[Senate Hearing 113-411]
[From the U.S. Government Publishing Office]
S. Hrg. 113-411
INNOVATIVE IDEAS TO STRENGTHEN AND EXPAND THE MIDDLE CLASS
=======================================================================
HEARING
before the
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
MARCH 13, 2014
__________
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COMMITTEE ON FINANCE
RON WYDEN, Oregon, Chairman
JOHN D. ROCKEFELLER IV, West ORRIN G. HATCH, Utah
Virginia CHUCK GRASSLEY, Iowa
CHARLES E. SCHUMER, New York MIKE CRAPO, Idaho
DEBBIE STABENOW, Michigan PAT ROBERTS, Kansas
MARIA CANTWELL, Washington MICHAEL B. ENZI, Wyoming
BILL NELSON, Florida JOHN CORNYN, Texas
ROBERT MENENDEZ, New Jersey JOHN THUNE, South Dakota
THOMAS R. CARPER, Delaware RICHARD BURR, North Carolina
BENJAMIN L. CARDIN, Maryland JOHNNY ISAKSON, Georgia
SHERROD BROWN, Ohio ROB PORTMAN, Ohio
MICHAEL F. BENNET, Colorado PATRICK J. TOOMEY, Pennsylvania
ROBERT P. CASEY, Jr., Pennsylvania
MARK R. WARNER, Virginia
Joshua Sheinkman, Staff Director
Chris Campbell, Republican Staff Director
(ii)
C O N T E N T S
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OPENING STATEMENTS
Page
Wyden, Hon. Ron, a U.S. Senator from Oregon, chairman, Committee
on Finance..................................................... 1
Hatch, Hon. Orrin G., a U.S. Senator from Utah................... 4
WITNESSES
Swonk, Diane, chief economist and senior managing director,
Mesirow Financial, Chicago, IL................................. 7
Packer, George, staff writer, The New Yorker magazine, and author
of ``The Unwinding: An Inner History of the New America,''
Brooklyn, NY................................................... 11
Dunkelberg, William C., Ph.D., chief economist, National
Federation of Independent Business, Washington, DC............. 14
Lindsey, Lawrence B., Ph.D., president and CEO, The Lindsey
Group, Fairfax, VA............................................. 16
Burman, Leonard E., Ph.D., director, Tax Policy Center, The Urban
Institute, Washington, DC...................................... 19
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Burman, Leonard E., Ph.D.:
Testimony.................................................... 19
Prepared statement........................................... 45
Responses to questions from committee members................ 60
Dunkelberg, William C., Ph.D.:
Testimony.................................................... 14
Prepared statement........................................... 67
Responses to questions from committee members................ 71
Hatch, Hon. Orrin G.:
Opening statement............................................ 4
Prepared statement........................................... 77
Lindsey, Lawrence B., Ph.D.:
Testimony.................................................... 16
Prepared statement........................................... 80
Responses to questions from committee members................ 92
Packer, George:
Testimony.................................................... 11
Prepared statement........................................... 95
Swonk, Diane:
Testimony.................................................... 7
Prepared statement........................................... 100
Responses to questions from committee members................ 107
Wyden, Hon. Ron:
Opening statement............................................ 1
Prepared statement........................................... 109
INNOVATIVE IDEAS TO STRENGTHEN AND EXPAND THE MIDDLE CLASS
----------
THURSDAY, MARCH 13, 2014
U.S. Senate,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 10:09
a.m., in room SD-215, Dirksen Senate Office Building, Hon. Ron
Wyden (chairman of the committee) presiding.
Present: Senators Stabenow, Carper, Brown, Bennet, Casey,
Warner, Hatch, Grassley, and Thune.
Also present: Democratic Staff: Adam Carasso, Senior Tax
and Economic Advisor; Joshua Sheinkman, Staff Director; Michael
Evans, General Counsel; Laura Berntsen, Senior Domestic Policy
Advisor; and Todd Metcalf, Chief Tax Counsel. Republican Staff:
Mark Prater, Deputy Staff Director and Chief Tax Counsel; Chris
Campbell, Staff Director; Jeff Wrase, Chief Economist; Preston
Rutledge, Tax Counsel; and Jim Lyons, Tax Counsel.
OPENING STATEMENT OF HON. RON WYDEN, A U.S. SENATOR FROM
OREGON, CHAIRMAN, COMMITTEE ON FINANCE
The Chairman. The Finance Committee will come to order.
A century ago, shortly after the Ford Motor Company
introduced its Model T, Henry Ford shocked the business world
by increasing his workers' pay to $5 a day. It was more than
double the going rate, but Ford knew it would guarantee he
would have the best workforce in Detroit. It also meant his
employees could afford to buy the cars that they built with
their own hands. It ensured that they could own homes, send
their kids to schools, and accumulate wealth.
It was the birth of the middle class in the United States.
And in the 100 years since then, that middle class has defined
the strength of America. Yet today, the middle class is under
siege. In spite of the work ethic, ingenuity, and productivity
of millions of Americans, globalization, technological change,
and flawed tax policies have contributed to a steep decline in
manufacturing jobs and wages.
Since 2000, employment in manufacturing has dropped by
nearly a third, and those same forces are putting pressure on
service industries. The portion of our economy made up by wages
and salaries, the lifeblood of the middle class, is now at the
lowest level on record, leaving many hardworking families
struggling from paycheck to paycheck. And because consumer
spending drives 70 percent of the American economy, that is a
prescription for slower economic growth.
Today, this committee is going to begin, on a bipartisan
basis, a drive to develop policies that get more Americans
inside the
middle-class winner's circle. And we need to focus on this,
because the alternative is unacceptable. If working families
fall further behind now, fewer will be able to climb America's
ladder of economic mobility and secure better futures for their
kids.
As those who fight our wars, educate our children, and hold
our communities together, the middle class deserves better. I
believe this committee, working on a bipartisan basis, has the
ability to produce policies that can help buck those trends,
build new pathways into the middle class, and expand the
winner's circle for all.
And here are just several ideas for getting started. First,
America has to find fresh policies to improve education and
lifelong learning and use them as springboards to economic
opportunity. It is critically important that our students not
only have access to higher education, but also the ability to
prosper once they have gotten in the door.
Senators Warner, Rubio, and I have offered a bipartisan
proposal that would get up-to-date and accurate information to
students, allowing them to compare schools and programs based
on completion rates, debt, employment, and earnings.
With today's technology, it seems almost unbelievable that
students are being denied access to that information. And, in
addition to that step, additional efforts need to be launched
to improve the rigid structure of Federal aid so that students
can put that information to good use.
It has been said that one of the best ways to raise wages
for the middle class is to have businesses compete for skilled,
educated workers. Our bipartisan bill helps promote that.
Any effort to improve education also has to include people
outside the school system, such as workers who want to learn
new skills and find unique pathways to new careers. In my home
State, I often talk with small business owners who want to hire
carpenters or electricians, but cannot find people with the
skill sets that are needed. So there is real potential here for
apprenticeships to help bridge that gap as a pathway to the
middle class. Our colleague, Senator Cantwell of Washington,
here on the committee, has done good work on this issue, and I
look forward to bipartisan efforts to partner with her on that.
A second boost for the middle class would be finding
policies that encourage people to save and especially get
started saving early in life. I have been struck by the
interest conservatives and liberals have shown in creating
child savings accounts, and I am interested, again, in working
with colleagues on both sides of the aisle to explore that.
What is indisputable is that giving everybody in America
the opportunity to save and get ahead--and especially those who
are struggling today--is something that will help sustain and
expand the middle class.
Our third focus is going to be retirement security. Too
often, our families save money for a lifetime only to have it
wiped away by chronic conditions like diabetes, cancer, and
heart disease. Millions of Americans of all generations suffer
from these conditions, and it is not just the government that
bears the cost.
I have been pleased to partner with Senator Isakson of
Georgia, another outstanding member of this committee, to come
up with a bill that would bring health care providers together
to keep these chronic care patients as healthy as possible in
their homes and in our communities.
Fourth, steps ought to be taken to make the tax code more
friendly to the middle class and not put up barriers to its
growth. Right now, a nurse who is married to a police officer
in Medford, OR could be paying a higher tax rate than someone
who makes a living entirely off investments. Any tax reform
plan needs to narrow that gap.
Over the years, I have had a bipartisan proposal with
Senator Gregg, Senator Begich, and Senator Coats, and we would
do just that. And, on a bipartisan basis, we have sought to
triple the standard deduction to put more money into the
pockets of our families.
A bedrock principle for tax reform ought to be to give the
middle class and everybody else in America the chance to get
ahead. Right now, despite good intentions, it does not always
work that way. Take, for example, the child and dependent care
tax credit. Because of the way that credit is structured, a
young family just starting out might not get any meaningful
benefit. Even with a meager level of assistance, child care
could still be unaffordable, and a parent might have to
sacrifice a career to stay at home. It is an obvious flaw in
tax policy that, again, prevents our families from climbing up
America's economic ladder.
Our people have proven time and time again that they are an
almost endless fountain of ingenuity and innovation. American
ideas and the businesses built on them have transformed the
world.
Mr. Packer, who will be here with us shortly, writes about
Americans like Dean Price and Peter Thiel, who want nothing
more than to build a business from the ground up and nourish
its growth. Our tax code should create a pathway for innovators
and entrepreneurs and not erect barriers to their success.
Millions of Americans dream of being the next Elon Musk or Mark
Zuckerberg, and our focus should be on policies that lay the
groundwork for bringing those dreams closer to reality.
And too often, tax policies that should encourage
innovation and entrepreneurship do not deliver. Far too often,
conversations about tax reform focus on the big businesses, the
big, successful businesses, and ignore the rest. But economic
growth and the jobs that follow so often flow from our small
businesses. So, as this committee continues to consider the
best ways, again, on a bipartisan basis, to fix this broken tax
code, let us ensure that young startups and green-shoot
entrepreneurs have the opportunity to succeed.
Working taxpayers, I would also point out, face an obvious
double standard with respect to enforcement of the tax law. It
is more likely that people working their way out of poverty
will have their Earned Income Tax Credits reviewed and denied
than wealthy tax-dodgers will have their tax shelters audited.
Finally, the government has an obligation to maintain and
strengthen the social safety net. The promise to hardworking
Americans ought to be twofold. Just as it helps them climb into
the middle class when times are good, let us also take steps to
prevent our people from falling into poverty needlessly when
times are bad. That means boosting the minimum wage, extending
unemployment insurance, and updating the workforce programs
that connect our people with the jobs of the future.
The safety net needs to be strong and modern in order to
sustain a thriving middle class. The best way to reinvigorate
the American economy is with a thriving, educated middle class
that can find good-paying jobs, afford homes and cars, and be
able to accumulate wealth over a lifetime. That is the ideal
Americans have aspired to since, in effect, the middle class
was born in Detroit a century ago.
Our challenge is to take the policies I have mentioned--
education, savings, retirement savings, taxes, and a strong
safety net--and come together as a committee and help retool
these policies into a stronger economic engine for lasting
economic prosperity.
I am going to turn it over to Senator Hatch now. I also
want to thank our panel. We have a superb panel of witnesses.
And, Senator Hatch and Senator Grassley, both of whom I have
had the pleasure of working with often, I look forward to
pursuing innovative ideas with you on these issues in a
bipartisan way.
[The prepared statement of Chairman Wyden appears in the
appendix.]
The Chairman. Let me recognize Senator Hatch.
OPENING STATEMENT OF HON. ORRIN G. HATCH,
A U.S. SENATOR FROM UTAH
Senator Hatch. Thank you, Mr. Chairman. I do want to thank
you for holding today's hearing. I also want to thank our
witnesses for being here. It is really important that you took
time out of your busy schedules to be with us and help us to
understand these issues better.
Now, this hearing is on ideas to strengthen and expand the
middle class, and focusing on the middle class is, of course,
always a safe political landing spot. A host of surveys reveals
that many Americans see themselves as residing in the so-called
``middle class,'' including those who, to an outside observer,
would appear to reside elsewhere.
That being the case, when politicians say they are working
for the middle class, there is clearly a large constituency.
Yet I do not believe that the motivation for today's hearing is
politics or class warfare, at least I hope that is not the
case, and I am quite sure it is not, with our distinguished
chairman. The motivation, I trust, is to explore the evolution
of middle-income families in America over the past few decades,
to discuss what can be done to enhance their prosperity in the
future, and to find ways to allow lower-
income Americans to climb into the middle class or beyond.
There are two ways to analyze the condition of middle-
income Americans. One way is to cherry-pick economic data that
conform to the policy or political points that one wants to
make without checking to see if the position is also supported
by other evidence. The other way is to analyze data to see if
they are consistent with one's position and to compare the
findings with different measurements, datasets, or economic
models.
If you are only interested in making a political point, you
are likely to choose the first option. But if you really want
to see what is happening with the middle class, the second
option is the better one.
I mention this because, in debates concerning things like
inequality and middle-class incomes, people often tend to
choose the first option, utilizing only the data that confirms
their preconceived notions. For example, if you try to measure
median income using a measure that is pre-tax and pre-transfer,
and with the tax unit as the unit of measurement, you find
growth of only around 3 percent between 1979 and 2007, which is
consistent with the common claims of middle-class stagnation.
However, if you look at post-tax, post-transfer income data
that includes valuation of health insurance benefits and take a
size-
adjusted household as the unit of measurement, you find that,
over the same period, median income has grown by close to 40
percent, which is decidedly less stagnant. There are similar
measurement issues when it comes to data commonly used to
analyze income inequality.
