[Senate Hearing 113-518]
[From the U.S. Government Publishing Office]



                              
                                                      S. Hrg. 113-518
 
        CONCURRENT RESOLUTION ON THE BUDGET FOR FISCAL YEAR 2015

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

                                HEARINGS

                               before the

                        COMMITTEE ON THE BUDGET
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION



  February 4, 2014--THE 2014 OUTLOOK: MOVING FROM CONSTANT CRISIS TO 
                           BROAD-BASED GROWTH

  February 11, 2014--THE BUDGET AND ECONOMIC OUTLOOK FOR FISCAL YEARS 
                               2014-2024

  February 25, 2014--THE ECONOMIC AND BUDGET OUTLOOK FOR INDIVIDUALS, 
                       FAMILIES, AND COMMUNITIES

    March 5, 2014--THE PRESIDENT'S FISCAL YEAR 2015 BUDGET PROPOSALS

  March 12, 2014--THE PRESIDENT'S FISCAL YEAR 2015 BUDGET AND REVENUE 
                               PROPOSALS

 May 6, 2014--THE PRESIDENT'S FISCAL YEAR 2015 EDUCATION BUDGET REQUEST

            May 8, 2014--THE US ECONOMIC AND FISCAL OUTLOOK

          
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                                                  S. Hrg. 113-518

CONCURRENT RESOLUTION ON THE BUDGET FOR FISCAL YEAR 2015
_________________________________________________________________


                            HEARINGS

                           before the

                      COMMITTEE ON THE BUDGET
                        UNITED STATES SENATE

                   ONE HUNDRED THIRTEENTH CONGRESS

                           SECOND SESSION




        February 4, 2014--THE 2014 OUTLOOK: MOVING FROM 
            CONSTANT CRISIS TO BROAD-BASED GROWTH

        February 11, 2014--THE BUDGET AND ECONOMIC OUTLOOK 
            FOR FISCAL YEARS 2014-2024

        February 25, 2014--THE ECONOMIC AND BUDGET OUTLOOK 
            FOR INDIVIDUALS, FAMILIES, AND COMMUNITIES

        March 5, 2014--THE PRESIDENT'S FISCAL YEAR 2015 
            BUDGET PROPOSALS

        March 12, 2014--THE PRESIDENT'S FISCAL YEAR 2015 
            BUDGET AND REVENUE PROPOSALS

        May 6, 2014--THE PRESIDENT'S FISCAL YEAR 2015 
            EDUCATION BUDGET REQUEST

        May 8, 2014--THE US ECONOMIC AND FISCAL OUTLOOK

          
        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
        
        
                  COMMITTEE ON THE BUDGET
                  
               PATTY MURRAY, WASHINGTON, CHAIRMAN
    
RON WYDEN, OREGON                      JEFF SESSIONS, ALABAMA   
BILL NELSON, FLORIDA                   CHARLES E. GRASSLEY, IOWA
DEBBIE STABENOW, MICHIGAN              MICHAEL B. ENZI, WYOMING
BERNARD SANDERS, VERMONT               MIKE CRAPO, IDAHO
SHELDON WHITELHOUSE, RHODE ISLAND      LINDSEY O. GRAHAM, SOUTH CAROLINA         
JEFF MERKLEY, OREGON                   ROB PORTMAN, OHIO
CHRISTOPHER A. COONS, DELAWARE         PAT TOOMEY, PENNSYLVANIA      
TAMMY BALDWIN, WISCONSIN               RON JOHNSON, WISCONSIN
TIM KAINE, VIRGINIA                    KELLY AYOTTE, NEW HAMPSHIRE
ANGUS S. KING, JR., MAINE              ROGER F. WICKER, MISSISSIPPI

                     Evan T. Schatz, Staff Director
             Eric Ueland, Republican Staff Director

                                  (ii)







                            C O N T E N T S

                               __________

                                HEARINGS

                                                                   Page
February 4, 2014--The 2014 Outlook: Moving from Constant Crisis 
  to Broad-Based Growth..........................................     1

February 11, 2014--The Budget and Economic Outlook for Fiscal 
  Years 2014-2024................................................    81

February 25, 2014--The Economic and Budget Outlook for 
  Individuals, Families, and Comuunities.........................   149

March 5, 2014--The President's Fiscal Year 2015 Budget Proposals.   217

March 12, 2014--The President's Fiscal Year 2015 Budget and 
  Reveue Proposals...............................................   299

May 6, 2014--The President's Fiscal Year 2015 Education Budget 
  Request........................................................   329

May 8, 2014--The US Economic and Fiscal Outlook..................   369

                    STATEMENTS BY COMMITTEE MEMBERS

Chairman Murray..........................1, 81, 149, 217, 299, 329, 369
Senator Sessions....................5, 84, 150, 152, 220, 302, 332, 371

                               WITNESSES

Robert Doar, Former Commissioner, New York City Human Resources 
  Administration and Morgridge Fellow in Poverty Studies, 
  American Enterprise Institute................................178, 180
Arne Duncan, Secretary, US Department of Education; Accompanied 
  by Thomas Skelly, Acting Chief Financial Officer, US Department 
  of Education.................................................334, 337
Douglas W. Elmendorf, Director, Congressional Budget Office......87, 89
Robert Greenstein, President, Center on Budget and Policy 
  Priorities..................................................... 7, 10
Courtney Johnson, High School English Teacher, Fort Hays Arts and 
  Academic High School, Columbus, Ohio.........................161, 163
Edith Kimball, Food Services Professional, Lee Elementary School, 
  Lee, Florida.................................................157, 159
Jacob J. Lew, Secretary, US Department of the Treasury.........304, 308
Sylvia Mathews Burwell, Director, Office of Management and 
  Budget 3, 225..................................................
David A. Rosenberg, Chief Economist and Strategist, Gluskin Sheff 
  & Associates, Inc..............................................46, 49
Neera Tanden, President, Center for American Progress..........165, 167
Scott Winship, Ph.D., Walter B. Wriston Fellow, Manhattan 
  Institute for Policy Research................................192, 194
Janet L. Yellen, Chair, Board of Governors of the Federal Reserve 
  System.......................................................373, 378
Mark Zandi, Ph.D., Chief Economist, Moody's Analytics............20, 28

                         QUESTIONS AND ANSWERS

Questions and Answers.....................................269, 359, 411




  THE 2014 OUTLOOK: MOVING FROM CONSTANT CRISES TO BROAD-BASED GROWTH

 

                       TUESDAY, FEBRUARY 4, 2014

                              United States Senate,
                                   Committee on the Budget,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 10:38 a.m., in 
Room SD-608, Dirksen Senate Office Building, Hon. Patty Murray, 
Chairman of the Committee, presiding.
    Present: Senators Murray, Whitehouse, King, Sessions, 
Crapo, and Johnson.
    Staff Present: Evan T. Schatz, Majority Staff Director; and 
Eric M. Ueland, Minority Staff Director.

              OPENING STATEMENT OF CHAIRMAN MURRAY

    Chairman Murray. Good morning. This hearing will come to 
order. First of all, I want to welcome everyone to the first 
Senate Budget hearing in 2014 and thank Ranking Member Sessions 
and all of our colleagues who are joining us here today.
    And I want to thank our witnesses as well. Dr. Mark Zandi, 
chief economist for Moody's Analytics, who will be here in just 
a few minutes--he is on a train, is my understanding; Robert 
Greenstein, president of the Center on Budget and Policy 
Priorities; and David Rosenberg, who is the chief economist and 
strategist of Gluskin, Sheff and Associates.
    Right now, as many of you know, the Congressional Budget 
Office is sharing its baseline numbers and economic outlook for 
the next decade. We will have a hearing with CBO Director 
Elmendorf on that outlook next week.
    But for our hearing today, I want to take some time to look 
back at where we have been and how I would like to see this 
Committee and Congress move forward in the years ahead.
    There is no question Congress has spent far too much time 
over the past few years lurching from budget crisis to budget 
crisis, from one artificial deadline to the next, and from one 
partisan battle to another. That has had a real impact on our 
economy and on families across the country.
    Last March, I was out in Lakewood, Washington, where I met 
a man who name is Matthew Hines. He and his wife both work at 
the Joint Base Lewis McChord. And when the across-the-board 
spending cuts, known as sequestration, hit, both he and his 
wife were furloughed. Together, they stood to lose about 40 
percent of their income. Because of irresponsible budget cuts 
in D.C., Matthew worried his family would miss their mortgage 
payments.
    He was working very hard--serving his country--doing the 
right thing. But because Congress was mired in partisanship and 
gridlock, his family was forced to pay the price. And I think 
that is just wrong.
    We were sent here by our constituents to solve problems, 
not create them; to work together, not tear each other apart.
    So I am hopeful that we here in this Committee and all of 
us in Congress can build on the foundation of the bipartisan 
budget deal we brokered last December and on the progress that 
we have seen since then.
    Now is the time to move away from governing by crisis and 
move forward by investing in priorities that help families and 
communities all across the country.
    Now, the senseless across-the-board cuts did not just hit 
defense workers like the Hines family. They also took a toll on 
education and Head Start programs.
    In years past, the Denise Louie Education Center that is in 
Washington State had a waiting list for preschoolers. But last 
year, because of those cuts, the school had to start dropping 
kids from their program.
    Across the country, more than 50,000 young learners were 
not able to attend Head Start.
    Severe cuts slashed other important investments in medical 
research, in infrastructure, and in military readiness. And it 
did not end there.
    At a time when families across the country have been 
reeling from the greatest economic downturn since the Great 
Depression, brinkmanship in Congress infused uncertainty into 
the economy.
    Last September, the Budget Committee had a hearing on the 
detrimental impact of political uncertainty on jobs and the 
economy.
    In fact, one of our witnesses today, Mark Zandi, was at 
that hearing, and he told us that since 2008, political 
uncertainty reduced real GDP by nearly $150 billion and 
increased unemployment by 0.7 percentage points.
    I am glad Dr. Zandi will be here again to share his outlook 
on the economy today because since then, Congress has made some 
significant progress.
    Late last year, after the Government shutdown and debt 
limit scare, Republicans dropped their demands and joined with 
Democrats to re-open the Government, prevent a catastrophic 
default by raising the debt limit without preconditions, and 
finally allow the budget conference that many of us here on the 
Budget Committee spent 7 months fighting to start.
    When Chairman Ryan and I sat down together in the budget 
conference, we faced a lot of skepticism that we would be able 
to get anything done. Every bipartisan budget group that had 
met over the past few years had ended the same way: with 
gridlock and inaction. And coming so soon after the 
partisanship and bitterness surrounding the Government 
shutdown, many people thought there was just no way Democrats 
and Republicans could work together for the good of the 
country.
    We came into our budget conference knowing we were not 
going to agree on everything. We came in with very different 
budgets, very different ideologies, and very different values 
and priorities. But we also came ready to listen to each other, 
put partisanship aside, find some common ground, and make some 
compromises.
    Many of us wanted an agreement, not a fight. We aimed for 
what was attainable, and we were able to reach a deal that 
showed the American people that the dysfunction of the past few 
years was a choice made by a minority, not an inevitable fact 
of our divided Government.
    That 2-year deal, the Bipartisan Budget Act, prevented a 
Government shutdown and set bipartisan spending levels through 
the end of 2015.
    It replaced almost two-thirds of this year's across-the-
board cuts to domestic investments. And it prevented another 
round of defense cuts that were scheduled to go into effect 
earlier this year.
    The bipartisan budget deal was a step in the right 
direction. But it was only a step. It was not exactly the deal 
that Democrats would have done on our own. And I know it is not 
what Republicans would have done on their own.
    But the agreement moved us away from the dysfunction that 
has defined Congress in the past few years. It proved that 
bipartisan work was possible. And now we all have a 
responsibility to keep that work going.
    Congress has now built on that bipartisan success. After 
laying the groundwork in the budget deal, Chairwoman Mikulski 
worked with House appropriators, and together they were able to 
make critical investments in our country.
    The bipartisan omnibus bill we passed last month expanded 
access to preschool. More 2-, 3-and 4-year-olds will get the 
tools they need to start kindergarten on strong footing.
    For our national defense, the bill eliminated the threat of 
civilian furloughs in 2014. That means more hard-working 
Americans will not have to worry if their next paycheck will be 
enough to make ends meet.
    And it made critical investments in transportation projects 
that put more people back to work and help make our roadways 
and transit systems safer and less congested.
    In addition to that important legislation, just last week, 
under the leadership of Chairwoman Debbie Stabenow, our 
colleague here on the Committee, an agreement was reached on a 
bipartisan farm bill.
    So we have bipartisan momentum right now. We should build 
on that by investing in broad-based economic growth and 
expanding opportunities for families, small business owners, 
and communities across the country.
    That does not mean we lose sight of or ignore our long-term 
fiscal challenges. Of course not.
    Since 2009, the deficit has been cut in half. We need to 
build on that work, fairly and responsibly.
    I know Democrats are at the table ready to do that, and I 
am hopeful this will be a year that Republicans are ready to 
join us and make some compromises.
    But we also need to make sure we do not let the reality of 
our long-term fiscal challenges prevent us from addressing the 
reality of our short-term economic challenges.
    Families are struggling today. Workers are fighting to get 
back on the job--or barely keeping their heads above the water 
with the jobs they do have.
    Our country is not making the investments that we need to 
in education, in research, or in innovation to compete and win 
in the 21st century global economy.
    Our infrastructure is crumbling, and we are not doing what 
we need to do to leave a stronger country for our children than 
the one we got from our parents.
    So we need to get to work. For starters, I believe we 
should increase the minimum wage. One of our witnesses here 
today, Robert Greenstein, testified last week before the House 
Budget Committee. I will echo a point that Mr. Greenstein made 
there.
    Raising the minimum wage would boost the upward economic 
mobility of low-wage workers. A pay increase to $10.10 would 
help families make ends meet, and it would expand opportunities 
for them to get ahead.
    Last week, in his State of the Union address, President 
Obama stressed that early childhood education is one of the 
smartest investments we can make, and I could not agree more. 
As a former preschool teacher, I know the difference it can 
make in a child's life.
    Preschool offers young learners the building blocks they 
need to go to kindergarten, ready to tackle a curriculum. The 
path to greater opportunity in this country starts with a 
quality education.
    So I will be working hard to make sure more students have 
access to preschool, to world-class grade schools, and to 
higher education.
    Those are just a few examples of the work we should be 
doing. But divided Government requires that Republicans and 
Democrats work together. That is the only way we will enact 
policies that solve problems and help families and businesses 
by creating broad-based economic growth and increased 
opportunity.
    Just when we have the opportunity to make progress on 
investing in the future, I worry that some Members of Congress 
are falling back into their old habits and planning to 
manufacture a crisis over the debt limit.
    And just like last time, they cannot seem to agree on which 
ridiculous demand to make in exchange for ensuring the United 
States pays its bills.
    Secretary Lew had an important message for these members 
yesterday: Time is running out. And the longer Republicans take 
to dream up empty debt limit demands, the more economic 
uncertainty and harm they will cause for workers and families 
and businesses.
    So I hope those Republicans who are engaging in 
brinkmanship will listen to Secretary Lew and to our discussion 
today. And I hope they will do right away what they have 
ultimately done twice in one year: give up their ransom demands 
and raise the debt ceiling without strings attached and work 
with Democrats on the real challenges that we face.
    I recently got an update from the Hines family I talked 
about a few minutes ago, and it reminded me of what is at stake 
here. Matthew said he and his wife survived last year's 
furloughs. He just hopes they never have to go through that 
again.
    Thankfully, because of our bipartisan budget deal, his 
family and his coworkers will not have to worry about layoffs 
and furloughs.
    When Congress gets serious about putting families and 
communities first, we can solve problems. We can help people 
like the Hines family, and we can move the country forward.
    I invite all of our colleagues--Democrats and Republicans--
to join me this year in building on the bipartisan work we have 
done and investing in our national priorities.
    Together we can move forward, beyond the constant crises of 
recent years, to make sure businesses can grow and communities 
can thrive.
    Together we can expand opportunity so all Americans get the 
chance they need to succeed.
    And with that, before we hear from our witnesses, I will 
turn to my Ranking Member, Senator Sessions, for his opening 
remarks.

             OPENING STATEMENT OF SENATOR SESSIONS

    Senator Sessions. Thank you, Madam Chairman. The recovery 
from the 2009 recession seemed to be solid at first, but it has 
not come close to meeting the projections of the Obama 
administration's, OMB, the Federal Reserve, Congressional 
Budget Office, or others.
    For example, every year when OMB and others have made their 
2-year GDP projections, they have missed, not just a little 
bit, and these misses were not divided, with some too high and 
some too low. Everyone projected markedly higher growth rates 
than actually occurred.
    Specifically, the August forecast team at the Federal 
Reserve projected just 2 years ago, 2011, that growth this past 
year, 2013, would be 4.1 percent when, in fact, it came in at a 
very weak 1.9 percent. CBO had estimated that we would have 3.5 
percent. Good growth rates. They did not occur.
    So some will say that is because we have a financial 
recession, but in 2011 and 2012, these experts knew this was a 
financial recession. Their projections were based on 
something--we do not know what--that did not come true.
    For example, in December of 2012, at the very beginning of 
the 2013 year, the Federal Reserve projected growth would be 
between 2.3 and 3 percent. It came in at 1.9 percent. President 
Obama's team, OMB, also produced 2-year growth projections that 
were higher than reality.
    So, additionally, the stock market experts have told us we 
will have a correction now. This is just a correction, but we 
have lost 6 percent since the beginning of the year. So forgive 
me if I am a bit concerned about where we are.
    More seriously, I am not attacking OMB, CBO, or the Fed for 
incompetence or deception. My concern is deeper. It is why our 
economy is failing to achieve liftoff even 4 years after the 
recession. The Government and Federal Reserve remain quite 
proud of themselves for their heroic response to the financial 
crisis. I know business profits are strong, and the stock 
market did extraordinarily well last year. That gives us hope.
    But it is time to face facts. All is not good, especially 
for middle-class working Americans. Middle-class family incomes 
have declined since 2000, and the decline has accelerated since 
2010, since the recovery was declared. Approximately 16 million 
people have been added to our population since 2000, but 2 
million fewer people are working today than they were in 2007. 
Nearly two-thirds of the jobs created in 2013 counted in our 
employment surveys were part-time jobs. We have the lowest 
workforce participation rate since 1974, and it is not getting 
any better.
    The Labor Department reported last month that the economy 
produced only 74,000 jobs for December--shockingly low and well 
below the 200,000 jobs per month actually needed to increase 
employment in America.
    So it seems to me the fiscal policies of our Government and 
the monetary policies of the Federal Reserve have relied on 
bold stimulus-type initiatives--spending more, borrowing more, 
and dramatic and unprecedented purchases of Government debt by 
the Federal Reserve, all to change the grim dynamic that is out 
there for the American people.
    President Obama pushes more Government spending, more 
regulations, more investments, expansion of Government, and 
more welfare as the proper response to this crisis we are in, 
especially to help the working poor. I know he is sincere in 
that. Specifically, the Government would set wages and provide 
more support payments for those not working. A new Government-
directed health care system is created that, we are told, will 
reduce the costs of health care and help all of us and help the 
economy. But is this a compassionate response that will 
actually work to help the millions of Americans that are 
hurting today? I have never thought this is a successful long-
term approach.
    Our debt margins have been eliminated. We cannot keep 
borrowing more. Taxes cannot keep going up. They have gone up 
significantly. We still face Medicare and Social Security 
crises. The Ryan-Murray spending agreement got Congress out of 
a political bind and avoided a conflict, but it did not change 
the debt course of our country. It taxed a little more and it 
spent a little more.
    We have tried taxing, spending, and borrowing to jump-start 
our way to prosperity. The President proposed more of the same 
in his State of the Union. It has not worked. This will not 
work. We need a course correction.
    I am going to suggest some solutions that will help 
American workers without adding to our debt. We need to promote 
more American energy, produce more American energy, fair trade, 
defending the American worker on the world stage, better 
immigration policies, welfare and tax reform, a leaner more 
productive Government, the elimination of regulations that 
destroy jobs, transforming the welfare office into a job 
training, job promotion office, and more growth that is created 
when we get off a debt course that we are now on that leads us 
to continuing increases in our annual deficits in the years to 
come.
    And I know we need to work together on a bipartisan way to 
get past difficulties that we have here, but my Democrat 
colleagues are not always right, at least in my opinion, and 
their ideas and visions for helping people in America are not 
always working. And, in fact, many times they are not working.
    So I hope that we can agree to take some steps toward 
improving our financial circumstances when the debt ceiling is 
reached. Why shouldn't that be a point in time in which this 
country can evaluate where we are going, how we reached the 
debt ceiling so fast, and what we can do to improve it? Mr. Lew 
says he will take no reform whatsoever as a part of raising the 
debt limit, that the credit card has reached its limit, no 
one--Mom and Daddy cannot question the spending that has gone 
on, and we cannot make any reforms. I mean, how reasonable is 
that? This is the same Mr. Lew that sat at that table there and 
said the President's budget would spend only money that we have 
and not add to the debt anymore. What a thunderously false 
statement, one of the greatest financial misstatements in the 
history of the world. And now he is telling us we can do 
nothing to contain spending, that we have to just ratify and 
raise the debt ceiling without even a peep? How silly is that?
    We need to be thinking about how to get this country on a 
sound path, and one way to get us on a sound path is to 
eliminate the debt cloud that is over this economy and put 
ourselves on a course that the whole world will recognize is a 
sound financial course.
    So I would say, Madam Chairman, we share the same goals. We 
want to see this economy grow. We want to see a growing economy 
produce more tax revenue and help us reduce our deficits. We 
want to see a growing economy that helps workers find jobs, 
that ends flat wages and reducing wages and creates naturally 
through the process of free enterprise higher wages for 
American workers. The question is how to get there. I just do 
not believe tax, spend, and borrowing is the right way. I think 
there is a better way, and I thank the Chair.
    Chairman Murray. With that, we are going to turn to our 
witnesses, and, Mr. Greenstein, we will start with you.

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

    Mr. Greenstein. Thank you very much and good morning.
    As you know, deficits have been coming down in the past few 
years. In 2013, the deficit was about 4 percent of GDP. The new 
CBO projection is it will come down to about 2.5 percent of GDP 
by 2015. Of course, in subsequent years and decades, it will 
climb, and we clearly have more work to do on our long-term 
fiscal challenges.
    But there has been significant progress. We project, if you 
look out three decades under current policies, that the debt in 
2040 would be somewhere in the rough vicinity of 95 percent of 
GDP. Now, that is too high, but it is much lower than the more 
than 200 percent of GDP that we and other analysts were 
forecasting for 2040 only a few years ago.
    The improvement in the long-term projections primarily 
reflects two factors:
    First, health care cost growth has slowed considerably. CBO 
has lowered its estimate of Medicare and Medicaid spending over 
the period from 2010 to 2020 by over $1 trillion relative to 
the estimates it made in 2010.
    And, second, counting sequestration, policymakers have 
enacted legislation that reduces the deficit about $4 trillion 
over the coming decade with nearly 80 percent of the non-
interest savings coming from spending cuts.
    Now, these figures reflect the fact, reflected in the 
budget agreement in December, that the costs of sequestration 
relief and relief from the scheduled Medicare physician payment 
cuts, it is increasingly clear, are being paid for, and the one 
policy uncertainty in this area is whether policymakers also 
will offset the cost of extending the tax expenditures known as 
``tax extenders.''
    We recommend that policymakers commit to doing so, that 
they apply to legislation to continue the extenders the same 
principle they are applying to sequestration relief, to the 
Medicare physician payment relief, and that it now appears 
clear Congress will be applying to Federal unemployment relief 
if that goes forward.
    If policymakers pay for the cost of continuing the tax 
extenders, we estimate that would reduce the debt in 2040 to 
somewhere in the range of 85 percent of GDP, or thereabouts--
still too high, but significant progress. And given political 
gridlock, this is likely to be one of the only steps 
policymakers have a shot at enacting this year that would 
materially improve the long-term fiscal outlook.
    As I have noted, ultimately more will need to be done with 
our fiscal challenges, but in the near term, the increased 
certainty that the December budget agreement brings for the 
next 2 years also gives Congress the opportunity to focus on a 
number of pressing issues that have received insufficient 
attention. Let me very briefly note four of them.
    Number one, I believe policymakers should temporarily 
extend the unemployment benefits that have expired. The 
Congressional Budget Office estimates the economy will have up 
to 300,000 more jobs by the fourth quarter of 2014 if those 
benefits are extended for the coming year.
    Second, as the Chair has alluded to, I do recommend that 
policymakers help lower-wage workers by strengthening the 
minimum wage, which is significantly below its purchasing power 
level of a number of earlier decades.
    Third, single workers who are paid low wages are the one 
group of workers in America whom the Federal tax system taxes 
into or deeper into poverty. The main reason for that is that 
the earned income tax credit for these workers is tiny. A 
childless adult working full-time year round at the current 
minimum wage earning $14,500 a year is considered to have 
income too high to qualify for the EITC, even though that 
individual pays over $1,500 a year in Federal income and 
payroll taxes. And a worker whose wages put them right at the 
poverty line, $12,000 for a single individual, is required to 
pay close to $1,000 in Federal income and payroll taxes, gets 
maybe $180 earned income credit, and is literally taxed into 
poverty. So I would recommend that Congress look at 
strengthening the earned income credit for workers who are not 
raising minor children, a recommendation that a number of 
experts and analysts across the political spectrum have been 
making, looking at the fact that it could induce more young men 
to enter the labor force, and it could have positive effects on 
marriage, crime, and incarceration rates. This is why you see 
people like former Bush adviser Glenn Hubbard recommending this 
as a policy to pursue.
    Lastly, we will need to return before 2016, although we do 
not need to do it this year, to the issue of discretionary 
funding levels. The budget agreement covered 2014 and 2015. By 
2016, non-defense discretionary funding will drop below the 
post-2013 sequestration level, adjusted for inflation, and will 
fall to the lowest level as a share of the economy since the 
1950s, and those figures understate the coming crunch.
    For example, veterans health care does not just grow with 
the caps. It has been growing and will probably need to grow 
around 7 or 8 percent per year. That has been its history. And 
the Pell grant program faces a funding shortfall starting in 
2016, which, if not addressed, will result in large cuts in 
that program that reduce the ability of students from low-
income families to attend college and get a chance at 
opportunity and upward mobility. There are issues in research 
and infrastructure. There are issues in defense. In short, 
after the 2 years the current budget deal covers, we really 
will need a new budget agreement. The Nation cannot afford to 
neglect funding for education, scientific research, and the 
like. That is not something Congress has to do this year. It is 
something we will need to get back to in 2015.
    Let me stop there. My time has expired. I look forward to 
answering questions.
    [The prepared statement of Mr. Greenstein follows:]
    
    
    
     [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    
        
    Chairman Murray. Thank you, Mr. Greenstein.
    Dr. Zandi, welcome. We will turn to you.

   STATEMENT OF MARK ZANDI, PH.D., CHIEF ECONOMIST, MOODY'S 
                           ANALYTICS

    Mr. Zandi. Sorry I am late. A lot of snow in Pennsylvania.
    Chairman Murray. We are glad it is not here.
    Mr. Zandi. Yes, more than I would have expected.
    Well, thank you for the opportunity to be here this 
morning. I have three points I would like to make in my opening 
remarks. I do have slides if someone wants to power that up. I 
will just use one or two of them.
    The first point is I am optimistic about the economy's 
near-term prospects. In terms of GDP, the value of all the 
things that we produce, we have been growing roughly 2 percent 
per annum, a little over that, since the recovery began 4-1/2 
years ago. I expect growth this year of 3 percent and closer to 
4 percent in 2015.
    There are a number of reasons for this optimism. The most 
important is the fiscal drag is fading. We have been through a 
period of very significant fiscal austerity--Government 
spending cuts, tax increases. If you add it all up, it shaved 
1-1/2 percentage points from GDP growth in calendar year 2013. 
So the economy grew 2 percent. If fiscal policy was simply 
neutral with respect to the economy, the economy would have 
grown 3-1/2 percentage points last year. By the way, that is 
growth in the private economy. The private economy grew 3-1/2 
percentage points last year.
    This year under current law, assuming no change in law, the 
fiscal drag will be no more than half a percentage point, 
probably a little less than that. So we are going to get a 
point to growth simply because the austerity is less 
significant this year compared to last. And that is arithmetic 
and a very solid reason for optimism. Next year the drag will 
be a couple three-tenths of a percentage point, and in 2016 it 
will be zero. So this is a very important reason for optimism.
    Another reason for optimism is more fundamental; that is, 
the economy has come a long way in righting the wrongs that got 
us into the Great Recession. We have de-levered. We have 
reduced debt. Businesses have reduced their cost structures 
significantly. Households in aggregate have their debt loads 
down. The banking system is much better capitalized. This is, 
most of it, with regard to American businesses, they are very 
competitive. Unit labor costs, which is a good measure of 
international competitiveness, have not changed--that is labor 
compensation per unit of output, so it counts for productivity 
growth--essentially in almost 10 years. And in manufacturing, 
which is obviously where the competition is most fierce 
globally, it has not changed in almost 25 years. And given the 
very positive energy story, I think prospects are very good for 
American companies. They are in very good shape and should be 
able to produce more jobs going forward.
    The one missing ingredient to stronger growth, though, 
throughout the economic recovery has been confidence. There 
have been a lot of factors weighing on sentiment. Most 
significantly has been the budget wars here in Washington. They 
have been very debilitating psychologically. The good news is, 
I think we are past the worst of that, and I think you can see 
it already in the confidence measures. Various surveys show 
much improved confidence, and I think that is going to start 
translating into more aggressive business hiring, so that means 
more jobs and more investment, and that augurs very well going 
forward. So I am optimistic.
    Point number two, things can go wrong. There are threats to 
my optimism. You can see that in the marketplace today, the 
last few days. I think the most significant threat is a policy 
error. Most significantly, most immediately is lawmakers must 
raise the Treasury debt limit quickly. By my calculation, the 
drop-dead date is probably March 3rd, large Social Security 
payment on that day. There probably will not be enough cash in 
the Treasury to make full payment, so the debt limit has to be 
increased.
    I would also argue that there are a number of other things 
policymakers could do to support the economy near term. I 
strongly agree with Mr. Greenstein that we should extend the 
emergency unemployment insurance program, expand the earned 
income tax credit for childless workers, and increase the 
minimum wage modestly. I think those would be very important 
boosts to the economy near term.
    Finally, my third point, while the fiscal situation through 
the remainder of this decade is stable, it looks okay, 
obviously in the longer run we have got problems. That requires 
then that lawmakers will need to do more work. We do need 
entitlement reform. We do need tax reform. We do not need it 
today. We do not need it next year. But we certainly will need 
it before the end of the decade because we will have very 
significant problems as we move into the next decade if we have 
not addressed these things. And along the way, it would be very 
helpful if we could do things that would spur strong economic 
growth, no better way to address our long-term fiscal problems. 
So we should be focusing on policy that helps to lift the 
supply side of the economy, more infrastructure spending--I can 
testify to that today. Being stuck on an Amtrak train for a 
half-hour, I am all for more infrastructure spending, and I 
would be willing to pay for it myself. More funding for early 
childhood education, evidence there is quite strong; and 
immigration reform. All those things I think would be quite 
helpful for the economy in the longer run and help our long-
term fiscal situation.
    Thank you very much.
    [The prepared statement of Mr. Zandi follows:] 
    
    
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    Chairman Murray. Thank you, Dr. Zandi.
    Mr. Rosenberg?

     STATEMENT OF DAVID A. ROSENBERG, CHIEF ECONOMIST AND 
          STRATEGIST, GLUSKIN SHEFF + ASSOCIATES INC.

    Mr. Rosenberg. Chairman Murray, members of the Committee, 
thank you for the opportunity to appear before you today. I 
concur with Mr. Zandi about the economy improving, 
notwithstanding the correction of the stock market. I think it 
will continue to improve, real GDP likely to be at least 3 
percent this year, I think slightly more than that in 2015.
    My principal concern, however, comes down more to what I am 
seeing on the supply side of the economy as opposed to the 
demand side. You know, when economists discuss their economic 
outlook, they invariably talk about their GDP growth forecasts, 
and GDP is actually not about production. It is about 
spending--consumer spending, housing spending, business 
spending, Government spending and the like. But there is also 
the supply side of the economy, which Mr. Zandi alluded to, 
which receives scant attention. It is equally important, with 
the critical inputs being productivity and labor force growth.
    Over the past year, productivity growth in this country has 
slowed to a mere 0.3 percent, which is completely abnormal for 
this stage of the economic cycle; in fact, only in the 
sclerotic 1970s has productivity been so anemic at this same 
stage.
    The labor force is also growing at only a rate of 0.3 
percent, again, disturbingly weak from a historical 
perspective. So when you combine productivity and labor force 
growth, the supply side of the economy is expanding actually at 
less than a 1-percent annual rate, with repercussions I will 
discuss later.
    Fed Chair Janet Yellen acknowledged the supply-side 
deficiencies in a speech she gave back on March 4th of last 
year titled ``Challenges Confronting Monetary Policy,'' where 
she stated, and I quote, ``the slow recovery has depressed the 
pace of capital accumulation, and it may also have hindered new 
business formation and innovation, developments that would have 
an adverse effect on structural productivity.'' And that is 
indeed what has occurred. Productivity growth has stalled for a 
country whose long-term trend has been close to 2 percent.
    One key reason is because the growth rate in the private 
sector capital stock over the past 5 years has been nearly 
stagnant, the weakest pace in any half-decade period in the 
post World War II era, and there is a direct, though lagged 
linkage, between capital formation in the private sector, or 
lack thereof, and productivity growth down the road.
    One survey I pay very close attention to is the National 
Federation of Independent Business monthly poll on confidence 
in the small business community. The 600-plus small businesses 
that are part of this survey are asked, among other things, 
what their top impediment is. In December, 43 percent of them 
said taxes and Government regulation. Very few times in the 
past has this share been so high, and there is no other factor 
today that comes so close as this as the most prominent 
obstacle.
    Now, what about the labor market, the other part of the 
supply-side story? The dilemma is that people are becoming 
disengaged from the labor market at an alarming rate. In fact, 
2.9 million Americans withdrew from the labor force in 2013, 
more than doubling the 1.4 million jobs that were actually 
created. There are now a record 92 million Americans in total 
who reside outside the labor force. Just 5 years ago, that 
number was 80 million.
    No doubt there is a demographic element since the first of 
the baby boomers turned 65 in 2011 and 1-1/2 million turn that 
age annually for the next 15 years, so the retirement wave is 
obviously one reason. But that does not explain why it is that 
the number of people in the 25-to 54-year age category who say 
they have left the labor market because they are 
``discouraged'' has fallen almost 20 percent in the past year.
    So something is going on here over and beyond the classic 
argument that people are either retiring or they are dropping 
out of the labor market because of a weak economy. The causes 
are open for debate, but the facts are not, and the facts are 
that we have a rapidly depleting pool of labor on our hands and 
it needs to be addressed. According to the Bureau of Labor 
Statistics, the available pool of labor shrunk 13 percent in 
2013 to 16.5 million, which is the lowest it has been in 5 
years, and the decline is unprecedented. If the depletion 
continues at that rate, we will run out of newly available 
workers in this country in just about 8 years' time.
    This is not about the demand for labor, which actually is 
strengthening. The number of job openings nationwide in 
November climbed above the 4 million mark for the first time 
since March 2008 and is up 6 percent from a year ago levels. 
The problem is that this is not translating into new hirings 
which are lagging well behind, up less than 2 percent over the 
past year.
    I look at the data, again, from the NFIB survey, and I see 
that nearly 1 in 4 small businesses have at least one position 
open right now that they cannot fill. Almost 40 percent say 
that there have been few or no qualified applicants for the 
jobs being advertised. In other words, there is evidence of an 
increasing shortage of skilled labor in this country, which in 
turn is posing a significant constraint on the sustainability 
of economic growth.
    In conclusion, we do indeed have a cyclical recovery in 
place, but if aggregate demand expands, say, 3 to 3-1/2 percent 
over the next 2 years, then we are going to begin to strain 
scarce supply-side resources in terms of available labor and 
capital. Then inflation re-emerges, interest rates begin to 
rise, potentially sharply, which is the last thing that fiscal 
policymakers need since it was actually relief from lower debt 
service costs that played a critical role in allowing the 
deficit to recede so substantially in recent years. I estimate 
that if not for this current low interest rate structure, debt 
service charges and the budget deficit would be roughly $250 
billion higher than is the case today.
    Under current official projections, net interest charges go 
from just over $200 billion now to over $800 billion 10 years 
from now, rivaling what the Government will be spending on 
Medicare, accounting for almost the complete deficit at that 
time, which I can assure you, seeing how this played out in 
Canada in the early 1990s, will severely impair fiscal 
flexibility in the future. At that time, nearly 20 cents of 
every revenue dollar will be diverted towards servicing the 
debt compared with fewer than 8 cents today, a dead-weight drag 
on the economy and the public purse that can be averted through 
macroeconomic policies that foster growth in the productive 
capacity or the supply side of the economy, keeping inflation 
at bay even as demand growth expands, thereby freeing up vital 
financial resources needed to deal with the burgeoning 
demographic requirements and tough fiscal choices that lie 
ahead.
    Again, thank you for the opportunity to present my views, 
and I look forward to your questions.
    [The prepared statement of Mr. Rosenberg follows:] 
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman Murray. Thank you again to all three of you for 
being here today.
    Dr. Zandi, I want to start with you. You testified before 
this Committee last fall and warned about the consequences of 
failing to raise the debt ceiling. You indicated that exceeding 
the debt ceiling would, and I quote, ``have catastrophic 
consequences for the economy and even threatening default could 
have significant negative consequences for our economy.''
    In today's testimony, you stated that the principal threat 
to the stronger U.S. economic growth you see for this year is a 
policy mistake, listing the debt limit as the most immediate 
risk that is out there.
    We are hearing again from some of our Republican colleagues 
raising the possibility of waging a fight again over this debt 
limit, and so for those watching at home, I wanted you to just 
explain what it would mean for them and their families if 
Congress failed to raise the debt limit, even temporarily.
    Mr. Zandi. It would be catastrophic. If we get to that 
March 3rd deadline--and there is a lot of uncertainty around 
that given tax refunding and other factors that will influence 
payments by the Treasury. But I think the most likely drop-dead 
date would be March 3rd. On that day, if memory serves, there 
is a $26 billion payment to Social Security recipients. It 
would be unlikely that the Treasury would be able to make that 
payment in full. So the most immediate obvious impact would be 
Social Security recipients would not get their checks in full 
or on time. And I think that mere fact alone would be 
incredibly debilitating and scary to everyone and would be 
enough to undermine confidence, undermine the recovery, and 
push us back into recession. But extended any longer than that, 
of course, it would be--the severity of the economic impacts 
would intensify very, very rapidly.
    So it is just not a path we want to go down, and it is not 
even a path we would really, I think, should entertain because 
that is by itself very counterproductive. It does undermine 
confidence. It undermines the willingness of business people to 
step up, increase their hiring, increase their investment. It 
weighs on economic growth. There is increasing statistical 
evidence of the impact of all the budget brinkmanship that has 
occurred over the past several years on economic growth, on 
jobs, on unemployment. So in my view, it would be a mistake to 
even go down the path--
    Chairman Murray. Or threaten or--
    Mr. Zandi. Or threaten to not do it.
    Chairman Murray. Okay. Mr. Greenstein, I wanted to ask you 
a question as well. As you know, in recent years some of our 
colleagues have attempted to use the need for Government to 
perform the most basic tasks--paying its bills, raising the 
debt limit--as leverage to extract major policy concessions 
from this administration. My question is: As one of our 
Nation's leading experts on budget issues, does raising the 
debt ceiling add to the deficit?
    Mr. Greenstein. No.
    Chairman Murray. Well, is it not the case that increasing 
the debt limit only allows the Treasury to pay the bills that 
resulted from our policy decisions that have already been put 
in place?
    Mr. Greenstein. That is right. Raising the debt limit does 
not change the level of benefits in any entitlement program; it 
does not change the tax obligation that any individual or 
corporation faces. It does not change the caps, the ceilings on 
discretionary spending. It does not have--
    Chairman Murray. All that was done in the budget agreement 
and the appropriations bills that we just did.
    Mr. Greenstein. That is right.
    Chairman Murray. And those decisions were made.
    Mr. Greenstein. That is right, and they are in law, and 
they hold, whether the debt limit is raised or not, except that 
as Dr. Zandi has said, if the debt limit is not raised, then 
the Government basically is faced with doing things like 
breaking the Social Security law by not sending the checks out 
on time because it does not have the resources with which to do 
so.
    Chairman Murray. Or people who are waiting for their IRS 
money back.
    Mr. Greenstein. Yes.
    Chairman Murray. Okay. I really appreciate that.
    Dr. Zandi, let me go back to you and talk about the 
bipartisan budget agreement. That was the result of some pretty 
tough negotiations on both sides. Republicans and Democrats 
compromised for the greater good. Neither one of us agreed it 
was perfect. Chairman Ryan did not think it was perfect; I did 
not think it was perfect. But we felt it was the right way to 
go for our families and communities and business rather than 
where we were.
    Importantly, the budget deal unwound some of the spending 
cuts from sequestration and reset the appropriations levels for 
2 years, 2014 and 2015. And in doing do, we were able to lessen 
some of the damaging consequences of sequestration that 
concerned actually members on both sides of the aisle here and 
remove the threat, again, of another Government shutdown and 
provided some certainty so that Chairwoman Mikulski could work 
with her counterpart and get our bills passed.
    Can you help us today better understand the impact--or the 
direct and indirect consequences of the bipartisan budget deal 
and explain how the increase in policy certainty for this 2-
year period and the decrease in austerity helps our economy?
    Mr. Zandi. Yes, I think the Bipartisan Budget Act was a 
significant plus for the economy, both directly and indirectly. 
Directly, as you point out, it reduces some of the spending 
cuts that were slated for 2014 going into 2015, and the 
sequester itself, which were poorly designed spending cuts. So 
eliminating that was very therapeutic for the economy in a very 
direct way.
    But perhaps most importantly is the indirect consequence, 
and that is the impact on confidence and sentiment.
    Chairman Murray. The mental health of the country.
    Mr. Zandi. Yes, really. It is hard to measure, admittedly, 
and it feels squishy, but I do think there is growing evidence 
that all of the budget battles that we have experienced, the 
fiscal cliff, the debt limit debacle back in the summer of 
2011--and there has been a string of them--have been very hard 
on the collective psyche, and it is the key reason, one of the 
key reasons why people have not fully engaged and not taken the 
risks that they normally take in an expansion, particularly 
business people. It is one of the reasons why small businesses 
have been so nervous about taking a chance.
    I sense in the wake of the budget deal that sentiment has 
dramatically improved. We have a survey we conduct of business 
people every week--we have been doing it since January of 
2013--and it hit a record high in January of--excuse me. We 
have been conducting it since January of 2003, so for 11 years. 
It hit a record high in January of 2014, by orders of 
magnitude, and expectations--you know, we ask a lot of 
questions, one of which is, ``How do you think things are going 
to be 6 months down the road?'' They are far and away as strong 
as they have ever been in this survey.
    So my sense is that because of the deal and because of what 
it means going forward with regard to the tensions here in 
Washington, we are going to get more risk taking, we are going 
to get more hiring, we are going to get more investment, 
business expansion, and a stronger economy. So I think the 
deal, the Budget Act, was very, very important to solidifying a 
much stronger economy going forward.
    Chairman Murray. Okay. Thank you very much.
    Senator Sessions?
    Senator Sessions. Madam Chairman, I would yield to Senator 
Crapo at this time.
    Chairman Murray. Okay.
    Senator Crapo. Thank you, Senator Sessions, and thank you, 
Madam Chairman.
    Dr. Zandi, I would like to start with you. In your 
introductory comments, you discussed the fact that some of the 
drag on the economy that is a result of Federal policies is 
going to be softening. We can expect some higher growth in the 
next few quarters, as I understood your testimony. The question 
I have, though, is: How do we determine that? And what I am 
getting at is, isn't the debt crisis that we face, isn't the 
level of debt that we are carrying a constant drag on the 
economy that needs to be resolved?
    Mr. Zandi. Yes, I agree. You know, I do think you have made 
significant progress. You stabilized the fiscal situation. The 
deficit to GDP is shrinking. The debt-to-GDP ratio is stable. 
And under reasonable economic assumptions--and they are 
reasonable because they are my assumptions, you know, and they 
are close to CBO--we are going to have a stable fiscal 
situation for the next several years. Good, great, it restores 
confidence and I think allows the private economy to kick into 
gear.
    Senator Crapo. But we still have a looming debt crisis.
    Mr. Zandi. Exactly, and I do not think we should feel at 
all comfortable with a debt-to-GDP of 73, 74 percent. It is 
double what it was before the recession. Thirty-five, 40 
percent is perfectly manageable, we are okay. Seventy-five 
percent I think is--we have no room for error if something goes 
wrong. And as importantly, as you move into the next decade, 
again, under reasonable assumptions, the deficits are going to 
start to rise; the debt load is going to start to rise. So your 
work is not done. You have more work to do.
    Senator Crapo. As I see it, we have done some modest 
improvement in terms of controlling discretionary spending, 
although we have backtracked on that a little bit from the last 
Congress' Budget Control Act. We have seen about $2 trillion of 
new taxes come into play, including everything that has 
happened over the last 4 or 5 years. So we have got more tax 
revenue coming in. But we have done very little in terms of 
reforming the Tax Code, and we have done very little in terms 
of reforming entitlement spending. And it seems to me that we 
need to pay strong attention to all of those areas. Would you 
agree to that?
    Mr. Zandi. Absolutely. Absolutely. The long run looks dark 
because our entitlement programs are not on a sustainable 
footing, and we do need tax reform both to make the Tax Code 
more efficient but also to raise more revenue. So we need both 
tax reform and--
    Senator Crapo. The pro-growth element of what we need to 
get done is critical, and in the Tax Code I think is where we 
need to look for that.
    Mr. Zandi. Absolutely.
    Senator Crapo. Thank you.
    Mr. Rosenberg, I would like to talk to you in my remaining 
few minutes about the issue of quantitative easing. As we try 
to look at what is happening in our economy, a number of us are 
very concerned that the Federal Reserve has basically been 
propping up our credit for--well, to the tune of trillions of 
dollars now, and we think there is a price that is going to be 
paid for that ultimately.
    First of all, is that correct? Has the quantitative easing 
put us into a posture of facing an increased risk of inflation 
or other difficulties in the economy? And what will be the 
effect of the ending of the Federal Reserve's quantitative 
easing, if and when the Fed ever does start actually easing 
off?
    Mr. Rosenberg. Thank you, Senator. Well, I think the Fed 
has already started that process in terms of tapering, which 
is--
    Senator Crapo. Just to some extent.
    Mr. Rosenberg. --reducing the rate of growth of its balance 
sheet. That is a very complicated question, and I will tell you 
why: because so much of what happens in the marketplace is 
psychological. So we will draw some sort of linkage between 
what the Fed is doing with its balance sheet and, say, what the 
stock market is doing or what asset prices are doing. And what 
is interesting is that when you take a look at the past few 
years, this money, in quotes, that has been created by the Fed 
through quantitative easing, well, 90 percent of that money 
creation has actually just ended up as excess reserves on the 
balance sheets of the commercial banking system.
    So you can really as a central bank create all the money 
you want, but if it just sits in the garage and does not get 
recirculated in the economy, it is not really going to have a 
sustained inflationary impact. The way economists would view 
that is one of the reasons why we have not had an inflationary 
impulse is because the velocity of money or the turnover rate 
has continued to decline and acted as a huge offset to the so-
called money creation.
    So the inflation would ultimately come if and when we get 
the commercial banks engaged in a new credit cycle, and there 
are reasons why that is not happening from a regulatory 
standpoint. But the inflation would come from a classic 
quantitative--quantity theory of money identity. If we were to 
go through a new credit cycle, if that velocity of money begins 
to turn around and go higher, we go into a whole new credit 
cycle, then the inflation would ensue.
    There are other reasons why I think inflation could rise 
for reasons I said before, but from a monetary standpoint, it 
is unclear to me that the quantitative easing is going to lead 
to inflation barring a new credit cycle formulating.
    Senator Crapo. Thank you.
    Mr. Greenstein, could you comment on this as well?
    Mr. Greenstein. I am afraid I am not an expert on things 
like quantitative easing. I think Dr. Zandi could opine, but I 
hesitate to offer an opinion on something that I really do not 
have the expertise in.
    Senator Crapo. All right. We will let you pass then.
    Dr. Zandi?
    Mr. Zandi. I do not think inflation is an issue, no. I 
think with a 6.7 percent unemployment rate and with labor force 
participation as low as it is, and a lot of discouraged 
workers, I think we are a long way from monetary policy 
resulting in inflationary pressure. So I do not view that as a 
concern at this point.
    Senator Crapo. Do you view there to be risk or concern 
about the level of quantitative easing that we have seen so 
far?
    Mr. Zandi. No. I think that the Federal Reserve had no 
choice in what they did. They had to bring long-term interest 
rates down, mortgage rates down to help the housing market, 
support asset values. So I think they did what they had to do. 
It is, you know, obviously not the most desirable policy, but 
we are not living in a very desirable time. So they did what 
they had to do. And there are downsides to it. You know, I--
    Senator Crapo. That is what I am getting at. I mean, I do 
not think that the Fed can undertake this for the length of 
time and to the level and scope that it has without 
consequences. What are those downsides?
    Mr. Zandi. Well, there are a number of potential downsides. 
You mentioned inflation, but I discount that. I think the most 
serious potential issue are bubbles in asset markets. And you 
could argue, reasonably so, that there was bubble-like 
conditions in a number of emerging markets that are now getting 
wrung out because the Federal Reserve is changing policy. And 
so this dislocation--the turmoil in financial markets we are 
seeing right now is in part related to the Fed starting to 
exit, and there is a case--in my view, that is the most 
significant potential downside to what they are doing. And it 
could show up in other asset markets. You know, they are 
scouring the planet for potential imbalances in the financial 
system. Before the crisis, I would not get a call from anybody, 
any regulator, about any problem. Now I get calls every week 
from every regulator all the time. You know, ``What should I be 
worried about?'' Which I view as quite encouraging. And so they 
are really thinking through what could be going wrong.
    But at this point, this bubble concern, it is a legitimate 
concern. I just do not think it is an overwhelming one. And it 
is not a reason not to go down the path of quantitative easing.
    Senator Crapo. All right. Thank you.
    Chairman Murray. Thank you.
    Senator Whitehouse?
    Senator Whitehouse. Thank you, Chairman. Thank you, 
gentlemen.
    I want to touch on health care in the first instance. Mr. 
Greenstein, your testimony is that we have reduced the debt by 
$2.8 trillion deficit reduction as a result of the tax 
increases and the spending cuts that have already been 
implemented.
    Mr. Greenstein. Closer to $4 trillion, if you count 
sequestration.
    Senator Whitehouse. If you count the out-years of 
sequestration, correct.
    Mr. Greenstein. Correct.
    Senator Whitehouse. Now, in parallel with that, CBO has 
just reported again on its forecast on Medicare-Medicaid 
prices, and they have reduced the proposed Medicare-Medicaid 
spending that they anticipate by $1.2 trillion, and in today's 
news, before anybody's testimony could adapt to it, I gather 
that they have added another $150 billion in Medicare and 
Medicaid savings in the out-years in their projections. Is that 
number incorporated into your $2.8 trillion or your $4 
trillion? Or is that a further addition to it in savings in the 
out-years?
    Mr. Greenstein. Some of it is incorporated and some is not. 
So the part that is incorporated is the part that results from 
legislative action. For example, changes in Medicare that 
were--well, no, actually this is since 2010, so it already had 
in the starting point the changes in the Affordable Care Act.
    The $1.2 trillion figure, which was CBO's estimate of 
Medicare and Medicaid costs through the coming decade relative 
to what it had forecast back in 2010 and before today's numbers 
reflects what we call economic and technical factors.
    Senator Whitehouse. Is it a part of the $2.8 trillion?
    Mr. Greenstein. Is it a part of the $2.8 trillion? Really, 
no, because the $2.8 trillion is limited to things that 
Congress enacted and CBO scored from legislation. And that $1.2 
trillion is lower prices and payouts in Medicare and Medicaid 
just because the costs of health care systemwide--Medicare, 
Medicaid, and the private sector--have been rising at a 
significantly slower rate. So that is not reflected in the $2.8 
trillion.
    Senator Whitehouse. So the point that I would make is that 
we are making ground on Medicare and Medicaid, the anticipated 
costs in the out-years are starting to decline, and by real 
numbers. And trillions are big numbers. But we still remain a 
country that is burning 17 to 18 percent of GDP on health care. 
We are still, by about a 50-percent factor, more expensive than 
all of our--including our most expensive industrial competitors 
in the OECD. There are huge opportunities for savings in ways 
that are win-wins, improving the quality of care by lowering 
costs, and I will just take this opportunity to again call on 
the Obama administration to please try to set a goal, a target 
for the administration and what they intend to accomplish with 
their delivery system reform programs. It is the one big gap in 
what I think is good implement and, frankly, a pretty good law. 
The Affordable Care Act, about a third of it was dedicated to 
this delivery system reform stuff, and we never hear about it 
from our Republican colleagues because it is noncontroversial. 
It is being used in Wisconsin. it is being used in Alabama. It 
is being done in people's home States. ACOs are standing up. 
Hospitals are taking advantage of it. Prices and costs are 
beginning to come down. Care is improving. And it is all to the 
good. But it is being done without a goal, and I think for the 
President to set a hard goal would add a lot of focus to the 
effort that is underway, and we really need to get that done.
    The last point I will make, Mr. Greenstein, would you mind 
calling up your Figure 9, tax expenditures are very costly, 
onto the screen? Can somebody do that who is in charge of AV? 
Or are we past that?
    Mr. Greenstein. I do not know if they are programmed--
    Senator Whitehouse. I go back to AV. I am sorry.
    All right. It is a good graphic. You know, we talk a lot 
about the concerns about the cost of Social Security, $768 
billion on the graph, the costs of Medicare and Medicaid $716 
billion on the graph. Tax expenditures, the money that goes out 
the back door of the Tax Code is $1.08 trillion, and we really 
have not addressed that yet. And I would like to ask the 
witnesses: Do we need to address the $1.8 trillion going out 
the back door of the Tax Code? And would you be able to help 
with the income inequality problem in the country by addressing 
the $1.8 trillion going out the back door of the Tax Code? Let 
me go right across. One minute, so pretty quick answers. Sorry.
    Mr. Zandi. I think tax reform is addressing this issue of 
tax expenditure. That is a big part of it.
    Senator Whitehouse. Which we have not done.
    Mr. Zandi. Which we have not done and we need to do. It can 
make the system more efficient, more fair, easier to implement, 
and at the end of the day generate revenue, which we 
desperately need. And as you point out, it has important 
implications for the distribution of income as well. So this is 
one place where--
    Senator Whitehouse. Why does it have important--
    Mr. Zandi. Well, the benefits of the tax expenditures 
accrue mostly to upper-income households, for very obvious 
reasons. They pay most of the taxes, and they are going to get 
most of the benefit. Whereas, the spending benefits generally 
go to lower-and middle-income households. So if you can focus 
on tax expenditures--which tax expenditures is simply spending 
through the Tax Code, no different from an economic 
perspective. So when we talk about spending cuts, reducing tax 
expenditures is the same thing. So we should be focused on that 
to address this issue of income inequality.
    Senator Whitehouse. Well, my time has run out, but I would 
urge my Republican colleagues to allow us to begin to address 
these massive multi-billion, -trillion dollar tax expenditures 
which so far they have protected with a vehemence that is 
really remarkable.
    Chairman Murray. Senator Sessions.
    Senator Sessions. Thank you. With regard to the earned 
income tax credit, which is certainly one of the larger tax 
expenditures that we have, I do think as a matter of policy 
that is preferable to the classical welfare benefits. It is 
tied directly to work. It incentivizes work. It helps people to 
work.
    But I would share with my colleagues, the way it is paid 
undermines that concept because people file a tax return, they 
get a big tax check, and they do not really realize it is tied 
to their work. It would amount to about $1 an hour if you put 
it on people's paychecks, and I think with the new modern 
computer payrolls, that could be done pretty easily, and I 
think that would help us. So I think that is a move that I 
would be supportive of, although we have got other problems.
    With regard to the labor situation in the country, Gene 
Sperling has said, the President's adviser, a few weeks ago, we 
have three applicants for every job, and I would suggest to all 
of you market economists, if we have a shortage of labor, why 
are not wages going up? Wages have been going down, and they 
continue to go down. So I do not think we have some compelling 
need to find more labor. I think the compelling need is to take 
the millions of people that are out of work and incentivize 
them and train them to get them back into the workforce. For 
what it is worth, that is my thinking.
    Mr. Rosenberg, according to the 2014 Index of Economic 
Freedom, Canada is more economically free than the United 
States, which is a change. I guess the progress Canada has 
made, would you say that is good? If the United States were 
more economically free, would that help us increase the gross 
domestic product?
    Mr. Rosenberg. Well, thank you for the question, Senator, 
and let us hope that translates into a Gold Medal for the men's 
hockey team in Canada.
    [Laughter.]
    Mr. Rosenberg. Well, in answer to the question, the answer 
is yes, and, you know, as I sit here today, I feel almost as 
though I have been transported back in time in a similar 
setting in Ottawa 15, 20 years ago, when Canada faced very 
similar fiscal pressures that the U.S. does today. So in answer 
to your question, yes, I think that in Canada it comes down to 
the question before from Senator Whitehouse about the 
importance of lowering tax rates. What was interesting in 
Canada was that the party that really got the ball rolling on 
the fiscal mess the country was in were the liberals, and they 
were actually the party ultimately in the mid-1990s that solved 
the problem. But they managed to convince Canadians that fiscal 
sustainability was important.
    The point I tried to bring up was not to fall into a false 
sense of complacency because in the future--I actually do not 
agree with Mr. Zandi. I think that inflation might be dormant, 
but it is not dead. And if it does come back, the windfall we 
have had--and a big part of this windfall has been lower debt 
service charges--we are going to lose that. That is why I 
focused on the supply side.
    I fully support what the Federal Government in Canada did, 
which was, by the way, broaden the tax base--it comes down to 
tax expenditures. Broaden the base. And the Government of 
Canada broadened the base from, say, 70 percent to 85 percent 
of participants, and at the same time they lowered top marginal 
tax rates, which I think most economists--not all--would tell 
you that helps improve the incentive system.
    Senator Sessions. Mr. Rosenberg, was there resistance to 
some of the fiscal restraints that were placed on spending 
during those years?
    Mr. Rosenberg. The spending cuts were dramatic, there is no 
question about it.
    Senator Sessions. And did it hammer the Canadian economy? 
Was the economy in Canada permanently damaged? or is it 
healthier today as a result?
    Mr. Rosenberg. Not at all. It was controversial at the 
time. Now, this is basically important because this was not the 
conservative party that did this. It was the liberals who 
typically were center or left of center. But they could see 
that fiscal sustainability was being put into question.
    Now, Canada ultimately did face a fiscal crisis in the 
early 1990s, and the government had to respond. And the answer 
to the question is that what the government did was they 
educated Canadians, comparing the fiscal budget to the 
household budget, living beyond your means, and it resonated 
because the liberals won two majority governments over the 
course of the next decade, so they never paid the political 
price. In fact, it became politically acceptable to have a 
lower level of government spending as a share of GDP in Canada 
and to have fiscal integrity.
    Senator Sessions. Well, Mr. Rosenberg, one of the 
difficulties we have, in my opinion--and I think I am fair in 
saying this--is that the President refuses to even acknowledge 
that we have a deficit problem, and the Secretary of Treasury 
testified in this Committee that his budget would spend only 
money that we have and not add to the debt anymore, so it makes 
it difficult for the American people to be asked to sacrifice 
if their leaders are not doing it.
    Now, let me ask you further, Canada has a much lower 
corporate tax rate. Would you say that if we eliminated some of 
the deductions or tax expenditures in the corporate world and 
used those savings to reduce corporate rates, this would help 
us a Nation have greater GDP growth?
    Mr. Rosenberg. I firmly believe that top marginal rates are 
very important. In Canada, the Federal Government cut top 
marginal rates on corporate income from 29 percent to 15 
percent. When you look at the combined provincial-Federal, it 
is 26 percent in Canada; it is 40 percent in the United States. 
And the reality is that--and, again, I am taking a big-picture 
view here. I know we are talking about, you know, the debt 
ceiling, things that are coming up in the next 4 weeks, 8 
weeks. I am taking a look at the next 4 to 8 years. We are 
talking about fiscal sustainability, because when you get to a 
situation where you are spending 20 cents of every revenue 
dollar on debt servicing, there is a significant problem, and 
that is a problem we are going to face under status quo.
    In answer to your question, yes, I think corporate tax 
reform--and, actually, Canada is a great template. Canada 
today, on an equivalent basis to the United States, has a 5.7-
percent unemployment rate in Canada today with a participation 
rate that is 3 percentage points higher. So if you are willing 
to take a long-term view, achieving fiscal sustainability and 
the certainty that imparts to the private sector is integral. I 
do not think anybody 20 years ago could have forecast that 
Canada today on an apples-to-apples basis would have a lower 
unemployment rate than is the case in the U.S.
    Senator Sessions. Would the fact that we could get our 
Nation, as Canada has done, on a fiscal course that is not 
dangerous, would that help the economy grow by creating more 
confidence?
    Mr. Rosenberg. Absolutely. And Canada is a template. You 
know, if I go back, say, to the mid-1990s and you take a look 
at where Government spending was as a share of GDP in Canada, 
it was 20 percent. Today it is down to 15 percent. It has come 
down 5 percentage points.
    Senator Sessions. And the economy has grown and 
unemployment is below the United States significantly.
    Mr. Rosenberg. That is correct.
    Senator Sessions. Well, my time is up, but I do think that 
these are some of the long-term questions that we are wrestling 
with in Congress. Frankly, it is the disagreement, the good-
faith disagreement between our parties mostly. Mr. Zandi 
believes we should spend more, borrow more, and tax more. So 
does Mr. Greenstein. And you do not, and I think I agree with 
you. Therein we have a disagreement.
    Thank you, Madam Chair.
    Chairman Murray. Thank you very much. And, Mr. Rosenberg, I 
just have to say I think all my constituents who want a 
Canadian-style health care would applaud how well Canada is 
doing as well.
    Mr. Rosenberg. Thank you.
    Chairman Murray. Senator King?
    Senator King. Thank you.
    Mr. Rosenberg, first, welcome to Washington and the U.S. I 
live in Maine where we can see Canada, generally.
    [Laughter.]
    Senator King. And I do not know if you are aware of the 
definition of a Canadian. A Canadian is an unarmed North 
American with health insurance.
    [Laughter.]
    Mr. Rosenberg. And a hockey stick in the other hand.
    Senator King. There you go.
    Madam Chair, in reference to the budget, I think--and this 
takes off on Mr. Zandi's testimony--the passage of the budget 
agreement was miraculous because it did show that we could, in 
fact, do things. And I think it has already shown a positive 
effect on the economy.
    I know it is miraculous because, in a hearing at the Armed 
Services Committee, we could not determine where the idea of 
reducing the COLA for military veterans came from, and I 
concluded that it was an immaculate conception, because it does 
not seem to have any parentage.
    Gentlemen, I am worried about interest rates and the debt. 
And I think my friends on this side of the dais should be 
worried about it, too, because right now at a $17 trillion 
debt, if interest rates go to anything close to historic 
levels--call it 5 percent; in 2000 it was 6 percent--we are 
talking about $850 billion a year just to pay interest. That is 
larger than Social Security. That is a dead expense. And it is 
going to crowd out all the priorities that this side of the 
aisle wants to effectuate. It is bigger than Social Security. 
It is bigger than defense. It is 5 percent of GDP.
    What do you think of the idea--I mean, we have done--I 
think we have done an incredible job of reducing the deficit 
from 9 percent of GDP to 3 percent. That is progress. But we 
have not done a thing about the debt itself. Do we need a 
mechanism to reduce the debt, some kind of 1 percent dedicated 
to debt reduction? In a home mortgage, it is when you put an 
extra $500 every month toward principal reduction. Otherwise, 
we will never get out of this hole, and I think we are facing a 
time bomb of interest rates. And an interest rate increase to 5 
percent would make--I am trying to think of the sequester. 
Basically it would equal the sequester, if not greater.
    Mr. Zandi, thoughts about that?
    Mr. Zandi. Well, I certainly sympathize with your concern. 
I would say a couple things to make you feel a little bit 
better. One is that in the budget forecast, the CBO budget 
forecast, they project a normalization of interest rates, so 
10-year Treasury yields go back closer to that 5-percent rate 
that you mentioned. And--
    Senator King. That makes me feel better?
    Mr. Zandi. Well, in the sense that--
    Senator King. That gets us to $850 billion a year of 
interest payments.
    Mr. Zandi. In the sense that even with that interest rate 
assumption, which is a very reasonable assumption, the deficit-
to-GDP ratio remains low, at least through the remainder of the 
decade.
    The other thing I--
    Senator King. The deficit or the debt.
    Mr. Zandi. Both. Both. The deficit to GDP will remain 
stable at 3, 3-1/2 percent of GDP, and the debt-to-GDP ratio 
will remain constant at 73, 74 percent for the next 5 years or 
so.
    The other reason to be a little sanguine in the near term 
is that the Treasury is also extending the maturity of the 
debt, so the average maturity of the debt is almost 6 years, so 
they are locking in these low interest rates for a while. But 
you make a great point. As you move out into the next decade, 
we have got rising entitlement costs and rising interest costs, 
and it does not work. Our fiscal situation will fall apart. So 
we need to address that.
    But the way to address that is through blocking and 
tackling. You know, we have got to reform the entitlement 
programs to put them on a sustainable basis. That means more 
work on health care at some point. And it also means tax reform 
and generating more tax revenue. There will be more baby 
boomers retiring needing Social Security and Medicare, and we 
need more tax revenue to meet that demand.
    So there is no easy answer that, you know, we pay back the 
debt one dollar--without addressing spending, without 
addressing the Tax Code. We have to do those things to address 
the debt.
    Senator King. We have to do all three of those things. But 
my question, Mr. Greenstein, is: Don't we need to be thinking 
about that $17 trillion and how we get it down to 10 or some 
number where 1 point of the interest rate does not equal $170 
billion a year?
    Mr. Greenstein. A couple of points. Our key figure is 
really the roughly $12 trillion that is the debt held by the 
public. The other roughly $5 trillion is debt one part of 
Government owes another part of Government, and the interest is 
just sort of moving between accounts within the Government.
    But the $12 trillion, which is the publicly held debt, is a 
concern, and the concern is that over the long term, if the 
debt keeps rising as a share of the economy and, as you say, 
interest rates come back to more normal levels, then I think 
all three of us are saying that the total amount the Government 
has to pay out in interest each year is too high. It probably 
both makes our fiscal situation less good and crowds out other 
things that are important to do.
    So the issue, I think, is not actually lowering that dollar 
amount. You know, let us suppose that magically you could keep 
the publicly held debt from not rising too much above $12 
trillion. Your debt would come way down over time as a share of 
GDP as the economy grew.
    I think we kind of see as the goal, first, stabilize the 
debt so it does not rise faster than GDP, and then as Mark 
Zandi said, over time we want to get that debt ratio down. We 
have made more progress than people understood. ``We, the 
Committee for a Responsible Federal Budget. 4 years ago, were 
predicting debt-to-GDP ratios of 200 to 300 percent of GDP out 
30 or 40 years. Now it looks like it is below 100 percent of 
GDP. Still too high. We have got to get it down lower. But I 
think the lesson to me of the last few years is it is 
politically very hard to do grand bargains, but if we keep 
chipping away incrementally, we can make progress, first, to 
stabilize the debt and then to put it on a downward path. And, 
of course, the single most important variable here, what 
happens to the rate of growth of health care costs throughout 
the entire U.S. health care system?
    Senator King. I missed your initial testimony. I apologize. 
I was at another hearing. But are there any good theories about 
why the health care costs have, in fact, fallen, the growth has 
fallen in the last 2 or 3 years? Is it sustainable? I guess 
that is the real question.
    Mr. Greenstein. That is the $64,000 question. I think the--
    Senator King. It is in the billions, Mr. Greenstein.
    Mr. Greenstein. I am showing my age. I watched that quiz 
show as a kid.
    I think there is broad agreement among analysts that some 
of the slowdown is due to the economy--less consumer demand 
affects purchases for health as well--but then a lot of it is 
due to changes in the health care system. If it were purely the 
economy, we would not see a big effect in the slowdown in cost 
growth per beneficiary in Medicare, since Medicare 
beneficiaries are generally out of the economy.
    With each new year of data, analysts are getting more 
encouraged that a larger share of this may be ongoing rather 
than temporary. We do not know yet, and there is a lot of 
ferment going on in the private sector, in demonstration 
projects throughout the country in Republican and Democratic 
States alike. States are experimenting with things like better 
coordinating care for Medicare-Medicaid dual eligibles. The 
hope is that much of this remains. There are new developments 
that slow cost growth and that we get results from research and 
demonstration projects that point out the next set of things to 
do. But that is part of the uncertainty. There is a wide range 
of uncertainty now on how much health care costs will slow on 
an ongoing basis in future decades. And if you are at the low 
end of the spectrum, the fiscal situation is no longer that 
dire in future decades. But if you are at the high end of the 
situation, it is a disaster in future decades. And we do not 
know yet where in that range we are.
    Senator King. I am out of time. I certainly appreciate your 
testimony and would commend to you three gentlemen to think 
about is there some mechanics whereby we can not only reduce 
the deficit but also make a credible reduction of the debt 
itself, for example, tax reform, part of the new revenues go to 
lowering rates, but part goes to debt reduction--not deficit 
reduction but debt reduction. It is just an idea, and I would 
ask you to think about that. If you have thoughts, pass them 
on. Thank you.
    Thank you, Madam Chair.
    Chairman Murray. Thank you.
    Senator Johnson?
    Senator Johnson. Thank you, Madam Chair.
    I will just quickly give a business person's perspective of 
one of the reasons that health care costs are restrained is 
over 31 years, as I bought health insurance for the people who 
worked with me, as we went to higher and higher deductibles, 
instituted health savings accounts, that put people in charge 
and involved in the consumer's decisions. I think that has 
certainly had an impact.
    One thing I would like to do is I do have one slide. You 
know, as a manufacturer, I certainly learned how to solve 
problems. The first step in solving a problem is to admit you 
have got one. The second step is to properly define it.
    Now, what we have tried to do--and CBO has been somewhat 
helpful, but not as helpful as I would like them to be, but we 
have used their alternate scenario here, which is really, if 
you take a look at the assumptions here, pretty reasonable: tax 
cuts for people making less than $250,000 continue, and we 
basically enacted that; AMT patches, doc fixes, all these 
things continue.
    As we have taken their percentage of GDP figures--which is 
incomprehensible. I mean, I am sorry, we all talk about it, but 
nobody understands it--and tried to turn that into dollars, 
what we have come up with is about $100 trillion of deficit 
spending over the next 30 years. Now, 30 years is not a very 
long time period. My eldest child just turned 30. It went by in 
a heartbeat.
    We do not have a 10-year budget window problem. You can see 
that. The deficit over the next 10 years is about $5 trillion. 
We have a 30-year demographic problem. We have a bunch of baby 
boomers retiring at the rate of 10,000 per day. We have made 
all these promises to them, and we did not make adequate 
provision to pay them. And that puts us in a real pinch.
    So if you take a look at--what I have tried to do is do 
this 30-year projection--and I know, Senator King, I appreciate 
you are willing to hear me out on this. We have tried to set up 
in a format where we are not dealing with that many numbers, 
but we are dealing with numbers so people can understand it. I 
think people can take a look at this and go, boy, $100 
trillion, by the way, that exceeds the net private asset base 
of the United States today.
    But you can also kind of see where the problem lies. You 
have got about $14, $15 trillion in Social Security benefits 
that exceed what we take in the payroll tax. You have got about 
$35 trillion of Medicare payments, benefits, that exceed what 
we take in the payroll tax, and the rest is just other deficit 
spending, if you want to define it that way. So, you know, from 
my standpoint I would like to start with a couple questions.
    Mr. Rosenberg, you were talking about labor force 
participation and talking about educating the public. I could 
not agree more with you. Very interesting that Canada limits 
their--right now their spending in relationship to GDP is 15 
percent. Ours peaked over the last couple of years at 25 
percent, not historically peaked but in the relatively short 
term 25 percent. We are down to 20, but we are on a trajectory 
to hit 30, 35 percent, depending on what projections you are 
looking at.
    You quote--and I am also aware of the fact that in the last 
5 years we have gone from people out of the workforce, from 
about 81 million to 92 million, increasing 11 million 
individuals. Now, some of those are those retiring baby-boom 
generation. Do you have that broken down at all? Have you ever 
seen where that breaks down? How many are retiring? How many 
should potentially be in the workforce?
    Mr. Rosenberg. Well, I do not have the numbers broken down, 
but the data from the BLS, from the household survey, are 
fairly detailed. So the data are not that difficult to obtain. 
But I think that when you take a look--and what I said before, 
that even if you take a look at the prime aged adult cohort, 
say that 25-to 54-year cohort, people have been leaving the 
labor force there as well. Those are not retirees. And I think 
the one area where I would disagree with Mark Zandi is that 
this is not about discouraged workers. That is what is 
incredible, is that in the prime aged cohort, the number of 
people that have left the labor force that say they are 
discouraged are actually down 20 percent. There is something 
else at work here.
    Senator Johnson. We had an incredibly interesting witness 
here, the head of the welfare department of Pennsylvania, and 
he did a study on a single mom, who we have got a great deal of 
sympathy for. But he showed that basically up to $26,000 of 
earnings it was marginally beneficial for her to continue to 
work. Past that point, because of a decrease in benefits and an 
increase in taxes, she basically was facing a marginal tax rate 
of 100 percent until her earnings got into the $60,000 range.
    Have you seen studies and could it be one of the reasons 
people are leaving the labor force, is we incentivize them not 
to work at a certain point?
    Mr. Rosenberg. Well, there have been studies, some rather 
controversial, which have shown that, you know, if you do tap 
the myriad of benefits at every level of Government, you can 
actually--in 39 States apparently you could make as much money, 
say, as an admin assistant. Now, as I said, these--you know, 
this report in particular was controversial. I cited in the 
written testimony that I handed in a report, testimony by C. 
Eugene Steuerle in
    February of last year to the House Committee on Oversight 
and Government Reform. It was titled--and I think this is well 
worth the read for everybody. It was called ``Labor Force 
Participation, Taxes and the Nation's Social Welfare System.'' 
And he did basically discuss some of the plausible explanations 
as to why people are falling through the cracks of the labor 
market as traditionally defined.
    Basically one of the things that should be examined, at 
least is his conclusion, was the piecemeal and inefficient 
manner that a lot of these, say, Government subsidies are being 
introduced. That is one thing that the Canadian Government did 
at the same time. They did a whole bunch of things back in the 
mid-1990s. But they unbundled a lot of these social programs to 
make them more targeted, and in the final analysis saved 
taxpayer money.
    Senator Johnson. Senator Sessions talked about making a 
modification to the earned income tax credit, which I believe 
is the best way of addressing a livable wage so that we do not 
actually reduce the entry-level job positions, because I think 
that is what happens when you increase the minimum wage.
    Another thing we take a look at in terms of strengthening 
that is let us work to eliminate the 21 percent of improper 
payments in the earned income tax credit. That is one way we 
can strengthen it.
    Before I run out of time, I do want to just touch on Social 
Security. I think, Mr. Greenstein, you talked about the 
difference between public debt and total debt, and that really 
does speak to the trust funds. We had very interesting 
testimony from CBO Director Elmendorf in our budget conference 
where finally, after four attempts with administration 
officials, I was able to get Mr. Elmendorf to admit that the 
Social Security Trust Fund nets to zero when you consolidate 
the books of the Federal Government. You have an asset in the 
Social Security Trust Fund offset by the liability to the 
Treasury netting to zero.
    And so when you take a look at these deficits, when you 
realize that you really have no asset, no real asset of the 
Federal Government to pay off $14, $15 trillion in Social 
Security, that is a real problem, isn't it?
    Mr. Greenstein. Well, it is part of their larger long-term 
fiscal imbalance. The Social Security Trust Fund holds Treasury 
bonds that investors worldwide view as perhaps the safest 
investment in the world. So Social--
    Senator Johnson. But when it is held in the hands of the 
Federal Government, it is the same thing as if you had $20, 
spent it, and then write yourself a pretty little note, put it 
in your pocket, and say, ``I have got 20 bucks.'' No. You have 
a piece of paper that you are going to have to get somebody 
else to give you money, either tax people or get somebody else 
to buy that bond. Correct?
    Mr. Greenstein. It is as good as gold for Social Security. 
It is not sufficient for Social Security for the next 75 years. 
That is why the system is projected to become insolvent in 
about 2033. But part--
    Senator Johnson. So who pays, who reimburses the trust fund 
for the $2.6 trillion?
    Mr. Greenstein. This is part of our larger governmentwide 
fiscal imbalance that we need to address.
    Senator Johnson. It is the Federal Government that has to 
pay the $2.6 trillion, right? So it has got the liability, the 
asset; it has no value to the Federal Government. I just want 
people to understand, to define the problem, admit we have one, 
because Social Security is not solvent to the year 2033. It is 
running cash deficits now. It will run cash deficits of $4 to 
$5 trillion over the next 30 years, and we better fix that. And 
Medicare is even worse, a dollar going in, $3 being paid out in 
benefits, and, you know, around this town nobody is--we 
basically have reality deniers here. Nobody is admitting we 
have a problem. We are not defining it properly. We are talking 
all these percentages and gobbledygook. We need to put some 
real hard numbers. We have got to have the solutions laid out 
with the dollar value of those solutions so we start talking 
about and debating these issues with real information. That is 
my point.
    Mr. Greenstein. I would just say two things can 
simultaneously be true, and this is not a contradiction:
    Social Security is solvent through the early 2030s because 
it has these assets which will absolutely be honored. If the 
Federal Government stopped honoring Treasury bonds, whether 
they were held by U.S. investors, foreign investors, or the 
Social Security Trust Fund, any one of the three, that would 
have catastrophic implications.
    But it is also true, as you are saying, that the overall 
Federal balance sheet that includes Social Security has to be 
stable, and to do that we have to have a debt-to-GDP ratio at a 
sustainable level that is not rising rapidly.
    Chairman Murray. Mr. Greenstein, that is going to have to 
be our last word, and I appreciate all of our witnesses for 
participating today, and I want to thank all of our colleagues 
as well.
    As I said at the outset, I really hope that the passage of 
our Bipartisan Budget Act really signals the beginning of the 
end of Congress lurching from these manufactured crises to the 
next and serves as a model of how we can all work together on 
issues that expand opportunity and growth for our families and 
our communities and our businesses.
    With that, as I mentioned earlier today, we will be here 
again next Tuesday to hear from Director Doug Elmendorf on 
CBO's latest budget and economic outlook. I urge all of our 
colleagues to attend that important hearing.
    And, finally, as a reminder, additional statements and/or 
questions for our witnesses from today's hearing are due in by 
6:00 p.m. today.
    With that, thank you all for your participation, and this 
hearing is closed.
    [Whereupon, at 12:09 p.m., the Committee was adjourned.]


