[Senate Hearing 113-519]
[From the U.S. Government Publishing Office]


                                                 
                                                         S.  Hrg. 113-519
 
               MID-SESSION HEARINGS FOR FISCAL YEAR 2015

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

                                HEARINGS

                               before the

                        COMMITTEE ON THE BUDGET
                        
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION



 April 1, 2014-OPPORTUNITY, MOBILITY, AND INEQUALITY IN TODAY'S ECONOMY
   APRIL 8, 2014-SUPPORTING, BROAD-BASED ECONOMIC GROWTH AND FISCAL 
                RESPONSIBILITY THROUGH A FAIRER TAX CODE
   MAY 1, 2014-INVESTING IN WHAT WORKS: EXPLORING SOCIAL IMPACT BONDS
  MAY 13, 2014-EXPANDING, ECONOMIC OPPORTUNITY FOR WOMEN AND FAMILIES
   JUNE 4, 2014-THE IMPACT OF STUDENT LOAN DEBT ON BORROWERS AND THE 
                                ECONOMY
    JULY 29, 2014-THE COSTS OF INACTION: THE ECONOMIC AND BUDGETARY 
                  CONSEQUENCES OF CLIMATE CHANGE deg.

                                     
               MID-SESSION HEARINGS FOR FISCAL YEAR 2015

                                ------
                                                     S. Hrg. 113-519               

               MID-SESSION HEARINGS FOR FISCAL YEAR 2015

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

                                HEARINGS

                               before the

                        COMMITTEE ON THE BUDGET
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               ----------                              


 April 1, 2014-OPPORTUNITY, MOBILITY, AND INEQUALITY IN TODAY'S ECONOMY
   APRIL 8, 2014-SUPPORTING, BROAD-BASED ECONOMIC GROWTH AND FISCAL 
                RESPONSIBILITY THROUGH A FAIRER TAX CODE
   MAY 1, 2014-INVESTING IN WHAT WORKS: EXPLORING SOCIAL IMPACT BONDS
  MAY 13, 2014-EXPANDING, ECONOMIC OPPORTUNITY FOR WOMEN AND FAMILIES
   JUNE 4, 2014-THE IMPACT OF STUDENT LOAN DEBT ON BORROWERS AND THE 
                                ECONOMY
    JULY 29, 2014-THE COSTS OF INACTION: THE ECONOMIC AND BUDGETARY 
                     CONSEQUENCES OF CLIMATE CHANGE

                                     
                                     
                                      ______

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                        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 WHITEHOUSE, RHODE ISLAND     LINDSEY O. GRAHAM, SOUTH CAROLINA
MARK R. WARNER, VIRGINIA             ROB PORTMAN, OHIO
JEFF MERKLEY, OREGON                 PAT TOOMEY, PENNSYLVANIA
CHRISTOPHER A. COONS, DELAWARE       RON JOHNSON, WISCONSIN
TAMMY BALDWIN, WISCONSIN             KELLY AYOTTE, NEW HAMPSHIRE
TIM KAINE, VIRGINIA                  ROGER F. WICKER, MISSISSIPPI
ANGUS S. KING, JR., MAINE

                     Evan T. Schatz, Staff Director

                 Eric Ueland, Republican Staff Director

                                  (ii)


                            C O N T E N T S

                               __________

                                HEARINGS

                                                                  Pages
April 1, 2014-Opportunity, Mobility, and Inequality in Today's 
  Economy........................................................     1
April 8, 2014-Supporting, Broad-Based Economic Growth and Fiscal 
  Responsibility Through a Fairer Tax Code.......................    57
May 1, 2014-Investing in What Works: Exploring Social Impact 
  Bonds..........................................................   113
May 13, 2014-Expanding, Economic Opportunity for Women and 
  Families.......................................................   193
June 4, 2014-The Impact of Student Loan Debt on Borrowers and the 
  Economy........................................................   329
July 29, 2014-The Costs of Inaction: The Economic and Budgetary 
  Consequences of Climate Change.................................   411

                    STATEMENTS BY COMMITTEE MEMBERS

Chairman Murray 







Senator Sessions 



Senator Warner...................................................   113
Senator Ayotte...................................................   116
senator Whitehouse...............................................   117
Senator Johnson..................................................   332

                               WITNESSES

Heather Boushey, Ph.D., Executive Director and Chief Economist, 
  Washington Center for Equitable Growth, and Senior Fellow, 
  Center for American Progress 



John L. Buckley, Former Chief Tax Counsel, House Committee on 
  Ways and Means, and Former Chief of Staff, Joint Committee on 
  Taxation 



Raj Chetty, PH.D., William Henry Bloomberg Professor of 
  Economics, Harvard University 



Rohit Chopra, Assistant Director and Student Loan Ombudsman, 
  Consumer Financial Protection Bureau 



Annmarie Duchon, Associate Director of Accommadion Services, 
  University of Massachusetts, Amherst 



Mark Fisher, CBE, Social Justice Director, Department for Work 
  and Pensions, United Kingdom 



Mark Fisher, Delegate, Maryland House of Delegates 



Diana Furchtgott-Roth, Senior Fellow, Manhattan Institute for 
  Policy Research 
  


Alfredo Gomez, Director of Natural Resources and Environment, US 
  Government Accountability Office 



Sherri W. Goodman, Executive Director, CNA Military Advisory 
  Board 




Jane G. Gravelle, PH.D., Senior Specialist on Economic Policy, 
  Congressional Research Service 



Keith Hall, PH.D., Senior Research Fellow, Mercatus Center 



Brittany Jones, Former President, Student Virginia Education 
  Association 



Jeffery B. Liebman, Malcolm Wiener Progessor of Public Policy and 
  Director, Social Impact Bond Technincal Assistance Lab, John F. 
  Kennedy School of Government, Harvard University 



Bjorn Lomborg, Adjunct Professor at Copenhagen Business School 
  and Director of the Copenhagen Consesus Center 



Mindy Lubber, President, CERES 



Kyle McKay, Analyst, Texas Legislative Budget Board 



David Montgomery, PH.D., Senior Vice President, NERA Economic 
  Consulting 

 

Sabrina L. Schaeffer, Executive Director, Independent Women's 
  Forum 

 

Joseph Stiglitz, PH.D., University Professor of Economic, 
  Columbia University 

 

Richard K. Vedder, PH.D., Distinguished Professor, Emeritus of 
  Economics, and FacultY Association, Contemporary History 
  Institute, Ohio University, and Director, Center for College 
  Affordability and Productivity 

 


             QUESTIONS AND ANSWERS AND ADDITIONAL MATERIALS

Questions and Answers 

 
 
        OPPORTUNITY, MOBILITY, AND INEQUALITY IN TODAY'S ECONOMY

        
        
                            TUESDAY, APRIL 1, 2014

                              United States Senate,
                                   Committee on the Budget,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:06 a.m., in 
Room SD-608, Dirksen Senate Office Building, Hon. Patty Murray, 
chairman of the committee, presiding.
    Present: Senators Murray, Sanders, Whitehouse, Merkley, 
Kaine, 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. This hearing will come to order.
    I want to thank my Ranking Member, Senator Sessions, and my 
colleagues who are joining us here today, and I especially want 
to thank our panel of distinguished witnesses for being here, 
Nobel Laureate Joseph Stiglitz and Senior Research Fellow at 
Mercatus Center, Dr. Keith Hall. We have a third witness. He is 
John Bates Clark Medal Recipient Dr. Raj Chetty. His flight was 
canceled coming in today. I believe he is landing at National 
shortly, so he will join us as soon as he can get here.
    Today's hearing is really going to focus on mobility, 
inequality, and opportunity, but really at the heart of the 
discussion is the basic promise of America, the idea that no 
matter where you come from or who you are or your 
circumstances, if you work hard and play by the rules, you have 
the chance to live out the American dream.
    That basic promise is why I sit in this chair today. When I 
was 15, my father was diagnosed with multiple sclerosis, and 
within just a few years, he could not work anymore and all of a 
sudden, without any warning, my family fell on very hard times. 
But the country did not turn their back on us. For several 
months, we relied on Food Stamps. With the help of a government 
program, my mom was able to attend Lake Washington Vocational 
School so she could get a job, help put food on the table, and 
take care of my dad. My brothers and sisters and I were all 
able to go to college and stay in college because of student 
loans and support from what we now call Pell Grants. We had 
lost our footing, but because of this great country, we never 
lost hope that with hard work, we would have the opportunity to 
live out that American dream.
    But, something happened to our economy over the last three 
decades or so. Instead of rewards from hard work and innovation 
being shared broadly, those rewards began to flow 
overwhelmingly to those at the very top while everyone else was 
getting left behind. But stagnant economic mobility and soaring 
inequality are not inevitable. We can expand opportunity to 
more Americans and ensure people have the tools that they need 
to succeed, and that is what Congress should be focused on in 
the coming years.
    We know that our economy thrives when America's middle 
class can earn enough to raise a family and save up for their 
kids' college and put some money away for a secure retirement. 
But in recent decades, the middle class has been squeezed. 
Wages have stagnated. Workers cannot find jobs. Homeowners 
worry about making their next mortgage payment. That has 
happened even as incomes for the country's top earners have 
increased. That trend is simply unsustainable and unhealthy for 
our economy.
    A recent study by the International Monetary Fund shows 
that countries with higher inequality have slower growth and 
more turbulent business cycles. As you have written, Dr. 
Stiglitz, the United States has one of the highest levels of 
inequality among the advanced industrial countries.
    Making matters worse, as inequality has grown, it has not 
gotten any easier for people to climb the economic ladder, as 
we will hear from Dr. Chetty, who is joining us as we speak. 
Thank you very much for being here. That research finds that 
the birth lottery, or a child's parents' socio-economic 
standing, matters more today than it used to because economic 
mobility is stagnant while inequality is on the rise.
    That is a very alarming trend because it goes against 
America's basic promise. Right now, there could be a child with 
the potential to go on to make new medical breakthroughs or 
start a new business or innovate new technologies, but even if 
she did not win that birth lottery, our economy and the world 
might never benefit from her talents and skills. But, Dr. 
Chetty, you also found in your research that some areas in the 
U.S. have greater economic mobility, notably places that have 
less inequality and good school systems.
    So, we can overcome these challenges. Government alone 
cannot solve the problem of inequality. Of course, businesses 
that create good-paying jobs help people reach the middle class 
and build a stable and secure life. But we in Congress can 
create the conditions so that all Americans, from the top 
income earners to those in the middle class and those 
struggling to get there, can succeed, and to do that, we need 
to do some foundational things to help today's workers.
    I believe that starts a with a minimum wage increase. 
Working full time should not leave a family in poverty. 
Congress can and should act to ensure that hard work pays off 
by raising the minimum wage for millions of workers.
    Last week, I introduced the 21st Century Worker Tax Cut. 
That bill would update our tax code to help today's workers and 
families keep more of what they earn. It would give working 
families with children a 20 percent deduction on a second 
earner's income and expand the Earned Income Tax Credit, or 
EITC, for workers without dependent children who are just 
starting out or whose children have already left home. Based on 
estimates from the Treasury Department and
    the Joint Committee on Taxation, those simple changes to 
our tax code would help more than 13 million childless workers 
and more than seven million working families climb the economic 
ladder.
    My bill is paid for by closing corporate tax loopholes that 
both sides have proposed closing. I know there are differences 
when it comes to our parties, how we would use those savings. 
My bill would close those loopholes to give workers and 
families some tax relief, while Chairman Camp has proposed 
closing those loopholes to pay for lower rates for 
corporations. I am hopeful that, especially when they consider 
the kinds of challenges we are discussing today, my Republican 
colleagues will rethink their approach and join our effort to 
give a tax break to struggling workers who really need it.
    We also need to address all of our deficits fairly and 
responsibly. Our country faces serious long-term fiscal 
challenges. So while this year our deficit is expected to be 
about a third of what it was just five years ago, I want to 
continue to build on the $3.3 trillion in deficit reduction we 
have already put in place. But at the same time, creating 
opportunity means we cannot lose sight of the other deficits 
that our country faces. Too many people cannot find work. Our 
economy is still recovering after the worst economic downturn 
since the Great Depression. So, we have to do more for people 
who are struggling to find a job.
    We have to also address our infrastructure deficit. 
Infrastructure is what makes our economy move. It helps our 
businesses grow. It makes our communities thrive. We need to 
make those investments to spark economic growth and to create 
more jobs for more workers.
    We have to also give our kids the best education and 
training they need to compete and lead the world, and that 
means investing in early learning all the way up to college and 
job training programs.
    And, we have to maintain a strong safety net. Programs like 
food assistance and affordable housing help make sure families 
do not fall into deep poverty or hunger or homelessness. 
Instead, it gives families more opportunity to climb the 
economic ladder.
    And the last point I will mention is the need to reform our 
tax code. Our system is riddled with tax loopholes and special 
interest carve-outs that benefit the wealthiest Americans and 
biggest corporations, and that is unfair. Instead of spending 
billions on those tax loopholes, we should be investing in 
national priorities that benefit American families.
    We have lots of work to do for families in our country, and 
in our divided government, getting anything done is going to 
take bipartisanship and compromise. Thankfully, here in 
Congress, we proved just a few months ago that is possible. 
Democrats and Republicans can break through the bitterness and 
rancor, work together, and reach an agreement.
    When Chairman Ryan and I sat down together after the 
government shutdown last year, we faced a lot of skepticism 
that we would be able to get anything done. But, we listened to 
each other, we searched for common ground, and we made some 
compromises. We knew we were never going to agree on 
everything, but we did not think that should mean that we could 
not agree on anything. And when we got a deal just a few months 
ago, the vast majority of the Congress put partisanship aside 
to do the right thing for the American people.
    Our two-year budget deal was a strong step in the right 
direction. It rolled back some of the damaging across-the-board 
cuts and prevented a government shutdown. It restored some 
certainty by setting budget levels, not just for 2014, but also 
for 2015, so our Appropriations Committees in the House and 
Senate can do their work on time using bipartisan numbers.
    Now, we need to build on that. We should not relitigate our 
bipartisan budget deal or create needless uncertainty again in 
a budget process that should finally be free of crisis. And I 
will certainly fight back against any attempts to move our 
country backwards, with deeper cuts to investments for our 
families and seniors or unfair and irresponsible budget 
proposals that protect the wealthiest Americans and biggest 
corporations from paying a penny more of their fair share.
    But, we do owe it to our constituents to keep working 
together towards policies that create jobs, increase economic 
mobility, and gives more people opportunity. Every child 
growing up today deserves the same shot at the American dream 
that my family had, and I am ready to work with anyone, 
Democrat or Republican, to get that done.
    With that, I will turn it over to my counterpart, Senator 
Sessions, and then we will hear from our experts on this.

