Senate Hearing 113-302]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 113-302
 
                             THE DEBT LIMIT 

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

                                HEARING

                               before the

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 10, 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...................     3

                         ADMINISTRATION WITNESS

Lew, Hon. Jacob J., Secretary, Department of the Treasury, 
  Washington, DC.................................................     7

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:
    Opening statement............................................     1
    Prepared statement...........................................    37
Hatch, Hon. Orrin G.:
    Opening statement............................................     3
    Prepared statement with attachments..........................    39
Lew, Hon. Jacob J.:
    Testimony....................................................     7
    Prepared statement...........................................    52
    Responses to questions from committee members................    59
Rockefeller, Hon. John D., IV:
    Prepared statement...........................................    66
Stabenow, Hon. Debbie:
    Letter from the National Association of Manufacturers to the 
      President and congressional leadership, dated October 8, 
      2013.......................................................    69

                                 (iii)


                             THE DEBT LIMIT

                              ----------                              


                       THURSDAY, OCTOBER 10, 2013

                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 8:06 a.m., 
in room SH-216, Hart 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, Crapo, Roberts, Enzi, Isakson, Portman, and Toomey.
    Also present: Democratic Staff: Amber Cottle, Staff 
Director; Mac Campbell, General Counsel; Tom Klouda, 
Professional Staff Member, Social Security; and John Angell, 
Senior Advisor. Republican Staff: Chris Campbell, Staff 
Director; Mark Prater, Deputy Chief of Staff and Chief Tax 
Counsel; Jeff Wrase, Chief Economist; 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.
    On January 27, 1838, a young State Legislator named Abraham 
Lincoln spoke before a gathering in Springfield, IL. At the 
time, America was a deeply divided Nation, and Lincoln warned 
that the greatest threats to the young democracy were internal.
    He said, ``If danger ever reaches us, it must spring up 
amongst us; it cannot come from abroad. If destruction be our 
lot, we must ourselves be its author and finisher. As a Nation 
of freemen, we must live through all time, or die by suicide.''
    The actions of the past few weeks, the extremism of a small 
core of members in the House of Representatives, have crippled 
Congress and put our Nation on a very perilous path.
    For more than 200 years, the United States has been true to 
its word. It has honored its obligations. It has paid its 
debts. Yet today, a small group of hardliners is using our 
economy as a bargaining chip to repeal the Affordable Care Act.
    Let me be clear. We are not going to let that happen. The 
Affordable Care Act is the law of the land. It is not going to 
be dismantled in this budget fight. The issue is not up for 
debate.
    Our committee wrote the Affordable Care Act. I am always 
open to this committee working together to strengthen the law 
to better serve the American people. But as the President said, 
we cannot negotiate under the threat of default on the Nation's 
bills. Before any debate, before any deliberation, we need to 
reopen the government and pay the Nation's bills, no strings 
attached. Then we need to work together, return to regular 
order. We must address the Nation's long-term budget challenges 
working together, including entitlement and tax reform.
    But right now, we need to prevent another self-inflicted 
wound to America's economy. That is what defaulting on the debt 
is: a self-inflicted wound, with global consequences.
    The deadline is fast approaching. In 7 days, the United 
States Treasury will have exhausted all extraordinary measures 
to remain under the debt limit. In 7 days, the United States 
will be at the risk of defaulting on payments. The United 
States of America, the richest, most powerful Nation in the 
world, will be forced to look for loose change in the sofa in 
order to pay its bills.
    While the government shutdown has been disruptive, a 
default would be a financial heart attack. It would have 
widespread, long-term economic consequences. The national 
markets are already showing serious signs of stress. The Dow 
has dropped more than 800 points in the last 3 weeks, and the 
1-month Treasury bill rate has risen to its highest level since 
the 2008 fiscal crisis.
    If the debt ceiling is reached, the government would 
immediately have to slash Federal spending by 20 to 30 percent 
and drive the Nation back into recession.
    The pain will be felt across every sector of society. 
Social Security and Medicare would be cut, veterans' benefits 
slashed, funding for highways would be hit. Every government 
program would be devastated by deep cuts. Families would feel 
it firsthand with dramatic drops in their retirement savings. 
Jobs would be lost. Home values would plunge. Interest rates on 
mortgages and student loans would soar.
    Now, some have said we can avoid default by prioritizing 
U.S. payments, paying bondholders and interest on the debt, but 
they fail to mention that this scheme would force Treasury to 
pick and choose which programs to pay, forcing vital programs 
like Social Security and Medicare to compete for funding. This 
idea is just irrational.
    A default would have a catastrophic impact on the global 
economy as well. Jim Yong Kim, president of the World Bank, 
warned that a default would have dire consequences for the 
world's economy. Christine Lagarde, managing director of the 
National Monetary Fund, said it is, quote, ``mission-critical 
that the debt limit be resolved as soon as possible.''
    This is serious. The whole world is watching. Our actions 
here in the next couple of days will have global implications. 
We are the most important economy in the world. The dollar is 
the world's reserve currency. Our Treasury bonds are the 
backbone of the international financial system. A default would 
put the global economy in chaos. Of that there is no doubt.
    Last week, Treasury warned us that a default would cause a 
``recession that could echo the events of 2008 or worse.'' Have 
people here forgotten what happened in 2008? The collapse of 
Lehman Brothers set off a financial earthquake. Markets 
plunged, unemployment surged, America's confidence was 
shattered to the core. The 2008 crisis upended lives across the 
country, the aftermath of which can still be felt today.
    We cannot let that happen. We have a responsibility to 
avoid another economic disaster. Our leadership and our resolve 
will be tested in the coming days. We, all of us here in this 
room, we have an opportunity to pull America back from the 
brink.
    Earlier this week, I introduced a bill with Leader Reid 
that would get us past this stalemate. The bill extends the 
Nation's borrowing authority through the end of 2014, past the 
midterm elections. It is a clean increase, without any 
amendments. It simply allows the United States to pay its bills 
and avoid a catastrophic default. This is only a short-term 
solution, but it will help pull us back from the edge. It will 
allow us all here to pause, take a deep breath, and once again 
try to come together to move forward.
    I have been here in the Senate for close to 35 years, in 
Congress going on 39. I have seen my fair share of partisan 
fights. But never, in my mind, have I seen Washington so angry, 
so gridlocked, so broken, and it does not have to be that way.
    I know the public might find it hard to believe, but there 
are some very reasonable people here in Congress. There are 
many who want to do what is right. There are many who want to 
work together to conduct the business of our Nation. And I 
would say to them and to all my colleagues, now is the time. 
Now is the time for Congress to stop re-fighting old battles. 
Now is the time for Congress to come together and do what is 
right for our Nation. And now is the time for Congress to come 
together, reopen the government, and fulfill America's 
financial obligations.
    I began my remarks with a quote from President Lincoln, and 
I thought it appropriate to conclude with another one. Lincoln 
once said, and I quote him, ``I am a firm believer in the 
people. If given the truth, they can be depended upon to meet 
any national crisis.'' And that is why we are here today. We 
need to give the American people the truth, the real facts, and 
only then, when everyone understands the real risks at hand, 
the facts and the truth, will we be able to meet this national 
crisis.
    [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. I want to 
thank you for holding today's hearing on the debt limit. I also 
want to welcome you, Secretary Lew, to the committee. We 
appreciate your time and coming at this early time.
    During debate over the debt limit increase in 2006, then 
Senator Obama stated that, ``The fact that we are here today to 
debate raising America's debt limit is a sign of leadership 
failure.'' Leadership, he said, ``means that the buck stops 
here. Instead, Washington is shifting the burden of bad choices 
today onto the backs of our children and grandchildren. America 
has a debt problem and a failure of leadership. Americans 
deserve better.''
    Secretary Lew, on the day then-Senator Obama spoke about 
our debt problem, our gross debt was $8.3 trillion. It is now 
more than twice that, currently standing at $16.7 trillion. 
That represents 107 percent of the size of our economy. And, as 
the Congressional Budget Office has made clear, this poses 
large economic and fiscal risks.
    During that same 2006 debt limit debate, then-Senator Biden 
said, ``My vote against the debt limit increase cannot change 
the fact that we have incurred this debt already and will, no 
doubt, incur more. It is a statement that I refuse to be 
associated with the policies that brought us to this point.''
    What a difference in attitude there has been since then. 
Now President Obama and Vice President Biden preside over an 
administration that tells us that raising the debt limit, in 
your words, Secretary Lew, ``simply allows us to pay our 
bills.''
    Secretary Lew, you have also publicly stated that only 
Congress has the power to lift the debt limit. Now, while it is 
ostensibly true that Congress has the power to raise the debt 
limit, there will be no increase if the President does not 
agree. At the same time, despite your public statements to the 
contrary, it is not true that raising the debt limit has only 
to do with spending Congress has already approved. This line of 
argument is based on a premise that Congress makes spending 
decisions unilaterally and that the Executive Branch plays no 
role in the process. That premise is simply false. No amount of 
spending can be enacted without the President signing it into 
law.
    Furthermore, while President Obama's budgets have not been 
well-received even by Democrats in Congress, the President has 
traditionally been deeply involved in Congress's efforts to set 
spending priorities. The administration also issues statements 
of administration policy and veto threats on spending bills and 
other pieces of legislation.
    Presidents work with Congress all the time to enact their 
domestic agendas. We all remember how President Obama unveiled 
and pushed his trillion-dollar stimulus through a Democratic 
Congress, which he then signed into law.
    In addition, this President has made unilateral decisions, 
with no input from Congress, that have had an impact on Federal 
spending. For example, there was the decision to delay the 
employer mandate under Obamacare, which CBO tells us will add 
an additional $12 billion to our deficit. Congress never voted 
on the delay. It was a unilateral choice made through 
rulemaking at the Treasury Department.
    So, in short, the commonly repeated notion that questions 
surrounding spending and the debt limit are Congress's and 
Congress's alone to answer is, to put it mildly, a case of 
false advertising on the part of the Obama administration.
    There have been several other instances of false 
advertising from the administration concerning the debt limit. 
One is the President's claim that non-budget items have never 
before been attached to the debt limit increase, a claim to 
which a fact-checker at the Washington Post assigned the 
maximum four Pinocchios, as we have on the chart over here. In 
fact, of the 53 debt limit increases passed since 1978, under 
both Republican and Democratic Presidents, only 26 were, quote, 
``clean.''
    Another is that, in 2011, we entered some sort of a brave 
new world in which, for the first time in recent history, 
people were commenting on the inability of Treasury to make 
timely payment on incoming due obligations. If you would just 
go back to President Clinton's administration and read some 
press conferences held by then-Treasury Secretary Rubin, you 
will see that this claim is also false.
    Mr. Chairman, I ask permission to enter a reprint of the 
press conference in 1995 with then-Treasury Secretary Rubin and 
then-White House Chief of Staff Leon Panetta that supports this 
position, along with an associated article from the New York 
Times.
    The Chairman. Without objection.
    [The documents referred to appear in the appendix on p. 
44.]
    Senator Hatch. Now, Secretary Lew, I hope that during 
today's hearings we do not simply regress into comparative 
recollections of history. What is at stake is too big for that. 
The issue we face is yet another debt limit increase. There 
have been seven debt limit increases since the President came 
into office, collectively raising the limit from $11.3 trillion 
to the current $16.7 trillion, a cumulative increase of $5.4 
trillion.
    When talking about the future increases in the debt limit, 
all the administration will say is that, one, they want a, 
quote, ``clean'' increase, and, two, they refuse to negotiate. 
Now, we do not know what that means--what they mean by a 
``clean'' increase. We do not even know how much of an increase 
they want or for how long. Apparently, even making such desires 
known would constitute a negotiation.
    This posture is neither productive nor helpful toward 
resolving the current impasse over the debt limit. Essentially, 
what the administration appears to be saying is that it is 
entirely up to Congress to increase the debt limit and to 
decide how much and for how long.
    This, of course, raises more questions than it answers. For 
instance, does it mean that if Congress chooses to enact a 2-
week clean debt limit increase, the President will sign it? 
According to the administration's public statements, because 
Congress is solely responsible for increasing the debt limit, 
such a hypothetical stopgap would be fine if that is what 
Congress chose to do. Yet, somehow I do not think that is what 
the President is looking for when it comes to the debt limit.
    In just the past couple of days, the President has 
expressed willingness to entertain a short-term increase in the 
limit, which sounds like a willingness to negotiate terms. 
Sadly, the President's statements are still short on details.
    Secretary Lew, the lack of real engagement on the part of 
the administration is just one of the elements of the current 
debt limit debate that I find disconcerting. It is also 
disconcerting to have administration officials, including you, 
publicly questioning sentiments of Americans and financial 
market participants and suggesting that people may be too calm, 
in an apparent effort to whip up uncertainty in the markets.
    It is disconcerting that you have suggested that payments 
of Social Security benefits to retirees and disabled American 
workers are at risk, especially since you are a trustee of the 
Social Security Trust Funds. It is disconcerting that 
administration officials are sounding alarms of emerging risks 
to financial stability arising from the debt limit and from the 
debt limit impasse, while, at the same time, the Financial 
Stability Oversight Council, which you chair, has been silent 
and refuses to tell the American people how it would respond to 
these risks.
    Finally, it is disconcerting that the administration 
refuses, in the context of the debt limit, to even have a 
conversation with anyone concerning our unsustainable 
entitlement programs, which everyone agrees are the main 
drivers of our debt. The President has thus far refused to 
seriously discuss structural entitlement reforms without 
assurance that he first gets another tax hike.
    More often than not, what we hear from the administration 
on entitlements is a series of disclaimers as to what reform 
proposals they will no longer consider, and that list seems to 
get larger every day. The biggest question I have is, if the 
Obama administration will not negotiate on entitlements in the 
context of the debt limit, when will they negotiate on 
entitlements?
    Secretary Lew, I will remind you that I have put forth five 
modest bipartisan reform proposals for our health entitlement 
spending and personally gave them to the President earlier this 
year. You have copies of these proposals yourself. Yet, to this 
day, I have yet to hear a response. I cannot even get mere 
conversations from the administration about my proposals that I 
offered in good faith well before the debt limit was even an 
issue.
    Most recently, the Senate Majority Leader has introduced a, 
quote, ``clean'' debt limit bill, that Senator Baucus referred 
to, that would increase the debt limit until January 1, 2015, 
which will likely raise the limit by $1.3 trillion or more. 
That apparently is the position of the Senate Democratic 
leadership but is somewhat inconsistent with the President's 
recent willingness to accept a short-term increase in the debt 
limit.
    As you can see, Secretary Lew, we have a lot to discuss 
today. My hope is that, during the course of this hearing, we 
can get a real sense of where the administration wants to go 
with regard to the debt limit. I also hope that we can get past 
the arguments that have thus far dominated the administration's 
rhetoric regarding this issue.
    Our Nation's debt is now larger, as a share of our economy, 
than at any time since the spike-up in World War II. Despite 
the rhetoric of the administration, our growing debt is not 
solely the result of decisions made by Congress. It is not all 
due to the financial crisis, and it is not all the result of 
tax relief enacted under the Bush administration.
    Instead, it is a problem that all of us, both Congress and 
the executive branch, need to deal with, and the only way to 
responsibly deal with it is to confront our unsustainable 
entitlement spending, which will require the administration to 
do something it is now refusing to do, which is negotiate.
    Secretary Lew, as President Obama said in 2006 regarding 
the debt limit, Americans deserve better.
    I want to thank you, Mr. Chairman, and I appreciate you 
holding this hearing.
    [The prepared statement of Senator Hatch appears in the 
appendix.]
    The Chairman. Thank you, Senator, very much.
    Before the Secretary of Treasury begins, I would like to 
remind members--and I thank you very much for the full 
attendance--that we have to be very efficient with our 
questions and our answers. The Secretary has an engagement at 
9:30. So I urge us all to respect others as we question so that 
we all have a chance and the Secretary has a chance to answer 
our questions.
    Mr. Secretary?