       THE BUDGET AND ECONOMIC OUTLOOK FOR FISCAL YEARS 2014-2024




                       TUESDAY, FEBRUARY 11, 2014

                              United States Senate,
                                   Committee on the Budget,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 10:34 a.m., in 
Room SD-608, Dirksen Senate Office Building, Hon. Patty Murray, 
Chairman of the Committee, presiding.
    Present: Senators Murray, Nelson, Stabenow, Whitehouse, 
Warner, Coons, Baldwin, Kaine, King, Sessions, Grassley, Enzi, 
Crapo, Portman, Toomey, Johnson, Ayotte, and Wicker.
    Staff Present: Evan T. Schatz, Majority Staff Director; and 
Eric M. Ueland, Minority Staff Director.

              OPENING STATEMENT OF CHAIRMAN MURRAY

    Chairman Murray. This hearing will come to order. I want to 
welcome everyone and thank my Ranking Member, Senator Sessions, 
and all of our colleagues who are joining us here today.
    And I want to thank Dr. Doug Elmendorf and the entire staff 
at the Congressional Budget Office. We really do appreciate all 
the hard work and the high standard of professionalism and 
objectivity that CBO provides to this Committee and to 
Congress. Those qualities were especially helpful last year in 
assisting Chairman Ryan and I with the completion of the 2-year 
Bipartisan Budget Act.
    That deal that we reached in December was a strong step 
away from the constant crises that we have seen for the past 
few years. Democrats and Republicans finally came together to 
pass a budget and roll back the irresponsible cuts from 
sequestration with a balanced approach that included smarter 
savings and new revenue. And we came together and compromised 
to show people everywhere that bipartisan work in Washington is 
possible.
    Unfortunately, the drama and uncertainty around the debt 
limit that caused so much harm to families and the economy last 
year has come back over the past few weeks. But there was 
encouraging news this morning. House Republicans seem to have 
finally realized that Democrats are not going to pay a ransom 
to allow the Federal Government to pay its bills, and I look 
forward to them sending over a debt limit bill with no ransom 
demands attached. And I am hopeful that we can truly step away 
from the constant crises and debt limit brinkmanship to build 
on the bipartisan progress that we did make in our budget deal.
    Now, recognizing the findings and the challenges that the 
CBO budget outlook identified, I think we should move forward 
in two ways. First, we need to work to ensure every family has 
the opportunity to succeed in America. At the same time, we 
need to address our long-term fiscal challenges fairly and 
responsibly.
    Those two goals go hand in hand because the best way to 
tackle our long-term fiscal challenges is to invest in broad-
based and long-term economic growth.
    Before we get into the details of the CBO's outlook for the 
next decade, it is helpful to take a step back and see where we 
have been.
    When President Obama took office, we were facing the worst 
economic downturn since the Great Depression. The country was 
losing more than 700,000 jobs a month. Families were losing 
their homes, and parents were losing confidence in what the 
future would be like for their children.
    We have made significant progress since then. We have had 
47 consecutive months of private sector job gains. Economists 
believe economic growth is poised to accelerate this year. The 
housing market has improved, though we cannot forget that many 
families are still struggling. And, of course, even though 
these are good signs, the recovery has not been nearly as fast, 
or as strong, as any of us would like. Last Friday's 
disappointing jobs report is just the latest reminder of that. 
So while we are moving in the right direction, Congress can, 
and must, do more to boost this economic recovery.
    In the past few years, we have also made significant 
strides in tackling our fiscal challenges. Since 2009, we have 
cut our deficit in half. CBO projects it is on a path to 
decline further this year and the next, with the debt 
stabilized as a share of the economy through the end of this 
decade.
    But as with the economic recovery, we have more work to do, 
and I look forward to hearing from Dr. Elmendorf about the 
long-term deficit challenges--challenges we cannot ignore.
    To be clear, discretionary spending--by which I mean 
investments in priorities like national security and 
infrastructure, research, education, and programs that fight 
poverty and provide economic security--that is not driving our 
fiscal challenges.
    In fact, CBO projects that discretionary spending will 
continue to decline as a share of GDP through 2024. In the 
1970s and 1980s, discretionary spending averaged about 10 
percent of GDP. Last year, it was at 7.2 percent of GDP. And by 
2024, those investments will represent just 5.2 percent of GDP. 
This decline is alarming because limiting discretionary 
spending means limiting investments in innovation and cutting-
edge technology that actually spark job growth. It also means 
threatening our efforts to care for service members, veterans, 
and their families. Those lifetime investments will be critical 
over the next few years as more military families transition 
from the battlefront to the home front.
    And limiting discretionary spending will roll back efforts 
to give kids and families the education and job training 
opportunities that they need to succeed in a global economy.
    I want to be clear on another point in the CBO report that 
caused a lot of confusion last week. For too long in this 
country, leaving a job also meant leaving behind your health 
care coverage. In 2008, Harvard University conducted a study 
that found 11 million workers wanted to change jobs, but felt 
locked in to their current job simply to keep their insurance.
    One of those workers is named Christine Lange. She is from 
my home State of Washington, and a year ago, Christine dreamed 
of quitting her job to start a small business. But her family 
relied on the health insurance that she received through her 
employer.
    The Affordable Care Act changed that for her. In January, 
she retired from her old job and now plans to launch her own 
business later this year.
    By expanding access to health care, more people will also 
have the opportunity to retire early. More entrepreneurs will 
have the chance to start a new business, without giving up 
access to health care.
    And CBO's report makes it clear that the Affordable Care 
Act is good for parents. That is because it will give more 
parents the choice to stay home and raise a family and the 
choice to reduce hours to take care of an aging parent or 
family member.
    That does not mean that unemployment will go up. In fact, 
CBO found that, on balance, the Affordable Care Act will 
actually boost demand for goods and services over the next few 
years. And that is because when people have access to 
affordable health care, they are able to spend more of their 
earnings on other family needs.
    But the latest outlook makes clear we have some areas to 
work on. The CBO projects mandatory spending for programs like 
Medicare and Medicaid will continue to rise over the next 
decade. The solution is not to shift those growing costs onto 
seniors and families, as we have heard Republicans propose. We 
need to work on ways to bring those costs down responsibly.
    The good news is health care costs have slowed 
significantly in recent years. From 2010 to 2012, the cost of 
health care grew at its slowest pace since the Government 
started tracking it in the 1960s, according to the Council of 
Economic Advisers. The CBO reports the cost of Medicare ``will 
be slower than usual for some years to come.''
    So we need to follow through on the reforms in the 
Affordable Care Act that reduce costs and increase access to 
quality care. And we need to work together to build on them.
    Bringing down health care costs is just one part of the 
solution. We also need a balanced approach to tackle our 
deficit--one that reduces spending and raises new revenue 
fairly and responsibly.
    As CBO reports, in 2014, Federal spending through the Tax 
Code is the single largest item in the budget, costing American 
taxpayers more than Social Security, Medicare, or defense.
    While some of those tax breaks go to important investments 
in the middle class and low-income working families, the 
Treasury loses hundreds of billions of dollars to tax loopholes 
and carve-outs that benefit the wealthiest Americans and 
biggest corporations.
    Big businesses should not get to write off expenses 
associated with shutting down a plant in the U.S. and moving it 
overseas. It is wrong that corporations can claim massive tax 
breaks by deducting the interest on loans used to finance 
foreign operations before they pay tax on their foreign income.
    These unfair tax giveaways only incentivize corporations to 
move jobs abroad, and they make it harder for U.S. businesses 
without foreign operations to compete.
    The list of egregious loopholes and special interest 
giveaways goes on, and it would be unfair and unacceptable to 
protect every last one of them and ask seniors and families to 
bear the burden of deficit reduction alone.
    In recent years, many in Congress have had almost a 
singular focus on reducing the budget deficit. While important, 
that has left us with deeper deficits in other areas.
    Our roads and bridges are crumbling. We are not making the 
investments we need in education and job training. While other 
nations are investing in innovation and research and 
development, we have scaled them back. We have a serious jobs 
deficit and a serious opportunity deficit. And we would be 
doing families today, and the next generation, a great 
disservice if we let these deficits continue to grow.
    Addressing these deficits is not just the right thing to 
do. It is also good economics, and it is good for the budget. 
When we invest in job creation and innovation, small business 
owners create new products and technology the rest of the world 
wants to buy. And with more growth, more people can find jobs, 
and incomes increase. As broad-based prosperity increases, our 
long-term budget challenges become easier to tackle.
    That point--that these two challenges go hand in hand--is 
riveted by the latest CBO report. As I read it, Dr. Elmendorf, 
the biggest change in the deficit and debt projections relative 
to last May result from changes in CBO's economic projections. 
Those changes lower revenues and, on net, increase deficits and 
debt by $1.2 trillion.
    To put that in perspective, $1.2 trillion is twice the 
amount of revenue that Congress elected to raise by allowing a 
portion of the 2001 and 2003 tax relief to expire for upper-
income taxpayers at the end of the last Congress.
    So we need to put in place a credible plan that reduces 
spending responsibly, that raises revenue by closing wasteful 
and egregious tax loopholes, and that invests in and grows our 
economy today and pays dividends for generations to come.
    But to do that, we will have to build on the bipartisan 
foundation we built with our 2-year budget deal. That deal was 
a good start. It showed that Republicans and Democrats can come 
together to put families and the economy first.
    I hope continue that work and tackle our long-term fiscal 
challenges fairly and responsibly and expand opportunities for 
our workers and our families, because I think if we do that, we 
can move forward together and build a future of shared 
prosperity for generations to come.
    With that, Dr. Elmendorf, I am looking forward to hearing 
your remarks, but first we will hear from my colleague Senator 
Sessions.

             OPENING STATEMENT OF SENATOR SESSIONS

    Senator Sessions. Thank you, Madam Chairman, and welcome, 
Director Elmendorf. We want to thank you and your team for the 
good work and support you give to Congress.
    The Ryan-Murray bill did, Madam Chairman, create some 
stability in our fiscal situation, which is good, but it did 
spend more money than was agreed to in the Budget Control Act. 
And this very day we will be voting again to bust the limits 
you placed in Ryan-Murray. So this Congress is not showing in 
any real sense a commitment to honor the promises we make to 
the American people, and that is one of the reasons our debts 
have reached such a high level.
    CBO's latest budget and economic outlook is another 
sobering report in a number of sobering reports since the 2007-
09 recession. It has been 4 years since that recession, long 
past the time we normally see more robust growth than we are 
now recognizing. And the CBO report indicates that in the tenth 
year, the amount of interest we would pay on our debt just that 
year is higher than you projected last year after 10 years. It 
is not a good path.
    So the Nation's policies after the recession ended in 2009 
have not come close to producing the results, the growth the 
President promised. CBO and many other organizations, the 
President's own OMB, and the Federal Reserve have also made 
forecasts for economic growth that were far above what actually 
happened. CBO's report today is a recognition that the economy 
has failed to lift off after the recession had been declared 
over.
    Millions of Americans are hurting. This is not a healthy 
recovery. It is just not. The United States economy typically 
reverts to the mean after a recession, but this time it has 
not. The President has said his stimulus bill, the Affordable 
Care Act, increased taxes and regulations, and more Government 
spending would result in a strong bounce-back. But after 
President Obama signed the stimulus bill, the Congressional 
Budget Office estimated that real GDP growth would be at 4.7 
percent for each of the past 2 years. That is 2012 and 2013. We 
did not have that growth. It grew at a paltry 1.9 percent last 
year, falling from an anemic 2.8 percent the year before.
    Only 2 years ago, after the Affordable Care Act was passed, 
CBO expected real growth this year, 2014, to be 4.6 percent. 
Wouldn't we like to have that? After these misses, CBO is now 
predicting we would have only 2.7 percent growth this year.
    Ominously, the percentage of people participating in the 
economy, working or looking for work, the labor force 
participation rate has fallen to 1970s levels.
    So the policies that the Nation has pursued to promote 
economic growth, they have not had the effect we hoped for. The 
growth that is needed to increase the number of Americans with 
jobs did not occur. The recovery to date has seen corporate 
profits increase some and the wealthy to see their investments 
grow at least close to what they were before the recession. But 
working Americans have seen lower wages, more part-time jobs, 
and fewer full-time jobs.
    It is clear that growth at 2 percent is merely treading 
water. It must be sharply higher to increase the number of 
Americans actually working. Certainly we have learned in this 
recovery that GDP growth can occur without real benefits for 
the working people in our country. And, sadly, CBO's report 
also recognizes that the President's 2010 health care law is a 
hammer blow to lower-income workers.
    Despite concerns raised at the time that the Affordable 
Care Act would reduce work opportunities, CBO did not think 
that effect would be significant when the law was signed in 
2010. CBO now estimates Obamacare will lead to Americans 
working fewer hours or dropping out, and this will be the 
equivalent of 2.5 million productive Americans. In other words, 
4 years after the health care law was enacted and just as it is 
beginning to be implemented, CBO has now tripled its estimate 
of the number of jobs that will be lost or equivalent jobs that 
will be lost as a result of the law. So that means the average 
employed person's wages will total $930 less 10 years from now.
    CBO has been criticized for this finding, but the analysis 
you have made, Dr. Elmendorf, it seems to me just reflects what 
data is showing. Indeed, two-thirds of jobs created in 2013 
were part-time jobs. So I look forward to receiving from CBO 
more information about how these conclusions were derived. We 
do know this compensation loss will fall more heavily on lower-
income Americans.
    So this is another example of the policies with good 
intentions that are actually hurting working Americans, not 
helping them. The end result is that CBO has reduced its 
estimate of the economy's growth potential, and the report 
finds the U.S. economy is not assumed to reach even that 
reduced potential over the next 10 years under current 
policies.
    So let us pause a minute to consider an important point, as 
stated by the free market-oriented National Review. They 
declare, rightly I think, that we are a nation with an economy, 
not an economy with a nation. It is our duty to take 
principled, achievable steps that will benefit the most 
Americans in our country, not just the fortunate few, and to do 
so without increasing our debt, which is already well into the 
danger zone.
    So I hope the CBO's report and today's decision can help 
serve as a springboard for a more serious conversation about 
what is going on in the U.S. economy and the people who have 
not prospered.
    Spend, borrow, regulate, and tax have not worked as a jump-
start to prosperity. Expanding Government has not produced 
prosperity. Stimulus programs and quantitative easing have done 
little good. Indeed, these actions reality shows overall have 
produced far weaker growth than was predicted even just a few 
years ago, and which we normally see after a recession.
    So working Americans should focus less on promises and good 
intentions. They need to focus more on results and what will 
actually happen. That is what we in Congress should do. Good 
intentions are not sufficient. We need to enact sound policies 
that reduce the deficits and put us on a path to growth and 
prosperity.
    I thank you for your report, Dr. Elmendorf, and look 
forward to working with you as we go forward.
    Chairman Murray. Thank you.
    Dr. Elmendorf, I understand that your microphone is not 
working, so we have jury-rigged something for you. It is 
probably unfortunate that our microphones did not blow out. But 
be as it is, I hope that that one works well for you and we can 
move forward with your testimony.

  STATEMENT OF DOUGLAS W. ELMENDORF, DIRECTOR, CONGRESSIONAL 
                         BUDGET OFFICE

    Mr. Elmendorf. So I hope this will be fine. Thank you, 
Chairman Murray, Senator Sessions, and members of the 
Committee. On behalf of all of my colleagues who have worked so 
hard to produce these reports on the outlook for the budget and 
the economy and on the slow recovery of our labor market, I am 
happy to be here today.
    Beginning with the budget, the Federal budget deficit has 
fallen sharply during the past few years, and it is on a path 
to decline further this year and next year. We estimate that, 
under current law, the budget deficit this year will total 
about $500 billion compared with $1.4 trillion in 2009. At that 
level, this year's deficit would equal about 3 percent of the 
Nation's economic output or GDP, close to the average 
percentage seen during the past 40 years.
    As you know, our baseline projections show what we think 
would happen to Federal spending, revenues, and deficits over 
the next 10 years if current laws generally were unchanged. 
Under that assumption, the deficit is projected to decrease 
again in 2015 to about 2.5 percent of GDP. After that, however, 
deficits are projected to start rising, both in dollar terms 
and as a share of the economy, because revenues are expected to 
grow at roughly the same pace as GDP, whereas spending is 
expected to grow more rapidly than GDP.
    Why the more rapid spending growth? In our baseline, 
spending is boosted by four factors: the aging of the 
population, the expansion of Federal subsidies for health 
insurance, rising health care costs per beneficiary, and 
mounting interest payments on Federal debt.
    With no changes in the applicable laws, spending for Social 
Security will increase from about 5 percent of GDP this year to 
about 5.5 percent in 2024. Spending for the major health care 
programs, a category that includes Medicare, Medicaid, the 
Children's Health Insurance Program--or CHIP--and subsidies to 
be provided through insurance exchanges, will climb from less 
than 5 percent this year to more than 6 percent in 2024 under 
current laws. And net interest payments by the Federal 
Government are also projected to grow rapidly, primarily 
because interest rates are likely to return to more typical 
levels.
    In sharp contrast, the rest of the Federal Government's 
non-interest spending for defense, for benefit programs other 
than the ones I just mentioned, and for all other non-defense 
activities is projected to drop from about 9.5 percent of GDP 
this year to about 7.5 percent in 2024 under current law. That 
would be the lowest percentage of GDP since at least 1940, 
which is the earliest year for which comparable data have been 
reported. Thus, an increasing share of the budget would go 
toward benefits from a few large programs, and a shrinking 
share would go toward most of the rest of the Government's 
functions.
    The large budget deficits recorded in recent years have 
substantially increased Federal debt, and the amount of debt 
relative to the size of the economy is now very high by 
historical standards. We estimate that Federal debt held by the 
public will equal 74 percent of GDP at the end of this year and 
under current law will reach 79 percent in 2024. Such large and 
growing Federal debt could have serious negative consequences, 
including restraining economic growth in the long term, giving 
policymakers less flexibility to respond to unexpected 
challenges, and eventually increasing the risk of a fiscal 
crisis in which investors would demand high interest rates to 
buy the Government's debt.
    Turning to the economy, we expect that, after a 
frustratingly slow recovery from the severe recession of 2007-
09, the economy will grow at a solid pace for the next few 
years, but will continue to have considerable unused labor and 
capital resources, or ``slack.''
    Further growth in housing construction and business 
investment should raise output and employment, and the 
resulting increase in income should boost consumer spending. In 
addition, under current law, the Federal Government's tax and 
spending policies will not restrain economic growth this year 
to the extent they did last year. And the State and local 
governments are likely to increase their purchases of goods and 
services, adjusted for inflation, after having reduced them for 
several years. As a result, our baseline shows inflation-
adjusted GDP expanding more quickly from 2014 to 2017--at an 
average rate of roughly 3 percent a year--than it did in 2013.
    We expect that those increases in output will spur 
businesses to hire more workers, pushing down the unemployment 
rate and tending to raise the rate of participation in the 
labor force, as some discouraged workers return to the labor 
force in search of jobs. That effect on participation will keep 
the unemployment rate from falling as much as it would 
otherwise. We project that the unemployment rate will decline 
only gradually over the next few years, finally dropping below 
6.0 percent in 2017, and then edging down further after that.
    Nevertheless, the labor force participation rate is also 
projected to decline further in the next few years because, 
according to our analysis, the increase in participation 
stemming from improvements in the economy will be more than 
offset by downward pressure from demographic trends, especially 
the aging of the baby-boom generation.
    After 2017, when the demographic trends will still be 
unfolding but the effects of cyclical conditions will, we 
expect, have largely waned, the participation rate is projected 
to decline more rapidly. That is the main reason why beyond 
2017 we project that economic growth will diminish to only a 
bit more than 2 percent per year, a pace that is well below the 
average seen over the past several decades.
    Thank you. I am happy to take your questions.
    [The prepared statement of Mr. Elmendorf follows:] 
   
