[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
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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
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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.]
A P P E N D I X
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