 STATEMENT OF HON. JACOB J. LEW, SECRETARY, DEPARTMENT OF THE 
                    TREASURY, WASHINGTON, DC

    Secretary Lew. Thank you, Mr. Chairman. Chairman Baucus, 
Ranking Member Hatch, and members of the committee, I 
appreciate the opportunity to appear here today, and I 
appreciate the invitation to discuss the potential impacts of a 
failure by Congress to increase the debt limit.
    Congress has an important choice to make for the American 
people, and Congress alone has the power to act to make sure 
that the full faith and credit of the United States is never 
called into question. No Congress in 224 years of American 
history has allowed our country to default, and it is my 
sincere hope that this Congress will not be the first.
    Among the risks that we control, the biggest threat to 
sustained growth in our economy is a recurrence of manufactured 
crises in Washington and self-inflicted wounds. Unfortunately, 
today, we face a manufactured political crisis that is 
beginning to deliver an unnecessary blow to our economy right 
at a time when the United States' economy and the American 
people have painstakingly fought back from the worst recession 
since the Great Depression.
    In addition to the economic costs of the shutdown, the 
uncertainty around raising the debt limit is beginning to 
stress financial markets. At our auction of 4-week Treasury 
bills on Tuesday, the interest rate nearly tripled relative to 
the prior week's auction, and it reached the highest level 
since October 2008. And measures of expected volatility in the 
stock market have risen to the highest levels of the year.
    The only way to avoid inflicting further damage to our 
economy is for Congress to act. I know from my conversations 
with a wide range of business leaders, representing industries 
from retail to manufacturing and banking, that this is a 
paramount concern for them. That is why it is important for 
Congress to reopen the government, to raise the debt ceiling, 
and then to work with the President to address our fiscal 
challenges in a balanced fashion.
    Republican and Democratic Presidents and Treasury 
Secretaries alike have universally understood the importance of 
protecting one of our most precious assets--the full faith and 
credit of the United States. President Reagan wrote to Congress 
in 1983, and I quote: ``This country now possesses the 
strongest credit in the world. The full consequences of a 
default or even a serious prospect of default by the United 
States are impossible to predict and awesome to contemplate. 
Denigration of the full faith and credit of the United States 
would have substantial effects on the domestic financial 
markets and on the value of the dollar at exchange markets.''
    If Congress fails to meet its responsibility, it could 
deeply damage financial markets, the ongoing economic recovery, 
and the jobs and savings of millions of Americans. I have a 
responsibility to be transparent with Congress and the American 
people about these risks, and I think it would be a grave 
mistake to discount or dismiss them. For these reasons, I have 
repeatedly urged Congress to take action immediately so we can 
honor all of our country's past commitments.
    The Treasury Department has regularly updated Congress over 
the course of the last 5 months as new information has become 
available about when we would exhaust our extraordinary 
measures. In addition, Treasury has provided information about 
what our cash balances will be when we exhaust our 
extraordinary measures. As our forecasts have changed, I have 
consistently provided updates in order to give Congress the 
best information about the urgency with which they should act. 
And last month, I met with the full membership of this 
committee to discuss these issues.
    Treasury continues to project that the extraordinary 
measures will be exhausted no later than October 17, 2013, at 
which point the Federal Government will have run out of 
borrowing authority. At that point, we will be left to meet our 
country's commitments with only the cash on hand and any 
incoming revenues, placing our economy in a dangerous position.
    If we have insufficient cash on hand, it would be 
impossible for the United States of America to meet all of its 
obligations, including Social Security and Medicare benefits, 
payments to our military and veterans, and contracts with 
private suppliers, for the first time in our history.
    At the same time, we are relying on investors from all over 
the world to continue to hold U.S. bonds. Every week, we roll 
over approximately $100 billion in U.S. bills. If U.S. 
bondholders decided that they wanted to be repaid rather than 
continuing to roll over their investments, we could 
unexpectedly dissipate our entire cash balance.
    Let me be clear. Trying to time a debt limit increase to 
the last minute could be very dangerous. If Congress does not 
act, and the United States suddenly cannot pay its bills, the 
repercussions would be serious. Raising the debt limit is 
Congress's responsibility, because Congress and Congress alone 
is empowered to set the maximum amount the government can 
borrow to meet its financial obligations.
    Some in Congress have suggested that raising the debt limit 
should be paired with accompanying spending cuts and reforms. I 
have repeatedly noted that the debt limit has nothing to do 
with new spending. It has to do with spending the Congress has 
already approved and bills that have already been incurred. 
Failing to raise the debt limit would not make these bills 
disappear. The President remains willing to negotiate over the 
future direction of fiscal policy, but he will not negotiate 
over whether the United States should pay its bills.
    Certain members of the House and Senate also believe that 
it is possible to protect our economy by simply paying only the 
interest on our debts, while stopping or delaying payments on a 
number of our other legal commitments. How can the United 
States choose whether to send Social Security checks to seniors 
or pay benefits to veterans? How can the United States choose 
whether to provide children with food assistance or meet our 
obligations to Medicare providers?
    The United States should not be put in a position of making 
such perilous choices for our economy and our citizens. There 
is no way of knowing the irrevocable damage such an approach 
would have on our economy and financial markets. Leaders have a 
responsibility to make our economy stronger, not to create 
manufactured crises that inflict damage.
    In 1987, President Reagan, addressing a debt limit impasse, 
delivered a message that is applicable to us today: ``This 
brinkmanship threatens the holders of government bonds and 
those who rely on Social Security and veterans' benefits. 
Interest rates would skyrocket, instability would occur in 
financial markets, and the Federal deficit would soar. The 
United States has a special responsibility to itself and the 
world to meet its obligations.''
    The very last thing the U.S. economy needs now is a fight 
over whether we raise the debt ceiling, not when we face 
serious challenges both domestically and internationally that 
require our full attention, and not when we know the kind of 
damage a financial and economic crisis can cause.
    Thank you, and I look forward to answering your questions.
    [The prepared statement of Secretary Lew appears in the 
appendix.]
    The Chairman. Thank you, Mr. Secretary.
    I would like to focus a little bit on a concept that some 
suggest as a way out of this problem and which some suggest is 
feasible, and I disagree with. It is called prioritization. You 
touched on it.
    Could you just briefly tell us what decisions you would 
have to make as Treasury Secretary, assuming interest was paid 
on the debt and you then had to choose which other obligations 
had to be paid?
    I know you cannot tell us which ones, nor should you tell 
us--Social Security, Medicare, military, the farm program, 
whatnot--but could you just go through the process and describe 
what the actual legal and administrative problems and 
consequences would be, and include how much toll that would be?
    My understanding is it is about 70 percent to 80 percent of 
those programs could be paid. And also, what effect would it 
have on the gross domestic product, that kind of a cut?
    Just walk us through the prioritization difficulties, 
please.
    Secretary Lew. Mr. Chairman, let me start by saying what I 
think should be obvious, that if we do not have enough cash to 
pay all our bills, we will be failing to meet our obligations 
and, under any scenario, we will be defaulting on obligations. 
There is no plan, other than raising the debt limit, that 
permits us to meet all of our obligations.
    When questions are raised about prioritization, the first 
question is about paying interest and principal on the debt and 
then, as you said, Mr. Chairman, what else? The legal issues 
even regarding interest and principal on the debt are 
complicated.
    Let me remind everyone, principal on the debt is not 
something we pay out of our cash flow of revenues. Principal on 
the debt is something that is a function of the markets rolling 
over. So there is a question of what we can do as a government 
and how the markets function when the government is failing to 
pay all of its bills. We have never been there, and I think 
anyone who suggests they know exactly what that means would be 
projecting, after 224 years of the history of paying all of our 
bills, what happens if we stop paying all of our bills.
    Mr. Chairman, I do not know how you could possibly choose 
between Social Security and veterans' benefits, between 
Medicare and food assistance. These are obligations we have 
made.
    We would not have the money to necessarily pay our troops 
in full. We would not have the money to pay our veterans their 
benefits in full. Our systems were not designed to not pay our 
bills. Our systems were all designed to pay our bills.
    The legal issues are many. I do not know how you could make 
the decisions. I do not think the legal authorities are clear 
at all, and I do not think the administrative process would 
permit the system to work.
    We write, roughly, 80 million checks a month. The systems 
are automated to pay, because, for 224 years, the policy of 
Congress and every President has been, we pay our bills. You 
cannot go into those systems and easily make them pay some 
things and not other things. They were not designed that way, 
because it was never the policy of this government to be in the 
position that we would have to be in if we could not pay all 
our bills.
    The Chairman. Now, if we were to prioritize, it is my 
understanding, as well, that you know, to some degree, what 
your out-pay obligations are--for example, there is a big 
Social Security payment due October 23rd, interest on the debt 
the 1st, and at the end of the month, this month, a major 
Medicare payment, and other bills due.
    But on the other hand, we know that the revenue is a little 
bit sketchy, it is lumpy. It comes in in unanticipated amounts.
    Could you go over that a little bit, please?
    Secretary Lew. Well, that is very much the case, Mr. 
Chairman. We have estimates. If these estimates are wrong, then 
there is the real risk of miscalculation. And I would just 
note, even in the period of time that I have been keeping 
Congress informed, we have seen swings in the normal course of 
things of $20 billion in terms of our estimate of what the cash 
on hand would be. And that is not because anyone did anything 
wrong; it is because quarterly tax receipts were not exactly 
where they were estimated to be.
    I would also remind everyone that we are now in an unusual 
position with the government shut down. That is having economic 
consequences that we are just beginning to understand.
    All of the revenue projections that we have based our 
analysis on were based on a world where the government was 
functioning and where all of the services that relate to 
government activity were happening. So they did not take into 
account any layoffs that might occur. It did not account for 
any reduction in payroll or payroll taxes.
    So I have to assume that the estimates from before shutdown 
are likely not to be an accurate predictor of exactly where we 
are.
    The Chairman. How do you reprogram computers?
    Secretary Lew. Well, Mr. Chairman, I have to tell you, I do 
not believe there is a way to pick and choose on a broad basis. 