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
   
    Chairman Murray. Thank you very much.
    Dr. Elmendorf, let me start off by asking you a question 
about the role the overall economy plays in our efforts to 
address the deficit. Last week's CBO report describes how 
``lingering effects from the Great Recession and the subsequent 
slow recovery continue to dampen our economic potential.'' 
Relatedly, your report contains some very significant downward 
revisions to your expectations about the strength of our 
economy over the next decade, and the direct fiscal 
consequences of those revisions were pretty dramatic, about 
$1.2 trillion in added debt by 2024. That added debt is not 
from new spending programs or new tax cuts. It is purely 
because CBO now expects the economy to be weaker than it 
previously thought, correct?
    Mr. Elmendorf. Yes, that is right, Senator.
    Chairman Murray. Okay. So my question is about the 
importance of economic growth and building a strong economy and 
tackling our deficits and our debt. Certainly, we have to 
continue to work to reform spending programs and the Tax Code, 
but do you believe, given the large negative impact your 
economic revisions had on the budget projections, that fiscal 
responsibility also requires that we take measures that ensure 
we have a strong economy?
    Mr. Elmendorf. Yes, Senator. Any actions that the Congress 
can take to boost economic growth can have a very powerful 
effect on the future budget outlook. There are no plausible 
changes in economic growth that would make the long-term budget 
pressures go away. When we did our long-term budget outlook 
last fall, we looked at a range of alternative possible growth 
rates of the economy and interest rates and health care costs 
and so on, and the fundamental problem will remain. But the 
magnitude of the problem, the extent of the changes that would 
be needed in tax policy or spending policy or both, would be 
smaller if the economy were to grow more rapidly.
    Chairman Murray. Okay. Last week, a rippling effect of the 
CBO report was the wide confusion about the section dealing 
with the impact of the Affordable Care Act on the workforce. 
That confusion actually was bad enough that the Washington Post 
fact checker examined some of the claims just 3 days ago. I do 
not know if you all saw it, but he called them ``out of 
context,'' ``deliberately misleading,'' and gave them three 
Pinocchios.
    Now, as Chairman Ryan noted in the hearing last week, when 
you were before them, your report does not say that the 
Affordable Care Act is causing employers to lay off workers. In 
fact, the ACA is making it possible for people to be innovative 
and start new companies without being locked into a job or 
keeping longer hours just so they can have health insurance.
    So can you please clarify this part of your outlook and 
specifically tell us are you saying that the ACA will cause 2.5 
million people to lose their jobs, as some are claiming you 
said?
    Mr. Elmendorf. No, Senator. We would not characterize our 
results as saying that 2 or 2.5 million people would lose their 
jobs. I have not, to be honest, read all of the coverage that 
sprouted last week, but we took pains in a blog posting 
yesterday to emphasize the point we made in the appendix to the 
outlook last week that almost the entire effect that we are 
projecting comes not from people losing their jobs but from 
people choosing to work not at all or to work shorter hours.
    Chairman Murray. Stay home and take care of their kids, 
start a new business, other things that families have that kind 
of choice.
    Mr. Elmendorf. A range of other activities, Senator, yes.
    Chairman Murray. Can you talk a bit about how increased 
accessibility and affordability and availability of health 
insurance helps workers and specifically prevents what is known 
as job lock?
    Mr. Elmendorf. Yes, Senator. So the subsidized health 
insurance coverage that will be provided under the Affordable 
Care Act through both the expansion of Medicaid and through the 
initiation of tax credits to be provided for insurance bought 
through insurance exchanges, those subsidies make the people 
who receive them better off by raising their--by providing 
health insurance coverage at reduced cost to them. Some of them 
will respond to being better off by not working or working 
less.
    In addition--and this is intrinsic to some extent in any 
program that provides benefits to lower-income people--those 
benefits are withdrawn under the Affordable Care Act as 
people's income rises. Lower-income people receive them and 
higher-income people do not. And that withdrawal of benefits 
creates an implicit tax that also reduces the incentive to work 
to some extent.
    As you noted, the health insurance system as it existed 
prior to the Affordable Care Act also distorted people's labor 
market behavior relative to some ideal system in which health 
insurance was not related to work. And, in particular, there 
has been a substantial amount of research showing that people 
who had jobs and had particular health problems or concerns 
about the risk of health problems would then be unwilling to 
leave those jobs to take other jobs they might be more 
productive in if they thought they would lose their health 
insurance. That is the phenomenon known as ``job lock,'' and 
that is a phenomenon that under the Affordable Care Act would 
not be there because people would be able to obtain health 
insurance through exchanges and possibly obtain subsidies for 
health insurance coverage.
    Chairman Murray. Okay. Thank you very much. I really 
appreciate your clarification.
    Senator Sessions?
    Senator Sessions. Thank you. I think I understand, Mr. 
Elmendorf, your comments about the Affordable Care Act and 
hours lost and reduced. I would note that, from my perspective, 
what you have indicated is the act has a tendency to 
incentivize people not to work, and what we need in this 
country, in my opinion, is incentives to work, and that will 
help us be more productive. And we have to create systems, I 
think, to help people work even longer and reduce the amount 
they are drawing down their retirement benefits, extending and 
increasing their Social Security benefits if they can work 
longer, and we should be looking to do that.
    Mr. Elmendorf. Senator, we have analysis of the effects on 
the Federal budget and on the economy of raising the 
eligibility age for some programs to encourage people to work 
longer, as you are suggesting.
    Senator Sessions. I think we have to talk about that, and 
you note that the big programs are the ones that are drawing a 
larger percentage of the taxpayers' revenue each year, are 
leading us and accelerating our debt course. I would just have 
to say, colleagues, that we are not going to be able to fix 
that and address it effectively if the President of the United 
States will not look the American people in the eye and tell 
them we have a problem that needs to be fixed. I wish it were 
different. But he has not done that, and we are not going to be 
able to achieve progress unless he does.
    Just looking at your estimate of interest costs that we 
will be paying each year is rather stunning. Do you recall what 
the interest payment total was last year? Was is $240 billion 
or $250 billion that we actually paid out of our Treasury to--
    Mr. Elmendorf. Yes. So last year there were $221 billion in 
net interest, Senator.
    Senator Sessions. So you project--and last year, last May, 
you projected 10 years from now, we would be paying $823 
billion. This year, you project 10 years from today we will be 
paying $880 billion in one year, each of those one year in 
interest on the debt, which is over $500 billion more than we 
are now paying each year on the debt. Where does this money 
come from? That is the question I think the American people 
need to ask. It is going to come out of programs that people 
from both parties believe in, want to support, and want to see 
grow, and they are not going to be able to grow because we are 
going to have this huge increase in interest, the largest, 
fastest increasing part of our budget. Would you not agree 
fundamentally?
    Mr. Elmendorf. Yes, Senator, that is right.
    Senator Sessions. Now, you projected a couple of years ago, 
I believe, that if interest rates increased 1 percent, that 
would add a $1 trillion extra interest cost to the budget. This 
year, I believe you are saying that if interest rates increase 
1 percent, it would add $1.5 trillion to the cost of the--to 
our budget cost. Is that correct?
    Mr. Elmendorf. Yes, Senator. If interest rates were 1 
percentage point higher throughout the coming decade, we 
estimate that would add about $1.5 trillion to the Federal 
deficit.
    Senator Sessions. And I teased you a little bit about 
missing some of your growth projections, but nobody knows for 
sure what interest rates will be 4, 5, 6, 8 years from now, do 
they? You just make the best estimates you can.
    Mr. Elmendorf. That is right, Senator, and your critique of 
our past economic forecast was quite correct. We missed the 
extent to which this recovery would be very slow. We had built 
in a slow recovery by the standards of the post-war U.S. period 
but not slow enough. And I think the people who had looked more 
carefully at financial crises in other countries over longer 
periods of time and said, ``No, no, this kind of crisis takes a 
long time to recover from,'' were more right than we were.
    Senator Sessions. Just briefly, since we cannot, in my 
opinion, continue to borrow more or to spend more to stimulate 
the economy, if we had a simpler Tax Code with a lower top 
marginal rate for corporate tax rate, as witnesses have said, 
would that help growth, be positive for growth?
    Mr. Elmendorf. Yes, Senator, and a tax reform that 
broadened the base and brought down rates in either the 
corporate or individual sides, or both, would be positive for 
economic growth. How much difference it would make would depend 
on the specific--
    Senator Sessions. If we could identify regulations that 
were unnecessary and eliminate those, would that allow more 
growth to occur?
    Mr. Elmendorf. It might, Senator, but, again, the effects 
would depend very much on--
    Senator Sessions. Well, experts tell us that regulations 
are adversely impacting growth. I would think so. If we produce 
more American energy and imported less, would that help growth 
in America?
    Mr. Elmendorf. Yes, Senator, I think it would, and we are 
in the process of working on an analysis now of the effects of 
fracking on the U.S. economy and on the budget, and we hope 
to--
    Senator Sessions. If we could reform our 80 or so means-
tested social programs and to focus more on incentivizing and 
training people to work and to move out into the employment 
field, would that improve America's GDP growth?
    Mr. Elmendorf. Yes, I think it would, Senator. Again, the 
effects would depend very much on the specific changes--
    Senator Sessions. And if we had a leaner, more productive 
Government, just the money that came into this United States 
Government, we got more for it for our citizens, would that be 
good for growth?
    Mr. Elmendorf. Well, getting more effective Government 
services or more benefits per dollar of tax revenue would be 
good for people by receiving more benefits or services--
    Senator Sessions. And if we--
    Mr. Elmendorf. --for growth depends on a lot of the--the 
timing of the changes and the nature of the changes.
    Senator Sessions. And if we brought our deficits under 
control, would that create more confidence and more growth in 
the future?
    Mr. Elmendorf. Reduction in the long-term projected 
deficits would be good for the economy in the long term and we 
think in terms of people's confidence today, Senator.
    Senator Sessions. Thank you.
    Chairman Murray. Senator Sessions--I mean, sorry, Senator 
Stabenow.
    Senator Stabenow. Thank you very much, Madam Chair. You 
know, listening to the debate on the budget and the numbers, I 
think for people watching this today could scratch their heads 
because you can look at things so many different ways.
    I want to back up and just start with some good news and 
if, in fact, bringing down the deficit increases economic 
activity, we ought to all be celebrating today. Mr. Elmendorf, 
when you say that in 2009 we had a $1.4 trillion deficit, this 
year it will be $500 billion--did I hear you say that?
    Mr. Elmendorf. Yes, that is right, Senator.
    Senator Stabenow. Yes. So that is a pretty big drop. A 
pretty big drop.
    Mr. Elmendorf. Yes, Senator.
    Senator Stabenow. And we should actually view that as good 
news. And, in fact, it is good news. It may not be good 
politically for folks that want to use the issue, but it is 
good news.
    We also have seen 8.5 million private sector jobs. We need 
more, but certainly in the last few years, and that is a good 
thing.
    Do you stand by your statement that says in your report, 
``In CBO's judgment, there is no compelling evidence that part-
time employment has increased as a result of the Affordable 
Care Act''?
    Mr. Elmendorf. Yes, we stand by that, Senator.
    Senator Stabenow. Yes, thank you. So, in fact, what we are 
seeing is job growth, and what we need is more of it.
    One of the things that is concerning to me in your numbers 
for us as policymakers is that you have indicated that in 
discretionary spending--our investments in education, 
opportunity, rebuilding America, infrastructure, innovation, 
those things that we do to compete in a global economy--that in 
the next 10 years we will see the lowest investments in those 
things that affect people and opportunity, economic 
development, since 1940? Did I hear you correctly?
    Mr. Elmendorf. So the specific fact, Senator, was that all 
of Federal spending, apart from Social Security, the health 
care programs, and interest on the debt, so the rest includes 
defense spending, non-defense discretionary spending, and the 
other benefit programs and mandatory spending, that collection 
of programs together, spending will be smaller as a share of 
the economy in 2024 under current law than at any point since 
at least 1940.
    Senator Stabenow. So when we are looking at a global 
economy competing with China, with those around the world 
investing like crazy to lower their costs of college, to build 
their countries, to invest in clean energy and so on, we in 
America are actually going in the opposite direction. And I 
want to underscore that when you talked about economic growth 
mitigating some of the other factors--obviously we care about 
long-term deficits; obviously we want to continue to stay on a 
path of fiscal responsibility. But certainly growing would do 
an awful lot, creating jobs would do an awful lot to mitigate 
that.
    My questions, I want to go back just one more time, because 
I feel like we are speaking two languages here on the Committee 
as it relates to the Affordable Care Act, so I want to go back 
just one more time and ask you, as it relates to the ability 
for people to have freedom to dream big dreams and make 
decisions without being chained to their desk or their job, one 
more time: Did the February 2014 report on the budget and 
economic outlook find that the affordable health care law will 
end 2.5 million jobs?
    Mr. Elmendorf. What we found, Senator, was that about 2.5 
million--we found that people would reduce their work effort by 
the equivalent of about 2.5 million full-time equivalent 
positions, but--
    Senator Stabenow. Okay. But is that 2.5 million jobs that 
we would lose?
    Mr. Elmendorf. We did not say that 2.5 million people would 
lose their jobs.
    Senator Stabenow. Or that we would lose 2.5 million jobs in 
the economy?
    Mr. Elmendorf. We have not quantified the ultimate effect 
on employment. I want to be careful here, as you say, Senator. 
We think that when people talk about--outside of economic and 
budget people-talk about people losing their jobs, they mean 
people who are laid off from jobs they want to keep. What we 
describe in our report is almost entirely people who are 
choosing to work less or not to work because of the extra 
benefits they will receive under the Affordable Care Act and 
the withdrawal of those benefits as incomes rise. That is a 
reduction in the supply of labor that is driving the change, 
and the amount of the change is ultimately a reduction, an 
equivalent to 2.5 million full-time equivalent positions.
    Senator Stabenow. So we are giving people more choices, 
just like the ones that exist for the very wealthy and live off 
investments, who can choose whether or not to be actively in 
the workplace or not or to do other things, philanthropic 
things, or to spend time with their family. We are giving a 
choice to someone in my family, in fact, right now where this 
is very real who wants to stay home with her 18-month-old and 
has not been able to do that because her family's health care 
comes from her job as opposed to her husband, who is in small 
business. And so they are going to have a different kind of 
freedom to be able to do something I would argue that is just 
as productive, which is to raise a little boy and have mom at 
home.
    Mr. Elmendorf. So, Senator, as we were clear yesterday, we 
are not judging the--
    Senator Stabenow. No, I appreciate that.
    Mr. Elmendorf. --value of the good things they are choosing 
to do. We are just--
    Senator Stabenow. I appreciate that. No, I am actually 
evaluating--
    Mr. Elmendorf. --economics of the situation.
    Senator Stabenow. Yes. What I am doing is adding the 
evaluation, which is moms or dads being able to be home with 
little ones has tremendous value for their family and for all 
of us, and I am so proud that we are going to be able to give 
moms and dads that choice.
    And then, Madam Chair, I know my time is out, but on the 
other end, also in my family are individuals that are going to 
be able to retire from some very, very hard work a little bit 
early, in one case develop the small business they have been 
hoping to for a long, long time. So I think the freedom 
involved in folks being able to make choices is one of the 
wonderful things about moving forward and not having health 
care have to be tied to employment.
    Thank you, Madam Chair.
    Chairman Murray. Thank you.
    Senator Grassley?
    Senator Grassley. I want to continue that discussion, but I 
want to look at the macroeconomic impact rather than the 
specific number of jobs. I would like to ask you about the 
lackluster economic recovery in the labor market. We already 
know that the labor force participation rate is at the lowest 
point since 1975, although I guess last month it ticked up just 
a hair. CBO now projects that the Affordable Care Act would 
reduce the number of full-time equivalent workers by about 2 
million by 2017, 2.5 million by 2024, obviously a result of 
some people choosing to not work at all or others choosing to 
work less. The fact is, it is a disincentive for some people to 
work, resulting in a decrease of labor supply.
    So getting to the questions, to grow the economy and 
increase economic opportunities, we need more workers and ought 
to encourage people to work. What effect will this have on the 
economy and GDP growth?
    Mr. Elmendorf. So, Senator, the reduction in the supply of 
labor that we estimate would result from the Affordable Care 
Act pulls down GDP, pulls down investment, pulls down tax 
revenues relative to what would be the case otherwise.
    Senator Grassley. So, simply put, it is not in our economic 
interest to shrink the size of the workforce.
    Mr. Elmendorf. Well, it is not in the interest of GDP to 
reduce the workforce. Of course, how we value GDP--
    Senator Grassley. Well, GDP is more for more people, and if 
we are going to have lower GDP, we are going to have more 
people in this country, and more people are going to have less. 
You have to expand the economic pie. It seems to me like it is 
very basic to Americans to have more for more people.
    Finally, then, would it be fair to say that discouraging 
people to work is harmful to our economic growth and diminishes 
individuals' economic opportunity?
    Mr. Elmendorf. It is harmful to our economic growth, 
Senator. I do not want to speak to how an individual feels 
about this because there are pros and cons. But it does reduce 
our economic growth, absolutely.
    Senator Grassley. Thank you. According to CBO, Federal 
revenues are expected to reach $3 trillion this year, or 17.5 
percent of the economy, which is just a little bit below a 40-
year average. Over the 10-year window, revenues are expected to 
grow at the same pace as the economy and average about 18.1 
percent of GDP. Conversely, Federal spending for 2014 will be 
20.5 percent of GDP, which matches about a 40-year average. CBO 
projects the outlays will grow faster than the economy over the 
next decade and will equal 22.5 percent of GDP by 2024.
    What is the economic impact of spending that consistently 
outpaces revenue? And, secondly, doesn't this demonstrate that 
we have a spending problem that is fiscally unsustainable?
    Mr. Elmendorf. Yes, Senator. We think the Federal budget is 
on an unsustainable path. As you understand, when spending 
outpaces revenues for prolonged periods of time, especially 
after we get out of this current economic downturn, then that 
extra--those deficits lead to an accumulation of Federal debt. 
That debt crowds out some private capital investment, which 
reduces GDP and wages and incomes relative to what they 
otherwise would be.
    In addition, as I noted, the rising debt reduce your and 
your colleagues' flexibility to respond to unexpected 
challenges that arise and raises the risk of a fiscal crisis 
down the road.
    Senator Grassley. Since CBO's previous baseline budget 
projection of May 2013, you have raised the estimate of the 
cumulative deficit between 2014 and 2023 by $1 trillion. 
According to CBO, most of the increase in projected deficits 
results from lower economic growth and, thus, lower tax 
revenue.
    First question: Can you describe what economic factors have 
led to the lower economic growth projections? And, secondly, 
can you describe what impact the Federal debt at 79 percent of 
the economy will have on economic growth?
    Mr. Elmendorf. So, Senator, the second question first. The 
high amount of debt, the historically high amount of debt that 
we project throughout the coming decade will diminish economic 
growth by the end of the decade by crowding out some capital 
investment and reducing our ability to produce.
    The downward revision to our projection of GDP actually 
stems from a large collection of factors, no one of which was 
dominant but almost all of which ended up going in the same 
direction. And we looked at revised data from the Bureau of 
Economic Analysis and the comprehensive revision to national 
income accounts last year. We reassessed how close we thought 
actual output would get to potential output by the second half 
of the decade. Historically, in fact, there has been some 
shortfall there, and we built that into our projection this 
time.
    We took a new look at the effects of the Affordable Care 
Act on the labor force, as we have been discussing, and a 
number of other factors as well. And the collection of those 
factors brings down, by our estimate, real GDP, inflation-
adjusted GDP, by 2 percent at the end of the 10 years relative 
to what we thought before. We have also brought down the price 
level so that nominal GDP in our projection is 3.5 percent 
below what it was before. And that is the dominant factor in 
our upward revision to projected deficits.
    Senator Grassley. Thank you.
    Thank you, Madam Chairwoman.
    Chairman Murray. Thank you.
    Senator Whitehouse?
    Senator Whitehouse. Thank you, Chairman. Welcome, Dr. 
Elmendorf.
    Mr. Elmendorf. Senator.
    Senator Whitehouse. We are having an ongoing discussion in 
the Senate about extending unemployment insurance. In Rhode 
Island, I just flying down sat next to a lady who has a friend 
who sort of meets the profile that we are talking about. She 
has worked all her life, and she was not able to retire, and 
she lost her job, and she is in her 50s, and it is very hard 
for her to find employment. It is through no fault of her own 
whatsoever. She is constantly looking for work. In Rhode 
Island, we still have a 9-percent unemployment rate, and if you 
put the number of people looking for work against the number of 
jobs, there is just no way you can make it fit.
    And we are also hearing that if you extend unemployment 
insurance, that will have an unhelpful effect on our employment 
numbers because really these are lazy people who are out there 
goofing off, and if they just got a good, solid swat from 
having their unemployment insurance benefits cut off, then they 
would get back to work. That is what--
    Mr. Elmendorf. That is not what our analysis shows, 
Senator.
    Senator Whitehouse. Indeed, your analysis seems to show the 
exact contrary. Could you tell us what your analysis shows of 
what the effect of extending unemployment insurance benefits 
would be on national unemployment levels?
    Mr. Elmendorf. So, Senator, our analysis suggests that if 
the emergency unemployment benefits were extended through this 
year, that would raise real GDP by two-tenths of a percent at 
the end of the year and would increase full-time equivalent 
employment at the end of the year by about 200,000 positions.
    Senator Whitehouse. So put the other way, to reverse what 
you just said, the Republican insistence on blocking even a 
paid-for unemployment insurance extension is costing this 
country a 0.2 percent GDP growth and is costing--will cost 
200,000 jobs if it is not resolved.
    Mr. Elmendorf. Senator, I can only repeat our analysis. 
Your attribution of consequences to particular people is beyond 
the scope of my position.
    Senator Whitehouse. But it does have that effect. Those are 
the effects that you have quantified.
    Mr. Elmendorf. The effects that we wrote about in a letter 
to Congressman Van Hollen in December remain our estimates, and 
we repeat some of them in the report we released last week.
    Senator Whitehouse. Well, on the strength of that, I would 
take this opportunity to urge my Republican colleagues, who 
came within one vote of doing this--we are one vote away from 
adding 0.2 percent to GDP and 200,000 jobs to the economy by 
doing the right thing for people who are out of work through no 
fault of their own. And how we are at a place where that is not 
something we can work together to get done I think is a sad 
commentary on politics in Washington.
    My time is running out, so let me close. I hear my 
colleagues on the other side talk about the debt and the 
deficit and say how--you know, to use words that were used 
today--this is a problem that needs to be fixed. And the 
enthusiasm and the passion and the militancy with which our 
colleagues on the other side pursue the debt and the deficit 
problem I think is commendable. What concerns me is that that 
passion and that militancy and that determination evaporates as 
soon as you are talking about benefits that go out to wealthy 
folks and to corporations through the Tax Code.
    We are, I think, more than happy to work to reduce our debt 
and deficit, but it is impossible for me to look at adding to 
the cuts that we have applied to middle-income families and to 
investments like infrastructure and scientific exploration and 
innovation, and at the same time be protecting the right of the 
hedge fund billionaire to pay a lower tax rate than a brick 
mason in Rhode Island.
    And my test of when our colleagues are going to be actually 
serious about the debt and the deficit is when it is no longer 
less important than protecting carried interest for hedge fund 
billionaires. As long as the primary thing is to protect that 
tax benefit and a horde of others that go to high-end and 
corporate politically influential people, you cannot put those 
to me side by side and say that we are actually really all that 
serious about the debt and the deficit. You are only as serious 
about the debt and deficit as you are putting it in relation to 
other things, and put in relation to protecting hedge fund 
billionaires paying lower tax rates than brick masons to me 
puts a context into that claim.
    Thank you.
    Chairman Murray. Senator Toomey.
    Senator Toomey. Thank you, Madam Chairman.
    Well, first let me say, Dr. Elmendorf, thanks for being 
here, and I just want to compliment you and your team. My staff 
and I have on numerous occasions turned to your office for help 
when we are wrestling with legislative challenges. Whether it 
is potential changes to the Flood Insurance Program or granting 
the administration some flexibility in managing through a 
difficult sequester, your staff has consistently and timely 
been responsive in helping us to understand the budgetary 
implications, the scoring implications, and that is a very, 
very helpful service. So you have a great team, and I want to 
thank you for that.
    Mr. Elmendorf. Thank you very much, Senator. That means a 
tremendous amount to all of us.
    Senator Toomey. Well, they do a great job.
    I do have to say I am shocked, have been since last week--
not by your analysis that suggests that if you increase 
incentives to leave the workforce, some people will, in fact, 
leave the workforce. That is not shocking. That is not 
revolutionary. What is shocking to me is my colleagues 
suggesting that this is a great thing, that it is somehow a 
good thing to diminish the incentives to work. I do not know 
how we got to the place in America where work has become a 
terrible thing that we must unshackle people from the misery of 
having to be productive and from actually supporting their 
family. And I do not know how it is lost on so many people in 
this town that work is a source of dignity and it is the way 
people get ahead. And it has always been the source of 
advancement in our society.
    I am not asking you to comment on that. I think you would 
probably rather not. But I do want to be clear. Your analysis 
about the effects, the result from the incentives of Obamacare, 
your analysis says that we will have a smaller workforce as a 
result. Correct?
    Mr. Elmendorf. Yes, absolutely.
    Senator Toomey. And a smaller workforce means a smaller 
economy.
    Mr. Elmendorf. Yes, that is our estimate, Senator.
    Senator Toomey. So your analysis is that, as a result of 
this phenomenon, we have less total output, and I think it is 
very clear that that means less opportunity, less prosperity.
    One of the things that is really disturbing about your 
projections is how meager the economic growth forecast is. For 
most recent decades--I am not sure exactly what the time frame 
I have here is--actually, I guess about the last 60 years or 
so, even including the Great Recession, average real GDP growth 
has been over 3 percent. You are projecting that starting from 
next year forward it just gradually declines every year, every 
single year, until we get to about 2 percent, which is well 
below our historical average. And what that means is just fewer 
people working, fewer people getting raises, fewer people 
advancing in a lower standard of living. Isn't that what it 
means to have a 2-percent GDP growth instead of a 3-percent GDP 
growth?
    Mr. Elmendorf. So let me just be clear here that the thing 
that slows throughout the decade is the growth of potential 
output. We think there will be some recovery of actual output 
up to our potential as we continue the recovery. But then 
potential output growth, you are right, Senator, we think will 
be much lower in the future than in the past. The most 
significant part of that is the demographic change. It is the 
retirement of the baby boomers. But there are other factors as 
well.
    Senator Toomey. Well, there are, and, in fact, you knew 
very well the demographics of the aging population last year. 
That has not changed in the last year. Demographics are very 
immutable. But yet you have reduced your forecast for the 
actual size of our--in fact, you reduced it so much between 
last year and this year, it is $1 trillion, which is a hard 
number to--roughly $1 trillion in 2024. It is hard number to 
wrap your brain around, so one way to think about it, that is 
the total economic output of Pennsylvania, West Virginia, 
Delaware, and Maryland combined. That is how much you have 
diminished your forecast of economic growth in 2024.
    So could you share with us the main reasons that you think 
our economy is going to be so much smaller now than you thought 
a year ago?
    Mr. Elmendorf. So there are a large collection of factors, 
Senator. Part of it was that the national income accounts data 
were revised last summer, and that affected our view of how 
much output had grown in the past. It affected our view of what 
productivity growth was likely to be going forward. There were 
new data that changed our view of how much the labor force had 
grown in the past. So a lot of factors.
    We also did, as we have discussed, a re-evaluation, a very 
intensive examination of the effects of the Affordable Care 
Act. And so this collection of things, it turned out that the 
revisions were largely in one direction. But we do think our 
current projection is the best one that we can give you at this 
point in time, recognizing tremendous uncertainty--
    Senator Toomey. But a significant contributing factor is 
the decline in the total workforce participation rate. Isn't 
that--
    Mr. Elmendorf. That is absolutely right. If you look at 
the--the most significant factor explaining why growth will be 
slow in the future relative to the past is slower growth of the 
labor force. And that is partly the retirement of the baby 
boomers. It is partly that the big increase in women's 
participation in the labor force in the 1970s and 1980s will 
not be repeated.
    Senator Toomey. Right. But you knew that last year. I am 
talking about--
    Mr. Elmendorf. We knew that last year.
    Senator Toomey. --the difference from this year to last 
year.
    I see my time is out, and I appreciate your answers, Dr. 
Elmendorf. I would just suggest that since the Great Recession, 
we have been in this great experiment with virtually and in 
some ways completely unprecedented governmental policies, 
massive expansion in regulatory burdens imposed on the economy, 
huge tax increases, massive surge in spending, which has since 
declined somewhat but is projected to grow again, completely 
unprecedented monetary policy. And I would just suggest that 
the data that is coming in is indicating this is not working so 
well, and the forecast is for it to get worse. I hope we will 
get off this path.
    Thank you, Madam Chairman.
    Chairman Murray. Senator Kaine.
    Senator Kaine. Just quickly, by way of introduction, there 
is a lot of food for thought in this, Senator Toomey's comments 
about, you know, does the ACA disincentivize work. The way I 
look at it, the Federal Government has been disincentivizing 
work for a long time. I mean, it used to--through tax policy. 
We used to tax investment income at a rate that was less than 
wage income--I am sorry. We used to tax investment income at a 
rate significantly higher than salary and wages. Then they 
reached a rough equivalence, and now we decide to tax work much 
heavier than we tax investment income. So if we are going to 
look at what disincentivizes work, we need to tackle the tax 
expenditure issue. That is my editorial comments.
    The questions I want to ask, to make sure I understand the 
report, deal with revenue as a percentage of GDP and spending 
as a percentage of GDP.
    Dr. Elmendorf, as I read the report--and this is pages 79 
and 80--on revenue as a percentage of GDP, the 10-year average 
you project from 2014 to 2024 is about 18.1 percent. It varies 
over the 10 years, but that is the average.
    Mr. Elmendorf. Yes.
    Senator Kaine. The 40-year average going back essentially 
to the start of Medicaid and Medicare 40 years, is 17.5 
percent. So the next 10 years we are projecting to be somewhat 
higher. But on the five times when we have had a balanced 
budget, the average of revenue to GDP is between 19 and 20 
percent. Is that correct?
    Mr. Elmendorf. Yes, that is right, Senator.
    Senator Kaine. For the record, I would like to ask you to 
submit an answer to this question later, and that is, if over 
the next 10 years, instead of an 18.1 percent revenue to GDP we 
had a 19.5 percent, or whatever the average is of the 5 years 
when we balanced it, we had a 19.5 percent revenue to GDP, what 
would that do to the deficit projections over the next 10 
years? And what would it do the projections of annual interest 
payments over the next 10 years?
    Now, I know that involves some assumptions that you could 
just up it to 19.5 without having cross-wind economic effects. 
But I just would like to know mathematically--because I believe 
what we have is not just a spending problem but a revenue 
problem. I would like to know mathematically, if we had revenue 
at 19.5 percent of GDP, what would that do to deficit 
projections and Internet expense over the 2014 to 2024 period?
    Mr. Elmendorf. We will provide you that answer, Senator.
    Senator Kaine. Similarly, on spending, which is at pages 49 
and 50 in your report, you project from 2014 to 2024 that 
spending will go from 20.8 percent of GDP to 22.4, and the 
components of that are also interesting: Social Security from 
4.9 to 5.6; major health programs, Medicare especially, from 
4.8 to 6.1; other mandatory programs dropping from 2.5 to 2.2; 
discretionary programs really dropping from 6.4 to 5.2; 
interest payments going up as a percentage of GDP from 1.3 to 
3.3.
    For the record, I would like to ask you to calculate where 
tax expenditures fit in this component. In your section in the 
CBO report on spending, you do not have tax expenditures. You 
would consider that more on the revenue side. But based on the 
work that we have done on this Committee and the Chairwoman's 
opening statement that the tax expenditures are virtually 
larger than any other programmatic line item, and they are 
every bit as much, quote, entitlements as other entitlement 
programs. Unlike the budget that we battle every year how much 
to put into Pell grants, so often these tax expenditures get 
put in the codes, and then we just, you know, let them go 
forever. I would be interested over the course of 2014 to 2024 
as to what is the projection of tax expenditures as a 
percentage of GDP and how that would change over the 10-year 
period. I know that involves some assumptions, too, assumptions 
about congressional behavior, will tax expenditures be 
extended, et cetera. But obviously you have built some of that 
into your revenue projections, anyway, and I would like to see 
the magnitude of tax expenditures as a percentage of GDP, as a 
follow-up question for the record, if that is okay.
    Mr. Elmendorf. We are happy to do that, Senator. I will say 
that we have a discussion of the tax expenditures in the 
revenue chapter of the report. We note there that the 12 
largest tax expenditures, which are about three-quarters of the 
total dollars, would total about 6.5 percent of GDP over the 
coming decade.
    Senator Kaine. So if the 12 largest are 6.5 percent of GDP 
and they are three-quarters, then you are probably talking 
about a total of like 9 to 9.5 percent of GDP if you put all 
the tax expenditures--
    Mr. Elmendorf. I think that is right. I think we have not 
projected all of them out over the entire decade, which is why 
we put it that way. There is a widespread consensus among 
analysts that tax expenditures have the same types of effects 
on the budget and on the economy as many types of direct 
Federal spending and, thus, should be viewed comparably by 
analysts and by policymakers.
    Senator Kaine. They cost money, but they can also kind of 
warp market behavior. I would love that answer with all of the 
tax expenditures added in, but just if I am doing the math 
right, for the 12 largest at 6.5 percent or three-quarters of 
the total, and so the actually total is closer to 9.5 percent, 
I mean, that is significantly larger than Social Security, 
significantly larger than Medicare and other health programs, 
and almost double of what the discretionary budget would be 
over the next year. So I would just ask you to submit that 
answer for the record.
    Mr. Elmendorf. Yes, Senator.
    Chairman Murray. Senator Johnson.
    Senator Johnson. Thank you, Madam Chair.
    To start out with, there are a number of things I agree 
with you in your opening comments. You said that we really want 
to drive for opportunity growth. I think we have pretty well 
established, I think, in the testimony that the Affordable Care 
Act is going to decrease economic growth by shrinking our labor 
force. I also agree that we need to address our long-term 
fiscal challenge.
    I disagree with the way you typify certainly what folks 
like me want to do in terms of a debt ceiling. It is not about 
demanding a ransom. It is about trying to instill, if we are 
going to increase the debt burden on our children and 
grandchildren, I think most Americans would expect us to at 
least enact some reforms to the long-term entitlement programs, 
you know, instill some additional fiscal discipline.
    So let me start out there, Director Elmendorf. If we 
stopped deficit spending today--and I realize that is kind of a 
long shot. If we stopped deficit spending today, other than 
maybe some short-term cash flow problems, there would be no 
reason whatsoever to increase the debt ceiling. Correct?
    Mr. Elmendorf. Well Senator, as you know, the unified 
budget deficit does not capture all the forces that lead to an 
increase in the debt subject to limit.
    Senator Johnson. Okay. There could be some cash flow 
issues. There can be some work--I got that. But, in general, in 
terms of how much, how dramatically we are having to increase 
the debt ceiling, by and large the reason we have to increase 
the debt ceiling is because we continue to deficit spend. 
Correct?
    Mr. Elmendorf. Yes, that is right, Senator.
    Senator Johnson. Okay. I have a chart up here, because I 
think as a problem solver myself, the first step in solving a 
problem is you have to admit you have one. And when I hear 
people say that Social Security is solvent to the year 2033, I 
challenge that assumption. And the next step is you have to 
properly define it, and I would continue to argue that we do 
not have a 10-year budget window problem; we have a 30-year 
demographic problem.
    What we have done with your CBO estimates is, you know, 
everything you do is basically a percentage of GDP, or most of 
what you do, which certainly I found in talking to my 
constituents, they do not quite--that does not really do it for 
them in terms of understanding the problems.
    So what we have attempted to do--and I would certainly like 
your input, and I want to make sure that we are getting this 
right, but off of the latest CBO projections, we have taken 
those percentages of GDP, put numbers to them, this is what we 
come up with over the next 30 years; in other words, deficit 
spending of $8 trillion in the first decade, $31 trillion in 
the second decade, $88 trillion in the third decade--for a 
whopping total of $127 trillion.
    And I want to first focus on Social Security because I 
appreciated during our December budget conference committee 
hearing when I was just kind of going through the practicality 
or the reality of the fact that, yes, the Social Security Trust 
Fund holds right now $2.7 trillion of Government bonds, but the 
Treasury has that offsetting liability which nets to zero. And 
your CBO projections of basically deficit spending in the 
Social Security Trust Fund--in other words, the amount of 
benefits we are going to pay out that exceed the payroll tax, 
it is about $15 trillion. Is that largely correct?
    Mr. Elmendorf. We have not done the calculation in dollar 
terms as you have, Senator, but it certainly would be a large 
number, and I would defer to your calculation.
    Senator Johnson. Well, I tell you what. It seems that you 
are being very cooperative with Senator Kaine in terms of 
providing those types of calculations. We have been asking--and 
your staff has been helpful, but I would really like the CBO to 
start converting these percentages of GDP. You do provide long-
term GDP figures in dollars. I think if you convert all the 
rest of your alternate scenarios and baselines in dollars, that 
would be extremely helpful.
    Mr. Elmendorf. As you know, Senator, we focus on shares of 
GDP because we think that nominal dollars have less and less 
meaning as one goes further and further out. We project that 
GDP over the coming decade will be more than $200 trillion in 
aggregate. So we find that these sorts of numbers without the 
context of the size of the economy around them have the 
potential to be--
    Senator Johnson. But you--you know, so--but it is all 
relative. So you publish the dollar amount of the size of the 
economy. So in 30 years, the size of the economy, according to 
your numbers, will be $64.8 trillion, and, you know, so off of 
that, percentage of GDP, what we are coming up with is the 
deficits, the cumulative deficit over that time period would be 
$127 trillion. Our debt at that point, based on those 
projections, by the way, would be--I have it--about $128 
trillion divided by the $64.8 trillion economy, would be 197 
percent debt held by the public as a percentage of GDP. Those 
are real scary numbers.
    Let me put this further into context. Then I will be done.
    To put that number into context, because I realize 
trillions of dollars are just incomprehensible, currently the 
net private asset base of America, all assets held by 
businesses, large and small, and households is about $96 
trillion. So in the next 30 years--which, by the way, my little 
baby is now 30 years old, and that went by [snaps fingers] like 
that. So the relevant time frame, the baby-boom generation 
retiring, all these benefits we promised and we have not made 
adequate provisions to pay for it, that long-term fiscal 
challenge that Madam Chair talked about us addressing, the only 
way we are going to address that is if we admit we have the 
problem, we start properly defining it, and put it in the terms 
that the American people understand. Percentage of GDP is not a 
term or a way of presenting this that the American people 
understand. I think they will start getting that, and if we 
start talking in these terms about the real danger facing this 
Nation, we just might have an opportunity to, in a bipartisan 
fashion, get everything on the table and start working toward 
real solutions so we stop mortgaging our children's future.
    Thank you.
    Mr. Elmendorf. Thank you, Senator.
    Chairman Murray. Senator Baldwin.
    Senator Baldwin. Thank you, Madam Chairwoman and Ranking 
Member Sessions. Thank you, Dr. Elmendorf, for being here.
    A lot of the terrain that I intended to cover has already 
been covered by my colleagues, but I thought I would still like 
to visit it with perhaps a Wisconsin face.
    Starting with the report on the impact of the Affordable 
Care Act on people choosing to leave the workforce, to me this 
brings me directly to a bunch of very hard-working people who I 
have been proud to represent, both in the House and the Senate, 
for many years, and I think of family dairy farms. For so many 
years, one of the family has usually had to leave the farm to 
work solely to bring in health insurance, whether it is because 
of the pre-ACA rules whereby insurance companies could deny 
coverage with pre-existing health conditions or simply the 
risks and actuarial risks associated with covering a small 
organization in a risky business. And that story has repeated 
itself--you know, I have met so many folks that are in that 
situation, and I think about the fact that they may, now that 
they can get family health coverage in a marketplace, choose to 
leave those jobs, and that that will be counted in one way, but 
I can assure you, when they return full-time to the farm, they 
will be working, both investing their efforts and labor in 
raising their families, caring for senior relatives, but also 
engaged in the economic activity of the farm.
    And I appreciated your blog entry the other day trying to 
bring greater clarity to what sort of movement in and out of 
the workplace this is, that, you know, when somebody is laid 
off, we mourn and we are upset, but when somebody chooses to 
leave in this sort of manner, whether it is retiring or doing 
what they really want to be doing, work in their family 
enterprise, that is more of a reason for celebration.
    I also note in the report on the slow recovery of the labor 
market, some of the recent numbers on the number of job seekers 
per job opening that exists--of course, we reached a huge peak 
in, I guess, 2009 of 6.7 job seekers per open job, and then 
dropped to what is now I guess 2.7--
    Mr. Elmendorf. Yes.
    Senator Baldwin. Somewhere I have been hearing between 2.7 
and 2.9 in the fall of last year. And so I know it is not a 
part of your Affordable Care analysis to talk about what 
happens when people do leave the job market or leave jobs 
because they can secure health insurance. But is it reasonable 
or logical to assume that there will be 2.7 people today 
looking to seize that opportunity if that displacement and 
dislocation occurs?
    Mr. Elmendorf. Yes, Senator, the effects of changes in the 
supply of labor are very different under the economic 
conditions we face in the country today, where there is, as you 
noted, a large excess of people looking for jobs who cannot 
find them, than the effects that that reduction in labor supply 
will have later in this decade when we think that the job 
market will have tightened considerably.
    Under current economic conditions, where really it is the 
demand for labor that is limiting the level of employment, 
changes in the number of workers does not have much effect on 
the actual ultimate level of employment. However, by later in 
the decade--I think that is the point you are referring to, but 
I want to emphasize, later in the decade, when the job market 
will have tightened, that is a point at which we think changes 
in the labor supply really will translate into changes in the 
number of people who are employed, because we think that this 
2.7 number will come back down to the more standard level we 
have in the labor force, just given the normal turnover.
    Senator Baldwin. And I know that my time is running out, so 
I just briefly want to associate myself with some of the 
previous comments on our ongoing debate on extending emergency 
unemployment benefits long-term unemployment benefits. When you 
were last before the Committee, we actually engaged in a 
conversation based on the Federal Reserve paper on the long-
term unemployed and how they have become less attached to the 
workforce and have lost skills they once held and present other 
real challenges.
    I just have to say, when this emergency unemployment 
compensation lapsed at the end of December, the statistics in 
Wisconsin are about 23,700 Wisconsinites lost benefits. It is 
supposed to, if let continue throughout the year, hit somewhere 
close to 99,000, and we know the statistics nationally.
    The stories are heartbreaking--foreclosure, I hear from 
folks on the number of jobs they have applied for, the budgets 
that they have been trying to live on with unemployment 
assistance and what that will mean to not have it.
    I guess I just would ask, is it correct to state that 
extending unemployment insurance is one of the most cost-
effective ways to stimulate a weak economy?
    Mr. Elmendorf. Yes, that is right, Senator. A report that 
we did a couple of years ago about a number of alternative 
possibilities that you and your colleagues could pursue to 
strengthen the economy and add jobs in the short run, expansion 
of unemployment insurance benefits was the most cost-effective 
item on that list.
    Senator Baldwin. Okay. Thank you.
    Chairman Murray. Senator Ayotte.
    Senator Ayotte. I want to thank the Chair and the Ranking 
Member and thank you, Dr. Elmendorf. I appreciate your being 
here today.
    I wanted to ask you, yesterday the administration announced 
another delay in the implementation of the Affordable Care Act 
for the business community. Businesses with 50 to 99 employees 
were given an additional year to comply with the law, and 
businesses with 100 or more employees are now able to phase in 
their compliance with the law.
    Is this something you have looked at? And has the CBO had 
an opportunity to review this most recent change and budgetary 
impact? And do you think it will have a difference? I mean, in 
your report, you basically, I think, put off some of the 
conclusions based on the original data of the employer mandate 
going in in 2015 in terms of what the impact will be on, for 
example, part-time employment, other employment issues. Where 
do we stand with all of these changes made essentially 
unilaterally by Executive order to this law in terms of CBO's 
analysis on the overall impact on the workforce?
    Mr. Elmendorf. So the analysis in this report, the reports 
we released last week, both in terms of the budgetary effects 
and the economic effects of the Affordable Care Act, are based 
on our view of how the Affordable Care Act would unfold as of 
early December. So these analyses we do are very complicated, 
and we need to stop taking on board changes in what is 
happening and focus on the analysis in order to get these 
reports done. We are already at work on our next baseline 
projections. Every year, as you know, we do projections in the 
spring that are the basis for our cost estimates for the rest 
of the year. So we are already working to update our 
projections for the Affordable Care Act and other aspects of 
the budget.
    Yesterday's announcement was, of course, as much a surprise 
to us as you. These things are complicated, so people have 
started to look at it. But we have reached no conclusions yet. 
But our spring baseline projections will incorporate the 
effects of all of the changes in policy that we can get in as 
well as all that we learn about what is happening in the 
insurance exchanges and in Medicaid programs in different 
States and so on. That is why we labeled these updates that we 
released last week as, quote, both partial and preliminary.
    Senator Ayotte. Well, at the rate the administration is 
changing this law unilaterally, I think your people are going 
to have to be working overtime, because it seems like it is a 
moving target. So I think this could be a real challenge for 
you.
    Mr. Elmendorf. I assure you, Senator, the people who work 
in health care are working over time.
    Senator Ayotte. I bet they are. I can only imagine.
    I wanted to ask you about the issue that Senator Toomey 
asked you on the conclusion in the report about the reduction 
essentially in the labor participation rate that you have 
predicted as a result of the Affordable Care Act. Are you 
concerned at all when you look at this reduction in the labor 
force in terms of the impact on the subsidies that will cause 
some people to either leave the workforce or work less hours, 
as I understand your report? Did I understand it correctly?
    Mr. Elmendorf. Yes, that is right.
    Senator Ayotte. Okay. Who will that have a more 
disproportionate effect on--lower-wage workers or higher-wage 
workers?
    Mr. Elmendorf. The change in the labor supply will be 
primarily by lower-wage workers because they are the people who 
are facing the largest change in incentives under the 
Affordable Care Act.
    Senator Ayotte. So are you worried at all that the 
incentives could have discouragement also on upward mobility? 
Because if there is a relationship between the amount of 
subsidy that you receive and whether or not you will continue 
working or perhaps seek higher employment, could that become a 
discouragement to upward mobility? In other words, do I take 
that promotion or don't I for lower-wage workers? We want to 
encourage more upward mobility.
    Mr. Elmendorf. Yes, Senator. I think the provisions in the 
Affordable Care Act that we studied reduced the incentive to 
provide more labor, and that can be reducing the incentive to 
work more hours or reducing the incentive to work harder in 
those hours or to do other things that would advance one's 
labor earnings.
    Senator Ayotte. So is it fair to say one of the concerns we 
should be keeping an eye on here is that the structure of the 
law could reduce some incentives for upward mobility--in other 
words, people seeking to go sort of up higher in the workforce 
depending on how--based on the structures of the subsidies? 
That is what I am trying to understand.
    Mr. Elmendorf. So I think, Senator, that the particular 
provisions that I have talked would, as you are suggesting, 
reduce upward mobility in that way, but I want to be very 
careful not to make that conclusion for the Affordable Care Act 
as a whole because we have not done that particular analysis. 
And the provision of subsidized health insurance to lower-
income people may also affect their upward mobility, and we 
simply have not analyzed that. So I think these particular 
provisions that we are talking about that reduce the amount of 
labor supply do reduce the incentive for people to move up the 
earnings ladder. But I do not want to suggest that we have 
drawn that conclusion for the Affordable Care Act as a whole, 
because other aspects of the provisions could have different 
effects, and we have not studied--
    Senator Ayotte. No, and I understand, and I would not ask 
you to draw it as a whole because we do not really know yet, 
with the changing landscape, with the Executive orders, exactly 
when things will be implemented on the whole. So I can 
understand why you would want to qualify your answer. I 
appreciate it.
    Mr. Elmendorf. Thank you, Senator.
    Senator Ayotte. Thank you.
    Chairman Murray. Senator King.
    Senator King. Thank you.
    Dr. Elmendorf, first I would like to say you are the 
indispensable man around here. I admire you, and I admire you 
even more today watching you. You remind me of the guy walking 
on the tightrope across the Grand Canyon between the various 
questions, and I think you are doing it very well, and you are 
providing a tremendous service to us.
    One technical question, then some more larger ones. What is 
the lag time in terms of the increase in interest rates and 
effects on interest charges? In other words, if all of our debt 
today was locked in 10 years at 2 percent, an interest rate 
change next year would have no effect, as I see it, and I am 
just trying to understand what components of the debt are 
locked in and what are short term? Because I am concerned about 
this interest rate increase and the impact on the budget and 
the crowding out of other priorities, but there is a time lag 
thing here, isn't there?
    Mr. Elmendorf. Yes, there is, Senator. In our estimates of 
the effect on the budget of having interest rates that are 1 
percentage point higher throughout the coming decade, we take 
explicit account of the phenomenon you are describing, which is 
that the Government will sell some new debt next year, and that 
will incur the higher interest rates right away. Other debt it 
will not roll over for 8, 9, 10 years, and some debt will not 
mature at all within the 10-year budget window.
    Senator King. So it would not be accurate to take $17 
trillion and say if interest rates go up next week 1 percent, 
then 1 percent of $17 trillion, that is not the way--
    Mr. Elmendorf. That does not work. What we publish in this 
appendix to the outlook is itself a rule of thumb for you and 
your colleagues to use, but that rule of thumb takes account of 
the phenomenon you are describing.
    Senator King. Thank you. And I perhaps want to follow up on 
that to get the data.
    Mr. Elmendorf. We are happy to talk to you, Senator.
    Senator King. All this talk about the effect of the 
Affordable Care Act on people's employment decisions, I believe 
that in the long run probably the most lasting and important 
effect of the Affordable Care Act will be the very subject we 
have talked about, which is the virtual elimination or 
certainly the significant reduction of job lock, because it is 
going to free people to start new businesses. That is where the 
dynamism comes in the country. And I know people and I am sure 
everyone in this room knows people who said, ``I have a great 
idea, but I cannot leave my job because I have a sick child and 
I cannot lose my insurance.''
    So, you know, this idea that somehow we are discouraging 
people from work, we are actually liberating people to follow 
the American principle of self-determination and creativity and 
innovation. And I think that is a hidden benefit, frankly, of 
the Affordable Care Act that I am not sure people really 
calculate. I realize that is hard to calculate in economic 
terms, but I believe that that is going to be very significant.
    The idea that somehow the Affordable Care Act by taking 
away the linkage between employment and health insurance is 
something we should discourage, we want everyone to work, you 
know, pensions, Social Security, why not have everybody work 
until they are 100? I mean, that just does not make sense to 
me. We want people working because they need to, they want to, 
they want to provide for their families, and they want to be 
creative about it.
    A specific question to get to my--another question is: Are 
tax expenditures expenditures just like Head Start or Pell 
grants?
    Mr. Elmendorf. As you know, Senator, they are recorded in 
different ways in the budget, but there is a widespread 
consensus among analysts that tax expenditures have very 
similar sorts of effects to direct Federal spending and, thus, 
should be viewed similarly to direct Federal spending by both 
analysts and policymakers.
    Senator King. And I would comment to my colleagues from 
page 89 on in the report a very good analysis of tax 
expenditures, and really you say they are almost like 
entitlements because if you are legally qualified, you get 
them, and they are not examined very often, and they just go on 
forever. Correct?
    Mr. Elmendorf. Yes, that is right, Senator.
    Senator King. It just strikes me that we are talking around 
here about how we pay for things, and it is always it is okay 
to pay for it by taking away some benefit that the disabled get 
or somebody else, but to say you cannot look at tax 
expenditures because that is revenues is really a 
misunderstanding of the fact that the two are really virtually 
identical.
    Mr. Elmendorf. I want to mention, Senator, we issued a 
report last year that looked in a more in-depth way at tax 
expenditures, including at the distribution of tax 
expenditures, also at their economic effects, and people who 
are interested in that topic, we are happy to send you that 
report.
    Senator King. I have not seen that report, but I am 
guessing that tax expenditures tend to go more heavily to 
people with higher incomes.
    Mr. Elmendorf. Well, different expenditures are quite 
different, so the earned income tax credit induces some tax 
expenditures that are obviously toward the lower end of the 
income distribution. But the State and local income tax 
deduction tends to be more for the high end of the 
distribution. So we will make sure you have that on your desk 
today, Senator.
    Senator King. Fine. I will have one more question for the 
record, but a final question is: Not fixing infrastructure is 
debt, is it not?
    Mr. Elmendorf. Well, it is a different sort of future 
commitment.
    Senator King. But it has to be paid eventually.
    Mr. Elmendorf. If we think we will ultimately repair the 
bridge or expand the highway, then not doing it now, putting it 
off, is putting a burden on the future in a way that is similar 
to the burden of doing something and borrowing to pay for it.
    Senator King. Carefully parsed, but I would take your 
answer as a yes.
    Mr. Elmendorf. Senator, I would like to close by noting 
that although you kindly referred to me as indispensable, as 
you and your colleagues understand, it is my colleagues who are 
indispensable. And if I have good answers for your questions, 
it is because of the things they have taught me. But they also 
taught me to be careful in how I put things.
    [Laughter.]
    Senator King. And I will bet after last week you certainly 
understand that. Thank you, sir.
    [Laughter.]
    Chairman Murray. Senator Portman.
    Senator Portman. Thank you, Madam Chair.
    Dr. Elmendorf, thank you for your indispensable staff and 
you and your personal responsiveness to our questions and your 
input and for being here today. I have so much I want to ask 
you about and so little time, so I am going to go quickly here. 
I want to focus on three things:
    One, of course, is what the real problem is in the deficit, 
and I think your new report only emphasizes what we already 
knew.
    Second is, What can we do on growth?
    And then third is, What is the impact of Obamacare on 
growth?
    In terms of the deficits, this was a discouraging report 
for me because it shows things are getting even worse. If you 
could give me just a series of quick yes-or-no answers, that 
would be great.
    Am I correct that in the past 50 years Federal revenues 
have averaged just under 18 percent of GDP?
    Mr. Elmendorf. Senator, we have averages for 40 years, and 
we say it has been about 17.5 percent.
    Senator Portman. Less than 18 percent over the last 40 
years. Over the next decade, you projected that it would 
average more than 18 percent of GDP. Is that right?
    Mr. Elmendorf. Yes.
    Senator Portman. And you are saying it will keep rising 
thereafter?
    Mr. Elmendorf. Under current law, yes.
    Senator Portman. Okay. So the notion earlier we talked 
about, you know, that we need more revenue, we are above the 
historic average based on your projections over the next 10 
years and continuing to grow.
    How about discretionary spending and what we call other 
mandatory spending? Are those falling as a percent of the 
economy over the long term?
    Mr. Elmendorf. Yes, under current law, Senator, and the 
projection--
    Senator Portman. Okay. So what is left? Discretionary 
spending is what we appropriate here every year; ``other 
mandatory'' is part of the two-thirds of the budget that is 
mandatory. Social Security, health entitlements, 7.8 percent of 
GDP in 2005, now 9.7 percent of GDP, on their way to 13.7 
percent of GDP in the next 20 years. Is that correct?
    Mr. Elmendorf. That sounds right, Senator.
    Senator Portman. And you project that health entitlements 
alone are going to go up over 100 percent, more than double, 
115 percent in the next 10 years now. Is that right?
    Mr. Elmendorf. The spending for the major health care 
programs we project to rise from 4.8 percent of GDP this year 
to 6.1 percent in 2024. If you are referring--
    Senator Portman. In nominal terms--
    Mr. Elmendorf. --to a nominal--
    Senator Portman. In nominal terms, you go 115 percent over 
the next 10 years.
    Mr. Elmendorf. I take your word for it, Senator.
    Senator Portman. Okay. Steeply rising national debt and its 
resulting interest costs are mostly the result of what, 
borrowing for what specific programs?
    Mr. Elmendorf. Well, the borrowing is for the gap between 
spending and revenues, as you know, Senator.
    Senator Portman. Right, but--
    Mr. Elmendorf. But the part of the budget which is--
    Senator Portman. We just talked about the fact that--
    Mr. Elmendorf. --growing most substantially is spending for 
Social Security and the major health care programs.
    Senator Portman. Okay. So we have identified what the focus 
ought to be. We are heading toward record high tax revenues 
over the decade, nearly record low discretionary spending, 
falling other mandatory spending, so we are talking about these 
important programs but unsustainable in their current form, 
health care entitlements, Social Security, and the resulting 
net interest cost. Is that correct?
    Mr. Elmendorf. There is a striking shift in the composition 
of Government spending toward those few large programs you have 
highlighted, Senator, yes, and away from other things.
    Senator Portman. So the next question is, How do you solve 
that? Obviously we need reforms, again, incredibly important 
programs. But we have heard a lot about a balanced solution 
which basically is to make the next generation pay the cost for 
our generation as opposed to reforming these programs. So that 
is very clear in your report. This is the problem. We have to 
address it. And if we do not, we will face consequences you 
talked earlier, including the possibility of a fiscal crisis.
    Second, the economy. I found it depressing, actually, what 
you put on your report. I am not saying you are wrong. I am 
saying that you are asking us to accept a new normal, and that 
new normal is not for 5 percent growth. It is 2 percent growth. 
In fact, what you tell us is that in this new baseline you have 
pared back your economic growth assumptions, which, by the way, 
have always been more optimistic than what actually happened in 
the last several years, and so I understand why you did it, 2.5 
percent over the next decade, decelerating to just 2 percent in 
2024; $1.4 trillion less tax revenue, therefore, over the next 
decade. And, you know, this is not the first time this has 
happened. Since, again, President Obama took office, you have 
consistently come out with decreases in projected economic 
growth. Those have translated just in this President's term to 
more than $2.2 trillion in reduced tax revenue when you take 
those projections out to 2024. And, remember, this is all about 
the bad economy since the President took office.
    So earlier you talked about this, but economic growth 
obviously is key. Restraining the spending, the growth, we need 
it. Economic growth through tax reform, would that make sense, 
lowering the rate and broadening the base?
    Mr. Elmendorf. That would be good for the economy, Senator, 
but--
    Senator Portman. How about trade?
    Mr. Elmendorf. It depends on the specifics of the reform.
    Senator Portman. Would trade be good for the economy, 
expanding trade?
    Mr. Elmendorf. Yes, it probably would be, Senator, again--
    Senator Portman. Okay. Trade promotion authority is before 
us right now. How about long-term debt reduction through these 
reforms we have talked about?
    Mr. Elmendorf. That would be good for the economy in the--
    Senator Portman. That would be good for the economy, so it 
is three--
    Mr. Elmendorf. --long term, Senator.
    Senator Portman. --things. How about more domestic energy 
production?
    Mr. Elmendorf. I think that would be good for the economy 
as well, and--
    Senator Portman. This is what is frustrating, is we have 
these things that you know would work and we know would work, 
and if we would just do them, we could both deal with the 
spending side and the growth side.
    On Obamacare just quickly, I appreciate you looked at the 
work of Casey Mulligan and others at the University of Chicago. 
There has been a lot of talk about this today. People are 
leaving the workforce because of this sharp cliff. I would say 
to my colleagues on the other side who said, you know, this is 
all about moms who want to stay home with their kids and it is 
all about people starting new businesses or even working in 
their family businesses. I mean, if you are working, you are 
working, and you are not out of the workforce, first. But tell 
us the demographics of this group that is likely to drop out. 
What do you know about them?
    Mr. Elmendorf. The attributes of the group?
    Senator Portman. Yes.
    Mr. Elmendorf. So the biggest effects, as we wrote, 
Senator, are primarily on people of lower income because they 
are the ones who are receiving the subsidies through the 
Affordable Care Act. It is the existence of the subsidies and 
the withdrawal as people's income rises that create--that 
reduces the incentive to work.
    Senator Portman. So as Mulligan says, about a 50 percent, 
in effect, tax or penalty on work because of this cliff. But 
tell us who these folks are. Do you think it is primarily 
people who would like to retire early or moms who want to stay 
home with their kids? Who is it? And I ask you this because 
when you look at the labor participation rate, which is already 
at 1970s levels, it is a record low for men right now. It is a 
record low for working men. And here we are taking this labor 
participation rate even lower, fewer people working, which is 
bad for the economy, it is bad growth, it is bad for 
prosperity. When you look at this data that we know out there--
and the early indications are this tends to be single men, they 
tend to be childless. And my concern is we are going to even 
exacerbate further this already record level. What do you think 
about that?
    Mr. Elmendorf. So, Senator, the subsidies under the 
Affordable Care Act affect a broad range of types of people, 
and we did not do this analysis in a way that lets us isolate 
the effects on particular--
    Senator Portman. Could you look at the Brookings study on 
that and look at whatever else you think is appropriate and get 
back to me on that as to who you think really is going to be 
affected here? We talked about the fact that these are people 
who you want to get on that ladder of opportunity, that income 
ladder and moving up on the ladder, and this takes them off the 
ladder, reduces their Social Security benefits, as you know, 
because their lifetime earnings are going to be reduced. It 
takes them out of this possibility of being able to achieve 
their dream for themselves and their families because they 
lose, again, the dignity and self-respect and the opportunity 
that comes with work. And that is my concern, is that--I know 
you and I disagree on some of the Obamacare impacts on the 
labor demand side. I think that $1 trillion in new taxes does 
have an effect on workers. I think also the 50-person limit and 
the part-time at 30 hours does have an effect. We may disagree 
on some of that. But this data is really concerning because it 
exacerbates an already terrible problem we have, and you do not 
have to do it. You can solve these health care problems without 
that stiff cliff. And that is one of the differences maybe 
between the two sides here, is that there are ways to do it, 
including through the Tax Code, that have been talked about 
where you would not have that 50-percent penalty and still be 
able to address many of the problems on pre-existing conditions 
and other issues that have been raised today.
    I am over my time. Thank you, Madam Chair, for your 
indulgence. Thank you, Dr. Elmendorf.
    Mr. Elmendorf. Thank you, Senator.
    Chairman Murray. Senator Coons.
    Senator Coons. Thank you, Senator Murray, and thank you, 
Director Elmendorf, for your work and for the work of your team 
and for the very valuable report you have delivered. I am 
struck at how across all the questions from members of this 
Committee, the one North Star is economic growth. We have 
talked back and forth about this Grand Canyon that Senator King 
suggested you are trying to navigate across the tightrope. The 
other side wants to focus almost exclusively on entitlement 
reform. We want to talk about tax expenditures. We think 
extending unemployment insurance will be stimulative for the 
economy. They think reducing regulatory burden--we seem to go 
back and forth on these issues with great predictability.
    One thing that I wanted to ask for your input on was the 
one area where I hear general agreement between our parties, 
and that is in manufacturing. Restoring robust economic growth 
in the United States strikes me as one of the best ways to 
achieve deficit reduction and to achieve return to full 
employment and to achieve a lot of other shared objectives.
    There are about 25 of my colleagues and more than a dozen 
bipartisan bills that would strengthen significantly the 
environment, the ground for manufacturing, and for the 
continuing growth in manufacturing employment in the United 
States. Manufacturing jobs, as you know, are among the highest-
quality jobs, have the best multiplier effect, and they have 
the best impact on their immediate community. And the bills 
broadly speak to skills, access to credit, investment in R&D, 
export markets, infrastructure.
    Could you just comment on the relative importance of 
manufacturing as a sector to contributing to growth and what 
you see as appropriate policy actions we might take on a 
bipartisan basis that would strengthen that sector?
    Mr. Elmendorf. Senator, those are hard questions for which 
I do not have adequate answers. You are certainly correct that 
manufacturing jobs have tended in the past to provide higher-
than-average wages and better than average benefits. But we 
have not done an analysis ourselves, at least at my time at CBO 
or that I am aware of, of what policy actions might do for the 
manufacturing sector and how that might then ripple through the 
broader economy.
    So, again, you ask questions to which I wish had answers, 
but I do not have them, I am afraid.
    Senator Coons. Well, I would be eager to work with you, if 
I possibly could, at submitting for some review and discussion 
a variety of both historical and prospective policy tools that 
have been brought to me and to many of my colleagues by the 
manufacturing sector, by manufacturing leaders in my State and 
the country around skills, credit, export, R&D. It is an area 
where Government action and fiscal policy can make a 
significant, enduring difference.
    Let me turn to one other topic in my time here, which is 
interest rates, and a number of other Senators have asked about 
this. There are, I think, roughly half of our current debt held 
by foreigners, and they have difficulty, I think, sometimes 
discerning the dance of politics here in the Capitol. I would 
be interested in what you view as the short-term and long-term 
threats to our interest rate, to our debt service costs. We 
have in recent years had, in my view, far too many close calls 
where there was open discussion of the possibility of default, 
and I think that has increased our borrowing costs. And then 
there are long-term drivers that also create some question 
about the debt service costs that we may face going forward. So 
if you would just briefly speak to the short-term and long-term 
drivers, I would be grateful.
    Mr. Elmendorf. So, Senator, we think that defaulting on any 
obligation of the U.S. Government would be a dangerous gamble, 
and that is importantly because, until now, investors had been 
able to count on the Federal Government paying its debt. And if 
that were to change, it would have consequences that could be 
very severe, but that are hard to quantify given the lack of 
historical experience.
    Interest rates can go up or down for a variety of reasons, 
and some would be good things for the economy as a whole, but 
would make the Government's interest burden larger and some--
for example, if there were much stronger economic growth than 
we expect over the next few years, that could increase private 
credit demands and push up interest rates in a way that would 
basically make this Committee and other people happy about the 
economy but could raise the cost of Government borrowing. If 
the economy is weaker in the next several years than we expect, 
that could keep interest rates lower.
    So there are economic factors that will matter, but also 
the perceived risk of Treasury securities and the perceived 
risk of other investments. As you know, capital can come into 
the U.S. Treasury market if it is leaving other financial 
markets that seem more dangerous. There is a wide panoply of 
factors that can affect interest rates, but--although one might 
root for low interest rates for the Federal Government, of 
course, that might come together with a weak economy, which is 
exactly what you are not rooting for. So one does not want to 
think about high or low interest rates as necessarily 
correlating with good or bad economic circumstances in general. 
And we look at a variety of forces that can affect interest 
rates. In our projections we think we balance the risks. But 
the risk of rates being a good deal higher or lower than we 
thought is a very real one.
    Senator Coons. But to be clear, if I understood your 
testimony, publicly discussing the possibility of default, 
urging default as a negotiating tool in policy debates is--and 
I think I am quoting you--a ``dangerous gamble.''
    Mr. Elmendorf. Yes, Senator.
    Senator Coons. Thank you.
    Thank you, Chairman.
    Chairman Murray. Thank you very much. I want to thank all 
of our colleagues who participated today. Dr. Elmendorf, I 
especially want to thank you and, again, this Committee really 
does appreciate all the hard work that you and all of your 
staff put in in order for us to do our work, so thank you very 
much for being here.
    As a reminder to all of our colleagues, if you have any 
additional statements or questions, they need to be submitted 
by 6:00 p.m. today.
    Senator Sessions. Madam Chair, just briefly, it looks like 
the President's budget will be late again. There are some 
reasons for that. Director Burwell called to discuss that.
    Chairman Murray. She has been very clear that there has 
been--we were late, they are late.
    Senator Sessions. But that result is causing us a problem I 
will write you about. Fundamentally, by the time she testifies, 
we still will not have had the complete budget. I think that 
would be better. So if there is some way we could alter the 
course we are on so that we do have the President's complete 
budget when she testifies, I think that would be essential for 
our smooth operation.
    Chairman Murray. I would be happy to discuss that with you.
    Senator Sessions. Thank you, Dr. Elmendorf.
    Chairman Murray. Thank you.
    Mr. Elmendorf. Thank you very much.
    [Whereupon, at 12:19 p.m., the Committee was adjourned.]






    THE ECONOMIC AND BUDGET OUTLOOK FOR INDIVIDUALS, FAMILIES, AND 
                              COMMUNITIES

  


                       TUESDAY, FEBRUARY 25, 2014

                              United States Senate,
                                   Committee on the Budget,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 10:35 a.m., in 
Room SD-608, Dirksen Senate Office Building, Hon. Patty Murray, 
Chairman of the Committee, presiding.
    Present: Senators Murray, Stabenow, Whitehouse, Sessions, 
and Johnson.
    Staff Present: Evan T. Schatz, Majority Staff Director; and 
Eric M. Ueland, Minority Staff Director.

              OPENING STATEMENT OF CHAIRMAN MURRAY

    Chairman Murray. The hearing will come to order.
    I want to welcome everyone and thank my Ranking Member 
Sessions and all of our colleagues who are joining us this 
morning. And I want to extend a very special thank you to all 
of our witnesses for being here today: Edith Kimball, Courtney 
Johnson, Neera Tanden, Robert Doar, and Scott Winship. Thank 
you all for being here. And, Edith, I understand this is one of 
the rare times in your life you
    have seen snow, so welcome to Washington, D.C.
    [Laughter.]
    Chairman Murray. Because of the votes that are now 
scheduled starting at 11:15, I am going to be very brief in my 
remarks. I want to make sure we have enough time to hear from 
all of our witnesses.
    At our last Committee hearing with Dr. Doug Elmendorf, we 
examined the economic outlook from the macro level, but to me 
it is just as important that this Committee also examines the 
micro level. I want to hear from people across the country 
about how the Federal budget affects them--people like Edith 
Kimball, from Lee, Florida, mother of three, who works as a 
food service professional at her children's elementary school. 
Courtney Johnson joins us from Columbus, Ohio. She is a high 
school English teacher and has a son in the second grade. I 
hope their stories today will serve as a reminder to all of us 
that we have work to do to expand opportunities for more 
Americans.
    The simple truth is, across the country, too many people 
sit at their kitchen table, wondering how they are going to be 
able to pay this month's bills or save enough to send their 
kids to college. Those challenges leave people without the 
opportunities they need to get ahead.
    I am hopeful that Congress will build on the bipartisan 
progress that we have seen in the past few months. As we all 
know, late last year, Chairman Paul Ryan and I compromised to 
reach a 2-year budget agreement, and that compromise was a 
strong step in the right direction. And I now hope we can work 
together to create more opportunities for people and families 
and do that by investing in education and job training and 
manufacturing so more Americans can climb the economic ladder.
    Expanding opportunity is not just the right thing to do; it 
is good for our economy. And it is a good solution for our 
long-term fiscal challenges.
    So I hope we can work together on a bipartisan basis to 
create jobs, grow the economy, invest in our middle class, and 
expand opportunity for more Americans. And I am looking forward 
to hearing from all of our witnesses today after I turn to my 
Ranking Member, Senator Sessions, for his opening remarks.

             OPENING STATEMENT OF SENATOR SESSIONS

    Senator Sessions. Thank you, Madam Chairman.
    CBO Director Elmendorf recently testified before this 
Committee to share an alarming diagnosis. He declared our 
current debt trajectory to be unsustainable and ``raises the 
risk of a fiscal crisis.'' The last thing we need is another 
fiscal crisis.
    One of the clearest indicators of the danger we face is the 
rising interest we pay. Our debt today stands at $17 trillion, 
and we owe $233 billion, he projects, in interest this year on 
that debt. In 10 years, he projects continued--the debt and 
interest will grow to a mind-boggling $880 billion in 1 year 
annual interest payment. This is money for which we get 
nothing. It will crowd out spending on all kinds of investments 
that the Chair would like for us to make.
    So I was, therefore, stunned to read, according to the 
Washington Post, that the White House has declared the 
President's 2015 budget will mark ``an end to the era of 
austerity.'' Our debt has grown 67 percent in the past 5 years, 
and we have had annual four deficits over $1 trillion. As 
Charles Krauthammer said such a characterization is ``an 
assault on the dictionary.''
    The Washington Post also reported that the President plans 
to bust the budget caps in Ryan-Murray that he signed into law 
only 8 weeks ago. The ink is not even dry, and he is already 
proposing we bust the new and higher spending caps that were 
passed. Do promises mean nothing in this country anymore?
    So I hope our distinguished Chair will join me in opposing 
any plan from the President that would spend more than we 
agreed to spend under Ryan-Murray.
    I am looking forward to our conversation today. The 
American workers are hurting. Wages are down. The workforce is 
shrinking. Welfare rolls continue to grow. We have a moral duty 
to take firm, principled steps that will actually help millions 
of struggling workers transition from joblessness and 
dependency to work and rising wages.
    Clearly this goal cannot be accomplished simply by 
borrowing and spending more money. There is an article in 
yesterday's paper that said, ``CBO reports stimulus now taking 
its toll. Economy will soon be worse off than if the stimulus 
law had never passed.''
    Mr. Elmendorf told us that would be the case. The sugar 
high is over. We will pay the interest and bear the burden of 
that stimulus plan, every penny of which was borrowed, for 
decades to come.
    So over the last 5 years, we have added a staggering $7 
trillion in debt. So what do we have to show for this? Just ask 
this honest question. Has it worked? Twenty-nine million people 
are unemployed or have become discouraged from even seeking a 
job. Nearly one in two college graduates are underemployed. We 
have 800,000 fewer jobs since the recession began, but the 
population has grown by 15 million. The share of the population 
actually working has declined to the lowest level in 40 years. 
Wages for American workers are lower today than in 1999. Take-
home pay has fallen each of the last 5 years. Forty-seven 
million people are on food stamps.
    So the desperate need today is for growth and job creation 
and higher wages. We can all agree on that. But what action do 
our Democrat colleagues propose to fix this problem? Energy 
restrictions, more restrictions on energy that drive up costs 
and destroy jobs; unprecedented increases in Federal 
regulations that are hurting our factories and small 
businesses; a health care law that the CBO confirms will result 
in the loss of another 2.5 million workers; higher taxes that 
enrich a booming Washington, the only place in America that's 
booming really other than North Dakota is here in Washington, 
while our middle class is being impoverished; a weak trade 
stance that allows China to devaluate its currency and foreign 
competitors to game the system, sending our jobs abroad; an 
immigration plan that would double the flow of immigrant 
workers, by definition job takers, competing against unemployed 
Americans by the millions; a new minimum wage that will reduce 
the number of jobs by 500,000 to a million, according to Mr. 
Elmendorf; a budget plan that will never balance and would add 
trillions to the long-term debt, resulting in weaker growth and 
a diminished future for our children.
    So we cannot keep hurting the future, burdening the future, 
to enjoy a sugar high today. So we should work on a strategy 
that would reduce our welfare rolls and bring our workers to 
prosperity.
    And I will just put the rest of my remarks in the record 
and say one more point. To me, it is so important that we use 
the welfare office as a job training office, an office to 
advance people from dependency to independence, to have, Madam 
Chair, like the special ed, an individual IEP right, individual 
education plan. We need an individual employment plan for each 
person that is hurting, unemployed, and help move them out into 
employment. We can pay for that by reduced welfare and improved 
economic growth in our economy.
    So I feel strongly that we are not doing well in America 
today. We can do better. And I think there is, unfortunately, 
some disagreement about how to get there.
    So I thank the Chair and look forward to this excellent 
panel.
    [The prepared statement of Senator Sessions follows:] 
    
     [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman Murray. All right. Thank you very much, and, 
again, thank you to all of our panelists for being here today.
    We are going to start on my left, Ms. Kimball, with you, 
and work our way across. So we will start with you. Thank you.

  STATEMENT OF EDITH KIMBALL, FOOD SERVICES PROFESSIONAL, LEE 
                ELEMENTARY SCHOOL, LEE, FLORIDA

    Ms. Kimball. My name is Edith Kimball, and I thank you for 
inviting me to be here today. I have been married to my 
husband, Kenny, for 14 years. We have three children: 9-year-
old twins, a boy named Cameron and a girl named Olivia; and a 
7-year-old, Jacob. I have lived my entire life in my small town 
of Lee, Florida, where I have worked as a food service 
professional at Lee Elementary for the past 3 years.
    Lee is a rural town in Madison County between Tallahassee 
and Jacksonville and near the Florida-Georgia State line. It is 
a caring community where you know just about everybody and 
people are willing to help out and lend a hand when someone is 
in need. We have a saying in Lee: ``Little, But Proud.''
    Our county is one the poorest in the State, and jobs have 
been tough to come by. About 20 years ago, a meat-packing plant 
closed down. It was a place where hard work was rewarded; you 
could move up the ladder and provide for your family. A lot of 
workers were the second or third generation in their family to 
work there. When the plant closed its doors, it devastated many 
families.
    I feel blessed to work at our elementary school where I 
work with my mother, who is the food service manager. Together, 
we prepare and serve almost 200 meals each day. Lee Elementary 
is a school full of great, well-mannered kids who say ``Yes, 
ma'am'' and ``No, ma'am.'' My school is special because of the 
caring teachers who pour their hearts into teaching their 
students. As a parent, I appreciate this.
    My school, like our county, is poor. A few years ago almost 
all our kids were on free or reduced-price lunch, and now a new 
grant helps provide meals to all of them. I love preparing 
healthy meals for them, even though many are picky eaters. And 
I know many of their families, like mine, struggle to make ends 
meet.
    Before the elementary school, I worked for a local grocery 
store for 10 years. I still remember families would come in 
with food stamps, and I knew they had to make that food last 
for their family until the end of the month. After Jacob was 
born, I chose not to return to the grocery store because of the 
high cost of child care. It just did not make sense for our 
budget. And I needed a job that would let me be there for my 
children after school. My prayers were answered when I got my 
job at Lee Elementary.
    I knew that the pay would not be great, but I would be 
there for my children, especially my oldest son, who is a 
special needs child, and be home to help my other two children 
with their homework to become better students. Being home when 
my kids are home is important. My husband, Kenny, is a truck 
driver and is on the road for 4 to 6 weeks at a time.
    Kenny is the owner/operator of his truck, which means he 
pays the maintenance and all costs for it. Between fuel costs, 
truck payments, and maintenance, there is not a lot left over 
at the end of the month. We get by decently. We pay our bills, 
buy groceries, and pay our tithe to our church, but there is no 
room for extras at the end of the month.
    I know that Congress is talking about raising the minimum 
wage. For me, in my job that would mean an increase of $200 
more a month for my family. That would help give us a just a 
little more in our budget. It could even help me open a college 
savings plan for my children for their future.
    Every parent wants the best for their children, and I am 
not any different than any other parent. My daughter, Olivia, 
wants to be a doctor. It is my responsibility to see to it that 
she gets the best education available. I have told her she will 
have to study and work hard and I would do my best to see that 
she could fulfill that dream. But right now that is going to be 
difficult for my family.
    I know other families in my town that would be helped by an 
increase in the minimum wage, too, and I think it would make 
more people want to work. It is my prayer that you will think 
about towns like mine and families like mine when you make 
major decisions here. We should not be forgotten and left by 
the wayside.
    Thank you to Chairwoman Murray and all of you for the 
chance to talk to you today.
    [The prepared statement of Ms. Kimball follows:] 
    
     [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman Murray. Thank you very much.
    Ms. Johnson, we will turn to you.

  STATEMENT OF COURTNEY JOHNSON, HIGH SCHOOL ENGLISH TEACHER, 
    FORT HAYES ARTS AND ACADEMIC HIGH SCHOOL, COLUMBUS, OHIO

    Ms. Johnson. Good morning. Thank you, Chairwoman Murray and 
members of the Committee, for inviting me to speak to you 
today.
    Three years ago, when I came here to Washington, D.C., to 
talk to Congress about why I as a teacher valued collective 
bargaining, I would have considered myself solidly in the 
middle class. Today, like so many others, my family's foothold 
in the middle class has become perilous.
    I am a high school English teacher at a public arts magnet 
school in Columbus, Ohio. My large urban school district is in 
financial trouble. State budget cuts, Federal sequester cuts, 
indirect cuts through charter school and voucher programs, and 
the end of one-time Race to the Top money means that many good 
teachers will lose their jobs. I worry that I will be laid off 
in the coming weeks as my district has to find a way to trim 
$50 million more from our already bare-bones budget. My 
husband, who holds a degree in health care administration, was 
laid off last month. In the past few years, we have made two 
major moves, suffered two job losses, and had to rely on Brad's 
401(k) to stay afloat. We know we are fortunate to have had 
that money.
    But we live under constant anxiety that I will be laid off, 
that Brad will not find another job, and that we will not be 
able to sell our home should we need to find more affordable 
housing. I bring home less in my paycheck now than I did 3 
years ago. Our Governor has raised the sales tax, spreading my 
smaller paychecks thinner and thinner. We cannot even fathom 
saving for college for our son, Brady, as we are still paying 
for our three degrees between the two of us. We only had one 
child because the cost of quality child care was too much. And 
yet we are fortunate. When I compare my family's situation to 
my students' families, I know that we are fortunate.
    I do not know all the specific policies that have 
contributed to the decline of the middle class, but I know that 
when folks do not have good jobs, everything else in our 
society unravels. When we cannot meet our basic needs of safety 
and security, we cannot care about much else. As any teacher 
will tell you, it is about the hierarchy of needs. I care very 
much about many issues: public education, women's rights, 
workers' rights, voting rights. But most of all, I care about 
whether or not we have jobs in my community. If I have to work 
three low-wage jobs, I do not have time to help my kids learn 
to read or do their homework. I cannot send my kid to college. 
I do not have time to be an informed voter. I do not have time 
to care about anything but paying my bills and making sure my 
family is fed.
    Anti-worker policies like the erosion of collective 
bargaining, wage stagnation, and free trade agreements have 
destroyed the middle class that labor built. I just read in the 
New York Times a couple of weeks ago that the top 40 hedge fund 
managers make as much as a third of all high school teachers in 
America combined. Where are we as a country when we do not 
value and respect the dignity of work?
    I am frustrated that the pathways to the middle class that 
existed for my generation no longer exist for my students or my 
son. Why does the American dream have to end with me?
    When I was a little girl growing up in Ironton, Ohio, I 
knew that college was how I entered the middle class. Becoming 
a teacher was not something I settled for as a career. I made a 
choice. Teaching was my pathway to making a middle-class life 
that would allow me to build lives, too. Where are we as a 
country when the folks who teach our children cannot have a 
stable economic avenue into the middle class?
    But that college opportunity that I was privileged to have 
is not there for many of my students. Just a few weeks ago, I 
was sitting with a bright young senior as she anxiously 
scrolled through her college application, and she sat like 
with, with her head in her hands, and she said, ``I just want 
to go to college.'' How will she afford it? It is 
heartbreaking, and I do not have an answer for her. We are 
complicit in a system where wealth protects wealth, and college 
is the new lotto ticket. Community college or bust is the story 
of dreams deferred. We are telling young people, ``College is 
not for you.'' We are the first generation to break Horace 
Mann's vision for America. He said, ``Education is the great 
equalizer.'' Where are we as a country when our young folks 
have no hope of a pathway out of poverty and into the middle 
class?
    We can create a world where kids can have hope that they 
can move out of poverty and into a strong middle class. You can 
work on investing in jobs and ensuring job creation in my State 
and in my community. You can raise the minimum wage. You can 
make education the great equalizer by providing formula-based 
funds to public schools where they are needed the most. You can 
make college affordable.
    I still have hope. My hope is in the eyes of my students 
and my second grader. They still believe in the promise of 
America and trust in education as the most powerful tool for 
advancement. But they cannot act alone. We give our power and 
our voice to you, our elected officials. Please speak--and 
act--on our behalf.
    Thank you again for inviting me to be here today.
    [The prepared statement of Ms. Johnson follows:] 
    
     [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman Murray. Thank you very much.
    Ms. Tanden?

   STATEMENT OF NEERA TANDEN, PRESIDENT, CENTER FOR AMERICAN 
                            PROGRESS

    Ms. Tanden. Thank you, Chairwoman Murray and Ranking Member 
Sessions and members of the Committee. My name is Neera Tanden, 
and I am president of the Center for American Progress. CAP is 
an independent nonpartisan educational institute dedicated to 
improving the lives of Americans through progressive ideas and 
action. We believe that a robust and growing middle class is 
critical to growing a stronger, more resilient economy and a 
competitive future. This tenet is one of CAP's core values, and 
I know that it is a priority for every member of this 
Committee.
    We believe that we should measure our budget priorities 
against a simple test: Are we expanding opportunity for all 
Americans? No matter where you come from, we are all better off 
if everyone in our society has the opportunity to succeed.
    Unfortunately, our recent budgets are failing that test. 
Simply put, many of the budget choices we have made over the 
past 3 years are hurting people and hindering economic growth.
    At a time when we should be doing everything we can to get 
the economy moving, where everyone is frustrated it is not 
moving fast enough, instead we have made deep cuts to 
education, research, infrastructure, and safety net programs. 
CBO has warned that these austerity policies have made our 
immediate economic problems worse and now reports that these 
short-term problems have weakened our long-term economic 
outlook. High unemployment is driving workers out of the labor 
force permanently. New capital investment remains relatively 
low, and less investment now means fewer resources in the 
future. Weak demand is hurting productivity by making it harder 
for workers to receive training and for businesses to invest in 
research and development. We need to solve these problems now, 
or the economy and American families will struggle for years to 
come.
    What troubles me most about our misguided austerity 
policies is that Congress has cut the very programs that help 
low-and middle-income families get ahead. Food stamps and 
nutrition assistance have been cut. Section 8 housing and 
welfare are not keeping up with the need. I am concerned about 
the impact of the cuts to these programs, because I know 
firsthand I would not be here today if they had not been 
available to me.
    Let me just tell you a little bit about my own story. I 
grew up the child of two immigrants who had come from India 
decades earlier. When I was 5, my parents divorced and my dad 
left. My mother was on her own, and she had never held a job in 
her life. She had a choice to make at that point. She could go 
back to India, a woman who had been divorced, with two 
children, or go on welfare here in the United States to support 
her two young kids. Now, it was a hard choice for her, but she 
knew if she went back to India, her children would be 
stigmatized for the rest of our lives.
    So she chose to stay. She went on welfare. As a child, I 
remember getting those little vouchers to get reduced lunch. It 
cost 10 cents back then. We were on food stamps. I remember 
going to the welfare office, and the lines. She stayed in the 
U.S., and we were on those programs, and we received Section 8 
housing as well. But we were lucky to be able to stay in 
Bedford, Massachusetts, that had good public schools. And after 
2 years, she got a job, first at a travel agent office and then 
a few years later at a defense contractor's offices in Bedford. 
And eventually, by the time I was 11, she was able to buy her 
own house in Bedford, Massachusetts.
    I know that I am here really because of the incredible 
tenacity of my mother. But I am also here because there were 
social safety net programs that were about giving people an 
opportunity, about giving people a hand when they needed it 
most.
    So I am worried that children today do not have that same 
social safety net to fall back on, and really the middle class 
is out of reach for too many families.
    As we strive to build an economy that works for everyone, 
there are a few key policies that would go a long way in 
rolling back income inequality.
    So first, let us stop cutting the programs that help people 
get into the middle class. Let us invest in job training and 
other programs to help the unemployed get the skills they need. 
And, absolutely, we must pass an increase in the minimum wage 
because that will mean real money in the hands of people who 
will actually spend it in their local communities and drive 
jobs. I think that is one of the reasons why The Gap just 
decided to increase its minimum wage to $10.10.
    We also have to ensure that we address the uneven playing 
field because when wealthy parents have a leg up in providing 
their children with an environment conducive to long-term 
success and middle-class and low-income families do not, that 
is a problem for all of us.
    So as the Committee addresses the work it has going 
forward, I hope you will keep in mind the families here and 
their struggles and pass minimum wage, address unemployment 
insurance, and take on the investments we need to make to make 
the economy grow.
    Thank you very much.
    [The prepared statement of Ms. Tanden follows:] 
    
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    Chairman Murray. Thank you very much.
    Mr. Doar.