Mr. Chairman, I know that I make these observations at
great risk of being accused of denying stagnation, inequality,
or any number of struggles facing the middle class. However,
given what I think is the spirit of this hearing, I believe
that we should fully examine the issues and measures
surrounding the middle class, including income growth and
income inequality. That is the only way we can get to the heart
of the problems that exist. And we should be addressing these
problems, and we should be addressing what our priorities
should be.
Mr. Chairman, I can point to positive examples very close
to home. The latest data from Harvard's Equality of Opportunity
Project ranked Salt Lake City as the number-one city in America
in terms of upward mobility.
Keep in mind that, in terms of policy, the vast majority of
Utahans support a vibrant private sector. We seek lower taxes,
individual responsibility, and less intrusive government, and
we take a backseat to no one in terms of caring for the less
fortunate in our communities. The means by which we care for
the less fortunate is, by and large, through strong charitable
institutions. I think Utah's story is instructive on what we
can do to help grow the middle class.
Finally, Mr. Chairman, I must say that, while there has
been a lot of rhetoric in recent years about the middle class,
I believe that the Obama administration's focus has been
misplaced and that its policies have actually been hurting the
middle class. Four and a half years after the end of the
recession, economic growth remains sluggish, and the labor
market remains depressed. Yet, in all that time, what has the
administration been focused on?
We have seen a massive expansion of our national debt due
to policies like the failed stimulus. What little deficit
reduction we have seen has been, by a factor of 9-to-1, due
more to increased taxes than reductions in spending. And to
date, the administration is unwilling to do much of anything
else unless there is yet another tax hike attached.
We have seen the effort to pass and implement the
Affordable Care Act, which further increased taxes and health
care costs for middle-class families and is, according to the
Congressional Budget Office, having an adverse impact on labor
market incentives. We have seen a vastly expanded Federal
bureaucracy through the Dodd-Frank Act, which has failed
entirely to address known significant contributors to the
recent financial crisis. And we have seen a regulatory effort
from the EPA to the Department of Labor to the NLRB that has
imposed costs on American businesses that will surely be passed
along to employees and consumers in the middle class.
I do not see a laser focus on job creation or growing the
middle class anywhere in these policies.
Now, Mr. Chairman, if we are serious about helping and
expanding the middle class, and I think we should be, it needs
to be more than just a slogan. Sadly, I believe that over the
last 5 years, the talk about helping the middle class has not
translated into policies that would actually do the job.
I look forward to working with you, Mr. Chairman, to
explore other ideas that will lead to a strong middle class and
an economy with robust growth in jobs, private investments, and
prosperity for all American families. And I think you are on
the right track in raising these issues, but I hope that
today's hearing will provide us with some insights on how we
can do better. I appreciate your efforts in having this hearing
and creating this dialogue and discussion that I think may be
very beneficial to our country.
The Chairman. Thank you, Senator Hatch. I thank you for
your kind words about me. And without making this a bouquet-
tossing contest, let me just say how much I have appreciated
your leadership on several of the issues that really undergird
this topic.
[The prepared statement of Senator Hatch appears in the
appendix.]
The Chairman. As you know, we have the CHIP bill for our
kids coming up. That would not have become law if it were not
for your leadership. And the reality is, every year in America,
there are millions of visits to community health centers now
that are not costing taxpayers an additional penny because you
are willing to work with me on a bipartisan basis to get those
community health centers out from under needlessly excessive
liability costs.
So I thank you for it, and I appreciate having you and
Senator Grassley and Senator Stabenow here. We have worked
together in a bipartisan fashion in the past, and we are going
to do so again.
We are going to call a little bit of an audible, since Mr.
Packer is still on the train, and I thought we might begin, if
we could, with you, Ms. Swonk. You are the chief economist and
senior managing director of Mesirow Financial, and I think it
would be ideal if you could, in your testimony, give us a sense
of the lay of the land, the challenges for middle-class people.
We have an excellent panel. And why don't we begin with
you, Ms. Swonk?
STATEMENT OF DIANE SWONK, CHIEF ECONOMIST AND SENIOR MANAGING
DIRECTOR, MESIROW FINANCIAL, CHICAGO, IL
Ms. Swonk. Thank you so much for having me here, both
Chairman Wyden and Ranking Member Hatch. I am honored to be
here with my colleagues, who have incredible expertise behind
them, and, looking over their testimonies, I am humbled and,
again, honored.
I really thought what I could do best and most prudently in
this hearing is to provide some sense of the direct result of
the Great Recession and the subpar recovery that followed on
the middle class, and where I think things are likely to get
worse before they get better with regard to income inequalities
and the potential for growth in the United States.
I will not read any notes I have, because I am dyslexic. So
I apologize in advance for that. I also flip numbers. So I will
try not to----
The Chairman. God has a special place in Heaven for those
who do not read their statements. [Laughter.]
Ms. Swonk. There you go. It means that sometimes things
come out of my mouth that probably should not, as well, but I
am sure you are all familiar with that too.
The crisis has revealed and exacerbated income and wealth
inequalities and set in motion some shifts that I think, if
unaddressed, are likely to compound the problems and undermine
potential growth in the U.S. economy.
We have seen substantial healing in the aggregate in credit
markets. We have seen things like the debt-to-income ratio get
down to 2003 levels, which is a great improvement, prior to the
housing market boom, but still well above the already-elevated
levels of both the 1980s and 1990s, which were both debt
decades for the U.S. consumer.
We have seen debt service burdens and debt financial
obligation ratios fall to record lows in recent years, although
I would argue, and the data supports it, that we have seen
homeowners more than account for all that improvement as they
have restructured their debt either by force or by choice. And,
on the flipside of it, renters have seen an increase in their
financial service burdens. And, as we know, we have seen more
people move into the rental category in recent years, and I
think that is going to continue. There are reasons for that,
but it is something that disturbs me all the same.
Wealth, net worth, has hit new highs both in absolute and
nearly relative terms. Of course, that is concentrated,
depending on what studies you look at, in the top 7 percent of
households, while the bottom 93 percent are still trying to
regain ground lost to the Great Recession.
Now, home values have come back, but not to the previous
equity we held in our homes prior to the housing market bust;
not that that is what it should be, but clearly people measure
themselves on a relative basis.
Also, median income, as you noted--there are problems with
the data--has stagnated and declined since 1999 and continues
to decline. I think there are some real issues in that,
although I do recognize, Senator Hatch, your important issues
on data, and I will address those in a minute.
One of the things that also is very important is that
income inequalities within the top echelons of income have also
intensified. And you are seeing in many areas what would be
considered very high income households actually having to pay
up and compete with the uber-wealthy in the .01 percent, say,
and they are finding that their pace of spending has slowed and
their living standards have been compromised.
So ``middle-income'' is kind of a relative term. I am
always amazed at people who think they are middle-income where
I would look on the numbers charts and say, ``Boy, you are at
the very top, in the top 5 percent or at least the top 10, if
not the top 1.'' But it is interesting to see how those
stresses are distributed.
I would also argue--and this is one of the more important
issues--that the stresses that these households are seeing are
being intensified. Student debt is one of my greatest concerns,
something I have been noting for many years, the rapid rise in
student debt. I followed consumer credit markets and the
banking industry--thank God, I am out of it now--for 19 years,
and I was in the middle of it, and I watched this happen. And I
warned people that the best way to die is in debt, and that was
the incentive, because they died above their means, living
above their means their whole lives.
And now we have student debt as the fastest-growing
component of consumer debt, with default rates at 11.5 percent,
which grossly understates the defaults. Now, some of this is
because some of those students--and you noted them earlier,
Senator Wyden--many of these students should not have gone to
college or did not know what their earnings potential was.
They turned around and tried to sue their colleges because
they could not earn enough to pay for it when they came out.
Also, a lot of these people maybe should not have been in
college in the first place, but they were given access. They
should have been in training programs or in what I consider
more 18-month training programs with community colleges. Where
the labor shortages are now, particularly in construction, that
is a difficult thing to do, because the employers are very
diverse and cannot pair up with community colleges to create
the kind of apprenticeship programs that are necessary.
I also think it is very important--we talk a lot about
labor force participation. And a lot of people want to discount
this, but when it comes to our young people, labor force
participation rates have fallen precipitously, and not just on
the soft skills among our teenagers. I do worry about my own
daughter, who is 19 years old and in college right now. She has
had unpaid positions, which I encouraged her to do, but not
many paid positions. She thinks she can go out and earn a good
paycheck. She wants a good job with good hours. I say, get in
line, there are another 115 million people in the labor force,
but anyways----
I think it is important, this decline in labor force
participation among, not just teens but those into their 20s,
what I call our learners and our earners, those who are 35 to
44 years old. We are losing people in that bracket. And guess
where they are living? They are living at home with their
parents in multigenerational households. Some research by the
Pew Research Institute suggests it is the worst situation since
1940 on multigenerational families living within a household,
causing economic stresses there, with many people not fully
employed and grandparents taking care of their grandchildren,
as well as their adult children.
Over 31 percent of 18- to 34-year-olds are currently living
with their parents. Again, the data is a little bit elusive on
that, because some of those people are just still in college.
They are not actually living at their parents' home
continuously, but their parents presumably are having to deal
with the overhang of that debt.
The result has been dramatically reduced pools of both
current and future first-time home buyers and vehicle buyers.
And why is this so critical? In January, first-time home
buyers, as existing home sales plummeted, that was not the
weather in January.
The important point is that we are seeing that these people
are diminishing the current pool of first-time buyers, just 26
percent in January. Forty percent is the norm on the existing
home market. Without first-time buyers, you do not have trade-
up buyers to trade up. They cannot sell their home to trade up.
You do not have churn in the housing market, and you also do
not have the path to saving and wealth that has been long
considered the American dream. I hate to use the term. It is a
little trite. But let us face it, we are losing some of the
pathways that we once saw to generating wealth and saving in
the United States, which means we are undermining the actual
backbone of our future and potential growth going forward.
I will end my comments. I know I speak quickly, but I know
that I also am longer-winded on time. You give an economist a
minute, we will take 10, and I am supposed to take 5. I
apologize.
But we have seen an extraordinary bifurcation of consumer
spending in the United States. Initially in the Great
Recession, nobody escaped. Everybody was hit, and we saw
consumer spending across income strata and across business
lines hit all the way across the board, and an extraordinary
migration down what I call the retail food stream. Now we see
divisions, the hollowing out of what were previously middle-
market retailers. We are now seeing more and more middle-income
households searching for value and not allowing any price
increases.
One of the most disturbing trends is the pooling at the
very top. Actually, as I came here yesterday through O'Hare and
all the delays that were present because it snowed in Chicago--
of course, they do not know how to deal with that there--one of
the things that came through on my e-mail was a bubble in the
luxury market, that everybody is trying to feed off of this
very small percentage and very small number of consumers, and
they have bid up these prices very high.
In the rest of the economy, you are not seeing any pricing
power. And one of the things that I find most striking is sales
in grocery stores. Today's retail sales data showed we have
seen some weakening, particularly since some of the food
subsidies have been lifted as well, but some weakening in
spending at grocery stores.
There is a difference between the cost of healthy and
hungry spending. It strikes me that during the polar vortex,
which I lived through and you had to live through here, some of
the biggest worries were about children missing their one meal
a day that they were going to get in school and, also, those
people who use school as day care who could not work.
I believe weather has redistributive effects. But clearly
those waitresses and waiters and people who are hourly who are
getting the influx of people migrating rather than hibernating
from the cold weather to ski resorts and sunny locations are
not the same people losing it, as those are the people who lost
it to the weather in this particularly harsh winter.
But the issue in grocery stores, I think, really does
highlight this. Dominick's, a mid-market store chain in
Chicago, went bust. Mariano's, which wants to be the new
Nordstrom's of the grocery world, is growing right now. I have
my doubts. Whole Foods has seen increased competition. You are
going to see a lot more competition at the high end as well.
And what you are seeing is the lack of pricing power at the low
end, which is exacerbating the slowdown in inflation, which
some would say is welcome. But if it becomes deflationary, that
is a spiral we do not want to get into in any way.
The Chairman. Ms. Swonk, I am reluctant to stop you,
because I think not only has this been good, but you are going
to probably get conscripted to come before a lot of other
committees, because it has been that good.
Could you perhaps----
Ms. Swonk. I have a last sentence, and I will finish it up.
The Chairman. Great.
Ms. Swonk. I apologize. I told you, if you give me a
minute, I do not keep time either. I apologize.
The Chairman. It has been terrific.
Ms. Swonk. My greatest concern, as I have outlined, is
that--well, I will end it on a personal note. My son is 16
years old, and I live in a highly income-diverse area. He has
not bought a pair of shoes in 2 years--he is 16 years old--
because his friends, who are in his honors and AP classes,
cannot afford a pair of shoes, and he will not buy a pair of
shoes until they can. He has grown 6 inches in those 2 years,
thankfully, not in his feet. Kind of like puppies growing into
their feet.
But I think the narrative of the Hartzell family that we
are going to hear from Mr. Packer is, unfortunately, going to
be more the norm than just a narrative going forward. And, if
we do not get the money to support our statistical agencies,
you are going to kill the messenger as well.
The Chairman. That was a really superb way to help us get
this started, and, particularly, your message is something that
I think is going to appeal to elected officials of both
parties, and I appreciate it.