The system was not designed to be turned off selectively.
    So anyone who thinks that it can be done just does not know 
the architecture of our multiple payment systems, which are 
very complex. They were designed properly to pay our bills. 
They were not designed to not pay our bills.
    The Chairman. In short, prioritization just does not work.
    Secretary Lew. I think prioritization is just default by 
another name. It is just saying that we will default on some 
subset of our obligations. But we are still--by definition, if 
we do not have enough money to pay all of our bills, we will be 
in default on our obligations.
    The Chairman. Thank you.
    Senator Hatch?
    Senator Hatch. Thank you, Mr. Chairman.
    Secretary Lew, I want to be clear about the 
administration's position on the debt limit. As I understand 
it, the position is that the President will only accept a so-
called ``clean'' debt limit hike with no other accompanying 
policy or fiscal considerations attached to it.
    I have asked you repeatedly how much of a debt limit 
increase you would like and for how long, and you have 
responded that it is up to Congress.
    Now, I believe that the administration's position is 
unfortunate, because it is clear that we have a debt problem 
and that the fundamental driver of our debt is unsustainable 
spending in our entitlement programs.
    I believe we can and should use this as an opportunity to 
address these problems, and I have personally, as I mentioned, 
offered five modest bipartisan proposals on entitlement reform 
to the President earlier this year. You have received copies. 
Unfortunately, I have heard no responses to those, and I 
sincerely did that. Nevertheless, the administration is 
entitled to its opinions and positions.
    So I just want to be clear concerning the debt limit. As 
long as there is nothing attached to a debt limit increase, the 
administration will say nothing more about it, including its 
preferred outcomes in terms of how much of an increase and for 
how long.
    Is my understanding correct, or do you wish to give me your 
preferences about how big of a debt limit increase you would 
like to have and for how long you would like it, so that at 
least we can begin discussions and negotiations on this 
particular issue?
    Secretary Lew. Senator, you and I have discussed this a 
number of times, and we have corresponded a number of times. I 
wrote to you just last week, a few days ago, stating what our 
view is. Our view is that this economy would benefit from more 
certainty and less brinkmanship. So the longer the period of 
time is, the better for the economy. It is really Congress's 
decision how often it wants to vote on the debt limit.
    I believe that more certainty is better. I think the Senate 
leader and the chairman have put forward a proposal----
    Senator Hatch. Mr. Secretary, all I am asking is, how much 
do you want and for how long? I mean, those are two simple 
questions. How much do you want us to raise it and for how 
long?
    Secretary Lew. Senator, the question of how long is one I 
think I am answering as clearly as I can. The longest that 
Congress is prepared to extend it for is the best. The 
President tried to be clear in his statements in recent days 
that if Congress passes something shorter, he was open to--he 
is not looking for there to be a crisis here, but Congress went 
right back dealing with it. So the better solution is to go 
longer.
    So we tried to be very clear, and everyone knows the 
numbers that are associated with different periods of time.
    Senator Hatch. Well, it is not clear to me.
    Now, Secretary Lew, the recent long-term outlook from the 
nonpartisan Congressional Budget Office makes a number of 
things abundantly clear.
    First, between 2009 and 2012, the Federal Government 
recorded the largest deficit since 1946, causing Federal debt 
to soar, as a share of our economy, to an amount higher than at 
any point in U.S. history, except a brief period during World 
War II. Gross debt now stands at 107 percent of our GDP.
    Second, our debt path is unsustainable, threatening to 
bring us to this fiscal crisis.
    Third, the root of our spending problem is the government's 
major health care programs. That includes not just Obamacare, 
but Medicaid and Medicare as well, and others.
    Fourth, trust funds in Social Security and health 
entitlement programs face exhaustion. Yet, when it comes to 
negotiating solutions to our entitlement spending problems, all 
I hear from the administration is that negotiations can only 
proceed if, first, the President is guaranteed yet another tax 
hike, or if the only spending restraint we have enacted thus 
far is turned off.
    Now, when it comes to so much as even discussing solutions 
to our entitlement spending problem, all I hear is that 
negotiations can only proceed if, first, we pass a clean 
continuing resolution and a clean debt limit increase.
    Now, what does it take beyond a guarantee to the President 
and congressional Democrats that they first get yet another tax 
hike or that the sequester be undone to get the administration 
to the table to talk about entitlement reforms such as the ones 
I have proposed and which to date have been met with total 
silence from the administration?
    Furthermore, is it reasonable to say that there can be no 
negotiations unless there is another tax hike, when we know, to 
this very day, that disabled American workers face a benefit 
cut of 20 percent or more under current law when the Disability 
Trust Fund is exhausted in 2016 or earlier?
    Secretary Lew. Senator, I think the record is clear that 
the President has negotiated, has wanted to negotiate, and 
remains anxious to negotiate, on a bipartisan basis to have a 
fair and balanced approach to dealing with our fiscal problems.
    Senator Hatch. It is not clear to me.
    Secretary Lew. He has been on the verge of agreements 
twice, until, frankly, it was not acceptable to Republicans in 
Congress. He was prepared to do very hard things. He was ready 
to have an agreement twice, in 2011 and at the end of last 
year.
    He put in his budget very tough policies, policies that 
many of the Democrats on this committee find very challenging, 
because he wanted to make clear he was looking for a balanced 
approach to entitlement reform and tax reform to settle our 
fiscal matters in a sensible way for the medium and long term.
    So I think the President's record on being willing to 
negotiate is clear.
    I would just make one comment----
    The Chairman. Briefly.
    Secretary Lew [continuing]. Very briefly--on the trajectory 
of our deficit. I would just note that, when the President took 
office in January 2009, we were in the middle of the worst 
recession since the Great Depression, we were in the middle of 
two wars, and we had a deficit that was 9 percent of our 
economy. We have cut that in half. We are making progress.
    We have more to do, but I do not think it is fair to say 
that we are in the same place we were. We have made tremendous 
progress.
    The Chairman. Senator Wyden?
    Senator Wyden. Thank you, Mr. Chairman.
    Mr. Lew, it seems to me, in the event of a default or a 
near-
default, the dominos are going to fall fast and hard, and those 
hit early on will be older people who depend on their own 
retirement savings to get by. These are the older people who 
saw much of their life savings evaporate during the recession, 
and they are struggling just to get those private savings, in 
effect, back to the water line, back to where they are.
    Be as specific as you can with respect to what default or 
near-
default would mean for those seniors who depend on their 
private savings.
    Secretary Lew. Senator Wyden, I can only begin to imagine 
what it would mean to a retired American who relies on Social 
Security as their major or sole source of income if we had to 
tell them their check was going to be late.
    I remember my late mother lived on her Social Security 
check. Many of us have relatives who live on their Social 
Security check. If the check did not come, if they did not have 
the ability to call someone who could help them out, they were 
in trouble.
    So anyone who thinks that anything short of default would 
be fine, has never experienced what it means to live on Social 
Security.
    In terms of Medicare----
    Senator Wyden. With private savings especially, Mr. 
Secretary--I share your view about those others, but I think 
the public has heard and you have given some comments with 
respect to mortgages, but I am concerned about those retirees 
and their private savings as well.
    Secretary Lew. Retirees saw their private--well, let us 
talk not just about retirees, because workers have their 
savings at stake as well. The effect is the same, it is just 
more immediate for retirees. Retirees have no time to catch up.
    We saw during the financial crisis that people's retirement 
assets fell quite dramatically in value. It reduced what 
retirees had to live on. It caused anxiety among working people 
about how they were going to make up for the ground that they 
lost.
    We are now in place where, because of the resilience of the 
American people, the recovery in the American economy, the good 
policy decisions made by Congress and the Federal Reserve 
Board, we are in a better place. We have a lot of work to do, 
but I think you can see from the economy that people are 
beginning to feel that the economy is moving in the right 
direction.
    Now, if you create a crisis that causes assets to shrink in 
value, for retirees, they do not have a lot of time to catch 
up. So, even if it all rights itself over a period of time, for 
those retirees, they are in a pretty bad spot. So I think it is 
very unfair to have manufactured crises that have a real life 
impact on working Americans and retirees who ought to have to 
worry only about market risks, not government policy risks.
    Senator Wyden. Let me ask you about the effect of default 
on the deficit. Now, we know that budget sequestration has not 
exactly been an ideal instrument, not exactly perfectly 
targeted for driving down the budget deficit. But it has 
produced budget savings that actually accrue to the benefit of 
the American taxpayer.
    In the event of a default or near-default, is it fair to 
say that some of those budget savings would be eaten up to pay 
higher interest costs, a substantial amount of which would go 
to foreign governments and to other foreign creditors?
    Secretary Lew. Well, Senator, we have seen just this week 
that, for the bills that mature at the end of October, the 
rates have almost tripled over the last week. We still have 
access to the credit markets, but it is more expensive, and for 
no reason. It could be resolved by just settling this issue and 
making it clear that the debt limit will not be breached and we 
will not have any problems.
    Senator Wyden. What is troubling to me is, after the 
American taxpayer has gone through something of a painful 
process and you see these savings, the results of a default 
would produce higher interest payments and, in effect, transfer 
American wealth from our taxpayers, and some of that would go 
to foreign creditors.
    Secretary Lew. And, Senator, I would just add that higher 
interest rates also flow through the economy in terms of higher 
mortgage rates and higher student loan interest rates. So the 
costs have multiple levels of impact on real people.
    Senator Wyden. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Grassley?
    Senator Grassley. Secretary Lew, Majority Leader Reid's 
clean debt limit increase into the beginning of 2015 would 
likely be an increase of around $1.3 trillion. But my 
understanding of the administration's position is that it is 
leaving the debt limit increase entirely up to Congress, that 
you will not negotiate, you require a clean debt limit 
increase, and you will say nothing about your negotiating 
preferences regarding how long or how much of a debt limit 
increase is desired.
    With that being the case, if Majority Leader Reid's clean 
debt limit bill were amended to raise the limit for 1 month and 
the amended bill were passed through Congress, then the 
President would sign it, I assume. Is that correct?
    Secretary Lew. Well, Senator, I would have to, obviously, 
see a bill, and the President would have to look at it to say 
what he would not sign. But the President made clear that he 
thinks dealing with this for a longer period of time would be 