 STATEMENT OF ROBERT DOAR, FORMER COMMISSIONER, NEW YORK CITY 
HUMAN RESOURCES ADMINISTRATION, AND MORGRIDGE FELLOW IN POVERTY 
             STUDIES, AMERICAN ENTERPRISE INSTITUTE

    Mr. Doar. Thank you, Chairman Murray, Ranking Member 
Sessions, and other members of the Senate Budget Committee, for 
inviting me to testify today.
    In looking at the conditions, prospects, and possible 
solutions for low-income Americans, I have four main points, 
all of which have been informed by my work in New York City for 
former Mayor Michael Bloomberg, where for 7 years I ran one of 
the Nation's largest social services agencies.
    First, things are not good for struggling Americans. More 
than 50 months after the end of the recession, millions of 
Americans are still unemployed, 3.6 million have been jobless 
for more than 27 weeks, 7.3 million are involuntarily working 
part-time, and the labor force participation rate is still too 
low. As a result, some 46 million Americans are living below 
the Nation's official poverty line.
    From my experience in New York, I believe I have an 
understanding of what works to increase the livelihood of 
struggling Americans. A stronger economy works to help the 
poor. But in order for that to happen, we need leaders who are 
focused on protecting and growing job opportunities.
    In New York City, we nurtured a strong and vibrant economy, 
providing an abundance of job opportunities for low-skilled New 
Yorkers. New York City's job recovery from the recession has 
been much, much faster than the rest of the country, and it is 
partly due to that vibrant economy that New York City is the 
only city among the Nation's 20 largest cities not to have seen 
an increase in poverty since the 2000 census. In fact, the 
average increase in the Nation's other major cities has been 36 
percent, and across the whole Nation, the increase has been 28 
percent. In New York City, zero. And that is after the deepest 
national recession since the Great Depression.
    Work expectations and requirements in public assistance 
programs also have been successful. We need to replicate the 
success of welfare reform and the TANF program in other public 
assistance programs. At the job centers in New York, we 
required a minimum number of hours of work or work-like 
activity for all welfare applicants and recipients, and we 
extended that requirement to able-bodied adults without 
children in the food stamp program. And our employment 
programs, which we paid for based on job placements not 
process, were able to absorb that increased demand.
    We need to reward work with available and sometimes more 
generous supports such as the earned income tax credit. New 
Yorkers receive the most generous EITC in the Nation, and we 
made sure food stamp benefits, child care assistance, child 
support collections, and public health insurance were available 
to low-income working New Yorkers.
    Finally, we need policies and messages which foster 
stronger families. There just is not any doubt that fewer 
Americans will be poor if more children are raised in two-
parent married households. I do not want to impose my culture 
on anyone, but I do want to be honest and I want our leading 
institutions to be honest about the consequences for our 
society of an increasing portion of our population being raised 
in single-parent families.
    The Bloomberg administration implemented a path-breaking 
public service advertising campaign which highlighted the 
consequences for children of teen pregnancy. We need to 
replicate that campaign on a much larger scale.
    Going forward, we need policies which create jobs, not 
shrink them, and we need to be especially protective of 
industries which provide entry-level opportunities: tourism, 
security, and retail. We need to impose welfare reform-like 
requirements on public assistance programs in return for 
assistance. We need to reward work with better targeted and 
more generous EITC, especially for single individuals, and we 
all need to participate in an honest discussion about good 
personal choices that will lead to better outcomes for children 
and families. And we should recognize and celebrate the value 
of low-conflict marriage for children.
    I would ask the Committee to consider a more generous EITC 
for childless adults, support programs which target poor young 
men, and test the two-generation programmatic approach which 
helps both parents and children under the same organizational 
structure.
    And, finally, the Committee should support relocation 
assistance so unemployed Americans can get help moving to areas 
where there are more jobs.
    Thank you.
    [The prepared statement of Mr. Doar follows:]
   
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    Chairman Murray. Thank you.
    Dr. Winship?

 STATEMENT OF SCOTT WINSHIP, PH.D., WALTER B. WRISTON FELLOW, 
            MANHATTAN INSTITUTE FOR POLICY RESEARCH

    Mr. Winship. Thank you. Chairman Murray, Ranking Member 
Sessions, members of the Committee, thank you for inviting me 
to appear today to discuss the outlook for the Nation's economy 
and budget. As we enter budget season, with the Great Recession 
growing dimmer in our rearview mirror but significant economic 
anxiety still riding shotgun, it is important to assess where 
we have been and where we stand, to carefully distinguish 
between short-and long-run challenges, and to prioritize among 
them. My written testimony reviews the long-term trends in 
household income earnings inequality and mobility and points to 
three conclusions for policy that I will highlight here this 
morning.
    Many of the statistics I cite will appear at odds with the 
lived experience of Ms. Kimball and Ms. Johnson and their 
communities. Nothing I say is meant to minimize their 
challenges or to contest their stories. But as a researcher, I 
rely on statistics, which are impersonal but which have the 
important strength of aggregating all Americans' individuals 
stories and assessing our challenges with the benefit of that 
information.
    So that said, first, while I will reiterate that we face 
challenges, I think the evidence indicates the American middle 
class is actually healthier economically than many of us 
believe, but what it really needs is for strong economic growth 
to return.
    A few statistics. The median household income of Americans, 
the income that's in the very middle of the distribution, for 
Americans under age 60 rose by 30 percent between 1979 and 
2007, before taking into account public transfer payments, 
employer-provided health coverage, or the impact of taxes. 
After accounting for them, median income rose nearly $22,000 
for a family of four between these two business cycle peaks.
    It is true that this rate of growth pales in comparison 
with those of the 1950s and 1960s. Many observers, including 
President Obama, have attributed this slowdown to rising income 
concentration, which is said to have produced gains at the top 
at the expense of the poor and the middle class.
    However, median incomes began to slow in the 1970s while 
income concentration did not take off until the 1980s. The 
middle class experienced strong income gains in the second half 
of the 1990s despite rising income concentration, and at the 
time you did not see inequality as a major political issue, 
interestingly enough.
    Given the healthy state of the middle class, it is not only 
necessary but reasonable to implement reforms to senior 
entitlements so that we contain future deficits and debt levels 
that threaten America's economic stability and growth. Doing so 
will allow us to afford current and new commitments to promote 
the upward mobility of poor children, which will also increase 
productivity and growth in the long run.
    Other policies to promote growth might include cuts in 
corporate and individual investment taxes; increases in Federal 
research-and-development spending, both of which might be 
expected to pay for themselves; greater high-skilled 
immigration; and health care reform, both as part of deficit 
reduction (because scheduled provider cuts are unlikely to be 
implemented) and to prevent the excessive health care inflation 
that the ACA's subsidies and mandated benefits are likely to 
create.
    Second, the experience of the 1990s shows that work-based 
welfare reforms can ensure that low-income Americans also 
benefit from growth. Indicators that remedy the well-known 
flaws of the official poverty measure show that poverty has 
declined since 1979, with a particularly large drop between 
1993 and 2000. This was the strongest period of income growth 
since the 1960s and reiterates the importance of robust 
economic growth for reducing poverty.
    However, research suggests that child poverty would not 
have fallen as much during these years if not for Federal taxes 
and transfers. Since the safety net for non-working families 
actually became less generous during these years while it 
became more generous for working families, the implication is 
that the work-oriented welfare reforms of the 1990s helped to 
reduce poverty by encouraging low-income adults to enter the 
workforce.
    Welfare reform was successful by replacing a program with 
minimal reciprocal expectations of recipients and severe work 
disincentives with a social policy regime in which work clearly 
paid off. Yet many of our safety net policies still ask little 
of beneficiaries and retain high marginal tax rates. For most 
people, as we have heard, I think, from some of the other folks 
who have testified, these programs serve as a temporary stopgap 
measure in hard times; but for others, especially during 
economic expansions, they end up becoming poverty traps, 
discouraging work, marriage, and saving. The problem is not so 
much one of personal failure but that people are responding to 
the incentives embedded in our safety net policies as any of us 
would in the same situation.
    Third, while we have reduced poverty, Federal programs have 
failed to increase upward mobility out of the bottom, which 
remains stubbornly low. Despite rising inequality--I think this 
is an important point to make--the academic literature 
consistently finds that intergenerational mobility has not 
fallen since the mid-20th century. The American dream has not 
died. But, of course, it has not increased either, and only 30 
percent of today's adults who are raised in the bottom fifth 
manage to make it into the middle fifth or higher as adults. 
This is a rate of upward mobility that should satisfy no one.
    Winning a war on immobility, I believe, will require not 
only economic growth and safety net reforms, but that we 
empower poor parents to invest in the skills of their children. 
But soft-hearted policies must also be hard-headed ones. Given 
the dearth of successfully scaled-up models, we will have to 
discover how to increase the school readiness of poor children 
and keep them on track.
    A system of opportunity grants for low-income parents would 
make markets for child investment services, uncover successful 
models, facilitate the dismantling of ineffective ones, and 
potentially raise parental aspirations in communities with 
deficits of hope for their children.
    Thank you.
    [The prepared statement of Mr. Winship follows:] 
    
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    Chairman Murray. Again, thank you to all of you for being 
here and your testimony today.
    Ms. Johnson, let me begin with you. You talked in your 
testimony about how hard it is for Americans to get into and 
stay in the middle class. This really is an erosion of the 
American dream, as you talked about. You are a teacher. You are 
a mother. Every day you are surrounded by a lot of young 
people. What types of investments do you believe are most 
important to make sure that our young people, our country's 
future really, have a better shot at the American dream?
    Ms. Johnson. Thank you, Chairwoman. I think we have to 
invest in job creation so that there is something--there is 
hope that they are going to have a job when they come out of 
school, whether they go to college or not. I think that is the 
most important thing. I have been very clear that I think that 
the creation of jobs in my community and my State is the number 
one, because when folks have jobs, when the parents of my 
students have jobs, when my students have the opportunity for 
good jobs, then everything is better in school. And that is the 
second thing I think we should invest in, is a reliable formula 
funding program for schools so that students like mine who 
largely live in poverty get what they need at school. So I 
would say jobs and public education.
    Chairman Murray. All right. Thank you very much. And 
Senator Stabenow, who has got a manufacturing bill, is nodding 
over there. I can feel her.
    Senator Stabenow. Yes, exactly.
    Chairman Murray. Ms. Tanden, we got a report from the 
Congressional Budget Office last week, as you know, about the 
projected effects of raising the minimum wage on family income 
and employment. Can you talk a little bit about your thoughts 
on this report and the related research on the minimum wage?
    Ms. Tanden. Absolutely. I think a lot of people who have 
been looking at the research were really surprised by CBO's 
findings because there have been so many really large-scale 
recent efforts and reports and analysis of minimum wage as it 
is actually applied that have demonstrated that the minimum 
wage does not encourage job loss and might actually increase 
jobs. There are numerous Nobel laureates who have supported the 
minimum wage and have argued that a minimum wage increase will 
have no negative impact on jobs.
    I would like to talk about one particular study that 
analyzed minimum wage increases among States, looked at States 
that increased the minimum wage and looked at States that did 
not, and it looked--really did a deep-dive analysis of the 
borders, the counties, and the borders between those two 
States, and it is one of the most comprehensive studies--it was 
done by professors at Berkley and Universit of Massachusetts at 
Amherst--and details how, in fact, when the minimum wage 
increased in communities, people had more money to spend, and 
they spent it in their communities, and there was no negative 
job attribution for that, and the jobs did not move from one 
county with a high minimum wage to a low-income county, 
although that would be relatively easy to do. And so they did 
not find the negative numbers, and it seems like CBO looked at 
recent studies and older studies and averaged the two, instead 
of looking at the most recent analysis. And that is why I think 
600 economists have written in favor of a minimum wage 
increase. And I think we should recognize the arguments behind 
the minimum wage are really important economic arguments, 
because we have a demand challenge in this economy.
    But at the end of the day, I think one of the most 
important issues here is whether people should work 40 hours a 
week, many of them parents, most of them women--two-thirds of 
minimym wage workers are women--and live in poverty. And I 
think in a country as great as ours, the answer to that 
question should be no.
    Chairman Murray. Well, thank you, and with that, let me 
turn to Ms. Kimball. It is great that we have got two witnesses 
here who actually work in schools, so thank you both. What you 
are all doing is really important, and we appreciate it.
    Ms. Kimball, let me talk to you. In your testimony, you did 
talk about the need to increase the minimum wage, which, we 
know, has not changed in 5 years. And I just wanted you to tell 
me what that increase in minimum wage would mean to your family 
and for others in your community. What types of things would 
you be able to buy or do then that you are not able to do 
today?
    Ms. Kimball. It would mean for people in my community 
probably to encourage them to get a job if, you know, it is 
there. For my family, it would mean I could save for college 
for my children, put that money to possibly go on vacation, 
which we have never had, never been on vacation. It would just 
mean a better life, you know, overall for my family.
    Chairman Murray. Okay. Thank you very much.
    My time is up, and we do have votes coming up, so I am 
going to turn it over to Senator Sessions for his questions.
    Senator Sessions. Thank you.
    Ms. Johnson, you know, we spend about $100 billion, I 
think, on all the different education programs from the Federal 
Government. Of course, the States are the primary funders of 
education. But interest on our debt this year is expected to be 
$233 billion, and it is expected to increase to $870 billion in 
10 years. So for those of us who are concerned about our future 
and our children's future, we have got to watch out that we do 
not put ourselves on a track to a fiscal crisis, as Dr. 
Elmendorf warned right from that table a couple of weeks ago, 
and put us in a position where interest--the fastest growing 
item in our budget--crowds out all other spending. I mean, $870 
billion in 1 year of interest is well above the defense budget 
of 500, well above Medicare, around 500, well above Medicaid. 
So, anyway, that is one of the challenges that we have to face. 
We just have to be realistic about it.
    Really, food stamps have not been cut, Ms. Tanden, to any 
significant degree. It went up four times from 2001 through 
2011, four-fold, and this year's ag bill reduced welfare from 
800--saved $800 billion out of--$8 billion out of $800 billion. 
That is how much the saving was over the projected growth of 
food stamps. So we made no real changes whatsoever and have not 
reduced that. And I just do not think we are evaluating that 
enough.
    Now, Mr. Doar--well, first, I think we all agree, Ms. 
Johnson, that economic growth is important. Could I briefly, 
Dr. Winship, ask you just some simple questions. You have 
studied these issues. Would more American energy strengthen 
economic growth and help create jobs?
    Mr. Winship. I would have to believe it would.
    Senator Sessions. Are there regulations that are damaging 
the economy and businesses that could be eliminated and improve 
economic growth?
    Mr. Winship. I think there are for sure at all levels of 
Government.
    Senator Sessions. Do you have an opinion as to whether or 
not the Affordable Care Act is adversely affecting job creation 
and economic growth?
    Mr. Winship. I think it has increased the amount of 
uncertainty that employers face in terms of their business 
plans. I think it has got incentives to hire part-time workers 
instead of full-time workers or reduce people to part-time 
work. So I think potentially it is a problem.
    Senator Sessions. Two-thirds of the jobs last year created 
were part-time.
    Higher taxes tend to retard economic growth, do they not?
    Mr. Winship. I believe that is right.
    Senator Sessions. And the deficits themselves, the debt 
itself that we have today, is that, as someone said, a wet 
blanket or a depressant of economic growth and investment by 
the private sector?
    Mr. Winship. It is certainly not helping growth, I think. 
The lessons of the 1990s, I think, is that when you take 
dramatic steps to show that you are concerned about deficits 
and getting them under control--
    Senator Sessions. All those things can be done without 
increasing debt and taxes and spending.
    Mr. Doar, share with us your view--this vision here, 
something that I think is not impossible, but we are not close 
to it, I will acknowledge, right now. So we create a single 
Federal welfare assistance office. All our programs are there. 
When a person is in need, they go to that office, and they are 
identified and worked with individually.
    I was with a lady who got 800 people jobs. She told us last 
week she spends as much as 18 hours with each unemployed person 
who comes in her office to focus them in the right way. Could 
we develop an individual plan for those people who are hurting 
and help them move into employment and prosperity?
    Mr. Doar. I think the programs could work much better 
together to support work and support--and provide assistance to 
working individuals so that they can go to work in jobs that 
may pay lower than is able for them to raise a family, but then 
you raise their total income by supports for working people as 
opposed to imposing a very, I think, blunt instrument that 
could end up losing jobs, especially for the most vulnerable 
part of our society.
    I ran the poverty programs in New York City, and to some 
extent, the people that were most at the fringes of the labor 
force were African American men. And I have a very great 
concern that raising the minimum wage will affect them more 
negatively than positively. And I think Congress should be very 
careful about playing with labor markets in that way when we 
have a work support system that shores up low wages through the 
earned income tax credit and other supports that can go to 
working Americans.
    Senator Sessions. Well, thank you. I know my time is up. 
Thank you very much, all of you.
    Chairman Murray. Senator Stabenow.
    Senator Stabenow. Thank you very much, Madam Chair, for 
this very important hearing, and thanks to each of you.
    Just a couple of things for the record on numbers. I just 
want to emphasize again that the head of the Budget Office, 
when he testified, indicated to us that in 2008 the budget 
deficit was $1.4 trillion, and this year it is going to be 514, 
so $1.4 trillion to $514 billion and next year down to 480, as 
the Chair knows. So I just want to say it is going down. It has 
dramatically gone down. Unfortunately, we are not seeing 
employment go up, and we are never going to get totally out of 
debt with 10 million people out of work. So we should be 
focused on jobs and investments certainly in the future.
    I also, just for the record, as Chair of the Agriculture 
Committee, want to indicate, in fact, we have built in savings 
to this 5-year farm bill, $11.5 billion, Madam Chair, we will 
spend in less food assistance dollars, the right way, which is 
people going back to work and they do not need temporary help. 
So $11.5 billion less because people are going back to work, 
and that is the way we ought to reduce these programs.
    So a question that I have, I guess, to start, Mr. Doar and 
Dr. Winship, you have talked about people working to be able to 
get help. What do you say to Ms. Kimball and Ms. Johnson, who 
are working, what do you say to somebody who is working 40 
hours, 50 hours, 60 hours, two, three jobs, and still in 
poverty? What do you say to them?
    Mr. Doar. Well, what we have talked about in New York is 
the extent to which work support programs can shore up wages 
that are not sufficient to rise people above the poverty level, 
so that is what has been successful, whether it is the earned 
income tax credit or food stamp benefits or public health 
insurance. And that is what I think Mr. Winship is talking 
about when he says the poverty measure does not really 
accurately measure the material well-being of families because 
it does not take into account all of the supports that 
Government provides.
    Senator Stabenow. If I may just stop you there, just in the 
interest of time, what you are suggesting is that rather than 
raising the minimum wage so there is a decent livable wage, 
that Government, taxpayers, should be paying more money through 
their earned income tax credit or food help or Medicaid and so 
on. Certainly we are already doing that. That is what is 
happening to people on minimum wage. But, I just want to throw 
out a business owner who some years ago said that the minimum 
wage was not good enough and actually doubled it for his 
employees, and he was heavily criticized and shunned by the 
business community. People said he would go bankrupt. A hundred 
years later, we now call him one of our great business leaders, 
and he is Henry Ford. And he doubled his employees wages at the 
time, and when they said he was crazy, he said, ``I need 
somebody who can buy my cars.'' And so, you know, how do 
juxtaposition that.
    Mr. Doar. Well, CBO did say that there would be job losses, 
as much as 500,000 to a million. And I think given the 
increased automation in the workplace and the not great health 
of labor markets in large parts of the country, an increased 
minimum wage is a very risky thing for allowing people into the 
workplace.
    Senator Stabenow. So your position would be that rather 
than reward work so if someone is working 40 hours a week, so 
they they would be out of poverty, that they work 40 hours a 
week, they stay in poverty, but Government subsidizes that 
poverty?
    Mr. Doar. Well, if poverty is the definition of material 
well-being, the Government supports would make them not in 
poverty. And often that is what many people from both sides of 
the aisle say, the extent to which these Government programs 
rise people out of poverty by providing assistance.
    So, again, from the perspective of the welfare office in 
New York City, this combination of work requirements and work 
expectations with work supports got people into the workforce 
in a very high degree and provided assistance that allowed them 
to be above the poverty line in terms of their entire material 
well-being.
    Senator Stabenow. And I agree with you. I think we need to 
be doing more on work, job training, and similar efforts. We 
are seeing programs in Michigan that match up employers with 
individualized skill development for people through community 
colleges. Of course, that takes resources, which is the other 
issue, because, Mr. Doar, you are suggesting that we actually 
support people by increasing the earned income tax credit, 
which colleagues on the other side of the aisle want to cut, or 
they want to cut food assistance. That was the big debate in 
the farm bill. It was not doing more. It was actually to do 
less.
    Mr. Doar. Well, I thought it was more to get people more 
into work, as you said--
    Senator Stabenow. No, not at all.
    Mr. Doar. Well, to the extent that their earnings were 
replacing the assistance provided and the savings was generated 
from that respect. And we are--I am not someone who shies away 
from Government spending that supports working individuals and 
gets more people working, because--
    Senator Stabenow. I appreciate that, and I am going to stop 
in just one second because I want to--I do not mean to be rude, 
but, Dr. Winship, I am just about out of time.
    Chairman Murray. And we do have votes that start at 15--
    Senator Stabenow. And I am just going to say then, I will 
just make a comment, Madam Chair, rather than ask a question. 
But when you talk about how the middle class is better today, 
boy, that is not what I am hearing. And I just have to say for 
the record, I do not even see the numbers showing that when we 
see the top 10 percent of the public getting 76 percent of the 
wealth in 2010, and the bottom 60 percent of Americans, fell to 
less than 2 percent of the wealth. So I would sure love to see 
your numbers because, Madam Chair, that is certainly not what I 
see.
    Chairman Murray. And we have to get our members to the 
vote, so I am going to go to Senator Johnson. Thank you.
    Senator Johnson. Thank you, Madam Chair. And as long as we 
are talking about numbers, Ms. Tanden, you talked about cutting 
food stamps. I just want to reinforce what Senator Sessions 
said. In the year 2000, 17 million Americans were on food 
stamps. It cost about $17 billion. Last year, 47 million 
Americans, an increase of 30 million more Americans, were on 
food stamps, and it cost almost $80 billion. And I have the 
entire list here. I have never seen a cut in the program, so it 
has grown. So just, you know, to give us accurate information 
from that standpoint.
    We share the same goal here. I mean, I agree with you, Ms. 
Tanden, that the question is: Are we expanding opportunity for 
all Americans? We want a prosperous America, and that is really 
what we have to talk about.
    Mr. Doar, I want to just talk a little bit about, you know, 
the minimum wage and a potential loss of 500,000 jobs. Those 
are estimates, that is true. But you talked about the earned 
income tax credit. Isn't that a better way of addressing 
individuals, particularly heads of households, that are in low-
wage jobs to rise them out of poverty without risking job loss?
    Mr. Doar. Yes, it is a better way; it is a more targeted 
way; it is a more effective way. And there are portions of the 
population, like single individuals without children, that we 
could do more to make them more a beneficiary of the EITC to 
help them get into the workplace.
    Senator Johnson. Let me just throw out a couple more 
numbers. If we were to increase the minimum wage from $7.25 to 
$10.10, that would raise an annual salary about $6,000. We had 
an Inspector General's report about the earned income tax 
credit showing that between 21 to 25 percent of those payments 
were improper, costing about $11 billion per year. So if you 
take $11 billion divided by, let us say, the 900,000 people CBO 
estimates that increasing the minimum wage would increase--rise 
out of poverty, that would be about almost $13,000. I mean, if 
we would solve that improper payment problem, possibly 
eliminate the individual taxpayer identification number that 
leads to that fraud, couldn't we make the earned income tax 
credit a far more robust program--
    Mr. Doar. Yes, the program--
    Senator Johnson. --and far more better job of raising 
people out of poverty without risking jobs?
    Mr. Doar. It is a good program, but it is not perfect and 
it needs fixing. And that is a major problem with the program.
    Senator Johnson. We had an incredibly interesting witness 
last year in the Budget Committee right here in this room. He 
was the head of the welfare department in Pennsylvania, and he 
had done a study on a single mom who, again, we have got a 
great deal of sympathy for. We all want a strong social safety 
net to help people like that. But his study showed that beyond 
$26,000 of income, that young woman had no incentive--there was 
no marginal benefit because of an increase in taxes and 
reduction of benefits for her to earn $27,000 or $30,00 or 
$40,000 or $50,000 or $60,000. She would have to leapfrog to 
$60,000. Can you just speak to the disincentivizing nature of 
our social safety net?
    Mr. Doar. Well sometimes arguments are made about the 
marginal tax rates, and that would lead to greater benefits or 
slower phase-out periods further into the middle class. I have 
some concern about that for budget deficit reasons. So, sure, 
there is a conception that the loss of the assistance from 
Government will make someone less likely to move up the 
economic ladder or take a higher-paying job. But I have not 
been persuaded that that is so significant that we should 
extend assistance even further up the economic ladder.
    Senator Johnson. I am not talking about the solution. I am 
just talking about the reality of the situation. You know, just 
like we heard CBO, because of the Obamacare subsidies, 2.5 
million people will remove themselves from the labor force, 
which, Mr. Winship, let me ask you, that is not good for the 
economy, is it? Because you have to combine human capital with 
financial capital to make an economy grow, correct? Can you 
speak to that disincentivizing nature?
    Mr. Winship. Yes, I think that is right, and I think the 
problem with a lot of policies that look really attractive, 
like raising the minimum wage, is that the benefits to them are 
obvious and clear-cut for the people that get them. To the 
extent that somebody's wage goes up from $7.25 to $10.10, that 
is a clear benefit to them. The costs are much more diffuse, 
and so for the people who lose their job, or who never get 
hired because the cost of hiring has gone up so much, that is a 
real problem.
    Senator Johnson. We always hear that raising the minimum 
wage increases demand. Who pays for that, though? And isn't 
that a business that pays it? And doesn't that decrease demand? 
I mean, aren't you taking money out of a business owner's 
pocket, which, you know, from my standpoint is going to 
probably reduce the number of jobs available, but also reduces 
that business person's purchasing power, does it not?
    Mr. Winship. Yeah, I think, I mean, the effects of 
increasing the wage in any given moment I think are really hard 
to predict. What we do know is that the major challenge of the 
Great Recession is long-term unemployment. That is the main way 
that this recession differed from past ones.
    Arguably, what the CBO report found is that there is a cost 
of raising the minimum wage that results in less employment. 
The flip side of that is you could actually lower the minimum 
wage and increase employment, and then we could use work 
supports like Mr. Doar talked about if we worried about poverty 
increasing. So I think the earned income tax credit and those 
sorts of policies are just clearly better than a minimum wage 
hike.
    Senator Johnson. Thank you, Madam Chair.
    Chairman Murray. Thank you, Senator Johnson. And we have 4 
minutes to get to a vote. I am going to let Senator Whitehouse 
have the last word. I cannot imagine somebody lowering the 
minimum wage from $15,000 a year and surviving, but I will let 
Senator Whitehouse--
    Senator Whitehouse. We do have very short time, so I just 
will ask my question for the record. But first I want to thank 
Ms. Kimball and Ms. Johnson for their testimony. You have no 
idea what a relentless diet of policy we get here, and that can 
get quite disconnected from personal life and personal 
experience, particularly when there is ideology and even 
perhaps special interests driving policy determinations. So 
hearing from you is really refreshing and really powerful, and 
I appreciate it.
    I do want to say that when the economy gets trashed, 
because of the Great Recession, because Wall Street looted the 
economy, because of unbelievable tax favoritism in the Tax 
Code, and as a result of those very painful countrywide 
phenomena that we saw, families have to go on to food stamps in 
order to continue to eat and feed their children, to take a 
look at that and say that the problem is the food stamps to me 
is very much at odds with reality.
    Let me ask the question, and I will ask--this is going to 
be a little bit unusual, but I would like to ask Ms. Tanden and 
Mr. Doar for the record, if you could get together and see if 
there are any joint recommendations that you could agree to, to 
address the benefit cliff question of when somebody gets right 
up to the edge and then they look at the next step they can 
take to help their family, and because of the benefit structure 
it actually worsens their family income. That is a dumb thing 
to have in a program. It is something we would like to avoid. 
If there are ways in which from both sides of the aisle we 
could get some guidance as to how best to address that, I think 
that would be a productive outcome for the hearing. So if you 
would be willing to have a conversation with each other and see 
if there is anywhere you agree and then get back to us for the 
record.
    Chairman Murray. That would be great.
    Senator Whitehouse. Thank you very much.
    Mr. Doar. The marriage penalty--
    Ms. Tanden. I would be happy to, and an expansion of the 
earned income tax credit.
    Chairman Murray. All right. We will let you have that 
conversation and get back to you.
    Chairman Murray. I want to thank everyone for participating 
today. I apologize. We do all have about 2 minutes to get to a 
vote, so they are all running. And I particularly thank both of 
our witnesses who traveled so far today. And I will leave the 
record open for any additional questions or statements until 
6:00 p.m. today.
    Thank you very much.
    [Whereupon, at 11:33 a.m., the Committee was adjourned.]









            THE PRESIDENT'S FISCAL YEAR 2015 BUDGET PROPOSAL



                        WEDNESDAY, MARCH 5, 2014

                              United States Senate,
                                   Committee on the Budget,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 10:01 a.m., in 
Room SD-608, Dirksen Senate Office Building, Hon. Patty Murray, 
Chairman of the Committee, presiding.
    Present: Senators Murray, Whitehouse, Warner, Merkley, 
Coons, Baldwin, Kaine, King, Sessions, Enzi, Crapo, Graham, 
Portman, Johnson, and Ayotte.
    Staff Present: Evan T. Schatz, Majority Staff Director; and 
Eric M. Ueland, Minority Staff Director.

              OPENING STATEMENT OF CHAIRMAN MURRAY

    Chairman Murray. Good morning. This hearing will come to 
order.
    I want to welcome everyone and thank my Ranking Member, 
Senator Sessions, and all of our colleagues who are joining us 
for this hearing today. A special thank you to Sylvia Mathews 
Burwell, who is the Director of the Office of Management and 
Budget.
    It has been nearly a year ago that you were before this 
Committee for your confirmation, for your nomination. You have 
been doing a great job since then, during some pretty tough 
times, and I really am pleased that you are able to join us 
here today.
    In a short few months, we had a Government shutdown in 
October, followed by the 2-year budget deal in December, and 
the fiscal year 2014 appropriations process was not finished 
until January. So the President's budget proposal is 
understandably a few weeks later than you would have hoped.
    But one of the many benefits of the 2-year budget deal is 
that we have agreement on a bipartisan spending level for 2015. 
That will enable Congress and the administration to complete 
our appropriations work on a timely basis this year.
    We are going to be discussing the President's 2015 budget 
proposal today, but I want to take a minute or two to talk 
about how we got here and what we can do to build on what we 
have done.
    For far too long, Congress has been lurching from one 
budget crisis to the next, hurting families, devastating our 
economy, and eroding the trust of the American people in our 
Government. But at the end of last year, Chairman Ryan and I 
finally sat down to negotiate in a budget conference.
    We both knew we were not going to get everything we wanted. 
We also knew the country was looking to us to make some 
compromises and to show that Government could function and that 
our democracy could work.
    So, working closely with many of our colleagues on the 
Budget Committees, we got to work and put our ideas on the 
table, made some very tough compromises, focused on what was 
attainable, put partisanship aside, and we did reach a deal.
    Our bipartisan 2-year budget passed with overwhelming 
support in the Senate and House and was signed into law by 
President Obama in December.
    It rolled back some of the most damaging cuts from 
sequestration. It prevented Government shutdowns in January and 
October of this year. It set spending levels for fiscal year 
2014. And, critically, because it was a 2-year deal, it set 
budget levels for fiscal year 2015, which now allows our 
Appropriations Committees to get to work with a bipartisan 
spending level. That gives our families and communities across 
the country the budget certainty that they deserve.
    I give Chairman Ryan a lot of credit for his work on our 2-
year budget, along with the many Republicans and Democrats who 
worked with us and supported it.
    Nobody thinks our 2-year budget deal was perfect. It was a 
compromise. And nobody thinks it was the end of the story. Of 
course it is not. I hope we can work together now to build on 
that 2-year budget deal and not re-litigate it.
    Let us take the opportunity we have here in Congress, 
finally freed from the manufactured crises, and invest in jobs, 
broad-based economic growth, and opportunities for our families 
and communities.
    There has been $3.3 trillion of deficit reduction done over 
the last few years, and it is more than $4 trillion if you 
include all of the savings from sequestration.
    Our deficit is on the path to shrink by about a two-thirds 
of what it was 5 years ago. And while we absolutely need to 
tackle our long-term deficit and debt challenges fairly and 
responsibly, we now have some breathing room to focus on the 
other deficits that face our country--our deficits in jobs, our 
deficits in innovation and infrastructure and education.
    And that is why I am very glad that we are here today to 
discuss the President's budget proposal that would build on our 
bipartisan 2-year budget in exactly this way.
    One important way that this budget proposal would build on 
our 2-year budget deal is through the Opportunity, Growth, and 
Security Initiative that would further invest in priorities 
like manufacturing and research and development, military 
readiness, education, and job training.
    The initiative would invest equally in defense and 
nondefense priorities and fully offset the cost of these 
additional investments in a balanced and responsible way--very 
much in the spirit of our bipartisan budget deal.
    Like every proposal in the President's budget, we would 
need a bipartisan agreement to pass it and build on this 2-year 
budget that we have in place now that will guide the work of 
the Appropriations Committee this year.
    I truly hope Republicans are willing to join us at the 
table once again to talk about this critical work of investing 
in jobs and our security in a balanced and fiscally responsible 
way.
    I want to briefly mention just a few of the many strong 
proposals in the President's budget that I am hoping to hear 
more about today. I was very glad to see that this budget 
maintains the commitment to a national preschool initiative. 
Expanding preschool would not only help our youngest children 
and pay dividends in future economic growth; it would empower 
millions of women who would be able to go to work and give back 
to their communities.
    I am also pleased to see that this budget proposal would 
invest in a skilled health care workforce with clinical 
training for community health programs. It would strengthen the 
National Service Corps and increase the number of medical 
residents for primary care, among other initiatives.
    This is an important step to ensure that our families 
across the country get the care they need. And it is something 
that should get strong bipartisan support.
    I am also very glad to see the budget calls for a reform of 
the Earned Income Tax Credit for childless workers. The EITC 
lifts millions of low-income working families out of poverty 
each year, but it is currently leaving individuals without 
children behind. Boosting the credit for this segment of the 
population would further incentivize work and increase economic 
opportunity for more Americans.
    The President's budget also includes a plan to reauthorize 
our surface transportation programs for 4 years. It would boost 
infrastructure funding and would address the expected 
shortfalls in the Highway Trust Fund, which would allow for 
much-needed investments in our aging infrastructure to help our 
commuters and our businesses and create jobs for countless 
Americans.
    The budget proposal pays for these investments with the 
temporary revenue boost that would come during the transition 
to a fairer and more competitive corporate tax system. This is 
a fiscally responsible approach to corporate tax reform. And 
Chairman Camp included a similar proposal to shore up the 
Highway Trust Fund in the tax reform plan that he released last 
week. So I think Congress should take a close look at that.
    On the individual side of the Tax Code, the President's 
budget would generate revenue for deficit reduction by 
eliminating hundreds of billions of dollars in back-door 
spending that benefits the wealthiest individuals who need it 
the least.
    These reforms would increase the efficiency of our tax 
system and make our Tax Code fairer to middle-class families.
    I am very glad the President has taken a balanced approach 
with this budget proposal. This is the approach that the vast 
majority of the American people support. It is fiscally 
responsible. And it is the right thing to do.
    Our Tax Code is riddled with wasteful loopholes and special 
interest carve-outs. It would be unfair and unacceptable to 
ignore every last one of them, while calling on seniors and 
families to bear the burden of deficit reduction alone.
    The budget also capitalizes on the savings from declining 
health care costs. In the past few years, health care costs 
have grown more slowly than at any other time period since the 
mid-1960s. I am glad the President's proposal builds on the 
savings from this decline.
    The President's proposal also upholds immigration reform as 
a way to tackle our long-term deficits. In July of last year, 
the Congressional Budget Office found that immigration reform 
would significantly reduce the deficit over the next 20 years 
and expand the labor force. Passing comprehensive immigration 
reform is the right thing to do for our families, for our 
economy, and for the long-term budget outlook.
    Finally, I want to note the President's budget this year 
does not include chained CPI. That is a proposal that has been 
pushed by Republicans that was included as a compromise offer 
in his budget last year.
    I personally believe there are better ways to create jobs, 
grow the economy, and tackle our long-term fiscal challenges 
than this policy. I am glad it was not included this year.
    The President's budget is a strong proposal for a long-term 
plan to build on our 2-year budget deal, create jobs and broad-
based growth, and expand opportunities for families and 
communities across the country.
    Congress proved in December that when we work together on a 
budget, we can invest in our priorities and reduce the deficit. 
I am hoping that everyone will join us again to continue that 
work.
    And with that, before I turn to Sylvia Burwell, I will ask 
Senator Sessions for his opening remarks.

             OPENING STATEMENT OF SENATOR SESSIONS

    Senator Sessions. Thank you, Chairman Murray, and it is a 
pleasure to be with you. There is no doubt that Murray-Ryan did 
avoid uncertainty and helped us in that way. I think we could 
have done that in a better way, but I do believe that you tried 
to do the right thing and you passed a law that has helped us.
    Ms. Burwell, thank you for contacting us and staying in 
touch and trying to--I believe you did the best you could to 
get a budget in on time, although it did not quite meet that, 
but it is something you promised to try to do, and I know maybe 
next year you will be able to do that. Thank you for being with 
us.
    Two weeks ago, where you are sitting today, we heard 
chilling testimony from Director Elmendorf of the Congressional 
Budget Office that declared the United States was on an 
unsustainable financial path and that this path leads to the 
risk of fiscal crisis. The President has proposed a number of 
ideas in this budget, but mostly it is a tax increase plan to 
confront our spending deficit problem.
    So I was really surprised and stunned that 2 months after 
the President signed the Ryan-Murray spending caps into law 
that does, in fact, validate the spending limits we all agreed 
to and he signed, his budget proposes to dramatically burst 
through those statutory limits and spend an additional $791 
billion, new spending above the growth that we are on today, 
and that is above the growth line we are on.
    Remarkably, in fiscal year 2015, the budget calls for $56 
billion more than Ryan-Murray limits. The budget then calls for 
another huge tax increase of well over $1 trillion and to 
increase spending by almost $1 trillion. Over 10 years, the 
President's plan projects mandatory spending to grow 78 
percent--and Medicare and Medicaid 73 percent. Means-tested 
welfare and poverty spending, which now totals $750 billion, is 
really the largest single Government expense. It continues to 
grow without reform.
    The President's health care law remains perhaps the 
greatest threat to our financial stability with GAO estimating 
it would add $6.2 trillion to our long-term unfunded 
liabilities. So all together, President Obama's budget by his 
own numbers, your numbers, would add more than $8 trillion to 
the debt, bringing the total debt from $17 to $25 trillion.
    This national profligacy is already inflicting an 
excruciating toll. Last year we paid our creditors $221 billion 
in interest on the Federal debt. We spent $40 billion on the 
highway bill, for example. Under the President's tax and spend 
plan, he projects, your own numbers, that the annual interest 
payments will increase to $812 billion in 10 years from today. 
That is less than CBO's $880 billion, but it is very high. That 
means that if you took the 150 or so million Americans that 
would be working 10 years from today, according to estimates, 
their share, each worker's share of the interest on the debt 
would be $429 in monthly interest costs and over $5,000 per 
year on their share of the annual interest every year.
    The White House also continues to make unreasonable growth 
assumptions. The budget you submitted, he submitted, from 2009 
through 2012 shows average growth projections for our economy 
of 3.9 percent. That is double what came in in 2013 last year 
of 1.9. That is a large difference.
    The new White House budget further projects that the 
economy will grow at 3.1 percent in fiscal year 2014, 3.4 in 
2015, and 3.3 in 2016, well above the respected Blue Chip 
economic estimates.
    With regard to the immigration savings that you claim would 
be accruing, I would note that the income you are projecting of 
Social Security and Medicare payroll taxes to be paid by 
illegal immigrants now being given legal status, but that is 
not your money to be spent. It is their money. It is their 
Social Security. It is their Medicare. And they will be drawing 
it out when they become eligible for it. In fact, they will 
draw out under current law well more than they put in, and that 
is the problem we are in today. A budget is a document that 
brings all the President's policies together in one place. It 
reveals the President's agenda in its entirety.
    So what does it show about the plans? Across the board, it 
showed the President's policies are to further grow the 
Government and, in effect, the effect is to shrink the private 
sector and the middle class. The administration appears 
determined to shield the bureaucracy from accountability and 
cuts and to spare it from reductions, and that drains American 
wealth. So American families are struggling under failed 
policies. We have got to change these. We have got too many 
energy restrictions. We have got regulations that are reducing 
productivity and closing factories. We have got a health care 
law that is hammering the economy and the workforce. We have 
got a welfare policy that is trapping people into dependency 
and poverty, not lifting them out; a trade policy that is 
sending jobs overseas; an immigration policy that CBO tells us 
will pull down wages for over a decade for American working 
people; a tax burden that undermines our ability to compete; 
and a crushing debt burden that is sapping our confidence and 
the vitality of our economy.
    So the President's budget proposes dozens of new taxes, new 
spending programs, and Government initiatives. It does nothing 
to fix our fiscally unsound Medicare and Social Security 
programs. This will have to be done. But the President will 
have over 8 years done not one thing to save or fix these 
programs, leaving his successor with an even harder challenge.
    Nor has the President done anything to contain soaring 
welfare costs. In fact, his administration has surged welfare 
spending and has been an obstacle to reform and accountability.
    And, finally, the biggest failure displayed in this budget 
presentation is that the President for political purposes 
refuses to look the American people in the eye and tell them 
the truth: that we are on an unsustainable fiscal path. He 
refuses to rally the Nation to avoid a fiscal crisis. If he 
would do so, I have no doubt the American people would respond, 
and we could meet this challenge. I can only assume he does not 
do so because it would interfere with his plan for ever growing 
the Government bigger and bigger, therefore requiring the 
American people, he thinks to raise more and more taxes.
    So the President's policy was made clear last week when the 
White House declared, colleagues, that the era of austerity is 
over. Everyone here knows the significance of that statement. 
It meant that he is going to oppose programs that would end the 
growth in spending at the rate we are now on. And he is 
abandoning as a priority the containing of debt growth in 
America.
    I know you score that there is a reduction in deficits, but 
that assumes over $1 trillion in new taxes that will not occur. 
They are not going to occur. You have already had over $2 
trillion in new taxes in the time the President has been here, 
and these new taxes are not going to occur. So you have more 
spending, assuming we are going to have tax increases that will 
not occur, and I think that is a path to problem, not 
prosperity.
    I thank you, Madam Chairman, for the opportunity to share 
these remarks.
    Ms. Burwell, you have got a challenging job. I know it is. 
I know it is hard. I hope that you have been able to look some 
of those claimers for money in the eye and say, ``Sorry, we do 
not have enough money. Go back to your departments and see if 
you cannot save some.'' I know you will try to do that as you 
can.
    Thank you, Madam Chair.
    Chairman Murray. Thank you very much.
    With that, we will turn it over to you for your testimony, 
Director Burwell.

 STATEMENT OF THE HONORABLE SYLVIA MATHEWS BURWELL, DIRECTOR, 
                OFFICE OF MANAGEMENT AND BUDGET

    Ms. Burwell. Thank you. Thank you, Chairman Murray and 
Ranking Member Sessions, members of the Committee. Thank you 
for welcoming me here today and giving me the opportunity to 
present the President's 2015 budget.
    The President's budget provides a fiscal road map for 
accelerating economic, expanding opportunity, and ensuring 
fiscal responsibility. It includes fully-paid-for investments 
in infrastructure, job training, preschool, and pro-work tax 
cuts. At the same time, it reduces deficits and strengthens our 
long-term fiscal outlook through additional health care 
reforms, tax reforms, and by fixing our broken immigration 
system.
    In recognition of the important bipartisan funding 
compromise reached by the Congress in December, the budget 
shows the President's funding priorities at the 2015 spending 
levels agreed to in the Bipartisan Budget Act. However, those 
levels are not sufficient both in 2015 and beyond to ensure 
that the Nation is achieving its full potential.
    For that reason, the budget also shows how to build on the 
progress made by that compromise agreement with a fully-paid-
for $56 Opportunity, Growth, and Security Initiative that 
supports investments in critical areas such as education, 
research, manufacturing, and defense.
    Building on the model that was established in the Murray-
Ryan compromise, the initiative is split evenly between defense 
and nondefense priorities and is fully paid for. So it is 
deficit neutral.
    Supporting what the President said in the State of the 
Union, the budget includes a series of measures to create jobs 
and accelerate economic growth. For example, the budget lays 
out an ambitious 4-year, $302 billion transportation proposal 
paid for with the transition revenue of pro-growth business tax 
reform. It invests in American innovation and strengthens our 
manufacturing base by supporting the President's goal of 
creating a national network of 45 manufacturing institutes. It 
maintains U.S. leadership in research by making the R&D tax 
credit permanent and continuing to support groundbreaking basic 
and applied research across a range of fields. And it enhances 
the administration's management efforts to deliver a Government 
that is more effective, efficient, and supportive of economic 
growth, focusing on areas directly impacting citizens and 
businesses.
    The budget also includes measures designed to expand 
opportunity for all Americans. For example, it doubles the 
maximum value of the earned income tax credit for childless 
workers to build on the EITC's success in encouraging people to 
enter the workforce and reduce poverty. It invests in the 
President's vision of making access to high-quality preschool 
available to every 4-year-old child. And it invests in new 
efforts to drive greater performance and innovation in 
workforce training to equip American workers with the skills 
that match the needs of employers.
    To ensure the Nation's long-term fiscal strength, the 
budget focuses on the primary drivers of long-term debt and 
deficits, particularly in the health care growth area and in 
adequate revenues to meet the needs of our aging population.
    It builds on the savings and reforms in the Affordable Care 
Act, with another $400 billion in health care savings aimed at 
continuing to slow the growth of health care costs and improve 
the quality of care.
    It curbs inefficient tax breaks that benefit the wealthiest 
and ensures that everyone is paying their fair share. It also 
calls for pro-growth immigration reform, which we know would 
promote economic growth as well as reduce the deficit.
    Under the President's leadership, the deficit has already 
been cut in half as a share of the economy. By paying for new 
investments and tackling our true fiscal challenges, the budget 
continues that progress, reducing deficits as a share of GDP to 
1.6 percent, and stabilizing debt as a share of the economy by 
2015 and putting it on a declining path.
    The budget shows the President's vision for moving the 
country forward. It provides a responsible, balanced, concrete 
plan for accelerating economic growth, expanding opportunity 
for all Americans, and ensuring fiscal responsibility.
    I look forward to working with the Congress and this 
Committee in the coming months. Thank you.
    [The prepared statement of Ms. Burwell follows:] 
    