[The prepared statement of Ms. Swonk appears in the
appendix.]
The Chairman. Mr. Packer, if you are not out of breath,
because I know you have sprinted here, I think it would be very
helpful to have you follow Ms. Swonk, who has really given us
an overview of the challenge of Americans trying to climb the
economic ladder.
Are you sufficiently situated there and not out of breath?
Can we go to you next?
Mr. Packer. Ready to go, Mr. Chairman.
The Chairman. We look forward to your testimony, and your
book is spellbinding. And having a spouse in the bookstore
business, I know a little bit about the challenge of writing
books, and we commend you, and we are glad you are here.
STATEMENT OF GEORGE PACKER, STAFF WRITER, THE NEW YORKER
MAGAZINE, AND AUTHOR OF ``THE UNWINDING: AN INNER HISTORY OF
THE NEW AMERICA,'' BROOKLYN, NY
Mr. Packer. Thank you, Mr. Chairman. I apologize for being
late. It was Amtrak's fault, not mine.
Chairman Wyden, Ranking Member Hatch, and members of the
committee, I am honored to have been asked to testify before
the Senate Finance Committee today.
I am a staff writer at The New Yorker magazine, and last
year I published a book called ``The Unwinding: An Inner
History of the New America.'' I conceived it as a 30-year
history of the political and economic upheavals that have
transformed America during my adult lifetime.
I might have added another policy book to the long shelf of
such tomes or written a conventional work of American history,
but I did not feel very qualified to do either. I am a
journalist, and I wanted to write about this generational
change through the lives and stories of a handful of unknown
Americans in some of the more forgotten corners of the country.
So, from 2009 to 2012, I spent a lot of time in the Piedmont
region of North Carolina, in Youngstown, OH, and in the
unincorporated subdivisions around Tampa Bay.
Here is what I learned from some of the people with whom I
spent many weeks and months. First, everywhere I went, I heard
again and again there is no more middle class here. There is
just rich and poor. Even if this was not statistically true, it
felt true to the people I talked with.
The disappearance of jobs in manufacturing, small-scale
agriculture, and construction, depending on where I was, has
been going on for a long time, since the late 1970s in the case
of the steel industry in Youngstown. And any long-term trend
can begin to seem normal and even becomes unnoticeable.
But the financial crisis and the Great Recession seemed to
focus people's minds on how far things had gone. I remember
walking along Main Street in Madison, NC with Dean Price, the
son of tobacco farmers and a native of the area.
He had grown up thinking of himself as middle class, but
just about every store he had known as a kid was closed down.
And he said, ``If you think about it, the people who ran the
hardware store, the shoe store, the little restaurant that was
here, they were the fabric of the community. They were the
leaders. They were the Little League baseball coaches. They
were the town council members. They were the people everybody
looked up to. We lost that.''
How many Madison, North Carolinas are there around America?
When you leave the more prosperous areas of the country, it
becomes almost routine to see deserted Main Streets in town
after town.
In Rockingham County, NC, population 93,000, three Walmarts
opened up in one 6-month period a few years back, with almost
10 applicants for every position, which paid an average of
$16,108 a year. Those were just about the only jobs available
to workers who had once held manufacturing jobs in the textile
mills and furniture factories before those moved overseas.
Dean Price told me that with the housing bust, a lot of
people in his area had to choose between paying the mortgage
and putting gas in the car to drive ever longer distances to
ever lower-paid work.
Again, this is not the exceptional case. It felt closer to
the norm. It is the economic success stories that we hear about
so much in the media in Silicon Valley and on Wall Street that
felt more like the exceptions. As Dean Price said to me, how
many investment bankers and software designers are there around
the country? Then think of how many farmers.
The second thing I kept hearing was that the game is
rigged. People who were trying to play by the rules found that
no matter how hard they tried, they could not get out of debt
or lift themselves out of an impoverished life, while they
watched more fortunate people with the right educations and
connections pull away, be granted second or third chances, even
get away with murder.
I heard this from people of all races, backgrounds, and
political views. And, while they had different explanations and
placed the blame in different ways--some blamed big business,
some blamed big government, some blamed Wall Street, some
blamed all of you--this widespread cynicism struck me as a
dangerous sign about the health of American democracy. The idea
that hard work and effort can lead to better prospects for
one's self and one's children is at the heart of the American
dream. It is one thing to read statistics about income
inequality and social immobility. It is another to see the
dream vanishing in the minds of ordinary Americans.
For example, in Tampa, I met the Hartzell family, Danny and
Ronale and their young kids, Brent and Danielle. Danny worked
as a welder, then at a packaging plant, but when those blue
collar jobs disappeared with the recession, he spent months
looking for work, with no luck. Then the Hartzells' daughter,
Danielle, was diagnosed with bone cancer, and the parents put
all their energy into her treatment and recovery, made possible
by the charity of local hospitals.
Finally, Danny got a job stocking produce at Walmart for
$8.50 an hour, which, because the store had him working part-
time and his hours kept going down, put Danny at about $10,000
a year. Try supporting a family on that. By the end of the
month, they had as little as $5 on hand. The only time they had
extra cash for any purchases beyond the basics was when they
received their Earned Income Tax Credit.
And yet, the Hartzells were not doing any of the things
that poor people are rumored to do. They did not drink or do
drugs. They obeyed the law. The kids were loving and
respectful. The family stayed together through everything, even
three periods of homelessness.
The parents continued to put their kids, who bounce between
schools and miss out on their education because of the family's
instability, ahead of every other consideration. The last time
I saw the Hartzells, Danny said to me, ``My view on everything?
If you want to change this country, you have to put a person in
office who has never done it for a day. Put a regular old guy
like me, someone who has lived it and never done nothing else
but live it.''
I think Danny was saying something like ``the game is
rigged.''
The Hartzells have made their share of mistakes, but they
are the kind of people who used to do okay in America--not
rich, but okay. There was a place of dignity for them in our
society.
Today, without good educations or successful connections or
other resources, the Hartzells are barely surviving. They feel
themselves to be disposable, and it is hard to be optimistic
about their or their children's future.
Just last week, Ronale Hartzell e-mailed to tell me that
they have left Tampa, where they have lived most of their
lives, to try their luck in Orlando. ``We just want a little
happiness, just a little,'' she wrote. ``We're trying so hard
since day one.''
How many people like the Hartzells are there in America?
I am not the policy expert in this room. You have heard
from others who are. But I have become a sort of expert on the
people I wrote about in ``The Unwinding.'' I can tell you that
the institutions that used to support the aspirations of
middle-class Americans, from Federal, State, and local
governments to corporations, banks, public schools, and the
media, are no longer seen as positive forces in the lives of
the people I spent time with. These institutions are either
very distant to the point of irrelevance, or else they are seen
as negative.
There is no simple or single solution to this state of
affairs, but it is real, it is out there, and every day it
corrodes the sense of fairness and opportunity that is
essential to our democracy. The people I wrote about do not
have lobbyists or trade associations or public affairs firms to
represent their interests here in Washington. The only voice
they have is yours. For that reason, I hope that the members of
this committee will put the Americans I have been describing
and others like them at the center of all of the legislative
work you do.
Thank you very much.
The Chairman. Mr. Packer, thank you very much. And I think
your testimony is going to help us get that done, get it done
in a bipartisan way. And I intend to make sure that those kind
of cases, like Dean Price and the Hartzells, really drive home
the economic tightrope that these middle-class families are
walking, where you just point out how they have to make these
choices between different bills, and any big expense literally
pushes them off the tightrope altogether.
[The prepared statement of Mr. Packer appears in the
appendix.]
The Chairman. So thank you. And I know you are going to get
questions from Senators here in a few moments. Particularly, I
can tell you have a big cold. You faced a late train, and I
very much appreciate your----
Mr. Packer. Sorry for the sniffling.
The Chairman. No. We are glad you are here.
Dr. Dunkelberg, thank you. Why don't we go to you next? And
we have very much enjoyed working with you all at the National
Federation of Independent Business, and we welcome your
testimony.
STATEMENT OF WILLIAM C. DUNKELBERG, Ph.D., CHIEF ECONOMIST,
NATIONAL FEDERATION OF INDEPENDENT BUSINESS, WASHINGTON, DC
Dr. Dunkelberg. Thank you, Chairman Wyden, Ranking Member
Hatch, and members of the committee. I am pleased to be here as
chief economist for the National Federation of Independent
Business, the leading representative for small business
organizations, with over 350,000 members.
I now have been NFIB's chief economist longer than I have
been a professor, which is kind of interesting, but I started
with them back when I was teaching at Stanford University in
1970. And I retired from teaching a couple of years ago, but I
am still the chief economist. So I appreciate the fact that you
recognize the importance of the small business sector to the
whole issue about the so-called middle class.
There are an estimated 6 million employer firms in the
United States, and beyond that, of course, there are tens of
millions of other people who make a living individually, like
my electrician, Charlie, who, over the past 20 years, I have
encouraged from time to time to hire somebody and train them.
And he says, in response, ``Half of my time would be used up
complying with the regulations that I have to deal with if I
hire one worker.'' So he does not hire anyone, and he does not
train anyone, because of the regulatory burdens that are out
there.
Just to give you some perspective, 25 percent of our
members have annual sales under $200,000. That is gross sales.
About 70 percent of those sales, on average, go to employee
compensation. So we are talking about a $50,000-$60,000 bottom
line here. I think that is definitely middle-class. So, not
only are the small business owners middle-class people, for the
most part, they also provide tens of millions of jobs for
middle-class workers.
So an estimated, according to the SBA, half of the private
sector workforce works for what they characterize as a small
business. So the health of the small business economy is really
important to what is happening in the middle class.
If you look at employment today, it is over 1 million below
where it was back at the peak in January of 2008, and those
people, I think, were probably not from the top 1 percent or
even the top one-third. These people were out of the middle
class and, of course now, are below that, and just getting a
job would help put them into the middle class again rather than
being unemployed.
So every 4 years, the NFIB looks at a random sample of its
350,000 members and gives them a list of 75 really important
problems and asks, what are the top problems that your business
faces; what are the things that are in the way for your growth
and hiring?
And I will just share with you the most recent one, which
we finished late in 2012. No surprise, top of the list is
health insurance costs, number one--lots of confusion and
uncertainty there.
Number two, uncertainty about the economy. That is what
they told us. They are so unsure about where the economy is
going to go, they are not going to bet their money, put their
money on the table, and make the kinds of bets that they have
to make with their own money. They cannot issue Facebook stock
and so on. It is their money, and they are going to be very
careful with it.
Number three, energy costs.
Number four, uncertainty about government policy. The Fed,
the EPA, health care costs, tax policy, all of these kinds of
things are very concerning to them.
The next, number five, is the cost of regulation and red
tape, and we have done a lot about that. Keep in mind that the
most valuable asset that a small business has is the time of
the entrepreneur, the person who thought this up and runs it
and makes it happen and creates the jobs, and all this
compliance stuff just drains away that most important piece of
capital. Not a very good thing.
Six, seven, and eight on the list are: Federal taxes, which
take away the capital that small businesses use to grow their
business, frequent changes in the tax code, and tax code
complexity.
That is the top eight, and then the remainder of the 75
things follow that. So you can get an idea about what that list
must look like, and we would be glad to provide that study to
you. We have done it for a lot of years now. You can take a
look. And I appreciate your focus on the whole tax code issue.
It is very, very important.
So, as we look at that, as you look at the menu of possible
things to do--you have suggested many. We certainly would like
to see things that are more focused instead of comprehensive.
That is pretty scary. So we like that, like making section 179
more permanent, because that is bottom-line capital for these
firms. Things like that would be very helpful.
Worrying about the banking side, I am the chairman of a
little bank in New Jersey. We lend to small businesses, and the
complication coming down in the banking system is making my
life very difficult. I spend 90 percent of my monthly board
meeting worrying about complying rather than how to grow the
bank and the business. That is not helpful.
These people are very important to providing capital to the
little firms on Main Street, and I worry about the fact that
the regulations for these big banks are very important, but to
apply them to the small banks is probably not a good idea.
So I think that restoring the vitality to the small
business sector is very important. If you look at the BLS data
on new business starts, you will see that, of course, not only
did we build too many houses in 2003 through 2007, we built too
many strip malls, too many restaurants, and we lost a lot of
them. And right now new starts are at a very low level relative
to where they had been historically.
That is where jobs come from. A lot of new jobs come from
just new barber shops, et cetera, that we have to have to help
3 million new people every year who come into our economy.
So I think that that is a very good place for us to go, and
I commend you and the committee for the good work you are going
to do to help revitalize this source of jobs and middle-class
consumers.
Thank you.
The Chairman. Dr. Dunkelberg, thank you very much. And you
raise a number of important issues, and, as you know, I have
followed up on a number of them with you. And I think what is
particularly relevant is, as we go into tax reform, every time
you hear people talk about it, it is always about what are the
C corporations, these big corporations, and, obviously, we want
them to be competitive. They employ a lot of Americans.
But as you said, the barber shop, the cleaners, the Main
Street businesses, somehow get left out because they, in
effect, pay taxes as individuals, as pass-throughs. And I very
much want to work with you on that in the days ahead so we do
not leave these small businesses behind.
[The prepared statement of Dr. Dunkelberg appears in the
appendix.]
The Chairman. Mr. Lindsey, why don't we go to you next?