             OPENING STATEMENT OF SENATOR SESSIONS

    Senator Sessions. Well, thank you. Thank you very much, 
Senator Murray, and for your leadership.
    This is an important discussion, an important issue that we 
are facing, and I would note that the Ryan-Murray spending 
limits that we agreed on was violated again yesterday, $6 
billion more spent in 2014 than we agreed, to in that 
legislation that you worked hard on to pass.
    So, a sober review of the data reveals that the economic 
situation for too many Americans remains unacceptable. 
Household incomes have declined for five years. The number of 
households at the lower end of the distribution grew by 1.7 
percent, while the number of households in the middle income 
decreased by 0.7 percent. In other words, the middle class lost 
members to the lower-income group. That is not the trend we 
want. I think we do need to understand that and recognize it.
    Our unemployment rate remains stuck around seven percent, 
but this statistic obscures much of the real picture. Millions 
of Americans have left the workforce entirely, bringing the 
workforce participation rate to its lowest level since 1978. We 
were told that massive debts accumulated over the last five 
years would lead to prosperity, but we are now left with none 
of the prosperity and all of the debt. Growth last year was 
half what the White House predicted it would be, and the White 
House estimates have consistently been too high.
    So, I agree, Dr. Stiglitz, with one of the remarks that you 
have in your statement that what matters is whether citizens 
see their living standard rise year after year. A pure GDP 
analysis is not sufficient. We are government officials. We 
have responsibilities to the people of this country and it is 
appropriate to consider what is happening and what policies 
might be exacerbating this condition.
    Both the President and Chairman Murray have proposed as one 
remedy to expand the Federal support for adults without 
children. However, the President's proposal to expand the 
Earned Income Tax Credit--and this is a real tax subsidy, 
colleagues, not a tax deduction--it interacts with the 
Obamacare subsidies in a way that surely would, contrary to 
expectations, penalize work. Because the Earned Income Tax 
Credit and the Affordable Care Act phase-out schedules 
correspond with one another, an adult without children whose 
income goes from $14,700 to $17,700 would lose 75 cents in 
higher taxes and reduced benefits for every dollar they earn. 
So, this creates an incentive not to earn. To grow employment, 
we need to affirm work rather than punish it.
    So, it is time for a compassionate reform, indeed. First, 
EITC would appear to be a better method of helping the poor 
than straight government assistance. I agree with that. This 
can be a point of bipartisan agreement. But, it cannot be one 
more program that traps Americans in poverty, and we do not 
have the money to create a new welfare program, colleagues. We 
do not have the money. So, any new program can and should be 
paid for out of savings from existing welfare programs.
    The government spends more than $750 billion a year on a 
maze-like welfare bureaucracy. This money is spread across more 
than 80 programs in dozens of agencies with little oversight 
and no guiding vision. Imagine how much better it would be if 
we combined these programs into a single credit with strong 
oversight and a greater emphasis on job training and work 
placement, where an individual prosperity plan could be 
developed for each unemployed or underemployed worker that 
would help move them into a better life financially.
    So, we continue to hear about many of the government 
spending projects our friend on the other side would like to 
fund. But, a major reason there is no money for these new 
projects is because of the huge rising interest payments on our 
massive debt. We have squandered our financial inheritance and 
are fast moving to destroy the American self-reliance and work 
ethic that has made our nation so dynamic.
    Let us put things in perspective. Last year, we paid out 
$221 billion in interest, but the Congressional Budget Office 
says that payment will rise in 2024 to $880 billion. The 
President says it will rise in his budget to $812 billion. That 
single year's interest payment is 300 times what we spend today 
on our National Parks. It is 20 times what we spend today on 
highways. It is enough to fund our Federal education programs 
for ten years. And the President and many in the Senate, in a 
time of slow growth and low job creation, want to double the 
number of guest workers to take jobs that are needed for our 
unemployed. If we care about economic growth, if we care about 
prosperity, than we have got to recognize these rising interest 
payments threaten to drown our economy.
    We need to create more growth, more jobs, and better pay. 
Some, I think, in this country believe higher wages are bad. I 
do not believe higher wages are bad. It seems to me we have a 
surplus of labor because wages are falling. In this economy, if 
we actually have a shortage of labor, a tight labor market, 
wages would be going up.
    Here is how to get this economy on the right track, it 
seems to me, without adding to the debt. Produce more American 
energy, creating jobs right here in America, keeping wealth at 
home. Eliminating all costly and non-productive regulations, 
and there are lots of them. Make the tax code simpler and more 
growth oriented. Ensure fair trade for U.S. workers by holding 
our foreign trading partners accountable. We cannot allow this 
continued massive currency manipulation, either. Adopt an 
immigration policy that serves our national interests and the 
interests of working poor in America. And last week, our House 
Democrats endorsed a plan that would double the flow of new 
immigrant workers into America--double the flow--which would 
further reduce wages and job prospects.
    We need to turn the welfare office into a job training 
center. Streamlining the government itself, make our government 
leaner and more productive to lessen the wealth it extracts 
from America. And, finally, let us balance the Federal budget 
and create confidence in our financial future and security for 
our children.
    All of these steps would create jobs and growth without 
adding to the debt. All of these steps would create rising 
incomes and wages. All of these steps would grow the middle 
class, not the government.
    Thank you, Madam Chair.
    Chairman Murray. Thank you.
    With that, we are going to turn to our three witnesses, and 
again, thank you all for coming here today.
    Dr. Stiglitz, we will begin with you.

 STATEMENT OF JOSEPH STIGLITZ, PH.D., UNIVERSITY PROFESSOR OF 
                 ECONOMICS, COLUMBIA UNIVERSITY

    Mr. Stiglitz. Well, thank you very much. It is a great 
pleasure for me to discuss with you one of the critical issues 
facing our country is growing inequality, the effect it is 
having on our economy, and the policies that we might undertake 
to alleviate it.
    America has achieved the distinction, as you pointed out, 
of becoming the country with the highest level of income 
inequality among the advanced countries. Matters have become 
worse in every dimension. More money, more than a fifth of all 
income, goes to the top. More people are in poverty at the 
bottom. And the middle class, long the core strength of our 
society, has seen its income stagnate. Median household income 
adjusted for inflation today is lower than it was a quarter-
century ago. There is a vicious circle. Our high inequality is 
one of the major contributing factors to our weak economy and 
our low growth.
    Data describing the other dimensions of America's 
inequality are even worse. Inequalities in wealth are even 
greater than income, and there are marked inequalities in 
health. The most invidious aspect of U.S. inequality, however, 
is the inequality of opportunity that you referred to earlier.
    America has become the advanced country not only with the 
highest level of inequality of outcomes, but is among those 
with the least equality of opportunity. The statistics show 
that the American dream is a myth. The life prospects of a 
young American are more dependent on the income and education 
of his parents than in other advanced countries. We have 
betrayed one of our most fundamental values. The result is that 
we are wasting our most valuable resource, our human resources. 
Millions of those at the bottom are not able to live up to 
their potential.
    This morning, I want to make eight observations concerning 
this inequality. The first is that this inequality is largely 
the result of policies, of what we do and do not do. The laws 
of economics are universal. The fact that in some countries, 
there is so much less inequality and so much more equality of 
opportunity, the fact that in some countries, inequality is not 
increasing, it is even decreasing, is not because they have 
different laws of economics. Every aspect of our economic, 
legal, and social frameworks helps shape our inequality. In 
virtually every domain, we have made decisions that help enrich 
the top at the expense of the rest.
    The second observation is that much of the inequality at 
the top cannot be justified as just desserts for the large 
contributions that these individuals have made. 
Disproportionately, they are those who have excelled in rent 
seeking and wealth appropriation, in figuring out how to get a 
larger share of the nation's pie rather than enhancing the size 
of that pie.
    Thirdly, the idea that one should not worry about 
inequality because everyone will benefit as money trickles down 
has been thoroughly discredited. While the top has been doing 
very well, the rest has been stagnating.
    Fourthly, this recession has, in turn, made inequality much 
worse. Ninety-five percent of the gains since the so-called 
recovery have gone to the top one percent.
    Fifth, it is not the case that our economy needs this 
inequality to continue to grow. One of the popular 
misconceptions is that those at the top are the job creators 
and giving more money to them will, thus, create more jobs. 
America has both creative and entrepreneurial people throughout 
the income distribution. What creates jobs is demand. When 
there is demand, America's firms will create the jobs to 
satisfy that demand. This growing inequality is, in fact, 
weakening demand, one of the reasons that inequality is bad for 
economic performance.
    Sixth, we pay a high price for this inequality, for the 
extremes to which inequality has grown in the nature of 
inequality in America, both in outcomes and opportunities. A 
divided society does not function well. Our democracy is 
undermined as economic inequality translates into political 
inequality. America's politics are increasingly better 
described as a result of a system not of one person, one vote, 
but of one dollar, one vote.
    Greater inequality leads to lower growth and more 
instability. These ideas now have become mainstream. Even the 
IMF, as you mentioned, has embraced them. We used to think of 
there being a trade-off. We could achieve more equality, but 
only at the expense of giving up on overall economic 
performance. Now, we realize that greater equality and improved 
economic performance are complements.
    This is especially true if you focus on appropriate 
measures of growth, focusing not on what is happening on 
average or to those at the top, but how the economy is 
performing for the typical American, reflected, for instance, 
in median income. For too many, perhaps even a majority, the 
American economy has not been delivering.
    And if our economy is not delivering, it not only hurts our 
people, it undermines our position of leadership in the world. 
Will other countries want to emulate an economic system in 
which most individuals' incomes are simply stagnating? We pay a 
price, not only in terms of weak economy today, but lower 
growth in the future. With nearly one in four American children 
growing up in poverty, many of whom face a lack of access to 
adequate nutrition and education, the country's long-term 
prospects are being put into jeopardy.
    The seventh observation is that the weaknesses in our 
economy have important budgetary implications. The budget 
deficits of recent years are a result of our weak economy, not 
the other way around.
    The final observation I want to make is that the role of 
policy in creating inequality means there is a glimmer of hope. 
There are policies that could reduce the extremes of inequality 
and increase opportunity. In the last chapter of my book, The 
Price of Inequality, I outline 21 such policies affecting both 
the distribution of income before taxes and transfers and 
after. Most of the policies are familiar: More support for 
education, including preschool; increasing the minimum wage; 
strengthening the Earned Income Tax Credit; giving more voice 
to workers in the workplace, including through unions; more 
effective enforcement of anti-discrimination laws; better 
corporate governance; financial regulations and antitrust laws 
more effectively enforced; and a fairer tax system.
    The special provisions for capital gains and dividends not 
only distort the economy, but with the vast majority of the 
benefits going to the top, increase inequality. At the same 
time, they impose enormous budgetary costs of the kind that Mr. 
Sessions has emphasized, almost $2 trillion, if we include the 
provisions of step-up of basis from the special provisions for 
capital gains and dividends. If we are to avoid the creation of 
a new plutocracy in the country, we have to retain a good 
system of inheritance and estate taxation. We need to make sure 
that everyone who has the potential to go to college can do so, 
no matter what the income of his parents, and to do so without 
undertaking crushing loans.
    In the past, when our country reached these extremes of 
inequality at the end of the 19th century, in the Gilded Age or 
in the Roaring '20s, it pulled back from the brink. It enacted 
policies and programs that provided hope that the American 
dream could return to being a reality. We are now at one of 
those pivotal points in history. I hope we once again will make 
the right decisions. You and your committee and the budget 
decisions that you will be making play a vital role in setting 
the country in the right direction.
    I would like to also submit for the record the paper that I 
wrote on reforming taxation to promote growth and equity, where 
I show that we can actually raise the revenue that we need to 
address the problems of inequality and address the problems of 
the budget deficit in ways, as I say, that will reduce 
inequality and promote economic growth.
    Chairman Murray. Okay. Thank you very much. Without 
objection.
    [The prepared statement of Mr. Stiglitz follows:]
    
    [GRAPHIC] [TIFF OMITTED] 
    
    Chairman Murray. Dr. Chetty, thank you very much.

    STATEMENT OF RAJ CHETTY, PH.D., WILLIAM HENRY BLOOMBERG 
           PROFESSOR OF ECONOMICS, HARVARD UNIVERSITY

    Mr. Chetty. Chair Murray, Ranking Member Sessions, and 
members of the committee, it is my pleasure to speak to you 
today about opportunity and inequality in the United States.
    As you know, America is often hailed as the land of 
opportunity, a society in which children can succeed regardless 
of their family background. However, opportunities for upward 
income mobility in the U.S. are actually lower than in other 
countries.
    To take one statistic, a child born to parents in the 
bottom fifth of the income distribution in America has a 7.5 
percent chance of reaching the top fifth of the income 
distribution, as you see here on the slides. In contrast, if 
you look at Denmark, a child born in the bottom fifth of the 
income distribution there has an 11.7 percent chance of 
reaching the top fifth. So, that is, children in Denmark have a 
50 percent higher rate of realizing the American dream than 
children growing up in America.
    Now, this low social mobility in the U.S. is not a new or 
temporary problem. Mobility has been low in the U.S. for the 
past several decades. However, because of the increase in 
inequality discussed by Professor Stiglitz, the lack of 
mobility is a much more pressing problem today. In a society 
without much inequality, mobility would not matter very much 
because everyone would have similar incomes regardless of 
whether they moved up or not. But in a society with very high 
levels of inequality, a lack of opportunity is a severe problem 
and can substantially hamper economic growth.
    Now, the stability and mobility over time has led some to 
question whether social mobility can be meaningfully influenced 
by policy. I think the answer to this question is, yes, 
mobility can be improved by changes in policies that you can 
shape. The reason I am confident that mobility is malleable is 
that there are substantial differences in mobility across 
communities within America, as illustrated in this map here, 
which I am going to turn to next.
    So, this is a heat map which shows you the chance that a 
child born to parents in the bottom fifth of the distribution, 
the income distribution, reaches the top fifth across areas of 
the United States. Lighter colors are areas with higher levels 
of upward mobility. So, what you can see from this map is that 
in some parts of the U.S., such as the Southeast or the Rust 
Belt, children who are born in the bottom fifth of the 
distribution have less than a five percent chance of reaching 
the top fifth. In contrast, in other areas, such as the Great 
Plains and the West Coast, the odds exceed 15 percent.
    Now, one thing you have to remember is no matter what 
policies you enact, you are never going to have more than 20 
percent of people in the top 20 percent, right. So, the fact 
that you have odds of 15 percent versus five percent, you know, 
these are really big differences in rates of upward mobility 
across places within the U.S.
    Now, there is substantial variation in upward mobility even 
among the largest cities. So, to take some examples here shown 
in this table, in cities like Salt Lake City and San Jose, you 
have rates of mobility that are comparable to Denmark and the 
most mobile countries in the world. But in contrast, if you 
look at other cities, like Milwaukee or Charlotte, North 
Carolina, the odds of reaching the--rising from poverty to the 
upper parts of the income distribution are much, much lower, 
lower than any developed country for which we currently have 
statistics.
    Now, this variation in economic mobility across areas in 
the U.S., in my view, is actually some reason for optimism, 
because if we can make every city in America have mobility 
rates like San Jose or Salt Lake City, the United States would 
become one of the most upwardly mobile countries in the world 
and this would dramatically change economic growth and the 
structure of the economy.
    So, this naturally leads to the next question which we have 
investigated in our research. What makes some places in America 
have much higher rates of upward mobility than others? So, we 
find five key factors that are correlated with differences in 
upward mobility across areas.
    The first is segregation. Areas with more racially 
integrated neighborhoods and more mixed-income neighborhoods 
tend to have higher rates of upward mobility.
    The second, as Senator Murray mentioned, is inequality. 
Areas with greater inequality, in particular, a smaller middle 
class, have less opportunity for mobility, as well.
    Third, as you might expect, areas with better schools, for 
instance, better teachers, smaller classes, better funding, 
tend to have higher levels of upward mobility.
    Fourth, areas with greater social capital, which are 
proxies for the strength of social networks and community 
involvement in an area, also tend to have higher levels of 
upward mobility.
    And finally, mobility is much higher in areas with stronger 
family structures, areas with fewer single parents, for 
example. Now, a very important thing to note there is that even 
children of married parents have higher rates of upward 
mobility if they live in a community with fewer single parents. 
So, this is something about the structure of the community and 
not, per se, whether you have single or married parents.
    So, these correlations do not necessary tell us what causes 
the differences in mobility across areas, but the results of 
the research that I have been describing point to certain types 
of policy solutions, and that is the last set of issues that I 
would like to discuss.
    First, since rates of upward mobility vary widely across 
cities, as I have shown you, place-based initiatives that focus 
on specific areas, for instance, improving mobility in 
Charlotte or Milwaukee, may be more effective than addressing 
the problem at a national level. Such policies might include 
targeted tax credits, efforts to revitalize local communities 
such as Promise Zones, or funding for improvements in local 
schools and investments in infrastructure.
    Second, much of the spatial variation in children's 
outcomes emerges before they start working. We find that 
children in areas with low-income mobility also have higher 
teenage birthrates and lower college attendance rates. So, by 
the time they are in their teenage years, you are seeing 
children in Charlotte and in Milwaukee falling behind if they 
are from disadvantaged families. This tells me that it is 
important to improve childhood environments rather than 
focusing exclusively on providing jobs and ladders for 
opportunity as adults. I think both are very important.
    Third, there is clear evidence that improving primary 
education can have substantial effects on mobility. For 
example, in a recent study tracking one million students over 
25 years, my colleagues and I find that a high-quality, 
excellent teacher generates more than $1.4 million in earnings 
gains for a single classroom of students over their lives. 
Hence, programs that increase teacher salaries and provide 
incentives for local school districts to retain and recruit 
higher-quality teachers are likely to have very large payoffs. 
Importantly, such investments in education have substantial 
returns throughout childhood, not just in the earliest years.
    Finally, perhaps the simplest and most cost effective way 
to improve mobility may be to construct and publicize local 
statistics on economic mobility. For instance, offering awards 
or grants to areas that have substantially improved their rates 
of upward mobility could spark local policy changes. I think 
that shining a spotlight on the communities where children do 
have opportunities to succeed can enable others to learn from 
their example and increase opportunities for economic mobility 
throughout America.
    Thank you.
    [The prepared statement of Mr. Chetty follows:]
    
    [GRAPHIC] [TIFF OMITTED] 
    
    Chairman Murray. Thank you very much.
    Dr. Hall.