     [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
  
    Chairman Murray. Thank you very much.
    You know, it was really important to Chairman Ryan and me, 
as well as a lot of our colleagues on this Committee, that we 
set a level not only for 2014 but for 2015 as well so that we 
could get back to our work to pass appropriations and focus on 
our other priorities.
    I have made it very clear the Bipartisan Budget Act is not 
the deal I would have written on my own, and I acknowledge that 
the funding levels for 2015 will be very tight.
    So, first, Director Burwell, as someone who oversees the 
budget and the appropriations process from the executive side, 
can you comment on the value you see in Congress having set 
aside the fights of the recent years and agreed upon a 
bipartisan funding level for the upcoming budget year?
    Ms. Burwell. I would focus on the benefits in two ways. One 
are the direct benefits to the American people in terms of what 
the deal did. By setting the levels in 2014 and 2015, the deal 
provided I think much needed relief in the sequester space that 
was paid for, so it was deficit neutral in terms of our long-
term fiscal health. It did things when the deal with translated 
to the appropriations process like ensure that there were 
double-digit percentage increases off of sequester for key 
things like infrastructure and TIGER grants.
    The deal also led to things like progress on making sure 
that States can get started on a process to get universal 
preschool. So across the board--and in our national security it 
provided additional funding for defense. And so those are 
things it specifically did I think that impact our citizens and 
our businesses every day.
    In addition to that, it is a process issue in terms of the 
certainty it provided, and I think we had a fall of much 
uncertainty, an uncertainty that caused damage to the Nation's 
economy and its citizens. And so the certainty I think is an 
important part of what it did as well.
    I think finally in that area of process, what it did is it 
shows that we in Washington can start to build the muscles of 
working together to move things forward.
    Chairman Murray. Can you also comment on the President's 
Opportunity, Growth, and Security Initiative and how you see 
that complementing the 2015 appropriations process?
    Ms. Burwell. I think ``complement'' is the right word. One 
of the things that we have done is, in the budget and in the 
1,500-page appendix that accompanies it that came out today, 
you see how the President would fund priorities at the current 
2015 levels, and so it is hopeful that yesterday when our 
budget came, the appropriations process can start and move 
forward. That was our objective; that was our goal.
    As you also articulated, while everyone signed and believed 
in the deal and we put forth a proposal to live at those 
numbers, we believe those are not the right numbers to actually 
encourage the economic growth and job creation and opportunity 
we need as a nation. Therefore, what we have done is propose an 
initiative, and an initiative that would be fully paid for, to 
express what we think is a more and better path for the Nation.
    Chairman Murray. Okay. Let me switch gears here really 
quick. I have been very clear in my conversations with you and 
the Department of Energy that I expect the Federal Government 
to meet its milestones at our defense environmental cleanup 
sites. That is really important to me as well as other Senators 
who sit on this Committee. Within your 2015 budget request, you 
cut environmental management by $135 million, with the Hanford-
Richland operations getting about $100 million of that cut. I 
would like you to explain that justification, and with that 
reduction, what is the plan now to keep the legal commitments 
that have been made to communities like the tri-cities in my 
home State?
    Ms. Burwell. Senator, the legal commitments are something 
that are very important and the administration takes very 
seriously and has put forward a budget that we believe enables 
us to do that.
    With regard to the cuts that are occurring, one of the 
things, a number of those programs are for pieces of work that 
have been completed.
    Have said that, the administration is committed to making 
the progress we need in Hanford and the other areas that are 
funded there to do the cleanup that we need to do and work on 
that. That is a commitment that the administration has made and 
we will continue to work towards.
    Chairman Murray. Well, we have really serious challenges in 
making progress at these nuclear cleanup sites across the 
country. We need a long-term sustainable plan for this, and I 
would like you and the Department of Energy to work with me to 
develop a long-term comprehensive plan to make sure that we are 
meeting the needs at these really incredibly important sites.
    Ms. Burwell. Senator, I look forward to doing that.
    Chairman Murray. Okay. And I just have a few seconds left 
here. I wanted to ask you about the health care costs that we 
are seeing, the slowdown in Medicare per beneficiary spending. 
I have asked Dr. Elmendorf for his views on what is 
contributing to the decline in health care costs, particularly 
for Medicare. Can you just comment on that really quickly?
    Ms. Burwell. A number of things are contributing to that.
    One, there were some things that were trending, that were 
trending down. We also saw some of the decline that has come 
from the slow growth of the economy, but most of that is now 
going away. And the Affordable Care Act is an important part of 
what is contributing to those slower growth levels. And what we 
try and do in this budget is build on that by doing additional 
cost savings in the health care space, which is one of the 
fundamental drivers of the deficit.
    Chairman Murray. Okay. Thank you very much. My time is up.
    Senator Sessions?
    Ms. Burwell. Thank you, Madam Chairman.
    Senator Sessions. Ms. Burwell, I think you have 
acknowledged plainly that the President's budget calls for 
spending on the discretionary side, $56 billion more than the 
Ryan-Murray bill that was passed about 10 weeks ago. Is that 
correct?
    Ms. Burwell. In a paid-for initiative.
    Senator Sessions. The question is: Do you spend more than 
was agreed to in the spending limits of the Ryan-Murray bill?
    Ms. Burwell. We propose an initiative that would be paid 
for to do that.
    Senator Sessions. And you would spend $56 billion more?
    Ms. Burwell. Only if paid for.
    Senator Sessions. But do you not agree that the Ryan-Murray 
law did not say pay for, it simply limited the amount of 
spending, and you are spending over the amount that that bill 
allows to be spent?
    Ms. Burwell. Senator, when the caps were put in place--and 
I had the opportunity to work with the caps in the first round 
when I was at OMB--much of the why the caps were put in place 
was about deficit reduction. When--
    Senator Sessions. No, you are talking about--you are 
theorizing about the purpose of it. The law limited spending, 
did it not, and you are spending over what the law requires?
    Ms. Burwell. Senator, only if the Congress would choose to 
pass a law that would alter that. Our budget comes in at the 
levels of--
    Senator Sessions. So you are proposing that we alter Ryan-
Murray so you can spend $56 billion more next year alone?
    Ms. Burwell. What we are proposing?
    Senator Sessions. Yes or no? Is that correct?
    Ms. Burwell. We propose a paid-for--
    Senator Sessions. Can't you answer that question simply yes 
or no? Do you propose to spend $56 billion more than Ryan-
Murray allows, and you are proposing that we change Ryan-Murray 
to allow you to do so? Yes or no?
    Ms. Burwell. Senator, we do propose a change in the law 
that would be fully paid for that would invest in the things 
that we believe are necessary for the economic health of the 
Nation.
    Senator Sessions. So you are spending $56 billion more, and 
you are going to raise taxes to pay for it, and you think that 
is acceptable?
    Ms. Burwell. Senator, we believe--
    Senator Sessions. And I just want you to know--ask you to 
tell the American people, do you want to spend more than the 
President agreed to when he signed Ryan-Murray 10 weeks ago?
    Ms. Burwell. Senator, we signed Ryan-Murray--
    Senator Sessions. You look real innocent the way you look 
at me here like you do not know what I am talking about. Can't 
you just simply answer the question? Yes or no, do you intend 
to spend more than Ryan-Murray? And will that not require an 
amending of the law to allow you to do so?
    Ms. Burwell. It will require an amending of the law.
    Senator Sessions. And it will spend $56 billion more?
    Ms. Burwell. Not against the--
    Senator Sessions. I am not talking about paid for. I am not 
talking about budgets. I am just saying, Are you spending more 
than the law allows currently?
    Ms. Burwell. Senator, it, I believe, makes a very big 
difference whether--
    Senator Sessions. Why can't you say yes or no to that?
    Ms. Burwell. Senator, because I think that some questions 
are not simply yes-or-no questions.
    Senator Sessions. Well, you have had your explanation. Now 
I am just asking yes or no--
    Ms. Burwell. Senator--
    Senator Sessions. --are you spending more or less?
    Ms. Burwell. I think there are some questions that are not 
simply yes-or-no questions. Therefore--
    Senator Sessions. This one is a yes-or-no question. You are 
refusing to answer it. I will answer it. The answer is that you 
are going to spend--you are asking us to raise the spending 
limits by changing the Ryan-Murray law so you can spend even 
more than you agreed to spend 10 weeks ago. And this is the way 
a nation goes broke. When we cannot adhere to our own spending 
agreements, then we get into financial trouble, and we end up 
with huge interest payments that we cannot afford, that are 
going to crowd out spending that we need to make in a dramatic 
way in the years to come as you well know. And I think that is 
important.
    Now, you say that you have got a pro-growth tax reform and 
that that is going to increase revenues to the Government $300 
billion for the transportation fund. That means you are going 
to raise taxes $300 billion, does it not?
    Ms. Burwell. Those are one-time transitional revenues.
    Senator Sessions. And they will come from increased taxes 
so you can afford this spending.
    Ms. Burwell. They are one time, and that is why we have 
chosen to invest those in infrastructure.
    Senator Sessions. Well, they are increased spending. Now, 
with regard to the interest on the debt, it is astounding to 
me, your own budget projects--OMB's numbers project that we 
would be spending--we spent last year $221 billion on interest, 
which is a huge sum for which we get nothing. And your budget 
projects that we would go to $812 billion in 1 year annual 
interest payment in 2024. Does that not threaten the financial 
future of America?
    Ms. Burwell. Senator, I agree with you, interest payments 
are not the most impactful way that we can use our dollars, our 
tax dollars as a nation, and that is why we need to be on a 
path to a declining debt-to-GDP ratio and a declining deficit-
to-GDP ratio, which are now.
    Senator Sessions. Well, not an impactful way to spend 
money--
    Ms. Burwell. Our budget--
    Senator Sessions. --but it gets no real benefit, right, to 
pay interest on the debt?
    Ms. Burwell. Senator, our budget decreases the amount of 
interest we will pay on the debt by $236 billion.
    Senator Sessions. The baseline budget that CBO gave us 
projected the interest would be $880 billion in the tenth year. 
You project $812 billion. The reason you project less I assume 
is because you have got $1 trillion in tax increases. But 
either way, doesn't this indicate that we have got to get our 
financial house in order because our future is threatened 
financially, as Dr. Elmendorf told us from that table a few 
weeks ago?
    Ms. Burwell. Senator, I think as we talk about our fiscal 
matters, we need to connect them to why we care about our 
fiscal matters, and that has to do with the health, the 
economic health of our Nation in terms of economic growth and 
jobs. And we think in the President's budget we have laid out a 
path that is the right path in terms of where the Nation needs 
to encourage growth and at the same time meet our fiscal 
responsibility.
    What has happened in the numbers that you are appropriately 
reflecting, those numbers have grown over many, many years. 
There is a deep hole. There is a deep hole, and we have made 
good progress--
    Senator Sessions. Well, when the President leaves office, 
he will have doubled the amount of debt of the United States of 
America, and he will be primarily responsible for at least half 
of it. And the President said in a statement a few days ago, 
this budget that you have prepared for us ``adheres to the 
spending principles Members of both Houses of Congress have 
already agreed to.'' That is Ryan-Murray. It does not. Would 
you agree?
    Ms. Burwell. I am sorry. Our budget does not adhere to 
Ryan-Murray?
    Senator Sessions. Right.
    Ms. Burwell. We do, because the document that has been put 
up shows fully how we will meet those levels.
    Senator Sessions. It does not agree with Ryan-Murray. 
Forgive me.
    Chairman Murray. Senator Baldwin.
    Senator Baldwin. Thank you, Chairman Murray and Ranking 
Member, for holding this. Welcome, Director Burwell, back to 
the Committee.
    As I have begun to study the President's fiscal year 2015 
budget, I think that there is a strong acknowledgment on behalf 
of the administration that we are facing deficits on several 
fronts and of several variations. While we are making our way 
to stabilizing our fiscal deficit, we are also facing an 
infrastructure deficit, an education and workforce development 
deficit, and a research and innovation deficit. And addressing 
these other deficits will help us out of our fiscal deficit 
because it sets the foundation, in my opinion, for long-term 
economic growth.
    And for this reason, I am encouraged by the Opportunity, 
Growth, and Security Initiative in the President's budget, 
which I think makes the very investments that we need in order 
to move our economy forward.
    I do want to actually focus on a couple of issues that are 
important to me as a Senator from the State of Wisconsin, some 
of which we have communicated about in the past.
    On the positive side, Director Burwell, as you know, I 
wrote to you last year, late last year, requesting that the 
President's budget include a new plan to address the chronic 
problems of siphoning off funding that is intended for forest 
management and for fire prevention activities, and instead 
using them for wildfire suppression. I am encouraged that the 
President's budget treats our biggest fires as the true 
disasters that they really are by separating them out from the 
rest of the Forest Service management budget, and I think this 
is a good first step, and I look forward to continuing a 
dialogue on this issue. It has particular relevance to the 
State of Wisconsin and our northern forested area.
    On a different note, I also want to make a comment about an 
issue that I was in communication with the administration about 
as the budget was developed, and that relates to a specific 
naval acquisition, the littoral combat ship. The Secretary of 
Defense has talked about a new vision, a pivot to facing the 
current day threats and the threats of tomorrow, and I frankly 
believe that this particular ship is very in tune with that 
change in direction, that pivot that we must take as a country. 
And while I have more overall supportiveness of the direction, 
I believe the proposal to truncate the purchase of littoral 
combat ships is shortsighted, especially given the direction of 
this administration.
    Now, as to questions, the President's budget states that 
the race is on to ensure that the next wave of high-tech 
manufacturing jobs are created and happen here in America 
rather than overseas. The President's budget calls for the 
continued transformation of regions across the country into 
really global epicenters of advanced manufacturing by funding 
five new manufacturing innovations, sort of hubs, this year. 
And I strongly believe in this effort, and I know that in my 
travels around the State of Wisconsin, I can tell you that this 
is an effort that has been given strong support by private 
industry as well as public research universities.
    So can you tell me how the President intends to roll out 
these next five institutes, how the selection will occur, and 
how these institutes fit into the President's overall 
manufacturing strategies?
    Ms. Burwell. So the institutes that will be coming online, 
some are in different categories. The Defense Department, as 
you know, has done one, and USDA will be doing one, and so 
different areas will be supporting the effort, and they will 
roll out one by one.
    In the President's budget, the proposal--and you mentioned 
the Opportunity, Growth, and Security Initiative. That is where 
we would actually expand the number so that you could try and 
do 45 of these throughout the period of the next 10 years.
    We think that encouraging this type of innovation, which 
brings together the private sector, our academic communities, 
and our communities themselves to encourage economic growth, is 
an important part of how we focus on growth and opportunity and 
jobs for the future. And so that is how it fits in the broader 
strategy.
    Senator Baldwin. Great. I notice I have just a couple of 
seconds left, but I want to note that the Department of 
Commerce has been an instrumental partner in the growth of a 
water technology cluster in the Milwaukee area known as the 
Water Council, and I hope that we can perhaps have a visit from 
you and others in the administration to see the fine work that 
is being done there.
    I am going to be submitting some additional questions for 
the record as my time has expired.
    Chairman Murray. Absolutely.
    Chairman Murray. Senator Crapo.
    Senator Crapo. Thank you, Madam Chairman. And, Director 
Burwell, welcome.
    Ms. Burwell. Thank you.
    Senator Crapo. I want to spend my time trying to get some 
clarity on some of the numbers as we move through analyzing the 
budget. First, I wanted to return to the $56 billion in 
discretionary spending that Senator Sessions was discussing 
with you.
    I understand the discussion you and Senator Sessions had. 
The question I have is: You indicated that $56 billion is fully 
paid for. I just would like to know, to be sure we are clear, 
how it is paid for. Is that in the tax revenue increases that 
are in the budget?
    Ms. Burwell. There are specific revenue areas in terms of 
what we think are loopholes, as well as mandatory spending 
cuts. So it is paid for both by spending cuts as well as 
revenue changes?
    Senator Crapo. And with regard to the revenue changes, the 
overall totals that I am seeing from the analysis that we have 
got is that if you look at the total number of revenue 
increases that are included in the budget, what I am seeing or 
what I am calculating is about $1.8 trillion over 10 years of 
new revenue. Is that correct? Does that square with your 
numbers?
    Ms. Burwell. I would not agree with the things that are 
included, and I think we could go back and forth on what is 
included in that number. For instance, things like immigration 
are counted on the revenue side, and that is because of the 
increased economic growth and productivity that is happening. 
So the revenue, immigration is counted in those numbers, but 
that is not what I think you would consider a policy change--
    Senator Crapo. If you took that, you would still be roughly 
over $1 trillion, then, wouldn't you?
    Ms. Burwell. Yes. Yes, around a trillion.
    Senator Crapo. So would you agree that leaving out the 
immigration revenue, there is roughly at least $1 trillion--
again, roughly--of new tax revenue in the proposed budget?
    Ms. Burwell. Yes, and we would say that some of that we 
believe is revenue that relates to closing tax loopholes, that 
there has been bipartisan support for--
    Senator Crapo. Sure, and I understand that there is a lot 
of room there where we can discuss the loopholes. I just want 
to get the numbers right here.
    By the way, with regard to the projected growth in the 
immigration reforms, I call that dynamic revenue--in other 
words, growing revenue as a result of growing the economy 
rather than just a straight tax increase. Would you agree with 
that?
    Ms. Burwell. No, in the way that CBO actually scored 
immigration. What CBO did was they scored a title of the bill, 
a very specific title of the bill that had growth in 
population, and while they did not--they did supplemental--
    Senator Crapo. Okay.
    Ms. Burwell. --efforts in terms of the scoring that would 
be related to what you would call ``dynamic scoring,'' I think 
is the distinction that I would make.
    Senator Crapo. All right. I understand your distinction. 
Someday I want to get into it, with Congress and the 
administration, and get to using dynamic scoring. But that is 
not what I want to use the rest of my time on here.
    You also said that you had in terms of the offsets in 
mandatory spending cuts, and I believe your number there is 
$402 billion in reductions in spending. Is that correct?
    Ms. Burwell. That is only the health care changes, and so 
that number does not reflect other mandatory changes such as 
those that are used to pay for the Opportunity, Growth, and 
Security Initiative, things like--
    Senator Crapo. Do you have a rough--
    Ms. Burwell. --crop insurance and other things.
    Senator Crapo. Okay. Do you have a rough estimate of what 
the total would be for all mandatory programs that you are 
counting?
    Ms. Burwell. I think what we are trying to do is put 
together, I think, the way we think about these spending 
numbers, which I think is what you are getting to in terms of 
the cut, is what we think about is in terms of there have been 
$3 trillion in deficit reduction from 2011 until now as the 
baseline. That is the baseline that was referred to in a number 
of others' comments. And then beyond that, when you add ours, 
the number goes to $5.3 trillion. When you take that number, 
the revenues to spending ratio is about 2:1.
    Senator Crapo. All right. Thank you. I appreciate that.
    I want to go back to the $402 billion for the health care 
mandatory spending.
    Ms. Burwell. Yes.
    Senator Crapo. I have a problem seeing how you get there, 
but I think I have figured it out, and I want to be sure that I 
understand this. Did you not assume that there was a Medicare 
doc fix in the baseline?
    Ms. Burwell. We did assume that SGR is in the baseline.
    Senator Crapo. And, in my opinion--that is a $110 billion 
figure, approximately. In my opinion, that is an assumption 
that is not valid, or at least that it ought to be paid for or 
offset in the budget and would reduce that $402 billion claim 
that you are making for health care savings. And in addition, 
does not the budget propose to turn off the Medicare sequester 
from the Budget Control Act?
    Ms. Burwell. We do turn off the sequester in the out-years, 
yes.
    Senator Crapo. And that is another $140 billion of new 
spending. My point is it seems to me that both the cost of the 
Medicare doc fix and the cost of turning off the sequester in 
the Budget Control Act are expenses that we are going to have 
that are not offset against the $402 billion figure that you 
are talking about. Am I seeing that wrong?
    Ms. Burwell. So I think the way we think about those 
numbers is in terms of the overall, and--because I think what 
we are all talking about is trying to get to a declining 
deficit. I think that is the point that was made and has been 
made continually. And so when you get to those overall numbers, 
what we see is that the deficit as a percentage of GDP goes 
down to 1.6 percent, and as a percentage in terms of the debt 
to GDP, we see a declining--in 2015, we stabilize and then we 
decline to a number that is around 69 percent.
    Senator Crapo. I understand. My time is up, but I just do 
not see the $402 billion figure being accurate in terms of 
health care reforms if you offset those other appropriated 
expenditures. But we can talk about that at some other time.
    Thank you.
    Chairman Murray. Thank you.
    Senator Warner?
    Senator Warner. Thank you, Madam Chairman. Thank you for 
the opportunity. And, Director Burwell, good to see you again.
    I want to move the discussion a little bit over to an area 
that I think we are all going to have to grapple with. My good 
friend Senator Crapo and I spent a lot of time talking about, 
in our efforts around debt and deficit reform, infrastructure. 
I commend the President for making a request for $150 billion 
over 4 years. How we do that, whether it is involved in 
repatriation or some other item, I know we will talk more 
about.
    I do believe that a permanent funding source of 
infrastructure, we are still struggling. We obviously rely upon 
a declining revenue source in the gas tax, and there is not a 
lot of appetite to grapple with that. But it is an area that I 
think needs a lot more examination.
    One of the things that the President mentioned in his 
budget that I want to try to share with my colleagues is, with 
record low interest rates, it is--I think it would be a real 
mistake if we did not take advantage of trying to leverage 
private capital to help support infrastructure. And while the 
President in previous times had proposed an infrastructure 
bank, that did not go too far. I appreciate the fact that the 
President has kind of restructured part of his proposal and is 
talking about more of an infrastructure financing authority.
    For example, I have got some legislation where there are 
five Republican cosponsors and another three that are looking 
at it quite a bit. It would recognize that we ought to leverage 
private capital in infrastructure. It would not include energy 
generation, but it would focus on road, rail, bridges, water, 
transmission. It would have private capital take first dollar 
loss. It would require that any project that would be financed 
would have to be investment grade. It is a more conservative 
version of what had been put out, proposed earlier. And, again, 
I mentioned that I start with five Republican cosponsors, five 
Democratic cosponsors, a number of other folks who are 
interested in it. And, you know, this would not replace TIFIA. 
It would be in supplement to TIFIA. We have got a major project 
in Virginia that just received TIFIA financing. It took a year 
for DOT to make that assessment.
    The challenge on trying to leverage private capital into 
infrastructure is: One, TIFIA is a great initiative, but it is 
not a career path in DOT. We need long-term capital that is 
patient capital. We have lots and lots of American pension fund 
dollars that are going abroad because there are not enough 
projects here to finance because there is no financing 
mechanism.
    Two, we need that backdrop that lowers the interest rates. 
A 200-basis-point interest rate can save $30 or $40 million on 
a 20-year or 30-year loan.
    And, three, you need the expertise to be concentrated on 
infrastructure, to be able to have on the public sector side 
the ability to go toe to toe with Wall Street. There are lots 
and lots of public-private initiatives out and around the 
States these days. Some of them are good deals; some of them 
are very bad deals for the taxpayer. And I would simply--this 
is more a commercial than a question, and I apologize--say that 
as we come up on the Highway Trust Fund challenge, coming up 
around Labor Day, an infrastructure financing authority that 
would be initially capitalized at $10 billion or only scored at 
$7 billion, it becomes self-funding because of the fees that 
are charged. And while not a solution set and I do not want to 
oversell it because it does not replace the need for a 
permanent funding source, but--and let me also make clear that 
this is also something that is extraordinarily viable to 
smaller States because, even if you may only have a $30 million 
water project, you still might have a tranche of private 
financing that could be a part of that. And I would simply say 
that I am glad that the President has included this idea in his 
budget, and I just wondered if you might want to comment on 
that.
    Ms. Burwell. Well, I think probably the biggest comment I 
would have is the overarching importance of infrastructure. 
This is one piece of an overall approach to ensuring that we do 
fund our infrastructure, and I think funding for infrastructure 
has a number of dimensions to it in terms of, in the short 
term, the job creation that it can cause and create right now 
in terms of projects that are ready, moving those, and actually 
fixing things on the ground that are in need of repair across 
all sectors. You mentioned across all sectors, which I think is 
also very important.
    I think the other thing that is important is us investing 
in our economy for the long term. A strong infrastructure, our 
manufacturing base--these are the kinds of things that I think 
we have to think about, not just today but they are the kinds 
of investments that we need to put in place so that 10, 15 
years from now, we have the things in place that we have an 
economy that is competitive. Having come from the private 
sector and a company that uses those roads every day, the 
Walmart fleet is out every day. And so these are important 
issues for the overarching economy, so I would just second and 
emphasize the importance, that focusing on this is an important 
issue for jobs today, but it is also an important issue for us 
to think through the long term.
    Senator Warner. If I could just take 10 more seconds, I 
just want to say I concur because I believe this adds to our 
deficit. It will cost us more later than today, not to take 
advantage of these record-low interest rates. And to echo what 
Senator Sessions said--and I want to commend Chairman Murray 
for her good work on the budget--we bought ourselves a couple 
years, but at $17 trillion in debt, a 100-basis-point increase 
in interest rates adds $120 billion a year of, whether you view 
it as taxation or mandatory spending. That is the creation of 
two Homeland Security Departments each year with a 1-percent 
interest rate increase.
    One of the things we do have to come back to after this 2-
year budget is entitlement reform and tax reform.
    Thank you, Madam Chair.
    Chairman Murray. Thank you.
    Senator Johnson?
    Senator Johnson. Thank you, Madam Chair. Director Burwell, 
welcome back.
    Ms. Burwell. Thank you.
    Senator Johnson. Thank you for your testimony, and also 
thank you for spending some time over the last year trying to 
work with us, with me, trying to define the problem and trying 
to look at areas of agreement.
    I want to focus a little bit--I want to understand a little 
bit more about the difference between discretionary and 
mandatory spending in the proposed budget here. I want to focus 
on 2015 just so I get a good understanding.
    The figures I have is that you are proposing in 2015 $3.9 
trillion of spending; whereas, the CBO baseline would be about 
$3.78 trillion. So we are actually increasing total spending, 
total outlays by about $118 billion over the CBO baseline. Is 
that about right?
    Ms. Burwell. I think one of the things that we would want 
to look at in terms of why and where those increases are is how 
things are accounted for, whether those are CHIMPS, fees, any 
manner of things.
    Senator Johnson. Which is always a problem, right.
    Ms. Burwell. Yes.
    Senator Johnson. So, anyway, I guess the question I have--
so $118 billion, $56 billion increase in discretionary 
spending, that would leave about $68 billion in some way, shape 
before scoring of mandatory spending. So the question I have 
is: Is the President or are you addressing the two-thirds of 
the budget, looking out 10 years in terms of the mandatory 
spending, in terms of reforming any of those types of 
programs--because what I am seeing in the first year is an 
increase in mandatory spending even though you are claiming a 
$400 billion savings over 10 years, for example, in the health 
care spending.
    Ms. Burwell. The mandatory savings do come as one moves out 
in terms of when they grow, and those savings in terms of those 
types of mandatory savings, when they are structural, as we 
have had the opportunity to discuss, those are the ones you 
want because they grow in the out-years. For instance, the--
    Senator Johnson. So what structural changes are you 
proposing in this budget--
    Ms. Burwell. In terms of--
    Senator Johnson. --two-thirds to the budget?
    Ms. Burwell. In terms of even just the implementation of 
the Affordable Care Act, when the Congressional Budget Office 
scores those numbers, in the second decade those numbers would 
be $1 trillion. You are starting to get into that in terms of 
now we have moved from 2010, so our budget window starts to get 
those. The $400 billion is within the window of changes that we 
do to Medicare, Medicaid, in terms of reducing those 
overarching health care costs.
    Senator Johnson. We are getting really heart-wrenching e-
mails and letters from our constituents. Their premiums are 
doubling and tripling. Their out-of-pocket maximums are 
increasing. They are making really heart-wrenching decisions, 
whether they have to quit a job so their income actually is 
lowered enough so they can qualify for subsidies and just be 
made whole because of increasing premiums.
    Specifically you mentioned that health care spending is 
coming down because of the Affordable Care Act. Can you point 
to one thing that is actually causing health care spending to 
decline because of the Affordable Care Act, which just kicked 
in?
    Ms. Burwell. We have seen some of the changes in terms of 
some of the things that had been put in place in terms of 
incentives and spending in the Medicare space. Also, we have 
also seen it is both a quality measure but it is a cost 
measure; 130,000 fewer readmissions are occurring because of 
some of the standards that have been put in.
    Senator Johnson. Okay. As you are well aware, as we were 
meeting over the year, I was really concerned about a 30-year 
budget window because we really have that demographic problem 
of the baby-boom generation retiring at the rate of 10,000 
people per day.
    Have you looked any further in terms of the 30-year problem 
that we are facing? I know we could never come to agreement in 
terms of what that 30-year deficit would be. Have you given any 
further thought to that or done any more work on that?
    Ms. Burwell. You know, one of the things that, when we 
think about those out-year numbers, I think is one of the most 
challenging--and you actually even see it in the 10-year 
window--is the question of the uncertainty when you get in 
those out-years in terms of the economic projections.
    Senator Johnson. I understand.
    Ms. Burwell. And one of the things, I think, that is most 
challenging about those out-year numbers is we know what 
affects these numbers dramatically are the underlying 
economics, and whether it is the growth rate, the interest 
rates, any of those, and the level of uncertainty. And so we 
have focused our attention on trying to get the problem 
contained in those 10-year windows, continue to think about the 
out-year windows because that is when some of these very 
important costs come to bear.
    One of the things we do know is the demographic bubble that 
you mentioned in terms of that Social Security. In the 10-year 
window, we are in the middle of some of the height of that. And 
so hopefully that will start to come down.
    Senator Johnson. Well, speaking of Social Security, we are 
taking a look at that, and that is probably the best actuarial 
math we have. We are looking at between $13 and $15 trillion 
more in benefits being paid over the next 30 years versus 
payroll taxes being collected. That is pretty tough--some 
pretty tough numbers to look at in Social Security. The latest 
alternate fiscal scenario of CBO, when you take the percentage 
of GDP and convert those into dollars, shows a 30-year deficit, 
a total of about $127 trillion. So those are way larger than 
any projections we were talking to certainly in our 
discussions.
    Talking about Social Security, because I tried to get you 
to answer this in your confirmation hearing, and now I have 
Doug Elmendorf. The trust fund holds about $2.6 trillion worth 
of bonds, U.S. bonds, right?
    Ms. Burwell. Yes.
    Senator Johnson. And the Treasury has a $2.76 trillion 
liability because of those bonds, right?
    Ms. Burwell. Yes.
    Senator Johnson. When you consolidate the Federal 
Government, what happens to the $2.76 trillion asset versus the 
$2.76 trillion liability? For the Federal Government that nets 
to what?
    Ms. Burwell. I think the question is whether those numbers 
are actually numbers that net. In terms of if one takes a 
balance--you know, a balance sheet and an income statement, you 
do not--the numbers--the way the numbers are--what the trust 
fund does--
    Senator Johnson. Oh, but they--
    Ms. Burwell. --is represents those claims and what has been 
paid in. What the unified deficit does is represents what we 
owe. Both of those are relevant, important, part of transparent 
representations that are important.
    Senator Johnson. I will refer you to your own--to OMB's 
publication that says that transaction nets to zero, and I 
would actually refer you to Doug Elmendorf's testimony where he 
also admitted that, yes, you have an asset, offset by a 
liability, and that nets to zero.
    Thank you, Director. Thank you, Madam Chair.
    Chairman Murray. Senator Merkley.
    Senator Merkley. Thank you very much, Madam Chair.
    In talking about the unified budget, I am looking at the 
budget total chart that is on 163 of your book. Do you have the 
budget with you?
    Ms. Burwell. Which table is it?
    Senator Merkley. It is Table S.1.
    Ms. Burwell. Yes.
    Senator Merkley. And just to be clear, this table includes 
the Social Security Trust Fund embedded within it, right? So as 
we look at these numbers, there is not some separate liability 
or concern that is on top of these. That is embedded inside of 
these numbers, yes?
    Ms. Burwell. Embedded within.
    Senator Merkley. Okay. If we look at 2015 and we have a 
projected deficit of $564 billion, do you know how that 
compares to the Simpson-Bowles glide path that would have--the 
bipartisan plan that would have--what we would have for a 
deficit in 2015?
    Ms. Burwell. I do not know the specific number within 
Simpson-Bowles, but within Simpson-Bowles a number of the 
concepts and actual numbers and presentations are incorporated 
within our budget. One of the difference--and so much of it is 
embraced, and so I think they have not scored theirs against 
the new baselines that we have seen. So I do not know the exact 
number.
    I think it probably also is important to reflect that there 
are places where we have a number of similarities. One place 
where we do have a difference is the issue of defense, and I 
think you know that in our current budget we replace sequester 
on the defense and nondefense side in the out-years. In 
addition, we proposed the Opportunity and Growth Initiative for 
this year.
    Senator Merkley. Okay. Thank you. I will follow up and do 
those comparisons. It is helpful, because we had that 
bipartisan vision of a glide path to come back in fiscal 
responsibility. I do not think we are that far off--
    Ms. Burwell. No.
    Senator Merkley. --from what was anticipated. And if we 
look at your projection for the year 2014 in that same chart, 
we basically see the debt held by the public drops to 69 
percent of GDP. This has been a conversation in this room for 
year after year, since I came to the Senate, of the fact that 
we have to cap that debt as a percentage of GDP in order to 
avoid traveling into a declining spiral that would endanger our 
economy, particularly given the risk of potentially higher 
interest rates. And what you are presenting here is a plan that 
has addressed that and started to bring us back down in terms 
of our debt as a percentage of GDP.
    Ms. Burwell. That is correct and is in line with Simpson-
Bowles in that the numbers that Simpson-Bowler, Rivlin-Domenici 
was about a $4 trillion number in total. Our budget produces 
about over a 5.3--it is $5.3 trillion in deficit reduction, so 
we are in that ballpark.
    Senator Merkley. Do you know what interest rate is assumed 
for the 30-year Treasury bond by the end of this 2024 period?
    Ms. Burwell. No, not the exact number because the interest 
rate assumptions, you know, are on an annualized--they are on a 
year-by-year basis. But those interest rate assumptions are in 
line with the Fed and basically the Blue Chip in terms of our 
interest rate assumptions.
    Senator Merkley. I appreciate that. I would be interested 
in running some sensitivity to variable interest rates, because 
it is something that is hard to predict, and one of the things 
we have been concerned about is our exposure if interest rates 
do go much higher. Some of the crises in the world have kept 
our interest lower than we might have anticipated, but maybe 
the world will be doing better and we will not be so lucky down 
the line. So that is why I was curious about that point.
    I want to turn to the investment in infrastructure, 
particularly the inclusion of the $302 billion surface 
transportation reauthorization and the National Infrastructure 
Bank. And the multiplier for infrastructure is a pretty high 
multiplier, especially in an economy that has a shortage in 
construction projects currently. And I just want to applaud 
that. Everywhere I go in my 36 town halls every county, every 
year, folks are concerned about the state of the 
infrastructure, whether it is the fact that their local small 
port needs to be dredged or their local interchange needs to be 
expanded to be able to get onto the freeway, or so on and so 
forth.
    It is strikingly of concern to me that Europe is spending 5 
percent of its GDP on infrastructure and we are spending, I 
believe, about 2 percent. So thank you for including a vision 
for increasing our investment in infrastructure.
    And, similarly, the importance that is placed on 
manufacturing in this budget, would you like to just comment on 
that?
    Ms. Burwell. Yes. As we discussed a little bit before, the 
importance of manufacturing and promoting manufacturing 
institutes or hubs that will help develop economies in local 
areas, as well as the technology that will help the U.S. remain 
a leader in this space. And so right now the plan is hopefully 
through implementation of the 2015 budget levels that you see 
presented in terms of meeting the Ryan-Murray levels, we will 
have an additional four and then hopefully an additional one in 
2016.
    As part of the Opportunity, Growth, and Security 
Initiative, we have proposed an additional funding that would 
get us to 45.
    In addition, in the manufacturing space, the importance of 
the R&D tax credit is something that we also think the 
permanent extension of that would be an important part of 
promoting that economic growth.
    Senator Merkley. And you have talked about these 
manufacturing research or promotion centers. How many of those 
are you going to locate in the State of Oregon?
    Ms. Burwell. It is a competitive process, as was reflected 
earlier.
    Senator Merkley. Thank you, Director, for your testimony.
    Chairman Murray. Senator Enzi.
    Senator Enzi. Thank you, Mr. Chairman. And thank you for 
your testimony. I am going to be a bit more specific, I think, 
than some of the others have been, because one area that I have 
been interested in and worked in a lot was this area of 
preschool. Of course, the President has proposed a Preschool 
for All Initiative to provide all low-and moderate-income 4-
year-olds with access to high-quality preschool. And we all 
agree that funding invested in early education programs save 
the taxpayers later on.
    So for a long time, the Federal Government has been doing a 
lot to increase access to these important programs, and they 
began in the War on Poverty in the 1960s and grew to 119 
programs. I think at the present time there are 69 programs. 
And those programs have more money dedicated to them than we 
dedicate to kindergarten through 12th grade.
    Now we are proposing another program. There has been a 
Government Performance and Results Act. It is not very well 
enforced. It is supposed to be enforced by the administration. 
That is where each agency, each one of these programs says what 
they are going to do, and then they evaluate how well they do 
it. And many of them are failing.
    What used to be education programs and we are paying for as 
education programs are now often babysitting programs. There 
should be a difference in cost between babysitting and 
education.
    When I was Chairman of the HELP Committee, we studied these 
programs, and Senator Kennedy and I were able to eliminate some 
of the overlap, some of the duplication, and change the course 
of some of the programs. But there are still 60 programs out 
there.
    Was there any effort in your budget process to eliminate 
any of these other programs, to further eliminate some of the 
overlap? There is a lot of money out there. Could that cover 
the Preschool for All Program that the President is suggesting? 
Would the President's proposal be duplicative of Head Start or 
child care development block grants or some of the other 
programs that were authorized in No Child Left Behind, maybe 
even the Disabilities Education Act? Was there an attempt to 
eliminate some of those to fund this?
    Ms. Burwell. So a couple of points. One is GPRA 
Modernization, which is something that also I do--am familiar 
and I am glad that we will be submitting, as part of this 
budget cycle, the goals. This will be part of the 
implementation. When I was here before, there was GPRA. Since I 
came back, right before I came back, there is GPRA 
Modernization, and we will be submitting goals, cross-agency 
goals as well as the Department goals. So step forward, a lot 
of progress in that since I was here before, need to continue 
on it. I believe it is an important tool that we need to make 
use of in terms of management.
    With regard to the specifics in the area that you are 
speaking to in terms of Head Start, preschool, and toddler and 
pre-K, yes, some of the things that we have considered. So one 
of the things we are doing to improve--you described, I think 
aptly, that there are some child care programs that are more 
babysitting but not focused on learning and skill development. 
And so as part of this effort, you will see these efforts not 
creating a new program, but connecting to early Head Start so 
that you build off of existing programs.
    And so the issue of trying to make sure that we are 
aligning the work, there are a couple things we are trying to 
do: make sure you are not creating too many new things, do 
things within existing authorities, but also align with the 
States, because much of this work is done in the States, and we 
want to make sure that is a topic we all spend a lot of time 
on. And so we have tried to consider those in our proposals as 
we go forward.
    With regard to the question of can you get enough cost 
savings to do that, I think you are familiar with the fact 
that, you know, even when done well, the programs--I do not 
know that we could get enough, but we are always looking for 
ideas and approaches to improve the way we do it.
    Senator Enzi. Well, I hope there will be some emphasis on 
that.
    My next question, similar to what Senator Warner said, in 
the last month the Congressional Budget Office estimated that 
spending on Medicaid is expected to increase by $574 billion, 
more than twice 2013, and Medicare will rise from $585 billion 
to $1.1 trillion by 2024. And over the next decade, spending 
for Social Security and Medicare, Medicaid, and the other major 
health programs will represent more than half of the Federal 
budget.
    How does the President propose to make these programs 
sustainable in the long term when the bulk of the savings that 
you proposed includes reimbursement cuts and increased use of 
price controls on prescription drugs and that is not 
sustainable?
    Ms. Burwell. I think that we believe that many of the 
changes that we are proposing in that space--first of all, we 
come back to the point that I think part of the opening 
conversation was about, the importance of entitlement changes. 
Entitlement changes are actually quite difficult when one looks 
at changes to Medicare in order to meet the deficit numbers 
that we do. So even to get our $400 billion, I think what you 
are appropriately reflecting is choices have to be made that 
are difficult. And we believe we have made those choices on 
best information and things like the GAO and MedPAC's 
recommendations for where people are having overpayments. And 
some of those issues are in coding and a number of other 
places, and that is where we are basing our choices on in terms 
of what we believe.
    With regard to the changes that have previously been done 
in a number of different areas, we still continue to see 
beneficiaries getting benefits in an appropriate way.
    Senator Enzi. My point, though, is that those are one-time 
savings, and so it is not sustainable.
    Thank you.
    Chairman Murray. Senators Coons.
    Senator Coons. Thank you, Chair Murray, and thank you, 
Director Burwell, for your hard work and for joining us here 
today. The administration in this budget has placed a real 
focus on economic growth and on job creation, which I think is 
appropriate and should be our highest priority as we continue 
to also find ways to achieve balanced deficit reduction and to 
improve our overall balance sheet as a country.
    Which of the proposals in this budget do you think has the 
potential to create the most jobs and the best jobs?
    Ms. Burwell. I think that in terms of the issue of job 
creation, it is about the entirety of the budget in terms of 
there are things that are happening in the short term and 
things that are happening in the long term that are important, 
some of our fiscal responsibilities important to job creation 
in the long term, and certain things we are doing in the here 
and now.
    I would focus on the here and now question with regard to 
infrastructure as an important place where I think we believe 
that the emphasis is important.
    I think also we believe that research and development is 
another place where that is a more interim--is about the jobs 
that it creates now, but also the technologies that we develop 
and how that promotes economic growth is an important part in 
sort of the medium term as well.
    Senator Coons. I agree, and I frankly also want to draw 
your attention to manufacturing, a sector I have focused on 
pretty heavily, that creates good jobs, high-quality jobs that 
have a great secondary benefit to the community. And there is 
one bill that I think may have been brought up by Senator 
Baldwin as well, or I have joined as Senators Brown and Blount 
as a cosponsor--
    Ms. Burwell. Yes.
    Senator Coons. --that continues to advance this strategy of 
taking R&D and a skilled workforce and growing manufacturing 
and export opportunities and pulls them together into a 
regional hub or institute.
    Tell me, if you would, about how these institutes will be 
rolled out going forward and why it is important to have it 
authorized by Congress.
    Ms. Burwell. I think we believe that congressional support 
in a bipartisan fashion, as you just described, is important 
from an authorization perspective. It will also be important as 
appropriations come in terms of how one funds these efforts 
over time.
    In terms of how they will be rolled out, it is the plan to 
continue with the existing resources that there are to 
continue, and four have been announced. There will be others 
that will be announced over the period of the next 2 years. I 
think at this point in time we are hopeful that we can get nine 
of these done, but are hopeful that the funding would come to 
do 45, because as you articulated, we believe it is an 
important part of economic growth.
    Senator Coons. My understanding is Germany currently has 
roughly 70 comparable manufacturing hubs or institutes, so if 
we could move from 2 to 4 to something like 40, I think that 
would be a great objective long term.
    The long-term unemployed have particularly difficulty in 
rejoining the workforce and in transitioning back to work 
opportunities where they exist. Manufacturing employment, after 
significant, painful losses in the first 8, 9 years of this 
century, has come strongly back. There have been about 600,000 
manufacturing sector jobs created over the last 4 years. And 
some studies suggest there are hundreds of thousands more that 
are currently unfilled because of a skills gap.
    Tell me more, if you would, about the administration's 
strategy in this budget to make it easier for the long-term 
unemployed to find meaningful work.
    Ms. Burwell. There are a number of elements of that 
strategy, and it is a problem that we take seriously. It is 
actually a problem that is related to the long-term numbers 
with regard to productivity and growth.
    In terms of what we hope to do is the President talked 
about a workforce strategy, and the Vice President is actively 
involved in it. There are a number of elements that I think are 
core to that.
    First is ensuring that one pursues job training and skill 
training in a demand-driven or job-driven way, making sure that 
the training is matched to the needs of employers so we get a 
better match there. And then there is the question of doing 
high-quality training for those that are getting the training 
for those jobs and trying to put in place programs and best 
practices that do that. And so there are a number of steps that 
are part of that.
    Credentialing is another element that we hope will be 
important to getting people to match with the skills.
    Senator Coons. Well, and I know there has been great work 
done on the Workforce Investment Act reauthorization, 
streamlining it, focusing it. That is something I hope we will 
move on a bipartisan basis.
    My last question. Ways and Means Chairman Camp recently 
released a tax reform proposal. This budget relies fairly 
heavily on tax reform in order to achieve both deficit 
reduction and new resources. Too often around here we focus on 
our differences, not our similarities. Are there any areas of 
commonality between Chairman Camp's proposals and the 
President's budget in terms of tax reform that you think we 
should focus on?
    Ms. Burwell. I think one of the similarities that is an 
important one is in a topic that we have had a lot of 
discussion on this morning, which is in the infrastructure 
space. Chairman Camp uses a similar approach to paying for 
infrastructure that we do in terms of those one-time transition 
revenues. I think that is a place.
    The other place that I would highlight that there are re 
some similarities in the proposal would be in the offsets that 
Chairman Camp uses. There are a number of things that he 
proposes that are offsets that you will see in the President's 
budget. The out-year deficit numbers are deployment that would 
concern us in terms of the increases to the deficit in terms of 
a difference.
    Senator Coons. Well, thank you. Thank you, Director.
    Thank you, Madam Chair.
    Chairman Murray. Thank you.
    Senator Portman?
    Senator Portman. Thank you, Madam Chair, and, Ms. Burwell, 
good to have you back. Having sat in that seat, I know it is 
not always fun, although you seem to be having a pretty good 
time this morning.
    I am, as you know, very disappointed in the budget, and it 
is for the simple reason that we are not addressing the 
fundamental issue we all know exists, and sitting in that very 
seat only a couple weeks ago was the nonpartisan Director of 
the nonpartisan Congressional Budget Office, telling us things 
are getting worse not better, telling us the deficit and debt 
projection over the next 10 years is worse not better, adding 
another $10 trillion to the debt.
    One reason the debt went up another $1 trillion or so was 
because of slow economic growth, by the way, and he pointed out 
what is obvious, which is that the mandatory side of the 
budget, which is the part that is not appropriated every year, 
is growing, and it is already about two-thirds of the budget. 
He said it is going to be 77 percent of the budget, over three-
quarters of the budget, in the next 10 years.
    And he said basically the discretionary side, the part we 
do appropriate every year, the part Congress wrestles with, is 
going to be pretty flat as a percent of the economy. Revenues 
are going to go up, he said, not down. In fact, he said 
revenues are going to be up above their historic high within a 
year or so and then continue at that level. He said the problem 
is on the mandatory side. He said specifically the health care 
entitlements are going to grow by over 100 percent--over 100 
percent.
    So you know why I am disappointed, because this budget in a 
political year is a political document, and it avoids the tough 
choices, takes a punt, it chooses to punt on these tough 
issues. And, you know, I have talked about this, but I think 
the President has a great opportunity to lead on this, and he 
has chosen not to.
    There are a lot of tax increases in here. There is over $1 
trillion in new taxes. When you add that to the Obamacare taxes 
and the fiscal cliff, that means we would have added about $3 
trillion in new taxes.
    You are probably going to tell me, no, there is $400 
billion in health savings. We can debate whether these savings 
are good policy or not. As I read it, about $350 billion of the 
$400 billion comes out of providers. And we have already heard 
from a lot of providers about those in Medicare and Medicaid 
who are less interested in providing those services because of 
the cuts to providers that we have already put in place.
    But let us even assume that those savings, $400 billion, 
are appropriate. That would change the health care entitlement 
spending from being 115 percent growth over the next 10 years 
to 105 percent over the next 10 years based on your numbers. 
This means you are seeing more than a doubling of these 
important but unsustainable health care entitlements.
    So, you know, I think, again, you are in a position to have 
to defend this, but I think anybody objectively looking at this 
would say, wow, it is just not responsive to the real problem 
that we have had laid out to us time and time again. Erskine 
Bowles also sat right where you are and said this problem of 
mandatory spending is the issue, and if we do not deal with 
this, we are facing the most predictable economic crisis in our 
country's history.
    Let me ask you this specifically: Social Security 
Disability Fund is schedule to go bankrupt, as you know, in 
2017. Nothing in the President's budget to save this program. 
Social Security Old Age Program is schedule to go bankrupt in 
just 20 years; in other words, people who are retiring today 
are going to see these trust funds go belly up. And the trust 
funds are not what most Americans think they are, as you know. 
Most of us think of the trust fund actually having assets in 
it. We are going to have to borrow more or tax more or take 
spending from somewhere else in order to fund these trust 
funds. But even so, they go belly up.
    The HI Trust Fund is scheduled to go bankrupt in 12 years. 
Nothing to save Medicare for generations to come in here. 
Again, understanding that there is $400 billion in these 
savings on the provider side. But those are not the long-term 
solutions that all of us know we must go to.
    So I guess if this is the budget that truly reflects the 
President's vision for the future, as you have said, what are 
the President's plans for reforming and preserving these 
programs for future generations?
    Ms. Burwell. As we have discussed a lot this morning, at 
the root of the issue in terms of these numbers--and they are 
growing. We have a baby boom; it is retiring. That is a point 
of fact, and the room looks like it is about split in terms of, 
you know, people who are part of that, and some people here 
will be the echo--
    Senator Portman. I will not ask you to say who is on which 
side of that.
    Ms. Burwell. I will not. You notice I stopped.
    [Laughter.]
    Ms. Burwell. You notice I stopped before I--
    Senator Graham. We are split on the high side, not the low 
side.
    Senator Portman. Yes, I think so.
    Ms. Burwell. I split before distinguishing between chairs. 
I looked around and thought it best not to do that.
    Senator Portman. So we agree there are 10,000 baby boomers 
retiring every day, and that is one of the things putting 
pressure on these programs.
    Ms. Burwell. It is putting pressure on the programs.
    Senator Portman. So why don't you address it?
    Ms. Burwell. The other thing that is putting pressure on 
the programs is health care costs, and I do not know if in your 
comment about health care and our reforms on the provider side 
if you were suggesting that the right way to approach it is to 
cut beneficiaries in the Medicare space in terms of beneficiary 
cuts.
    Senator Portman. Well, what do you think?
    Ms. Burwell. I think we have proposed what we believe is 
the right approach to handle--
    Senator Portman. Which is having these programs increase by 
over 100 percent over the next 10 years? Do you think that is 
sustainable?
    Ms. Burwell. The programs are going to increase because of 
numbers. The programs are going to increase because of rate of 
growth of cost--
    Senator Portman. So what do you--what happens when the 
trust funds go belly up, when they are insolvent?
    Ms. Burwell. What we are--
    Senator Portman. It is a 25-percent cut in people's Social 
Security benefits.
    Ms. Burwell. What we are doing is proposing what we--
    Senator Portman. Talk about beneficiaries. So you do not 
want to touch beneficiaries, but you want to be sure the 
beneficiaries take the brunt of this, because we refuse to do 
anything at this point--anything to deal with this--
    Ms. Burwell. There are premium increases--
    Senator Portman. --slow motion train wreck we see coming.
    Ms. Burwell. There are premium--in our Medicare approaches, 
there are a number of different things, and in addition, we 
believe actually that revenues are a part of the solution for 
the long term in terms of an ability to meet the numbers.
    When one looks at the actual numbers, when one sits down--
    Senator Portman. So you would just continue to increase 
taxes, that is your solution?
    Ms. Burwell. Our solution is a combined proposal. If you 
look at deficit reduction in our budget, right now at the 
baseline, the CBO baseline since 2011, there has been about $3 
trillion in deficit reduction. If you look at the proposals 
that we put in place, the number increases to 5.3. The ratio of 
spending to revenue in that is about 2:1. So we put much more 
burden on the spending side than on the revenue side.
    Senator Portman. We can have a longer discussion about the 
so-called savings, because when you increase spending at the 
same time you are doing things like the Ryan budget, which I 
supported--I will call it the ``Murray-Ryan budget'' here 
today.
    Chairman Murray. Thank you.
    [Laughter.]
    Senator Portman. You know, you are increasing spending in 
other places, and the fact is, again, you cannot escape this 
$10 trillion additional debt that CBO told us, sitting in that 
very chair, is going to occur, and the fact that these programs 
are not sustainable in their current form.
    And I guess your answer today is we will just continue to 
tax more and more. We already have taxes as a percent of the 
economy going up to above the historic levels. And, you know, 
that is not me again. That is third-party nonpartisan 
Congressional Budget Office telling us that.
    So I am disappointed in the budget, as you know. It does 
not surprise you. And I do hope that we can work together on 
some very small but positive aspects on the Medicare means 
testing side, because those stayed in the budget even though 
you took out your Social Security reforms during a political 
year, but on the--
    Chairman Murray. Senator Portman, we need to move along 
here. We have got--
    Senator Portman. I am sorry. I was not looking at the time. 
My apologies. But I do hope we can work together on means 
testing under Part B and Part D, which I believe is still in 
the beginning.
    Thank you, Madam Chair.
    Chairman Murray. Thank you.
    Senator Whitehouse?
    Senator Whitehouse. Thank you, Chairman. Welcome, 
Administrator Burwell. It is good to see you again.
    I want to ask about health care, but before I do, let me 
point out, as you evaluate my colleagues' alarms about the debt 
and deficit, I think we should all bear in mind that those 
concerns seem to have an interesting characteristic, which is 
that they evaporate in proximity to billionaires and big 
corporations tax goodies. And if you raise the question of the 
low rates that hedge fund operators pay or offshoring tax 
schemes or special interest loopholes, well, we have got to 
protect those at all costs.
    So when you hear these concerns about the debt and the 
deficit, do bear in mind that for a great number of my 
colleagues, the debt and the deficit is in practice much less 
important than protecting carried interest, much less important 
than maintaining Cayman Islands offshore shelters, and much 
less important than keeping big oil subsidies rolling. And I 
think that context is important in the context of this 
discussion.
    I think we could get a lot done on the debt and the deficit 
if it was not more important to protect the carried interest 
loophole, to protect the big oil subsidies, and to protect 
offshoring in the Cayman Islands on the part of some of my 
colleagues.
    You point out in your testimony that we have over $1 
trillion in baseline reduction in Medicare and Medicaid, CMS. 
And when I look at your Table S.3, the cumulative deficit 
reduction that adds up all of the different steps that have 
been taken to reduce the deficit, I do not see that $1 trillion 
there.
    Would it add to this in its practical effect on the 
deficit?
    Ms. Burwell. Because it is incorporated in the baseline, 
these numbers reflect everything. So it is in the baseline, and 
what S.3 reflects is in addition to the baseline.
    Senator Whitehouse. Additional. Well, if you are looking at 
the actual deficit--
    Ms. Burwell. So the savings that we see--so it would be 
reflected in the higher--in the upper bank of numbers.
    Senator Whitehouse. Yes, so it washes through this, but in 
practical effect, that $1 trillion does lower our out-year 
deficits and our liabilities.
    Ms. Burwell. It does.
    Senator Whitehouse. Okay. You have proposed a variety, the 
President has proposed a variety of reforms to Medicare and 
Medicaid that save a little over $410 billion, and most of 
that, as I think we have pointed out on both sides of the aisle 
here, is in the form of reduced payments to providers and 
pharmaceutical companies and so forth. There are only two that 
appear to be in the category of delivery system reform: one is 
bundled payments for post-acute care for $8.7 billion in 
savings, and the other is to have skilled nursing facilities 
contribute to the readmissions problem at $1.9 billion in 
savings. So that is a little over $10 billion out of total of 
over $400 billion in proposed savings.
    I think that the delivery system reforms have much more 
potential than that. The Institute of Medicine has said it is 
$750 billion a year systemwide in potential savings. The Lewin 
Group puts it at $1 trillion a year in savings. You have got 
RAND with a new study that puts it somewhere between 700 and 
900 at a midpoint, depending on how much you adjust for fraud. 
And I understand that there is a scoring problem with trying to 
get that into a document like this.
    What concerns me is that the administration has never set a 
goal, it has never set a target, it has never set a concrete 
desire beyond bend the health care cost curve, which to me is 
kind of accountability free and meaningless.
    So I would love to have the administration actually say, 
look, we cannot predict exactly what this is going to be, but 
we are in charge of this, and we are going to direct these 
changes, and we are going to force the bureaucracy to come up 
and try to--you know, meet a savings target.
    Why would you not want to set a savings target in the 
context of such huge potential savings and such small actually 
identified savings in your budget?
    Ms. Burwell. In terms of making the kinds of changes in the 
system in terms of the health care delivery system, I think 
that is something that we are interested in, and you see some, 
as you reflect, perhaps not as aggressive as you are indicating 
that you believe we should be. I think we are open to those 
ideas.
    With regard to the question of setting a specific goal, 
that would be something I would want to have the conversation 
with Secretary Sebelius, because I think the question of the 
delivery changes that you need and those savings and how that 
relates would be something that I would consider her more 
expert than myself in, in terms of what kinds of impact it 
would have in terms of the delivery system, in terms of what it 
provides for those in the system, individuals receiving care.
    Senator Whitehouse. Would you agree that bureaucracies tend 
to work better when they are given a specific goal to target 
rather than just operating without that?
    Ms. Burwell. I do believe that targets and goals are 
generally helpful things in terms of disciplining mechanisms. 
In this particular case, understanding the underlying changes 
and what it means to those receiving care is something I am 
just not close enough to to comment on this specific case, but 
in general take your point.
    Senator Whitehouse. Thank you.
    Chairman Murray. Senator Graham.
    Senator Graham. Thank you, Madam Chairman. Welcome.
    What percentage of GDP are we spending on defense in the 
President's proposed budget?
    Ms. Burwell. As a percentage of GDP, I know that in terms 
of the numbers that we are over $500 billion. In terms of our 
overall spending, it is about $3 trillion as a percentage of 
GDP. I would have to get back on the exact number.
    Senator Graham. Okay. Could you do me a favor and report 
back to the Committee--
    Ms. Burwell. Yes.
    Senator Graham. --the historical average of GDP spending on 
defense in times of peace and the historical average in times 
of conflict--and I know there are pretty wide variations there, 
depending on level of conflict--and give me the number we are 
spending. And when you look at sequestration, in year 10 of 
sequestration, if nothing changes, what percentage of GDP will 
we be spending on defense and compare the historical averages? 
Could you do that for us?
    Ms. Burwell. I would be happy to get it. I think it is 
reflective of why we believe that sequestration needs to be 
replaced, because we do not agree that those are the 
appropriate levels over the 10 years.
    Senator Graham. Do you agree with me that if nothing 
dramatically changes, President Obama will have added more debt 
held by the public on his watch than all Presidents combined 
before him?
    Ms. Burwell. Because we do not analyze it in terms of those 
numbers, you know, I have not done the historical averages in 
terms of adding all the numbers. When we think about this issue 
of the debt and the deficit, we think about where we are as a 
Nation and where we need to go and the slope of that line.
    Senator Graham. Well, where are we as a Nation?
    Ms. Burwell. Right now, in terms of debt to GDP, we are at 
a number that is in the 74 range, and this budget and these 
policies take us down to a range that is about 69. So it 
stabilizes in 2015, and then we decline to those numbers over 
time.
    Senator Graham. Over time does our deficit go up?
    Ms. Burwell. The deficit-to-GDP number actually goes down, 
and goes down to 1.6 in the end of the 10-year window in 2024. 
So it goes down as a percentage of GDP, which most economists 
and markets believe are the right--
    Senator Graham. Okay. When President Obama came into 
office, I think there was about $10.5 billion--trillion 
publicly held debt, 17 now. At the end of the 8 years--and this 
is all a guesstimate--could you report back to us whether or 
not the statement that on President Obama's watch his 
administration has added more publicly held debt than all 
previous Presidents combined? Could you report back to me and 
see if that is a true statement or not?
    Ms. Burwell. I would be happy to.
    Ms. Burwell. I think one of the important questions is, Why 
do we care about debt and deficit? And how--
    Senator Graham. Apparently we do not. None of us do. I am 
not just beating on you. Apparently none of us seem to be 
caring that much about it.
    Let me ask you about the deficit and debt. Do you agree we 
need to adjust the age of retirement for Social Security and 
Medicare to sustain these programs over time?
    Ms. Burwell. What I believe is that we need to have a 
conversation and a bipartisan approach to thinking through the 
long-term issues with regard--
    Senator Graham. I am not asking you to unilaterally raise 
the age of retirement. I am not asking you to do that. I am 
asking you from--you are a very smart person. You are supposed 
to be telling the country the state of affairs through the 
budget. Is it fair to say to the American people that we as a 
Nation need to adjust the age of retirement for Medicare and 
Social Security because people are living a lot longer, there 
are fewer workers, and this is really driving our long-term 
debt?
    Ms. Burwell. At this time, in terms of our budget and what 
it reflects, our proposal reflects what we think are the better 
options to turn to in terms of reducing Medicare costs.
    Senator Graham. I am just asking you--you gave me a 10-year 
outlook here. It is a simple question. I mean, Ronald Reagan 
and Tip O'Neill adjusted the age of retirement for Social 
Security back in the 1980s. Should we look at doing that yet 
again and harmonizing Medicare with the Social Security age 
retirement as a Nation? Should we be doing that, Republicans 
and Democrats?
    Ms. Burwell. I think the question is coming together on 
what are the first-order things that people should change. In 
our budget we propose what we believe are the first--
    Senator Graham. How about this as a good answer: Yes, we 
should. Republicans and Democrats need to make structural 
changes to entitlements. Ten thousand baby boomers a day are 
retiring. It is politically tough, but if you did it together, 
the country would be better off. So why don't we just admit 
that eventually we are going to have to adjust the age of 
retirement. We are going to have to change CPI and do some 
means testing to save these programs from oblivion. Is that not 
generally true?
    Ms. Burwell. On the means-testing point, I think you know 
it is in our budget. On the CPI issue, I think you know that 
while--
    Senator Graham. Is it generally true that entitlement 
reform has to be accompanied by revenue increases? It is called 
the ``grand bargain,'' right?
    Ms. Burwell. We believe that you need both in order to meet 
the numbers.
    Senator Graham. So let us say that you had--you know, you 
got $600 billion in revenue increases about a year ago. You 
upped the tax rates. I do not know how much revenue is enough. 
If you took every dollar from every billionaire, would that 
balance the budget?
    Ms. Burwell. If you every dollar from every billionaire, 
would it balance the budget? I have not ever done that 
analysis.
    Senator Graham. Okay. Well, I will end with this thought: 
The flattening of the Tax Code, eliminating deductions for 
groups, billionaires, whatever group you want to include, I 
think is an exercise that Republicans have to embrace. And in 
return we have to have meaningful entitlement reform. My 
problem with your budget is that you eliminate deductions in 
the Tax Code and you do nothing on the entitlement reform 
structurally, nothing that really matters, and there will be no 
money left for the grand bargain.
    So my disappointment is--and I will just end with this 
thought--that the President has got a couple of years left. 
After this election, he is still going to be President. I just 
hope we could sit down as a Nation, challenge the Republican 
Party to come up with a reasonable amount of revenue through 
Tax Code reform, and have the Democratic Party come up with 
some real structural changes to entitlements before it is too 
late. That would be a good legacy for the President. We will 
see what happens.
    Do you agree with that general thought?
    Ms. Burwell. What I agree with is that I am still hopeful 
that the idea and concept of a larger bargain that goes beyond 
what we did to improve our discretionary spending, which I 
think Senator Portman mentioned, is, you know, we were able to 
make progress, some progress there, that that can happen. And I 
think part of why we believe that can happen is we reflected 
that the things that we put forward, we still stand by in our 
budget.
    Senator Sessions. Senator Graham, would you yield just 
briefly? You would assume that that tax revenue increase would 
be used to save Social Security and Medicare, not spent on 
other things?
    Senator Graham. I would say this, Mr. Chairman, that Social 
Security and Medicare--Medicare is being heavily subsidized by 
the general treasury. Three out of four dollars, almost 60 
percent at least, is coming from the general treasury. So I 
want to save Medicare from bankruptcy, and the reason we have 
long-term debt is the general treasury is going to be the 
funding source for Medicare. As to Social Security, eventually 
you get in that same boat. I am willing to put some of the 
revenue to retire debt to entice my Democratic friends to 
reform entitlements.
    Chairman Murray. Thank you very much.
    Senator King, you have been very patient. You will be the 
wrap-up questioner here.
    Senator King. Thank you. The good news, Administrator, is I 
am the last--but you have not heard my questions yet.
    [Laughter.]
    Senator King. I am very interested in what Senator Graham 
just talked about, and I think it is a discussion that we 
should have and continue to have. I think one of the--the good 
news is we have got a budget, we have got a 2-year budget. The 
bad news is it has sort of lowered the level of intensity and 
interest in trying to find larger solutions to the longer-term 
problems, which, as has been pointed out today, generally do 
involve many of the mandatory spending programs.
    A couple of short points. One is a lot of the discussion 
today of health care, and I think, frankly, some of the 
discussion is misplaced because it focuses, for example, on 
Medicare. What can we do to solve the health care cost that is 
driving Medicare. I think that is the wrong question, because 
if you focus on that question, inevitably you end up shifting 
those increasing costs to either the providers or the 
beneficiaries. There is no place else to go.
    I believe that the emphasis ought to be lowering health 
care costs everywhere for everybody because it is a drag on our 
economy. As you know, we pay more than twice as much as anybody 
else in the world. Our results are 17th to 20th in the world, 
and it is just preposterous, the amount that we are paying for 
Medicare in light of what--I mean, for medical costs in light 
of what we are getting.
    So I would urge the administration to continue to really 
look and work with us on structural changes, and there are 
promising results coming out of the Affordable Care Act. We are 
seeing in Maine a significant lowering in accountable 
organizations of emergency room visits and readmissions. They 
are a big savings, and that is where we need to be talking. You 
are nodding. I will take that as a yes.
    Ms. Burwell. Yes, that is. I mentioned the 130,000 
reduction in readmissions earlier.
    Senator King. But that is where we have got to go, and to 
me the narrow focus on just Medicare is really misplaced. We 
have got to lower health care costs for everybody, and there is 
plenty of room to do it given what we see around the world.
    Next question, different topic. Failing to support 
infrastructure is debt. It is debt just as sure as it is on the 
national books as the debt and deficit that we all talk about, 
and we are kidding ourselves if we beat our chests about 
lowering the deficit and lowering the debt if we are neglecting 
infrastructure because eventually it is going to have to be 
built, it is going to have to be repaired, and somebody is 
going to have to pay for it, and it is going to cost more 
money. Do you agree with that?
    Ms. Burwell. I agree. Pay now or pay later.
    Senator King. A different point, and that is, I am very 
concerned about interest and interest rates. And I think all of 
us are sort of whistling past the graveyard on that. If 
interest rates went back to 6 percent on the national debt, 
which it was in the year 2000, just the interest on the debt 
would be $1.02 trillion. If that number rings a bell, it 
should, because that is the amount of the budget that we just 
passed. In other words, the interest on the debt would equal 
the entire discretionary budget that was just passed in this 
body. And I believe we have to really be worried about that 
because we have been lulled by these low interest rates over 
the last few years.
    I would like to ask your reaction to a proposal that would 
do tax reform. Everybody is talking about tax reform and where 
to get it. Chairman Camp and everybody else is. The difference 
is: What do we do with the money? And just like Senator Graham, 
I would invite my colleagues on the other side to talk about a 
tax reform package where the revenues were dedicated--I hate to 
use the term ``lockbox.'' I am old enough to remember that ill 
use of a phrase--but were dedicated strictly to reducing the 
deficit. Because if we do not get those $17 trillion back, it 
is going to destroy our ability to do anything. It is going to 
eat up Pell grants, national parks, the defense budget, 
everything that we want to do around here.
    Would you concur that there is some--how would you react to 
a proposal to do tax reform and dedicate it specifically to 
deficit reduction, not new spending?
    Ms. Burwell. So a large portion of our tax proposals 
actually are dedicated to deficit reduction, and you are right, 
that is the distinction. In terms of 600
    Senator King. But I am talking about a legal mechanism, not 
just precatory language.
    Ms. Burwell. Well, we team our--because we make clear where 
our tax offsets are used to pay for spending, the rest of our 
tax changes are dedicated to, as you are reflecting, deficit 
reduction. And I would also say, having been a part of the 
creation of the lockbox, when we had a balanced budget, that 
actually was the objective, is by using the construct of a 
lockbox, it went towards deficit reduction, which was about 
extending the life of the trusts.
    Senator King. Well, I think that is something that we 
really need to consider, because otherwise all of us, Democrats 
and Republicans and Independents, are going to be struck by the 
oncoming train of interest rates.
    Finally, why don't we have a capital budget in the United 
States? It strikes me as odd that we equate building highways 
with paying park rangers, and we are borrowing for both. It 
seems to me it would make a lot more sense, we could understand 
our budgets better, if we had a capital budget and an operating 
budget. And then we could have a better--I do not mind 
borrowing for building highways and schools and bridges. I do 
mind borrowing to pay ongoing operating costs. And if we had 
that distinction in our budget, wouldn't everybody understand 
better what is going on?
    Ms. Burwell. You know, I am open to conversations about how 
to think and talk about budgeting. When one is thinking about 
capital budgeting, one of the things I think that is 
challenging is the question because we do not do multi-year 
commitments over a period of time in terms of how one pays back 
things. And so I think there are complexities in any of these 
things, whether it is capital budgeting or some of the other 
budgeting ideas. But as always, open to any conversation about 
understanding ways that you think you can get around--
    Senator King. I would urge you to think about that, because 
it is one thing to owe $17 trillion, the question is what do 
you owe it for and what part of that is legitimate capital, 
which future generations should help pay for because they are 
going to enjoy it. But future generations should not be paying 
our costs of the ongoing budget of the EPA or the FAA or that 
kind of thing. So I would urge you to give that some thought.
    Thank you, Madam Chair.
    Chairman Murray. Thank you. Thank you very much.
    I want to thank all of our colleagues for participating 
today, and I especially want to thank you, Director Burwell, 
for your testimony and your responses and just let you know 
that the Committee really does appreciate the hard work that 
you and your staff put in on the budget and helping Congress 
with our work throughout the year.
    As a reminder to all of our colleagues, additional 
statements or questions for Ms. Burwell are due in by 6:00 p.m. 
today.
    And, finally, for the information of everyone, we will 
reconvene a week from today to hear from Treasury Secretary 
Jack Lew on the President's budget proposals within the 
Department of Treasury.
    With that, this hearing--
    Senator Sessions. Madam Chair, if we--the witness suggested 
maybe Secretary Sebelius could answer some questions. Maybe in 
the future we could have--Senator, maybe in the future we 
should have her here because her Department does impact the 
budget significantly.
    Chairman Murray. Senator Ayotte, we were just going to call 
it to a close. I think the vote has been called. We will give 
you a few minutes here if Director Burwell is willing to stay.
    Ms. Burwell. Happy to, Madam Chairman.
    Senator Ayotte. Thank you, Director Burwell, and thank you 
for the last-minute run-in. We have had, as you know, a lot of 
hearings going on at once today, so I very much appreciate 
that.
    I guess what I wanted to ask you about is this: The 
President's budget request seeks to improve the impact of 
Federal investments in STEM, which is obviously an important 
issue that we care about. And so we have had this outstanding 
GAO report out there that has talked about the overlapping and 
duplication in STEM programs, and essentially found that 83 
percent of them are overlapping, also reporting that there was 
an inconsistency in figuring out which ones work best and what 
is the measurement of those.
    So are you incorporating that in these budget requests? And 
do you plan to actually take up some of these GAO reports that, 
unfortunately, have been sitting on the shelf? Because it seems 
to me that is something that I hope we could agree on a 
priority on a bipartisan basis.
    Ms. Burwell. So in terms of the GAO reports, a couple of 
things.
    First, in the specific area of STEM, there is STEM reform 
in this budget. It is proposed--we proposed it last year. It 
was not accepted by the Congress in terms of the changes that 
we proposed and the consolidations that we proposed. We have 
re-proposed it. We hope that it will gain support this year.
    Second, in terms of the GAO, we have included GAO analytics 
in how we think about some of our Medicare changes in terms of 
places where they believe that there are over-expenditures, and 
some of that is in a number of places.
    And so the last thing is in our cuts and consolidations, as 
we review those lists each year, some of those have been 
enacted, and we are pleased by that, and there is some 
alignment there with GAO.
    Senator Ayotte. Well, I think this is an area where I hope 
that you certainly would do more, because I believe that there 
is a whole host of areas--if I had a list--I am actually the 
cosponsor of the Duplication Elimination Act that is 
bipartisan, and essentially what it would require is for the 
executive branch, as a GAO report is issued, within a certain 
time frame to make the legislative recommendations to the 
Congress on implementing them. So, not just STEM areas but also 
we have seen duplication in areas of the Pentagon, we see 
duplication in areas of even drug prevention areas, which, I 
think is a very important mission, but you have got multiple 
agencies doing a lot of the same work. And, you know, there are 
lists of these areas, basically. And I am hoping that you will 
be more aggressive on that in terms of making proposals that 
will help us really review which programs are effective and 
which are not, and to make it actually easier to deal with the 
Federal Government on important issues.
    Ms. Burwell. And I hope that you will see that in the 
budget there are a number of areas in addition to STEM where we 
do that. And also hopefully you will also see an increase in 
the OMB-GAO conversations about not just in areas of 
duplication but other areas where the management function of 
OMB can build on some of the work of GAO.
    Senator Ayotte. So as I understand the President's budget 
proposal overall, we are still on the path to be at a point of 
close to $25 trillion in debt over the 10-year window. Is that 
true?
    Ms. Burwell. When we look at--I am not sure if you are 
using publicly held debt or just--we are at--
    Senator Ayotte. Right now we are at over $17 trillion, 
right? So as I look at the President's budget request, based on 
the amount of debt, where we would be in 2024 would be about 
$25 trillion, using that measure of right now what we 
understand, not unfunded liabilities, nothing like that.
    Ms. Burwell. So I think putting aside the question of gross 
or publicly held debt, I think what we believe is the most 
important measure is considering the debt in the context of the 
size of the economy, the debt to GDP. And as you look at the 
numbers in our budget and our policies, what we do is stabilize 
that debt-to-GDP ratio in 2015 and then take it on a declining 
path.
    Senator Ayotte. Well, I understand that measure, and 
certainly we could have a dispute over how we measure that 
total debt, unfunded liabilities. But I am just asking you this 
straightforward question. Even if you think the better measure 
is as compared to GDP, right now we are over $17 trillion in 
debt; by 2024, as I understand it, under this proposal we get 
to $25 trillion. Yes or no?
    Ms. Burwell. Yes, in terms of the measure that you are 
using.
    Senator Ayotte. Right. Well, that is the question that I 
asked with that measure, $25 trillion.
    Ms. Burwell. With that measure.
    Senator Ayotte. Yes. So as I view this budget, this is one 
that continues on the path that is dangerous for our Nation in 
terms of the fiscal challenges that we face as we see mandatory 
spending growing at even higher levels. So I think for us to 
get to $25 trillion in debt is not where this country should 
be, what the Nation should be, and certainly presents 
significant risks for us in terms of the fiscal challenges 
facing the Nation.
    So we can dispute the measure, but I just want people out 
there to understand where we are going. It is not a downward 
trajectory. It is an upward trajectory.
    Ms. Burwell. Actually, I agree that helping folks 
understand the importance of these numbers is quite important. 
And when one thinks about the deficit, which is what 
contributes to the debt, that is on a downward trajectory. It 
has the steepest slope of decline that we have seen on a 
continuous basis since World War II. And as Nation, I think 
what the American people are most interested in is the 
tradeoffs that our fiscal policy is not about a number, it is 
actually about what it means for them in terms of economic 
growth, job creation, and people coming into the middle class. 
And when you have a decline that is the steepest slope that we 
have seen since World War II, I think the real question that we 
should be discussing is: Do you want that slope to be more 
steep? And if you do, what are the costs in terms of the 
deficits that were mentioned by your colleagues in terms of 
infrastructure and other things? And what does it mean for job 
creation and--
    Senator Ayotte. But, Director Burwell, do you dispute that 
the deficit goes up again?
    Ms. Burwell. In our budget window, all of our numbers, the 
debt to GDP and the deficit to GDP, are on a declining path.
    Senator Ayotte. You say declining. So the deficits under 
your proposal are going to continue going down?
    Ms. Burwell. That is--
    Senator Ayotte. In real numbers.
    Ms. Burwell. In terms of the debt to GDP, which over the--
    Senator Ayotte. No, not debt to GDP. In real numbers. In 
other words, I am not asking you debt to GDP. I am asking you 
if I have a $500 billion deficit this year, does it go to a 
$400 billion the next year, then $300 billion, then $200 
billion? As I understand it, it actually increases--that you 
have actually a situation where--you have several years of 
declining deficits, but then you go back to increasing 
deficits.
    Chairman Murray. Senator Ayotte, I am going to let Director 
Burwell answer, and we have votes, and we are going to have to 
adjourn.
    Ms. Burwell. The number stays--in terms of the number that 
we are at the beginning of the window, it is 564. At the end of 
the window it is $434 billion. During that period of time, it 
vacillates around a $503 billion level, but over the period of 
the trajectory, in real numbers, not as a debt to GDP or 
deficit to GDP, it is a decline.
    Senator Ayotte. Is there any point where there is no 
deficit?
    Chairman Murray. Senator Ayotte, we are going to have to 
adjourn here, which we already did 5 minutes ago, but I 
appreciate, Director Burwell, you staying and really appreciate 
your testimony, and with that, we adjourn this Committee.
    Ms. Burwell. Thank you, Madam Chairman.
    Senator Ayotte. Thank you.
    Chairman Murray. Thank you.
    [Whereupon, at 11:54 a.m., the Committee was adjourned.]
    
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     THE PRESIDENT'S FISCAL YEAR 2015 BUDGET AND REVENUE PROPOSALS



                       WEDNESDAY, MARCH 12, 2014

                              United States Senate,
                                   Committee on the Budget,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 10:02 a.m., in 
Room SD-608, Dirksen Senate Office Building, Hon. Patty Murray, 
Chairman of the Committee, presiding.
    Present: Senators Murray, Whitehouse, Kaine, King, 
Sessions, Graham, Portman, and Toomey.
    Staff Present: Evan T. Schatz, Majority Staff Director; and 
Eric M. Ueland, Minority Staff Director.