STATEMENT OF LAWRENCE B. LINDSEY, Ph.D., PRESIDENT AND CEO, THE
LINDSEY GROUP, FAIRFAX, VA
Dr. Lindsey. Thank you, Mr. Chairman. I would like to thank
you and Senator Hatch for inviting me today.
Mr. Chairman, you said that there was a special place in
Heaven for those who do not read their statements. I need all
the help I can get to get there, and so I will not read my
statement.
The Chairman. Thank you.
Dr. Lindsey. But I would like to refer to the charts that
are attached to the statement.
The Chairman. Absolutely. Absolutely.
Dr. Lindsey. I am in sympathy with everything I have heard
today, and I think one of the themes we need to think about in
terms of the middle class is really a psychological one, which
is, it is one where self-reliance is key. These are all
individuals who want to support themselves, and I think that is
actually why most people think of themselves as middle class.
They do not think of themselves as part of some over-class
which sets the rules and runs things. They do not think of
themselves as an underclass, which is dependent on others. They
want to be self-reliant.
With that in mind, let me refer you to chart 1. My theme
today is going to be something one almost never hears in
Washington, and certainly never hears or almost never hears
from a policy wonk, which is a request for modesty. We have
done a lot, but we are not doing a very good job.
So the first chart tracks two measures that the Bureau of
the Census has for tracking inequality. And what I did was, I
looked at each administration. The data only ran through the
first 2 years of the current administration. But what you will
note--by the way, these are called the GINI coefficient and the
mean log coefficient, which you probably learned about in
freshman economics, and I hope you have brain cells to put to
use to remember how they are calculated, and I will not go into
them today.
But what you will notice is that both rise under every
administration, both measures. It does not matter. Neither
party has done a very good job. In fact, the biggest rise in
inequality was under President Clinton, where, in those 8
years, inequality rose under both measures more than it did
under 8 years of Reagan and 8 years of Bush combined.
So I think, from a partisan basis, we all have to be very,
very modest about our ability to influence things. So both
parties have not done a very good job. But it is not for want
of trying. And so--if I could ask you to turn to the second
chart. So what do we do to try to make things more equal? Well,
one thing we do is we try to make the tax code more
progressive.
Now, I know it is not conventional wisdom that the tax code
has become more progressive, but it has become more
progressive. And what I did was I looked at IRS data. I also
looked at Bureau of the Census data.
I looked at the share of income and the share of income
taxes paid by the top 5 percent and everyone else in various
years. And, as you will see, the share of income, according to
Census, going to the top 5 percent has gone up since 1980,
between 1980 and 2010. It went from 16.5 percent to 21.7
percent.
The share of income taxes paid by that group has gone from
roughly 37 percent to roughly 60 percent. The point here is
that the share of income taxes paid at the top has risen faster
than the share of income at the top. That is mainly because all
of the big tax cuts we have had have primarily been focused at
cutting taxes on middle-income families, this in spite of the
fact that we have this view out there that the middle class is
shrinking.
And you can see it in the next two columns. If you compare
the tax share paid by the top 5 percent to their income share
versus everyone else, we started at a ratio of about 3-to-1
back in 1980. This was under Bill Clinton, when the top rate
was 70 percent. In 2005, the top rate was half that, and the
ratio of the tax share to income share of the top 5 percent was
5 times what everyone else was paying.
So, in fact, in spite of the conventional wisdom, in spite
of all the rhetoric, the income tax has become more
progressive. A greater share is paid at the top, and it has
grown faster at the top than has the income share. This should
be a cause for modesty that we do all this and it does not have
the effect we think.
Chart 3 compares what is happening on the other side, which
is with transfer payments. And these are government payments to
individuals, a variety. Right now, they are primarily medical,
but they also include direct cash income.
Back in 1960 when, actually, we had the most equal income
distribution that we have seen in a long time, transfer
payments were just 6 percent of personal income. Today, they
are roughly 18 percent of personal income. So the share of
personal income and transfers has tripled, thanks to the
efforts of the government, in spite of what we have seen is the
trend.
On the other hand, the share of income from interest and
dividends, what the people call property income, has dropped
since 1980. So, again, my lesson from this is modesty. It is
not like we are not doing a lot. We have moved around a full 12
percent of personal income, which is a lot, $2 trillion, in the
form of transfer payments, and yet we still have the inequality
situation we do.
We should be very modest about our efforts to do things.
The fourth thing I would like to point out, and the next
chart, is the decline in middle-age labor force participation.
This is something Diane mentioned earlier, and I think it is
very, very important. This is not the people in my generation,
which I think of as the mature people, wise people with lots to
contribute. [Laughter.]
We all actually have higher labor force participation than
we did at the peak of the last business cycle. This is middle-
aged. They are just leaving the labor force.
If you compare middle-aged labor force participation today
versus what it was in 2007, we have lost 2 million middle-aged
men and 1 million middle-aged women. And by definition, you are
not going to build the middle class, if you do not have people
participating in the labor force. It is as simple as that. The
key is self-reliance. These people are choosing not to be self-
reliant.
Now, the choice may be that there are not good alternatives
out there. I am not criticizing these people. They are facing
the world as it is in front of them. But we are not going to
solve the problem as long as people leave the workforce, and
the problem seems to be getting worse. And I was struck by the
report of the CBO, for example, looking forward to another 2.3
million people leaving the labor force as the Affordable Care
Act takes effect.
I think the reason we failed, in spite of our efforts, is
complexity, and this was something that Bill Dunkelberg talked
about. And I would like to turn to chart 5, which was actually
put out by the Urban Institute.
I call this the benefits mountain. They looked at a number
of different people, but this one has to do with a single
parent with two kids. And you can see how complicated the
benefit structure is. You cannot say this is a well-targeted
transfer process. It just is not. And the phase-out ranges are
different, and the standards for each one are different. And we
here in Washington--policy wonks, Senators, staff--we have done
this. This is our fault.
So, if we were to do anything, I would urge you to look at
the complexity. And one thing they did at the Urban Institute
was, they took this and they put it into a summary statistic,
which is in chart 6, which is the effective marginal tax rate
on the single parent with two kids. So this is the effect if he
or she works a little bit more, tries to improve their own
standard of living, how much of it does the government take
from them, either in taxes or lost benefits.
And you will see that, for what most of us would call the
middle class, say $25,000 to $50,000, we are talking about a
tax rate over 50 percent. The tax rate is actually 82 percent
for this single mom with two kids in the $30,000 range. We did
this, policy wonks, staff, Senators; you did it, we did it.
We have a higher marginal tax rate on single moms making
$30,000 a year than President Hollande has put on French
millionaires. It is dumb French policy, and it is even dumber
here.
And so the one thing I would urge us all to do is be very
modest about our ability to tinker with things, because when we
tinker, we make the world more complex. And these are people
who are best-off when the world is simple and they are self-
reliant and are given the means to solve their own problems and
not told how to do it.
Thank you.
The Chairman. Dr. Lindsey, thank you very much.
[The prepared statement of Dr. Lindsey appears in the
appendix.]
The Chairman. And I thought it would be very helpful to
have you and Dr. Burman, in effect, as bookends at the end,
because, if we can find common ground between the two of you on
some of these issues, that will go a long way to coming up with
a bipartisan tax reform proposal that will give everyone in
America the chance to get ahead.
We are going to probably talk about it, but one of the kind
of key numbers--and I appreciated your using a number of charts
to document your points, Dr. Lindsey--is in the 2 years after
Democrats and Ronald Reagan got together in the 1980s, and Dr.
Burman was involved in it, our country created 6.2 million new
jobs.
Now, nobody can say that every one of those jobs was due to
tax reform, but it sure helped. And it helped particularly give
all Americans the chance to get ahead. That is the operative
phrase: all Americans--Dean Price, the Hartzells, everybody in
America--got the chance to get ahead.
Dr. Burman, I am not going to put much pressure on you to
try to find some common ground with Dr. Lindsey and the other
three outstanding panelists, but you did it in 1986. You also
helped Senator Coats and Senator Gregg and Senator Begich and I
write a bipartisan bill. So, no pressure, but let us see what
we can do to wrap up with some common ground on helping the
middle class get up that ladder.
STATEMENT OF LEONARD E. BURMAN, Ph.D., DIRECTOR, TAX POLICY
CENTER, THE URBAN INSTITUTE, WASHINGTON, DC
Dr. Burman. Thank you, Chairman Wyden, and it is a great
pleasure to be testifying before your committee, at the first
hearing you are having without Jack Lew. And thank you, Ranking
Member Hatch, and members of the committee.
Senator Wyden and Senator Hatch, you have both been my
heroes, because you have spent so much of your careers trying
to work on a bipartisan basis, trying to solve important
issues, and I look forward to seeing what you can accomplish
together.
Today, I want to talk about this important issue of what is
happening to the middle class. There is a chart in my testimony
showing real median earnings over time, and this is something,
I think, Senator Hatch referred to earlier. The real median
earnings, the earnings for somebody right in the middle of the
distribution of pay, working full-time for a full year, after
adjusting for inflation, have stayed virtually flat over the
last 35 years.
At the same time, productivity has exploded. The amount
that the average worker is producing has more than doubled. As
Senator Hatch pointed out, part of the difference is
attributable to health care costs and other fringe benefits.
Payroll taxes have gone up over that interval.
And Senator Hatch also pointed out that, after taxes and
transfers, we have actually been helping the middle-income
people more, but the key point is that the market is not really
rewarding work for people at the middle of the distribution the
way it used to.
There are a number of reasons why. Globalization has often
been targeted. Larry Summers gave a talk at the National Bureau
of Economic Research last year, and he talked about how the
traditional economist's view of the economy is that there is
capital and labor, and capital makes workers more productive,
which means they get paid more. He said now you need to think
of a new kind of production function, which is that there is
the old kind of capital that makes workers productive, but
there is a new kind of capital that substitutes for some kinds
of workers.
Every time you go to the grocery store and you go into the
self-checkout line and look at the lonely cashier who is the
only one left there, you are seeing the effect of this kind of
capital that is not augmenting labor, it is replacing labor.
One obvious solution is not on the tax side. It is to train
people so that they cannot be replaced by machines. And,
Senator Wyden, your bipartisan efforts to make higher education
more transparent and to actually produce real value for people
is extremely important.
President Obama has proposed for the last 2 years to
encourage community colleges to collaborate with local
employers to train workers to use high-tech machines in
manufacturing. That is an enormously promising approach and
very cost-effective. I think making college, making retraining
activities affordable for workers and accessible, without
leaving them with a crushing debt burden, is probably the most
important thing you can do.
You talked a little bit about savings. Senator Wyden, you
have promoted the idea of child savings accounts, which I think
are a really promising approach.
In the nature of recycling, I want to remind people of
something I worked on in the Clinton administration, which was
universal savings accounts, which involved restructuring the
subsidies for savings so that low-income people would get an
automatic contribution, kind of like what they would get from
their employer if they actually worked in a job that was good
enough to make a contribution to savings, and then a generous
match that phased down with income. I think that is also very
promising.
Obviously, encouraging savings and education will fit well
into a bipartisan opportunity agenda. My most innovative
proposal, and you might say radical, would be to change the way
we do indexing for the income tax.
So in the 1980s, we changed the income tax so that rising
price levels did not push up people's average tax burdens. So
when the price level goes up by 3 percent, all of the tax
bracket thresholds, the standard deduction, personal
exemptions, some other parameters, would increase by 3 percent.
The idea that I put forward in my testimony is, well, maybe
what we should do is think about the indexation as something we
could use to redress inequality at the same time. We would not
raise the real tax revenues that are collected by the
government. We would make the same overall adjustment, but we
could tailor it so that if the middle class continues to be
falling further behind, we could increase the standard
deduction by more, increase personal exemptions by more, maybe
push up the credit rate for the Earned Income Tax Credit.
If income gains were widely shared, then basically you
would be doing the same thing as we are doing with price
indexing now. I think this is a very promising approach. I do
not think the income tax is the solution to economic
inequality. I think structural issues, like education, savings,
things like that, are much more important over the long term.
But in the short-term, especially as the market economy is
basically not sharing much of the gains of productivity with
middle-
income workers, this is something that could help.
I would be happy to answer your questions. There are a
number of other issues I talked about in my testimony, but I
would like to end close to on time.
The Chairman. Thank you. And all of you, I think, have been
very helpful in sort of illustrating our challenge.
[The prepared statement of Dr. Burman appears in the
appendix.]
The Chairman. I thought I would start--I know Senator
Grassley is on a tight time schedule--with a question for all
of you.
Let us say, as unimaginable as it is in this town, that we
will set aside the politics for just a minute. I would be
interested in having each of you give the committee a fresh
idea that you would like to see us pursue to try to help
struggling Americans climb the economic ladder.
Ms. Swonk, we will start with you. Just give us your sense,
if you could take one idea that has not just been politicized,
shoed-over in the battle, the partisan battle, what would you
pursue?
Ms. Swonk. Well, mine is just the obvious one that I
concluded in my own remarks, and that is that we need to have a
way to restructure out of student debt so that we do not keep
these generations committed to an overhang of debt and the
status that goes with that, which means they do not have access
to other ways of building wealth and saving going forward.
So an ability to restructure that debt is, I think, one of
the most critical issues. Some people do make mistakes, and
they will pay the price for what they did. They should not have
gotten the credit. It is not forgiveness, but just being able
to restructure it.
The Chairman. Dr. Dunkelberg?