    STATEMENT OF KEITH HALL, PH.D., SENIOR RESEARCH FELLOW, 
                        MERCATUS CENTER

    Mr. Hall. Chairwoman Murray, Ranking Member Sessions, and 
members of the committee, thank you for the invitation to 
discuss income and equality and today's economy. I appreciate 
the opportunity to testify today.
    Nearly five years after the end of the Great Recession, the 
labor market today is still far from full recovery. The share 
of the working-age population with employment remains lower 
today than at the end of the recession in 2009. At the heart of 
this poor labor market recovery lies weak economic growth.
    I want to talk about three things in my testimony. First, I 
want to talk about disengagement from the labor force. I 
believe that our unprecedented disengagement from the labor 
force is the biggest ongoing economic challenge that we face 
today.
    Second, I want to talk about jobs and income inequality. 
Because of the impact of employment on income inequality, 
particularly on poverty, I believe that our current 
disengagement from the labor force is a real concern for income 
inequality in the U.S. in the near term and we should not lose 
sight of this fact.
    Third, I want to talk about economic policy and income 
inequality. We need to be keenly aware of what impact current 
policies and proposed policy changes are likely to have on the 
size of the U.S. labor force and, therefore, on income 
inequality in the United States, and this is in the near term, 
in particular.
    First, labor force disengagement. We have had an 
unprecedented disengagement from the labor force in the United 
States. This is, I believe, the biggest ongoing economic 
challenge that we face today. We should, therefore, be very 
cautious about how our current policy choices may contribute to 
this problem.
    Since the beginning of the recession, participation in the 
labor force has fallen to a 35-year low of just 63 percent. 
While some of this decline was expected and is due to an aging 
population, most was not. In 2013, labor force participation 
was at a 20-year low or longer for every age range between 20 
and 54 years old. If you look at my written testimony and see 
Figure 1, you will see the data on that.
    The adverse effects of this are real for American families. 
It is well established that individuals experiencing job loss 
will have large and persistent earnings losses for years 
afterwards. Also, the young graduating from school into a bad 
labor market will remain behind in their careers for well over 
a decade. Further, the longer an individual is out of the labor 
force, the less likely they are to return to employment. With 
four million long-term unemployed and likely millions more 
long-term jobless, this disengagement may already be 
permanently affecting the size of our labor force going 
forward.
    Fully eliminating the effect of our aging baby boomers 
reaching retirement, I estimate that the labor force is 
currently short over 4.5 million people. Last year alone, this 
amounted to a loss of $500 billion in potential national 
income.
    Second, jobs and income inequality. Let me start with a 
simple statement. Government spending does not move people out 
of poverty. Jobs do. I am not suggesting that the government 
social safety net is not important. However, despite a dramatic 
increase in government spending on means tested programs, there 
were a record 46 million people living in poverty in 2012. Lack 
of employment is the primary cause of this poverty. Most of 
those aged 18 to 64 years old who were in poverty did not have 
as much as a single week of employment during 2012. Only about 
11 percent had full-time employment.
    Further, we have never had a decline in the poverty rate 
that was not associated with a rise in the rate of employment. 
And, since the late 1990s, employment appears to be the only 
thing that reliably reduces poverty. If you look again at my 
written testimony, Figure 2 shows this relationship. For this 
reason, I believe that this disengagement from the labor force 
is our biggest threat to improving income inequality in the 
United States in the near term.
    Third, I want to talk about economic policy and income 
inequality. Because of the current state of the labor market 
and its impact on income inequality in the short run, I want to 
emphasize that policies that either raise the cost of hiring or 
make it more difficult for individuals to return to the labor 
force are counterproductive to our labor market recovery. They 
can even contribute to income inequality through encouraging 
continued disengagement from the labor force.
    I want to briefly mention three examples. First, the 
proposal to raise the Federal minimum wage from $7.25 to $10.10 
an hour may have the perverse and unintended effect of 
increasing income inequality. It is, of course, a laudable goal 
to see wages increase, particularly for those who could benefit 
the most from the raise. However, forcing employers to pay more 
to low-skilled workers could mean job losses for a group that 
is already having trouble finding work and fewer hours for a 
sector of the labor market that mainly works part-time.
    No matter what you have heard about the effects of raising 
the minimum wage, there is a significant amount of economic 
research that finds raising the minimum wage only benefits some 
workers at the expense of jobs for others, particularly the 
least skilled and experienced workers.
    The current proposal represents a huge 39 percent increase 
in the hourly wage cost of hiring for many. Common sense 
dictates that raising the cost of hiring the least skilled 
workers will force employers to look to substitutes like higher 
skilled workers or rapidly advancing technology. The 
Congressional Budget Office recently agreed, estimating that 
half-a-million people will lose their jobs as a result. The 
least skilled and experienced workers will pay this price in 
job loss.
    A second example is the Affordable Care Act. CBO's recent 
finding that the Affordable Care Act will significantly reduce 
the incentive to work by the equivalent of more than two 
million full-time workers in just a few years is deeply 
concerning.
    And, third, a broader example of a counterproductive policy 
is raising the regulatory burden for companies while we still 
have a struggling labor market. While new regulation may be 
important, they raise the cost of production and, therefore, 
the cost of hiring production workers. Many of those workers 
have below-average wages to begin with, and in a bad labor 
market, job loss is much costlier for affected families.
    So, in conclusion, our current very low rate of labor force 
participation needs to be a central focus of policy makers. We 
should focus on what the government is doing that makes it 
harder for companies to increase hiring and avoid policies that 
discourage individuals from reentering the labor force. 
Government assistance to the low-income and jobless is 
important, but the reemployment of the jobless is what we need 
to reduce poverty and lower income inequality.
    Thank you.
    [The prepared statement of Mr. Hall follows:]
    
    [GRAPHIC] [TIFF OMITTED] 
    