              OPENING STATEMENT OF CHAIRMAN MURRAY

    Chairman Murray. This hearing will come to order.
    Secretary Lew, glad to have you here today. Thank you for 
all the important work you are doing to boost our economy and 
strengthen our middle class.
    Thank you to my Ranking Member Senator Sessions and all of 
our colleagues who will be joining us today.
    I want to just start by talking a few minutes about where 
we are today in terms of the budget and our economic outlook 
and why I think there should be some opportunities for 
bipartisanship when it comes to creating jobs and encouraging 
growth through our Tax Code.
    We have a 2-year budget agreement in place, and we have 
taken the possibility of another fiscal crisis off the table 
through 2015. This was a very important step forward for 
families and businesses who expect some certainty from 
Washington. D.C.
    But it cannot be the last step we take, because while the 
economy has come a long way since the Great Recession began in 
late 2007, we all know we are still not where we need to be. We 
need to do everything we can to get more people back on the job 
and build a foundation for broad-based economic growth now and 
in the future.
    When it comes to our debt and deficits, we have also made a 
lot of progress over the last few years. Since August of 2010, 
we have put in place $3.3 trillion in deficit reduction. This 
year our deficit will be about a third of what the 
Congressional Budget Office expected it to be just 5 years ago, 
and the long-term outlook has improved somewhat as well.
    But there is much more we will need to do to tackle our 
debt and deficits over the coming decades. As we are looking 
for ways to address each of these challenges--getting more 
Americans back to work and bringing down our debt over the long 
term--we are going to have to take a close look at our Tax Code 
because right now it is getting in the way. It is incentivizing 
activities that do not help growth in the United States, and we 
are missing opportunities to end wasteful spending in our Tax 
Code and bring down our long-term debt.
    Our Tax Code is riddled with wasteful loopholes and special 
interest carveouts. In 2014 alone, tax expenditures, or the 
countless special tax breaks in our code, will cost us $1.4 
trillion. That is more than we are expected to spend on 
Medicare, Medicaid, Social Security, or our national defense 
this year.
    And far too many of these tax breaks are skewed to benefit 
the wealthiest Americans and biggest corporations, who need 
them the least. In other words, we are spending a lot of money 
through the Tax Code on wasteful and inefficient giveaways to 
people and businesses who do not need help, at a time when 
investing in better schools, infrastructure repairs, or medical 
research could strengthen our economy and help a lot of 
families who really do.
    The good news is there are members on both sides of the 
aisle who would like to eliminate wasteful expenditures in our 
Tax Code. House Ways and Means Chairman Dave Camp recently 
released a new House Republican tax reform proposal that would 
get rid of many of them.
    Now, I do have some serious concerns about Chairman Camp's 
plan. It puts every dollar of savings from closing loopholes 
back into lower rates, primarily for corporations and those at 
the top of the income scale, and continues to protect the 
wealthiest Americans and biggest corporations from paying their 
fair share toward reducing our deficit and boosting the 
economy.
    Chairman Camp's plan does nothing to help tackle our long-
term budget challenges and, in fact, depends on gimmicks just 
to stay deficit neutral over the next 10 years and would 
increase deficits in the decades beyond.
    That is truly disappointing because the fact is, when you 
take a serious look at our debt and deficit in the coming 
decades, tax reform that does not help stabilize our debt is 
simply fiscally irresponsible.
    But with that said, I am very pleased there appears to be 
some agreement about getting rid of wasteful, unfair tax 
loopholes. Chairman Camp would close a loophole--sometimes 
called the ``John Edwards'' or ``Newt Gingrich'' loophole--that 
enables some wealthy business owners to get out of contributing 
their fair share to Medicare and Social Security.
    He would eliminate special tax breaks for oil companies and 
bring an end to Wall Street gaming in derivative contracts, 
which cheats taxpayers out of billions of dollars every year.
    And Chairman Camp would close the carried interest loophole 
that allows hedge fund managers to pay lower taxes on their 
income than many middle-class Americans do.
    These are just a few of the unfair special breaks that both 
Democrats and Republicans agree we need to eliminate. In fact, 
every one of these provisions also appears in the President's 
budget.
    As we continue to work towards comprehensive tax reform, 
moving forward on any of them could help us do a lot to tackle 
our long-term debt challenges, and we could put some savings 
towards investments in job creation and economic growth.
    One option I think there is a lot of interest in exploring 
is an expansion of the earned income tax credit, which 
President Obama proposed in his budget. The EITC helps lift 
millions of Americans out of poverty each year by rewarding 
work. But right now, workers who do not have children and 
workers whose children are no longer dependents are being left 
behind.
    The President's proposal could really help them out because 
currently they are eligible for a maximum EITC that is only a 
tiny fraction of the maximum credit available to workers with 
dependent children.
    President Obama's proposal would boost the credit for 
childless workers, further incentivizing work and expanding 
economic opportunity for more Americans who are trying to make 
ends meet.
    To pay for it, President Obama would close a number of 
loopholes Chairman Camp also agrees we should close, like the 
carried interest loophole for hedge fund managers.
    Chairman Camp unfortunately proposed cutting EITC in his 
plan, but many other Republicans and conservative experts agree 
it has been effective.
    One expert from the American Enterprise Institute said 
recently, and I quote, ``Look, I have been doing public policy 
since the 1970s, and this program worked.''
    Chairman Ryan said that the earned income tax credit 
``gives families flexibility'' and ``lets them take ownership 
of their lives.''
    The bottom line is there is bipartisan support for the 
EITC, and there is bipartisan support for closing the kinds of 
loopholes that could help us expand it to more struggling 
workers. So I hope my Republican colleagues will be interested 
in working with us on this because I think it is very critical.
    Another issue I am going to be very focused on in the next 
few months, and I know a lot of our colleagues are as well, is 
making sure the Highway Trust Fund can pay its bills. The fund 
is facing a $60 billion shortfall over the next several years. 
As soon as mid-August, this could stall construction projects 
and put jobs across the country in jeopardy. If it is not 
resolved, it would place an unnecessary drag on our recovery 
this year and would put off much-needed repairs to our roads 
and bridges, costing us a lot more down the line.
    So I was pleased both President Obama and Chairman Camp 
proposed using one-time corporate revenue to help tackle this 
fast-approaching infrastructure deficit.
    In the past, both parties have been able to agree that 
repairing critical infrastructure is a good way to create jobs 
and encourage growth. Helping to create jobs here at home 
rather than letting corporations send them overseas to avoid 
paying taxes makes a lot of sense.
    So between now and August, there is no reason we should not 
be able to work together on closing just a few corporate 
loopholes that both sides agree are unfair, in order to make 
sure planned repairs to our roads and bridges continue, and 
prevent any further hardship for workers in an industry that is 
just now getting back on its feet.
    Now, even though closing wasteful loopholes is something 
many of us agree on, and even though many of us also agree that 
work incentives for struggling Americans and investments in our 
infrastructure make sense, I know moving the ball forward will 
not be easy.
    Everyone here is well aware there are fundamental 
differences between our parties when it comes to making tax 
reforms. But as we saw in December, when both sides join 
together ready to make some tough choices and compromise, we 
really can deliver.
    I think there are important opportunities to build on that 
bipartisan foundation by encouraging growth and job creation 
through our Tax Code. And I hope colleagues on both sides of 
the aisle agree. I am ready to get to work.
    With that, let me turn it over to Senator Sessions for his 
opening remarks.

             OPENING STATEMENT OF SENATOR SESSIONS

    Senator Sessions. Thank you very much, Madam Chairman, and 
thank you, Secretary Lew, for being with us. You are a key 
player in this administration's financial and economic policy.
    Let me give a brief perspective from my view. In 2009, the 
administration wagered America's financial future on the idea 
that a record increase in Government spending, funded by 
borrowing--debt--would revive the economy. Nobel Laureate Gary 
Becker wrote an editorial at that time that said it would not 
work. It was not sufficiently stimulative in the long run, and 
he was correct. It has not worked.
    Growth is critical to America's progress. We all understand 
that. We know that is the big issue. And it is not an academic 
matter. Growth is not. It is real for workers in America. Will 
their wages go up? Will they have a better chance for having a 
job for themselves, their spouse, their children or 
grandchildren, or a lack of jobs because of a lack of growth?
    CBO said that the stimulus bill would have a temporary 
boost, for the economy, but over 10 years we would have less 
growth than if we had had no stimulus bill at all. And that is 
where we are today. The growth is gone, and we are now slipping 
into the drag.
    Since then, our Government debt has increased 64 percent 
and is on track to double by the end of the President's second 
term.
    Now, what are the results? America is in the midst of the 
slowest recovery since the end of World War II. Workforce 
participation has shrunk to a nearly 40-year low. The Labor 
Department reports that most occupations pay less today than 
they did when the President took office. There has been a slide 
for over a decade, really, but it has accelerated in recent 
years.
    Government debt has leaped from roughly $10 trillion to $17 
trillion, yet with investors in the market doing well, median 
income has dropped $2,268 per household over the same time, and 
the decline has accelerated.
    So this is a huge disaster. This is really bad. Working 
Americans are having their wages decline and unemployment 
remain exceedingly high, and two-thirds of the jobs last year 
that were created were part-time.
    The justification for this unprecedented accumulation of 
debt was the claim it would lead to prosperity, and yet we have 
none of the prosperity and all of the debt. The plan has proven 
to be one of the most costly, failed gambits in American 
history. The White House's average growth projections for 
2013--in their through 2009 through 2012 budgets was 3.9%. You 
were participating in that, Mr. Lew. You projected an average 
of 3.9 percent growth, and 2013 came in at 1.9 percent growth, 
a half of that. And that is a huge difference with real impact 
on millions of Americans.
    So what does the President propose now in his new budget? 
Well, the plan increases spending growth again by almost $1 
trillion, over $800 billion, bursting through the Ryan-Murray 
spending caps that he signed into law just 2 months ago. So 
while the military gets hammered, other agency budgets are 
soaring. We are surprised to see these numbers, Mr. Secretary. 
The budget proposes the following increases next year: a 45-
percent increase for the Department of Housing and Urban 
Development; an 18-percent increase for the Legal Services 
Corporation; a 15-percent increase for the Department of 
Energy; a 30-percent increase for the Commodity Futures Trading 
Commission; and a 7-percent increase for the Bureau of Consumer 
Financial Protection.
    So what is your cut in spending? I do not see it, frankly. 
But what we do see is a claim that we need to eliminate 
loopholes and that loopholes are spending. And we can cut 
spending by closing loopholes, and this is through the looking 
glass because closing loopholes, as we all know, is an increase 
in taxes. That is not a cut in spending. That is an increase in 
taxes.
    So the plan raises taxes by more than $1 trillion in 
addition to the $1.7 trillion taxes that have already been 
raised during this administration's term. The new taxes 
include: limit the value of itemized deductions to raise taxes 
by $600 billion; raise the death tax by over $100 billion, 
after we agreed on the death tax numbers not long ago; increase 
taxes on unemployment insurance, $78 billion; increase taxes on 
energy production, $49 billion.
    So the President raises taxes to increase spending. It is a 
tax-and-spend budget. It just is. It is not going to pass. It 
will never pass. So all together the White House budget plan 
would add another, by your own numbers, $8 trillion to the $17 
trillion debt we have today.
    So I think we need to focus on the seriousness of this 
situation, and I believe it is demonstrated most clearly by 
this fact: Last year, we paid our creditors $221 billion in 
interest on our Federal debt. That is a lot of money. The 
Federal highway bill is $40 billion or so. The aid to education 
is a little under $100 billion. We spent $221 billion first, 
the first thing we had to pay last year, in interest on our 
debt, and this is payments outside the Government to people who 
hold our debt, the public debt.
    Under the President's plan, according to his own numbers, 
annual interest payments, though, will quadruple to $812 
billion. Ten years from today, 1 year you calculate in your own 
numbers, Mr. Lew, that we would pay interest of $812 billion. 
CBO said it would be $880 billion in 10 years from today. I 
think their number is closer to correct. And rising interest 
payments represent, arguably, the greatest threat to our 
Nation's financial security.
    Should interest rates increase even slightly over these 
projections, the cost of financing our debt would quickly surge 
to emergency levels. As Director Elmendorf told us, we face the 
risk of a fiscal crisis.
    Clearly we must pursue a new course that creates jobs and 
does not add to the debt. That is what we have got to look to 
consider work on. And there are some ideas that are plainly 
there, and I have said before--I just listed them--that will 
work to create growth without debt. I will not repeat them 
today.
    The Chair mentions the earned income tax credit. I think 
there is some possibility that we could make some progress and 
utilize that more effectively to fight poverty. I think it 
should absolutely be considered, but it cannot be just another 
social assistance program on top of the programs we have today. 
And we will have to ask how we can pay for it. We will have to 
consider carefully the impact that it will have on our budget.
    So I guess I would just conclude to say you increase taxes 
and you increase spending. When you talk about a balanced 
budget, I asked a group of people from my cities today, when we 
had--when you hear the phrase from Washington, ``a balanced 
plan to deal with our Nation's financial situation,'' do you 
think a balanced plan means there will be some raise in taxes 
and some cut in spending? And they said yes. But what we have 
here essentially from your plan is a tax situation where we 
raise taxes and raise spending. That is the wrong direction for 
America at this critical time.
    I look forward to further discussions. Thank you, Madam 
Chair.
    Chairman Murray. Thank you very much.
    Secretary Lew, your testimony.

   STATEMENT OF THE HONORABLE JACOB J. LEW, SECRETARY, U.S. 
                   DEPARTMENT OF THE TREASURY

    Secretary Lew. Thank you, Chairman Murray, Ranking Member 
Sessions, members of the Committee. I appreciate this 
opportunity to testify today on the President's budget.
    Before I begin, if I might, I would like to say a few words 
about Ukraine. Today the President will meet with the Ukrainian 
Prime Minister at the White House, and we are ready to do what 
we can to help Ukraine during this fragile period. Our ultimate 
goal, of course, is to work with all parties to de-escalate the 
situation in Ukraine, and we call on Russia to take the 
necessary actions to resolve this crisis.
    It is in all of our interests to have a stable and 
prosperous Ukraine, and as the Ukrainian Government prepares 
for elections in May, it is critical that the international 
community support the government's efforts to restore economic 
stability.
    We have been working closely with Congress to develop an 
assistance package that will help the Ukrainian Government meet 
some of its most pressing economic needs and lock in the 
fundamental reforms that will provide financial stability and 
put Ukraine on a path to long-term economic growth. This 
package includes a $1 billion loan guarantee, and we are ready 
to work with the Ukrainian Government to adopt the necessary 
reforms in conjunction with that assistance.
    Our loan guarantee will supplement the core financial 
backstop from the IMF, and we are already engaging with our 
colleagues at the State Department and USAID to lay the 
groundwork.
    As important as our assistance is, the IMF is the world's 
first responder in a crisis of this kind. That is why we are 
encouraged by the work in the Senate to approve the 2010 IMF 
quota reforms so that the IMF can provide the necessary 
resources to Ukraine and the United States can maintain its 
leadership within the Fund.
    While the United States will not increase our total 
financial commitment to the IMF by approving the 2010 reforms, 
it is important to note that for every dollar of support the 
United States provides to the IMF, other member countries 
provide $4 more. At a time when the United States is at the 
forefront of international calls for urging the Fund to play a 
central and active first responder role in Ukraine, it is 
imperative that we secure passage of IMF legislation now so the 
IMF can provide the most effective assistance to Ukraine in its 
vulnerable moment and we can preserve our influential voice in 
this indispensable institution.
    I want to be clear that even as we deal with the unfolding 
events in Ukraine, we continue to focus on our central 
objective: expanding opportunity for all Americans. Over the 
past 5 years, we have accomplished a number of important things 
to make our country stronger and better positioned for the 
future. In fact, since 2009, the economy has steadily expanded. 
Our businesses have added 8.7 million jobs over the last 48 
months. The housing market has improved, and rising housing 
prices are pulling millions of homeowners out from under water.
    At the same time, household and business balance sheets 
continue to heal, exports are growing, and manufacturing is 
making solid gains. The truth is, as the President said in his 
State of the Union, we are more ready to meet the demands of 
the 21st century than any other country on Earth.
    Nevertheless, our economy was thrown against the ropes by 
the worst recession in our lifetimes, and while we are back on 
our feet, we are not yet where we want to be. Everyone here 
understands that. The question is: What are we going to do 
about it?
    The President's budget lays out a clear path to move us in 
the right direction. It not only fulfills the President's 
pledge to make this a year of action, it offers a framework for 
long-term prosperity and competitiveness. This budget addresses 
the critical issues we face as a Nation. It recognizes that 
while corporate profits have been hitting all-time high, 
middle-class wages have hit a plateau, with long-term 
unemployment an ongoing challenge.
    It recognizes that while the stock market has been vibrant, 
saving for retirement and paying for college is little more 
than a dream for millions of families. It recognizes that while 
our national security threats are shifting and we are bringing 
the war in Afghanistan to a responsible end, soldiers, military 
families, and veterans are struggling to success in our 
economy. And it recognizes that while work is being done to put 
the final pieces of financial reform in place, reforms like the 
Volcker rule have made our financial system strong and an 
engine for economic growth once again.
    The solutions in this budget flow from a frank assessment 
of the challenges. They are carefully designed to show the 
choices we can make to increase opportunity and bolster the 
middle class. For instance, a cornerstone of these proposals is 
to expand the earned income tax credit so it reaches more 
childless workers. We know this credit is one of the most 
effective tools for fighting poverty, and it is time to adjust 
it so it does an even better job of rewarding hard work. This 
tax cut, which would go to more than 13 million Americans, will 
be fully offset by ending tax loopholes that let high-income 
professionals avoid the income and payroll taxes other workers 
pay.
    Another initiative that will make a difference for 
hardworking men and women is myRA. This retirement security 
program will be available later this year, and it will allow 
Americans to start building a nest egg that is simple, safe, 
and can never go down in value.
    While this budget puts forward essential pro-growth 
initiatives, it also calls on Congress to reinforce our growth-
enhancing strategies by passing measures like comprehensive 
immigration reform and trade promotion authority.
    But even as it does those things, make no mistake. This 
budget is also serious about building on the success we have 
made together to restore fiscal responsibility.
    The fact of the matter is the deficit as a share of GDP has 
fallen by more than half since the President took office, 
marking the most rapid decline in the deficit since the period 
of demobilization following the end of World War II. The 
deficit is projected to narrow even more this year, and today 
we are charting a course that will push the deficit down to 
below 2 percent of GDP by 2024 and rein in the national debt 
relative to the size of the economy over 10 years.
    Last year, the President put forward his last offer to 
Speaker Boehner in his budget as part of a balanced compromise. 
This year's budget reflects the President's vision of the best 
path forward. While the President stands by his last offer, he 
believes that the measures in his budget are the best ways to 
strengthen the economy now.
    As this budget demonstrates, the President is firmly 
committed to making tough choices to tackle our fiscal 
challenges, and our fair and balanced solutions represent a 
comprehensive approach to strengthening our Nation's financial 
footing. This approach shrinks the deficit and debt by making 
detailed, responsible changes to Medicare, while eliminating 
wasteful corporate tax loopholes and subsidies that do not help 
our economy and scrapping tax breaks for those who do not need 
them.
    Increasing basic fairness in our Tax Code is not just about 
improving our Nation's fiscal health, though. It is about 
generating room so we can make investments that will strengthen 
the foundation of our economy for years to come. That means 
helping to create more jobs by repairing our infrastructure, 
increasing manufacturing, boosting research and technology, and 
fostering domestic energy production. It means training 
Americans so they can get those jobs by promoting 
apprenticeships and upgrading worker training programs. It 
means improving our education system by expanding access to 
preschool and modernizing high schools. And it means making 
sure that hard work pays off by creating more Promise Zones, 
increasing college affordability, and raising the minimum wage 
to $10.10 an hour and indexing it to inflation.
    In closing, let me point out this budget represents a 
powerful jobs, growth, and opportunity plan. It is carefully 
designed to make our economy stronger while keeping our fiscal 
house in order. What is more, it offers Washington a real 
chance to work together.
    As everyone on this Committee knows, for far too long, 
brinksmanship in Washington has been a drag on economic growth. 
But thanks in large part to the work that you, Madam Chairman, 
have done, we have seen significant progress in making 
bipartisan progress in recent months, and that has helped to 
improve economic momentum.
    Some cynics say it is fleeting. Some call it ``election 
year posturing.'' But I do not agree. I believe this progress 
is real. I believe we can keep finding common ground to make a 
difference. And I believe we can continue to get serious things 
done on behalf of the American people by working together.
    I thank you and look forward to answering your questions.
    [The prepared statement of Secretary Lew follows:] 
   
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman Murray. Thank you very much, Mr. Secretary.
    Let me start with the fact that about 2 years ago the White 
House released a Framework for Business Tax Reform that lowered 
the top corporate rate to 28 percent on a revenue-neutral 
basis. That framework was updated last year, I think in a good 
way, to devote one-time revenues towards job-creating 
investments in our infrastructure.
    I support asking some of the biggest beneficiaries of our 
infrastructure system to contribute to rebuilding that system 
in ways that will improve the productivity of business, both 
large and small, and relieve congestion for our workers. And I 
should add this is a fiscally responsible approach to corporate 
reform. We should not devote temporary revenues to permanent 
tax rate reductions.
    The President's budget adopts this model. It devotes $150 
billion in corporate revenue to the next surface transportation 
reauthorization and ensures the near-term solvency of our 
Highway Trust Fund that I mentioned in my opening remarks, a 
$60 billion shortfall. I wanted to ask you this morning if you 
can elaborate on the administration's--why they feel this is a 
strong approach and what your objectives area.
    Secretary Lew. Senator Murray, I would love to. The 
President gave a speech in July where he laid the idea out, and 
the budget obviously carries that forward. And the idea is a 
simple one.
    There is a convergence of thinking on business tax reform, 
and the outline that Congressman Camp put out, the 
administration's white paper, ideas that have been circulating 
in the Senate, they are not identical. But they are all moving 
in a similar direction.
    And the proposition is a simple one. It says let us work on 
business tax reform and let us use the one-time revenues that 
come in in the initial 5, 10 years, and you really can only do 
two things with that if you are going to have a revenue-neutral 
bill: you either can reduce the deficit, or you can use it for 
one-time investments.
    And we say put $150 billion into one-time investments, 
particularly in infrastructure, to get a jump-start on meeting 
the needs we have as a country to have a strong economic 
foundation for the future.
    We actually think that there is a potential to work 
together here, and I say business tax reform because it is not 
just corporations. We have things in our white paper that 
actually would help businesses, whichever side of the Tax Code 
they are on. So it would give small business of any type the 
ability to deduct $1 million of expenditures in the first year 
that they make the expenditures, which is a huge benefit to 
small businesses as well as corporations.
    So I hope that there is the basis for a conversation to go 
forward. It would make our country more competitive to have a 
lower statutory rate and fewer loopholes, and building our 
infrastructure--when I talk to CEOs around this country, the 
two things that they say we need to do is we need to make sure 
our infrastructure works and we train our young people to have 
the skills that they need. Those are the two things that they 
ask about.
    Chairman Murray. I agree, and I do think there is room for 
us to start looking at how we can come together on that really 
critical issue. So I appreciate your addressing it.
    Also, you mentioned in your opening remarks at the top the 
situation that is unfolding in Ukraine, which we all know is 
nothing short of a tragedy. Like everyone, my heart really goes 
out to those that continue to fight for a democratic Ukraine 
and for those who hope to see Crimea free from Russian forces.
    The House, as you know, passed legislation providing $1 
billion in loan guarantees last week to help stabilize the 
economy in Ukraine. I know that there are a number of our 
colleagues here in the Senate who are working on a larger 
package of reforms as well to respond to that, including 
legislation that would increase the amount of resources 
available to the International Monetary Fund. You mentioned 
this in your opening remarks as well.
    But I wanted to ask you this morning while you are here if 
you can tell us why it is important for Congress to act quickly 
to pass comprehensive legislation that includes both financial 
assistance to the nation of Ukraine and language fulfilling the 
United States' commitment to increase the resources available 
to IMF.
    Secretary Lew. Senator, I think if you look at what Ukraine 
needs, they need many things. They need to have a foundation to 
rebuild their economy. It is going to have to come from the 
IMF. It is going to be a package that could be as large as $15-
plus billion. There is no one country, certainly not the United 
States, that could provide that level of support. That is why 
the IMF is so important. It is the first responder. It is the 
foundation. We as the leading voice, the only one with a veto 
power in the IMF, have an ability to help drive the IMF to do 
what it needs to do in situations like this. Approving the 
reforms strengths our voice. Not approving them weakens our 
voice.
    We are already hearing calls by some to say if the United 
States does not approve its reforms, we should maybe move on 
without them. That is not a good place for the United States to 
be.
    Specifically with regard to the Ukraine, Ukraine increases 
the amount that it can draw from the IMF in terms of flexible 
funds, from $1 billion to $1.6 billion when the reforms were 
approved. So it is, in general, important for us to be able to 
have the powerful voice that we have in the IMF, and it is 
specifically important to Ukraine in terms of how much they 
have access to.
    Chairman Murray. Okay. Thank you very much. I think that is 
extremely important for us to understand here, so I appreciate 
it.
    Senator Sessions?
    Senator Sessions. Director Lew, with regard to Ukraine, I 
do believe that we need to assist, and I would look forward to 
working with you and the administration to achieve the kind of 
loan guarantee that has been discussed. It needs to be paid 
for, and it cannot be paid for by borrowing more or taxing 
more, in my view. There are plenty of monies that we can find 
for it.
    Secondly, I think the plan, if it is tied to IMF reform, 
will create a lot of complications. I think you would be better 
off at this point not asking for that, because that has been on 
the agenda for a number of years. The administration has pushed 
for it, and it has not happened, and I think it could 
jeopardize this agreement.
    Director Lew, last week Budget Director--Secretary Lew, 
former Director Lew.
    Secretary Lew. I am proud of having been OMB Director, so I 
do not consider it--
    Senator Sessions. It is the most August position maybe in 
the Government. She was here and she acknowledged really that 
the President's budget does change the Ryan-Murray law that he 
signed recently, and it would even within this year spend--even 
next year's budget of 2015, would spend $56 billion more than 
was agreed to under that law. Is that your understanding?
    Secretary Lew. Senator, if I may just respond on the IMF, 
we think that without the IMF being the foundation, we will not 
be able to provide the level of support we need for Ukraine. So 
we view them as integrally connected, and we look forward to 
having conversations--
    Senator Sessions. Well, there is some uncertainty from my 
perspective, and we will be glad to look at it.
    Secretary Lew. Yes, and appreciate the importance of paying 
for it and are working to do that.
    Chairman Murray. Before you respond, Senator Sessions, the 
votes have been called. There is a series of them. I am going 
to go vote right now. When you are done with your questions, I 
am going to turn to Senator King. I will try and be back as 
quickly as I can. We will just have to rotate. But if you want 
to continue. Thank you.
    Senator Sessions. [Presiding.] Thank you. It is 
unfortunate. I wish we could have started a little earlier. 
Maybe we could have had less interruptions.
    Secretary Lew. With regard to your question, you asked 
about the investments in our budget. We very much appreciate 
the importance of the budget agreement reached. We supported 
it. We built a budget that was based on it. And we said, as we 
have said before, that it is important to--as was outlined in 
the Budget Control Act--look for alternatives to the across-
the-board cuts and the level of discretionary cuts that came 
out of that by putting other policies on the table so that we 
could still invest in the things we need for our country.
    So we have a budget that has an investment fund that is 
paid for. We may not agree on how to pay for it, and obviously 
if we cannot agree on it, then the caps cannot be raised.
    Senator Sessions. Well--thank you.
    Secretary Lew. But we think it is consistent.
    Senator Sessions. Well, I am not going to repeatedly argue 
with you about this, as I felt I needed to do with Director 
Burwell. It is not a question of being paid for. We agreed how 
much money we would spend next year, 2015. That was the 
agreement. And you want to spend more than that. If you want to 
raise taxes, then we ought to stay at that spending level and 
use the taxes to pay down the debt, reduce the deficit. That is 
the difference we have. And, fundamentally, we have a big 
question here, and you know it. I think the American people 
need to understand it more clearly. What do you do about our 
financial condition? What do we do about the budget? What is 
the way to have prosperity? Is it to raise taxes, to increase 
all these agencies' and departments' spending? Is it to extract 
more money from the private sector? Has that worked? Has it 
made life better for working Americans? I say not.
    So this is--we have an honest disagreement. I am concerned 
about working Americans. I do not think they are doing well. I 
do not think the plan has worked. I did not believe it would 
from the beginning. Dr. Becker said it would not. I think he 
has been proven correct.
    And one of the things that is really worrying me, having 
talked to the former Prime Minister of Canada, who produced 
five consecutive balanced budgets after being in a critical 
financial state, he said you have to focus on interest 
payments. That is the danger to the economy. That is what they 
did in Canada. They talked about it.
    Isn't it true that our interest payment last year was $221 
billion and, according to your estimates, it would move $812 
billion in one year 10 years from today?
    Secretary Lew. Senator, I do not disagree that we were on a 
better path when we were paying down the debt in the 1990s. It 
is a long time since then. We had decisions made that built up 
the deficit: a tax cut that was not paid for, wars that were 
not paid for, we had the worst financial crisis since the Great 
Depression. And we are now on a path towards digging our way 
out. We have cut the deficit in half. We are on a path to 
bringing the deficit to less than 2 percent of GDP. And we look 
forward to working together to make more progress, but we have 
to simultaneously invest in making sure we have the foundation 
for economic growth in the future.
    Senator Sessions. Well, you have to watch it. What the 
Prime Minister of Canada, the Liberal Party Prime Minister, 
told us, told me yesterday was they cut spending and people--
and a lot of spending, and they worked their way through it. 
And the people of Canada felt good when they saw the deficits 
falling rapidly and felt really good when they had a surplus. 
You have not led; the President has not led. All we have heard 
is we want to invest more at a time when deficits are huge and 
the interest rate is a stunning challenge for us.
    The cost of the legislative branch, all of Congress, is $5 
billion. From 2016, interest on the debt is one year will 
increase $66 billion. The judicial branch, including--and 
Department of Justice and the prisons is $38 billion. Interest 
rate would increase in one year $66 billion. The Department of 
Homeland Security budget is $49 billion. Interest would 
increase $66 billion just 3 years from now. It will average 
over $60 billion increases in interest payments per year. If 
interest were to surge higher than--not just returning to the 
mean, but went above the mean, wouldn't that place us in fiscal 
danger? And shouldn't we take action, like Canada did, now 
before it is too late?
    Secretary Lew. Senator, I think the interest rate 
assumptions in the budget are prudent assumptions. They build 
in a path that has interest rates returning to normal levels in 
the period--
    Senator Sessions. Well, that is what we hope, and CBO is 
close to the same numbers you are using. But we do not know. 
You predicted last year we would have almost twice the economic 
growth that we had. That was a huge miss. What if you miss on 
interest rates?
    Secretary Lew. We could be over on some things and under on 
other things. There are a lot of moving pieces in economic 
projections. Obviously we try to get it right on everything, 
but I think that it is a prudent set of economic assumptions. 
It is a proper foundation for building a budget, and we revisit 
it every year, as every administration does.
    Senator Sessions. Well, I think we are in the red zone, we 
are in the danger zone. We need to get out of it. If we have an 
international crisis of some kind that we do not predict or 
other things might happen we cannot foresee at this point, this 
Nation could find itself at great risk. And I believe you are 
pushing the envelope far too far.
    I believe the Senator from Maine would be next.
    Senator King. Thank you, Senator Sessions.
    I want to follow up and echo Senator Sessions' concerns. I 
think interest rates are a ticking time bomb, and if they 
return to 5 or 6 percent, which is where they were at the year 
2000, we would be paying over $1 trillion a year in interest, 
and it would squeeze out everything. No matter what our 
priorities are around this table, it would squeeze them out, 
whether it is Pell grants, student loans, national parks, 
defense, air defense, whatever. And I believe we have to have a 
plan to start not to reduce the deficit, because you are 
reducing the deficit, you are still adding to the debt. And we 
need to think about reducing the debt itself, and certainly 
reducing the deficit.
    So I believe that when we talk about tax reform and tax 
expenditures and reducing tax expenditures, we need to talk 
about interest rates, because $1 trillion a year of interest 
would just squeeze out everything else. So I think this is not 
something we can whistle by.
    First, I want to thank you, Mr. Secretary, for the work 
that I know you have done on the Affordable Care Act 
regulations. I hope you will keep at that, keep after that, 
make them as simple, clean, streamlined, unburdensome as 
possible. I think it is very important for American business 
and for the success of the Affordable Care Act. I know you have 
been working hard on that, and I just want to say I appreciate 
that.
    One of the issues is, the long-term large issue is: What is 
the right percentage of GDP for revenues? And it is argued that 
it should be the historic level of 17.5 to 18 percent. I would 
like to ask you--and you can take this for the record--to 
provide us with some data on the cost of the demographics in 
terms of GDP. In other words, it seems to me that saying it 
should be at the 40-year average does not make sense because of 
the demographic baby-boom retirement phenomenon that we have 
headed toward us. And is that 1 percent, 2 percent, 2.5 
percent? That, it seems to me, gives us a better database to 
decide what the right percentage of GDP is for taxation. Is 
that something you could talk about?
    Secretary Lew. Senator, I am happy to talk about it and 
happy to provide more in response for you after.
    I think that, you know, there is no secret that with the 
baby boom approaching retirement, the demographics are 
changing, and the number of people eligible for Social Security 
and Medicare are growing. I mean, that was predictable 60 years 
ago, just as it is predictable today. We were building up 
reserves to pay for it. That was one of the notions of the 1983 
Social Security reforms. As we ran a surplus in the 1990s, we 
were reloading the fiscal cannon to improve our fiscal health.
    A lot of things happened between 2001 and now that caused 
the deficit to grow. So I think we have to separate what is our 
fiscal condition because of non-demographic factors and then 
what is the proper way to plan.
    I think that, you know, there is no doubt that between 2001 
and 2008 there were a lot of policy decisions that were made to 
take the surplus and reduce it. There were tax cuts enacted 
that were not paid for. We for the first time I think in our 
history fought two wars and did not pay for them in real time.
    Senator King. I do not disagree. We can--absolutely, there 
is plenty of fault to go around.
    Secretary Lew. I actually was not doing it to ascribe 
fault. That is why we are now dealing with the demographic 
issue on top of the fiscal issue. I am just trying to separate 
them.
    And we have funded the Social Security Trust Fund to deal 
with the retirement of the baby boom over the next several 
decades, and I think the problem is largely on the other side 
of the budget, that we have not run our fiscal policy so that 
we can keep those commitments. And I think it is a mistake to 
look just at the demographics, and we have to ask: What do we 
do to have a balanced approach to putting our fiscal house in 
order? And as part of that, we for a long time said balanced 
entitlement reform and tax reform have to go together, but they 
both have to contribute to deficit reduction. And that is kind 
of where they start to come together.
    We have in this budget $400 billion of savings in Medicare. 
That is actually more savings than the 10-year window that the 
Bowles-Simpson Commission had in the same time frame. So it is 
not actually--we have not at all ignored the issue. There is 
still more that would require a different political context to 
deal with it. There has to be a willingness to move on multiple 
fronts in a balanced and fair way.
    Senator King. I agree. Changing the subject, we managed to 
raise the debt ceiling this year with a minimum of drama, but 
there has been--it has been rather dramatic in the past. I 
understand some years ago there was something applicable called 
the ``Gephardt rule'' that said when you increase spending, you 
automatically increase the debt ceiling. I think that makes a 
lot of sense. To me, it is too easy for us sitting around here 
to vote for spending and then later vote against the debt 
ceiling when the debt ceiling increase is implicit in the 
spending we just voted for.
    What would you think about trying to reimpose something 
like the Gephardt rule so a budget resolution contained within 
it a debt ceiling?
    Secretary Lew. Senator, I could not agree more that 
bringing together the decisions on fiscal policy, what we tax, 
what we spend, and how many commitments we make ought to be 
more integrally connected to our borrowing authority, because 
once we have made the commitments, it is really more of a 
ministerial act to raise the debt limit. We cannot not pay our 
bills.
    You know, in full disclosure, I worked for the Speaker of 
the House when the Gephardt rule was put into place. I thought 
it was a good thing at the time because it made it less of a 
political hurdle and tied substantively the issues together 
where they belonged.
    There are a lot of ways to make it easier to do the debt 
limit. We are one of very few countries that separates the 
policy decisions of how much to spend from the borrowing 
authority issue. And I think the closer together they are, the 
better. And I would be happy to work with you and others on 
exploring ideas.
    Senator King. I am working on a legislative version of the 
Gephardt rule and would be delighted to consult to have your 
expertise and what I now know is your historic knowledge. Thank 
you, Mr. Secretary.
    Thank you, Madam Chairman.
    Chairman Murray. [Presiding.] All right. Thank you very 
much.
    Secretary Lew, we have a number of Senators who are 
returning to ask questions, and I will go ahead and ask a few 
while they do.
    Secretary Lew. Sure.
    Chairman Murray. And then I will yield to them as soon as 
one of them returns.
    As you know, the earned income tax credit is really 
critical to providing economic opportunity for our low-income 
working families. As I said earlier, it lifts millions of 
families and children out of poverty every year by rewarding 
work. You have to earn wages to get the benefit of the EITC. 
That I think is something that appeals to both Democrats and 
Republicans.
    The benefits to society are intergenerational. Studies have 
shown that kids in families who get the EITC go on to have 
higher educational outcomes, work more hours, earn more income.
    But as effective as it is at encouraging work and reducing 
poverty and improving outcomes for kids, the credit is leaving 
low-income workers without dependent children behind, and I 
wanted you to comment on this idea that we have been talking 
about in terms of the EITC leaving behind a critical segment of 
our economy.
    Secretary Lew. Yes, Senator, our budget proposes to fix 
that by making single childless workers eligible and increasing 
the amount for which they would be eligible. I think it is 
extremely important. You know, we are talking about low-income 
working people who are struggling to get started, who where the 
incentive to work should be strong, where early attachment to 
the workforce in some cases can be part of a career-shaping 
life experience.
    You look at the history of the earned income tax credit, it 
has been a history of bipartisanship. It was started in the 
Nixon-Ford years, and in almost every administration, 
Republican or Democrat, it has been expanded because there has 
been a consensus that encouraging work, making work pay, is 
something we actually all can agree on.
    I hope that the proposal that we put forward is the basis 
for that kind of a conversation and that, you know, young 
workers, single workers who are low-income workers, are able to 
get the benefit of the earned income tax credit and the 
incentive to be part of the workforce and stay in the 
workforce.
    Chairman Murray. Good. Well, I look forward to having that 
conversation with you and with everyone as we move forward.
    Senator Whitehouse?
    Senator Whitehouse. Thank you, Chairman. Welcome, Mr. 
Secretary.
    I do this virtually every time, but I really have to point 
out yet again that our friends on the other side talk a good 
game on the deficit, but whenever it is crunch time, they will 
stick up for the carried interest exemption for billionaires 
instead of deficit reduction; they will stick up for corporate 
offshoring of revenues and hiding from the tax guy offshore 
instead of dealing with the deficit; they will protect oil 
subsidies rather than deal with the deficit. So don't just look 
at their words when you hear this. Look at their actions, 
because over and over again they have showed that the special 
interest loopholes are preferred to dealing with the deficit. 
And, indeed, you heard the Ranking Member say today that 
closing loopholes is just a way of increasing taxes, and I 
guess they want to continue to defend this stuff. I do not see 
how that is defensible, and we are going to continue to have 
that conversation.
    Your testimony says that the administration's position is 
that tax reform should raise revenue, and yet you recommend 
corporation tax reform that is revenue neutral. Could you 
explain why you are not doing what you say you should with 
corporate tax reform?
    Secretary Lew. Well, Senator, we have said overall 
comprehensive tax reform should be part of the solution. On the 
business side, we are very concerned that the high statutory 
tax rate in the United States is a real problem in terms of our 
competitiveness, in terms of our ability to retain and attract 
corporate headquarters and job creators in the United States. 
And we think the way to resolve that is to eliminate loopholes 
in the business Tax Code and to lower the statutory rate.
    There has been a lot of debate about how low the statutory 
rate can be. We have not been able to come up with a plan that 
would get it below 28 percent without using the revenue from 
closing loopholes to lower the statutory rate. So it was really 
a pragmatic conclusion that we believe the statutory rate needs 
to come down and we need to pay for that. And on the individual 
side is where most of the revenue is. It is where the loopholes 
that are available for mostly very high income taxpayers are 
most profound. And in the process of comprehensive tax reform, 
we believe that it has to be part of an overall fiscal plan, 
which is why we think you can separate business tax reform and 
do it on its own.
    Senator Whitehouse. I know you are not there and I do not 
want to put you in the position of saying that you are there or 
are going to be there, but for the record, a carbon fee at the 
level of the previous social cost of carbon, if applied to 
corporate tax rates, could reduce it, I believe, all the way to 
25 percent before you even get into loophole closing and, in 
addition, would rev up the green energy economy, which creates 
more jobs right now than oil and gas do anyway and would help 
us reduce the really terrible long-term liabilities associated 
with adapting to and mitigating the changes that climate change 
is going to cause us.
    Is there a place where the United States Government tries 
to look forward to those liabilities and put them on the books 
someplace, the cost of coastal damage, the cost of--
    Secretary Lew. It is actually an interesting question that 
you ask. In the context of our budget this year, we tried to 
look at how do you deal with the questions of resilience and 
building a capability to respond to the increasingly frequent 
kind of natural disasters that result from climate change. I 
think that is a conversation we need to have, and figuring out 
a way to pay for it is very important. The President suggested 
that we need to think about that.
    I think that we are all in the relatively early stages of 
thinking that through, and it is something that we--
    Senator Whitehouse. Well, my time is running out, so let me 
just make one last point, which is that I would--I continue to 
urge the administration on health care to set a target for 
delivery system savings. You know that health care expense is 
probably the number one part of our budget problem. Health care 
expense is largely the result of health care cost. Health care 
cost in America is unjustifiably and uniquely high compared to 
the rest of the world. And there is a lot of effort that is 
being put into reducing that cost, and people are being given a 
direction by the administration, which is to bend the health 
care cost curve. But that is only a direction. That is not a 
goal. And being told which way to go versus how far to go are 
two very different things. And I think that the failure to 
produce an articulable goal for health care savings from 
delivery system reform is a really serious failing, and I urge 
you to keep looking at that.
    Secretary Lew. Senator, we have over the years discussed 
this, and I compliment the work you have done in this area. I 
think that what we have done is we have made policy changes in 
the Affordable Care Act in particular that are having a real 
impact on bending the cost curve. We are seeing the slowest 
increase in health care costs in a long time.
    I do not disagree with you that we need to get more 
progress in--
    Senator Whitehouse. I am over my time, so I do not want to 
get into a debate, but the good things that you have done make 
it all the more frustrating that there is still this gap.
    Chairman Murray. Senator Toomey.
    Senator Toomey. Thank you, Madam Chairman, and thank you, 
Mr. Secretary, for joining us.
    I wanted to follow up on a concern raised by Senator 
Sessions about the IMF reforms. I understand the administration 
wants to get this done. I share his view. Frankly, I would like 
us to move forward on a well-crafted package of aid for 
Ukraine. I think that makes a lot of sense. I am concerned that 
this unnecessarily complicates it, so I want to make sure that 
I am clear about this.
    It is my understanding that the reforms are not actually 
necessary for the IMF to proceed with the $15 billion loan 
package that is under consideration. And while that amount is 
far in excess of the normal limit that would apply for 
Ukraine's quota, the IMF has a framework in place for those 
kinds of circumstances, the Exceptional Access Framework. It 
has been used in the past. It could be used again.
    So am I correct in understanding that it is not actually 
essential to complete that $15 billion package to have the 
reforms adopted by the United States?
    Secretary Lew. Senator, there is a distinction between the 
flexible window, which would go from $1 billion to $1.6 
billion, and the extraordinary package. And the extraordinary 
package is not governed by quota share.
    What is very much the case is that our voice in the IMF is 
affected by whether or not we approve quota reform, and our 
ability to drive that package in the direction that we think it 
needs to go is diminished if we do not act on it.
    Senator Toomey. Okay. Fair point.
    Secretary Lew. And one point I should make is in terms of 
the complication, we are working very closely with the 
Government of Ukraine. I have talked to the Prime Minister a 
number of times. I will be meeting with him today and tomorrow. 
Ukraine has sufficient cash for the immediate future. Their 
need is not today or tomorrow. It is in Ukraine's interest that 
we get this right. And if we do the three-part package that is 
being developed in the Senate Foreign Relations Committee, that 
will be the best way to help Ukraine.
    Senator Toomey. Okay. And I just--you confirmed--you would 
like to have it. I understand that. And you believe it enhances 
our ability to influence the composition of the package. I get 
that. But it is not actually--
    Secretary Lew. Yes, Senator, I have conversations with my 
counterparts every day, Foreign Ministers from other countries.
    Senator Toomey. Right.
    Secretary Lew. I am in one part of the conversation urging 
them to do what we want, and in the other part of the 
conversation answering when are you finally going to do the 
quota reforms. We need to not be on the defense. We need to be 
the strongest country in the world.
    Senator Toomey. Well, the other thing that is just a little 
peculiar about the reforms is, it seems to me, an unfortunate 
timing in some respects since this is in response to the 
outrageous behavior of the Russian Government to some degree, 
and yet the reforms actually diminish American voting power and 
increase Russia's voting power. So it sort of looks like it 
sends a bit of a mixed signal.
    But I wanted to raise another issue, and that is the 
Government's role with Fannie and Freddie. As you know, when 
the Government stepped in and bailed out Fannie and Freddie, 
the Government signed a very specific agreement with the Board 
of Directors, which they entered into voluntarily. It involves 
the Government providing guarantees and a line of credit and a 
very specific return, that the Government would get a 10-
percent return on money extended and options to purchase 79.9 
percent of the equity.
    In August of 2012, just as it was becoming apparent that 
Fannie and Freddie were going to return to significant 
profitability, the Government came along and negotiated a new 
deal with itself. With the Treasury Secretary on one side and a 
Government-appointed regulator on the other side, they wrote a 
new agreement whereby the Government now gets 100 percent of 
the profits when the previous agreement stipulated that they 
would have ownership of just under 80 percent.
    Isn't this a serious breach of the sanctity of contracts? 
And doesn't this undermine our commitment to the rule of law to 
have done this?
    Secretary Lew. Senator, you know, we have had a very clear 
policy on Fannie and Freddie, which is that we are winding them 
down, and that is why it is so important that we are making 
progress in a bipartisan basis to work on housing finance 
reform. I think that when you look at the agreements that were 
made for the Federal Government to step in and become a 
conservator and the subsequent agreements that were made, it 
serves the public interest, and the sooner we get on with the 
debate of housing finance reform, the better.
    We have sent clear signals of what our policy intent was so 
no one was not warned of what the goal was. And, you know, I 
think the damage done to our economy because of the failures of 
Fannie and Freddie were deep, and I think that the policies in 
place are right.
    If I could just respond, though, on the point you made 
about Russia, just a technical matter--
    Senator Toomey. I would like a quick follow-up on the 
Fannie and Freddie question, but go ahead.
    Secretary Lew. As just a factual matter, Russia's share 
goes up a trivial 0.2 percent, from 2.4 to 2.6. The important 
thing about the 2010 agreement is the United States maintains 
its veto authority and the reallocation of shares did not 
reduce the U.S. influence on the IMF, which is why it is so 
important that we get it done.
    Senator Toomey. Well, I am happy to have that conversation. 
I just think it would be better to do it on a different 
vehicle.
    And just a final word on Fannie and Freddie. Whatever 
policies have been signaled--and I am one that believes we 
absolutely cannot go back to the status quo ante. I think that 
was a very bad model that we had. I criticized it in the past. 
I certainly do not want to return to that. And, by the way, I 
will be the first to acknowledge that the taxpayers have not 
yet gotten the return on the money that they have extended. 
They have back an amount about equal to the principal amount, 
no return, no interest, none of the 10 percent. So--
    Secretary Lew. Nothing close to the damage to the economy.
    Senator Toomey. By no means has that occurred. But whatever 
signals you have sent about policy cannot be more important 
than a contract that has been signed. And when the American 
people--and that includes savers, investors, pension funds, 
community banks--all across the country cannot have confidence 
in a contract that they have with the United States Government, 
I think that has a chilling effect on our economy as well, and 
our ability to attract the private capital to reform Fannie and 
Freddie. So I am very concerned about that.
    Thank you, Madam Chairman, for the indulgence.
    Chairman Murray. Thank you very much.
    As I said, we have a series of votes, so people are racing 
to the floor and back. I know we have several people who want 
to return. The second vote has just been called. I am going to 
go ahead and put us into recess.
    Secretary Lew. Sure.
    Chairman Murray. So we will hold temporarily until we get 
someone back here. I know Senator Portman wanted to return. We 
will make an assessment of how many people--
    Secretary Lew. Senator, since once of those votes is to 
confirm my Deputy, I encourage the votes to go on.
    [Laughter.]
    Chairman Murray. Okay. We will work on that.
    Secretary Lew. Thank you.
    Chairman Murray. So a temporary recess, and we will return.
    [Recess.]
    Chairman Murray. We will bring this hearing back into 
session. We have one final questioner for Secretary Lew. 
Senator Graham?
    Senator Graham. I am last and least, so I appreciate it.
    IMF--you are making an argument to the Congress that the 
reform package, the expansion of contribution, could really 
help our economic and national security interest. Is that the 
message you are delivering to us?
    Secretary Lew. Yes, it is.
    Senator Graham. In terms of the Ukraine, it could have an 
exponential effect in terms of providing economic support to 
the Ukrainian people at the time they need it the most. Right?
    Secretary Lew. Absolutely.
    Senator Graham. For a relatively small cost to the American 
taxpayer.
    Secretary Lew. It is truly a technical cost.
    Senator Graham. It is not even a rounding error. So to 
those of us who believe the world is rapidly changing and we 
need to be influential, being a member of the IMF--and Ms. 
Lagarde is doing a terrific job, I think. Would you share that 
view of her?
    Secretary Lew. Yes, I do.
    Senator Graham. It is a reformed organization, so the 
Congress has an opportunity here to increase the effect of an 
international organization to provide economic stability in 
troubled regions, and that is what you are urging us to do, is 
to seize the moment.
    Secretary Lew. Indeed it is.
    Senator Graham. Okay. Thank you.
    Now, as to our overall problems as a Nation, am I correct 
that by year 10 of sequestration, if nothing changes, we will 
be spending 2.3 percent of our GDP on defense?
    Secretary Lew. I would have to look up the number. It 
sounds right.
    Senator Graham. Okay. Let me know if I am wrong. 
Sequestration, I think you have said in the past, was a very 
bad idea. Do you still concur with that?
    Secretary Lew. Yes, it was designed to be so bad that 
nobody would let it happen--
    Senator Graham. Yes, so only we could do that, design 
something so bad that we would not let it happen.
    Secretary Lew. Correct, and so we would do something 
sensible instead.
    Senator Graham. Right. Okay. So let us talk about how 
sensible we could possibly be. If you left $100 billion intact 
over the next 7 or 8 years, what is left of sequestration, on 
the defense and the non-defense side, how much would we have to 
replace? Around $400 billion, is that right?
    Secretary Lew. If you left how much? I am sorry.
    Senator Graham. $100 billion on the defense side and the 
non-defense side.
    Secretary Lew. Well, if it was $100 billion and $100 
billion, you would have $200 billion if it was over 10 years. 
Obviously it depends on what the annual amount was.
    Senator Graham. But what I am saying is that we could leave 
some sequestration intact.
    Secretary Lew. Sure, and that is consistent with the 
agreement that Senator Murray and Congressman Ryan reached.
    Senator Graham. Right.
    Secretary Lew. Where they backed out a part of 
sequestration with a balanced package of savings.
    Senator Graham. Well, let us see if we can back out some 
more.
    Secretary Lew. And that is what the President has proposed 
to do, to have an equal 50 percent of the increases that he 
would pay for would go to defense and half for non-defense.
    Senator Graham. Okay. So if we could figure out how much to 
leave on the table for sequestration that our defense community 
could absorb and the non-defense sector could absorb without 
doing structural damage, the deal would go something like this: 
We would have entitlement reform as part of the replacement. Do 
you agree with me if you did that, you would want to look at a 
30-year window in terms of reduction in spending, not 10?
    Secretary Lew. Well, I think for entitlements and revenues, 
looking at--
    Senator Graham. I am talking about doing both. I am talking 
about doing both.
    Secretary Lew. I understand, but for both, looking outside 
the 10-year window makes sense because they tend to arc up over 
time.
    Senator Graham. Right. So if we looked at whatever we did 
to generate revenue over a 30-year period and whatever we did 
on entitlement reform over a 30-year period--
    Secretary Lew. Yes.
    Senator Graham. --that would probably be a better indicator 
of how it would benefit the country.
    Secretary Lew. With the obvious caveat that our estimates 
are weaker as we get into the out-years.
    Senator Graham. I agree. But the concept--
    Secretary Lew. The concept, the direction--you certainly 
need to know the trajectory.
    Senator Graham. Okay. So is the President willing to sit 
down and try to accomplish that goal?
    Secretary Lew. Senator, the President not only is willing, 
he has sat down and tried very hard--
    Senator Graham. I have sat down for weeks over there, and 
we could not get there.
    Secretary Lew. We have not gotten there, and I think some 
Senators on your side, some representatives on your side are 
willing to think about a balanced package. But we have not 
gotten to the point where we have had a consensus.
    Senator Graham. Now, that is going to require structural 
reform to entitlements, right?
    Secretary Lew. Yeah, I think that the President has made 
clear and by putting in his budget last year his last offer to 
Speaker Boehner he made clear that he was willing to do that. 
When that did not go anywhere--
    Senator Graham. Okay. I got--
    Secretary Lew. --he just is starting the conversation with 
what he thinks is the best--
    Senator Graham. Ten thousand baby boomers a day retiring.
    Secretary Lew. Yes.
    Senator Graham. Do you believe it is smart to eventually 
adjust the age for retirement for Social Security and Medicare 
and to means-test benefits as part of a balanced package?
    Secretary Lew. Well, we have included in our budget the--
    Senator Graham. Some means testing.
    Secretary Lew. --the means testing as--you know, the 
income-related premium--
    Senator Graham. Yeah, absolutely.
    Secretary Lew. --as a form of means testing.
    Secretary Lew. But to do more--
    Secretary Lew. In terms of--
    Senator Graham. If we could do the revenue side.
    Secretary Lew. In terms of adjusting the CPI, you know, our 
view is that it was never an easy thing to do, but--
    Senator Graham. What about adjusting the age for 
retirement?
    Secretary Lew. See, I--
    Senator Graham. If I am willing to do revenue, would you be 
willing to do that?
    Secretary Lew. I think what the President made clear in all 
of his negotiations that he is willing to put together a 
balanced package, doing hard things. I think it is probably not 
the right time for me to say which of the things that we would 
do, but I think his bona fides are clear. He showed he was 
willing to do it.
    I think that this is probably not the 6-to 9-month window 
when we are likely to get that done.
    Senator Graham. I agree with that.
    Secretary Lew. And we have a lot of other things we need to 
make progress on, so this is a budget that is really to do some 
of the other things we can do to build our economy. But we know 
this is a conversation--
    Senator Graham. Hopefully we will see you after the 
election.
    Secretary Lew. And I just want to thank you, Senator, for 
the leadership you have shown on this IMF issue. It is just 
critically important that we increase Ukraine's access to an 
additional $600 million of flexible financing and that we 
restore and maintain our leadership in that critical 
institution. I thank you for your help.
    Chairman Murray. Thank you very much. And, Secretary Lew, 
thank you for your flexibility, and to all of our colleagues 
today. We really appreciate the hard work that you and your 
staff put into all of this at the Department of Treasury.
    As a reminder to my colleagues, additional statements or 
questions for Secretary Lew are due by 6:00 p.m. today.
    With that, I will call this hearing to a close.
    Secretary Lew. Thank you, Senator.
    [Whereupon, at 11:36 a.m., the Committee was adjourned.]


       THE PRESIDENT'S FISCAL YEAR 2015 EDUCATION BUDGET REQUEST



                          TUESDAY, MAY 6, 2014

                              United States Senate,
                                   Committee on the Budget,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 10:32 a.m., in 
Room SD-608, Dirksen Senate Office Building, Hon. Patty Murray, 
Chairman of the Committee, presiding.
    Present: Senators Murray, Whitehouse, Sessions, Grassley, 
Crapo, and Wicker.
    Staff Present: Evan T. Schatz, Majority Staff Director; and 
Eric M. Ueland, Minority Staff Director.

              OPENING STATEMENT OF CHAIRMAN MURRAY

    Chairman Murray. Good morning. This hearing will come to 
order.
    I want to welcome everyone and thank Ranking Member 
Sessions and all of our colleagues for joining us here today. 
And I especially want to thank Secretary Duncan for taking time 
to be here to detail the administration's vision for investing 
in a world-class education system.
    A quality education opens up opportunities and can give 
people a shot at living out the American dream, and a strong 
education lays the groundwork for economic growth and 
prosperity for our future.
    But right now, our Nation is facing an education deficit. 
College is becoming more and more unaffordable for American 
families; workforce training and adult education programs must 
do a better job of lining up our workforce with the skills 
needed to succeed in our economy; and many schools are 
struggling to get students ready for success in the classroom 
and in future careers.
    In a recent assessment, U.S. students ranked below average 
in math compared to students in other developed countries, and 
our students ranked only average in science and reading. As we 
struggle to prepare our students, other countries are gaining a 
significant and potentially lasting advantage.
    We also see gaps in achievement between African American 
and Latino students with their counterparts. While a quality 
education can be a pathway toward success, the inverse is also 
true. Failing to make important investments so that every child 
has access to a world-class education can weaken opportunities 
for Americans, and it hinders our Nation's ability to lead on 
the world stage. Where there is an education deficit, there is 
also an opportunity deficit. So one of the challenges for this 
Committee is to find ways to better invest in education.
    The Murray-Ryan deal was a strong step in the right 
direction. For far too long, Congress had been lurching from 
one budget crisis to the next. But as you know, at the end of 
last year, Chairman Ryan and I finally sat down to negotiate in 
a budget conference. We put ideas on the table, we made some 
tough compromises, we put partisanship aside, and we reached a 
deal.
    Our bipartisan 2-year budget rolled back some of the most 
damaging cuts from sequestration. It prevented a Government 
shutdown in January. And it will help avoid another one this 
October. And it set spending levels for fiscal years 2014 and 
2015. Nobody thinks our 2-year budget deal was perfect. It was 
a compromise. And now we need to look at ways to build on that 
agreement by focusing on bipartisan areas of investment like 
education and workforce training.
    The President's budget proposal would do just that by 
expanding education opportunities from early learning all the 
way to college and career training. I was pleased to see this 
budget continues the administration's commitment to expand 
early learning. As a former preschool teacher, I have seen 
firsthand how early learning can give kids a strong foundation, 
not just to start kindergarten ready to learn but to succeed 
later in life.
    But it is not just educators who recognize the importance 
of early learning. I have heard from sheriffs in Washington 
State, business executives, and military leaders who all 
support early learning because of the long-term benefits it 
provides.
    In Congress, Democrats have proposed a bill to expand early 
learning programs across the country. Early learning should not 
be a partisan issue, and I am hoping that Republicans will 
support that legislation to expand high-quality preschool 
programs.
    We also need strong K-12 schools to make sure our kids can 
compete in a global economy. That starts with basic skills like 
reading and writing.
    Several years ago, Senator Sessions and I worked on that 
national priority, and together we introduced a bill to boost 
literacy programs in schools around the country. In the 
President's budget proposal, I was glad to see it includes 
strong support for a program I have championed called the 
``Striving Reader's Comprehensive Literacy Program.'' Boosting 
literacy will help students get the skills they need to succeed 
in a 21st century economy.
    Right now, K-12 schools are facing a very difficult 
situation in my home State of Washington. Secretary Duncan, as 
you well know, it is the first State to lose its waiver from 
some requirements mandated by No Child Left Behind. As you and 
I have now talked about several times, I am very disappointed 
by the loss of this waiver, and I am extremely concerned about 
the impact it is going to have on our students, our teachers, 
and our families.
    Now it is critical for all of us at the State and Federal 
level to come together to rectify this situation and put our 
students first. At the Federal level, my focus will be on 
reauthorizing the Elementary and Secondary Education Act. It is 
long overdue, and it is time for Congress to work on that 
legislation and strengthen our K-12 schools.
    The President's budget also includes proposals to support 
all students who want post-secondary education, and that 
includes job training. Expanding apprenticeship programs would 
help train workers in the skills that businesses need and would 
help those workers secure good middle-class jobs.
    The proposal also include ability to benefit, which has 
been one of my priorities. Budget cutbacks in 2012 eliminated 
student aid for those who did not have a GED or high school 
diploma. But any student who wants to pursue higher education 
should have that chance, so I am glad the budget would restore 
job training opportunities for low-income students.
    One in six adults in our country score below average in 
literacy and basic math skills, according to a study by the 
OECD. That is why I am a strong supporter of a program in 
Washington State called I-BEST that helps students gain basic 
skills like reading as well as skills for the workplace. We 
need more support at the Federal level for programs that 
strengthen our workforce.
    I also look forward to hearing from the Secretary about 
higher education and college affordability. Specifically, I 
have very serious concerns about recent allegations that 
student loan servicers have been violating the law when it 
comes to how they are treating our men and women in uniform who 
are deployed abroad. I hope to hear today, Secretary Duncan, 
how you are handling this situation, ensuring that we keep our 
promises to our servicemembers.
    More broadly, I believe getting a college degree should not 
be as cost-prohibitive to so many families as it is today. The 
average student today graduates from college with more than 
$29,000 in debt. So I hope to hear from the Secretary today 
about the ongoing discussion in Congress to give students the 
option to refinance their school loans as well as how we are 
going to maintain Pell grants that help low-and middle-income 
students get the chance to go to college.
    But student debt and grants are not the only factors we 
need to talk about. The cost of college is too high, and it is 
only getting more expensive. That is prompting students to take 
out hefty loans that have serious impacts on their financial 
security after they graduate. I look forward to hearing today 
about how we are going to tackle both sides of the equation 
here--the rising cost of college in the first place and what 
that means for families and students who are being forced to 
take out more and more debt--because, unfortunately, in recent 
years States have reduced their investments in higher 
education. Forty-eight States now are spending less on higher 
education than they did before the recession hit in 2007. That 
is according to the Center on Budget and Policy Priorities.
    We know that education is fundamental to expand 
opportunities to more Americans. That is why students at every 
stage of their learning, from preschool to college and career 
training, deserve a quality education. The President's 
education proposal is a strong plan to build on our 2-year 
budget deal. Now it is time for Congress to work together to 
make investments in a world-class education system. If we do 
that, we will lay the groundwork for economic prosperity. We 
will help students get the skills they need to lead in the 21st 
century, and we will give our kids a better shot at living out 
the American dream.
    So, Secretary Duncan, thank you again for being here. I 
look forward to your testimony, and before I turn to you, I 
will turn to my counterpart, Senator Sessions, for his opening 
remarks.