Dr. Dunkelberg. Well, that is a challenge. As an educator
for most of my life, or all of my adult life I guess, one of
the things I see is that, as I look at our education system,
lots of times, we are blaming teachers for not doing a good
job, and there are certainly a lot of issues around that that
we all know about.
But the more fundamental problem that I have observed kind
of firsthand, working all the way from grade school to college
level is parenting. And the kids show up not ready to learn,
not understanding discipline. But I do not have a good policy
recommendation for dealing with parenting other than that we
just need to give these young people more guidance with more
structure so that, when we do get our hands on them in the
educational system, we can be much more productive in turning
them into good, solid citizens.
The Chairman. Dr. Lindsey?
Dr. Lindsey. I go back to the problem--my generic solution
is less complexity, because I think complexity moves power up
to the governing class and moves it away from the middle class.
A specific recommendation--since I wrote it, I will suggest
it. I put out a book last year called ``The Growth Experiment
Revisited.'' I had a very radical tax reform in it which would
simplify things dramatically, and I would commend that book.
The Chairman. Giving people back their springtime so that
they do not have to spend March and April tortured is pretty
appealing.
Dr. Lindsey. I just spent the other day with my accountant,
and I told him what I was doing, and he said that it is now
impossible for any accountant to do the tax form unassisted.
Now, I spent my life in taxes. Until 3 years ago, I took
great pride in being able to do my own taxes. It took several
days, but I did it. And then I got stuck on one of your new
rules. I had a foreign account, which I did not want to have, I
was given it because it was an ESOP, and, oh my God, I could
not figure out for the life of me how on earth to comply.
And so he and I sat down, and he said, well, he would try
three different ways. Finally I decided, all right, enough is
enough.
And here is something you can fix, and I promised him I
would pass it on. On foreign taxes, you, the Congress, and the
President, have now mandated that we have to fill out yet
another form if we have a foreign account, and we cannot submit
it with the rest of our tax forms. It has to be submitted
separately on June 30th, not on April 15th. Why you did that, I
do not know.
So here he is, he is saying, ``You know, I will fill it out
for you, Larry, and just sign this paper and authorize me to
fill it out. One problem. You have severe penalties if you
don't fill out this form, but the IRS hasn't generated the form
yet.''
So come on, right, this is complexity that is not being
followed through on your side, on the part of the government.
If you are going to make life complex, at least make it doable.
Complex and impossible is unacceptable.
The Chairman. Well, Dr. Lindsey, for you and everybody else
paying attention to today's hearing, I have been chair of the
committee for about 9 working days. So I have not yet figured--
--
Dr. Lindsey. And you have not fixed it yet, Senator.
[Laughter.]
The Chairman. I have not fixed it, but, by God, we are----
Senator Hatch. That is no excuse.
The Chairman [continuing]. We are all going to be on a
bipartisan mission to do it.
Dr. Burman, and then, appropriately, wrapping up with Mr.
Packer.
Dr. Burman?
Dr. Burman. Well, I completely agree with Larry that
complexity is a major issue, and you have actually proposed tax
reform bills that would make things much simpler.
Larry is focused on complexity for rich people--like him--
which is a problem, but--just kidding. The tax code is too
complex for lower- and middle-income working people as well.
Those marginal tax rates that Larry showed from a study by
my colleague, Elaine Maag, have to do with the phase-in and
phase-out of the Earned Income Tax Credit. We do not want to
lose that, because, yes, EITC is the single-most effective
anti-poverty program there is. It is an important part of the
safety net.
When middle-income people fall on hard times and their
earnings fall, they can get up to $5,000 in credits to help
them if their earnings decline. But yet, you see it is
needlessly complex, and you could make it much, much simpler.
One idea which I and other people have put forward is just
turning it into a wage credit that maybe would provide a
subsidy for the first $10,000 worth of earnings that anyone
could get, and it could be provided through a payroll tax
adjustment, if you wanted, and, then, a child credit that just
depended on having children but did not phase in with income,
did not phase out.
Basically, the IRS would have no problem administering that
child credit, because all they would have to do would be to
determine that only one person was claiming each child, and, as
long as no more than one person claimed the child, they would
be eligible. It would be so much simpler.
Right now, a majority of low-income people pay people to
fill out their income tax returns using money they cannot
afford. We should make things simple enough that people just
with wage income can fill out their returns themselves.
The Chairman. But between the two of you, you have now made
it clear that tax simplification is needed for the low-income,
the high-income, and everybody in between, and I very much
appreciate that.
We will wrap up with Mr. Packer. You have had a chance to
see sort of Washington in action, and to have you bring it back
to what you saw as you made your travels, I think, is an
appropriate way at least for me to wrap up.
Mr. Packer. So my idea is neither new nor particularly
modest. It is campaign finance reform. It is giving Dean Price,
the Hartzells, millions of people like them, a bit more of a
level playing field here in Washington with the Chamber of
Commerce and the National Association of Manufacturers.
I think one reason why we have the incredible level of
growing inequality that we do, beyond anything you see in
similar industrialized countries, in Europe, is because we
accept it. We accept it. And our system of campaign finance is
one aspect of that acceptance.
So I would say if you were to begin anywhere, it would be
in convincing Americans that the game is not rigged by making
our system of financing campaigns at least a little more equal
and more fair.
The Chairman. I would be setting off a truly spirited
discussion if I got into this. I will tell you, after we are
done, Senator Murkowski and I have proposed a bipartisan
proposal to start leveling the playing field.
Let us go with Senator Grassley, and I very much appreciate
his involvement in these issues.
Senator Grassley. Thank you.
Dr. Lindsey, I am going to start with you. Your testimony
points to the labor force participation as the greatest
challenge to increasing the middle class, but, also, to
reducing income inequality and increasing economic growth.
You point out that many of our well-intended transfer
payment programs aimed at helping low-income individuals can
actually create a strong disincentive to work. Your testimony
cites marginal effective rates as high as 80 percent. But as I
understand it, in certain circumstances, that could be 100
percent.
During the debate on the Affordable Care Act, I requested
the Joint Committee on Taxation to do an analysis of marginal
effective tax rates, looking at all transfer payments, and the
then-
proposed premium tax credit. The JCT analysis actually said
that, in certain circumstances, you could have what they said
was an infinite marginal effective rate.
Now, before I ask you your question, I kind of add all this
up, and Congress, over a long period of time, passes a lot of
well-
intended government programs, and they turn out to have some
unintended negative consequences. And when we try to do
something about income inequality, maybe we are spending too
much time on that and not enough time on inequality of
opportunity.
So here is my question. What suggestions do you have to
ensure Federal programs intended to be a bridge to the middle
class do not become an insurmountable wall?
Dr. Lindsey. First of all, let me say, since we are trying
to build bipartisanship, I agree with everything Dr. Burman
said. The one thing you heard from us was complexity, and my
chart here shows this is not the rich right here. And what we
have done is, we have passed hopelessly, hopelessly complex
rules so that the individual who wants to comply with the
government's rules has a strong disincentive to work.
A lot of the people who are nominally out of the labor
force may--may, we do not know--be participating in the gray
economy. We should not be proud of that accomplishment either.
But there is no question that when you have complex programs
that ordinary people cannot follow, that punish them with very
high rates when they try to work harder, you are making things
worse. You are building a barrier to the middle class.
I am not saying that we should do away with these programs,
and I agree with the Earned Income Tax Credit. I think it is a
great program. I am saying if you put in this hodgepodge, which
is what you have done, and you have no idea what the marginal
tax rate is or what the complexity is for that middle-class
person, that is what the problem is.
We could sit down and we could simplify this and we could
agree on a simplified program that would be a win-win for the
middle class. This is not what the Congress and the President
have done. They have made it worse. And some of those infinite
marginal tax rates you referred to come straight from the
Affordable Care Act.
We know there are two different phase-outs. We do not have
to go into that. Why that is there, I have no idea. Did anyone
not figure it out when you passed the Act--no, I know the
answer to that.
You cannot do things like that and expect to have
government policy be on the side of the middle class.
Senator Grassley. My next question is for Dr. Dunkelberg.
Obviously, because of time, it is going to have to be the last
question, although I do have other questions I may submit in
writing.
As you mentioned in your testimony, small businesses are
vitally important to building jobs for the middle class. So I
would ask a couple of questions about the Affordable Care Act,
because I have heard this from small businesses in Iowa.
Among the top concerns in an NFIB survey is the uncertainty
over government actions and regulations. How is a haphazard
implementation of the Affordable Care Act adding to the
uncertainty facing many small businesses?
Dr. Dunkelberg. Senator, thank you for that question. It is
nice to see you again.
Obviously, there is a huge amount of confusion surrounding
the Affordable Care Act, and the rules, of course, are
changing. I do not know how many changes we have had in the
implementation so far.
So people are very unsure. Again, these are not Ph.D.s
running these little firms out here. They are trying to run a
business, and they are trying to figure out where this thing
fits in, what taxes apply to them, when will they be penalized,
will they be penalized, how will that be changed in the future.
There is a 50-employee thing now, but we know that Congress
may well make it 40, 30, 20. There is so much uncertainty about
it that they cannot make hiring decisions.
Small business owners view hiring as an investment. It is
not like a 1-year thing. You hire an employee, you train them,
and the story is, it takes a year to get your investment back
before they are really productive in the job you have them in.
So those are investments that owners are very unwilling to
make now. They are very expensive. Hiring is very expensive,
and, if you cannot be sure what the cost is going to be or
whether you can even afford them, you do not make the hire.
So we are waiting. Everybody is waiting for some more
clarity before they spend any more money, and that is the
difficulty we have.
The Chairman. Thank you, Senator Grassley.
Senator Hatch?
Senator Hatch. Thank you, Mr. Chairman.
This has been a particularly interesting panel, and I
really enjoyed every one of you here. Let me direct some
questions to Dr. Lindsey, though, and I wish I had time to
direct to everybody.
By the way, you mentioned your book. I turned around and I
said to my staff, ``I've got to get a copy of that,'' and they
said, ``Well, he sent you a copy, but we kept it so we can read
it.'' I guess they figured we cannot read. [Laughter.]
But you may have to send another copy, but I will be happy
to pay for it. How is that?
Dr. Lindsey. Senator, I will be happy to send you one, and,
in honor of your public service, you do not have to pay for it.
Senator Hatch. Now, that is the kind of language I like to
hear. [Laughter.]
Now, Dr. Lindsey, your testimony identifies effective
marginal tax rates facing low-income earners that can rise to
as much as 80 percent or more, and your testimony identifies
that there are elements of our entitlement and transfer systems
that help impose those rates. One result is that the structure
of the entitlements and transfers puts in place some
significant disincentives to work more or advance up into the
middle class.
Indeed, I would remind the committee of the nonpartisan
Congressional Budget Office's recent findings which indicate
that the construction of the Affordable Care Act, with generous
subsidies, financed by increased taxes, will discourage
economic activity, including work and efforts to earn more,
such as getting more education or training.
Now, Dr. Lindsey, can you give us some of your thoughts on
whether high marginal tax rates and disincentives to labor
supply and other economic activity inherent in many of our
redistribution and entitlement programs, including the
Affordable Care Act, are inhibiting economic growth?
Dr. Lindsey. Yes, Senator. Even though I am about to turn
60 and old people are not supposed to change their minds, I
changed my mind about this one.
I tend to follow the Federal Reserve very closely, and I
think the labor force participation issue has been a conundrum
for them. And their view, which I agreed with until December,
was that the people who have left the labor force are likely to
come back.
That had been my view. And then I actually began to do the
kind of research on an anecdotal basis, and that led me to a
statistical analysis, and I switched my view. I do not think
they are coming back.
Senator Hatch. Why is that?
Dr. Lindsey. Well, the Hamilton Project, for example, which
is Mrs. Clinton's outfit, did a very careful look at this.
Suppose you are a construction worker who has been laid off,
and you are married to a nurse who has not been laid off. The
question is, all right, do you want to go back to work?
Well, what they found was that, in most cases, the
effective tax rate on the second spouse going back to work was
on the order of 80 percent because of lost benefits and higher
taxes. And that goes on top of the fact that you have just
arranged a certain child care arrangement and now, oh my gosh,
you have to turn that upside down.
So I do not think these people are going to come back, and
that means that we are not going to get the GDP from them, we
are not going to have the employment, and we are not going to
have them move into the middle class. They are going to be
getting by on one income.
And, if you look at the incentives for them to go back, the
government has taken them away. I am sorry, but people do not
go back to work when they lose 80 cents on the dollar of what
they are going to earn.
And so, no, I do not think we are going to see a reversal
in the rate of participation, unfortunately. That is bad for
the economy, and it is bad for the middle class.
Senator Hatch. Well, as the economy sluggishly recovers
from the 2009 recession, labor markets remain persistently
sluggish, with the employment-to-population rate remaining
stubbornly low at around 59 percent and the labor force
participation rate down to 63 percent relative to an average of
close to 67 percent between 1990 and 2007. Some people argue
that most of the persistence of the low employment-to-
population numbers and the persistently low and declining labor
force participation reflects aging of the population.
Yet, even a recent analysis of the economy's long-run
growth potential by the nonpartisan Congressional Budget
Office, which they have ratcheted down, says that, ``Changes in
people's incentives caused by Federal tax and spending policies
set in current law are expected to keep hours worked and
potential output during the next 10 years lower than they would
be otherwise.'' Now, that is in the CBO's view. The persistent
sluggishness of the labor market does not stem solely from
demographics. Policies also have played a role.