    Chairman Murray. Well, thank you, all of you, for your 
testimony today.
    I want to start with a question about the types of policies 
that we here in Congress should consider if we want to create 
more opportunity and improve economic mobility and strengthen 
our middle class.
    Over the last several years, we have made significant 
progress towards addressing our medium-term budget deficits, 
and while I certainly believe that we need to build on the 
foundation we laid with the Bipartisan Budget Act and continue 
to address our long-term debt challenges, I also really worry 
that we have not done nearly enough to address the many other 
deficits that our country faces today, which I believe are a 
big part of the reason why economic opportunity is so scarce 
for so many families these days. I know my colleagues on the 
other side of the aisle tend to argue that rather than invest 
in education or fix our crumbling infrastructure or patch the 
holes in our social safety net, that we should reduce taxes for 
those at the top and cut back on those services.
    So, Dr. Stiglitz, I want to ask you your thoughts today on 
the importance of public investments--education, 
infrastructure, scientific research--and ask you if these types 
of public investments are an important part of improving 
economic mobility in this country.
    Mr. Stiglitz. Yes, I very strongly believe they do. Let me 
try to emphasize a couple points. One, if we focus--we need to 
focus on both sides of the nation's balance sheet. When we talk 
about the debt, every company looks at both its liabilities, 
what it owes, and its assets. And the fact that in the 
government, you only look at one side, is a big mistake. We 
should be looking not only at what we owe, but also the assets. 
And what are the assets? The assets are human capital, the 
investments in people, our infrastructure, investments in 
technology.
    So, if we were looking at this like a company, it would be 
clear that these were good investments. We can borrow today at 
a negative real interest rate, and there are lots of studies 
that show that the returns on these investments are enormous. 
So, that is one aspect.
    The second one is that in making those investments, we 
would create demand. The real problem today with our economy is 
lack of aggregate demand. That is why there are not jobs. In 
the sectors of our economy where there is demand, jobs are 
being created. So, it is lack of demand that is really holding 
the economy back.
    So, if we started investing in areas like you mentioned, 
infrastructure, education, we would increase demand in those 
areas. We would create jobs. And that would strengthen our 
economy.
    Now, what is very clear is that one of the sources of 
inequality is the lack of demand. It is hurting the poor, 
people in the middle, because both directly because of the 
unemployed, but indirectly, the unemployment is driving down 
wages. It is one of the things. But we have to remember, this 
is a quarter-century problem. It is not just something that has 
been post the recession. It has gotten worse. That is what I 
emphasize. But, it has been there for a long time.
    And part of the reason it is there for a long time is the 
under-investment in education. Professor Chetty pointed out the 
importance of, for instance, those childhood investments, 
preschool education, recognized by Professor Heckman in his 
research.
    So, it is the failure to make these investments that both 
lead to the weak economy today, will contribute to a weak 
economy tomorrow, and both through the macroeconomic and 
through the effects on the children, are going to create more 
inequality.
    Chairman Murray. Dr. Chetty, you have been studying the 
relationship between different factors in economic mobility. 
Let me ask you sort of the same question, and in your research, 
have you found that lowering taxes for the wealthiest Americans 
helps improve mobility?
    Mr. Chetty. Thank you. No. So, we have studied, as I 
mentioned, various factors that are correlated with differences 
in mobility across areas and over time, and we do not find any 
evidence that lowering tax rates on the wealthiest Americans 
would increase mobility. In fact, I would say to the contrary, 
as Professor Stiglitz was saying. You have got to think about 
where you are spending the revenue that you collect.
    So, if you raise taxes and collect additional revenue that 
you then invest in better schools or better infrastructure, 
given the rates of return that we found on such investments, I 
would think, actually, precisely the opposite, that in a 
situation such as the one we are in today, where many people 
think we are under-investing in basic infrastructure that is 
going to have a huge long-term payoff for the American economy, 
we need to find, as Senator Sessions said, we need to fund 
those investments in some way. And, on net, I would say, 
increasing the taxes on the wealthiest and closing certain 
loopholes, for instance, in the corporate tax system, as you 
suggested, would, if invested well, have very large returns.
    Chairman Murray. Okay. Thank you. My time is up.
    Senator Sessions.
    Senator Sessions. Thank you.
    Dr. Hall, I did not realize that your chart shows something 
surprising to me, and that is that the dropout or the decline 
in the workforce participation is much higher from the 
historical average among younger workers than it is among the 
older workers. You actually have, from 60 to 65 and over, about 
a two percent increase in participation, whereas from age 20 to 
24, there is a 6.7 percent decline in workforce participation. 
From 50 to 54, a four percent decline in workforce 
participation. You expressed concern about all this. Would you 
share with us a little more your thoughts on those numbers.
    Mr. Hall. Well, sure. You know, there has been lots of talk 
about the effect of the aging baby boomers, that that is the 
reason for labor force--
    Senator Sessions. Madam Chairman, Senator Johnson needs to 
go, and I told him I would let him go first and I just blithely 
went right on in asking questions. Could I yield to him, and I 
will try to reduce my time by a minute when I get to my time?
    Chairman Murray. Absolutely. Of course.
    Senator Sessions. He has another meeting, and I am glad he 
could be here.
    Senator Johnson. Thank you, Senator Sessions and Madam 
Chair.
    I would like to go to Mr. Hall right off the bat, a similar 
type of question. Mr. Hall, you talked about our workforce 
being 4.5 million people short. Can you just tell me where you 
are getting that from and explain that.
    Mr. Hall. Well, sure. If you look at what is typical 
participation rates by age, for example, the participation 
rates in 2007 were rather different than they are right now, 
and so, really, what I just did is I look at every single age 
and look at what the participation rate was in 2007 and what 
the participation rate is right now, and you find that we are 
short in terms of the average participation at every single age 
rage between 20 and 54 right now, and this is pretty 
significant.
    So, the part of the issue, I think, that we really need to 
face is getting people back engaged in the labor force. It is 
not just baby boomers that are retiring. This is every age. The 
young in particular, actually, have really dropped out of the 
labor force, and I think that is a real concern going forward.
    Senator Johnson. Okay. You are just talking about a 
shortage in the labor force. You are not saying that there are 
4.5 million jobs available that are not being filled.
    Mr. Hall. Well, that is right. That is right. In fact, if 
you were to look at where we are short in jobs, we are short in 
jobs probably 10.5 million people--jobs, actually.
    Senator Johnson. We had a pretty interesting witness before 
the Budget Committee here last year, Gary Alexander, who is the 
Secretary of Public Welfare in Pennsylvania. He had a pretty 
interesting study that he conducted on single moms which showed 
the disincentive nature--disincentivizing nature of all the 
assistance programs. Basically, his conclusion was that a 
single mom was better off only earning up to $29,000 because 
her combination of earnings plus benefits, a total of $57,000, 
versus earning $69,000 where her combination income and 
benefits would be the same amount, basically, $57,000 after 
tax. In other words, she had a 100 percent maximum tax rate 
from $29,000 to $69,000 with increased taxes as well as 
reduction in benefits. Can you just speak to that type of 
problem in terms of the incentives not to continue working.
    Mr. Hall. Sure. You know, I do not want to--we need a 
social safety net. That is an important thing. But we need to 
be very aware of what sort of incentives that creates with our 
policies. Keeping people--making it hard for people to reenter 
the labor force and making it hard for businesses to rehire 
people, I think, really creates a problem. And so many people 
out of the labor force for so long is a problem because the 
longer people are out, the less likely they are to ever return 
to the labor force. So, to some degree, we can make people 
unemployable by keeping them out of the labor force for a long 
period, like we have seen.
    Senator Johnson. You know, I agree. We are a compassionate 
society. We all want a strong social safety net. But the 
problem is, how do you design that social safety net where it 
really stays confined to those people that really need it and 
does not start creeping into populations where it creates this 
kind of disincentive for participation in the labor force.
    My final question really has to do with mobility. We are 
always talking about income mobility. What about geographic 
mobility and what effect--there are jobs going wanting up in 
North Dakota, up in those energy fields. In the State of 
Wisconsin, we have 18,000 welding jobs that are unfilled. So, 
what is the effect--I mean, why do we no longer have that 
mobility? Why do people feel like they really should not go to 
the areas where there really are lucrative jobs for the taking?
    Mr. Hall. Well, certainly, sort of fiscal location mobility 
would be something that would slow down a recovery and make it 
difficult for folks to recover, and that is really a good 
point, that we have a very weak labor market, but not 
everywhere in every industry. There are industries where you 
can see some real issues with difficulty finding workers, 
qualified workers. That is the sort of thing we ought to worry 
about, is mobility of all different types, because that is a 
real strength for an economy.
    Senator Johnson. I would just like to ask the other 
witnesses, do you have any comment on that lack of mobility, or 
the fact that we simply--people are not moving to where the 
jobs are.
    Mr. Stiglitz. Yes. One of the problems is that when people 
have very little wealth, because the people at the bottom have 
no wealth--in fact, a lot of them have negative wealth--they 
cannot afford to just take the risk of moving somewhere else. 
There is a piece of legislation, I do not know whether it is in 
the House or the Senate, that has been introduced to try to 
provide assistance to help people move, mobility assistance, 
and it has gotten bipartisan support and I think it is an 
important kind of measure, because people do not have the 
resources to up and move.
    Part of the reason is the severity of the housing crash. 
People at the bottom had a very large fraction of their wealth 
in their housing--always--but then the house prices came down. 
They were over-indebted. They had been sold wrong mortgages. 
And so this has exacerbated, which is something that is always 
a problem--the Great Recession has exacerbated, and the data 
that has recently come out from the Fed about the wealth at the 
bottom has really highlighted this particular problem, and I 
think it is something that Congress ought to be doing something 
about.
    Senator Johnson. Okay. Well, thank you.
    Thank you, Madam Chair and Senator Sessions.
    Chairman Murray. Thank you very much.
    Senator Kaine.
    Senator Kaine. Thank you, Madam Chairwoman, and to the 
witnesses, thank you for your testimony.
    We are in an interesting centennial that I just discovered 
this morning, and I just want to read something before I ask a 
couple of questions. Quote, ``After the success of the moving 
assembly line, Henry Ford had another transformative idea. In 
January 2014 [sic], he startled the world by announcing that 
Ford Motor Company would pay $5 a day to its workers. The pay 
increase would also be accompanied by a shorter workday. While 
this rate did not automatically apply to every worker, it more 
than doubled the average auto worker's wage. Henry Ford had 
reasoned that since it was now possible to build inexpensive 
cars in volume, more of them could be sold if employees could 
afford to buy them. The $5 day helped better the lot of all 
American workers and contributed to the emergence of the 
American middle class. In the process, Henry Ford had changed 
manufacturing forever.'' That is from a Ford Motor Company 
press release issued earlier this year celebrating the 100th 
year anniversary of that wage increase.
    The question I want to ask all of you is really about tax 
policy. As a general matter, we have made the policy decision 
to tax salary from labor at significantly higher rates than 
earnings from investments. To what extent does that contribute 
to inequality, and to what extent does it affect our economy? I 
would like to hear from all of you about that.
    Mr. Stiglitz. Okay. Well, very briefly, it obviously 
creates a lot of--contributes to inequality, because the 
distribution of capital, wealth, is much more concentrated than 
the distribution of wage income. So, what you are doing--if you 
look at the data in the CBO study that recently came out, if 
you look at the data of who benefits from that lower taxes of 
capital gains, who benefits from the lower preferential 
treatment of dividends, who benefits from the step-up of basis 
on death, it is disproportionately money all at the top. So, 
this is a provision that creates more inequality.
    At the same time, the next one I referred to, the cost over 
ten years of these special provisions is basically $2 trillion. 
That is a lot of money that would go a long way to putting our 
budget in better shape.
    The evidence that this leads to more investment just is not 
there. You know, when they are keeping their money in the 
Cayman Islands or, you know, it is not there because of the 
greater sunshine makes the money grow faster than for the lack 
of sunshine, and they often take that money and are not 
reinvesting it in America. So, we could have a tax program that 
would incentivize investment in America, job creation in 
America, but that is not what these special provisions are 
really doing.
    Senator Kaine. Dr. Chetty.
    Mr. Chetty. Yes. I would agree with everything Professor 
Stiglitz said. I think the key issue here is that capital 
income is much more concentrated than labor income.
    Another point that adds onto that is because you have to 
meet a given budget, if you have lower capital income tax 
rates, you naturally have to have higher labor income tax rates 
and that potentially leads to more of the disincentive effects 
that were mentioned before, where people feel like their net 
return to working is smaller and it is harder--it is more 
costly for companies to hire workers.
    So, in my view, a reform that moved towards increasing 
capital income tax rates, either investing that money, again, 
coming back to infrastructure, education, or lowering labor 
income tax rates, would likely improve the strength of the 
American economy.
    Senator Kaine. Dr. Hall.
    Mr. Hall. I am not an expert in tax policy. I will not 
speak too much on it, other than I do feel like we try to do 
too much with our tax policy. You know, I think when you try to 
conduct policy through taxes, you create a lot of incentives 
and you create a lot of problems with that.
    Just in general for me, I think, I would rather see tax 
policy there to generate revenue and not try to manipulate 
things in the economy. Just simplify the tax code. Get rid of 
loopholes. Make it basic.
    Senator Kaine. You know, I think the history would show 
that we taxed earnings from capital at higher rates than 
earnings from labor for a very long time, and then we attempted 
to begin to manipulate and moved the taxation on capital and 
labor to approximately an equivalent, and now we have moved the 
taxation on earnings from capital to significantly less. So, I 
think there has been a manipulation of the tax code in the ways 
you described.
    The traditional answer has been that education is one of 
the great lifters and levelers in that opportunity. What are 
the barriers to that being the case today, and answer quickly, 
because I have pretty much used up my time.
    Mr. Stiglitz. Okay. I mean, really, we focus on higher 
education. It is getting very expensive, particularly with the 
recession, the cutback in State aid. Tuition has soared. We 
mentioned before that median income is at a quarter-century 
low, so incomes are going down. Tuition is going up. The only 
way to make it is debt. And the form of debt the United States 
has is really crushing, because bankruptcy law, you cannot get 
forgiveness of that even in bankruptcy. Other countries, like 
Australia, have come up with really good proposals like income-
contingent loans, where the amount you repay depends on your 
income. So, it is not the crushing effect, and it has worked 
very well. It is one of the reasons why they have succeeded in 
getting more equality of opportunity in Australia than in the 
United States.
    Senator Kaine. Thank you, Madam Chairwoman.
    Chairman Murray. Thank you very much.
    Senator Sessions, we will go back to you.
    Senator Sessions. All right. Thank you.
    Dr. Hall, you indicated three things that would actually--I 
think it is indisputable--would reduce jobs in America. That is 
the minimum wage increase that the CBO has told us. There is no 
doubt, I think, that the Affordable Care Act has been a 
detriment. Two-thirds of the jobs last year that were created 
were part-time. Some of that clearly was Affordable Care Act. 
And that more regulations, excessive regulations. Maybe 
regulation is good for one industry, but it applies to too many 
industries. That is unhealthy.
    Let me ask you a few things that might be healthy and 
helpful without adding to our debt. If the United States were 
to exploit this new ability to produce energy, both onshore and 
offshore and on Federal lands, would that help create jobs and 
wealth in America and tax revenue for the government?
    Mr. Hall. Absolutely, and actually, it already has. The job 
growth in, for example, the natural gas industry has really 
been pretty impressive, despite the job loss in the rest of the 
private sector since 2006.
    Senator Sessions. And you mentioned the tax code simpler, 
and I agree with that. It needs to be more growth oriented and 
simpler, it seems to me. Can we do that? Could we retain this 
current level of revenue and create a tax code that is, in 
fact, simpler and help create more growth than we are seeing 
today?
    Mr. Hall. Well, absolutely. I do not want to go too far 
beyond my expertise, but I think that is right. I think the 
efforts to look at the tax code and look at just sort of 
simplifying it, getting rid of loopholes and getting a simpler 
basic tax code whose real goal is just to collect taxes, not to 
do all sorts of things, has real potential benefit.
    Senator Sessions. Dr. Stiglitz, the problem about loopholes 
is something we have gone around about a good bit here. I think 
there is not support in Congress to close loopholes to fund new 
spending, but there is a belief that we can create a tax code 
that is more growth oriented. In fact, Chairman Baucus was 
clear that we ought to close loopholes, have a simpler system, 
but use that to keep the rates more competitive worldwide. How 
would you analyze that issue?
    Mr. Stiglitz. Actually, mean, obviously, we need a better 
tax system. I referred to the special provisions on capital 
gains and dividends that, I think, do not lead to stronger 
growth. The way we treat foreign income of multinationals and 
American companies that operate abroad, that they can keep the 
money abroad, reinvest the money abroad and not bring it in the 
United States, is an incentive to create jobs abroad. So, we 
have a perverse tax system which encourages job creation 
abroad.
    But, the actual effect of the corporate income tax, 
lowering that would not help, I believe, because, remember, at 
the margin, firms can borrow and debt on the part of firms is 
tax deductible. In fact, most evidence is that most firms 
finance the marginal investment by debt. It is tax deductible. 
So, the income is taxed at the same rate that the interest is 
tax deductible. There is no significant adverse effect, in 
fact, from the corporate income tax. So lowering the corporate 
income tax would provide no benefit.
    What we should do is to say, if you invest in America, you 
can get a lower rate. If you do not invest in America, you 
actually should pay a higher rate. So, I would argue that get 
rid of the corporate loopholes, raise the corporate income tax, 
but give a break for those who invest in America.
    Senator Sessions. Well, that is pretty much the government 
directing a lot of things that I am not sure we are able to do.
    Dr. Chetty, thank you for your participation. I do think 
moving from the bottom quintile to the top is a big move, and 
maybe culturally, we have already done so much of that that we 
will not expect to see that. I would like to see people move 
from lower income levels to middle income levels, the middle 
income level to move up a level or two in a system that is 
fair. I think that would be better for America, and it was 
within our grasp. My time is up, but--
    Mr. Chetty. If I could just say one thing on that, I 
absolutely agree. So, the statistics I presented were just one 
example, focusing on moving from the bottom fifth to the top 
fifth. But you see exactly the same patterns that I showed you 
if you look at, say, moving from the bottom fifth to the middle 
class. The places that look better in terms of helping kids 
move up all the way to the top also are better in terms of 
helping kids reach the middle class. And I agree that that 
would be a great goal. The U.S. falls behind other countries in 
achieving that goal, as well.
    Senator Sessions. Well, our numbers that I just said show 
we are dropping from middle income to lower income, 
unfortunately, a little bit.
    Chairman Murray. Senator Sanders.
    Senator Sanders. Thank you, Madam Chair, and thanks for 
holding this important hearing, and thank you very much for our 
guests for being here.
    I do not have a whole lot of time. Let me just focus very 
briefly, if I could, on three issues. While we are dealing 
today with economics and finances, ultimately, we are dealing 
with a moral issue of what kind of nation we want to become. 
From a moral perspective, Dr. Stiglitz and other members of the 
panel, do you have a problem that the top one percent owns 38 
percent of the financial wealth of America while the bottom 60 
percent owns all of 2.3 percent? Do we have a problem that one 
family, the Walton family of Wal-Mart, owns more wealth than 
the bottom 40 percent of the American people, one family? 
Should Congress begin to address income and wealth inequality 
from a moral perspective? Dr. Stiglitz, very briefly, because I 
have a couple of other questions. Yes or no, do you think?
    Mr. Stiglitz. Yes. Yes, but it also has strong economic--
    Senator Sanders. I am going to get to that in a second, 
within my two minutes here.
    Dr. Chetty.
    Mr. Chetty. Yes. I certainly agree that inequality, and to 
the extent it creates inequalities in opportunity, which I 
believe it does, it is a moral issue.
    Senator Sanders. Okay. Dr. Hall.
    Mr. Hall. My expertise is in economics, but I will just 
say, I think we should be focusing more on raising the incomes 
of the low and focusing on those, increasing mobility for the 
low. That should be the focus and not so much worrying about 
whether the wealthy make a lot or not.
    Senator Sanders. So, you do not have a concern that the top 
one percent own 38 percent--
    Mr. Hall. Well, what I want is I want to see a better 
outcome. I want to see a better outcome for the low-income 
folks, and I think the way to do that is to focus on their 
situation.
    Senator Sanders. Let me ask this, and again, I know I am a 
little bit off subject here and I apologize for that, but it is 
important. I think, Dr. Stiglitz, you touched on this. When we 
talk about unfair distribution of wealth and income, what we 
are seeing, especially in recent years, is the wealthiest 
people in this country are not simply reinvesting their money 
in business or putting it under their mattress. They are, in a 
very significant way, putting that money into politics, to 
elect politicians who will represent their interests.
    Do you have a concern with, say, the Koch family spending 
what we think will be hundreds and hundreds of millions of 
dollars on the political process, that Sheldon Adelson just the 
other day had a primary which he brought potential Republican 
candidates to audition in front of him? Is that a problem for 
American democracy?
    Mr. Stiglitz. Very much so, and I think it also is a 
problem for America's confidence in its political system. If 
Americans come to believe that the political system is bought, 
they will lose faith in one of our fundamental values.
    Senator Sanders. Right. Dr. Chetty, is that a problem, do 
you think?
    Mr. Chetty. Yes, I certainly agree with that view.
    Senator Sanders. Dr. Hall, is that a problem?
    Mr. Hall. Well, first of all, again, it is not my area of 
expertise--
    Senator Sanders. I do realize that.
    Mr. Hall. --but this has always been an issue. This has 
always been part of free speech, is people get to do what they 
want to do to impact politics and outcomes in government.
    Senator Sanders. Okay. So, you think free speech is the 
ability to buy elections?
    Mr. Hall. Well, I did not say buy elections.
    Senator Sanders. But that is the practical implication of 
that--
    Mr. Hall. No, and--
    Senator Sanders. I appreciate it. Okay.
    Mr. Hall. And singling out people--you know, there are lots 
of folks who contribute--
    Senator Sanders. There are.
    Mr. Hall. and lots of folks who try to have an influence.
    Senator Sanders. There surely are.
    Third question, which is something you guys do know 
something about, and that is economics. When so few--my 
understanding is that about half the American people have less 
than $10,000 in savings. It is rather extraordinary. That means 
one car accident, one illness, you are in financial ruin. But, 
the bottom line is, when so few have so much and so many have 
so little, can you create--and when 70 percent of the GDP is 
based on consumer consumption, can you create the jobs you 
need, or is this really--this inequality an impediment to job 
creation? Dr. Stiglitz.
    Mr. Stiglitz. Yes. As I said before, one of the major 
problems in the United States right now is a lack of adequate 
demand, insufficiency of demand, and people at the top spend 
less than those at the bottom. And it is one of the problems, 
not only in the United States but globally, that is 
contributing to the weak recovery that we are experiencing.
    Senator Sanders. That so many folks have just no money to 
buy anything and--
    Mr. Stiglitz. Exactly.
    Senator Sanders. Yes.
    Mr. Stiglitz. And before the crisis, remember, what we--the 
way we kept our economy going was on an artificial life support 
of a bubble.
    Senator Sanders. Right.
    Mr. Stiglitz. And it was only the bubble that was able to 
offset the adverse inequality--
    Senator Sanders. That was debt, borrowing money and--
    Mr. Stiglitz. Exactly.
    Senator Sanders. Right. Dr. Chetty, what do you think?
    Mr. Chetty. Yes. So, I think the low savings rates of low-
income people is potentially a problem. And coming to your 
question about what would stimulate jobs and aggregate demand, 
there is good evidence that if you give a dollar to a person 
with below-median income, much more of that is spent than if 
you give a dollar to a person at the top end of the income 
distribution. So, if you are trying to raise aggregate demand, 
these things are intricately linked--
    Senator Sanders. Such as extending long-term unemployment, 
putting money in the hands of people who desperately need that 
money.
    Mr. Chetty. The marginal propensity to spend out of 
unemployment benefits is extremely high, so that, I think, 
would have a stimulative--
    Senator Sanders. Dr. Hall.
    Mr. Hall. Well, the thing I want to emphasize is the 
inverse of that relationship. Economic growth helps reduce 
income inequality. You do not change the poverty rate unless 
people get jobs and you get stronger economic growth. That 
relationship, I think, is clear.
    Senator Sanders. But, let me ask you this on that point. If 
95 percent of all new income generated in recent years went to 
the top one percent, is that, in fact, true, that economic 
growth is going to impact poverty?
    Mr. Hall. Well, let me just talk about just the general 
facts, okay, about economic growth. We have had very weak 
economic growth. The last three years, new growth has averaged 
about 2.2 percent a year, all right. We have been very lucky to 
get 190,000 jobs a month over that time period. That is 
actually very strong job growth given that weak economy.
    So, I still think at the heart of our labor market problems 
is a weak economy. It is not--
    Senator Sanders. I think you are right, but my point would 
be that even if you had more economic growth, if you had this 
kind of incredible inequality in terms of income, if 95 percent 
of all new income went to the top one percent, you can have six 
percent growth and still see an increase in poverty.
    Mr. Hall. The sort of thing I am worried about is that we 
have a very large number of long-term unemployed or long-term 
jobless and these folks are not just long term, they are very 
long-term jobless. These folks are going to have a really, 
really hard time getting back into the labor market unless we 
focus on these focus and get stronger growth. Actually, what 
really happens in a typical business cycle is once you get 
stronger growth, once you get three percent-plus economic 
growth, then you finally rehire those long-term unemployed--
    Senator Sanders. Do we extend long-term unemployment 
benefits to help those folks?
    Mr. Hall. I do not object to a long-term unemployment 
benefit. I do not object to that. That is part of the safety 
net. Now, there are some effects, of course, disincentive 
effects of that, but you have got to sort of weigh the two 
things. I am worried about other policies, though, that really 
do impact this cost of hiring and incentive to work.
    Senator Sanders. Okay. Thank you very much.
    Chairman Murray. Thank you.
    Senator King.
    Senator King. Thank you, Madam Chair.
    A couple of quick observations. One is, this is important. 
It is important for economics, this distribution, because the 
middle class are the customers. And the biggest problem with 
this economy now is a lack of demand, and it is because the 