             OPENING STATEMENT OF SENATOR SESSIONS

    Senator Sessions. Thank you, Madam Chairman. We appreciate 
your leadership and your expertise in matters of education.
    Secretary Duncan, you came to this job with some real 
experience in it, having battled on a lot of important issues, 
and we appreciate your service. And I do think it is a little 
unfair, some of the rankings nationally, because does anybody 
doubt that China does not count a lot of the rural areas where 
education is weaker? We are more honest in the way we account 
for our progress in education, and I really respect our 
teachers. I know they work hard every day, and helping them do 
their job better is something we all should focus on.
    I am proud of Alabama's education program. With very little 
new money, using their reading initiative and their math and 
science initiative that they developed based on scientifically 
proven methods to help children learn, they have achieved 
remarkable success. And, Mr. Secretary, thank you for examining 
that and looking at it at my request. Using good techniques can 
help education without a lot of new money.
    Washington does not educate children. More money alone does 
not improve learning. Better results, I know you agree, must be 
the goal. So you must know, Mr. Secretary, that your Government 
is running out of money. Congress and the President agreed to 
certain spending limits in the Ryan-Murray legislation that I 
think did get us past a difficult time. But you simply are 
proposing now spending well above that with your Oppurtunity 
Growth and Security Initiative, some $56 billion above what we 
agreed to spend. You are violating the spending limits that we 
agreed to and the President signed into law. And so that is 
just not going to be possible. We just cannot and we will not, 
I believe, do that.
    So if you and the administration want to spend more money 
on education, you must make it a priority within the 
discretionary accounts, reducing spending somewhere else. 
Simply proposing to break the spending limits is irresponsible. 
It is more of a political gesture and not a serious policy 
proposal. We must and will, I think, stick to the Ryan-Murray 
spending limits. The very future of our country and the quality 
of our children's future depends on wise management of our 
money today.
    Overall, the President's budget would add about $8 trillion 
to our debt, our current $17 trillion debt. It would add $8 
trillion to that over the next 10 years. According to the 
Congressional Budget Office, this massive debt accumulation 
means annual interest payments will nearly quadruple over the 
next decade. You get less than $60 billion a year, I guess, on 
your base budget, less than $70. Last year, we paid our 
creditors $221 billion in that year alone in interest on our 
debt. That is more than 6 times what we spend on Pell grants.
    Accordingly, in 2024, 10 years from today, one single 
year's interest payment, according to CBO, will be $876 
billion. Again, that is just one year's payment. The one-year 
debt interest payment in 2024 will be greater than the amount 
we will spend on your Education budget over the next 10 years 
total.
    So interest has got to be paid. The huge demands that 
interest places on us will steal money from all accounts, 
including the Education account. So deficits matter. Debts have 
consequences. If you truly want to support our Nation's 
children, then we have got to live within the limits that we 
have set for ourselves.
    At the same time, we must recognize that more money does 
not always produce better results. Some of the worst-performing 
schools in the country are some of the best-funded. Base 
education spending has increased 15 percent from 2008 through 
2014 without a corresponding increase in education scores, and 
you propose another increase of $1.3 billion next year, not 
counting the initiative, the new Opportunity Growth and 
Security Initiative that I mentioned earlier.
    So more Federal money is not a substitute for the support 
of family or community for the value of a role model or mentor 
or the quality of a great teacher. More money cannot make a 
student do his homework or show up on time for class. More 
money will not ensure that a teacher will use the best methods.
    So we also owe our students a secure future when they 
graduate. We must work to ensure there are jobs waiting for 
them.
    The Pell grant program and college loans that you 
supervise, those programs--well, Pell grants have received no 
reductions in the Budget Control Act or the sequester. But we 
have to ensure that they work well.
    Nearly one in two recent college graduates are unemployed, 
but the administration proposes to double the number of guest 
workers to fill jobs throughout our economy, including a large 
increase in STEM guest workers where, it is said, a crucial 
shortage of workers exist. But contrary to the claims of 
various technology corporations, we actually appear to have a 
surplus of STEM-trained American students who are looking for 
work.
    As Professor Hal Salzman of Rutgers recently wrote, ``The 
Nation graduates more than 2 times as many STEM students each 
year as find jobs in STEM fields. For the 180,000 or so 
openings annually, colleges and universities supply 500,000 
graduates.'' That is what he said. And I think other data tends 
to confirm that.
    Meanwhile, many of those guest workers' visas were used to 
offshore American jobs, and it is not a healthy trend, and we 
have to examine, I believe, in utilizing our resources for 
higher education, ways to make sure that the positions we train 
people for are actually out there. So across the board, we must 
do more to ensure that American youth find good jobs.
    But here is what I think we should fundamentally do to 
improve the opportunities for our graduates, and I guess the 
first one today we should talk about is we should reform 
education to make it better prepare students for jobs that 
exist at the lowest possible cost and try to implement the 
policies we know will help education help students to the 
maximum degree. And we have got to produce more American 
energy, eliminate costly and unnecessary regulations, make the 
Tax Code more growth oriented, turn the welfare office into a 
job training office to help people who are hurting today get 
jobs on a path to prosperity and streamline Government to make 
it better, and balance the Federal budget, which I believe our 
failure to do so is threatening growth today.
    Thank you, Madam Chairman. I look forward to hearing from 
our guest.
    Chairman Murray. Thank you very much.
    Secretary Duncan, we will turn to you, and, again, thank 
you for being here today.

    STATEMENT OF THE HONORABLE ARNE DUNCAN, SECRETARY, U.S. 
 DEPARTMENT OF EDUCATION; ACCOMPANIED BY THOMAS SKELLY, ACTING 
     CHIEF FINANCIAL OFFICER, U.S. DEPARTMENT OF EDUCATION

    Secretary Duncan. Thank you so much, Chairman Murray, 
Ranking Member Sessions, and other Senators.
    Let me first begin by thanking you for your work on the 
2014 budget, which increased our investment in education over 
the previous year. Your ability to overcome partisan 
disagreements in the interest of America's children has 
provided both stability and clarity that serve America's 
families and schools well. That investment is a vital part of 
the good news in America's educational good-news and bad-news 
story.
    On the good-news side first, our students are making 
substantial progress in both graduating from high school and 
enrolling in college. Our Nation's on-time high school cohort 
graduation rate reached 80 percent in 2012--the highest in our 
Nation's history. And that is a testament to the hard work of 
our Nation's teachers, school leaders, students, and their 
families. College enrollment is up substantially as well since 
President Obama took office.
    The bad news is that we still have unacceptable opportunity 
gaps in America, and it will be very difficult to close these 
gaps when Federal discretionary funding for education, 
excluding Pell grants, remains below the 2010 level.
    Our international competitors are simply not making the 
mistake of disinvesting in education, and their students are 
making more progress than America's students, endangering our 
competitiveness and our prosperity.
    In a knowledge-based global economy, closing these 
opportunity gaps and strengthening our competitiveness are 
among our most urgent challenges. Falling further behind would 
hurt our country economically for generations to come. So I 
appeal to all of you to continue America's longstanding 
bipartisan commitment to investing in education.
    Despite the real educational progress we have made as a 
Nation, large opportunity gaps remain at a time where education 
is more important than ever to accelerating economic progress, 
increasing upward mobility, and reducing social inequality.
    President Obama's budget would increase investigation in 
education to boost that progress and close those insidious 
opportunity gaps. Sadly, these opportunity gaps start with our 
youngest learners and early childhood education. Chairman 
Murray, this is where you began your career, and no one knows 
better than you how formative, how critical those early years 
are.
    But the brutal truth, the honest truth, is that America is 
only 25th in the world--25th in the world--in our enrollment of 
4-year-olds in preschool. Four in ten public school systems in 
the United States do not even offer preschool, setting the 
stage for a huge gap in school readiness, and that gap, as we 
know, too often never gets filled.
    Outside of Washington, this has become a truly bipartisan 
issue, and, in fact, last year, in a very tough budget climate, 
30 Governors--17 Republicans and 13 Democrats--increased 
funding for preschool in their State budgets. We applaud that 
leadership and that courage, and we need to help every State be 
able to make that same claim.
    Ranking Member Sessions, obviously Alabama has done a 
fantastic job of increasing by about, I think, 50 percent their 
funding for preschool. And Mississippi, Senator Wicker, I think 
for the first time in its State's history, is investing in 
high-quality preschool. So, again, this has become an 
absolutely bipartisan issue in the real world away from the 
dysfunction here in Washington.
    That is why the President's request for $500 million for 
preschool development grants and $75 billion in mandatory 
funding for the Preschool for All program are so essential. 
They would support the State-led efforts to provide access to 
high-quality preschool for all 4-year-olds from low-and 
moderate-income families.
    State's attorneys, sheriffs, and police associations have 
come together to support high-quality early learning because it 
reduces crime when kids grow up. In fact, we have a letter here 
from over 5,000 leading law enforcement officials around the 
Nation supporting this effort.
    Military leaders, admirals, and generals support it because 
a staggering three-quarters of young adults today are not fit 
to serve in a voluntary military because of educational 
shortfalls, poor physical fitness, or a criminal record. High-
quality early learning reduces all of those problems.
    Hundreds of tough-minded business leaders, CEOs, and 
chairmen of the board are big advocates as well because they 
know high-quality early learning produces a better workforce 
and has a high return on investment. That is a language that 
our Nation's CEOs absolutely understand.
    Nobel Prize-winning economist James Heckman found a return 
of $7 to every $1 of public investment in high-quality 
preschool programs. I would ask everyone gathered here today, 
how many other uses of scarce taxpayer dollars have such a high 
rate of return for the American people?
    Unfortunately, opportunity gaps in early learning continue 
all the way through high school, as new data from our civil 
rights data collection show. Today, students of color, students 
with disabilities, and English language learners simply do not 
get the same opportunity as their white and Asian American 
peers to take the basic math and science courses that figure so 
importantly in preparing for both college and careers. Often, 
this lack of access means students cannot take the classes they 
need to apply to a 4-year college.
    Black and Hispanic students are close to 40 percent of high 
school students nationwide, but just over a quarter of students 
are taking AP classes and only 20 percent of those enrolled in 
calculus classes. And most schools today have nowhere near the 
bandwidth speed they need to support current applications and 
instruction. Fully two-thirds of our Nation's teachers wish 
they had more technology in their classrooms.
    In South Korea, which we all know is a very high performing 
nation educationally by every measure, 100 percent of schools 
have access to high-speed Internet. Here in the United States 
it is only about 20 percent. So 100 percent South Korea, 20 
percent United States. As a result, our students, our teachers, 
and our schools often lack the bandwidth to take advantage of 
new technologies that could help to close those insidious 
achievement gaps and help to individualize instruction.
    How is that fair to our children or to our hard-working 
teachers? How is that in our Nation's self-interest? Closing 
these opportunity gaps is the ribbon, it is the theme that runs 
throughout President Obama's 2015 education budget request. It 
is the overarching goal of the preschool development grants and 
Preschool for All. It is behind our request for a $300 million 
Race to the Top Equity and Opportunity Fund to help States and 
districts develop road maps to ensure that all students can 
reach their potential, and also our $200 million 
ConnectEDucators initiative to provide teachers with the 
expertise they need to use technology effectively.
    By contrast, the Ryan budget in the House would widen, 
would increase opportunity gaps, cutting funding for education 
by an estimated 15 percent in 2016, or about $10 billion. If 
that 15-percent cut were applied this year, Title I funding for 
high-poverty schools and disadvantaged students would be cut by 
$2.2 billion. IDEA grants to States for students with 
disabilities would be cut by about $1.7 billion. That is 
exactly the wrong direction to go for our children and for our 
Nation's future. And that is absolutely contrary to the spirit 
that you have set to work through partisan issues in order to 
serve America's children well. You have shown that we can do 
better together.
    The American dream has always been about opportunity. Today 
our Nation is failing to live up to that core American ideal 
for all of our citizens. We must do more to level the playing 
field and make a great education available to every child. That 
is who we are.
    As former Florida Governor Jeb Bush says, the sad truth is 
that equality of opportunity does not exist in many of our 
schools, and that failure is the great moral and economic issue 
of our time, and it is hurting all of America. So let us get 
back to working together to close those opportunity gaps.
    Thank you so much, and I look forward to your questions.
    [The prepared statement of Secretary Duncan follows:] 
    
     [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    
    
    Chairman Murray. Thank you very much, Mr. Secretary.
    Let me talk, first of all, about one of my top priorities, 
which is protecting servicemembers and veterans. I was really 
troubled by some recent allegations that Sallie Mae violated 
the Servicemembers Civil Relief Act with regard to student 
loans of military members, forcing servicemembers who are being 
deployed to pay higher interest rates on their loans and really 
ignoring the law altogether. And I understand now that several 
Federal agencies are investigating these accusations.
    The Department of Education spends millions to contract 
with Sallie Mae. The Department has not yet levied any fines 
against the company and last fall indicated that it will renew 
Sallie Mae's contract despite these allegations.
    Is that still the plan?
    Secretary Duncan. Well, obviously all of us, I think, have 
not just an educational but a moral responsibility to provide 
our veterans with the best education possible. They have given 
up so much. They have sacrificed so much. The least we can do 
is to give them a chance to transition back to civilian life, 
get the education they need, and move on to the workforce. So 
there is an active investigation underway. I am not at liberty 
to comment on that at this point. Just know that we are 
partnering--we are working with the Department of Justice on 
that, and when that investigation is concluded, we will take 
those findings very, very seriously and act accordingly.
    Chairman Murray. If Sallie Mae violated the law, will you 
pull the servicing loan contract?
    Secretary Duncan. Obviously we will look at every avenue if 
laws are broken.
    Chairman Murray. Okay. Is someone looking at the other 
student loan servicing companies to make sure this is not 
happening in other places?
    Secretary Duncan. We absolutely have to do that, and our 
Federal Student Aid Office is doing that.
    Chairman Murray. Okay. I will continue to watch that very 
closely. It is a high priority.
    Secretary Duncan. It is a really important issue, and I 
appreciate your attention to it.
    Chairman Murray. Okay. Mr. Secretary, after reviewing the 
administration's entire fiscal year 2015 budget request, it is 
pretty clear that education is one of the President's top 
priorities. In fact, your budget requests an increase of $1.3 
billion, as you mentioned.
    I really applaud that focus. However, you and I both know 
that investments in education are trending downwards at the 
Federal, at the State, and at the local levels. So can you just 
talk to us a little bit about the long-term economic impact 
that could occur if our country continues to disinvest in our 
students?
    Secretary Duncan. I just think, again, Senator Murray--and 
everyone here knows this, Chairman Murray--that we live in a 
globally competitive economy; we live in a flat world, and 
high-paying, middle-class, high-wage, high-skilled jobs are 
going to go to where the most educated workforce is. And I 
think everyone here desperately wants that to be in our 
communities, in our States, and in our country, and not in 
other countries.
    But businesses can move where those knowledgeable workers 
are, and I look at every level, and, quite frankly, at no level 
right now are we as a Nation where we need to be. So we talked 
about the early childhood side where we rank about 25th in the 
world in providing that opportunity. Again, no one knows this 
better than you, but for so many of our children coming from 
disadvantaged communities, the average child coming from a poor 
community starts kindergarten in the fall a year to 14 months 
behind--the average child. And far too often, frankly, we never 
catch up.
    So we have to, you know, get out of the catch-up business. 
We have to level the playing field. The fact that we are 25th 
in the world, that is no badge of honor. That is early 
childhood.
    On the K-12 side, on the math and science rankings, we are 
somewhere usually between 15th and 30th. We are nowhere near 
where we need to be, again, if our goal is to be number one.
    And then, finally, I think we can all unite behind the goal 
of leading the world in college graduation rates. That seems to 
be in all of our mutual self-interest. One generation ago, we 
were first in the world. Today we are 12th. And it is 
interesting. It is not that we have dropped. It is that we have 
stagnated, we have flat-lined, and 11 other countries have 
passed us by.
    So you look at early childhood, you look at K-12, you look 
at higher education. None of these--none of these--are where we 
need to be. Now, we are making some progress. I talked about 
how high school graduation rates are up, college enrollment is 
up. Those are positive trends. But we are so far from where we 
need to be. All of us, regardless of politics, regardless of 
ideology, all of us have to work together to lead the world in 
education success, and to do that it cannot just be a little 
tweak. We have to get better faster. We have to work together 
in ways that put aside politics and ideology.
    Chairman Murray. Thank you. I really appreciate that 
response, and you are continuing to give that message 
everywhere. I think that by ignoring what is happening 
globally, we are going to lose out dramatically in the future, 
so I appreciate that.
    You have talked about early childhood education. You know 
that is a passion of mine. I really believe that an expansion 
like the one that we do envision in the Strong Start for 
America's Children Act would make significant strides in 
helping us close the opportunity and achievement gaps that we 
are seeing. But I continually hear from some of our friends on 
the other side that we have too many Federal learning programs.
    I wanted you today to talk and give us a little better 
understanding of the current unmet need for early learning 
opportunities and how the proposal in your budget is not 
duplicative of existing Federal programs.
    Secretary Duncan. And I think, again, all of us can unite 
that where we have, you know, duplicative efforts, where we are 
wasting money, we should not do that. But at the end of the 
day, we want to go from about a million young children with 
access to high-quality pre-K to 2.2 million, so we want to 
double that. And you cannot do that without increased 
investment. And, we have to make sure this is not just access. 
We have to make sure this is about high quality. We have to 
hold ourselves accountable. I am actually proud of HHS and my 
friend Kathleen Sebelius. They are making folks recompete on 
the Head Start side, so it is not business as usual there. But 
there is tremendous unmet need.
    This would not be any kind of Federal mandate or top-down 
thing. We simply want to partner with those Governors--again, 
more Republicans Governors than Democrats today, and we think 
that is fantastic--who are investing. What breaks my heart, 
Chairman Murray, as I have traveled the country and we do these 
very unusual meetings, public meetings with CEOs and military 
leaders and heads of the chambers of commerce, faith-based 
community, in virtually every State I go to where Governors are 
putting their scarce tax dollars behind increasing access to 
early learning, there are still waiting lists of 6,000, 10,000, 
12,000, 15,000 kids. So these are families who want to do the 
right thing, who are looking to have their children be prepared 
to enter kindergarten, and we collectively as a Nation simply 
are not providing those opportunities. This is not good enough.
    Chairman Murray. So expanding the Federal program will help 
support those Governors who are providing it to make sure that 
more kids get served.
    Secretary Duncan. It would just be a partnership. States 
would--you know, if they want to extend their reach, leverage 
our resources with their resources, they will have that 
opportunity. If they do not want to do that, they would have 
the right not to do that. But I cannot tell you how many 
Governors have said, you know, ``We are working hard here. We 
are trying. We need help.'' And, again, this is Republican and 
Democrat.
    Chairman Murray. And I think sometimes we forget how mobile 
our families are today, so if you have a couple States or half 
a dozen States that do really well, they have got kids coming 
in every day that have come from States that have not focused 
on this, and that is why I think we have a national level. I 
assume you would agree.
    Secretary Duncan. And, again, I meet with these education 
ministers from all over the globe, met with the minister from 
Japan last week, met with the minister from Finland yesterday, 
and quite honestly, it is embarrassing, it is humiliating. They 
are stunned that we do not care more about our babies than we 
do, and they sort of ask me, ``Why isn't this a national 
value?'' And I do not have a good answer for them.
    Chairman Murray. Okay. Thank you. I really look forward to 
working with you on all these issues.
    Senator Sessions?
    Senator Sessions. Thank you. I would yield to Senator 
Grassley.
    Senator Grassley. I only have two questions, so I may not 
take the full 7 minutes.
    Secretary Duncan, I have written to you before about the 
fact that the waiver provisions in No Child Left Behind do not 
authorize you to add requirements that do not exist anywhere in 
the law. And I still believe that that exceeds your authority.
    Now, I am not going to get into that here, but I do want to 
ask you about one of those waiver requirements. Your 
Department's waiver application requires States to have 
``college-and career-ready standards'' in place. That is 
defined as either ``standards that are common to a significant 
number of States, or standards that are approved by a State 
network of institutions of higher learning.''
    As you know, the first option can only be met by adopting 
the Common Core standards. However, you or others in the 
administration have made a point of saying that adopting Common 
Core is not a requirement for a waiver because of Option 2.
    My question: What happens if a State pulls out of Common 
Core, as Indiana just did, given that you have pointed to this 
other option to argue that you are not pushing Common Core on 
States? Will States that pull out of Common Core automatically 
get to keep their waivers, assuming they are able to get the 
required sign-off from their State higher education 
institutions and continue to meet other criteria? If not, why 
not?
    Secretary Duncan. Yes.
    Senator Grassley. Okay. The second question: As you know, 
the No Child Left Behind Act requires schools to bring all 
students up to a proficient or higher level of achievement by 
the end of the 2013-14 school year. While no State is in a 
position to attain this goal, Iowa is one of a few States that 
were not granted waiver of this requirement by your Department. 
We are now at a point where virtually every school will be 
labeled ``a school in need of assistance'' and required to 
undertake corrective action. That will put the Iowa Department 
of Education in the impossible position of having to assist 
hundreds of schools in Iowa with reforms, not to mention the 
administrative burden on many Iowa schools that have high 
levels of achievement but short of the 100-percent goal.
    What guidance will you give to non-waiver States like Iowa 
on how to prioritize actions and minimize disruption to student 
learning, given an impossible task?
    Secretary Duncan. So we are happy to work with Iowa and 
with your Governor, whom we have a great relationship with, 
going forward. As you know, we have provided waivers to about 
44 States, again, across the political spectrum--left, right, 
Republican, Democrat. We have worked with virtually everybody. 
That was always Plan B. So we will partner with Iowa in the 
current situation.
    I would just urge you to join with Chairman Murray and with 
your fellow Senator from Iowa, Tom Harkin. The best thing we 
can do as a Nation would be to fix the law and to fix it 
together in a bipartisan way.
    Senator Grassley. I agree with you on the latter point.
    Secretary Duncan. We have had to step in due to Congress' 
dysfunction, and if Congress could do their job, we would back 
right out in a heartbeat.
    Senator Grassley. Now, I hope that when you say you will 
work with States, that is something that is practical to do, 
because I think you have been a little bit vague in this whole 
advice to States, if they do not have the waiver, what they can 
do.
    Secretary Duncan. So I beg to differ, and we will be as 
clear as we can. Talk to your Governor, talk to your State 
education agency. We have, I think, had very, very good 
relationships with the overwhelming majority of Governors and 
SEAs across the country and have partnered, honestly in a 
pretty remarkable way. Given all the dysfunction here in 
Washington, to have 44 States partnering directly with us is a 
big accomplishment and you hear very little noise, you feel 
very little drama. We listen, we work together, we challenge 
each other, we hold each other mutually accountable. And I am 
pretty proud of--we have not done it perfect, we make mistakes 
every day, but we are actually pretty proud of how we have 
functioned so well.
    Senator Grassley. Okay. I will look forward to you working 
with our State. Thank you very much.
    Secretary Duncan. We will continue to do that.
    Senator Grassley. Thank you. I am done. I yield back my 
time.
    Chairman Murray. Okay. Senator Whitehouse?
    Senator Whitehouse. Thank you, Chairman. Welcome, Secretary 
Duncan.
    Secretary Duncan. Good to see you.
    Senator Whitehouse. I am not an education expert. I was a 
prosecutor, and my first connection with the education system 
was the realization that our middle schools were the opening to 
a pipeline that ended in my office and in a courtroom with a 
juvenile prosecution. And so for a long time, I have tried to 
learn more about this, and I have a group of friends and 
colleagues and advisers in Rhode Island who live education. 
They work in charter schools. They lead reform initiatives. 
They are involved with public school teacher unions. They are 
classroom teachers. It is a broad array of experience from a 
variety of different perspectives.
    And what has struck me now is that one area of agreement 
across all that array of people is that the education oversight 
establishment as a collective creature has become so burdensome 
that it is now interfering with classroom teachers' ability to 
manage their classrooms and local schools' ability to direct 
their local affairs. And I was a little bit surprised by that 
because I did not expect that to be so uniform and so forceful 
a belief.
    But it is not outside of the human experience for an 
industry or a bureaucracy to come to the point where it begins 
to propagate itself and the mutualist relationship becomes a 
parasitic relationship.
    What are you doing to analyze that question? And are you 
committed to a model where control comes from the top down? And 
how much room is there to maneuver with really local, like 
school-specific innovation as opposed to innovating with 
Governors who are, you know, responsible for a massive amount 
of the bureaucracy and deal at a very high level in the system?
    Secretary Duncan. So it is a real issue, and as you know, 
what teachers and parents and students feel is not just one 
bureaucracy but multiple bureaucracies.
    Senator Whitehouse. Yes. Wherever they look, there is more 
being thrown at them.
    Secretary Duncan. There is State and Federal, and they do 
not care where it is coming from. It is just more of whatever. 
So it is a real issue. We are absolutely committed.
    I say everywhere I go, where people have specific 
challenges with our bureaucracy, to let us know when we are 
asking for redundant information, when we are asking for 
useless information, to please let us know. We have tried to do 
lots of things ourselves. We have streamlined the waiver 
process in direct response to hearing from folks. In IDEA, the 
burden of data collection has been pretty high. Under our 
revised SPP/NPR, we have eliminated reporting on 4 compliance 
indicators and th e need for States to develop 20 separate 
improvement plans instead of a single comprehensive plan. So we 
are really working.
    I am sure we have a long way to go, so, again, where folks 
have concrete recommendations, please feed those to me 
directly, hold me accountable. This work is so important, it is 
so serious. I love that we have an 80-percent graduation rate. 
I stay up at night worrying about those 20 percent of young 
people who are not graduating and what they are going to do 
with their lives. And I want teachers and principals, all their 
time and energy, thinking about how to improve educational 
outcomes, not how to fulfill some request from me or someone 
else. So we want to be a good partner. We have tried to take 
some very concrete steps, we are open to more.
    The other one that we are early on, but just to talk about 
for a minute, is I think part of what we see in funding-silos 
at the State and local level. Those silos reflect silos that we 
have had in our agency, so a Title I funding source and a Title 
II funding source and a Title III funding source. And what we 
are trying to do is move away from funding streams, we are 
trying to move to a model of State desks and State support for 
the entire State or for the district, and have a much more 
holistic approach to this. And so we are hoping--and we are 
early on in this, you know, in our infancy, so we are still 
trying to map it out. But we are hoping if we can change our 
behavior and model to something different that that will have 
pretty significant ramifications at the State and the local 
level and start to remove some of those real barriers, those 
impediments.
    Senator Whitehouse. In addition to the direct burden of 
compliance with that whole array of oversight burden, schools 
and school districts also often have to spend scarce resources 
on consultants and experts who they bring in to help negotiate 
all that bureaucracy for them. And I am wondering if you are 
aware of anyone who is looking at what the total burden is, not 
just of the schools' internal compliance with it and not just 
of the cost of all of that bureaucracy, but also of that 
private sector component that exists to help schools navigate 
that bureaucracy, but is in itself a burden to those schools.
    Secretary Duncan. Yes, there are a couple--let me come back 
to you on the details. There are a couple States that are 
looking at that. And this is a little bit off topic, but I just 
want you to know sort of where our thinking is.
    So one area--two quick areas. Sorry. One is in the area of 
special education. That has been, in my mind, a very 
compliance-driven entity, and it is interesting to me that once 
you are labeled as a special needs child, that label almost 
never gets removed. That stays with you for life. So how do we 
help move children out of special ed; how we prevent more 
children from going into special ed? The person who is leading 
our shop there, Michael Yudin, is very, very thoughtful, and he 
is moving towards results-driven accountability and also 
looking at what we are doing around high school graduation 
rates and to help more young people to go on either to the 
workforce or to higher education. So we feel very, very good 
about that.
    And the area where I think that there has been way too much 
emphasis on the private side is our Title II money, 
professional development money for teachers. We are asking so 
much of teachers. We owe it to them to give them great 
professional development, and that is absolutely the exception. 
That rarely happens. We spend at the Federal level $2.5 billion 
each year that goes out there. When I say that to teachers, 
they usually laugh or cry. They are not feeling the impact--
    Senator Whitehouse. I have got about 10 seconds left.
    Secretary Duncan. Okay.
    Senator Whitehouse. So let me just say that I hope that you 
keep in your heart, as you go about your job, these teachers 
and these local school administrators who are feeling stifled 
and frustrated by this compliance-driven regime that they are 
forced to live in. And if we can unpack some of that, I think 
we will do them a lot of good.
    Secretary Duncan. So we are trying to unpack it, and, 
again, any concrete recommendations you or your team has, 
please feed them to me directly.
    Chairman Murray. Senator Sessions.
    Senator Sessions. I will yield to Senator Wicker.
    Senator Wicker. Thank you. Thank you very much. And, Mr. 
Secretary, thank you for your participation today. I have had 
to be in and out of the room. I understand while I was out of 
the room you mentioned Mississippi's new preschool program. It 
will begin this September with a relatively modest $3 million 
State investment. I assume you meant that as a compliment.
    Secretary Duncan. Highest compliment.
    Senator Wicker. Thank you,
    Secretary Duncan. And thrilled you guys are in the game. We 
would love to see you do more. You and I know the challenges of 
children there, and getting them off to a better start, I 
cannot overemphasize how important that is.
    Senator Wicker. Thank you.
    Secretary Duncan. We really appreciate the Governor's 
leadership.
    Senator Wicker. It is my understanding that the Governor 
proposes to do that without additional Federal funds, and I 
would just observe, before I go on to my question, that it is 
my understanding the President's Preschool for All program 
would add to some 45 existing Federal early childhood programs. 
Let me just make that observation. You can respond later, if 
you would like to.
    You also quoted with approval former Governor Jeb Bush, I 
believe, and saying that we have a real problem with 
opportunity in our education system. And, of course, so much of 
that comes from failing school districts. Those are districts I 
would not send my children to. Those are districts that the 
President of the United States chooses not to send his children 
to, in so many areas, whether it is achievement or just basic 
safety of the children. And it just seems to me that we are 
more and more a society that believes in choices. And from 
consumer goods to Internet providers to flavors of coffee to 
whatever, we want a wide variety of our choices. And one of the 
areas in which we have not empowered families and parents to 
make the best choices for their children is in the area of 
choosing to place their children in better opportunities 
without having to pull up and move the whole family. So I would 
make that observation.
    But here is my question, and it deals with the proposed 
rule the Department of Education released in March on the issue 
of gainful employment. Now, it is my understanding this has 
been a statutory phrase for some 40 years, but the new rules, 
an 845-page regulation, proposing to define the phrase 
``gainful employment'' seems to many of us, Mr. Secretary, that 
you are discriminating against vocational programs, you are 
discriminating against for-profit colleges, and some community 
colleges by defining meeting the gainful employment requirement 
as a program in which students have a debt-to-earnings ratio 
below 12 percent 2 years after graduation.
    I think this singles out the sort of for-profit college and 
university that is a gateway to the middle class for 
minorities, for veterans, for other underserved demographics. 
And so I would like you to respond to that. Why do we single 
out vocational? Why do you--and do you, as I understand, exempt 
the more traditional colleges?
    For example, if this metric were used at private nonprofit 
colleges, 39 percent of students would not meet this metric. If 
it were used at the traditional 4-year public institutions 
which I attended, 26 percent of graduates would not meet this 
metric.
    There were other metrics which could have been used, and I 
would like for you to comment about why you did not go in that 
direction, such as placement rates, graduate study, passage of 
licensure exams, things of that nature. So why that metric? 
Aren't you, in fact, discriminating against for-profit 
colleges? And why not use these other definitions.
    Secretary Duncan. Two good questions. Let me start on early 
childhood first, and, again, just give your Governor, Governor 
Bryant, tremendous credit for investing.
    Senator Wicker. Thank you.
    Secretary Duncan. The question I would have for you and for 
the State is, what is the unmet need in Mississippi. How many 
additional 3-and 4-year-olds do not have access to high-quality 
early learning? And you and I know that by virtually every 
measure, sadly, Mississippi ranks near the bottom nationally--
you know, 48th, 49th, 50th on many, many measures, and I just 
do not think that is fair to your children or to your State or 
to your State's economy. And whatever we can do to work 
together to have more children entering school ready to be 
successful, we want to do that. So I'mm thrilled with the 
investment. As you said--
    Senator Wicker. Thank you for that bit of highest praise.
    Secretary Duncan. But let us work together. Great starting 
point but not a finishing point, and let us figure out how we 
do that.
    Just quickly, the challenge on the gainful employment side 
is obviously Congress defined ``gainful'' there, and we just 
want to make sure that the right thing is happening for 
taxpayer dollars. To be very clear, where for-profits 
institutions are helping to prepare people for real jobs that 
have good wages and help move them up the economic ladder, we 
want to see them grow, we want to see them thrive, we want to 
see them prosper, we want to see them serve more students.
    But the fact of the matter is that today students at for-
profit colleges represent about 13 percent of total higher 
education population but almost half, 46 percent, of loan 
defaults. So 13 percent of enrollment, 46 percent of loan 
defaults. So we need to just make sure that we are rewarding 
those players that are acting in good faith and helping them do 
well. But the challenge I think we have, Senator, is when 
people are taking advantage of the disadvantaged, burdening 
them with debt, and there are no jobs or no high-wage jobs, and 
they end up in a worse economic position than when they 
started, that is something I think none of us can support.
    I want to read you a quick quote. It says, ``You will find 
accounts of semi-literate high school dropouts lured to enroll 
in expensive training programs with false hopes for a better 
future cruelly dashed. You will read of falsified scores on 
entrance exams, poor-quality training, and harsh refund 
policies. The pattern of abuses revealed in these documents is 
an outrage perpetuated not only on the American taxpayer but, 
tragically, upon some of the most disadvantaged, most 
vulnerable members of society. The kids are left without an 
education and with no job and the taxpayer holding the bag for 
a kid who got cheated.''
    That did not come from me or this Administration. That came 
from Secretary Bennett, who was President Reagan's Secretary of 
Education in 1988. And so I think this is something to be 
addressed in a bipartisan way. Scarce taxpayers dollars are 
funding these programs--where we get a good return on 
investment, we should help them. Where we do not have a good 
return, we should challenge the status quo and do that 
together.
    We are at a time right now of public comment. We put out a 
draft. We put out the draft with great humility. And where 
folks have better ideas, we are absolutely willing to listen. 
But to do nothing, to accept the status quo where 13 percent of 
enrollees are leading to half of our Nation's defaults, I think 
we can do better together.
    Senator Wicker. It seems to me--and we have a vote on, so I 
have to be very, very brief.
    Chairman Murray. We do have a vote, and we want to finish.
    Senator Wicker. But when you do not apply it to every 
institution of higher learning, and when there is a 26-percent 
failure rate in 4-year institutions, 39 percent in private 
nonprofit colleges, it seems to me we are singling out one 
sector. And I would trust consumers to sort this out over time 
and choose the good colleges which get placement, graduate 
study, and licensure--
    Chairman Murray. Senator Wicker--
    Senator Wicker. --and leave it to the private sector.
    Chairman Murray. Senator, I really appreciate your--
    Senator Sessions. Thank you.
    Chairman Murray. But we want to make sure Senator Sessions 
has a chance to speak before the vote ends here and we both get 
called out. So, Senator Sessions, you will be our last--
    Senator Sessions. Thank you. Thank you, Madam Chairman.
    I was looking at some of your reforms in the Department of 
Education, and not a lot of money, but you did eliminate a 
number of programs that looked like some politician passed 25 
years ago that do not really contribute to the overall 
improvement of education in America, so I salute you for doing 
that. We need more of that in Government. We have just got to 
eliminate some of these small niche programs that do not 
provide national impact.
    With regard to priority setting, I would say to you, Mr. 
Duncan, that the President has signed a limit on spending. I 
would say to you that if you need more education funding, the 
President should propose altering his discretionary spending 
accounts and put more in education. But just to spend more 
above the limits we have agreed to is not going to be good.
    Now, we are in a tight budget time, as you know, and we 
looked at the interest rates that I just mentioned to you, the 
size of our deficits. Dr. Elmendorf in your chair a few months 
ago told us we are on an unsustainable path financially.
    Okay. So I do not think it is fair to say we are 
disinvesting in education. If you look at Pell grants, which 
make up about a third of what we spend, Pell grants went from 
$18 billion in 2008 to your proposal of $32 billion next year. 
That is an entitlement program, not a discretionary program, 
but are those numbers accurate?
    Mr. Skelly. Those numbers are accurate, Senator. The number 
of recipients also went up over 50 percent. That is the driver 
of the cost.
    Secretary Duncan. And just one quick point on that. We went 
from about 6 million Pell recipients to almost 9 million, a 50-
percent increase, a $40 billion investment, without going back 
to taxpayers for a nickel. We simply stopped subsidizing banks, 
made the loans ourselves. That was wildly controversial here in 
Washington. We thought it made common sense. That is an 
additional almost 3 million young people who may not have had 
the chance to go to college without those dollars.
    Senator Sessions. Well, we will test that out, and maybe it 
will work. I hope so.
    Secretary Duncan. It is working.
    Senator Sessions. All right. And in 2008, the Department of 
Education budget was $59.2 billion. That is your base budget. 
And you are proposing next year a $68.6--increasing to $68.6 
billion, which is, I think, a 15-percent increase. But there 
was only one year, last year I guess, where you had an actual 
reduction.
    Now, that is a result of the Budget Control Act and the 
sequester. So in 2012, you were at $60 billion; at 2013, you 
were at $68.3; post-sequester, you were at $65.7, about a $2.6 
billion reduction. So that was a cut in your base budget. Pell 
grants going up, but your base budget did take a reduction.
    Now, isn't it true that after next year your budget will 
increase at 2.5 percent a year under the Budget Control Act?
    Mr. Skelly. Unfortunately, in 2016, we revert to the 
sequester levels, the bipartisan--
    Senator Sessions. I know, but the sequester level--maybe 
2016 is flat again. But 2017, under the sequester, you get a 
2.5-percent increase each year thereafter?
    Mr. Skelly. I wish we did get that. My understanding, 
Senator, is that we will drop down, almost off another cliff, 
in 2016 and future years in discretionary appropriations.
    Senator Sessions. We will have to look at that number. My 
impression is under the Budget Control Act that after the cuts 
were impactful in the last 2, 3 years, this year, you have got 
tight budgets, you do begin to have some inflationary rate of 
increase in the future.
    Secretary Duncan. I think your understanding is wrong 
there. I wish it was, but I do not think that is correct.
    Senator Sessions. All right.
    Chairman Murray. We can make that happen.
    [Laughter.]
    Senator Sessions. Well, you have improved the budget for--
we spent more in the Ryan-Murray than we originally agreed. But 
it was a tight time because this was the worst year in the 
whole Budget Control Act period, and it was definitely a 
painful process.
    I guess my first point is, as of to date and expecting next 
year, you are not really taking big cuts. Since President Obama 
has been in office, you have increased spending. And that does 
not count the stimulus bill, which was $97 billion for the 
Department of Education. Divided over this 6-year period, that 
would be another $14 billion above what your base budget is.
    So I just want to say, first of all, the Education 
Department has not been savaged. You are having some tough 
times. The growth rates you would like to see have not been 
accomplished. But this is not a savaging of the Education 
budget, in my opinion.
    Now, you and I talked previously about Alabama's reading 
initiative and its math and science initiative. It was 
developed in-State--Madam Chairman, it is really interesting. 
Katherine Mitchell studied all the studies about reading, and 
she crafted a reading program that emphasized proven techniques 
to improve reading. And they would have a reading coach for a 
school. It would start in kindergarten through the sixth grade. 
And all the teachers were coached in how to build on the 
previous year's teacher's processes. And they were taught to 
use these techniques.
    And, you know, people do not like testing, but the way they 
did it was they are testing constantly, and they are knowing 
where a child is falling behind immediately and helping them 
up, not just at the end of the year and say, ``You failed.''
    So it seems to me that did not cost a lot of money, but 
Alabama led the Nation in improved reading scores statewide 
several years ago.
    Could we do more of that? Couldn't you use more of the 
Federal money to research techniques of teaching to help 
teachers in that classroom do better?
    Secretary Duncan. So if we had more research money, we 
would be happy to do that. Just to be very clear, I think what 
Katherine and her team did was remarkable. And I talked earlier 
about how poorly teacher professional development money is 
often used. Well, I think they used their State money and our 
Federal money in some very thoughtful ways.
    As you know, we cannot mandate that. We do not want to do 
that from Washington. That is best done at the State level. But 
this was strong State leadership. This was not let a thousand 
flowers bloom. It was we are going to work together, we are 
going to be on the same page, this is going to be tough-minded. 
And the results speak for themselves, and the State should be 
proud of that.
    Chairman Murray. All right. Thank you to everyone who 
participated today. Secretary Duncan, thank you very much. We 
are late for a vote. We are going to run. But I appreciate what 
you have contributed and look forward to working with you on 
these critical investments.
    I want all of our Committee members to know that Federal 
Reserve Chair Janet Yellen will be here Thursday to testify. 
The hearing starts at 9:30 a.m. Any additional statements or 
questions for the record are due in today.
    Thank you very much.
    [Whereupon, at 11:33 a.m., the Committee was adjourned.] 
    
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                  THE U.S. ECONOMIC AND FISCAL OUTLOOK

 

                         THURSDAY, MAY 8, 2014

                              United States Senate,
                                   Committee on the Budget,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 9:30 a.m., in 
Room SD-608, Dirksen Senate Office Building, Hon. Patty Murray, 
Chairman of the Committee, presiding.
    Present: Senators Murray, Nelson, Stabenow, Whitehouse, 
Merkley, Coons, Kaine, King, Sessions, Grassley, Graham, 
Portman, Johnson, Ayotte, and Wicker.
    Staff Present: Evan T. Schatz, Majority Staff Director; and 
Eric M. Ueland, Minority Staff Director.

              OPENING STATEMENT OF CHAIRMAN MURRAY

    Chairman Murray. This hearing will come to order. Thank you 
to my Ranking Member, Senator Sessions, and all of our 
colleagues who are here and many who will be joining us.
    Today we have the great opportunity to hear from the Chair 
of the Federal Reserve, Dr. Janet Yellen. Dr. Yellen, I want to 
start by thanking you for your leadership in encouraging 
stronger economic growth, stability, and job creation 
throughout your tenure at the Federal Reserve as Vice Chair and 
now as Chair. It really is wonderful to have you here.
    I also do want to take a moment and recognize your 
predecessor, Chairman Ben Bernanke, for all the work he did on 
behalf of the country through some extraordinarily difficult 
times.
    I am glad that we do have the opportunity today to talk 
about our economic and our fiscal outlook and the steps we can 
take to continue creating jobs and broad-based growth now and 
over the long term.
    Dr. Yellen, your new role at the Fed comes at a very 
dynamic time. Just a few years ago, the economy faced its 
biggest crisis since the Great Depression. We were hemorrhaging 
jobs, business faced a massive liquidity crisis, and markets 
were in a free fall. I think we all remember how grave the 
situation was and how much fear and uncertainty there was 
throughout the country.
    As all of this unfolded, the Fed stepped in. They acted 
boldly and aggressively. They cut interest rates, launched new 
emergency programs, and played a very key role in coordinating 
the crisis response. Thanks in no small part to the decisive 
work of the Federal Reserve, our economy is much stronger than 
it was 5 years ago when the Great Recession hit. More workers 
are getting back on the job. The unemployment rate has declined 
to 6.3 percent, the lowest level since September of 2008.
    But as you have noted before, Dr. Yellen, the unemployment 
rate is only part of the story. Across the country there are 
still far too many men and women who simply gave up hope 
finding a job and dropped out of the labor force. There are 
millions of workers who would like to take on more hours but 
are stuck in part-time jobs that leave them really struggling 
to get by.
    Millions more have been hoping for a much deserved raise 
for years, and they are still waiting. And as a result of 
decades of rising prices and stagnant or declining wages, 
families are now finding it more and more difficult to buy a 
home, send their children to school, and save for retirement, 
the opportunities that I know everyone in this room wants them 
to have.
    So while we have made some real progress, there is still a 
lot we need to do to not only get Americans back to work, but 
to encourage the kind of economic growth that leads to higher-
wage jobs, more opportunity, and a stronger middle class.
    Taking a responsible approach to our budget challenges will 
be a critical part of this effort. Since August of 2010, 
Congress has put in place roughly $3.3 trillion in deficit 
reduction over the 10-year window. Some of that deficit 
reduction came from letting the Bush tax cuts expire for those 
at the top of the income spectrum. But the majority came from 
deep spending cuts as a result of fiscally austere policies 
fought for by many of my Republican colleagues. That includes 
the across-the-board cuts from sequestration which impacted so 
many of our families and communities across the country.
    Today our near-term budget outlook has improved 
significantly. We have stabilized the deficit as a share of the 
economy for the next several years. And the deficit for this 
fiscal year is expected to be about a third lower than what the 
Congressional Budget Office projected it would be 5 years ago. 
It is important to keep in mind, however, that as many 
economists and experts have noted, fiscal austerity, like the 
steep spending cuts from sequestration, has actually hurt our 
recovery, slowed growth, and cost jobs.
    These cuts also crippled critical Federal investments that 
make our workforce more competitive and expand economic growth 
in the long term. And while the cuts did contribute to an 
improved fiscal outlook in the next few years, they did very 
little to tackle the real drivers of our debt in coming 
decades.
    Over the last few years, the conversation about these two 
challenges--boosting our economy, getting our fiscal house in 
order--took place within a cycle of lurching from crisis to 
crisis on our budget. Those crises created a lot of economic 
uncertainty and put the focus on getting through the next 
crisis rather than reach an agreement on measures to help the 
economy recover in the near term and tackle our debt in the 
long term.
    With the 2-year budget agreement that Chairman Ryan and I 
reached in place, we finally have a chance to look at these 
challenges without one budget deadline after another hanging 
over us. I am very hopeful we can take advantage of this 
opportunity and be able to build on the Bipartisan Budget Act 
by working together on a balanced approach that puts job 
creation and growth first and continues to address our debt and 
deficit.
    This means even as we look for ways to tackle our long-term 
budget challenges, we need to address the other deficits that 
we face in areas like education and innovation and 
infrastructure and research, which are very critical to job 
creation and broad-based economic growth now and over the long 
term.
    It means we will need to follow the recommendation of the 
bipartisan experts and include both responsible spending cuts 
and new revenue from those who can afford it most in our 
deficit reduction efforts.
    And as we have seen in the last few years, we will need to 
protect our economy by phasing in deficit reduction over time 
rather than allowing deep, immediate spending cuts like those 
in sequestration to slow growth and hurt our recovery.
    I strongly believe that if we can take this kind of 
balanced approach, our economic growth will be stronger and 
more broadly felt right now for the millions of workers and 
families still struggling and for workers and families in the 
decades to come.
    All of this will be especially important as the Federal 
Reserve begins to scale back its most recent round of 
quantitative easing. For most of the last 3 years, the Federal 
Reserve has had to step up its efforts because of the 
counterproductive austerity measures pursued by some in 
Congress. But in this more stable budget environment, I hope 
Congress will be able to work together to encourage job 
creation and growth in a bipartisan way.
    I know there are serious differences between our two 
parties when it comes to the best ways to encourage growth and 
fiscal responsibility. But really our work on the Bipartisan 
Budget Act has shown that when Democrats and Republicans come 
to the table ready to make tough choices and compromise, we can 
find agreement and take some sensible steps towards addressing 
the Nation's near-and long-term economic and fiscal challenges. 
That is what the American people expect of us.
    So I am very hopeful we will be able to continue to make 
progress. Dr. Yellen, thank you again for the critical work you 
are doing and for taking the time to be with us at this 
Committee today.
    With that, I will turn it over to my colleague, Senator 
Sessions.

             OPENING STATEMENT OF SENATOR SESSIONS

    Senator Sessions. Thank you. Thank you, Chairman Murray, 
for your courtesy. Thank you, Chairman Yellen, for appearing 
before us today for an important discussion, and I know you had 
one yesterday.
    I must say that I do not think we can say our economy is 
where we want it to be. It has some very serious problems.
    Like the foundation of a home, America's economy must be 
built on something real, solid, and something firmly planted. 
Neither Federal stimulus in the form of easy money nor fiscal 
stimulus in the form of Government borrowing can produce real 
lasting prosperity or a sound financial future long term.
    Millions of Americans face the economic future with great 
unease today. A large majority think the Nation is on the wrong 
track. No Government regulator, you or your predecessors, no 
matter how intelligent, can see into the future and micromanage 
the economy.
    Let us consider the testimony of former Chairman Alan 
Greenspan at that table before this Committee in January of 
2001. Chairman Greenspan came to alert Congress about an urgent 
policy decision that we would have to make. And what was that 
decision? Whether to raise the interest rates, reduce subprime 
lending, reform entitlements? No. Chairman Greenspan came to 
warn us that we would have to decide how to spend all of the 
surplus money after we soon paid off the entire Federal debt of 
the United States of America.
    He predicted budget surpluses ``well past 2030, despite the 
budgetary pressures from the aging baby-boom generation.'' And 
he said that, ``The highly desirable goal of paying off the 
Federal debt is in reach before the end of the decade.''
    Greenspan warned that after ``continuing to run surpluses 
beyond the point at which we reach zero or near zero Federal 
debt,'' we would need to eschew private asset accumulation. He 
added for emphasis that, ``The emerging key fiscal policy need 
is to address the implications of maintaining surpluses beyond 
the point at which publicly held debt was effectively 
eliminated.''
    So forgive us if we cannot--we as policy leaders ought not 
to assume everything you tell us is always correct. The maestro 
was certainly wrong in that.
    The Federal Reserve is not infallible. Our responsibility 
as legislators is to provide oversight. We are one small voice 
for the American people in watching the organization that you 
head.
    In 2011, the Fed forecasted growth last year between 3.5 
and 4.3 percent. Actual growth was an anemic 1.9 percent, 
roughly half of what you predicted. This is a drastic 
overestimation, not a small miss. And the Fed overestimated 
2013 growth in every formal quarterly prediction for each year 
since 2011. For the people's representatives, your performance 
in that regard, the Fed's performance before you became 
Chairman, is not good.
    Let us consider whether the stimulus policies of the last 5 
years have produced the results predicted. Since 2007, interest 
rates have been near zero, and the Federal Government has added 
$8.3 trillion to the debt. But where do we stand? The 
population has grown by 15 million since 2007, yet we are still 
500,000 fewer people working today than in 2007.
    The workforce participation rate has fallen to 63 percent 
of the civilian population, which is the lowest level in 36 
years. Median household income has fallen an average of $2,268 
per household. That is huge for working Americans, almost $200 
a month less median household income. And the low-income cohort 
has grown while the middle-income group has shrunk. The middle 
class is getting smaller in America.
    While the stimulus mind-set in Washington has at least so 
far been better for the investor class and the political class, 
it has not been good for the working class. Not only has the 
stimulus failed American workers, but it has left us with 
regard debt and an economy dependent on unprecedented policies 
that you and I know cannot continue.
    One of your two statutory duties is to advance full 
employment. While the good job numbers last month are a 
positive sign, it was fully offset, it seems to me, by the fact 
that 988,000 people dropped out of the labor market entirely, 
and the large numbers that did get jobs were part-time jobs.
    So the time has come, I think, to assume and return to 
first principles. Spend what you have. Plan for the future 
carefully. Lay out policies that are prudent and can be 
maintained long term. Do not borrow what you cannot pay back.
    So here are some ways I think would improve the economy 
without adding to the surplus, without adding to the debt, and 
I think each and every one of these absolutely would help 
create jobs and prosperity: more American energy; eliminate all 
costly and wasteful regulations that do not provide benefit; 
make the Tax Code flatter, simpler, revenue neutral; help our 
companies be globally competitive; ensure that fair trade 
protects our workers from unfair trade; adopt an immigration 
policy that serves American workers; turn the welfare office 
into a job training center; streamline the Government, make it 
more productive; and balance the Federal budget to restore 
economic confidence. These are concrete steps that will work. 
We need to return to those principles and move this country 
forward, and I look forward to discussing with you any other 
ideas you might have that would help the country prosper.
    Chairman Murray. Thank you very much, Senator Sessions.
    With that, we are very delighted to have the Chairman of 
the Federal Reserve with us today. Dr. Yellen, we will turn it 
over to you for your testimony.

  STATEMENT OF THE HONORABLE JANET L. YELLEN, CHAIR, BOARD OF 
            GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Ms. Yellen. Thank you. Chairman Murray, Ranking Member 
Sessions, and other members of the Committee, I appreciate the 
opportunity to discuss the current economic situation and 
outlook along with monetary policy before turning to some 
issues regarding financial stability.
    The economy has continued to recover from the steep 
recession of 2008 and 2009. Real gross domestic product growth 
stepped up to an average annual rate of about 3-1/4 percent 
over the second half of last year, a faster pace than in the 
first half and during the preceding 2 years. Although real GDP 
growth is currently estimated to have paused in the first 
quarter of this year, I see that pause as mostly reflecting 
transitory factors, including the effects of the unusually cold 
and snowy winter weather. With the harsh winter behind us, many 
recent indicators suggest that a rebound in spending and 
production is already under way, putting the overall economy on 
track for solid growth in the current quarter. One cautionary 
note, though, is that readings on housing activity--a sector 
that has been recovering since 2011--have remained 
disappointing so far this year and will bear watching.
    Conditions in the labor market have continued to improve. 
The unemployment rate was 6.3 percent in April, about 1-1/4 
percentage points below where it was a year ago. Moreover, 
gains in payroll employment averaged nearly 200,000 jobs per 
month over the past year. During the economic recovery so far, 
payroll employment has increased by about 8-1/2 million jobs 
since its low point, and the unemployment rate has declined 
about 3-3/4 percentage points since its peak.
    While conditions in the labor market have improved 
appreciably, they are still far from satisfactory. Even with 
recent declines in the unemployment rate, it continues to be 
elevated. Moreover, both the share of the labor force that has 
been unemployed for more than 6 months and the number of 
individuals who work part time but would prefer a full-time job 
are at historically high levels. In addition, most measures of 
labor compensation have been rising slowly--another signal that 
a substantial amount of slack remains in the labor market.
    Inflation has been quite low even as the economy has 
continued to expand. Some of the factors contributing to the 
softness in inflation over the past year, such as the declines 
seen in non-oil import prices, will probably be transitory. 
Importantly, measures of longer-run inflation expectations have 
remained stable. That said, the Federal Open Market Committee 
recognizes that inflation persistently below 2 percent--the 
rate that the Committee judges to be most consistent with its 
dual mandate--could pose risks to economic performance, and we 
are monitoring inflation developments closely.
    Looking ahead, I expect that economic activity will expand 
at a somewhat faster pace this year than it did last year, that 
the unemployment rate will continue to decline gradually, and 
that inflation will begin to move up toward 2 percent. A faster 
rate of economic growth this year should be supported by 
reduced restraint from changes in fiscal policy, gains in 
household net worth from increases in home prices and equity 
values, a firming in foreign economic growth, and further 
improvements in household and business confidence as the 
economy continues to strengthen. Moreover, U.S. financial 
conditions remain supportive of growth in economic activity and 
employment.
    As always, considerable uncertainty surrounds this baseline 
economic outlook. At present, one prominent risk is that 
adverse developments abroad, such as heightened geopolitical 
tensions or an intensification of financial stresses in 
emerging market economies, could undermine confidence in the 
global economic recovery. Another risk--domestic in origin--is 
that the recent flattening out in housing activity could prove 
more protracted than currently expected rather than resuming 
its earlier pace of recovery. Both of these elements of 
uncertainty will bear close observation.
    Turning to monetary policy, the Federal Reserve remains 
committed to policies designed to restore labor market 
conditions and inflation to levels that the Committee judges to 
be consistent with its dual mandate. As always, our policy will 
continue to be guided by the evolving economic and financial 
situation, and we will adjust the stance of policy 
appropriately to take account of changes in the economic 
outlook. In light of the considerable degree of slack that 
remains in labor markets and the continuation of inflation 
below the Committee's 2-percent objective, a high degree of 
monetary accommodation remains warranted.
    With the Federal funds rate, our traditional policy tool, 
near zero since late 2008, we have relied on two less 
conventional tools to provide support for the economy: asset 
purchases and forward guidance. And because these policy tools 
are less familiar, we have been especially attentive in recent 
years to the need to communicate to the public about how we 
intend to employ our policy tools in response to changing 
economic circumstances.
    Our current program of asset purchases began in September 
2012 when the economic recovery had weakened and progress in 
the labor market had slowed, and we said that our intention was 
to continue the program until we saw substantial improvement in 
the outlook for the labor market. By December 2013, the 
Committee judged that the cumulative progress in the labor 
market warranted a modest reduction in the pace of asset 
purchases. At the first three meetings this year, our 
assessment was that there was sufficient underlying strength in 
the broader economy to support ongoing improvement in labor 
market conditions, so further measured reductions in asset 
purchases were appropriate. I should stress that even as the 
Committee reduces the pace of its purchases of longer-term 
securities, it is still adding to its holdings, and those 
sizable holdings continue to put significant downward pressure 
on longer-term interest rates, support mortgage markets, and 
contribute to favorable conditions in broader financial 
markets.
    Our other important policy tool in recent years has been 
forward guidance about the likely path of the Federal funds 
rate as the economic recovery proceeds. Beginning in December 
2012, the Committee provided threshold-based guidance that 
turned importantly on the behavior of the unemployment rate. As 
you know, at our March 2014 meeting, with the unemployment rate 
nearing the threshold that had been laid out earlier, we 
undertook a significant review of our forward guidance. While 
indicating that the new guidance did not represent a shift in 
the FOMC's policy intentions, the Committee laid out a fuller 
description of the framework that will guide its policy 
decisions going forward. Specifically, the new language 
explains that, as the economy expands further, the Committee 
will continue to assess both the realized and expected progress 
toward its objectives of maximum employment and 2 percent 
inflation. In assessing that progress, we will take into 
account a wide range of information, including measures of 
labor market conditions, indicators of inflation pressures and 
inflation expectations, and readings on financial developments. 
In March and again last month, we stated that we anticipated 
the current target range for the Federal funds rate would be 
maintained for a considerable time after the asset purchase 
program ends, especially if inflation continues to run below 2 
percent, and provided that inflation expectations remain well 
anchored. The new language also includes information on our 
thinking about the likely path of the policy rate after the 
Committee decides to begin to remove policy accommodation. In 
particular, we anticipate that even after employment and 
inflation are near mandate-consistent levels, economic and 
financial conditions may, for some time, warrant keeping the 
target Federal funds rate below levels that the Committee views 
as normal in the longer run.
    Because the evolution of the economy is uncertain, 
policymakers need to carefully watch for signs that it is 
diverging from the baseline outlook and respond in a systematic 
way to stabilize the economy. Accordingly, for both our 
purchases and our forward guidance, we have tried to 
communicate as clearly as possible how changes in the economic 
outlook will affect our policy stance. In doing so, we will 
help the public to better understand how the Committee will 
respond to unanticipated developments, thereby reducing 
uncertainty about the course of unemployment and inflation.
    In addition to our monetary policy responsibilities, the 
Federal Reserve works to promote financial stability, focusing 
on identifying and monitoring vulnerabilities in the financial 
system and taking actions to reduce them. In this regard, the 
Committee recognizes that an extended period of low interest 
rates has the potential to induce investors to ``reach for 
yield'' by taking on increased leverage, duration risk, or 
credit risk. Some reach-for-yield behavior may be evident, for 
example, in the lower-rated corporate debt markets, where 
issuance of syndicated leveraged loans and high-yield bonds has 
continued to expand briskly, spreads have continued to narrow, 
and underwriting standards have loosened further. While some 
financial intermediaries have increased their exposure to 
duration and credit risk recently, these increases appear 
modest to date--particularly at the largest banks and life 
insurers.
    More generally, valuations for the equity market as a whole 
and other broad categories of assets, such as residential real 
estate, remain within historical norms. In addition, bank 
holding companies have improved their liquidity positions and 
raised capital ratios to levels significantly higher than prior 
to the financial crisis. Moreover, recently concluded stress 
tests mandated by the Dodd-Frank Act have provided a level of 
confidence in our assessment of how financial institutions 
would fare in an extended period of severely adverse 
macroeconomic conditions or a sharp steepening of the yield 
curve alongside a moderate recession. For the financial sector 
more broadly, leverage remains subdued and measures of 
wholesale short-term funding continue to be far below levels 
seen before the financial crisis.
    The Federal Reserve has also taken a number of regulatory 
steps--many in conjunction with other Federal agencies--to 
continue to improve the resiliency of the financial system. 
Most recently, the Federal Reserve finalized a rule 
implementing section 165 of the Dodd-Frank Act to establish 
enhanced prudential standards for large banking firms in the 
form of risk-based and leverage capital, liquidity, and risk 
management requirements. In addition, the rule requires large 
foreign banking organizations to form a U.S. intermediate 
holding company, and it imposes enhanced prudential 
requirements for these intermediate holding companies. Looking 
forward, the Federal Reserve is considering whether additional 
measures are needed to further reduce the risks associated with 
large, interconnected financial institutions.
    While we have seen substantial improvements in labor market 
conditions and the overall economy since the financial crisis 
and severe recession, we recognize that more must be 
accomplished. Many Americans who want a job are still 
unemployed, inflation continues to run below the FOMC's longer-
run objective, and work remains to further strengthen our 
financial system. I will continue to work closely with my 
colleagues and others to carry out the important mission that 
Congress has given the Federal Reserve.
    Thank you. I will be pleased to take your questions.
    [The prepared statement of Ms. Yellen follows:] 
    