good for the economy, but he did not rule out doing something 
shorter, if that is what Congress does.
    I think we have been very clear about what we think the 
right thing to do is.
    Senator Grassley. Both you and President Obama have 
repeated the talking point that negotiating deficit reduction 
policies on the debt ceiling increase is unprecedented. The 
debt limit has been used in the past as a means to enact 
deficit reduction policies.
    I quote the Congressional Research Service: ``Since 1978, 
Congress has voted to raise the debt ceiling 53 times. In 27 of 
those, or 51 percent, the debt limit increase was tied to other 
reforms.''
    I assume you are aware that more often than not, the debt 
ceiling is raised with other policy or reforms. If you are so 
aware of that history, why do you and President Obama continue 
to use the talking point that negotiating on a debt limit bill 
is unprecedented when the facts demonstrate otherwise?
    Secretary Lew. Well, Senator, I do not think that is an 
accurate version of history and certainly not what I recall, 
having lived through many of the budget debates over the last 
35 years.
    If you look at the last nine budget agreements, only three 
of them have involved the debt limit. So it is not the case 
that most budget agreements involve the debt limit. If you look 
at the budget agreements that did not involve the debt limit, 
in several of them, the debt limit was just added onto a bill. 
It was not driving the debate.
    What I think changed in 2011 was that the affirmative case 
was made in 2011 that if a certain faction--and I am not saying 
it is the people in this room--but if a certain faction in the 
House did not get their way, they would prefer default over a 
compromise that they found unsatisfactory. That is different. 
It is just different.
    We cannot have the debt limit be something that is a threat 
to the economy unless policy concessions are made. That is not 
how our democratic system works. A minority cannot do that.
    Senator Grassley. Secretary Lew, before I go on to my next 
question, at least you cannot say that it is unprecedented to 
have negotiations and reforms tied to a debt increase.
    Secretary Lew. I have never said it is unprecedented for 
debt increases to be tied to actions. But debt increase has 
always been a hard vote. Since 1917, this country has been 
working to try to turn it into a more ministerial vote. 
Congress used to have to vote on every bond issue. The debt 
limit was put in place to reduce the number of times Congress 
had to vote on debt.
    In the 1970s, when I was working for the House Speaker, we 
tried to turn it into an automatic vote so there would not have 
to be a vote on the debt limit. Just 2 years ago, Senator 
McConnell put in a mechanism to try to make it easier to vote 
on the debt limit. It has always been a hard vote.
    The question is, is it going to be used as a threat to the 
economy, and that cannot be.
    Senator Grassley. Secretary Lew, the President has made 
clear that if we pass a clean continuing resolution and a clean 
debt limit extension, he is ready to negotiate. Where we need 
to negotiate is obvious. If you look at long-term projections, 
spending on our health care entitlements demands our attention.
    In the next 25 years, spending on Medicare and Medicaid as 
a percentage of GDP is projected to double, nearly. Now, if I 
ask you if the President is willing to negotiate on health care 
entitlements--I think you have already mentioned what the 
President put in his budget--you are probably going to cite the 
President's budget. You have already done that.
    I do not consider that negotiation. I consider it a 
restatement of your position. Negotiation means you are willing 
to give serious consideration to the other side's ideas.
    Senator Hatch has made numerous, serious proposals on 
health care entitlements. I am told that the message of the 
2012 election was that Democrats no longer have to negotiate on 
health issues.
    Can you convince me that that is wrong?
    The Chairman. Senator Schumer?
    I am sorry, Senator.
    Senator Grassley. Can he answer this question?
    The Chairman. In about 10 seconds.
    Secretary Lew. Senator, I think the President's budget does 
reflect his openness to serious entitlement reform. He has been 
willing to work on a bipartisan basis to do things that are 
unpopular on the Democratic side, and he is just looking for a 
partner to work with who is willing to have some give-and-take, 
not just one way.
    The Chairman. Senator Schumer?
    Senator Schumer. Thank you, Mr. Chairman.
    And thank you for coming, Secretary Lew. This hearing is 
much needed. I think if it has a purpose, it is to deal with 
the debt ceiling deniers. The debt ceiling deniers try to claim 
that default will not be a big deal. Middle-class families will 
not be hurt. We can just pick and choose which bills to pay. 
Prioritization, they call it.
    Well, the debt ceiling deniers need a dose of debt ceiling 
reality, and you have given them that today. Basically, you 
have said, I think in just about these words, you said 
prioritization is default by another name. And prioritization 
is extremely difficult, as you have said.
    Do we pay foreign debts or veterans' benefits? Do we make 
sure Social Security benefits go out or pay Medicare? Do we pay 
for education? Do we pay for our troops?
    The American people do not want that. They would certainly 
want us to just pass a clean debt ceiling bill and avoid those 
awful choices.
    By the way, one of these debt ceiling deniers, I read in 
the New York Times, a Congressman named Brown, has also said 
that much of what he learned in medical school was lies. They 
came from, in his words, ``the pits of hell.'' If we are 
letting people like this lead us, God save America.
    Now, I would like to deal with the second issue, which is 
the timing. In my view, we are like a blindfolded man walking 
toward a cliff, and, if we keep walking in that direction, very 
soon we will fall off. We may fall off on October 16th, we may 
fall off on October 17th, we may fall off on October 25th or 
November 1st, but we will fall off.
    And the most interesting part--the most important point 
about this--is, we do not know which day we will fall off. The 
markets are somewhat mystical. They could, even a day or two 
before October 17th, come to the view the U.S. is going to 
default, anticipate that, Treasuries go down in value, interest 
rates go up, much of our financial system freezes, and we are 
back where we were in 2008 when AIG failed.
    So I just want to ask you this question to be clear. Is 
there not a risk almost every single day, starting around 
October 17th, even perhaps a day or two earlier and getting 
worse, that we cannot tell exactly when each day after that we 
will not have enough money to pay our bills and default could 
occur, even if you laid out the most meticulous plan in the 
world?
    Secretary Lew. Senator Schumer, I have been trying to be as 
transparent as possible for several months, because I very much 
fear that a miscalculation is something that could lead to an 
unintended, but very severe, consequence.
    Since August, I have been very clear, we are already in 
overtime. We hit the debt limit in May. We have been using 
extraordinary measures. We call them extraordinary measures, 
but everyone now assumes that they are infinite. They are not 
infinite.
    I warned in August that we are going to run out of 
extraordinary measures sometime in the middle of October, and I 
even went the step further, which mostly has never been done, 
and said we are going to have roughly $50 billion in cash.
    A month later, based on the year-end tax receipts and 
expenditures, I updated it, and I said no later than October 
17th we would run out of borrowing capacity, and, instead of 
$50 billion, we would have roughly $30 billion.
    Now, I think that should indicate that what I said in each 
of these correspondences is true. It is impossible to predict 
with accuracy. We are talking about enormous variations in day-
to-day expenses and in economic activity which generates tax 
revenues. So it is impossible to predict with accuracy.
    It is typical to keep roughly $50 billion in reserve at all 
times just as a cushion against the unknown. So, when you talk 
about having less than $50 billion and drawing it down, it is a 
dangerous place to be. That is why Congress needs to act to 
raise the debt limit sooner rather than later.
    Senator Schumer. One way to avoid a potential cataclysm is 
to pass a clean debt ceiling increase now, not delay and say, 
well, we can wait until the eve of the 17th or the 19th or 
October 31st. Is that right?
    Secretary Lew. Well, I must say there is a parlor sport in 
Washington of, when is the last minute? You cannot do that with 
the debt limit. With the debt limit, if you look for the last 
minute and you make a mistake, you have done serious damage to 
the U.S. economy, to the world economy. It is just not 
responsible. It is reckless.
    Senator Schumer. So would you agree that my analogy--
blindfolded man walking toward a cliff, and we do not know 
exactly what date he will fall off, but if he keeps walking, he 
will--is pretty accurate?
    Secretary Lew. I have tried to describe it in my own words.
    Senator Schumer. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Crapo?
    Senator Crapo. Thank you.
    Secretary Lew, you indicated in your beginning remarks that 
we face a terrible threat to the economy from a manufactured 
crisis. And I understand the fact that the issue of whether the 
Federal Government's borrowing limit should be raised is 
problematic and creates serious concerns with regard to our 
economy.
    But the fact is that we do face a debt crisis, not a--well, 
I guess it is manufactured over decades now, but we face a real 
debt crisis. And, as we hear in the discussion about whether 
the United States is going to lose its good faith and credit 
ultimately or go into default, I think the real crisis is that 
default, the one that we are screaming toward because of our 
refusal to engage, as a country--Congress and the President--
with regard to reforming our failed entitlement system, 
reforming our failed tax policy in this country, and dealing 
with the real debt crisis that we face.
    I think Senator Schumer's comment about the blind man 
walking toward the cliff is even more appropriate with regard 
to the debt crisis that we face with a $16-trillion, almost now 
$17-trillion debt.
    So my question to you is, do you not believe that the long-
term trajectory of our debt gives our economy a greater threat 
and gives investors even more concern in terms of their 
confidence about the ability of the United States to avoid 
default?
    Secretary Lew. Senator, we clearly have long-term 
challenges, but I think the financial markets--when you talk to 
financial lead policymakers around the world, they actually see 
that we have made a lot of progress in the last few years. We 
have more to do in terms of entitlement reform and tax reform, 
but we have taken a deficit that was 9 percent of GDP, and we 
have cut it in half to 4 percent of GDP.
    If anything, we are getting criticized around the world for 
having done too much deficit reduction too fast, because they 
want more growth.
    Senator Crapo. But, Mr. Secretary, you mentioned----
    Secretary Lew. I very much agree that we should be dealing 
on a bipartisan basis with--and you and I have talked about 
this--sensible, balanced approaches for medium- and long-term 
reforms, and I would love to be engaged in that conversation--
--
    Senator Crapo. But the very progress----
    Secretary Lew [continuing]. But it is not the crisis that 
we are talking about.
    Senator Crapo. The very progress you are talking about 
occurred as a result of significant tax increases and a debt 
ceiling compromise that was reached with the Budget Control 
Act.
    The fact is that we have not dealt--and in that compromise, 
we dealt with discretionary spending almost entirely. We have 
not dealt with entitlements, which the administration seems to 
say are off the table, and now we have yet even more demands 
for greater tax hikes. And that is what the negotiations that 
we want to engage in are all about.
    Secretary Lew. Senator, the President has engaged on 
multiple occasions, and I have been part of those negotiations. 
We very much believe that a balanced approach, where you do 