middle class does not have money. They masked their declining 
standard of living in the 1980s and early 1990s by women going 
into the workplace. It was then masked by debt in the late 
1990s and early 2000s and there are no masks left and we are 
stuck with an economy that is stagnant because of a lack of 
demand.
    It is also important because of an issue of social 
stability. We do not want to become a country of gated 
communities, a country where the rich live behind walls with 
barbed wire. You go to some Latin American countries and that 
is exactly what you see.
    Senator Kaine mentioned Henry Ford. Henry Ford was the 
ultimate capitalist, but who realized he needed customers. And 
I worry today that with the concentration of wealth, that those 
at the top have forgotten that they need customers. So, I think 
there are very serious implications of this for the long-term 
strength not only of our economy, but of our political economy, 
of our political system, which is based on the premise that 
people have hope of moving up. And if people lose that hope and 
decide that the system is entirely rigged against them, that is 
going to produce instability and a level of political and 
economic resentment that we have never seen in this country and 
I think it is very dangerous.
    Secondly, I want to identify myself with Senator Sessions, 
his points about interest costs. I think we are whistling by 
the graveyard on interest costs right now. It is two percent. 
If it goes to 4.5 percent, just the cost of interest is going 
to exceed the entire defense budget. It is going to sink all of 
the priorities of everybody sitting around this table.
    Finally, I want to get to a couple of honest to goodness 
questions, and I do not expect answers now, but I would like to 
see, Mr. Hall, particularly, data on what is causing lower 
labor force participation. You know, what are the factors? And, 
by the way, I believe that is a problem. I talk to tradesmen in 
Maine, people, plumbers, carpenters. They cannot get help even 
in a time of high unemployment. They say these guys come to 
work, they work three days, and then they do not show up on 
Thursday and they wonder why I fire them. There is a problem. 
There is a subterranean problem going on about people, 
particularly young people, who do not seem--now, there are 
millions that want to work, that desperately are looking for 
jobs, but there is a problem there and I would love to see some 
data or studies, at least, on what is causing that.
    Second, I am a great believer in regulatory reform and the 
cost of regulation to our society. It would really help me to 
have data on that. If you guys could do some case studies or 
know of studies in real live cases where regulatory drag has 
significantly impaired economic growth, profitability, ability 
to hire, I think that is very important.
    Mr. Hall, a question for you. I go to a lot of--I am all 
over Maine on weekends, talk to a lot of people. Put yourself 
in my shoes. I am at the gates of Bath Iron Works. There is a 
guy there who works hard every day. It is really backbreaking 
work, and he pays 35, almost 38 percent on his income tax. And 
a guy down the street who is getting dividends pays 20. How do 
you explain to that guy why he is paying almost twice as much 
taxes as this guy that gets his money out of the mailbox?
    Mr. Hall. Well, I will just go back to my general comment 
about tax policy. Tax policy should be for revenue generation 
and we should be collecting revenue with that. We should not be 
trying to do all sorts of little manipulations--
    Senator King. So, does that not argue for the same rate on 
all forms of income?
    Mr. Hall. It does. You know, like I say, I am not a tax 
expert--
    Senator King. Did you hear him say, ``It does.'' Let the 
record show.
    [Laughter.]
    Senator King. Go ahead.
    Mr. Hall. You know, I just--for example, I do not know what 
the facts are, for example, on tax rates. I could not tell you 
how much distortion we wind up getting--
    Senator King. Well, it is 39.5 at the top end for income 
and it is 20 for capital gains. It was--and I just cannot 
explain that to a working man, why what he is doing gets taxed 
at almost twice the rate as the other guy. I have never--help 
me out here.
    Mr. Hall. Well, I think the sort of thing that I find 
bothersome, one of the reasons we have such a low savings rate 
is our tax policy encourages people to spend. We get a tax 
break for housing. We get a tax break for a lot of things. And 
that is almost certainly one of the reasons why the savings 
rate is so low, is because our tax policy distorts people's 
behavior with things like that.
    Senator King. Well, I would argue that--
    Mr. Hall. Our housing boom--go ahead.
    Senator King. --encouraging people to buy houses is 
encouraging investment, not spending. I would see that--
    Mr. Hall. Well--
    Senator King. That is the source of wealth for most 
American families.
    Mr. Hall. It is hard not to see that a lot of our troubles 
are a housing bubble where, perhaps, people over-purchased 
housing. There is too much investment in housing. That is 
certainly something that differs in the United States to in 
other countries.
    Senator King. Dr. Chetty, this is a question, I think, for 
the record, because I am running out of time, but you do a 
scale of upward mobility by county around the country. I am 
going to submit a question for the record of we have our--I 
look at it--counties that are different levels, and I would 
just like some explanation, background on what that really 
means, county to county, and how we deal with that.
    I think, finally, the question is, how do we as government 
policy makers improve this issue of income inequality without 
turning the government into Robin Hood? I do not think we have 
a responsibility to take from the rich and give to the poor. I 
think the question is, how do we improve--how do we build 
policies that provide incentives and also the opportunities for 
greater growth. I like your ideas about looking at student 
loans and how we deal with that, because right now, we have 
thousands and millions of kids graduating from college with 
what amounts to a mortgage and no house and I would like to see 
you supply us some--with help. We need proposals for solutions. 
This is a problem. We need data and we need proposals for 
solutions.
    Thank you very much, gentlemen. Thank you, Madam Chair.
    Chairman Murray. Thank you very much.
    Senator Whitehouse.
    Senator Whitehouse. Thank you, Madam Chair.
    In any discussion of taxes, I cannot help but point, 
particularly after we have heard more of the ardent commentary 
of our Republican friends about the debt and the deficit, that 
the tax loopholes that contribute to that debt and that 
deficit, they appear to defend with a rare and special passion, 
whether it is the carried interest exemption that allows 
billionaires to pay lower tax rates than brick masons, whether 
it is the offshore tax havens that allow American corporations 
to pay essentially no taxes, use our roads, use our courts, 
enjoy the benefit of a free society that everybody else pays 
for, and then run their money offshore and avoid the tax man, 
or letting the richest companies in the history of the planet 
continue to enjoy oil subsidies.
    Every time we try to address those, it is the very same 
people who like to give these ardent statements on the debt, 
then defend all of those loopholes, and it causes me to take 
with a grain of salt how serious we are about the debt if we 
are willing to--if we would prefer to maintain those tax 
preferences than to deal with it. And, clearly, they are 
political. It is very wealthy people and very wealthy 
corporations and very wealthy interests that are behind all of 
those.
    So, to my friend from Maine, if he wants to explain to the 
guy at Bath Iron Works why the tax code works that way, I would 
ask how many people who work at Bath Iron Works are big 
political donors, whereas the folks who are getting the big 
capital benefits are the billionaires, and they are the ones 
who are pouring money into elections and they are getting 
things their way. And it is important for us, I think, to stand 
up against that in order to have this run more fairly.
    Mr. Stiglitz, I read in your paper on reforming taxation to 
promote growth and equity the following. ``A tax on carbon 
emissions has even more benefits. It encourages firms to make 
carbon-reducing investments, to retrofit their firms to reflect 
the true costs of the pollution that they generate. A tax on 
pollution has a triple dividend because it leads to a better 
environment which can itself lead to stronger economic 
performance, and it raises revenue even as it reduces the bad 
externalities spilling over on the rest of us. Moreover, it 
incentivizes firms to retrofit, thus encouraging investment 
that leads to higher output and employment.''
    Could you comment a little further on that, and 
particularly on the value of a revenue-neutral carbon fee.
    Mr. Stiglitz. Yes. The point you quoted is exactly right. 
This is an example of--
    Senator Whitehouse. I should hope you think so, since I was 
quoting you.
    Mr. Stiglitz. Yes, I know, but--
    [Laughter.]
    Mr. Stiglitz. People often say that taxes have to depress 
the economy, and what I wanted to emphasize there was that this 
is a kind of tax that can actually stimulate the economy at the 
same time that it is raising revenues and improving our 
environment.
    Senator Whitehouse. And you won a Nobel Prize.
    Mr. Stiglitz. Yes. This is, you know, very commonly 
accepted, and--
    Senator Whitehouse. Including among economists--
    Mr. Stiglitz. Among economists--
    Senator Whitehouse. --who negotiated with Republican 
Presidents--
    Mr. Stiglitz. Most would say, yes, there is a distortion in 
our economy because there is something that is imposing a cost 
on our society and people are not paying for it. It is like a 
subsidy, in a sense. They are not paying a real cost that they 
are imposing on the American economy, the American society.
    Senator Whitehouse. So, having price match cost actually 
helps make markets work better, correct?
    Mr. Stiglitz. That is right. So, this is an example of 
trying to make markets work like markets, and the point is that 
there is a cost to society that they are getting away with, and 
if we impose that charge, we would get more revenue and create 
more employment.
    Senator Whitehouse. Well, thank you very much. I am afraid 
in the same way that concern about the debt seems to vanish in 
front of the tax benefits for special interests, concern about 
properly operating markets is going to vanish in the face of 
the subsidies to those special interests, so wish us luck in 
getting that done.
    [Laughter.]
    Senator Whitehouse. Thank you.
    Mr. Stiglitz. Thank you.
    Chairman Murray. We have all decided that we get a 
lightning round here, one additional question for each Senator 
who is remaining, and Dr. Chetty, I wanted to ask you. There 
has been a lot of discussion here in Congress about whether or 
not the actual programs that are there to support families who 
are struggling today are the problem or whether or not the 
economic downturn and the changes that occurred to that are it, 
and I wanted to ask you about one example that is very timely 
and that is the unemployment insurance extension that we are 
discussing. From your research, what can you tell us about the 
effect of unemployment benefits on families and the economy?
    Mr. Chetty. So, the concern that many people voice is that 
when you extend unemployment benefits, as has been voiced here, 
you potentially reduce the incentive for families to return to 
work, and that is, theoretically, a concern that economists 
have noted for a long time. It could be something that is 
important.
    The same exact issue arises in another context that we have 
been discussing, the EITC. Senator Sessions pointed out that 
when you have large phase-out tax rates, you potentially create 
a disincentive for families to work. Now, while theory says 
that that effect could be small, it could be large, we now have 
good data that allows us to actually study what happens 
empirically in practice, and the best data--there are now 
numerous studies using millions of data points which indicate 
that these disincentive effects, while they exist, are quite 
small.
    So, when you extend unemployment benefits by, say, ten 
weeks, you extend the amount of time that people stay out of 
work quite modestly. And even the small amount of longer time 
out of work that occurs appears to be driven by things like 
people trying to find a better job, a job that might work 
better for their skill set, taking advantage of those longer 
benefits to find the right match that is ultimately going to 
help the economy grow rather than just idling their time and 
living off the system, as some people perceive.
    So, I think, theoretically, those issues are important and 
economists talk about them, empirically, the data says those 
effects are not nearly as big as you might have worried about.
    Mr. Stiglitz. Could I just add one point to that, which is 
that, right now, the problem is a lack of jobs. And having more 
people applying for the same few jobs does not make the labor 
market work better. So, if you have five applicants per job, or 
three applicants per job, that is not going to affect the 
actual level of employment in our economy.
    So, right now, the issue is, you know, if we were at full 
employment, these issues of whether people search for a job 
would become more important. But right now, they are totally 
irrelevant.
    Chairman Murray. Or they are in a different place than 
somebody is available to get to them, and when you have got a 
mortgage on a house you have got to pay, it is hard to move, 
and we had that discussion. I actually met a woman this 
weekend--you have been watching the mudslides that occurred in 
my State that has just been devastating, horrible, and was up 
there this weekend visiting the town at one end of it that has 
now been cut off from our main economic corridor, and a woman 
said to me that she is three weeks away from losing her 
unemployment. She now has no opportunity to get to the 
employment center, which is down the road, and she is 
desperate. She is not sitting at home saying, well, I just want 
to sit on--you know, keep getting this check. She wants a job, 
but she also wants to be able to put some food on the table for 
her kids, so a point well taken.
    Senator Sessions.
    Senator Sessions. Well, thank you all for a very important 
discussion, and I believe Congress has gone down the Keynesian 
road as far as we are going to go. One of the problems is--
    Senator Kaine. What is wrong with the Keynesian road?
    Senator Sessions. Well, we have gone from--
    Senator Kaine. I am joking. My name is Kaine, so--
    Senator Sessions. Oh.
    [Laughter.]
    Senator Sessions. I am a little slow there, Senator 
Keynesian--I mean, Kaine.
    [Laughter.]
    Senator Sessions. Thank you for correcting me, or helping 
me. Going down that road of borrowing more has put us at a 
point where we cannot borrow any more. I remember the former 
Federal Reserve Chairman testified before--talked to a group of 
Republicans and he said, ``Well, we could borrow more,'' and we 
were at 35 percent of GDP. Debt was 35 percent of GDP. Now, it 
is about 100 percent, gross debt, of GDP. And things changed. 
And so we have done all these borrowing and spending. The 
Agriculture Secretary told us, ``Oh, if we quadrupled Food 
Stamps, oh, if we just spend more on Food Stamps, we would get 
$1.75 in economic growth from it.'' So, why do we not just 
quadruple that again? Why do we not provide people free shoes, 
just borrow the money? We have been told now the interest rate 
is going to be $880 billion in ten years by the Director of CBO 
sitting right there. So, this day is over.
    We spend $750 billion on welfare programs. We have no 
vision, no coherence, no driving ability to move people from 
poverty to productivity. We spend enough money on it. We are 
just not doing a very good job on it. And we are going to spend 
more money on education. That is going to fix our future. We 
know that money does not prove--is not a direct correlation in 
improving education.
    So, I just would have to say to you, there are things we 
can do. I do think--we have added five million jobs from 
abroad, and that is about the same number that have been 
created in the last number of years. So, I would just say we 
are--you want me to hush and go and wrap this up.
    Chairman Murray. No, I just want to--
    Senator Sessions. This is a very good panel and we are 
talking about something important, and I thank you, Madam 
Chairman, for doing it, because it is not healthy when we are 
seeing these things happen in our economy. And the National 
Review had a piece and said we are a nation with an economy, 
not an economy with a nation. So, we do have a responsibility 
to our people. I think that is correct.
    So, I think there is a conservative view, too, on how do we 
help the American people prosper and get back on the road to 
growth. We should consider all the comments we have had today 
and keep working on it. But just taxing more, borrowing more, 
spending more, regulating more, I believe, is the wrong 
direction, and that is, in some degree, where we have a 
difference of opinion. Thank you.
    Chairman Murray. All right. Thank you.
    Senator Kaine.
    Senator Kaine. Thank you, Madam Chairwoman.
    Something I am confused about, and as long as we brought 
John Maynard Keynes into the conversation, many economists--
Keynes, Schumpeter, and others--have written about the capacity 
of technology to destroy jobs. So, in Virginia, we mine as much 
coal as we did 50 years ago, but with one-tenth the coal 
miners. They did not propose that we not be innovative, because 
they would assume that technology would also create jobs, and 
hopefully the net creative over destructive would be positive.
    Is there any research currently about whether that sort of 
net result of technological advancements is still for the 
American economy a positive in terms of creating more jobs than 
destroying, or is the pace of technological change or 
productivity advances at a place now where it is destroying 
more work than it is creating? I am just curious about the 
status of the research.
    Mr. Stiglitz. Well, I guess it is really an open question. 
A lot of people would use the metaphor of what happened back 
with--you were mentioning Henry Ford. The car replaced 
blacksmiths and buggy whips, but created more jobs with car 
repairmen. But, we do not know whether the next round, which is 
pretty fundamentally different--you know, we have robots 
creating robots creating robots, and the question is, will the 
job creation be there?
    It will not be--well, I mean, the real issue is, it will 
not be there unless there is some help, and I think from the 
government, in making the structural transformation. The new 
jobs will be in areas like the service sector, and people that 
were in manufacturing will not necessarily have the skills for 
the new sectors, and they do not have the capital to move into 
those sectors.
    The reason we made the structural transformation from an 
agrarian economy to a manufacturing economy was through the 
help of the Federal Government through things like the G.I. 
Bill that really worked and created real opportunity for 
Americans. It really transformed the country. It moved people 
from the rural to the urban sector and created this huge 
opportunity. For the first time, people could go to college. 
So, that was a real example of a successful government 
intervention that, through that whole period of the 1950s, 
1960s, we created lots of jobs.
    It was a period where we grew faster than any other period 
and we grew together. Every part of our economy grew, but the 
bottom grew more than the top. That is, I think, what we should 
be aspiring for. And the success of that period was based on a 
strong role for the government to make this structural 
transformation, which markets do not do well on their own.
    Mr. Chetty. So, just to echo that, you know, I think the 
answer to that question depends fundamentally on whether 
workers are reskilled when technology changes. So, clearly, if 
you have changes in technology and the miners you described are 
continuing to be in the same profession, if their jobs are 
being done by machines, then they obviously are not going to be 
employed at the same rates.
    And so the question is whether the economy and the 
investments we are making give workers the diverse set of 
skills that they need to be able to transition to changing 
jobs, and I would say some of that comes from things like job 
training programs that might help workers adapt to the 
structural shift, but some of it also comes from earlier 
investments, echoing a theme we talked about earlier, where 
when there are more college-educated workers or workers who 
have had a strong background in school, they are going to be 
able to adapt more naturally to changes in the demands of the 
economy. And so I think the answer would be favorable if you 
have that.
    Mr. Hall. Well, once upon a time, I spent some time working 
at the Council of Economic Advisors and helping with the 
administration forecasts, and one of our big issues was 
figuring out when the baby boomers were going to retire and 
pull out of the labor force, because we are going to have to 
significantly lower our forecast for economic growth, and that 
is a big issue. And we had better hope we get a boost in 
productivity, because the baby boomers are going to retire, and 
especially if our labor force does not get back to growing, if 
we are going to maintain our standard of living and our incomes 
and growth, we need a boost in productivity. We need continued 
gains in productivity.
    Senator Kaine. Thank you.
    Chairman Murray. Senator--
    Senator Sessions. Can I ask a follow-up on this point?
    Chairman Murray. We are going to be here for a long time, 
but one quick follow-up and then short questions--
    Senator Sessions. We keep hearing from business that we 
have got a shortage of labor, but wages are down. You believe, 
Dr. Hall, in a free market, do you not?
    Mr. Hall. Absolutely--
    Senator Sessions. If there is a shortage of labor, why are 
wages down?
    Mr. Hall. Well, first of all, I do not know that there is a 
broad shortage of labor. I think there is a shortage of labor 
in certain areas. I think there is a growing concern that there 
is a skills mismatch going on that may hold us back. I am not 
sure I am a believer quite in that yet because we just have not 
gotten strong enough economic growth to push us to higher 
hiring. And I think if we had had stronger economic growth and 
still had this disengagement from the labor force, I would be 
more worried about that.
    Senator Sessions. Well, if we had stronger economic growth 
and the wage market got tighter, maybe we would have some 
economic growth for working Americans.
    Mr. Hall. Well, absolutely. I mean, that would be--
    Senator Sessions. The problem is, we seem to have this view 
that, somehow, we have a constitutional right to have low wages 
among some of our business friends, and I am not for that. I 
think our job needs to be helping our people in America get 
higher wages and better jobs.
    Chairman Murray. Senator King.
    Senator King. Professor Stiglitz, a question about the 
Affordable Care Act. I had a couple in my office last week for 
a coffee. They were touring Washington. At the end of our 
conversation, the lady said, ``By the way, thank you for 
supporting the Affordable Care Act.'' And I said, ``Well, that 
is very nice. Why do you say that?'' And she said, ``Because I 
have been in a job for the last 15 years that I really hate and 
I have had to stay in it because it had health insurance. My 
husband does not have it. And the Affordable Care Act has 
allowed me to leave that job and start my own business, which 
is something I have always wanted to do.''
    I understand there is an economics accepted principle 
called job lock, and I think one of the most significant 
effects of the Affordable Care Act will be releasing job lock 
and having people have the ability to start new businesses. 
And, by the way, those are the job creators. Hedge fund 
managers are not the job creators. It is people who start 
businesses. Do you believe that this is--I think this is sort 
of a hidden benefit that does not get talked about very much. 
Is there anything to this idea of the ACA unlocking job lock?
    Mr. Stiglitz. Yes, very much so. And, let me say, it also 
increases productivity because the people can go from 
employment where they are less productive to where they are 
more productive. So, not only are they creating jobs, they can 
be more productive.
    And I want to highlight one other thing, that GDP, I have 
emphasized, is not a good measure of well-being. So, she may 
have been getting an income, but we were not appropriately 
taking into account the effect that she was in a job that she 
was unhappy. She now gets to be more creative in creating a new 
business, create more jobs, and have a higher income. And the 
increase in well-being is well in excess of the dollar income 
that she gets.
    So, we do not--one of the benefits of the Affordable Care 
Act that is not fully appreciated and not reflected in GDP 
statistics is that and the fact that it gives more security to 
an awful lot of people. And again, our GDP statistics do not 
capture the value of this insecurity that so many Americans 
have felt.
    Senator King. Thank you. Do either of you gentlemen want to 
comment on that phenomenon?
    Mr. Chetty. Again, just to say that there are empirical 
studies which show that the job lock phenomenon is important, 
and people, in particular, when they are in a job previously 
that provided health insurance, were much less likely to 
transition out of it for fear of losing health insurance. So, I 
do think the ACA will have an impact in terms of increasing the 
flow of workers across jobs and potentially lead to more 
entrepreneurship, as well.
    Senator King. Dr. Hall, do you accept the idea of job lock 
and is the ACA going to help with that?
    Mr. Hall. It may well. I do not know a lot about the ACA, 
do not know a lot about the job lock, but just keep in mind 
that you create all sorts of incentives with this. You know, 
the one I pointed out was a different incentive and that is the 
incentive to keep people out of the labor force when, in fact, 
they probably should get back into the labor force, especially 
if you want to see long-term improvement in inequality.
    Senator King. But my visitor was not leaving the labor 
force.
    Mr. Hall. Right.
    Senator King. She was changing places.
    Mr. Hall. Right. Now, I understand.
    Senator King. And there may be some people, a mom who says, 
``I do not have to keep this job anymore and I am going to be 
able to take care of my kids.'' I am not sure that is a bad 
thing.
    Mr. Hall. It may not be a bad thing, but it is also--like I 
say, it is also a concern when you have all these things going 
on, right. And part of the idea with any sort of policy is try 
to design it as carefully as you can so you get less of these 
sort of bad side effects and more of these good side effects.
    Senator King. Right. Thank you. Thanks, gentlemen.
    Chairman Murray. Last question, Senator Whitehouse.
    Senator Whitehouse. Thank you.
    I would note that the ancient Egyptians did a pretty good 
job at getting everybody engaged in the labor force, but they 
did not do it in ways that I think we would find very humane 
right now.
    [Laughter.]
    Senator Whitehouse. Does the term disengagement from the 
labor force in your testimony, Dr. Hall, include people who 
were chucked out of their jobs as a result of the recession? It 
sounds from the terminology that you use as if they all kind of 
went for a walk in the woods and this was a voluntary 
disengagement.
    Mr. Hall. Right.
    Senator Whitehouse. Did you mean to imply that, or am I 
reading that wrong?
    Mr. Hall. No, I will sort of define it for you. These are 
people who are jobless and they are not currently looking for 
work. So, they are not considered--
    Senator Whitehouse. And they may very well be jobless 
because they lost their job in the recession involuntarily.
    Mr. Hall. Exactly.
    Senator Whitehouse. Okay.
    Mr. Hall. They may simply be discouraged, and if the labor 
market improves, they will get back. Or, they may have retired.
    Senator Whitehouse. And back to the question of the carbon 
fee, you put that, Dr. Stiglitz, into the category you call 
corrective taxes. We have some corrective taxes, like on liquor 
and on cigarettes, where we tax it and people do less of it, 
and that is to everybody's benefit, including the taxpayer, 
because you are paying less for health care and car wrecks and 
so forth.
    But, we also tax work, income, earnings. Could you speak 
generally about what value difference there is between a 
corrective tax and a tax on productive activity, just as a 
general proposition.
    Mr. Stiglitz. Yes. P.S., and it goes back to the previous 
question I did not fully answer about revenue-neutral taxation. 
So, the point is, if you tax things that are, quote, ``bad,'' 
that means you have more revenue which you can then use to 
reduce the taxes on things that are good. So, you can get--
another way of saying the same thing is that you get the 
benefit of discouraging the pollution, discouraging the 
externality, the bad activity, and because you can then lower 
the taxes on work or savings, you get more of the good things, 
which means more economic growth, more benefits.
    So, that is why--and let me emphasize, there is a lot of 
revenue we are talking about here. The social cost of these 
environmental externalities--carbon--are very, very large. It 
will impose a very large cost on our society and our economy in 
the future years. So, what we are talking about is not a little 
bottle tax, which is an important tax, but we are talking about 
something, when we are talking about carbon, that is very large 
for our economy.
    Senator Whitehouse. So, hypothetically, if you were to 
add--let us just pick round numbers--a trillion dollars in 
revenue to the country as the result of a carbon fee and you 
offset that with half-a-trillion reduction in the corporate tax 
rate and half-a-trillion reduction in the personal income tax 
rate, either through the EITC or rate reduction or otherwise, 
you do not end up with a net-zero benefit to the economy. You 
end up with a positive for the economy because of how you have 
shifted the tax burden, correct?
    Mr. Stiglitz. Doubly positive, because on the one hand, you 
have less of the pollution, and secondly, because now you have 
more work, more savings, more economic growth.
    Senator Whitehouse. Thank you.
    Chairman Murray. Thank you very much. That was one question 
with five parts, but it was taken.
    [Laughter.]
    Chairman Murray. I want to thank all of our colleagues who 
are participating today.
    I especially want to thank our three witnesses who have 
traveled here today and for your testimony.
    And as a reminder to all of our colleagues, additional 
questions are due by 6:00 p.m. today.
    With that, I close this hearing. Thank you.
    [Whereupon, at 11:50 a.m., the committee was adjourned.]
    