Now, what have you seen and heard about changes in people's
incentives caused by Federal tax and spending policies since
the recession that CBO thinks are contributing to and will
continue to contribute to the sluggishness of the labor markets
and the economy?
It is a little along the same line of what you have been
saying.
Dr. Lindsey. I think the CBO analysis is right. And yes,
the population is aging. But one thing that you can do is, you
can control for age, and my chart in there, chart 4, does that.
And so what you have had is 2 million middle-aged men and
1 million middle-aged women not participating. Not
participating means not only not having a job, but saying, ``I
don't want to work.'' And, as an old-fashioned guy, I have
problems thinking about a 45-year-old man saying, ``Not only do
I not have a job, but I don't want to work.'' And that is what
got me to look into why that was possible. How could that
possibly be happening? And the same thing, by the way, is true
for a lot of middle-aged women. It is now the case that people
do not want to go out there and work.
The answer that came up over and over again, came out
across the political spectrum--I mentioned the Urban Institute,
I mentioned the Hamilton Project, I mentioned the CBO--so this
is not a controversial finding. The policies enacted in our tax
and our transfer system are creating a huge disincentive for
people to work. It is as simple as that, and that is a burden
on economic growth.
Senator Hatch. My time is up, Mr. Chairman.
The Chairman. Senator Brown?
Senator Brown. Thank you.
I guess, Dr. Lindsey, I meet a whole different group of
people from the people whom you seem to talk to. I want to talk
about something different.
Clearly, people on this panel have promoted their books. I
want to promote Mr. Packer's for a moment, if I could. You have
written poignantly about the tragic history of Youngstown, what
has happened in one of the most important cities in my State.
You trace the life of a woman named Tammy Thomas, a single
mother, trying her best to raise children.
Her story and her speaking through your eloquent words made
two important points. First, manufacturing has been a long-time
ticket to the middle class, especially between the coasts, but
really including up and down the east and west coasts too. A
factory job meant a steady income, a secure retirement, and
often a pension that was a defined benefit, and some ability to
send children to school, buy a car, buy a house, all of that.
Second, when communities lose these jobs, and you know what
it has done to the Mahoning Valley, Youngstown, it is
absolutely devastating for that family who may be foreclosed
on, the family next door whose home is devalued, and the entire
tax base and all of that.
So just walk through what we ought to do about that. What
do you do to encourage and build upon the manufacturing
renaissance in places like Youngstown, which is beginning to
happen? How do we reach into these communities and help people
like Tammy?
Mr. Packer. In her case, she worked for 20 years in an auto
parts assembly plant. It was one of the last good manufacturing
jobs in the Mahoning Valley. And then Delphi declared
bankruptcy, got out of its contracts, and moved all but a tiny
number of jobs to Mexico. It was part of a whole North American
restructuring on the part of Delphi, and that was pretty much
the end of Tammy's career as a blue-collar worker.
She remade herself. She went back to school. She got a
degree in social work. She became a community organizer, which
is what she was when I met her in Youngstown, and she was
essentially working with people whom she knew, people in her
old neighborhoods, to try to rebuild, to get vacant houses torn
down by the city, basic things, things that seem like--they are
not about creating a shiny new economy. They are about making
life livable in neighborhoods that had become pretty much
unlivable.
I think one of the biggest challenges in bringing jobs to
people in the Mahoning Valley is, there is this incredible
ethic of work in Youngstown because of the history of the steel
mills. People there know about work. But there is also a
missing generation that did not have jobs and that probably did
not get very good educations and that may have spent time in
prison, which was almost a part of the education of people that
Tammy knew, including her own brothers. So how do you get the
jobs in things like natural gas and manufacturing that are
beginning to trickle back into the old manufacturing parts of
Ohio to people who do not have a history of working?
I have seen her stand up in front of a group of ex-cons,
felons, who were desperate to find a job, but also felt
hopeless about finding a job because of their record. And so
she sort of worked with them to figure out how to tell their
story to a potential employer in a way that they would be given
a chance, and it is partly a matter of training and of
education, but it is also a psychological problem.
There is a huge barrier between people of the next
generation after hers and the people who are beginning to hire
in the Mahoning Valley. As of now, what I heard is, a lot of
those jobs are going to people with very specialized skills or
people from outside the region who know how to do those jobs.
So it is not yet becoming a part of the rebuilding of
Youngstown.
Senator Brown. Thank you. And I appreciate Dr. Lindsey's
affirmative head nods as you were talking about much of that.
Last question, Dr. Burman. I do not have a lot of time.
You discussed using the tax code to combat wage stagnation.
Talk to us about the importance of not just the Earned Income
Tax Credit, but our efforts on this committee. Chairman Wyden
is a sponsor; pretty much a number of us are.
It started with President Ford, as you know. President
Reagan said it was the best pro-family, anti-poverty thing the
Federal Government can do.
Talk about the expansion, the permanence, the importance of
a permanent, predictable EITC--we talk about predictable taxes
here, but we seem to leave out EITC and CTC as something that
should be predictable long-term--and the expansion to people,
to men and women who are childless, and the importance of all
of that. If you would, just give us your thoughts.
Dr. Burman. Thank you, Senator. I think the EITC and the
Child Tax Credit and other subsidies for lower-income working
people, as Larry pointed out, they are too complicated, but
they have been enormously valuable.
The evidence shows that the Earned Income Tax Credit does
encourage people to work, particularly single parents. It
raises the reward to work. You can work at the minimum wage,
and, with the EITC, you can get close to an adequate level of
income to support your family.
The President has proposed and Marco Rubio has talked about
this as bipartisan support for the idea of increasing the
Earned Income Tax Credit for people without children. Right
now, there is a tiny, tiny credit that phases out at a very,
very low income.
And I think that would be tremendously important, because
it would encourage, for one thing, noncustodial fathers to go
into the workforce, to be in the above-ground economy, by
raising the reward to work, making it easier for them to make
child support payments and stay connected with their children.
And education and being in the workforce are important
avenues into the middle class, and the EITC does encourage
that. There are some disincentives created by the phase-out,
but, on balance, the empirical evidence shows that this is a
very strong pro-work program, and it helps people who are
really struggling, who are trying to get by and support
themselves.
Senator Brown. Thank you. Thank you, Mr. Chairman.
The Chairman. All of my colleagues have been very patient.
Senator Brown, I am looking forward to going with you to Ohio
soon to meet some of those people, and I appreciate it.
Senator Bennet?
Senator Bennet. Thank you, Mr. Chairman. And I appreciate
very much your holding this hearing.
As we sit here today, we face income inequality that is
greater than it has been since 1928 in this country. If you are
a child living in poverty in the United States, your chances of
getting a college degree or the equivalent of a college degree
are roughly 9 in 100, which means the situation is getting
worse and worse and worse, and 91 out of 100 of our kids are
constrained to the margin of the economy, the margin of the
democracy, from the very beginning. If we do not change what we
are doing as a country, the gap is only going to get a lot
worse.
Mr. Packer, I want to thank you for this book. It is one of
the most extraordinary things I have read in a long time. I
read it without knowing you were coming to the committee. My
brother made me read it.
Mr. Packer. Thank you, Senator.
Senator Bennet. And John Dos Passos, I think, would be
proud of what you have done here. If people listening to this
do not read any other part of it, please read the chapters
about--is it the Hartzell family in Tampa?
Mr. Packer. Yes.
Senator Bennet [continuing]. Which is one of the most
shattering accounts I have ever read of something happening in
America.
I wonder whether you could--I just want to give you the
opportunity to share with the committee some of the things that
you saw that might be least obvious to the people in Washington
who are making policy, the chapters about Jeff Connaughton and
what he learned while he was here on Capitol Hill. Because to
me, the power of what you recount is the extraordinary
disconnect that exists among the working Americans you are
describing and their government, and their sense that the
priorities here have nothing to do with the priorities that
they have or the things that would be essential for them to be
able to get ahead.
So, I apologize for the long-winded question, but I would
love to give you the rest of my time.
Mr. Packer. That is very kind of you, and thanks for your
really kind remarks, Senator Bennet.
As I said in my testimony, the people I spent time with, I
spent a lot of time with. This was not going and doing a half-
hour interview. It was staying in their houses, eating their
dinners, driving around the State with them. So I got to know
them really well, and I just got to understand a little bit
about what it is like to be inside their skin.
Washington felt very far away and utterly unresponsive, but
so did Wall Street, so did Silicon Valley, so did corporate
America, so did my profession, the media--and so did even the
schools, even the local schools. So there was a sense in which
they were on their own. Over and over again, I kept running
into the same feeling that people had that there is no support
out there, that there is no institutional structure that they
can turn to that sort of understands what it is like to not
have a strong voice.
So you mentioned Jeff Connaughton. The book has all these
different characters, and one of them is a Washington guy,
because I think to understand----
Senator Bennet. He is not a Washington guy anymore.
Mr. Packer. No. He has burned those bridges completely. He
has done the unthinkable. He has actually named names and told
tales, and now he is in some kind of retirement at the age of,
what, 53. He is one of those middle-aged men who has left the
labor force voluntarily.
His story is the story of a guy who goes from being a
Senate aide to a White House aide to a lobbyist. And of those
three, the thing that makes him happiest is being a lobbyist,
because he knows more about what is happening to legislation,
and he is making more money, and he is more successful. He is
someone who is doing things. And then comes the financial
crisis, and there is a sort of moral crisis that comes for him,
which is perhaps advanced by the fact that he loses half his
net worth.
He goes back into government. Some of you may have known
him when he was Chief of Staff to Senator Kaufman. And his
mission is to make sure that the financial crisis is never
repeated, by enacting strong Wall Street reform and by
prosecuting some of the top executives who might have been
behind the fraud that led to the financial crisis.
In his view, neither of those things happens. And the
reason they do not happen is because of people like him. He
sees how little voice ordinary people have in Washington when
he goes from one side of the revolving door to the other in a
hurry, and suddenly it becomes clear to him that the position
he was in and that his partners from the firm are still in, is
a much better position to be in in Washington than to be a
Capitol Hill aide who thinks he is acting in the interest of,
broadly speaking, the public, where he feels he has very little
power.
So that is why, when I was asked by Chairman Wyden to name
one idea that I would have for supporting the middle class, it
is not a Finance Committee idea, but it is campaign finance
reform.
Senator Bennet. My time is up, but I want to thank you
again, Mr. Chairman. I want to thank all the panelists today.
If we do not figure out how to educate our kids better, and
if we do not figure out how to recouple job growth and wage
growth to economic growth, we are not going to recognize
ourselves in the middle of the 21st century, and this is what
we should be focused on 24/7.
The Chairman. Thank you, Senator Bennet.
Senator Thune is next. Senator Stabenow has been
exceptionally patient, and I am looking forward to getting her
in as soon as possible.
Senator Thune. Thank you, Mr. Chairman. Thank you to you
and Senator Hatch for covering and having a hearing on this
important subject, and thanks to all our witnesses for being
willing to testify today.
I think we have two kind of contrasting views about how to
improve the plight of middle-class Americans in this country.
And over the past several years, we have sort of tried the
government approach, the redistribute income approach, and what
we got is sluggish growth, stagnant wages, and a middle class
that feels increasingly squeezed by health care costs and taxes
and everything else.
The other approach, I think, looks at a vibrant, growing
small business economy, where we incentivize work and really
try to encourage small businesses to hire. Sixty percent of the
jobs that are created in this country, I think--and I think the
number may be even higher than that, but I know that that is
the number that I have seen quite a bit--come from small
businesses. So I would argue that the best thing that we can
probably do in terms of improving the overall status and
conditions for middle-class Americans in this country is to get
a vibrant, growing, robust small business economy.
And to Mr. Packer's point, if people feel disenfranchised
from Washington and big government, feel disenfranchised from
big business and Wall Street, in most cases, they do feel a
connection to the small businesses in their community, and that
is where most of the jobs are created. That is why I think the
focus of our policies ought to be on that.
And so I would ask Dr. Dunkelberg, because we are having a
debate around here right now about the minimum wage and other
types of policies that I think are intended to improve the
plight of the middle class and to address the issue of income
inequality, but I am interested in knowing if there might be
some other types of policies, tax policies, that you can think
of that would help small businesses grow and hire, maybe
increasing small business expensing limits or expanding the use
of cash accounting, those types of things that would be
helpful, that would really encourage small businesses to hire
and to grow and to get the economy expanding again.
That really is ultimately, I think, the best way to lift
people higher up in the middle class.
Dr. Dunkelberg. Thank you, sir, for that question. I think
you put your finger on a couple of interesting issues, all of
them pointed to the bottom line. That is where small business
funds its growth. That is the source of capital.
So, whether it is a change in tax rates or expensing or any
of these kinds of things, and, in particular, a reduction in
the compliance costs that they have, with all the regulations
that are coming out--I think I saw a statistic that said we had
a new regulation in the Federal Register last year every hour
and a half or something like that, some absurd number. I do not
even know how small business owners find out what regulations
they have to comply with, much less comply with them. It is
very expensive.
So this is the important capital, the owners' capital, the
intelligence and the smarts of the entrepreneur, as well as the
financial capital. Those are the kinds of things that should be
fixed. Simplification, as a number of our testimonials have
suggested, would be really important here.
The other thing, of course, is that a lot of what Congress
does for these things are temporary provisions. So it is not
just complexity. A lot of our members do not use the investment
tax credit, for example, because it is too complicated, or they
will not use, say, some tax credit, like, we will give you
$5,000 if you hire a worker. Well, the worker costs $25,000,
and you get $5,000 after a lot of paperwork, later and maybe,
and those kinds of temporary things do not help either.