entitlement reform and tax reform, would be good for the 
country.
    We tried in 2011, we tried in 2012. We are ready to try 
again. The President said, when we take away the threat of 
economic disaster, he is ready to engage. If I heard him 
correctly in his press conference the other day, he said he 
would pay for dinner.
    So he is willing to talk and wants to talk, but it cannot 
be that it is with the U.S. economy being threatened if one 
small part of Congress does not get its way.
    Senator Crapo. So, we need another $1 trillion or more of 
debt authorized before we can even discuss whether to start 
reforming entitlements, whether to start reforming the tax 
code?
    Secretary Lew. Senator, what we believe is, the government 
needs to open. Congress needs to open the government, and 
Congress needs to make it possible to pay our bills, and we 
need to engage. And we are ready to do that.
    Senator Crapo. Well, just to conclude my questioning, then. 
Back to the issue of our long-term debt and the threat that it 
poses to our economy, are you telling me that those fears have 
now been allayed?
    Secretary Lew. No, Senator. What I tried to say is, and I 
hope I was not confusing, there is a challenge to deal with in 
the medium and the long term. It is not the same as a crisis, 
which is what happens if you fail to act on the debt limit in 
the next short period of time.
    I would very much like to do it sooner rather than later. I 
think it is better for the country. It would have been better 
for the country if we had been able to complete the negotiation 
where the President and the Speaker were very close, until 
House Republicans said they would not vote for it.
    We would love to be in a place where we were talking about 
a sensible alternative to these mindless across-the-board cuts. 
We have been very clear about that. But it cannot be with the 
threat that the government is shut down and we are going to 
default on our bills. That is not the way to engage in the kind 
of bipartisan negotiations that need to happen.
    The Chairman. Senator Cantwell?
    Senator Cantwell. Thank you.
    Secretary Lew, thank you for your testimony about how you 
think that the serious prospects and uncertainty to the market 
are happening right now. That is my question to you, because 
everybody is talking about default as if that is the triggering 
point, and I think your testimony lays out that this moment 
could happen at any time.
    The reason I brought this chart is that everyone thinks 
Treasury notes--if you are not involved in the financial 
markets or have not been in the business community--are some 
mysterious thing. But this chart shows that Treasuries are held 
not only in the U.S. by businesses, but in Europe and China, 
and they are significant. It is a network. It is as complicated 
and complex as just about anything around when it comes to all 
the individuals who are involved. It is not, as one of our 
colleagues said, picking up the phone and calling Wall Street 
and telling them to settle down.
    I just went on the web and said, ``what about Treasuries.'' 
If you just Google ``Treasuries,'' what comes up is `the most 
important market indicator,' way more important than the Dow 
and the S&P. It is an important number in the economy because 
of the interest rates being pegged off of its interest rate.
    So here we are now, basically almost, talking the interest 
rate up with the talk in DC. And in the last 48 hours--I wish I 
could print out this chart, because we have seen a spike, a 
dramatic spike from .03 percent to .297 percent. That is more 
than a doubling in 48 hours.
    So my question is, if the interest rate on Treasuries 
doubles in the next 48 hours again, are we not already to that 
tipping point?
    Secretary Lew. Senator, I have been trying to be very 
careful and just report what has happened. I am not going to 
predict what markets will do. I do think that if you look from 
last week to this week, a tripling of interest rates on short-
term bills is not a good thing.
    We have seen stability in the long-term bond markets, but 
markets are delicate things, and I do not know how markets will 
translate one day's news, one day's action, into discomfort.
    What I do know is that every week we roll over $100 billion 
of Treasury bills, and that relies on the market being open and 
willing to function. And I just think everyone has to remember 
that it is not just the interest, it is also the principal. The 
markets have to keep working.
    Senator Cantwell. I think the thing that people are missing 
here in DC is that everybody is at risk in the U.S. economy. It 
is not just what you just explained, but everybody at home.
    Last time we had this discussion about whether we were 
going to default or not, the stock market dropped 20 percent. 
So we could have this same discussion, and then by Friday or 
Monday, you could see--in fact, one of my constituents who is 
an analyst said you could see as much as a 25-percent drop in 
the stock market, just triggered off of Treasuries. So we do 
not have to go to default--just the talk of default is causing 
the level of uncertainty that we are all trying to avoid.
    Secretary Lew. Well, Senator, that is what we saw in 2011. 
In 2011, we had an 11th-hour agreement, and we avoided seeing 
what happens when you cross the line. But we had the damage. We 
had the drop in the market. We had the higher interest rate 
costs. We also saw for the first time a downgrade in the U.S. 
credit rating.
    So that is what happened when we did not cross the line. I 
do not think anyone should want to test what happens when we 
cross the line. We are seeing, with the government shutdown, 
that every day new things are coming out that are really bad. 
People who thought it was okay to shut down the government are 
now rushing to open up one piece or another at a time.
    It would be reckless to see what happens when you cross the 
line and do not pay America's bills.
    Senator Cantwell. I think what we are doing right now is 
reckless. So I hope our colleagues--I hope we will come 
together. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Roberts?
    Senator Roberts. Thank you, Mr. Chairman.
    I do not think we have a blindfold on and are walking 
toward a cliff. I think we are walking toward a cliff with our 
eyes wide open, and that is the problem.
    All this talk about self-inflicted wounds--it was not a 
self-
inflicted wound when we raised the debt limit and we also 
achieved the Gramm-Rudman-Hollings Act, the Social Security 
amendments, the Balanced Budget Act, the Budget Control Act, 
and I could go on and on with the fact sheet here that has been 
referred to by other Senators.
    I think it is down to a willingness to really negotiate. 
The President has said over and over and over again that he 
will not negotiate, but I do not think that is true. There is a 
meeting as we speak with the Republican leadership. Yesterday 
he met with Democrats.
    My question to you is, you have been briefed on the agenda 
of this meeting with regard to the time that the President 
would prefer with regard to an extension of the debt limit and 
the agenda, and, more especially, I am talking about sequester 
flexibility with Appropriations Committee oversight, the repeal 
of the medical device tax, the restoration of a 40-hour work 
week to the ACA as opposed to the 30-hour work week that is 
causing all the problems, and perhaps even a decision or at 
least a time frame on a decision on the Keystone Pipeline.
    There is a long list that all of us have that we have been 
talking about, more especially, Senator Crapo was asking 
specific questions on entitlement reform, and that is the real 
cliff with our eyes wide open that I think that we are walking 
toward.
    I would only opine to you, sir, that the reason why this is 
so tough is, the American people get this--maybe not on the 
shutdown, although there has been a lot of debate back and 
forth, but they sure get this on the debt limit; 52 percent do 
not want any increase in the debt limit. They get it.
    They look at this as their own family budget, and they 
understand this. Seventy to 80 percent say ``no increase 
without any spending reform,'' and yet, all we heard was, ``I 
will not negotiate.'' This reminds me about the debate in the 
Paris Peace Talks back in the Vietnam era, the size of the 
table and the height of the chairs.
    Maybe this morning, when the President meets with the 
Republican leadership and, also, the Democratic leadership 
previously, we could get the size of the table. You all can 
have the high chairs. We will take the low chairs. This is 
silly.
    Senator Schumer said that basically we are walking toward a 
cliff with a blindfold on. I think we have the blindfold off--
no action on entitlement reform, no action on tax policy.
    I have been to the dinner, with the help of Senator 
Isakson, at the White House. It was a privilege. But when we 
talked about how we achieve the grand bargain on tax reform, 
the President said he needed $800 billion. Now, that price has 
been raised by the distinguished Majority Leader to $1 
trillion. I do not think you are going to find much support on 
this side of the aisle for that.
    Then, when we talked about reform, he said, ``Why can't we 
take mortgage interest, charitable giving, retirement, just 
means-test those?'' and then he gave some specific examples. I 
tried to put in regulatory reform, and I would put that in on 
the agenda, if you would agree to it or if the President would 
agree to it.
    We are not going to do that. We are not going to means-test 
everything in the tax code, and we are not going to raise taxes 
$800 billion or $1 trillion. That is a nonstarter. So I hope 
that we could do that.
    Have you been briefed, or what is the up-to-date news that 
you can give us about the agenda of this meeting as to the time 
amount and as to what could be on the table?
    Secretary Lew. Senator, the President has been very clear. 
Congress needs to open the government. Congress needs to make 
it possible for us to pay our bills, and then he is open to 
talking about anything. And it not a question of the shape of 
the table or the size of the table. It is a question of whether 
there is give and take.
    Senator Roberts. So you indicate that the President is 
willing to negotiate, but he is not willing to tell us what 
agenda or what specific parts of the agenda he might be 
interested in or not or the time frame?
    Secretary Lew. Senator, he has made clear Congress has to 
open the government, Congress has to make it possible for us to 
pay our bills, and he is happy to talk about anything. He has 
made it clear what he would like to get done. We have made it 
clear in our budget. We have made it clear in numerous 
communications.
    Give-and-take means everyone coming in and doing hard 
things. He demonstrated his willingness to do hard things. If 
others are willing to do hard things, maybe we can do something 
important.
    Senator Roberts. All right. I am over 13 seconds. I 
apologize, Mr. Chairman.
    I think what you are saying is that, if the government 
shutdown can be discontinued--everybody wants that, nobody 
wants a government shutdown, and I do not want to get into that 
debate again--he is willing to negotiate, but only if we end 
the shutdown and agree to an extension on the debt limit. Then 
he may negotiate with an agenda that is just sort of amorphous.
    Secretary Lew. He has always been willing to negotiate, 
just not with the threat of destroying our economy.
    The Chairman. Senator Menendez?
    Senator Menendez. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary.
    My colleagues have already expressed a series of dimensions 
in which both the shutdown and the threat of default, I think, 
affect our country domestically economically.
    I want to look at a different dimension that both has 
domestic and global issues. In the other role I play as 
chairman of the Senate Foreign Relations Committee, I worry 
about the incredibly, extremely negative effects that the 
government shutdown and the threat of default have on our 
foreign policy and our national security, both now and in years 
to come.
    The shutdown and the potential default affected some of 
America's near-term foreign policy priorities, such as the 
President not being able to go to the Asian Economic Summit. 
And his absence, although certainly appropriate due to the 
crisis, feeds into existing fears, having traveled to the 