    [GRAPHIC] [TIFF OMITTED] 
    

 SUPPORTING BROAD-BASED ECONOMIC GROWTH AND FISCAL RESPONSIBILITY 
                       THROUGH A FAIRER TAX CODE

                              ----------                              -




                         TUESDAY, APRIL 8, 2014

                              United States Senate,
                                   Committee on the Budget,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:36 a.m., in 
Room SD-608, Dirksen Senate Office Building, Hon. Patty Murray, 
chairman of the committee, presiding.
    Present: Senators Murray, Whitehouse, Sessions, and Crapo.
    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 thank my Ranking Member, Senator Sessions, and 
all of our colleagues who are joining us today.
    We have a great group of witnesses here to speak with us: 
John Buckley, who is the former Chief Tax Counsel on the Ways 
and Means Committee and a former Chief of Staff of
    the Joint Committee on Taxation; Dr. Jane Gravelle, a 
Senior Specialist in Economic Policy at the Congressional 
Research Service; and Senator Sessions has invited Diana 
Furchtgott-Roth, a Senior Fellow at the Manhattan Institute for 
Policy Research.
    So, welcome to all of you and thank you so much for being 
here and participating today. I appreciate the opportunity to 
hear from all of you about how we can use our tax code to 
expand opportunity and encourage broad-based growth and tackle 
some of our budget challenges.
    Our country has seen a lot of changes over the last several 
decades, and one of the most striking is the widening gap 
between those at the top and everybody else. In the last 30 
years, the top one percent of the income distribution has seen 
their earnings rise by more than 250 percent. But earnings for 
those in the middle class and those struggling to make ends 
meet has stayed stagnant or even declined. Costs for everything 
from health care to college tuition have gone up, and 
especially coming out of the financial crisis and the Great 
Recession that began in 2007, the good, middle-class jobs that 
helped so many families climb the economic ladder in the past 
are fewer and farther between.
    All of this adds up to a 21st century economy where even 
though those at the very top continue to prosper, it has become 
more and more difficult for many families to afford the middle-
class lifestyle they are working so hard for. I think we can 
all agree that is not the kind of economy we want now or in the 
future.
    Changes to our tax code cannot solve this problem alone, 
but there is no question tax reform can and should be a 
powerful tool in the fight, especially because, right now, 
inefficiency and unfairness in our tax code is actually making 
things worse.
    Today, our tax code is riddled with wasteful loopholes and 
special interest carve-outs. 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, Social Security, or our national defense this year. 
And far too many of these tax breaks are skewed to benefit 
those who need them the least.
    There is a real need for reform when it comes to those 
unfair tax breaks, and I am grateful, in particular, to Senator 
Whitehouse, who is here today, for his focus on this issue, 
because by letting them continue, we are spending a lot of 
money through our tax code on wasteful and inefficient give-
aways to people and businesses who do not need help at a time 
when investing in better schools and infrastructure repairs or 
medical research would benefit a lot of families who really do. 
On top of that, we are also missing an important opportunity to 
help tackle our long-term budget challenges without burdening 
seniors or the most vulnerable Americans.
    Our economic, fiscal, and demographic situation is very 
different than what it was in 1986, when the last major 
overhaul of the tax code took place. While the near-term budget 
outlook has improved significantly, we still need to tackle the 
long-term debt that grew sharply as the result of two unpaid 
wars, the massive 2001-2003 tax cuts that were skewed towards 
the wealthiest, and the lingering effects of this recession. 
And, as our population ages in the coming decades, more and 
more seniors will rely on Medicare and Social Security benefits 
they are owed.
    When you add all that up, it is very clear, tax reform that 
does not ask the wealthiest Americans and biggest corporations 
to pay their fair share is simply fiscally irresponsible. And, 
every bipartisan group that has examined our budget situation 
has reached that same conclusion.
    Now, I know many of my Republican colleagues prefer a 
different approach. Chairman Camp's recent tax reform proposal 
would put every dollar of savings back into lower rates, 
primarily for corporations and those at the top of the income 
scale, and protect the wealthiest Americans and biggest 
corporations from paying their fair share towards reducing our 
deficit and boosting our economy.
    The House Republican budget that is being debated this week 
would do all this, as well, but even goes a step further. Their 
budget would push the top tax rate down to 25 percent, which 
would mean that middle-class families would have to pick up the 
tab for the new tax cuts for the wealthy. Giving tax breaks to 
millionaires while doing nothing to help working families keep 
more of their hard-earned income is not only wrong-headed in 
terms of our budget, it is also unfair to families across the 
country who are up against a decades-long trend of rising costs 
and stagnant wages.
    Now, I know everyone here is well aware of the differences 
between the two parties when it comes to comprehensive tax 
reform, and I do want to express my appreciation to Senator 
Wyden, who in his new role as Finance Chairman will be tackling 
these very tough issues.
    As we look for opportunities to move forward on the larger 
effort, I am hopeful we can also look for opportunities to 
compromise in areas where there is some more agreement right 
now. Chairman Ryan and I were able to reach a compromise on the 
budget agreement to avoid another government shutdown and 
create some economic certainty.
    Now, I think it is time for the two parties to build on 
that bipartisan foundation by coming together and finding ways 
to make the tax code more fair for working families. We can do 
this by getting rid of some of the wasteful loopholes I 
mentioned earlier and putting the savings towards helping 
working families keep more of their money and making job-
creating investments in areas like infrastructure and R&D that 
both sides agree are important.
    The 21st Century Worker Tax Cut Act that I recently 
introduced is a great example. This bill would complement 
critical reforms like raising the minimum wage by updating our 
tax code to help today's workers and families keep more of what 
they earn. It would give working families with children a 20 
percent deduction on the second earner's income, and it would 
expand the Earned Income Tax Credit, or EITC, for workers 
without dependent children, like those who are just starting 
out or those whose children have already left home. The 
proposal builds on work incentives in the EITC that both 
Republicans and Democrats agree have been effective, and it is 
paid for by closing wasteful, unfair corporate tax loopholes 
that Chairman Camp and Democrats have proposed eliminating.
    Opinion leaders from across the political spectrum have 
said it would provide much needed relief to workers and 
families. One conservative commentator wrote in the National 
Review that the 21st Century Worker Tax Cut Act is, quote, ``a 
serious proposal that has the potential to better the lives of 
a large number of workers.'' And, a New York Times editorial 
columnist said it would be, quote, ``a huge benefit to low-
income childless families and two-earner families.'' So, I am 
hopeful that here in Congress we will see similar support on 
both sides of the aisle.
    We will also be looking to close wasteful corporate tax 
loopholes when it comes to addressing the looming shortfall in 
the Highway Trust Fund. That fund supports transportation 
projects that ease congestion and make much needed repairs to 
our roads and bridges. But, in just a few months, at the height 
of the construction season, the Highway Trust Fund is going to 
reach critically low levels. That could lead to a construction 
shut-down across the country this summer, which would halt 
critical projects and put construction workers out of jobs. 
Some States are already anticipating this crisis and planning 
to stop construction projects in their tracks if Congress does 
not act.
    Fortunately, President Obama and Chairman Camp have both 
proposed using corporate revenue to rescue the Highway Trust 
Fund, so we should be able to find a bipartisan solution to 
that challenge and I am hopeful that we can work together over 
the coming weeks and months to give the Highway Trust Fund some 
multi-year certainty and do it in a bipartisan way that also 
closes wasteful tax loopholes and makes the tax code more fair. 
In the 21st century economy, these kinds of changes to our tax 
code, ones that help workers and families in a fiscally 
responsible way, are opportunities we cannot afford to pass up.
    We all know reforming our tax code will not be easy. The 
difference between Republicans and Democrats when it comes to 
making these changes are serious. But I also know, when both 
sides are willing to come together and make some tough choices, 
we can deliver. So, I am hopeful we will be able to move 
forward on some of the proposals I have laid out today, and I 
hope, going forward, we can build on them to achieve the kind 
of comprehensive tax reform that will offer more workers and 
families a fair shot and really help us build the foundation 
for broad-based economic growth in the future.
    With that, I want to thank our witnesses for joining us 
again today and I will turn it over to my Ranking Member, 
Senator Sessions, for his opening remarks.

             OPENING STATEMENT OF SENATOR SESSIONS

    Senator Sessions. Thank you, Chairman Murray, and thank you 
for your hard work and for this hearing with good witnesses on 
economic fairness.
    American workers are, indeed, right to believe that 
Washington actions are stacking the deck against them. As 
Senator Murray noted, Washington and Wall Street are booming. 
The greatest growth area in the United States is
    Washington, D.C. The highest home values and incomes are in 
this beltway area, sucking wealth out from middle America. So, 
finding out what these issues are and how to fix the problem we 
have is an important and valuable thing, and hopefully, we can 
reach some bipartisan agreements on a number of areas that can 
improve our situation.
    Over the last five years, Washington has surged our debt 
from $10 trillion to $17 trillion, promising all the time that 
this borrowing and spending would create a better economy for 
the very people that we are now lamenting who are hurting. Now, 
that is just the bottom line. I do not think these policies are 
working, will work, or will ever work. You cannot borrow your 
way to prosperity.
    Lobbyists, consultants, and politicians are doing quite 
well, but median household incomes have declined by $2,268 
since 2009. This is a stunning statistic. It is very real. I 
have not heard it disputed. Both parties seem to agree with 
that.
    What policies have we been using that have created this? Is 
there anything we could have done better? The Federal Reserve 
has pursued an aggressive easy money policy that has been great 
for the investor class, but at last week's hearing, where we 
heard from Dr. Keith Hall, the former Commissioner of the 
Bureau of Labor Statistics. He explained, quote, ``We have seen 
an unprecedented worker disengagement from the labor force 
since the end of this recession.'' I think that is an 
undisputed fact.
    Among workers without a high school diploma, nearly one in 
four are unemployed, under-employed, or discouraged from 
working. And African Americans and Hispanics, as a group, are 
hurting more than any other groups in America.
    Meanwhile, the U.S. logged a trade deficit of $42 billion 
in February, the highest in six months. Overall, there are 1.7 
million fewer manufacturing jobs today than there were in 
December of 2007. Yes, robotics are a part of that, but we need 
to have more growth and we are still not seeing the growth that 
we need. Last year, growth came in at 1.9 percent GDP growth, 
well below experts' projections and well below what we need to 
create an economy that is healthy. Yet, Washington continues to 
place new barriers to work.
    It is fundamentally a vision, colleagues, of a 
redistribution of wealth. Just tax more of people who have 
wealth and pass out more to people who do not have it and this 
will somehow fix our problems. I reject that. That will not fix 
this economy. We need a tighter labor force. We need a growing 
economy that is creating jobs. And it is hard for us all to 
agree, but there are ways, I think, we can agree on this.
    Now, CBO tells us that the President's health plan will 
eliminate the equivalent of 2.5 million full-time jobs over the 
next decade, eliminate those jobs. How can a proposal that is 
supposed to help America is going to eliminate 2.5 million 
jobs?
    And the President has proposed more subsidies for adults 
without children. But, this proposal, when interacting with 
Obamacare, the Affordable Care Act subsidies, creates a 
disincentive to work. For example, because EITC and the 
Affordable Care Act have phase-out schedules as your income 
rises, an adult without children whose income goes from $14,700 
to $17,700 would lose 75 cents in higher taxes and reduced 
government benefits for every dollar they earn. That creates a 
disincentive to work.
    The Federal Government spends more than $750 billion each 
year on more than 80 means-tested income support programs. We 
need to consolidate and reorganize these programs in a way that 
affirms work, that does not punish it. Work is central to life. 
It is central to character. It is central to self-esteem. It is 
central to the ability of a nation to provide better things for 
people. We need to reaffirm work. We need to insist that every 
American work. It is good for them and good for the country.
    We need a tax policy that allows our industries to compete. 
We have the highest tax rates in the world. How can that be 
good for business growth in America and job creation? Yet, when 
it is talked about that we would reduce those rates to a more 
competitive level, members are attacked. They say, you do not 
care about poorer people. We want to attack the businesses 
more. Real tax fairness should remove the competitive 
disadvantage faced on American workers and businesses.
    But, our friends in the majority believe that tax fairness 
means more money for Washington. They propose to eliminate 
popular deductions, not for the purpose of lowering rates, as a 
Democratic witness told us a few months ago, or as Chairman 
Baucus says, but for new government programs, new government 
spending.
    What we cannot do is borrow our way to prosperity. Our 
excessive borrowing has already inflicted a painful toll. Right 
now, it is hurting the economy now, this debt is. It is slowing 
growth.
    Last year, we paid our creditors $221 billion in interest 
payments on the debt last year. That is five times the entire 
Federal highway budget that Senator Murray mentioned that we 
need to work on and see if we cannot fix. Five times that 
amount of money went to interest on the debt last year alone. 
But CBO now estimates that annual interest payments will grow 
to $880 billion in ten years. That means one year's interest 
payment ten years from now will be almost 12 times greater than 
what the Federal Government spends on education.
    Tax, spend, borrow, regulate is not only dangerous, but it 
will not create jobs and higher wages. We must act to create 
more jobs and rising incomes without adding to the debt. Here 
are things that I think clearly will all improve the situation. 
Let us produce more American energy. Let us eliminate all 
wasteful regulations that do not produce benefits. Let us make 
the tax code more competitive and more growth oriented. Let us 
ensure fair trade, stand up for our trading partners and insist 
on fair trade and end the cheating. Let us adopt an immigration 
policy that serves the American workers' interest, that creates 
rising wages, not falling wages. We need to turn the welfare 
office into a job training center, where people come there for 
help temporarily and they are helped and assisted into a way to 
produce more and have a higher income. We need to streamline 
the government to make it leaner and more competitive and 
productive. We need to balance the Federal budget to restore 
economic confidence.
    All of these would create more jobs for American workers. 
All of these steps would empower the individual, not the 
bureaucracy. And all of these steps would grow the middle class 
and not the government.
    Thank you, Madam Chairman. I look forward to hearing from 
our witnesses.
    Chairman Murray. Well, thank you very much, and with that, 
we will turn to our witnesses. Again, thank you all for being 
here.
    Mr. Buckley, we are going to begin with you.