Small businesses are investing for the long run, and they
need a set of policies that are long-run policies, that are
simple and that they can understand and comply with and still
spend most of their time running the business and creating jobs
rather than trying to figure out how to comply with all these
regulations that are coming down on their heads.
Senator Thune. I appreciate that.
Mr. Lindsey, there has been a good amount of discussion
about the EITC. I think you were around when that was created
during the Reagan administration. And it was designed, I think,
to help reward hard work by offsetting some portion of payroll
taxes.
As someone who served on President Reagan's Council of
Economic Advisors, I would be curious to know what you think
about the EITC and whether it was intended to be primarily a
spending program that makes payments, in many cases, above and
beyond both income tax and payroll tax liability. And do we
need to consider reforms to the EITC as opposed to an expansion
of it, which is what the President is proposing?
Dr. Lindsey. I think the EITC is a very good program, and I
think--let us put it in a little historical context.
It was intended as an alternative to an old program called
AFDC, which was Aid to Families with Dependent Children, which
basically put a 100-percent marginal tax rate on someone who
was on welfare so he could return to work, and this actually
reversed that. It was a very successful supply-side program and
is now embraced by everyone.
I really do not want to do you all's job here. So I am
going to tell you the pros and cons and try and get out of here
alive.
I think the first decision you have to make is whether or
not you want to stick to the basic premise that this was an
alternative to AFDC; that the intent here was to help families
with children who have unique problems and unique issues over
and beyond those of childless individuals.
I think that is a very important decision. I am probably in
agreement with you on it, but that is not a decision for me to
make. I think that is something you do not want in an age of
scarce dollars.
My preference would be to focus those scarce dollars on
families with children. That would be where I would go. But I
think that, first, the same decision, whether or not you extend
it to childless individuals or not--and here is where Dr.
Burman and I agreed--you can do it so much easier than you do
it now. You really can, and that is where you want to go.
There are a lot of people who do not get it who should, and
there are a lot of people who do get it but should not, and
that is also well-documented. Let us admit that there is fraud
in the program, but there are also people who do not get it.
Well, that has to do, let us be honest, with complexity. It
is done in a very inefficient manner. So I do think that no
matter what you do about expanding it and reaching out to
childless couples, please, please, please, whatever you do,
make it simpler.
The Chairman. Thank you, Senator Thune.
Senator Stabenow?
Senator Stabenow. Thank you very much, Mr. Chairman. I want
to thank you for your first hearing being on what is the most
important issue today, which is whether or not we are going to
have a middle class in this country, and I thank you very much
for that.
There are so many pieces to this. Ultimately, I think, in a
broad economic picture, we do not have an economy, and we do
not have a middle class, unless we make things and grow things.
We need to focus on that in manufacturing, small business, all
of the things being talked about.
But I am concerned that not much of the discussion that
seems to be happening today is focused on how we reverse cuts
in job training. And the number-one thing I hear from
manufacturers is, we are not matching up the right job right
now with the right skills, and that means job training and
education and so on.
It is very much about somehow blaming people who are out of
work, which, I have to say, coming from Michigan, boy, is not
what I see. I do not see people--unfortunately, Dr. Lindsey,
when you say people are choosing not to be self-reliant, that
surely does not speak to anybody whom I know in Michigan.
Dr. Burman, when you talk about the market not rewarding
work, that is more what I see. And I want to just speak for a
minute--when we have a minimum wage right now that allows
people to work 40 hours a week and still be in poverty, there
is something wrong with that, I think.
And we have a bill on the floor right now, Mr. Chairman,
that we all support, on child care.
The Chairman. A bipartisan Mikulski-Burr bill.
Senator Stabenow. Exactly. And what is interesting about
that, though, is that the average child care costs for families
today equal somebody working 40 hours a week for a year at
minimum wage. It is basically the same: $14,000, $15,000.
So I am very concerned about how we reward work and do not
take away from someone who is 50 years old whose job went
overseas or their plant closed down or we are more efficient
and we do not need this type of work anymore, and they are out
of work and they cannot afford to go back to school, to the
community college, because they have no work, and we are not
extending unemployment benefits so that they can go back and
get job training and so on.
I think my first question just would be, Dr. Burman, in
your testimony, you said that income concentration has not
arisen because the middle class is working less. The opposite
is true.
So is the average family working more or less? What is
happening here? Is this people choosing not to work?
Dr. Burman. If you look at the data over time, labor force
participation overall is much higher. It is a little bit lower
among men. It is much higher among women. There are many more
2-earner couples than there used to be.
So for the average household, I think it was something like
20 percent more--in terms of labor force--hours in the
workplace than there had been 20 or 30 years ago. Americans
work really hard, and a lot of them are still struggling to get
by.
Senator Stabenow. Would you agree with what I hear so
often? I do not know if you are seeing this, but I know an
awful lot of folks who are trying to piece together two or
three part-time jobs, and they are actually working a whole lot
more, just not getting ahead very well. So I do not know how
that factors into what you see, but we have a lot of folks
working awfully hard.
Mr. Packer, from your perspective, do you think folks just
do not want to work, do not want to work as hard?
Mr. Packer. The people I was with always seemed to be
working or always seemed to be looking for work.
There is a demoralizing effect when you are working part-
time because you cannot get a full-time job. Danny Hartzell
wanted full-time work. He could not find it. All he could get
was 35 hours a week at Target and Walmart, which then became 30
and then became 25 and by the end was down to 20--$10,000 a
year. It is just untenable. And he did, in his mind, go through
the calculation. If I somehow lost this job, I could probably
make more from unemployment and food stamps than I am making
working in the produce department at Walmart.
Then his daughter got sick and he had to go take her to a
doctor's appointment. He did not call in, probably because he
was pissed off at his employer, and he lost his job and did not
get unemployment benefits because it was not found that the
employer had laid him off.
So there is a little gray area----
Senator Stabenow. So it is a cycle.
Mr. Packer. But, honestly, the cycle starts with a man who
wants to work and cannot find a job that allows him to do
anything more than allow his wife to pay $2.99 for six
Salisbury steaks and cook them in the toaster oven or whatever.
That is the level of life. And this is a family that worked,
that worked all their lives and that has stayed together. They
have not broken up and gone their separate ways and fought over
the kids and started drinking and taking drugs.
They have done the things that society asked them to do,
and they still cannot really survive in our economy, and I
think the effect has been, to some degree, a demoralization
about whether there is a job out there for him.
Senator Stabenow. Just very quickly, I know my time is up,
but very quickly, what leads to that--and I want to say, again,
we are never going to get out of debt with 10.5 million people
out of work. This is about jobs, it is about the economy, it is
about supporting small business, investing in innovation,
manufacturing, job training, all of it. But we have people
right now who are stuck here in this transition.
Ms. Swonk, just very, very briefly, we are both from
Michigan. You know how hard things have been there. We are
coming back right now. But your testimony discusses some of the
permanent damage caused by people who are on the sidelines for
too long, which is a concern of mine--the long-term unemployed.
I wonder if you might elaborate on that for just a moment.
Ms. Swonk. Sure. There are plenty of labor force studies
that have looked at long-term unemployment, most of them from
the early 1980s, actually, in places like Pittsburgh. Chicago
Fed Director of Research, Dan Sullivan, and, actually, Mary
Daly at the San Francisco Fed, have done some of this as well.
And I disagree with Larry a little bit on the permanence of
unemployment, but I would argue that these problems compound
over time. We know that for the long-term unemployed,
particularly among men, not only is their earning potential--
when they finally do get back in, if they are out more than a
year--permanently reduced, but the earning and educational
attainment of their sons, in particular, is reduced. So you are
generationally setting these people back, and they are from
those manufacturing jobs like we had in Michigan with a
controlled, unionized workforce.
We do know that in the 1990s, they came out of the woodwork
and came back, but they never earned what they did before. They
were on a completely different trajectory.
And we also know that mental health, physical health, which
are both intimately combined, in my view, in my own experience
with what I see, but also, the data now supports it, they are
intricately combined, and things like mortality rates among the
long-term unemployed went up quite dramatically as well.
So there is a whole issue here that I think it is
compounding. That said, we do know that in much better economic
times, they do come back. They just never achieve what they
once did.
So I do not completely disagree that these workers are
permanently sidelined, but some of them are people who have
taken disability, very few ever come back, and they are younger
than they used to be.
Senator Stabenow. Thank you. And, Mr. Chairman, thank you
for your patience.
I think when we look at extending unemployment benefits so
folks have a roof over their head and food on the table and can
go back and get the job training they need so that they can
lift themselves up, that is all a very, very important part of
this, and we need to get unemployment insurance extended so
more people have the opportunity to be able to focus on getting
themselves back on track.
The Chairman. Thank you, Senator Stabenow. And before
Senator Stabenow leaves, I am pretty sure I heard you mention
the words, Ms. Swonk, mental health.
Ms. Swonk. Yes.
The Chairman. And Senator Stabenow and a Republican
colleague, Senator Blunt of Missouri, are the champions of the
effort to expand mental health coverage, and I am very hopeful
that we are going to be able to do that here very shortly. And
our farm bill is also going to be helpful in terms of creating
some of the agriculture jobs of the future, the jobs that are
going to get our agricultural products into export markets.
So before she leaves, I just want to thank her for her
leadership.
I have a couple of other questions, and I know my
colleague, Senator Hatch, does as well.
I want to ask the panel a question on this issue of savings
accounts and particularly child savings accounts.
There seems to be more agreement than might initially meet
the eye. I have looked at some of the statements, for example,
that our former colleague, Rick Santorum, has made on this
issue, and Senator Santorum makes the point that he is
sympathetic to child savings accounts because he sees them as
part of an ownership society. Many of my Democratic colleagues
support the idea of a child savings account because they would
like to increase the tools for those with modest incomes to be
able to accumulate wealth.
So my question for the panel would be, what, in your view,
might be an appropriate role for government? And Senator Hatch
and I already have begun discussing a lot of these issues, and,
when we talk, the question always comes back to, what is the
appropriate role of government? In some instances, on some
issues, there simply is not an appropriate role for government.
But given the fact that conservatives and those who have a
different place on the political spectrum seem now to be coming
together around the idea of child savings accounts--making it
possible for young people to accumulate wealth--I would be
interested in whether the panel--and I am not going to
conscript you into duty here, but what might be an appropriate
role for the government on child savings accounts?
Would any of you like to take a crack at that?
Dr. Burman, you are moving cautiously toward your
microphone.
Dr. Burman. The concern I have about child savings accounts
is the idea that you just put a little bit of money in an
account and then somehow people will get to be 18 years old and
they will have a nest egg and that will give them a chance.
They, obviously, need to know how to manage the money, but
I think it is a promising idea. What I would look for would be
ways to actually teach people when they are quite young about
the value of savings and not just put money in the account and
say, read the statement and see how it grows but, also,
encouraging them and maybe their parents to contribute, provide
them with the kinds of match that upper-income people can get
through their employers now, and then see how the account
balance grows.
I think, actually, people want to save. My parents were
quite poor, and my mother still would hide money and put it
away, because she wanted to have something set aside. But we
need to make it easier for people to do that.
The Chairman. You are absolutely right. There are a number
of pieces to the puzzle, and that is why the committee is going
to look at this. We are going to look at it in a bipartisan
way. There is not going to be any kind of rush to address it.
But I am struck by the numbers, that young people who have
a savings account are more likely by many times the ratio to
those who would not attend college, they would move on. They
clearly benefit, and the financial education you are talking
about is a key part of it and particularly for those of modest
means.
Any of the rest of you--Dr. Dunkelberg? And so the question
is really the appropriate role of government, and if you think
I am just off-base and you do not think there is any role for
government at all, so be it. But that, to me, would be the
initial question in terms of trying to see how Democrats and
Republicans might come together behind it.
Dr. Dunkelberg. Well, it could be a Federal-level issue,
although lots of times we are doing things at the Federal level
that we probably should leave to the States.
The American Financial Services Association has developed a
program called Money Skill. It makes it available free to high
schools. It is totally self-contained, because high schools
have a lot of people who do not know how to teach personal
finance.
But the States are requiring it. They are starting to ask
for it. And Money Skill is made available, and, as I say, it is
a self-
contained, self-teaching kind of an instrument. But the kids in
high school need to get this kind of an education to see what
saving means and what it means over time and why you want to
save. All they think about is, I want to spend.
I think there are good efforts underway, and anything we
could do to encourage that would, I think, be very, very
helpful, because once these kids get through this stuff and go
through all the examples and the work, it is amazing what they
learn and how much retention they have once they get out.
And that is a good time, I guess, when you graduate from
high school, you are going to get your first job, maybe, to
have had those skills pounded into your head.
The Chairman. Ms. Swonk, did you want to get into this?
Ms. Swonk. I just wanted to add one point of caution, as
the cautionary tale here of complexity, agreeing that we all
believe in simplification.
One of the things we saw during the 1990s--and I remember
reading these studies and being quite moved by them--was that
people who owned a home had a higher chance of people living in
that house going to college, lower rates of high school
dropouts, and higher rates of high school attainment.
The problem was, we ignored self-selection in the process.
And what I worry about is, when we look at these students who
have already saved--I had my first savings account at 5 years
old. I had a little book. We had a savings book back then. But
there is a self-selection involved among the family and among
the children. And so, when we try to expand those ideas to a
Federal level, we have seen already some dangers of unintended
consequences by well-
intended policies, despite the bipartisan nature of it.