region, that our rebalance to Asia is more rhetoric than 
reality. And who showed up and was more than willing to fill 
the void? China. And in doing so, America's loss is China's 
gain.
    This is an opportunity for opening markets for U.S. 
businesses to sell products and services. This is an 
opportunity to promote economic and security questions. And I 
think our allies are going to wonder, is the United States 
capable of meeting its promises, whether about economic 
initiatives or security initiatives?
    Perhaps the most damaging, I think, and difficult thing to 
reverse is the impact this has on America's reputation in the 
world and the economic consequences that flow from that. The 
entire global financial system depends, in large measure, on 
the faith that the U.S. Government can and always will pay its 
debt. And America enjoys the unique privilege of having its 
currency act as the world's reserve currency.
    So it seems to me that, by playing political games, we give 
credence to other emerging powers, like China and Brazil, who 
want the world to become less reliant on the dollar, and there 
are consequences to becoming less reliant on the dollar. Not 
only does it undermine our standing in the global economic 
system, it puts our dependability in question with allies.
    I know in your role as Treasury Secretary, you fill various 
international roles within that context. Could you give the 
committee a sense of the consequences? We have talked about 
those consequences at home, but there are consequences abroad 
that affect us here at home.
    Secretary Lew. Senator, I think it would be impossible to 
overstate the importance of the U.S. playing the role in the 
world that we do in terms of the stability we provide. There is 
a reason why the dollar is the world's reserve currency.
    The world actually counts on us being responsible and 
making the kinds of decisions that allow them to continue to 
look to Washington for that kind of stability. We have finance 
ministers from around the world gathering in Washington this 
week, and yesterday I met with finance ministers from Africa 
and finance ministers from Latin America. And it is challenging 
when they look at you and they ask, ``What is going on in 
Washington?'' It makes them nervous about their economies, and 
we need them to have growing demand, because that is good for 
our economy.
    And this question of world reserve currency--it is no 
secret that there are discussions around the world where others 
would like there to be a basket of currency that might be used 
as an alternative to the dollar.
    So I have to ask the question. When our role in the world 
is so important to the United States' well-being, both in terms 
of security and economic well-being, and to the stability in 
the world, why would this kind of a manufactured crisis be seen 
as something that is necessary to pursue, when it undermines 
that?
    So I think the questions you are asking are quite 
significant.
    Senator Menendez. Let me ask you. There are those who 
suggest, oh, that is not a real issue, because the rest of the 
world has no place to go.
    Secretary Lew. I am not going to speculate on whether 
someone else will emerge as an alternative, but we are in a 
place right now where it is important for the United States and 
the world for us to maintain our position, and we have the 
capacity to do that. We have the economic ability to do that. 
It is only a matter of political will.
    Senator Menendez. And there is no reason to risk that 
possibility of finding out whether or not there is some other 
universe of currencies which people could look to. And there is 
no reason to risk having the potential economic impacts we can 
have globally rather than providing domestic opportunities for 
growth in jobs and opportunities.
    Secretary Lew. I certainly think there is no reason. I 
would go a little further and say that it is against our 
interest to invite that kind of discussion.
    Senator Menendez. Thank you, Mr. Chairman.
    The Chairman. Senator Enzi?
    Senator Enzi. Thank you, Mr. Chairman.
    Mr. Secretary, I think this is the 11th time I have been 
through this discussion about ``the sky is falling.''
    Wyoming families are not buying these arguments. They are 
saying you cannot spend more than you take in, and you 
definitely cannot keep doing it forever.
    I know a person who interned for me several years ago who 
now is the owner of a major company in Wyoming that operates in 
four States. And he pays his people well, but every once in a 
while somebody comes in and says, ``I need a pay raise.'' And 
he hands them a copy of Dave Ramsey's book and says, ``You 
don't have a problem with income. You've got a problem with 
spending.''
    That is what the Wyoming people think. We have a problem 
with spending, not revenue. They are not interested in having 
their taxes raised so that we can put more people in the wagon.
    I used an example on the Senate floor the other day about 
how the people working in the private sector get a little upset 
because government keeps growing, and when it grows, that means 
there are more people in the wagon and less people pulling the 
wagon, and they are getting tired of it.
    In fact, it is getting pretty hard to pull, and we are not 
doing anything about it. That is their impression. Why should 
the goverment be able to increase its revenue? How do we solve 
this spending problem?
    We keep asking for this debt limit increase, and it is 
always asked for as though, sometime down the road, we are 
going to negotiate and figure out a way to solve the problem. 
You mentioned that you would rather we did not have these 
manufactured crises. America would prefer we do not have these 
manufactured crises.
    I think this is a manufactured crisis, again, because we 
did not work on it yesterday. The government shutdown--it shows 
we have not done the budget the way we are supposed to. We are 
supposed to begin work on the spending bills on April 15th, do 
one a week, and not get to this continuing resolution situation 
on October 1st, so everybody will know exactly how much they 
can spend.
    I was invited to Blair House when we were doing Obamacare, 
and I spent a day of the President chopping down every 
suggestion that Republicans made. It was a waste of a day. So, 
when we hear this thing about a willingness to negotiate and, 
if you have any ideas, get them to me, it is wearing just about 
as thin as ``the sky is falling.''
    So why do you and the President feel we should not be 
discussing right now this dire financial situation and coming 
up with a solution that will put a little bit of room in there 
for something to be done right now?
    If people are running up their credit card debt and they 
need to raise their limit, they are expected to say what they 
will do in order to be able to take care of their debt, 
although the credit agencies are not really interested, because 
the interest rate goes up, which is the same thing we are 
facing here. You have already said that it has tripled in the 
last week. So we are running into that same problem.
    Why should we not present some kind of a solution? It could 
be a long-term solution. It does not have to be just a 1-week 
solution. But we are not even providing a long-term solution. I 
put out a penny plan that would take care of the deficit in 2 
years and result in a balanced budget. Some variation on that 
might be helpful.
    But why do you think the President should not discuss this 
right now and come up with solutions right now in conjunction 
with the extension of the debt limit?
    Secretary Lew. Senator, those Wyoming families know that, 
after they have run up their credit card, they do not get to 
ignore it. They have to pay the bill. The debt limit is just 
paying our bills. You and I have talked. You know that I would 
very much like to be in a conversation about long-term, 
sensible entitlement and tax reform to give the kind of 
stability going forward that this country needs.
    That cannot be done by saying, we will not pay our bills 
next week. That is what is wrong with engaging right now. The 
President wants to negotiate.
    Senator Enzi. We keep saying that this terrible thing is 
going to happen, and that this is just paying our bills. How 
many times can we say it is just paying our bills? The American 
public does not get that same option.
    Secretary Lew. The time to reduce what we need to borrow is 
when we make the decisions on what we are spending, not after.
    If Congress appropriates money, if Congress puts laws in 
place where people are entitled to benefits, if Congress 
commits military resources, once those commitments are made, 
you cannot tell a contractor who is doing work, ``I am not 
going to pay you because we changed our mind.''
    Senator Enzi. Which takes me back to my comment that we 
should have been doing the spending bills one at a time----
    Secretary Lew. I am not disagreeing with you on that.
    Senator Enzi [continuing]. In a piecemeal fashion.
    The Chairman. Senator Enzi's time has expired.
    Mr. Secretary, it is getting close to 9:35. There are many 
Senators here who have questions to ask. Senators have been 
very good about sticking within the limits.
    I am hoping you can stay a little bit longer so we can 
enable Senators to ask their questions. They will probably 
shorten their questions so that you can stay.
    Secretary Lew. It is going to be very difficult to go more 
than 5 minutes over.
    The Chairman. Well, let us see what we can do.
    Senator Carper?
    Senator Carper. Thanks, Mr. Chairman.
    Mr. Secretary, thanks for joining us.
    I want to say to my colleagues, I just stepped out of the 
room for a few minutes. I was watching the hearing on 
television in an adjoining room, and, I must say, people 
watching this on TV must be frustrated and disappointed with 
us.
    Some of the finest people who serve in the Senate serve on 
this committee. That is why I wanted to be on this committee. 
Thoughtful Democrats, Republicans, people willing to be 
pragmatic, find the middle, find reasonable, principled 
compromises.
    The problem here is pretty simple. Democrats need to 
support entitlement reform that saves money, saves these 
programs for the long haul, and is consistent with our 
obligation to look out for the least of these. That is what we 
need to do. Republicans need to embrace tax reform that 
provides some certainty and predictability for businesses and 
for investors in this country, but at the same time, generates 
some revenues.
    We go back to those 4 years at the end of the Clinton 
administration when we had four balanced budgets in a row. 
Revenues as a percentage of gross domestic product were right 
around 20 percent all 4 years. Those 4 years, spending as a 
percentage of gross domestic product was right around 20 
percent.
    Our deficit is down from--it peaked out about 4 years ago 
at $1.4 trillion. Last year, the year that just ended about 10 
days ago, the deficit was about $700 billion. We cut it in 
half.
    Is that enough? No, it is not enough. We need to do more. 
But we cannot do more unless we do entitlement reform. Over 
half our spending is entitlement spending. And we cannot do 
more unless we generate some revenues.
    The problem here is--what was the old line in the Paul 
Newman movie? ``What we have here is a failure to 
communicate.'' That is part of our problem. We are really 
talking past each other.
    I talk to people all the time, people who have a lot of 
money, and I tell them they are going to have to pay some more 
taxes, and they say, ``I don't mind paying more taxes. I don't 
want you to waste my money.'' That is what they say. ``I don't 
want you to waste my money.''
    I do not want to waste their money either. I do not think 
any of us does. Tom Coburn, who used to serve on this 
committee, and I have introduced legislation that is called the 
PRIME Act, P-R-I-M-E, and we go at entitlement programs, not to 
savage old people or poor people, not to hurt the least of 
these, but to actually save money and preserve these programs 
for the long haul.
    Every one of you on this committee has gotten a letter from 
Tom Coburn and me asking you to join us as a cosponsor. I hope 
you will read the letter. I hope you will join us.
    Tom Coburn and I held, along with Carl Levin, a hearing on 
Monday of this week on Social Security Disability. Nobody wants 
to harm people who are disabled and unable to work. But in 