 STATEMENT OF JOHN L. BUCKLEY, FORMER CHIEF TAX COUNSEL, HOUSE 
 COMMITTEE ON WAYS AND MEANS, AND FORMER CHIEF OF STAFF, JOINT 
                     COMMITTEE ON TAXATION

    Mr. Buckley. Thank you, Madam Chairman and Ranking Member 
Sessions, for the opportunity to participate in your hearing 
today.
    It is clear that tax reform will not be on the agenda this 
year, but I believe that, ultimately, we will see a reform of 
our tax system. It is inevitable. How that reform is 
structured, however, will have a major impact both on our 
economy and on long-term budget issues faced by this committee. 
So, clearly, the committee is correct to start examining the 
impact of tax reform.
    For many people, tax reform is defined by reference to the 
model of the 1986 Tax Reform Act: Lower rates, broadened base, 
distributional neutrality, and revenue neutrality. I think the 
Chair quite accurately points out that there are big 
demographic and fiscal changes since 1986 that no longer make 
that model the appropriate one for tax reform. Also, I think it 
is very important to understand that although the 1986 Act was 
an enormous accomplishment, and I take great pride from being 
part of that, it failed in two major respects.
    First, it did not result in a stable rate structure. Fairly 
quickly after 1986, there were a series of substantial 
increases in the top marginal rate, the first one signed by 
President George Bush. In my opinion, it was the structure of 
the 1986 Act that made those rate increases inevitable and that 
offer a caution about tax reform going forward.
    In no small part, the rate reductions in the 1986 Tax 
Reform Act were financed by revenues from timing changes to our 
tax law. Timing changes do not affect the ultimate size of a 
deduction or income inclusion. They merely affect the year in 
which that item is taken into account.
    If you repeal a timing benefit, and most tax preferences 
are timing benefits, you have a one-time temporary increase in 
revenues during the budget window due to the transitional 
effects of moving to the new system. If you finance a rate 
reduction with revenue from a timing benefit, which is exactly 
what the Camp tax reform plan does, you will end up with a bill 
that appears to be revenue neutral during the budget window 
because of those temporary transitional taxes, but will result 
in large and growing deficits outside the budget window. That 
is exactly what I believe happened in the 1986 Act.
    Second, the economic benefits predicted from the 1986 Act 
never materialized. In that respect, the 1986 Act was not 
unique. Almost all of the economic predictions, which are 
largely based on supply side economics, of the major revenue 
acts enacted after 1981 were simply wrong. They never provided 
the economic growth that was predicted when they were being 
considered. Indeed, the 1993 tax increase was preceded by 
predictions of extraordinary economic dislocations that simply 
never happened.
    I would argue, instead of following the 1986 model, I think 
the goal for--there should be three goals for future tax 
reform.
    First, it should result in a stable revenue structure. I 
think much of the debate over tax reform ignores the fact that 
the fundamental purpose of our tax system is to raise revenue 
to cover reasonably expected government expenditures. Tax 
reform should initially focus on that goal, not an arbitrarily 
selected top rate. Given the long-term fiscal challenges that 
we face, I believe that means tax reform must result in 
additional revenues.
    Also, the Congress should not be bound by the ten-year 
budget window in assessing the impact of tax reform. I assure 
you, based on my experience, the ten-year budget window is 
easily manipulated. I think the Camp tax reform plan is a 
particularly artful manipulation of the ten-year budget window. 
Proponents of substantial changes to our entitlement programs 
point to concerns largely outside the budget window. Proponents 
of tax reform should not be able to avoid the impact of their 
proposals outside the ten-year budget window.
    But, above all, tax reform should not worsen the long-term 
budget projections. I see no benefit from repeating the 1986 
reform example, and that is unsustainably low rates followed by 
very politically painful decisions to reverse the impact of 
those rates.
    Second, I think tax reform should be designed with the goal 
of increasing economic opportunities. I have to say that I 
agreed with much of what Senator Sessions said about the lack 
of job opportunities in this country. I believe it is the lack 
of job opportunities that is the biggest challenge facing this 
government, not the lack of willing and able workers. The 
projections of economic growth from tax reform are largely 
based on their expansion of the labor force, not their 
expansion of work opportunities. Indeed, I think that you 
should have a different focus in tax reform.
    Finally, tax reform should not increase the growing 
inequality in income and wealth in this country. A tax reform 
that is based on temporary tax increases to finance rate 
reductions could become quickly regressive outside the budget 
window when those temporary tax increases end.
    Thank you, Madam Chairman.
    
    [GRAPHIC] [TIFF OMITTED] 
    
    Chairman Murray. Thank you very much.
    Dr. Gravelle.

  STATEMENT OF JANE G. GRAVELLE, PH.D., SENIOR SPECIALIST IN 
        ECONOMIC POLICY, CONGRESSIONAL RESEARCH SERVICE

    Ms. Gravelle. Thank you very much for inviting me here 
today.
    The United States, due to the growth of programs to serve 
an aging population, which we have known is coming for a long 
time, faces an unsustainable debt. Now, tax reform might serve 
as a vehicle to raise revenue to reduce this debt as well as 
for lower rates or to pay for alternative, more desirable tax 
benefits. A small change in tax revenue could close much or all 
of the fiscal gap and prevent the debt from rising as a percent 
of GDP.
    Although raising taxes to reduce deficits might cause a 
modest initial reduction in GDP in the short run, those effects 
are expected to be offset by the benefits of reducing the 
crowding out of private investment. That is, increasing taxes 
to reduce the debt is expected to contribute to positive 
economic growth.
    Revenue-neutral tax reform is often argued to cause 
economic growth through rate reduction, however, the same base-
broadening provisions that you use to finance these rates can 
have effects on effective marginal tax rates. Just think of the 
State and local tax deduction. If you reduce the deduction for 
it, you have raised the marginal tax rate, and that happens 
with a lot of provisions. So, the overall effects of this are 
really very uncertain and probably negligible.
    A study by two prominent economists found that the tax 
reform of 1986, which lowered rates and broadened the base, had 
little effect on the economy in the aggregate. Pursuing base 
broadening, because revenues can be used to lower statutory 
rates, with the objective of spurring economic growth is 
unlikely to achieve its goals.
    Although base broadening simply to permit rate reduction is 
unlikely to achieve a growth objective, tax reform can 
potentially improve fairness, efficiency, and simplicity. Tax 
reform can also eliminate or limit existing benefits, but it 
might also add or expand provisions. The Tax Reform Act of 
1986, for example, expanded the Earned Income Tax Credit. And 
the provision that Chairman Murray, that you have recently 
proposed for the EIC and the second worker, there are a lot of 
merits in this.
    I actually wrote a paper about some of this in 2006, where, 
basically, I showed with my co-author, who is my daughter, that 
you would improve horizontal equity. The most important thing 
to increase horizontal equity in the tax law is to increase the 
EIC for couples, married couples without children and single 
individuals. There is very little EIC for them.
    Despite tax expenditures that are 80 percent of individual 
tax revenues, potentially enough to decrease rates by 43 
percent, a CRS study suggested the difficulties in broadening 
the tax rate, because these tax expenditures, in most cases, 
are viewed as serving an important purpose. I mean, among the 
large tax expenditures are taxing Medicare to the recipients, 
taxing capital gains at death, and taxing defined benefit 
pension plans, all of which technically are very difficult to 
do.
    So, we kind of went through the top 20 tax expenditures and 
found--we suggested that base broadening would--feasible base 
broadening would be likely no more than six percent to nine 
percent of revenues. The individual revenues in Chairman Camp's 
proposal were of this magnitude, about six percent. Now, this 
amount would not fund significant rate reduction, but if used 
to raise revenue, would largely close the fiscal gap.
    It is particularly difficult to find provisions that would 
lower the top individual tax rate to 25 percent without 
shifting the burden of the middle class. In the Tax Reform Act, 
top rate cuts were financed, in part, by taxing capital gains 
at ordinary rates and restrictions on tax shelters, options 
that do not appear to be feasible now. Both of the fully 
specified tax reform proposals that I mentioned in my testimony 
both have a top rate of 35 percent.
    Corporate tax expenditures are much smaller relative to 
corporate tax revenue. Setting aside the treatment of foreign 
source income, repealing every corporate tax expenditure would, 
according to my estimates, prevent [sic] a reduction in the 
corporate rate to 29.5 percent. If deferral of foreign source 
income is eliminated, the rate could be reduced to 27 percent. 
So, that is every tax expenditure that I am talking about.
    While it might be more feasible to eliminate corporate tax 
expenditures, there are also trade-offs. For example, financing 
a rate cut with accelerated depreciation, which might be 
desirable on other grounds, would nevertheless increase the 
cost of capital. Circumstances are very different for corporate 
rate reduction than they were in 1986. The 12 percentage point 
reduction in the corporate rate at that time was financed 
largely by the repeal of the investment credit. Accelerated 
depreciation today would allow only a 2.2 percentage point 
reduction.
    One area where I believe revenue could be raised without 
increasing the domestic cost of capital is increasing the tax 
on foreign source income. Measures could also be taken against 
artificial profit shifting, which is not an issue of the 
treatment of investment but of tax avoidance. There are also 
some other provisions, both individual and corporate, that 
might be classified as loopholes--examples are carried 
interest, inherited IRAs, there is a whole series of these--
that might be easier to address than a lot of tax expenditures.
    A budgetary risk in tax reform is the use of provisions 
that have transitory revenue gains to finance permanent tax 
cuts, which would increase the deficit outside the budget 
window. I describe in my testimony examples of these practices 
in the Tax Reform Act of 1986, significant transitory 
provisions and a number of revenue-raising provisions in 
current proposals that produce less revenue loss outside the 
budget window.
    The Budget Committee has discussed including macroeconomic 
estimates. I believe that economic science and research is not 
at the stage that we could get reliable estimates for 
macroeconomic effects. However, we are certainly able to get 
reliable estimates for the steady state effects, and it would 
be very easy for the JCT to estimate any of these tax proposals 
as they would appear had they been in place for many years, and 
that is something I think the Budget Committee might consider.
    Thank you.
    [The prepared statement of Ms. Gravelle follows:]
    
    [GRAPHIC] [TIFF OMITTED] 
    
    Chairman Murray. Thank you.
    Ms. Furchtgott-Roth.

 STATEMENT OF DIANA FURCHTGOTT-ROTH, SENIOR FELLOW, MANHATTAN 
                 INSTITUTE FOR POLICY RESEARCH

    Ms. Furchtgott-Roth. Thank you very much, and I believe I 
have some slides that you said were on a computer somewhere.
    Ms. Gravelle. They are right behind you.
    Ms. Furchtgott-Roth. So, thank you very much for inviting 
me to testify. I would like, with your permission, to submit my 
entire testimony for the record and then summarize it.
    Chairman Murray. Without objection.
    Ms. Furchtgott-Roth. Thank you. So, I would like to really 
agree with my co-witness here, John Buckley, that the lack of 
job opportunities is the major problem facing America. We have 
a labor force participation rate that is around 1978 levels, 
before the millions of women started moving into the workforce 
in the 1980s. And the way to fix this problem is with--through 
different types of tax reform, both at the bottom end, so 
fixing entitlements so people leaving unemployment do not face 
such high tax rates, and at the top end, because right now, for 
top earners and small businesses, State and Federal taxes are 
over 50 percent.
    While taxes do matter--if they did not matter, America 
could double them and buy everybody a Prius, and in study after 
study, we find that taxes do have an effect. So, I do not want 
to go through all these studies. I mention some of them in my 
testimony. Professors Jonathan Gruber of MIT and Emmanuel Saez 
found that people in the upper end of the income distribution 
are highly responsive to tax rates. Edward Prescott got a Nobel 
Prize for showing the effects of taxes on different countries, 
including the United States. Professors William Gentry of 
Williams College and Glenn Hubbard of Columbia found that high 
taxes discourage entrepreneurship. Princeton University 
Professor Harvey Rosen--the list just goes on..
    I would like to just focus on a couple of slides from 
Professors Christina and David Romer. As you know, Christina 
Romer was the Chairman of President Obama's Council of Economic 
Advisors and she concluded that a tax increase of one percent 
of GDP reduces output over the next three years by nearly three 
percent. And in Figure 1, you can see the estimated effect of 
an exogenous tax increase of one percent of GDP on GDP, and you 
can see that it is going down.
    If you look at Figure 2, you can look at the effect of a 
tax increase of one percent on the inflation rate, and the 
Romers find that it makes inflation rise. The Romers took data 
from the 1940s to the present and did a very thorough effect of 
the increases of taxes on GDP.
    And what is most startling and also related to the 
testimony of my friend John Buckley over here is the effect of 
a tax increase of one percent of GDP on the unemployment rate, 
and it shows that there is a--that the unemployment rate 
actually does decline under this.
    But what they find is that with the increase in taxes, then 
GDP actually does go down, and the reason is that, as all of 
you know, when the government takes a dollar of your money, 
then it spends it less efficiently than you do.
    Well, one objection that we have heard today is that 
reducing taxes leads to more inequality, and inequality 
decreases economic growth. There has been an International 
Monetary Fund study about this, and I think that a lot of this 
is misstated. The IMF study used pre-tax, pre-transfer income 
to measure inequality and many of these studies looking at 
inequality do not take into account the taxes paid by the top 
percent and the transfers that go to the bottom. So, for 
example, the top five percent paid 57 percent of all Federal 
individual income taxes in 2011, the latest year that data are 
available, and the top half of earners paid 97 percent of these 
taxes. So, the idea that inequality can be measured just 
looking at these issues is very--just does not make sense at 
all.
    Well, mismeasurement of income is not the only flaw. Many 
changes occurred between 1980 and 2012. For example, as we can 
see in Table 1, women streamed into the workforce in the 1980s, 
and by 2012, most families in the top fifth of the income 
distribution had two earners. So--and in the middle of the 
distribution, the average was 1.3 earners. So, one thing we 
could do to increase income equality is to say that only one 
person in a family can work. One of the things that we are 
looking at when we observe more income inequality is more women 
in the workforce.
    We have also had, over the past 20 or 30 years, more people 
living alone, and that has contributed to the perception of 
income inequality. So, if you look at Table 2, you can see that 
men and women living alone are more likely to be in the lowest 
income quintiles, and with increasing life expectancy and more 
divorces, we can see that there are more people living alone 
than there used to be and this also contributes to the 
perception of income inequality.
    So, that is why it is important, when you look at income 
distribution, to look at it on a per person basis so that you 
can adjust for that, and also looking at consumption rather 
than income, because when you look at taxes and transfers, the 
taxes go from the top part of the income distribution and they 
go to transfers to the bottom.
    So, in Table 3, where I have done that, you can see that 
the ratio of top to bottom income quintile spending is about 
the same. It is about 2.5 in 1987 and about 2.5 in 2012. It has 
not changed that much, and that is because even though looking 
by certain measures, income inequality, it seems as though the 
top--there is a lot more income inequality based on income 
measures that do not include taxes and do not include 
transfers. When you take out taxes and transfers, you have a 
very different situation.
    So, the answer is to do tax reform and not be concerned 
about these measures of inequality, which are frequently 
incorrect, and thank you very much.
    [The prepared statement of Ms. Furchtgott-Roth follows:]
    