     [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman Murray. Thank you very much for your testimony.
    And for our Committee members, we are going to keep our 
questions to 5 minutes each for this since we have a number of 
members here and votes that are coming up.
    Over the past several years, you, your predecessor, and 
your many colleagues on the Federal Reserve System worked 
really tirelessly to put the economy back on track using all 
the tools of monetary policy at your disposal. I wanted to ask 
you about the role that fiscal policy played and should play in 
healing the economy. We have been having a very robust debate 
here in Congress about the direction of near-term fiscal 
policy, and some of my colleagues have been urging very large 
and immediate cuts to a wide swath of public investments, 
programs, services, and, in fact, Government spending and the 
overall budget deficit have both shrunk at or near historic 
rates over the last several years.
    I wanted to ask you this morning about the effect of these 
fiscal policies. Do you think that near-term spending cuts are 
beneficial for our economy's recovery?
    Ms. Yellen. I think that fiscal policy, while it has 
accomplished a very meaningful reduction in the budget deficit, 
as you pointed out, has served as a drag on the economy, on 
spending and aggregate demand in the economy, and in a sense, 
this has been part of the headwinds that the Federal Reserve 
has had to confront in designing our own monetary policy.
    My predecessor asked in a sense that fiscal policy should 
do no harm. We are looking at a significant reduction during 
this year in the amount of drag we are likely to see from 
fiscal policy. According to CBO's estimates, last year 
tightening fiscal policy both on the spending and tax side 
subtracted about 1-1/2 percentage points from GDP growth, and 
that drag is projected to diminish to something on the order of 
half a percent. And so that is really one of the reasons that 
my colleagues and I are forecasting stronger growth and 
continued improvement in the labor market.
    Now, I do want to agree with my predecessor in emphasizing, 
though, that long-run sustainability of fiscal policy and the 
debt is something that is very important. As you mentioned, 
this is something, a set of changes, further changes, as we 
look at CBO's longer-term budget projections, we can see that 
going out 20, 30, 50 years without some further shifts in 
fiscal policy, it is projected that the ratio of debt to GDP 
will rise to unsustainable levels. And I would join my 
predecessor in saying that I do think it is important that the 
Congress address that issue, that having a long-run sustainable 
fiscal policy and debt-to-GDP path that can be maintained over 
time does require changes. But it does not require changes that 
would come into effect so quickly that it would impede the 
recovery.
    Chairman Murray. Do you think the various stand-offs and 
crises that we have had surrounding the debt limit had negative 
consequences for our broader economy?
    Ms. Yellen. It is hard to put a number on what the impact 
of all of those crises has been, but I think probably all of 
you have had the same experience that I have had as you talk to 
business people around the country and to households as well, 
who do talk about uncertainties surrounding fiscal policy and 
that crisis atmosphere along with other elements of regulation 
and uncertainty about the outlook as something that has 
diminished their willingness to hire and invest. And I do think 
that mentality is beginning to change, and I consider it a good 
sign for the economy going forward.
    Chairman Murray. Okay. I only have a few seconds left, but 
I did want to ask you about the discussion we are having about 
wealth and income inequality. We have had some hearings on that 
here. I know you have thought a lot about the role that 
opportunity plays in growing our economy and talked about the 
enormous positive impact from opening up more economic 
opportunities for women. And I just would love to have you 
comment on that in my last 20 seconds here.
    Ms. Yellen. I am very concerned about rising inequality. It 
is a long-term trend that I think is very disturbing, and it is 
something that public policymakers should focus on.
    I do think that opportunity for women has been very 
important, not only recently but really over the last century, 
increasing opportunities for women and their expanding role in 
the workforce in promoting a strong economy and really a 
century of very solid economic performance and growth, and I 
hope that will continue.
    Chairman Murray. Thank you very much.
    Senator Sessions?
    Senator Sessions. Thank you.
    Dr. Yelllen, we have had unprecedented stimulus in the 
fiscal side, including $1 trillion almost in one single piece 
of legislation. We did have a containment of spending last 
year, but it will begin to go back up again soon. So we are far 
from austere. And Dr. Elmendorf has told us that whereas the 
interest on our debt last year was $221 billion, he projects it 
to be $876 billion in 10 years. So this is a threat to our 
future, and we simply have to get our fiscal house in order, 
and I hope you understand that. And you are not going to be 
able to call over from the Fed and tell Congress now is the 
time we would like for you to cut spending this month, but not 
cut it next month.
    Now, since 2009, the United States has borrowed $8 trillion 
and added $8 trillion in new debt. Since 2008, the Federal 
Reserve has increased its balance sheet debt five-fold from 
$900 billion to $4 trillion, over $4 trillion. So let me ask 
you first: Who has benefitted most so far in this process of 
stimulating the economy: investors, CEOs, or everyday working 
middle-class Americans?
    Ms. Yellen. So I would say that there have been widespread 
benefits from the policies that we have followed. Since the 
low, we have created, the economy has created over 8 million 
jobs. And monetary policy has sought to foster that and I 
believe has made some contribution there.
    Senator Sessions. But could I ask you on the job creation, 
we talk about jobs created. We created 288,000 last month, 
which was the best month, supposedly, we have had since--I 
guess one of the best since the recession. But 988,000 dropped 
out of the labor market, and we have got fewer people working 
today than there were in 2007. So how can we tell the 
American--and the population has increased by 15 million, 8 
million in the work age group. So how is this progress, please 
tell me?
    Ms. Yellen. First of all, I would caution you not to 
emphasize too much one month's fluctuation, things like that.
    Senator Sessions. I agree with that.
    Ms. Yellen. I guess if we look over the last 6 months or 
so, I would describe the labor force participation rate as 
roughly stable. However, looked at over a longer span, the 
labor force participation rate has declined very substantially. 
And I would say that there are two reasons for that. One is 
demographic, and it is something that we should expect to 
continue going forward. As I look forward, I am envisioning in 
coming years a continued secular decline in labor force 
participation, and that is due to the fact that the baby 
boomers are entering the retirement years. And as the fraction 
of the population in the retirement years rises, it is very 
natural--
    Senator Sessions. But, Dr. Yellen, the data show, at least 
this recently, that the over 55 are participating at a higher 
rate than the under 55. Do you not agree?
    Ms. Yellen. Yes, it--
    Senator Sessions. One columnist in Barrons said it is 
because daddy has got to take care of the unemployed son in the 
basement.
    Ms. Yellen. It is absolutely true what you say, that 
younger cohorts, more recent retirees, are working more than 
their predecessors did, and we have seen their rate of labor 
force participation rise. But in looking at the overall trend, 
that is dominated by the fact that there is an increasing 
fraction of the labor force in these retirement years. But I do 
want to emphasize that there is more that is going on here, at 
least in my view, than simply demographics, because labor force 
participation has also declined among prime age workers and 
among young people, in part because they are in school a lot 
more.
    But I think that some of those declines--and a portion 
probably of the decline among retirees as well--is because we 
have a weak labor market, and--
    Senator Sessions. Well, I think we have a weak, slack labor 
market. I agree with that. You said yesterday we have never 
seen a situation where long-term unemployment is so large a 
fraction of unemployment.
    Ms. Yellen. I agree.
    Senator Sessions. That is a very significant concern, would 
you--
    Ms. Yellen. Yes, we are on the order of 35 percent, and 
that is--of all those unemployed more than 6 months, and that 
is a very disturbing trend and something that we would like to 
be able to do something about.
    Senator Sessions. Well, thank you for your service. You 
have undertaken a tough job. We want to be positive and 
helpful, but from the point of view of working Americans, this 
is the slowest, most anemic recovery we have seen maybe ever, 
since the Great Depression at least. And we have had median 
income fall by $2,300 per family. We have had a 15 million 
increase in population and a decline in people actually 
working. And we have got more people working part time. This is 
not a good trend. Whatever we are doing, we need to get better 
at it.
    Thank you, Madam Chair.
    Chairman Murray. Thank you.
    Senator Whitehouse?
    Senator Whitehouse. Thank you, Madam Chair. Welcome, Chair 
Yellen. Thank you for being here with us today.
    Many reports on the economy show continuing improvement. 
The stock market is higher, unemployment continues to go down. 
There are elements to the economy that are flourishing. But I 
urge you to remember that there are locations in the country 
where the recovery really has not been experienced much. One is 
my home State of Rhode Island where unemployment is still at 
8.7 percent, and although that puts us in unhappy position of 
being the leading State in the country, there are similar 
geographic areas in larger States that are experiencing similar 
difficulties.
    We are a long way from the boom of Wall Street. We are a 
long way down the pipeline from the natural gas boom. We are a 
long way from the big interventions, like the auto industry 
rescue, that were so beneficial in the Midwest. And I guess two 
things:
    One, I urge you to not be beguiled by the national numbers 
into forgetting the areas where it is still very difficult 
locally;
    And, second, to ask you what policies you think might be 
helpful for those States and areas, geographic areas, that are 
still suffering economically.
    Ms. Yellen. I agree completely with your characterization 
of the national situation. There are pockets of the country 
that are doing extremely well, in part the areas where energy 
production is very strong, and some other areas as well.
    But I think your description of the situation in Rhode 
Island, many areas of the country share the problems that you 
describe. Our objective in monetary policy is to continue to 
maintain an accommodative monetary policy for as long as 
necessary to see recovery of the labor market to a state--it is 
hard to know exactly how to characterize it quantitatively, but 
what the Federal Reserve Act calls ``maximum employment'' or we 
used to call ``full employment'' for short. And in many ways, 
we are far from that, and that is part of the reason why not 
only is there a shortage of jobs but also I think wages are 
rising as slowly as they are. And our mission is both to make 
sure that inflation moves back up to our 2-percent objective, 
but also to want to foster continued recovery in the labor 
market to help Rhode Island and other places like it.
    Senator Whitehouse. One of the ways that I find I can help 
at home is to help support infrastructure projects, 
particularly since we have a national infrastructure deficit in 
a great number of areas--highways, water facilities, so forth.
    From the sort of high perch that you look down on the 
economy from, is there a difference between spending that goes 
out the door in the form of essentially expense and spending 
that results in a tangible asset that remains in the United 
States of America as a highway or a water treatment plant or 
some other facility?
    Ms. Yellen. The way I would look at it in the short run, in 
terms of creating jobs in the economy and for trying to get 
output back up to the potential of what we can produce, it does 
not matter where the spending occurs; it does not matter 
whether it is for a capital investment or something else--
    Senator Whitehouse. It is valuable either way in that 
sense.
    Ms. Yellen. But from the standpoint on long-run growth, it 
does make a great deal of difference what the spending is on, 
and investment spending and capital formation helps not only 
create jobs in the short term, but to promote growth in the 
long term.
    Senator Whitehouse. So there is an immediate value to 
spending in either direction in terms of economic recovery, but 
the long-term value is for the spending that is on 
infrastructure that creates a lasting asset.
    Ms. Yellen. Right. And I think one of the reasons we have 
seen a decline in the productivity growth over the last several 
years is that firms have been spending less and doing less 
capital formation. So this holds not only on the public 
investment side; it holds on the private investment side as 
well. And that is in a way one of the ways in which this 
shortfall, this recession that we are still recovering from has 
served to harm the growth of the economy over the medium or 
longer term.
    Senator Whitehouse. My time is up. Thank you for being with 
us.
    Thank you, Chairman.
    Chairman Murray. Thank you.
    Senator Johnson?
    Senator Johnson. Thank you, Madam Chair.
    Welcome, Madam Chair. It is nice to meet you.
    Ms. Yellen. Thank you.
    Senator Johnson. My background is in education, as an 
accountant, and as a manufacturer, so it is in my DNA to go to 
root cause analysis and I also like numbers. You mentioned 
earlier the 20-, 30-, 40-year outlook and how that is 
unsustainable from a debt-to-GDP ratio. Have you looked at just 
the dollar amounts of deficits that is going to be driving that 
debt?
    Ms. Yellen. You know, I guess I have. I often focus on what 
is the ratio of debt to GDP and is it stable or rising.
    Senator Johnson. Well, one of the reasons I go to dollar 
deficits is it is something I think people can understand a 
little better. CBO seems to be kind of resistant to put their 
projections, so I have done it for them. They like percentage 
of GDP; I like dollars. So their baseline projection over the 
next 30 years--and I think that is a pretty relevant time 
frame; we have that demographic bubble--shows $66 trillion of 
deficits. That is the baseline. The alternate fiscal scenario 
is $127 trillion of deficits, so let me just break that out by 
decade for the alternate fiscal scenario. It is $8 trillion the 
first decade, $31 trillion the second decade, $88 trillion the 
third decade.
    Does that comport with basically what your understanding is 
of the unsustainable nature of our debt and deficit over the 30 
years?
    Ms. Yellen. Yes. I mean, my understanding of the core 
problem is that as the population ages--and, of course, it 
depends on the trend in health care costs relative to other 
prices in the economy as well, which had historically been one 
of rising relative--
    Senator Johnson. That is--again, but my point, that is 
pretty accurate in terms of the numbers I am looking at, and 
that is completely unsustainable. By the way, my daughter just 
turned 31. That just kind of went by like that, so this is not 
that far out in the future. We need to address this sooner 
rather than later.
    I want to hone in on Social Security. Whether you take a 
look at the trustees' report or CBO's, somewhere between $13 
and $15 trillion will be paid out in benefits that exceed the 
payroll tax over the next 30 years. Is that pretty much your 
understanding?
    Ms. Yellen. So I do not have those numbers at my 
fingertips, but--
    Senator Johnson. That seems about correct.
    Ms. Yellen. But eventually that begins to occur.
    Senator Johnson. Okay, because I have been trying to get 
people--and I actually had CBO Director Elmendorf admit this, 
but I just want to ask you if you agree with this statement in 
an OMB publication talking about the trust fund. It says, 
``...these trust balances are assets of the program agencies 
and corresponding liabilities of the Treasury, netting to zero 
for the Government as a whole.'' Do you agree with that 
assessment? In other words, you have $2.6 or $2.7, $2.8 
trillion of the U.S. Government bonds in the trust fund, but 
the Treasury has the offsetting liability. Is that correct?
    Ms. Yellen. Yes.
    Senator Johnson. And so when you consolidate the books of 
the Federal Government, that nets to what?
    Ms. Yellen. Well, it nets to zero.
    Senator Johnson. Zero. So the trust fund really has--to the 
Government as a whole, has no value. Do you agree with that?
    Ms. Yellen. The way I look at it, what is the ratio of 
spending on programs like Social Security--
    Senator Johnson. No, again, I want to hone in on Social 
Security--really I want a very simple answer. Social Security 
will pay out $15 trillion in benefits over the next 30 years 
more than it takes in in payroll tax, and the trust fund has no 
value to the Federal Government. That is a correct statement, 
is it not?
    Ms. Yellen. Well, no, I would not have phrased it exactly 
that way. I mean--
    Senator Johnson. Well, that is the way I am phrasing it, 
and I am phrasing it correctly, am I not?
    Ms. Yellen. The Government has essentially provided the 
Social Security fund with IOUs that says that we will make--
    Senator Johnson. Right, asset offset by--
    Ms. Yellen. --these payments and--
    Senator Johnson. --liability netting to zero, okay.
    Ms. Yellen. --the rest of the Government needs to come up 
with--
    Senator Johnson. Let me move on to jobs. Do you agree with 
CBO's assessment that an increase to the minimum wage, the one 
proposed, would cost us jobs? Up to a million is what CBO 
estimates.
    Ms. Yellen. I do not know what the exact number is. I--
    Senator Johnson. But it will cost jobs.
    Ms. Yellen. It will help individuals who benefit from a 
higher wage at the expense--
    Senator Johnson. But it will hurt individuals that do not 
have a job, correct?
    Ms. Yellen. It is likely to have some negative effect on 
jobs, and it is a question mark exactly how large that impact 
is with different studies coming up with different numbers.
    Senator Johnson. So with the Fed's dual mandate looking at 
trying to improve the employment situation, does the Fed ever 
consider the effect that its low interest rates--the incentive 
it creates for manufacturers to automate? Because I am seeing 
that. As I visit factories around Wisconsin, I am seeing 
functions that I never thought would be automated. For example, 
just a hand tow motor truck, automated. So now there is not a 
person that has to operate that anymore. It is just flying 
around the factory by itself, or maneuvering. Do you consider 
the harmful impact of these very low interest rates on the 
incentives to automate and also reduce employment?
    Ms. Yellen. Those investments raise productivity, and in 
the long run, that is good for the economy. And in order to 
have enough jobs in this economy to put people to work, we do 
not have to ask firms to avoid making investments that are 
profitable for them, that improve productivity. We need to 
expand demand in the economy so that there is enough economic 
activity, even if it is capital-intensive economic activity, 
that creates jobs for people who want to work. So that is what 
we are trying to do.
    Senator Johnson. My point is just the misallocation of 
capital being caused by the very low interest rates, but my 
time is up. Thank you, Madam Chair.
    Chairman Murray. Senator Nelson.
    Senator Nelson. Good morning. Thank you for your public 
service. I am concerned that we are getting too much in a trend 
of the haves and the have-nots, with a shrinking middle class. 
The political and economic stability of this country for two 
and a quarter centuries has been because we have had a broad 
middle class and an aspiring middle class. Could you comment on 
the direction of the country's economy?
    Ms. Yellen. I agree with you, I am very concerned about 
trends toward rising income inequality in the country and 
trends that have affected the middle class. Partly this 
reflects a weak economy and a weak job market that is only 
gradually beginning to get back to normal. So a downturn in the 
economy tends to have a disproportionate impact on middle-
income and lower-income families, and we have seen that. And 
putting in place policies that promote recovery will help, I 
believe, in that dimension.
    But there are also longer-term trends that are contributing 
to what you are describing that are quite disturbing, and I 
think some of them have to do with technology, with 
technological trends that have shifted the demand for labor to 
very high skilled workers and away from those with less 
education, and, in addition, trends in globalization and the 
global economy. And these are longer-run structural shifts that 
I do think policymakers, it is something the Fed cannot address 
all of the causes of this, but a broader range of public 
policymakers, including Congress, I think should be focusing on 
policies that could help. I find this a very disturbing trend 
as well.
    Senator Nelson. If the rich are getting richer and the poor 
are getting poorer and the broad middle class is constricting, 
it sounds like from a policy standpoint that we need to reverse 
those trends to encourage what has caused the political and 
economic stability. Do you want to suggest any policy changes 
that we in the Senate should consider?
    Ms. Yellen. I do not want to give you detailed policy 
advice, and there are a long list of things you could consider. 
But I would say that on anybody's list, training, education, a 
wide range of policies that make it possible for people to 
obtain the kind of education they need to have the skills to 
succeed in this economy, there is a great deal of work on the 
benefits of early childhood education and, of course, access to 
loans that enable people to obtain a good college education, a 
wide range of job training programs, and so forth I think would 
be on anyone's list of things to consider.
    Senator Nelson. Amen to all of that. Thank you.
    You no doubt are aware of the Tax Code provision that has 
expired that Senator Stabenow and I are trying to remedy where, 
if someone who has been very unfortunate, the only way out in 
losing their home is a short sale, that is the least painful 
way, and then lo and behold, they now find that that is 
considered as income, taxable income.
    Just to give you three quick examples from my State, which, 
of course, the housing market was hit enormously hard in 
Florida, but here is someone that, after they exhausted all 
their savings, had to sell their home, and they happen to sell 
the home in 2014, not before the end of the year in 2013, and 
so they have got to pay income tax.
    Another one, they lost their family business, bankruptcy, 
now losing the home due to foreclosure and a short sale, they 
were able to work out. But lo and behold, now they have an 
additional financial obligation of the income tax.
    And so, too, in a third example, they had a contract to 
sell before the end of 2013. It got delayed, and that delay of 
a few weeks then causes them this additional thing.
    Now, we are trying to remedy that. Do you want to comment 
on that?
    Chairman Murray. Very quickly, because, again, we have a 
lot of Senators and a short time frame.
    Ms. Yellen. I think that in my role it is important for me 
not to weigh in on detailed specific changes in fiscal policy 
or taxes, but, of course, the recovery of the housing sector is 
very important, to see that ongoing is important to our 
recovery and has been, a very important factor in the downturn.
    Chairman Murray. Thank you.
    Senator Ayotte?
    Senator Ayotte. Thank you. I want to thank you for being 
here.
    I wanted to ask you about, according to reports, FSOC is 
considering designating asset managers as systematically 
important financial institutions. And as I understand it, two 
companies have already advanced to stage two of the designation 
process. And what I would like to understand is that I believe 
that asset management business is completely different from the 
banking business or in many ways very different, and that the 
risks are different.
    So I guess I would ask you, do you agree that asset 
management and banking are different? And can you help me 
understand also, as I understand it, the designation of asset 
managers as systematically important financial institutions 
that the FSOC council announced it is going to hold a public 
forum on asset management, but they have already moved two 
companies to stage two, so it seems like the cart got before 
the horse there. So if you can help me understand that as well.
    Ms. Yellen. To start off, I would say certainly asset 
managers have very different characteristics than banking 
organizations. FSOC does not comment publicly on individual 
firms or where they might be in the process, and so I do not 
want to comment on what firms are under consideration or where 
they might be in the process. But it has been FSOC's procedure 
all along to do extremely detailed analysis of the specific 
characteristics of the firms that they are looking into and 
considering for designation. There is no one size fits all in 
terms of analysis, and what they are looking to see is, is 
there some way in which the distress of a particular firm could 
give rise to systemic risk for the financial system and the 
economy? And that can occur through a number of different 
mechanisms that they have specified, and it will be necessary, 
if they consider such firms, to really identify clear ways in 
which the failure of these firms could trigger systemic risk.
    Senator Ayotte. And if they are designated that way, asset 
managers potentially--I know that this was one of the issues 
that has been raised--that would serve as a designation of 
potentially too big to fail, which could, as we have seen 
historically, make them eligible for taxpayer assistance in a 
crisis situation. And what we do not want is that to encourage 
them to take on more debt or more risk.
    So can you comment on that criticism of putting asset 
managers perhaps in that category?
    Ms. Yellen. They are not, to my understanding, really 
eligible for taxpayer assistance in a crisis. The Federal 
Reserve is authorized to lend to depository institutions, and 
we are not authorized except in a systemic risk situation 
through our 13(3) powers to--we can design broad programs to 
cover sectors of the economy that may be impacted by 
difficulties in gaining access to credit. But we have no 
authority to lend to individual firms, and if these firms are 
systemic, their failure can cause financial instability 
problems, that is a reason for them to be designated and 
subject to risk standards and potentially capital and liquidity 
standards that would reduce the odds that they could fail.
    Senator Ayotte. Well, one of the things we want to just 
ensure is that hopefully we are not encouraging more risk by 
saying, you know, you have got that taxpayer backdrop, given 
the history of where we have been.
    I wanted to ask you about an important issue that I know 
you have already made some comments on. You know, I am hearing 
so much from our community banks that they feel incredibly 
burdened by Dodd-Frank. And as you look at the history, the 
number of banks is decreasing in the country. And it seems what 
I hear is a one-size-fits-all solution. And I know that you 
recently commented about this issue at the Independent 
Community Bankers conference.
    Ms. Yellen. Yes, I did.
    Senator Ayotte. Can you tell me what your thoughts are 
about how we can address this concern for community banks, 
smaller banks, so that they do not get swallowed up with the 
regulations that may not fit necessarily because they were not 
the big systematic institutions that caused some of the--or put 
us in a situation we were concerned about?
    Ms. Yellen. I completely agree with you that community 
banks were not the source of the financial crisis, and my 
colleagues and I do not want to see them caught up in 
unnecessary regulatory burden. We are very attentive to the 
need to reduce regulatory burden for these institutions to make 
clear that most of the regulations that we are putting in place 
to address systemic risk that affect larger institutions do not 
apply to these smaller institutions. Whenever we put out a 
regulation--an example would be our recent capital regulations 
implementing Basel III--we put out a special guide to show what 
is relevant to community banks, that they can ignore and are 
not affected by the rest. I know that they--there is no 
question they do feel that banking regulation has become more 
burdensome, but I pledge that I will continue to work with my 
colleagues to do all that we can to make sure that we reduce 
the burdens on these community banks and do not in any way have 
a one-size-fits-all approach. I do not think that would be 
appropriate.
    Senator Ayotte. Thank you for that.
    Chairman Murray. Thank you.
    Senator King?
    Senator King. Dr. Yellen, thank you very much for being 
with us. I would urge you to search YouTube and put in ``Jimmy 
Stewart Wonderful Life.'' The very first 2-minute clip is an 
exchange between George Bailey and Mr. Potter that captures so 
much of what we are talking about here today. And I would just 
say, ``Gosh, Ms. Yellen, gee whiz,'' channeling Jimmy Stewart, 
``how about putting a community banker on the Federal Reserve 
Board? Don't you think that would be a good idea?
    Ms. Yellen. I am in favor of that.
    Senator Ayotte. I agree.
    Ms. Yellen. I certainly am in favor of that. We just lost 
two individuals who were very familiar with community banking: 
Governor Duke, who ran a community bank in Virginia and had a 
lifetime of experience in community banking; and Governor 
Raskin, who has now moved to become Deputy Treasury Secretary, 
who served as Commissioner of Banking in Maryland and got to 
know the community banks and the community bank regulatory 
issues very closely. They made huge contributions, and I would 
love to see a replacement.
    Senator King. I hope you will convey that sentiment to the 
White House, please.
    Ms. Yellen. I have done so. Thank you.
    Senator King. By the way, I met with a group of bankers 
from Maine, just to underscore the point you made earlier about 
a little weakening in the housing market, that is what I was 
hearing from them. They are seeing a marked decline in new 
mortgages, and I realize the plural of anecdote is not data, 
but it is getting close, and I think that is something we need 
to pay attention to.
    I was at a panel recently on economics, and there were two 
questions that were unrelated to each other, but it seems to me 
they are related. One was about why is this recession recovery 
so sluggish, and the other was about the gross income 
inequality, the data of 95 percent of the income growth in the 
last few years has gone to the top 1 percent of the population.
    It seems to me those two things fit together. If two-thirds 
of the American economy is driven by consumer spending and the 
income is going to the top 1 percent and not to the people who 
do the spending, isn't that a contributing factor itself to the 
sluggishness of the economic recovery, the lack of demand?
    Ms. Yellen. We have been trying to stimulate demand. 
Greater spending is the key to trying to get the economy to 
operate--
    Senator King. But what I am saying is the consumers who 
generally drive the economy do not have the--are not getting 
the income.
    Ms. Yellen. That clearly is a factor that is relevant, the 
pace of expansion we have seen, yes.
    Senator King. And the famous book that has just recently 
come out by Mr. Piketty that talks about the drag worldwide by 
income inequality, have you had time to digest that? It is only 
1,000 pages.
    [Laughter.]
    Ms. Yellen. I cannot say I have to the last page of it, but 
I am certainly familiar with the book.
    Senator King. Well, it just seems to me it is something--
again, going back to the basic principle that two-thirds of our 
economy is driven by consumer spending, Henry Ford, 100 years 
ago this year, had this insight, doubled the pay of his workers 
so they could buy his cars. And we have got to start thinking 
that way again.
    Ms. Yellen. Many economists have argued that the 
distribution of income does matter to the pace of spending, 
and, I do not know with any utterly clear evidence on this 
topic, but it makes sense to assume that households that would 
tend to spend a great deal of their income when income 
distribution shifts in the direction of those who are wealthier 
and likely spend at the margin less of their income that 
creates a drag on the economy. And a number of economists have 
certainly made that argument.
    Senator King. In the 1 minute left, I want to turn 
completely and talk about the issue of debt, which several of 
your questions have talked about. I think you have articulated 
an intelligent strategy, which is be careful about short-term, 
abrupt fiscal changes to deal with the debt, because that, in 
effect, as you characterize it, is a headwind for the recovery.
    Ms. Yellen. Right.
    Senator King. On the other hand, we cannot ignore this. I 
mean, the debt, just the interest on the debt, if we have a 1-
percent increase in the interest we are paying on our current 
Federal debt--1 percent--which I think everyone agrees is 
likely within the foreseeable future, that will suck more money 
out of the Federal budget than the sequester.
    Ms. Yellen. I would agree that interest does matter to 
spending and to the accumulation of debt. I would also want to 
point out, though, that interest rates are unlikely to begin 
rising until we are in a strong economic recovery. So we 
eventually will start to raise interest rates. I mean, I am 
assuming the economy will continue to recover, and at some 
point that will become appropriate. But in thinking about what 
will happen with deficits and the debt, it is important to keep 
in mind that a stronger economy will be very good for the 
Federal budget deficit. There will be stronger revenues coming 
in and a decline in social safety net spending, and that will 
be an offset, and probably the most important element for the 
deficit and the evolution of the debt. Yes, interest payments 
will go up, but I believe the larger piece of it is likely to 
be that a stronger economy will improve the budget. So both of 
those things are operative.
    Senator King. So a long-term strategy, not a short-term 
emergency strategy, is what we really need to be looking at.
    Ms. Yellen. That is what I would urge.
    Senator King. Thank you.
    Thank you, Madam Chair.
    Chairman Murray. Thank you.
    Senator Graham?
    Senator Graham. Thank you. Let us continue. That was a very 
interesting conversation.
    So it is good news if interest rates go up?
    Ms. Yellen. It is likely good news if interest rates go up. 
I mean--
    Senator Graham. Compared to historical averages, how would 
you say interest rates are today? Are they unusually low?
    Ms. Yellen. Absolutely.
    Senator Graham. Okay. So what you are saying is sort of 
like a cocktail. Interest rates go up. That means more interest 
payments on the debt. It affects long-term and short-term 
indebtedness, right?
    Ms. Yellen. That is correct.
    Senator Graham. But it would be offset by a stronger 
economy.
    Ms. Yellen. Right. We--
    Senator Graham. Would it be one for one?
    Ms. Yellen. I think most projections would suggest that, as 
growth picks up and we are getting the economy moving back 
toward full employment, the effect--I believe this is the 
case--of higher output on the economy, that the impact of that 
on the Federal budget deficit would be larger than the likely 
impact, the negative impact of higher interest rates.
    Senator Graham. So it would be actually a net positive.
    Ms. Yellen. I believe it probably would for a time. You 
know--
    Senator Graham. Okay. I got you. I got you. We got to move 
on.
    Sequestration--if it is fully implemented as envisioned 
beginning in 2016, what effect will it have on our long-term 
national debt--small, medium, large, insignificant?
    Ms. Yellen. What matters is the overall size of budget--
    Senator Graham. Sequestration itself. Would you agree with 
me it would have very little effect because it is not reforming 
entitlements, it is just all discretionary spending?
    Ms. Yellen. I guess I would say that it is not something 
that addresses the long-term problems that are--
    Senator Graham. Well, what are the long-term problems?
    Ms. Yellen. I think what shapes the long-run trajectory 
of--
    Senator Graham. Isn't it the retirement of the baby 
boomers?
    Ms. Yellen. Yes. It is the fact that--
    Senator Graham. Like 80 million of us are going to retire 
in the next 20 to 30 years and we are going to swamp Medicare 
and Medicaid and--Medicare and Social Security. Is that--
    Ms. Yellen. The projections are that Medicare, Medicaid, 
and Social Security would roughly double as a share of GDP.
    Senator Graham. And the projections said that about 2042 
all the projected revenue would go just to pay those payments 
and no money left for anything else?
    Ms. Yellen. That is the dominant trend. It depends on--
    Senator Graham. Okay. So the real long-term effect--
    Ms. Yellen. --health care costs as well.
    Senator Graham. Right. The long-term effect on the country, 
what makes this grease, what puts us in an unsustainable 
situation is the baby boomer is going to retire, and it is just 
going to take all the money to generate to pay the bills with 
the entitlement systems there are today. That is generally--and 
if you do not reform entitlements, you are not going to fix 
this problem. Do you agree with that?
    Ms. Yellen. I think both revenues and spending matter--
    Senator Graham. I did not say how. I just said--
    Ms. Yellen. --Congress to--
    Senator Graham. Well, can you raise enough taxes to fix 
this problem?
    Ms. Yellen. That is really a decision for you to make.
    Senator Graham. I mean, is it possible to raise enough 
taxes to fix this problem? What if you took every penny from 
everybody that made over, you know, the top 1 percent? Could 
you get us out of debt?
    Ms. Yellen. I do not know the answer to that and--
    Senator Graham. Well, I do. No.
    Now, when it comes to our tax system, would you support a 
territorial tax system?
    Ms. Yellen. I do not intend to weigh in on particulars 
about--
    Senator Graham. Do you agree with me that under the current 
Tax Code trillions of dollars of money held by American 
corporations that do business overseas are not coming back into 
this country with a 35-percent tax rate?
    Ms. Yellen. We have seen some trends toward--
    Senator Graham. Why don't you ask them? Why don't you just 
go to the top people and say, ``Are you going to bring the 
money back?'' Pfizer is going to move their headquarters 
overseas. I mean, this is not that hard to figure out. Just 
call up somebody who has got one of these big companies and 
say, ``What would happen if we had a one-time good deal where 
we could take the money and apply it to infrastructure 
spending, something we all agree, would you bring the money 
back?'' Would you call up some of the major companies and ask 
them that question on my behalf?
    Ms. Yellen. We talk to business executives--
    Senator Graham. I am asking you to ask them that question. 
If we had a one-time good deal to repatriate money held 
overseas, would they take advantage of it? Okay?
    Now, let us talk about Obamacare. Do you believe that if 
the incentive in the law is to, if you are not covered, if you 
hire somebody for 29 hours versus 40, a lot of people are going 
to wind up with 29 hours of pay? Is that a likely possibility 
that an employee who works 29 hours, is not covered by the 
mandate of an employee who works 40, can you see a scenario 
where a lot of employers will reduce hours? Do you think that 
is a likely possibility?
    Ms. Yellen. The magnitude of that effect is something that 
one has to look at empirically.
    Senator Graham. Very quickly, if you have over 50 employees 
in the future, every employer will be covered by the mandate, 
could you see a scenario where a company of 48 employees would 
not hire 3 more?
    Ms. Yellen. Such incentives are present. I do not know how 
large they are.
    Senator Graham. Well, you need to talk to people about 
this, because I can tell you, I do not think I would. If I had 
48 employees, I do not think I would hire 3 more if everybody 
was covered by Obamacare.
    Last, if you make $46,000 as an individual, you are 
entitled to a subsidy somewhere in that range, 46, 47. Would 
you take a promotion for $50,000?
    Ms. Yellen. So--
    Senator Graham. You would lose your subsidy, or at least 
part of it. Thanks.
    Chairman Murray. Senator Kaine.
    Senator Kaine. Thank you, Chairwoman Yellen. Great to have 
you here today.
    I want to ask a first question about the management--
economic wisdom about the management of debt. I was a mayor and 
Governor, and we had debts for capital purchases. We did not 
manage our debt either in a city or State by a total debt 
number, we will not go over this number. We managed it by 
ratios. Usually ratios of debt service payment to annual budget 
or in some instances total debt to gross city or State product.
    There has been controversy about the study most discussed, 
this Reinhart-Rogoff study. We have talked about it a lot here 
in this Committee over the last year and a half.
    In your work with the Fed, what is the current sort of best 
economic wisdom about the levels of debt and what ratios we 
should be looking at to keep debt within acceptable levels in 
Federal budgeting?
    Ms. Yellen. There has been, as you mentioned, a great deal 
of controversy over Reinhart and Rogoff, so I do not have a 
number to give you about what is a safe level of debt to GDP. 
But I think it is essential that the path of debt to GDP be one 
that is sustainable over time. And we can see, as we have seen 
in the case of some European countries over the last couple of 
years, that when a country is seen to be on a path where debt 
to GDP is not only high but is projected with current spending 
and tax policies to be rising unsustainably, that can have an 
exceptionally negative effect and begin to drive lenders away, 
and we see interest rates rise.
    Now, the United States has never seen anything like that. I 
think for us it is known that changes have to be made to put 
our debt to GDP on a sustainable course, but that we have 
enough time and have a good enough record as a country in 
making these policy changes that we have not seen any impact in 
our own financial markets I am aware of.
    Senator Kaine. I think the discussions we have been having 
around here generally sort of focus on publicly held debt as a 
percentage of GDP. You would rather be in the low 70s rather 
than the high 70s. We have been trending downward, which is 
positive. There are some demographic trends that you have 
discussed that we would have in out-decades. It is starting to 
trend back up in a pretty significant way.
    If we are sort of using that as sort of our rough strategy 
to try to manage--did that and better to be trending toward the 
low 70s than the high 70s, does that set off, you know, red 
lights in your head like, no, that is probably the wrong way to 
approach this?
    Ms. Yellen. It does not set off red lights.
    Senator Kaine. Okay.
    Ms. Yellen. But as you go out and you see the trend is 
heading up, that is what is worrisome to me.
    Senator Kaine. And that is a little bit like the back and 
forth you had with Senator King about short-term versus long-
term and the different challenges in each time horizon.
    Ms. Yellen. That is right.
    Senator Kaine. The pace of the recovery has been a topic we 
have been discussing today, and something that I wanted to get 
into is uncertainty is affecting the recovery, congressional 
budgetary uncertainty. So long periods of time without budgets, 
the imposition of a sequester that all Congress said, ``We do 
not want this to happen. This will be a bad thing. We are 
setting it up as a punishment to force us to find a deal. But 
if we do not find a deal, we allow the sequester to occur after 
we have said it is going to be bad.''
    Government shutdown, continuing resolutions, which, as I 
describe to my constituents as spending by looking--it is like 
driving by looking in the rearview mirror rather than the 
windshield, we just do what we used to do. Flirting with debt 
ceiling default.
    To what extent has the kind of combined weight of 
congressional budgetary uncertainty been a factor in the slow 
pace of the economic recovery?
    Ms. Yellen. It is just impossible to put a number on that, 
but in discussions that my colleagues and I have had with 
businesses and members of the public, this is a topic that 
comes up very frequently as contributing to an overall sense of 
uncertainty that I think inhibits spending, inhibits hiring and 
business investment.
    And while I do not know just how important it is, there 
certainly is work suggesting that policy uncertainty and 
uncertainty more broadly about the path of the economy has been 
something that has depressed the pace of the recovery.
    Senator Kaine. And so, for example, doing a 2-year budget 
deal, the Murray-Ryan budget deal in December, the first 2-year 
budget in Federal history to give people some certainty, doing 
a full appropriations set of bills in January, getting over a 
debt ceiling discussion with no flirting with default or 
gimmicks in February, those are the kinds of things that--would 
you suggest we should be more like that in the future?
    Ms. Yellen. That does seem like a positive in terms of 
providing confidence to businesses and the public.
    Senator Kaine. Thank you, Madam Chairwoman.
    Chairman Murray. Thank you.
    Senator Wicker?
    Senator Wicker. Thank you, Dr. Yellen. We have a national 
debt of $17 trillion. How much of that does China hold?
    Ms. Yellen. I do not have the number at--
    Senator Wicker. If I have a chart here that says $1.3 
trillion, that would be about right?
    Ms. Yellen. That is probably right.
    Senator Wicker. And Japan next at $1.2 trillion. Let me ask 
you, I also have some information that with regard to this 
foreign debt, some 70 percent of it is actually held by 
governments and some 30 percent is attributed to private 
foreign investors, Japanese banks, for example. So we have got 
a $17 trillion debt, these big Asian countries with a lot of 
it. What should we worry about? Do you worry about the $17 
trillion? Should we be concerned in this Congress about the 
fact that the Chinese and Japanese own so much of it? What do 
you worry about as Chairman of the Federal Reserve?
    Ms. Yellen. I worry about, as we have discussed here, the 
long-term path of the debt and whether or not it is 
sustainable. U.S. Government debt is regarded as the safest of 
safe assets, and it is very much in demand globally among 
investors who want security.
    Senator Wicker. That is a good point. What rate of return 
do these investors receive today on U.S. debt?
    Ms. Yellen. Well, a 10-year Government bond is a little bit 
over 2-1/2 percent, and so this is a safe return, and--
    Senator Wicker. Why do they continue to purchase--why do 
these governments continue to purchase our bonds, Chairman 
Yellen?
    Ms. Yellen. Because they have confidence that it is an 
extremely safe investment, and I hope it also suggests and 
believe it suggests that they have confidence in the Federal 
Reserve as an institution that is committed to maintaining 
price stability and a sound dollar. And so in addition to what 
Congress does with respect to future deficits, our management 
of the economy, our commitment to keep inflation as close as we 
can to our inflation objective of 2 percent, this is also an 
important factor.
    Senator Wicker. What alternatives do they have? And what 
could tip the balance away from them choosing to invest further 
in United States securities?
    Ms. Yellen. I think--
    Senator Wicker. What is their next choice?
    Ms. Yellen. They have many other choices of assets that 
they can purchase. I think if we were to lose their confidence, 
either by a failure to address long-term debt problems, fiscal 
problems, or by mismanagement by the Federal Reserve, then we--
    Senator Wicker. Well, let me ask you about the long-term 
issue, and Senator King mentioned this. If the economy improves 
as you expect it to, the $221 billion we pay each year in 
interest on the national debt, that will double. Is that 
correct?
    Ms. Yellen. It depends on what happens to interest rates, 
but, yes, as the economy recovers and as inflation moves back 
toward our objective, the Federal Reserve eventually will begin 
to normalize monetary policy and raise short-term interest 
rates.
    Senator Wicker. And so the 227 billion that we paid-the 221 
that we paid in fiscal year 2013 or $227 billion that we expect 
to pay in this fiscal year would double to somewhere close to 
half a trillion in interest on the national debt under that 
scenario, would it not?
    Ms. Yellen. Well, it certainly would go up.
    Senator Wicker. Let me ask you also, yesterday I had the 
opportunity in another committee to have a conversation with 
you. You expect the asset purchase program to end in the fall 
of 2014. What variables could occur to make the Fed alter that 
decision and continue the asset purchase program?
    Ms. Yellen. What we need to see in order to follow that 
plan is continued improvement in the labor market and an 
overall pattern of growth that is sufficient to cause us to 
project continued improvement--
    Senator Wicker. Can you modify that improvement? What 
degree of improvement?
    Ms. Yellen. Our objective is to make sure that the economy 
moves back to full employment or maximum employment, and we are 
making gradual progress. We have made considerable progress 
since we started the asset purchase program. Whenever we meet, 
we ask ourselves the question: Do we continue to believe that 
the economy is on a path that will take us toward our objective 
of reaching full employment or maximum employment? And we also 
think about inflation, which is running below our 2-percent 
objective, and ask ourselves: Does incoming evidence suggest 
that inflation will also be moving back up to 2 percent over 
time? And if the answer to those two questions is yes, we will 
continue to reduce the pace of our asset purchases.
    Now, if the economic outlook were to change in such a way 
that we no longer felt that the answer to those questions was 
yes, then we would reconsider our plans.
    Chairman Murray. Thank you.
    Senator Stabenow?
    Senator Stabenow. Thank you very much, Madam Chair, for 
holding the hearing, and, Dr. Yellen, thank you very much for 
being here. And let me first say thank you for being prudent as 
you move forward on decisions and for recognizing that jobs and 
the economy matter, so I appreciate very much your thoughtful, 
deliberate approach.
    I also wanted to associate myself with my colleagues 
Senator Ayotte and Senator King and others on community 
bankers, so let me just say we certainly appreciate and need 
there to be an understanding that they did not cause what 
happened and are very much at the front lines of helping us get 
out of any recession that we still have, which we do for many, 
many middle-class families.
    I want to speak just for a moment before asking a question. 
When we talk about why would people invest in the United 
States, I think there are a lot of great reasons in terms of 
rule of law and stability and the manufacturing renaissance 
that is coming, the low natural gas prices that are helping to 
fuel that. We, in fact, have a deficit, Madam Chair, as you 
know, that since 2009, since the President came into office, is 
down by about two-thirds, about 66 percent. Any other time 
there might be ticker-tape parades and speeches on the floor 
about bringing down the deficit that much. We are seeing stock 
markets double, basically double since the spring of 2009. Also 
at other times, if there was a different President, a different 
party, I think we would be hearing very different things about 
the economy improving. And so I just want to say for the record 
the economy is improving.
    My biggest concern--and I know many, of my colleagues share 
this--is that it is not improving for everyone. And we have an 
economy based on supply and demand, very focused on supply, 
waiting for things to trickle down, and too many people are 
still waiting for things to trickle down. And the demand part 
of this is critical.
    So before I ask any questions, I do want to also say that 
if we were to line up 774 people around this building, 774 
people making minimum wage, which still keeps them below the 
poverty level, still keeps them on food assistance, still keeps 
them on additional health care help, you could line them up, 
and that would equal one average CEO's salary in this country. 
That is a problem for us if we, in fact, have an economy based 
on two-thirds consumer spending.
    So when colleagues talk about raising the minimum wage or 
equal pay or giving folks a fair shot, I just want to one more 
time toot the horn of a great Michigan person, Henry Ford, 100 
years ago, as Senator King mentioned. He doubled his workers 
wagers--which, by the way, if it was today's minimum wage would 
be almost $15 an hour. Because of this small businesses 
thrived. He was heavily criticized by the Wall Street community 
saying the world was going to end. It did not end, and he 
became one of the wealthiest men of his generation. So I would 
take that any day.
    On to my question. As we see deficits coming down, there is 
one area of deficit that continues to go up which is of great 
concern in terms of the economy, and you mentioned education. 
We now have total student loan debt over $1 trillion, which is 
more than credit card debt. A huge issue. Seventy percent of 
the students have to borrow money to attend college and leave 
with nearly $30,000 in loans. Talk to a medical student, or 
others in grad school, it is much, much higher.
    So could you talk about what you would see as the estimate 
of the impact of student loan debt on the economy and the costs 
for us as we try to continue to come out of this recession and 
keep our middle class?
    Ms. Yellen. I certainly agree with you that student loan 
debt has risen at a very rapid rate. I always start, though, 
by--I think it is important for us to recognize how important 
it is to be able to get education and to have access to loans 
that will improve earning power over time.
    That is always my starting point in thinking about this. 
But I do worry, for example, when students are taking on heavy 
burdens of debt, which cannot be discharged in bankruptcy, do 
they really actually understand for starters what the benefits 
will be of the programs that they are involved in? Are they 
being given appropriate information about what the benefits of 
a particular program are in terms of placement, completion 
rates, and so forth? Do they have good knowledge about the 
returns from the debt that they are taking on?
    But the debt loads certainly are high enough that they may 
play a role, for example, in making it hard for people to buy 
first homes, to build a downpayment, and that may be an effect 
that we are seeing right now already in the housing market. I 
do not know of clear evidence of it, but there has been just a 
huge increase in debt. And for families that get into trouble 
with student debt, it is something that cannot be discharged in 
bankruptcy. And it can represent a very heavy burden for an 
individual if things do not go well.
    Senator Stabenow. And I might just add that it is also an 
area where we have not allowed refinancing at the low rates 
that you have created for other parts of purchasing in the home 
market and so on, which is why many of us have joined with 
Senator Warren in legislation that would allow those students 
to refinance at the lowest rate that we had all voted on last 
year, 3.86 percent, and get folks out of debt so they can buy 
that home, get that car, and be able to have the life that they 
want. So thank you very much.
    Chairman Murray. Thank you very much.
    We have three Senators who are left here in this order: 
Senator Grassley, Senator Coons, and Senator Portman. I have to 
go to another hearing, Sylvia Mathews Burwell's confirmation 
hearing, so I am going to turn the gavel over to Senator King. 
This is how you get senior really fast, Senator King, if you 
want to come up here and take over the gavel, and I really 
appreciate your doing it. And I really want to thank you, Dr. 
Yellen, for your testimony today. We will finish with these 
last three Senators, and thank you very much, Dr. Yellen.
    With that, I will turn it over to Senator Grassley.
    Senator Grassley. The American Enterprise Institute studied 
salaries of bank regulators and compared them to salaries of 
bank employees. They found that bank regulators on average made 
more than double the amount of their private sector 
counterparts. This study involved salaries of the Comptroller 
of the Currency office, the Federal Deposit Insurance 
Corporation, Consumer Financial Protection Bureau. The 
institute was not able to examine salaries of the Federal 
Reserve employees because the Fed refused to respond to Freedom 
of Information Act requests from Judicial Watch.
    I ask this question because I am quite an advocate for 
transparency and disclosure because I would think it creates 
accountability. You have been called a leader in transparency 
at the Federal Reserve. To what extent would you provide 
detailed information about the salary of Federal Reserve 
employees?
    Ms. Yellen. Let me just start by saying with respect to 
general salary levels at the Fed, we benchmark what we pay very 
carefully on an ongoing basis to surveys of competition, 
including at other Federal regulators. We do release salary 
information. We have provided the names of individuals who are 
our top earners, individuals with salaries above $225,000. We 
have provided information on salary grades, including officer 
grades, and salary ranges that go with those grades. We have 
provided information on benefits that employees at the Board 
and the Federal Reserve receive, and our annual report contains 
total salary and compensation expenditures, so that is 
information that we are already providing.
    Senator Grassley. Then you must be telling me that Judicial 
Watch has been satisfied that they got the information that I 
was told they did not get from you? I guess my question is: 
What would be wrong with providing that information, a Freedom 
of Information request? What would be wrong with that? Wouldn't 
that be the thing to do? I mean, you are a public servant; your 
organization is a public institution. It seems to me like it 
should'nt be any different than any other, like the Comptroller 
of the Currency, the Federal Deposit Insurance Corporation?
    Ms. Yellen. We have provided this information in response 
to FOIA requests, including--
    Senator Grassley. Well, if you have and I am wrong, I am 
willing to accept that. I will get back to the people that I 
read about and the reason for my question. Let me go on to 
another one. And if they tell me you are wrong, I am going to 
be writing to you, and I want an answer why. You are a public 
institution; you are public servant. Why are you different than 
any other part of the Federal Government that will make the 
same information available?
    On another question, in the past a conventional view among 
many economists was that there was an inverse relationship 
between inflation and unemployment. That is, rising inflation 
was associated with lower unemployment. Now, a couple decades 
ago, Milton Friedman challenged the view, claiming that over 
the long run this relationship actually breaks down as 
individuals begin to expect inflation. An example of his theory 
at work was the stagflation of the 1970s.
    So just one question: Do you have any concerns that the 
high inflation and high unemployment that we experienced in the 
1970s could happen again should the Fed act too slowly in 
reversing its easy money policies?
    Ms. Yellen. The Federal Reserve is very well aware of 
Milton Friedman's theory, and I am not aware of anyone in the 
Federal Reserve who adheres to the notion that there is a 
permanent trade-off between unemployment and inflation. We all 
recognize that inflation expectations matter and can shift over 
time. All of us lived through the 1970s where we saw that 
happen. None of us want to or would be willing to see that 
happen again, and it is why in our statements we constantly 
reference the importance of inflation expectations and their 
stability and the fact that they are anchored in terms of 
describing our policy and how it will be conducted.
    Senator Grassley. How long will it take you to get your 
balance sheet down to $800 billion like it was in 2008?
    Ms. Yellen. We all expect our balance sheet to gradually 
decline over time after we regard it as appropriate to begin to 
tighten policy. We have not decided and will probably wait 
until we are in the process of normalizing policy to decide 
just what our long-run balance sheet will be. But clearly it 
will be substantially lower than it is now, and it will take a 
period of a number of years. This could happen simply by ending 
our reinvestment policy at some point. If we did that and 
nothing more, it would probably take somewhere in the 
neighborhood of 5 to 8 years to get it back to pre-crisis 
levels.
    Senator Grassley. Thank you, Mr. Chairman.
    Senator King. [Presiding.] Thank you.
    Senator Coons?
    Senator Coons. Thank you. Thank you, Dr. Yellen. Thank you 
for your leadership of the Fed, and thank you for your 
testimony here today and for your service. And thank you, 
Senator King, for chairing the hearing.
    There were some exchanges previously about community 
bankers, community banks, and their potential role that I just 
thought was constructive and would encourage your continued 
thought in that direction.
    Let me, if I might, move us towards a focus on inflation. 
Given that it is still well below the target of 2 percent, I 
would be interested in what you think are the consequences of 
it staying below 2 percent. In your written testimony, you 
talked about a variety of factors that might lead to inflation 
either re-emerging or staying low. And do you think there is 
any risk of our entering a deflationary period and what would 
be the consequences if that were to happen?
    Ms. Yellen. We have seen that deflation is associated with 
very weak outcomes, economic outcomes, in the rare situations 
where it has occurred. And it is something we absolutely want 
to avoid.
    But even ignoring the risk of deflation, inflation that 
runs persistently at levels that are lower than our 2-percent 
objective also has economic costs. First of all, it raises the 
real or inflation-adjusted cost of capital, and it also 
redistributes debt burdens in the sense that when individuals 
take on debt, they have an expectation for how rapidly prices 
and their own incomes, wages, will be rising. And when those 
expectations are frustrated by exceptionally low inflation, 
debtors find that the burden of their debts is really greater, 
and that is something that constrains their spending.
    So we want to avoid persistently having inflation both 
running higher than our objective, but also running lower than 
our objective on a persistent basis.
    Senator Coons. Referencing back to the question perhaps 
that Senator Grassley asked, folks who grew up in the 1970s or 
in the 1980s implicitly, from your comments, have gut 
assumptions about inflation rates that are significantly 
different than the current period. Would there be some real 
benefits to having inflation exceed 2 percent?
    Ms. Yellen. We have to a point in this country we have now 
had a long period since the early or mid-1990s in which 
inflation has averaged 2 percent. And if you look at inflation 
expectations, they run around 2 percent. And they have been 
very stable and well anchored. And they have not moved around 
when actual inflation on some temporary basis has diverged from 
2 percent, and that is a huge asset to this country, to have 
stable, well-anchored inflation expectations.
    For example, when we have undergone periods in which oil 
prices have risen and there were a number of years in which, 
contrary to our in-the-markets expectations, oil prices 
continued to go up for a number of years, so headline inflation 
ran above 2 percent. With well-anchored inflation expectations, 
we did not see what happened in the 1970s. Namely, what should 
be a temporary period of inflation above our objective due to 
rising commodity prices,, in the 1970s, dislodged inflationary 
expectations_they rose. And then even when energy prices 
stabilized, we were left with permanently higher inflation. We 
have not seen that since the mid-1980s, and that is a huge 
asset to us in conducting monetary policy to be able to rely on 
it. So I would not favor trying to raise our inflation 
objective above where it is.
    Senator Coons. Let me ask one other question. There has 
been a lot of conversation here and work around deficits and 
deficit reduction in the last few years. The American Society 
of Civil Engineers has given our national infrastructure a 
rating of D-plus. My own home State has a number of bridges 
that fail safety standards. I would posit that we have a 
significant infrastructure deficit as well as an innovation 
deficit because we are underinvesting in R&D relative to our 
main competitors. We are underinvesting in maintaining and 
upgrading our infrastructure relative to our main competitors.
    Do you have any comment about what value it would be to our 
economy and to recovery of significantly increasing our short-
term investment and then sustaining in a longer-term way our 
investment in infrastructure and in research and development?
    Ms. Yellen. Spending in the short term on infrastructure 
would tend to create jobs or stimulate aggregate demand. From a 
long-run perspective, I believe it has benefits for long-term 
growth. Studies of the factors that determine long-term growth 
consistently point to R&D, which influences the pace of 
technological change, productivity growth, as well as 
investment or capital spending, both private and public.
    Senator Coons. Thank you. Thank you very much for your 
testimony.
    Thank you, Mr. Chairman.
    Senator King. Senator Portman.
    Senator Portman. Thank you, Mr. Chairman. And thank you, 
Chairwoman, for being here today. I know you have had to answer 
a lot of questions today and a lot of things have been 
discussed. I guess one that I have always been curious about is 
when you say that you are going to begin to reverse this 
quantitative easing, which I view to be at historic levels, one 
thing you talked about is interest rates. And you said that if 
interest rates are below 6.5 percent, you will begin that 
process--
    Ms. Yellen. Unemployment.
    Senator Portman. I am sorry. The unemployment rate at 6.5 
percent. First I look at the fact that people say we are at 6.3 
percent unemployment now, but more to the point, are you taking 
into account the more fundamental weakness on the labor market 
side when you look at folks who have left the workforce 
altogether? As you know, if you were to take the labor force 
participation rate, which is the percent of folks who are 
actually looking for a job or working, and compare it to either 
before the recession or even when President Obama was sworn 
into office, the first one, if you compared those two rates, we 
would be at 10.8 percent unemployment right now. If you take it 
back to when President Obama was sworn in, it would be 10.4 
percent.
    So the 6.3 percent or 6.5 percent, for that matter, looks 
better than it actually is given the reality out there, and one 
of my colleagues said earlier that this is a weak recovery, 
another one said it is a real recovery, but not everybody is 
benefitting from it. I would tell you there are millions of 
Americans not benefitting, historic levels of long-term 
unemployment, who are counted in the unemployment numbers 
relative to any other recovery, and all these folks who have 
left the workforce altogether.
    So are you taking that into account when you choose an 
unemployment rate to begin backing off on the easing?
    Ms. Yellen. Okay. If I could just clarify, 6.5 percent was 
an unemployment rate we named. It had the following 
significance. We said that as long as inflation was under 
control and the unemployment rate exceeded that level, we would 
not consider raising our target for short-term interest rates. 
So it was not something that we tied to our asset purchases. It 
was tied to the level of short-term interest rates.
    Now, we did not say that we would start to raise our target 
for short-term interest rates when unemployment fell below 6.5. 
It was something we were simply trying to tell the public: Do 
not even think about the possibility the Fed will raise 
interest rates with unemployment in excess of that 6.5 percent 
level as long as inflation is not an issue.
    It was not a trigger to start raising the level of rates. 
And we recognize that as we get closer to our goal of full 
employment, we cannot look at any single statistic in 
describing the state of the labor market, and everything that 
you mentioned--the level of labor force participation, trying 
to understand why it has fallen so much, what part of that is 
due to demographics, and what part of that is a reflection of a 
weak labor market--the fact that you mentioned that long-term 
unemployment is so very high and there is so much part-time 
employment that is involuntary, that we would have to factor 
all of those things and other facts about the labor market--
    Senator Portman. I understand that, and yet I would hope 
that you all would be looking at some of those other indicators 
of our economy, and--
    Ms. Yellen. We are indeed looking at those indicators.
    Senator Portman. And, by the way, I am not suggesting that 
you should not back off some of, again, what I view as 
unprecedented Federal Reserve quantitative easing, including 
setting interest rates at relatively low levels, because I do 
think there is some danger there. But in terms of the economy, 
I just do not think that the unemployment number reflects the 
reality. And, you know, in terms of the demographic changes you 
suggest, I would suggest--I am sure you have all looked at the 
Brookings study that talks about the fact it is not my 
generation, baby boomers, who are retiring early primarily. It 
is probably disproportionately young people, probably 
disproportionately men, probably disproportionately single men. 
And this economy is, therefore, in my view, not as strong as 
folks say.
    Then the question is: What do you do about it? What should 
the Fed do? And I think there is this old saying, you know, if 
you have a hammer, every problem you see is a nail. And I worry 
that the Federal Reserve is trying to use its monetary policy 
hammer, in effect, to solve a problem that is really not a 
monetary problem, and at some risk by doing so. So that is my 
own view. When I talk to business leaders, I hear that the 
reason that they are not investing in plant and equipment and 
people has a lot less to do with interest rates and a lot more 
to do with the uncertainty in the economy.
    There is a study--you probably say it out there--of 500 
CFOs, chief financial officers, around the country saying--68 
percent of them said they would not increase their business 
investments, no matter how low interest rates go. And they said 
that they will not even though they have got $2.5 trillion 
right now in excess reserves in banks and businesses are 
hoarding about $2 trillion of their own cash as well, we are 
told, sitting on the sidelines. That is not happening because 
they say there is uncertainty. And what they tell me is that it 
is about the debt. You talked about this earlier in response to 
some of the questions. The fact that we are heading toward just 
about 100 percent GDP to debt, right now we are about 74 
percent, concerns them. And I hope it concerns us as 
policymakers.
    Tax increases, they are concerned about when the President 
keeps proposing more tax increases. Certainly the Affordable 
Care Act and its effect on costs of doing business, what the 
EPA is doing and other regulations that increasingly move from 
the legislative branch to the executive branch, creating even 
more uncertainty, not knowing what the regulators will do. And 
I would say one of the uncertainties is Federal Reserve policy. 
One, they do not know what you are going to do, as you say, so 
many different factors so you really do not have a trigger; 
but, second, concerned about the potential impact of the 
unprecedented expansionary policies, in particular the 
possibility of a bubble as more and more people, not being able 
to invest in stocks and bonds and getting any return because 
rates are so low, are going into the equity markets, taking 
sometimes more risky investments on the stock market side and 
creating the potential for a bubble.
    So that is a lot of, you know, commentary for you to 
respond to, but I would love to hear your response to that. Is, 
in fact, what the Fed is doing not responsive to the real 
problem based on the anecdotes that I am hearing, you are 
hearing, I am sure, in your various boards around the country 
and what these surveys are telling us, one? And, two, is what 
you are doing, in effect, making it even worse?
    Senator King. Madam Chair, before you begin, we have just 
been notified a vote has begun on the floor, so if you can 
respond to the very broad question with a very precise answer. 
Thank you.
    Ms. Yellen. Monetary policy is not a panacea, but I think 
maintaining a policy of low interest rates has been helpful in 
a number of ways. I think it has helped get housing back on 
track, helped the housing sector more broadly, house prices 
have risen. That has helped the financial situation of many 
households. We have seen a revival in car sales. For firms in 
terms of their investments, as you mentioned, many different 
factors matter, and interest rates, low interest rates, may be 
less of a factor in stimulating capital spending. But I think 
there are a number of sectors of the economy that have 
responded favorably to a policy of low interest rates, and it 
has helped stimulate demand and job growth. It has been one 
factor that has been helpful. Again, I would not say it is a 
panacea.
    Senator Portman. Thank you, Madam Chairwoman.
    Thank you, Mr. Chairman.
    Senator King. Senator Sessions, closing?
    Senator Sessions. Well, thank you, Mr. Chairman. You look 
good in that job.
    [Laughter.]
    Senator Sessions. A rapid rise, meteoric rise, I have to 
say.
    Madam Chair, thank you for coming, and I know that you work 
hard at this job and take it exceedingly seriously. You were 
one of those more correct--the only one, I think, on the Board 
anticipating the severity of the housing crisis. So that is 
something that I express my appreciation for.
    But just let me say we are not happy. The average American 
is not doing well. I do not think we need to overspin the 
positive numbers that are there, because I agree with Senator 
Portman almost totally on his comments about what he is hearing 
in the business world.
    So thank you. You are challenged in your new position. We 
hope that you will lead us with wisdom and good insight. Thank 
you.
    Ms. Yellen. Thank you, Senator.
    Senator King. Chairman Yellen, thank you so much for 
joining us today. It has been delightful to meet you and to 
hear your, I think, very thoughtful comments. I want to thank 
my colleagues for the information.
    My colleagues will meet back here on Tuesday, the 13th, for 
a hearing on expanding economic opportunity for women and 
families.
    I also want to mention I was delighted, Chairman Yellen, to 
hear your comments about infrastructure. In 1832, a 23-year-old 
young man running for the legislature in Illinois talked about 
the key importance of infrastructure development--canals, 
riverways, and roads--for the development of the economy of the 
nascent United States. That was Abraham Lincoln at the age of 
23.
    Finally, as a reminder to my colleagues, additional 
statements and questions for the witness are due by 6:00 p.m. 
today to be submitted to the Office of the Chief Clerk in Room 
624.
    With that, and, again, our sincere thanks, Chairman Yellen, 
not only for appearing today but also for the work that you are 
doing.
    Ms. Yellen. Thank you so much.
    Senator King. I call this hearing to a close.
    Ms. Yellen. Thank you.
    [Whereupon, at 11:27 a.m., the Committee was adjourned.]
     
     
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