Huntington, WV, my native State, by the way, Huntington, WV, 
one judge approved 99.7 percent of the people who applied for 
Social Security Disability--99.7 percent. And that kind of 
thing is the exception. That is the outlier. But there are 
people who apply and get approved who, frankly, can work and do 
not deserve to be on disability.
    The idea that we cannot somehow meet our moral imperative 
and also meet a fiscal imperative, that is a fiction. We can do 
both. And I would say we would really not just boost our 
approval rating, but we would really instill a lot of 
confidence in the American people if we would just stop talking 
past each other and actually work together.
    Mr. Secretary, we are going to meet with the President 
today--Democrats. I presume the Republicans are also going to 
meet with him today.
    Somehow the President has to make it crystal clear that he 
is willing to negotiate, and I think he has said it--I have 
heard him say it--on the entitlement stuff. And the 
Republicans, they have to indicate a willingness to negotiate 
on tax reform that generates some revenues.
    Then there is a matter of trust here. I do not know how to 
break through it. I really do not know how to break through it.
    Any ideas?
    Secretary Lew. I think that the kinds of conversations that 
he is having are meant to try to rebuild some of the trust, to 
make it clear that, once we get beyond where we are right now, 
once Congress reopens the government and takes away the threat 
of default, he has been and remains open to honorable 
compromise, which means give-and-take. But it has to be a 2-way 
street, and that has always been the case with any negotiation.
    Senator Carper. All right. Thanks, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Brown?
    Senator Brown. Thank you, Mr. Chairman. I will be brief 
with my questions.
    Mr. Secretary, thank you for joining us.
    We have heard a lot from the debt limit deniers about how 
October 17th is not really the day we default. We hear from the 
debt limit deniers that they are sure that, even if we get 
there, nothing will happen, since we can pay China and Wall 
Street first. But the fact of the matter is that that day, 
October 17th, as you know well, the day we run out of borrowing 
capacity, is a Thursday, which happens to be the day that 
Treasury holds its weekly auction to roll over $100 billion in 
debt.
    Comment for us, if you would, what could happen at that 
auction if we did not raise the debt limit, what could happen 
if our borrowing costs--would they substantially increase? What 
would happen if they did increase on Thursday? What would 
happen if we were unable to roll over the $100 billion in debt?
    Secretary Lew. Senator, I am not going to comment on what 
markets might do. I think the history is clear that anxiety 
leading up to 2011 caused a bad market reaction.
    We have seen in the last few days unease, certainly, with 
maturities in the period between October 17th and the period 
immediately after that. I cannot say what the likelihood is of 
there being a problem. I can say the consequences of any 
inability for us to roll over would be quite serious.
    In terms of the household budget, it is like, instead of 
having to pay your monthly payment on a mortgage, having to pay 
the full mortgage, and that would be a problem.
    Senator Brown. Second question. And I will be brief, Mr. 
Chairman.
    Over the last couple of weeks, I have spent a lot of time 
just calling people in Ohio--community bankers, business 
executives, entrepreneurs, people running research 
institutions, hospital executives, small manufacturers--in 
regard to their party, and I assume, though I do not know their 
party in most cases, I assume most of them are Republicans 
because they are in lines of work that might suggest that. But 
over and over, they say the same thing. Why is this happening? 
We cannot risk a default.
    They do not understand why the government is shut down. 
They increasingly understand that it is one faction of one 
party in one house in one branch of government that has brought 
much of this to a halt.
    The National Association of Manufacturers, a large 
manufacturing association in the country, wrote on Monday, 
``The failure of policymakers to address the debt limit is 
injecting uncertainty into the U.S. economy, hampering the 
ability of manufacturers and the broader business community to 
compete and invest and create new jobs.''
    For the last several years, since the Health Care Act, 
since Dodd-Frank, the criticism I hear more than anything from 
business in my State is uncertainty, uncertainty. When are the 
Dodd-Frank rules going to be finished? What is going to happen 
with the implementation of Obamacare? All of these, the 
uncertainty, that pall that they claim hangs over our country, 
our economy--I hear it especially from politicians who are 
critical of many of these programs.
    So my question is, if we agree to a short-term clean debt 
limit increase, does that provide the certainty that we would 
need to compete?
    Secretary Lew. Senator, I have tried to be clear that I 
think longer certainty would be very good for the economy, and 
the shorter the period, the less stability it provides.
    When you talk about shifting debates to different time 
periods, retailers are very worried about what happens in 
November and December if we are going through what we are going 
through now.
    So I think longer is better, but avoiding a crisis is 
better than having a crisis. And in no case is the President 
going to end up in a position where the threat of destroying 
the American economy is the basis for compromising. He wants 
that negotiation to be on the basis of the kind of give-and-
take that honorable compromises come from.
    Senator Brown. Thank you, Mr. Chairman.
    This is the worst uncertainty and the most precarious 
uncertainty I have ever seen in our economy in my time in 
public office, and what is tragic about it is how self-
inflicted it is.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Portman?
    Senator Portman. Thank you, Mr. Chairman.
    Secretary Lew, you have said again today the President will 
not negotiate on a debt limit, and the President, as was noted 
earlier, has asserted that there have not been additional items 
added to debt limits in the past. And, as you and I have talked 
about and as you know, when you look back at the last 30 years 
of the history of debt limits, it is the only thing that has 
worked.
    In fact, every significant deficit reduction package that 
has passed this Congress in the last 30 years has come in the 
context of a debt limit. I found one that did not. It was in 
2005 for about $40 billion, a relatively small deal.
    That is the way it has worked, and it is Gramm-Rudman, it 
is the 1990 Balanced Budget agreement or the Andrews Air Force 
Base agreement, it is the 1997 Balanced Budget, it is PAYGO 
rules that many in this committee on the other side of the 
aisle talk about favorably, and, of course, it is the most 
recent Budget Control Act just a couple of years ago, all in 
the context of the debt limit.
    So my view is, it is kind of strange the President would, 
one, not want to negotiate, but, two, say we have not had this 
stuff. It is all that has worked to deal with this. And you 
indicated this earlier--it only makes common sense, because it 
is a tough vote, as you say. Why? Because our constituents do 
not get it.
    Why would you extend the credit card again, go to the limit 
again without dealing with the underlying problem? And that is 
why the polling shows that by over 2-1, the American people 
say, yes, we should extend the debt limit, but only--only if we 
deal with the underlying problem. And that is all we are asking 
for.
    I am speaking for myself. I will say we need to avoid a 
debt limit crisis, but we also need to avoid a debt crisis. So, 
avoiding a debt limit crisis today and avoiding a debt crisis 
tomorrow should be our objective.
    The President himself said, back in 2006, when the debt was 
half as big as it is today, $8 trillion, and this was a floor 
speech: ``America has a debt problem and a failure of 
leadership.'' He said, ``I am, therefore, going to oppose the 
increase in the debt limit.'' He opposed it when it was half as 
big as it is today. He said we needed to deal with the 
underlying problem.
    In response to Senator Hatch's question earlier about why 
the President refuses to deal with the underlying problem--
which we all know is the two-thirds of the spending and the 
biggest part of the spending and the fastest growing part of 
the spending that is on autopilot, that we do not appropriate 
every year, which is the mandatory side--in response to that 
question, you said, and I quote: ``He put in his budget 
significant entitlement spending reforms. He wants to do 
this.'' And, in fact, you are right. The President's proposal 
includes a pretty long list of entitlement savings, mandatory 
savings. It adds up to about $730 billion over 10 years, a step 
in the right direction.
    During that time, by the way, we are likely to add another 
$8 trillion to the debt, according to CBO, the Congressional 
Budget Office. But he has $730 billion over 10 years.
    Now, not all of those choices reflect my top priorities or 
others' on this committee, probably, but in a negotiation, you 
do not get everything you want.
    So my question to you today is really very simple. By 
adding some of those proposals, maybe not all $730 billion, 
maybe it is $500 billion, maybe it is $400 billion. But by 
adding some of the President's own proposals to an extension of 
the debt limit, consistent with what has been done historically 
and consistent with what the American people are asking for, 
could we not move forward, and is that not what we ought to be 
doing, dealing, yes, with the debt limit but also with the 
underlying problem, and taking the President's own proposals to 
do it?
    Secretary Lew. Senator, on the history of the debt limit, 
you and I have been back and forth many times. I think it makes 
a big difference if you tack a debt limit increase onto 
something that has already been agreed to.
    In 1997, the Balanced Budget agreement was all signed and 
sealed, and then a debt limit increase was put into it. It did 
not drive it. Nobody threatened default. So I think we are in a 
different situation since 2011, and that has changed the world.
    Senator Portman. Well, nobody has been in default because 
you have not had a President saying he would not negotiate.
    Secretary Lew. And the President has said, and he just 
repeated this week, he wants to and is prepared to negotiate. I 
think it is important not to just go through a President's 
budget and cherry-pick the things that are hard for him to do, 
you have to look at the things that are hard for others to do, 
because the negotiation is give-and-take.
    If everything is on the table, if we are looking at 
entitlement reform and tax reform in a way that we join 
together to solve the problem, there could be a serious 
conversation.
    But I would caution to not take just one side of the 
ledger.
    Senator Portman. Let me focus on that, because the 
President also said in that budget that he believes we ought to 
have tax reform. And specifically with regard to corporate tax 
reform, for the first time in your budget, you indicate it 
should be revenue-
neutral, and I applaud you for that, as you know.
    I think that is important. I think it is an urgency right 
now. If we do not deal with it, we are going to continue to 
lose more jobs in this country.
    My question to you would be, on the President's own 
proposals on entitlements, I agree there should be a give-and-
take, but I am going to say, let us look at the President's own 
proposals, put those into this debt limit increase, plus 
directions to the Congress on tax reform, as you all have 
suggested. Would you all be willing to move that forward?
    Secretary Lew. Well, just to be clear, the President's view 
on the debt limit, he has stated this as clearly as he can: he 
is not negotiating over the debt limit. The debt limit--
Congress has to make it possible to pay our bills. He looks 
forward to negotiating.
    The Chairman. Senator Bennet, you are next. Senator Bennet?
    Secretary Lew. Senator, I hate to call attention to the 
time, but I am going to be late for another commitment if I----
    The Chairman. Could we have just one more? How about two 
more?
    Secretary Lew. I think if we do two more----