And so I would just point that out as something to be
cautious of.
I also think dispelling myths is really important, and I am
going to really get on a third rail of politics here, and I
probably should not. My colleagues at home are probably getting
angry already that I opened my mouth, but people believe that
they are getting back in Social Security what they earned, and
they do not believe--my grandmother died at 99, thankfully, and
she took back more than she ever could have earned in the stock
market or anything else, and that was lovely for her.
But I think more people realize that they have to support
themselves, as well as depending on these safety nets that we
set up for a very small percentage of people initially. I think
that is an educational issue for 28-year-olds and 25-year-olds,
realizing they are going to have to support themselves, not
because they might not get Social Security, but because it is
not enough.
I think those issues are really important, because we have
to dispel some myths. People think of these things in a
different way than they were intended to be, and they were not
designed to support it.
The Chairman. Your point is well-taken. And I think part of
what I try to bring up at practically every town hall meeting
is that I want to promote this ethic of private saving,
particularly as it relates to Social Security, on top of Social
Security, so that people do not walk out of there and
immediately say, there is going to be a big brawl.
My time has expired. The point is, we are going to be
anxious to talk with you all about the details on this, because
of your point about self-selection and analysis, particularly
in one area or another that may or may not be comparable for
young people.
I have been struck, and we will get them to you, about the
data that show that this does look like a path to upward
mobility, particularly for those youngsters of the modest means
that I am talking about.
Senator Hatch has been very patient.
Senator Hatch, do you have other questions?
Oh, let us see. We have our colleague, who may be out of
breath. Senator Carper, would you like Senator Hatch to go and
then you, or would you like to go now, because Senator Hatch,
as usual, is being his collegial self?
Senator Carper. I would like for Senator Hatch to go, and I
thank you very much for the offer.
I just would say to all the witnesses, thanks very much.
Welcome. Thanks for waiting for me.
The Chairman. Let us have Senator Hatch ask any questions
he would like on another round, and then we will go to Senator
Carper.
Senator Hatch. I just have to say, this has been a very
interesting panel. I have to read your book, Mr. Packer, and I
will try to do that.
Mr. Packer. Thank you. I have read yours.
Senator Hatch. You have?
Mr. Packer. ``Square Peg in a Round Hole.'' Yes, I have.
Senator Hatch. You did read that.
Mr. Packer. I did. Why are you so surprised?
Senator Hatch. I have been surprised at anybody who read my
book recently. Although, it actually sold quite a few books.
That reminds me, it is hard for me to understand why
anybody would not want to work. And to hear you, Dr. Lindsey,
explain why they do not want to work, even then, it is hard for
me to understand, although I understand what you are saying,
because I was born in poverty.
My family lost our home right after my birth. I always felt
like I was responsible for that. And then my father borrowed
$100 and bought an acre of land in the hills of Pittsburgh and
tore down a burned-out building to build our home. We did not
have any indoor facilities or anything.
And from the time I was 6 years old, I was working. My dad
did teach me his trade. I became a skilled tradesman. I was a
member of the AFL-CIO for 10 years and worked at the trade. To
get through school, I worked as a janitor. When Ted Kennedy
found out that I had worked as a janitor, he said, ``Orrin, you
should have stuck with it.'' [Laughter.]
I will not tell you what I told him he should have stuck
with. [Laughter.] We were good enough friends, we could really
badger each other.
But it is hard for me to get this concept of why people
would not work at anything.
Now, in your book, Mr. Packer, you have indicated that they
cannot get anything. But I have always found you can if you
move or if you have to.
How do we get out of this mentality? You can hardly blame
people for not working when, with the transfer of payment
systems that we have in this government today and the welfare
payments that we have, people can make, in some States, upwards
of $55,000 a year, which is a little bit more than the average
wage, by staying home and just getting the transfer payments.
Am I wrong on that? I mean, I have been reading about that,
and I get that from all sources. I am happy to have any of you
talk about that.
Let me direct it to you, Dr. Lindsey. You made the point.
Dr. Lindsey. Yes, Senator. And I think we----
Senator Hatch. Why can we not get people to work?
Dr. Lindsey. Senator Stabenow said that I said something
that I do not think I said, and I think it is a way of
answering your question. She said that I said people choose not
to be self-reliant.
I do not think anyone chooses not to be self-reliant.
Senator Hatch. I do not either. That is one of the points I
am making.
Dr. Lindsey. And what happens is, they lose their job, and
they get into one of these programs. That program leads to
another program and----
Senator Hatch. Or a whole bunch of programs.
Dr. Lindsey [continuing]. They need the program. It is that
benefit mountain chart.
There is nothing wrong with any of these programs if they
need the help. But then comes the time when maybe a job does
come along, and what they either get from personal experience
or from their social network--it may be that their sister-in-
law tried this.
She says, ``You know, I got a $15-an-hour job, and I
thought I would be a lot better off, and I took home $3 more. I
was better off by $3 more.'' It is not that they are choosing
not to be self-
reliant. It is that it does not make sense for them to be self-
reliant.
Senator Hatch. Well, how do we solve that problem? That is
what I am getting to.
Dr. Lindsey. Again, we are going to have to balance the
generosity, and I think we are a generous Nation, and I am all
for it, with the complexity and with the phase-outs.
The fact is, people are not going to go back to work when
they face 80-percent marginal tax rates. It is not because they
do not want to be self-reliant. It is that even a self-reliant
person is smart. They know whether or not they are better off
if they go back to work. And, if the government says you are
not better off if you go back to work, they are not going to go
back to work.
Senator Hatch. How do we solve the problem? Take away the
transfer payments? How do we do it?
Dr. Lindsey. Dr. Burman was mentioning reforming EITC as
one example. These are soluble problems.
With all respect to this body, I think what happens, and
the reason we have a chart that looks like this, with a
mountain there, is, we pass a program and then we have a
different Congress that comes along and somebody else wants
their name on a bill and we put that program on top of that
program and that program on top of that program, and they are
all well-intended, but because there is never an effort to go
back and really think through what we are doing, to think about
the consequences, we build up a situation where you have 80-
percent marginal tax rates.
Senator, if I may just give one other example that just
puzzles me--and this is from the implementation of ACA. We have
mental health programs in the country, and I do not disagree
they could be made more generous. We have rehabilitation
programs. We have programs for habilitation. They are paid for
out of general taxation, which is progressive.
One of the things Secretary Sebelius did was to put all
three of those programs into a mandate for insurance. Now, what
she has done by doing so is take programs that are financed by
progressive taxation and turn them into programs that are
financed by lump-sum taxation of the middle class.
If I were thinking simply about a way to hurt the middle
class--this is 20 percent, by the way, of the cost of a silver
plan premium. Why on earth would the administration, if it is
interested in helping the middle class, move 20 percent of
health care costs from progressive taxation to lump-sum
taxation?
I have asked that question of everyone, and this is, again,
an unintended consequence. The answer I get is, ``Well, it got
it off her budget and onto the insurance budget.''
I do not know what else there is. We have to work smarter
in Washington.
I am sorry I am talking too long.
The public is fine. Dr. Dunkelberg's members are very smart
people. They know how to run their lives. The people in Mr.
Packer's books are very smart people. They are able to run
their lives despite very difficult circumstances.
The people who are not being smart are the people here in
Washington, and I will include myself in that, in how we design
the programs that they have to live under. And we have to get
smarter here. We have to get more efficient. It is not more or
less. It is, come on, guys, there is plenty of money out there,
let us deliver it in a way that is much more efficient.
Senator Hatch. And we are going to need all of your help.
The Chairman. Thank you, Senator Hatch.
I know we have a vote going on. We want to get Senator
Carper in before the vote.
Senator Carper?
Senator Carper. Thank you very much, Mr. Chairman.
Again, our thanks to each of you.
I chair the Senate Committee on Homeland Security and
Governmental Affairs. We just had a budget hearing with our new
Secretary, Secretary Jeh Johnson. We just concluded that. So I
have missed most of this hearing, and I apologize.
I want to share a thought and then maybe ask for a
response, maybe from Dr. Burman on this.
On the Affordable Care Act, let me just say as a preamble
here, for years, we spent more money for health care than a lot
of the rest of the world, industrial nations; we spent way more
money.
I like to talk about Japan. I spent some time there when I
was in the Navy. They spend about 8 percent of GDP. Up until a
year ago, we spent about 18 percent. It actually came down a
little bit last year, and we have seen a sort of leveling off
and a slowing of growth in health care costs.
But my view is, if we want to make sure that people have
some money for their incomes and in their paychecks, we have to
continue to bend the cost curve, make sure that we get better
health care results for the same amount of money or less money.
The Affordable Care Act is not the answer, the be-all in
terms of actually getting there. There are a lot of things that
can be done. But among, I think, the good ideas in the
Affordable Care Act, one is moving away from a sick care system
to a healthy care system to try to encourage people to take
better care of themselves and incentivize that behavior.
I think it is moving toward Accountable Care Organizations,
which is really cooperative care, collaborative care
organizations--another good idea. Incentivizing people to lose
weight, to stop smoking, that kind of thing, that is a good
idea. Moving toward electronic health records, so we can better
coordinate the delivery of health care, is a good idea. I think
the exchanges, large purchasing pools, the Republican
alternative to Hillarycare in 1993-1994, I think that is a good
idea.
The idea that came out of Massachusetts--thank you,
Governor Romney--where we have an independent mandate to make
sure that we had an insurance pool that was not just the sick,
but we had some healthy people there too, I think that is a
good idea, although those ideas are criticized by many.
But let me just ask, if we want to make sure, at the end of
the day, that employers do have some money to pay more money in
wages to folks, trying to maintain the middle class, what are
some further things that we need to do, can do, in terms of
stuff that can be done outside of the Affordable Care Act?
Dr. Burman, just share some thoughts with us, if you would.
Dr. Burman. Thank you for your question. I am not an expert
on health care, although I have written a fair amount about the
tax aspects of health.
One thing that clearly would be worthwhile would be to do
more kind of cost-benefit analyses of health care procedures.
We spend an enormous amount of money on procedures that do not
even necessarily make people better off. People get old and
sick, and doctors think, ``Well, we'll spend $1 million to keep
you alive for another 6 months and probably make your life a
living hell while we are poking and prodding and medicating
you.''
One of the aspects of the Affordable Care Act was setting
up--I do not remember exactly what it was called, but there was
an agency that was going to look at the effectiveness of
different kinds of procedures. And because of the demagoguery
around the whole idea of death panels, it said, ``Okay, we are
going to look at whether things work, whether they are cost-
effective, but this will in no way affect anything we do in
terms of providing medical care.'' I think you should take out
that last part.
If you are paying for care--we do not have an unlimited
amount of money to pay for health care, and you should be
making rational cost-benefit decisions. I think for people at
the ends of their lives, we probably spend too little money
keeping them comfortable. A lot of people are in really
horrible nursing home situations, and we spend way too much
money on acute care.
So there are a lot of things we can do, but it has to be
done on a bipartisan basis, because it is so easy to demagogue
the issue. I think both sides have done that.
Senator Carper. I think living wills or health care
directives--I have one for myself. I go to a doctor. That
doctor may be aware of my directive. If I go to a hospital, an
acute care hospital, they may not be. If I go to a nursing
home, they may not be.
So it does not travel; it does not migrate. And one of the
things that Senator Grassley and I are working on is an effort
to make sure that that directive, my wishes, actually goes with
me to where I am receiving the health care.
The other thing I want to say is on defensive medicine. One
of the things we did on defensive medicine--in Naval aviation,
we used to call it watching our 6 o'clock, who is coming up
behind us to shoot us down.
And in the delivery of health care, doctors, hospitals,
nurses, they are worried about somebody coming up and suing
them. And so they order more tests, more visits, more MRIs,
more everything, in order to cover their 6 o'clock, to ensure
that when they are sued, they can say, ``Look, I did everything
I could have done.''
There are actually some very exciting alternatives that are
out there. One actually came out of the University of Michigan,
``Sorry Works.'' In a place called Illinois, there is some
great work going on. They took ``Sorry Works'' and put it on
steroids to actually do an even more interesting job in
reducing the incidents of defensive medicine.
They realized better health care results, fewer lawsuits,
and greater patient satisfaction. It is like the trifecta. It
is something to keep our eye on. I think we are going to try to
spread it across the country, including in the first State of
Delaware.
Thank you so much.
The Chairman. Thank you, Senator Carper.
Senator Hatch and I want to thank all of you as well. And I
am just going to wrap up with a quick minute.
For the record, Ms. Swonk, we are going to ask you to
expand a little bit on your notion about less traditional kinds
of education. You talked about apprenticeships, and that is
very good.
The only other point I would make, really, I think, sums up
what you all had to say. We talked a bit ago, 2 hours ago,
about Henry Ford, and Henry Ford said, in effect, we are all in
it together. And today, you have something of a Dollar Tree-
Neiman Marcus economy, where you have the bargain stores and
the high-end stores doing well.
We have to find a way to come together in a bipartisan
fashion to give all Americans the opportunity to get ahead. I
am going to be working very closely with my partner on this,
Senator Hatch, and all our colleagues.
Thank you all. This has been a terrific way to begin my
service on the Finance Committee.
With that, the Finance Committee is adjourned.
[Whereupon, at 12:24 p.m., the hearing was concluded.]
A P P E N D I X
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