    Senator Hatch. This is important.
    Secretary Lew. This is very important, Senator.
    Senator Hatch. There is nothing more important than this, 
and I want to make sure everybody on our side at least has a 
chance.
    Senator Bennet. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary, for your indulgence. I will just 
take a few minutes.
    In your view, would failing to raise the debt ceiling make 
our debt limit situation better or worse?
    Secretary Lew. Well, it does not do anything good. If the 
cost of borrowing goes up, it raises our expenditures. It does 
not reduce them.
    Senator Bennet. And if the cost of borrowing went up, just 
1 percent or 2 percent--we are at historically low interest 
rates--what would that cost us?
    Secretary Lew. I would have to go back and do the numbers 
exactly to give you an answer, but these are--we are talking 
billions of dollars. We are not talking about small numbers.
    Senator Bennet. No. I think it is very clear, and Ronald 
Reagan shared this view--you quoted him earlier--that this 
would just make matters worse.
    Secretary Lew. Unless we were to do something unthinkable 
and say, we will never pay those bills, you have to pay the 
bills and you are going to be borrowing money at a higher 
interest rate. So it only costs----
    Senator Bennet. Which means that our interest costs are 
just going to continue to go up, and our ability to do things 
like respond to the floods in Colorado or be able to educate 
our kids will be diminished.
    I am going to let you go, because I know you have to go, 
but I have heard a lot of people on both sides of the aisle 
today talk about their willingness and their desire to try to 
meet in the middle, and I think that is important. And I think 
we need to do that, because I can tell you this: people in 
Colorado, they are sick and tired of a lot of things about 
Washington, but what they are mostly sick and tired of is our 
managing by crisis and, therefore, our inability to manage the 
affairs of this country in a way, in this case, that does not 
threaten the full faith and credit of the United States and our 
ability to have the reserve currency for the world be the 
American dollar.
    Thank you, Mr. Secretary.
    The Chairman. Thank you, Senator.
    Senator Toomey?
    Senator Toomey. Thank you, Mr. Chairman.
    Secretary Lew, you have said a couple of times, in 
reference to previous discussions over the debt limit, that it 
is different now.
    It is true, it is different now. I would argue now it is 
much more urgent that we deal with the underlying fiscal 
problem. Now, unlike in past years, we are spending $3.6 
trillion. We have run up a string of unprecedented deficits. 
The modest improvement you alluded to, you know that is 
temporary, and it is scheduled, if there are no structural 
changes, for those deficits to get much worse, not terribly far 
from today.
    We now have a total debt that is over 100 percent of our 
total economic output, I believe, already limiting economic 
growth and prosperity. We have trillions of dollars of 
guarantees that we did not use to have. We have tens of 
trillions of dollars in unfunded liabilities. We have large 
entitlement programs, the largest of which are all growing 
faster than our economy and, therefore, are on a completely 
unsustainable path.
    So what is different, it seems to me, is that our situation 
is much more dire now than it was in previous discussions. 
Nevertheless, the President is saying, ``You give me everything 
I want, and then we could have a conversation about these 
things that are important to you.''
    I still find that shocking. But here is the bottom line, it 
seems to me. If the President refuses to agree to include even 
a modest reform that begins to take us in the direction of a 
more sustainable path in the context of a debt ceiling 
increase, there appears to be a real chance that this Congress 
will not pass a debt ceiling increase before October 17th.
    Now, I hope that we do pass a debt ceiling increase with 
appropriate reforms, because there is no question, in my mind, 
at some point, if we do not raise the debt ceiling, it will 
become disruptive.
    As you know, ongoing tax revenue is only about 85 percent 
of all the money this government intends to spend in the coming 
fiscal year. So, if we only get 85 percent of everything we 
intend to spend in tax revenue, the 15 percent shortfall would 
have to be covered by borrowing, or else we would not be able 
to pay everything in full and on time, and that would be 
disruptive.
    But the greatest disruption, by far, would occur if you 
were to choose to not pay interest on our debt. Senator 
Cantwell made a very compelling argument about the unique role 
that U.S. Treasury securities play in the world and for the 
United States.
    So my question for you, Mr. Secretary: as the Secretary of 
the Treasury, are you prepared to assure us, but, more 
importantly, the millions of Americans who are investors in 
U.S. Treasury securities and the entire American economy, that 
under no circumstances will you permit a missed payment on a 
U.S. Treasury security obligation?
    Secretary Lew. Senator, the only way to make sure we could 
pay all of our obligations is for Congress to act and raise the 
debt limit. No President has ever had to decide whether to pay 
some bills and not others.
    Senator Toomey. I understand. That is a different question, 
though.
    Secretary Lew. The law is complicated, and I am not the one 
who makes that decision, as you know. I think that if you 
look----
    Senator Toomey. You would make the decision.
    Secretary Lew. No, no. It is actually not my decision. It 
is something that the President would have to decide. And I am 
telling you that it would put us into default if we went to a 
place where we could pay one bill and not others.
    What would you say to people on Social Security who are not 
getting paid?
    Senator Toomey. Mr. Secretary, I have acknowledged that it 
is very disruptive and that is not where I hope to go, but I 
only control one vote in the Senate and the administration 
controls zero, and they control zero votes in the House. So it 
would seem to me the only appropriate thing to do is plan for a 
contingency.
    So are you telling me that the President would decide to 
ensure that we would not miss a payment on Treasury securities?
    Secretary Lew. Senator, what I am telling you is there is 
no good solution if Congress fails to raise the debt limit, and 
that is why the President has called on Congress to raise the 
debt limit.
    You used the number 80-85 percent coverage in terms of 
revenue. That is an annual average.
    Senator Toomey. I understand. It is unequal.
    Secretary Lew. Some months it is 50 percent.
    Senator Toomey. That is right. It varies.
    Secretary Lew. So the amount that we fall----
    Senator Toomey. Sometimes it is over 100. I know it.
    Secretary Lew [continuing]. Behind in payments is 
unthinkable. Congress has to do its job and act.
    Senator Toomey. And I certainly hope that the President 
will work with us so that we can avoid this, but, frankly, I am 
shocked that the Secretary of the Treasury will not assure the 
financial markets, American investors and savers, and the 
millions of people who hold Treasuries, that they do not have 
to worry about the security of their Treasuries. I am extremely 
disappointed.
    Secretary Lew. I would refer you back to statements by 
President Reagan and Secretary Jim Baker, who made the same 
warnings that I am making, because only Congress can act to 
raise the debt limit. No President has ever been put in the 
position of having to figure out what bad option they choose if 
Congress does not act.
    Senator Toomey. I understand. I am almost out of time. On 
Tuesday, the President said, and I quote, ``We plan for every 
contingency. So, obviously, you know, worst case scenario, 
there are things we will try to do,'' end quote.
    Could you tell us about these contingencies?
    Secretary Lew. Senator, the options are all bad.
    Senator Toomey. I agree.
    Secretary Lew. I tried to, earlier, describe how 
complicated the Federal payment system is. There is no way to 
make our Federal payment system work well to pick and choose 
what we pay.
    So we are going to be in a place which is uncharted 
territory, and anyone who thinks it works smoothly--it would 
not work smoothly.
    Senator Toomey. Nobody said this would be smooth.
    Secretary Lew. It would not work smoothly. It would be 
chaos.
    Senator Toomey. The question is whether the Treasury is 
prepared to try to minimize the disruption.
    Secretary Lew. Obviously, we have looked at many options. 
There have been reports indicating things that have been looked 
at over the years. Nobody has ever had to put any of these into 
effect. They are not tested. We have never stopped----
    The Chairman. The Senator's time has expired.
    I might say the Secretary has been very patient. I also 
note there are four Senators left who want to ask questions.
    If I might ask, Mr. Secretary, if they can state their 
questions in 10 seconds each, and you do not have to respond to 
them----
    Secretary Lew. I am happy to do that.
    The Chairman. Ten seconds each and next--just for 
questioning, because we do not have time--would be Senator 
Casey.
    Senator Casey. Mr. Secretary, thank you very much for your 
testimony.
    My question relates to Social Security and Medicare and 
veterans' benefits. I am just going to read two lines from a 
letter that I got from a constituent talking about her parents.
    She said, ``At 85 and 83, they should not have this 
uncertainty,'' the uncertainty about the impasse. ``These 
should be their golden years. It breaks my heart to see my 
mother saying she cannot sleep and has a stomach ache from the 
worry about where our country is headed.''
    Tell us about the impact of a default when it comes to 
Social Security, Medicare, and veterans' benefits.
    The Chairman. Senator, I told the Secretary he did not have 
to answer questions, because so many Senators have to ask. So I 
appreciate it.
    Secretary Lew. I am happy to follow-up.
    The Chairman. Next, Senator Stabenow.
    Senator Stabenow. Thank you, Mr. Chairman and Mr. 
Secretary.
    I would just like to ask that we put in the record the 
complete letter from the National Association of Manufacturers, 
and I would read one sentence. ``A default would put upward 
pressure on interest rates, raising both short- and long-term 
cost of capital and discouraging business investment and job 
creation'' in America.
    [The letter appears in the appendix on p. 69.]
    The Chairman. Thank you, Senator.
    Senator Nelson?
    Senator Nelson. Ten seconds.
    The Chairman. Or thereabouts.
    Senator Nelson. Mr. Secretary, I am concerned that you have 
indicated that we might agree to a short-term extension on the 
debt ceiling, and I think that would be counterproductive. We 
would be back in this soup right at the end of that short-term 
extension.
    I commend the President for standing firm. We cannot 
negotiate over the debt ceiling. National security is another 
consideration. I will put that in the record.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Cardin?
    Senator Cardin. Mr. Chairman, thank you.
    Secretary Lew, thank you for being here, and thank you for 
giving us--it is our responsibility to pass the extension of 
the debt limit. It is Congress's responsibility to do this.
    Uncertainty is really hurting this country, and we cannot 
govern from crisis to crisis. So I strongly support your view 
that the longer term is what we need here.
    My question would be, what legal authority do you have to 
pick and choose? It seems to me that any analogy we use to a 
company or a business that cannot pay its bills--there is a 
limit as to the discretion you have to make those judgments.
    I would be interested as to the legal authority you have on 
prioritization.
    The Chairman. Thank you, Senator.
    Other Senators are not here. Obviously, they willwant to 
submit questions to the Secretary.
    Secretary Lew. I would be happy to respond.
    The Chairman. Mr. Secretary, you have been very generous 
with your time. We deeply appreciate it. Thank you very much.
    Secretary Lew. Thank you, Mr. Chairman.
    The Chairman. The hearing is adjourned.
    [Whereupon, at 9:49 a.m., the hearing was concluded.]



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