    [GRAPHIC] [TIFF OMITTED] 
    
    Chairman Murray. Thank you to all of you.
    Let me start with a question about House Ways and Means 
Chairman Dave Camp's tax reform plan. That plan attempts to pay 
for lower tax rates by closing loopholes and reducing tax 
expenditures. Chairman Camp even imposes a new excise tax on 
big banks and places a surtax on the income of wealthy 
individuals. All told, his plan raises more than $4.2 trillion 
in new revenue to pay for lower tax rates. And he tried to make 
all these changes without increasing or decreasing revenues or 
shifting tax burdens among taxpayers at different income 
levels.
    Mr. Buckley, you noted that despite all of his efforts, 
Chairman Camp's plan would still lead to both bigger deficits 
and tax cuts for the wealthy beyond the ten-year budget window, 
and let me just say again, this is an approach to tax reform we 
cannot afford, given our current budget window. But, can you 
explain to us why Chairman Camp's plan would lead to bigger 
deficits down the road.
    Mr. Buckley. It is fairly simple. If you just look at the 
revenue table of Chairman Camp's bill and look at what I call 
permanent changes in the law--changes other than timing 
changes--he has well over a trillion dollars in permanent tax 
reductions. That is offset by a series of pure one-time revenue 
increases--the tax on the unrepatriated profits of U.S. 
multinationals, release of reserves from repeal of LIFO 
accounting methods. Those are purely one-time revenue 
increases. They are in the range of a couple hundred billion 
dollars.
    He also, you know, forces many into Roth IRAs and claims 
that to be a revenue increase. It is not a revenue increase. It 
is a tax benefit disguised as a revenue increase in the budget 
window.
    And then, finally, he has a whole series of pure timing 
changes--repeal of accelerated depreciation, repeal of expense 
treatment for R&D, you could go on, repeal of expense treatment 
for advertising expenses. Those are all pure timing changes and 
they will disappear to a very large extent--I have seen as much 
as two-thirds disappear outside the budget window.
    So, it is fairly simple math. He results in growing 
deficits outside the ten-year window. Also, all of those one-
time and temporary tax increases are taken into account for 
distributional purposes. During the ten-year window, these are 
changes affecting businesses. The way the Joint
    Committee on Taxation distributes tax burden, they will 
flow almost all to upper-income taxpayers. That is what enables 
his distributional table to look distributionally neutral in 
the ten-year budget window.
    Chairman Murray. But it is in the out-years that the 
wealthy benefit.
    Mr. Buckley. Those revenues disappear and the upper incomes 
will get a substantial net tax cut, and you only have to look 
at the Joint Committee distributional tables to find that 
people making more than a million dollars get a significant tax 
reduction in the last year of his ten-year budget window.
    Chairman Murray. Okay. Dr. Gravelle, you recently wrote 
that in 2008, U.S. companies reported profits in Bermuda, a tax 
haven with no corporate income tax, that exceeded the size of 
that country's GDP by almost 650 percent. Many of us are aware, 
of course, of the infamous five-story building in the Cayman 
Islands that houses something like 18,000 companies. But, no 
doubt, really, our government is losing billions of dollars 
every year to offshore tax abuse. Let us be clear. Those 
schemes give big companies an unfair business advantage over 
companies that only operate domestically, and I think that is 
important to remember, as well.
    I talked in my opening statement about the bill that I 
introduced, the 21st Century Worker Tax Cut Act. My bill 
actually borrows from Chairman Camp's to combat profit shifting 
and tax haven abuse, uses those savings to invest in targeted 
tax cuts for childless workers and two-earner families.
    First of all, Dr. Gravelle, I wanted to get your 
perspective on the magnitude of offshore profit shifting and 
tax avoidance.
    Ms. Gravelle. Actually, I think my 650 percent number has 
grown. It is really more like over a thousand percent by now, 
probably.
    Chairman Murray. Really?
    Ms. Gravelle. I need to update my paper. So, the estimates 
that I look at would say that I think that the profit shifting, 
sort of the best estimates, amount to probably about $70 
billion in fiscal year 2015. That is profit shifting, not 
revenue we could raise from it. But it is growing. It seems to 
be growing all the time. But, you know, if you put out a 35 
percent rate, you could get a substantial revenue gain from 
that, and I think there are certainly ways to collect that 
money effectively. A lot of countries tax currently income from 
countries that have low taxes. That is very common. But we do 
not do any of that.
    Chairman Murray. Right. And, Mr. Buckley, would you agree 
that providing targeted tax relief to struggling workers is a 
better use of taxpayers' resources than allowing these tax 
havens to continue unabated?
    Mr. Buckley. I absolutely agree. I think, of the barriers 
to employment faced by two-worker married couples are 
significant when they have children, and so that anything that 
is done to address those barriers, make it easier for them to 
get quality day care, to afford the cost of that, is positive.
    I am deeply troubled when you see tax reform plans like 
Dave Camp's that repeal the Dependent Care Credit and that will 
result in a net tax increase on many of the two-earner spouses 
that you are concerned about. We should make it easier for them 
to enter and remain in the workforce.
    Chairman Murray. And we want people to work. I know my 
counterpart here has talked about that before. But, it is a 
disincentive to the second worker when they start working and 
they have to pay for child care and clothes and transportation 
and are not getting that tax credit, correct?
    Mr. Buckley. That is correct.
    Chairman Murray. Okay. My time is out. I will yield to 
Senator Sessions, and thank you all very much.
    Senator Sessions. Thank you.
    Ms. Gravelle, you indicated you discussed new taxes, that 
they would be used to pay down the debt, or reduce the annual 
deficits, maybe more correctly. If taxes were to be increased, 
is that what you would propose should be done with the money?
    Ms. Gravelle. Well, I cannot recommend a policy. CRS never 
makes recommendations.
    [Laughter.]
    Ms. Gravelle. Just basically, what I wanted to say in my 
statement is--and, in fact, I would go on to say I have written 
a paper on the long-run debt outlook where it seems to me, if 
you put all the numbers together, it is very hard to deal with 
that long-run debt without relying on some increase in taxes. 
But, mainly, what I was saying--
    Senator Sessions. But it does not improve the long-term 
debt if you increase taxes to fund new spending. That is the 
point.
    Mr. Buckley, thank you for your comments. I would just say 
that--well, CBO tells us that the marginal rate tax increases 
do reduce economic growth. I think most people would agree. We 
do have to have a certain amount of money to run this 
government. There is just no doubt about it. But, I think that 
it is clear that a marginal rate increase on the private sector 
weakens the private sector and increases the Washington sector 
and that is pretty clear.
    I have got just a minute and I will let you respond. I see 
you would like to.
    Mr. Buckley. Well, I think you should look, carefully look 
at the economic models that predict economic growth from tax 
reform. They are what I call supply side models. Many of them 
assume--if you could look at the Joint Committee analysis of 
Dave Camp's bill, one of the models used that shows big 
increases in growth assumes that the two major problems faced 
by this country are already solved. They assume that the 
Federal budget is sustainable, no long-term problems, and there 
is no unemployment in this country. They are modeling the 
effects--
    Senator Sessions. Well, I doubt that they say there is no 
unemployment--
    Mr. Buckley. Well, that is what the model assumes.
    Senator Sessions. Do you mean zero unemployment?
    Mr. Buckley. I mean zero unemployment.
    Senator Sessions. That would be unrealistic, I would agree.
    Mr. Buckley. It is unrealistic, but that is where the 
projections of economic growth come from.
    Senator Sessions. Well, Ms. Furchtgott-Roth, you refer to 
studies. There are a number of studies that have shown that in 
Europe, IMF and some sophisticated analytical studies by 
professionals who say that in reducing the deficits they were 
facing, that the nation benefits more from reducing government 
spending than it does from increasing taxes to reduce the 
deficit. Is that your understanding of the state of the 
economic analysis?
    Ms. Furchtgott-Roth. I think it is important to reduce the 
deficits by cutting spending. Increasing taxes to reduce the 
deficit, especially in the system of government that we have 
right now, seems to result in higher taxes and higher spending, 
and I really agree that it is a great problem that companies 
are putting profits abroad and one reason for this is that we 
have a much higher tax rate than other countries around the 
world and we need to lower our corporate tax rates to average 
OECD levels and start taxing not on a worldwide but on a 
territorial basis. OECD averages about 24 percent. So, it is no 
surprise that since our rate, Federal and State, is 39 percent, 
our companies are keeping profits offshore rather than bringing 
them back where they would be taxed.
    Also, I am surprised that we have not had any discussions 
of cuts in spending. We are just assuming that spending cannot 
be cut, and there are a lot more efficient ways of dealing with 
the spending that we have. For example, we talked about the 
Highway Trust Fund. If that were devolved to the States, for 
example, instead of sending all the gas tax to Washington, then 
sending it back to the States, if we let the States keep their 
gas tax revenues and spend it themselves on what highway 
projects they wanted without having to have the required 15 
percent for mass transit, which is not much good in places like 
Nebraska, where they do not use mass transit, States could make 
much more efficient uses of these revenues and they would not 
be hamstrung by project labor agreements and other kinds of 
Federal rules on this highway construction and that could go a 
lot further.
    There are many ways we could be cutting spending, such as 
the $12 to $15 billion we spend every year making electricity 
more expensive, and I think we really need some discussion of 
that, not just assume we need to raise taxes to reduce the 
deficit. We also need to be looking at entitlements out in the 
long run, how we can trim those down, because those are the 
major source of government spending.
    Senator Sessions. Well, I think that is exactly right. It 
is the equivalent of a tax to pass an environmental regulation 
or a global warming regulation that raises the price of 
everybody's energy for people alike. It is the equivalent of a 
tax, in my opinion. It is equivalent to the government taxing 
those same people and then paying for the CO2 reduction ideas.
    Ms. Furchtgott-Roth. Right. And what is really--
    Senator Sessions. Economic sense, it is not much 
difference, is it?
    Ms. Furchtgott-Roth. Yes--
    Senator Sessions. I would just say this--
    Ms. Furchtgott-Roth. --and what is really interesting is 
that when extended unemployment benefits ended in December, 
between December and March, the labor force participation rate 
went up by four-tenths of a percentage point. That is the 
fastest increase since 2010. And that was because, in essence, 
the effective tax rate for working at lower income levels had 
disappeared when people were not losing that extra unemployment 
benefit by going out to work.
    Senator Sessions. Could I ask you this, Ms. Furchtgott-
Roth. University of Chicago Professor Casey Mulligan has said 
that the penalty on working, that, in effect, for low-income 
workers, can be much higher than those for upper-income earners 
because of the phase-out of different benefits they are 
receiving from the government.
    Ms. Furchtgott-Roth. Right. He had speculated about 40 to 
60 percent, and that is why we really need to work on trimming 
back these entitlements and making the phase-outs different. 
That is why it is particularly interesting that when extended 
unemployment benefits ended in December, we saw this movement 
of people into the workforce, and also, the percent of long-
term unemployed went down from 37 percent--the long-term 
unemployed, that is 26 weeks or longer--went from 37 percent of 
the unemployed to 35.8, just last month.
    Senator Sessions. Thank you, Madam Chair. I would just say 
that the argument over taxes and economic growth is complex, 
but in 1981, the Reagan plan took the marginal tax rate from 70 
percent to 50 percent, and I think that was a positive step for 
the economy. The economy did recover. And then in 1986, it was 
taken to 28 percent. Perhaps that was lower than the country 
could sustain, Mr. Buckley, I do not know. But, when it went 
back up--it went up, what, to 39--and you still ended up with 
far less marginal tax rate imposition on the private economy 
than you had in 1980. And, I think all of that did help create 
growth and prosperity.
    All of us are guilty. Something changes in policy and we 
run out and say the next month, whatever good or bad happened 
was a result of that event. And it may just be a smaller event 
in the long-term shape of things that helped shape it.
    So, anyway, these are important issues. Thank you for your 
leadership, and this is a valuable discussion.
    Chairman Murray. Thank you.
    Senator Whitehouse.
    Senator Whitehouse. Thank you, Chairman.
    Let me get a sense--I think the Chairman used one of the 
numbers that I want to use already, but I would like to hear it 
from the witnesses. The revenue that comes into the Federal 
Government has two ways of being spent. One is it can be spent 
through the budget and through appropriations, and you could 
describe that as going out the front door, and everybody gets a 
look at it when it is on the porch because the appropriations 
process looks on a regular basis at all of that.
    And the other is by tweaking the tax code to give people 
advantages and deductions and so forth. You can send revenues 
that would otherwise be collected for spending in the 
traditional sense, that would otherwise go out the front door, 
you can send them out the back door, and that can also be very 
beneficial to special interests, and, indeed, there are huge 
lobbying professions that are designed to make sure that 
industries maximize their benefit of that expenditure out the 
back door.
    In terms of the scale of how much money is lost through tax 
avoidance, tax deductions, tax specialized rates, things like 
that, compared to what gets actually spent, how would you 
compare the two, generally? And on the corporate side and on 
the individual side separately, if you would.
    Mr. Buckley. Senator, I think you have to divide what are 
called tax expenditures into different pockets here.
    Senator Whitehouse. Let me put it this way. Are they called 
tax expenditures for a reason?
    Mr. Buckley. They are called tax expenditures for a reason.
    Senator Whitehouse. And what is that reason?
    Mr. Buckley. That they are spending through the tax system.
    Senator Whitehouse. Okay.
    Mr. Buckley. But, many of the tax expenditures are items 
like the Dependent Care Credit, per child credit, charitable 
deductions, home mortgage interest deductions, State and local 
tax deductions--
    Senator Whitehouse. Yes.
    Mr. Buckley. Those type of tax expenditures on the 
individual side are somewhere between 80 and 90 percent of 
total tax expenditures. So, there clearly is a lot of special 
interest things here.
    Senator Whitehouse. Particularly on the corporate side.
    Mr. Buckley. Particularly on the corporate side--on the 
business side--
    Senator Whitehouse. Yes.
    Mr. Buckley. Not just corporations, but businesses. But, if 
you look at the overall numbers that are being tossed around, 
the bulk of the tax expenditures are things that you really 
could not accomplish through a spending program. They are 
called tax expenditures, but you cannot replicate the 
charitable deduction through a spending program. I do not think 
the Congress would want to replicate--
    Senator Whitehouse. My point is, the scale of it, because I 
think most people think, when they think of Federal spending, 
that what we see through the appropriations process is a very, 
very big number--
    Mr. Buckley. Right.
    Senator Whitehouse. and whatever happens with the tax code 
is sort of a lesser thing. And, in fact, on the corporate side, 
it is 70 to 80 percent of all revenues that actually goes--
    Ms. Gravelle. No, it is smaller than that.
    Mr. Buckley. No.
    Senator Whitehouse. Smaller than that?
    Mr. Buckley. Yes, very much.
    Ms. Gravelle. It is smaller. It is about--I think it is--it 
seems to me it was about 40 percent--35 percent, 40 percent. 
The biggest tax expenditure, I think, is comprised partly of 
what I think is a loophole, and that is the revenue loss on the 
deferral of foreign source income.
    Mr. Buckley. Correct.
    Ms. Gravelle. Some of that might be real activity, but I 
think a large part of it is these profits that have been 
shifted through various schemes to, you know, to the Cayman 
Islands or to Bermuda or--
    Senator Whitehouse. And some of that, we do not see at all 
because the income is hidden, so you never know that--
    Ms. Gravelle. We are capable of collecting that if we want 
to.
    Senator Whitehouse. If we want to, yes.
    Ms. Gravelle. But, it is the biggest tax expenditure and it 
is worth--I do it in percentage points of the rate--it is worth 
about three percentage points. The one that is talked about all 
the time, the next biggest one, is worth about 2.2 percentage 
points. So, those are the two biggest tax expenditures, and 
accelerated depreciation only accidentally became a tax 
expenditure because we set the rates where they should be in 
present value terms in 1986, but we set them with the wrong 
expectation of inflation. That is what happened there.
    Ms. Furchtgott-Roth. But, that is on the corporate side. If 
you look at the individual side, the mortgage interest 
deduction, the deduction for health care expenses on the 
employer side, the deduction for State and local taxes, I mean, 
all these really are the major tax expenditures and they are 
very difficult to get rid of for political purposes.
    Senator Whitehouse. Ms. Furchtgott-Roth, while I have got 
you here, I think the last time we saw each other was in the 
Environment and Public Works Committee, and we do not often 
have witnesses who show up in both the Budget Committee and the 
Environment and Public Works Committee, and so I have looked at 
some of the areas where you have testified, and you have 
testified on climate change in the Environment and Public Works 
Committee.
    You have testified on the impact of Obamacare on America's 
health insurance in the House Energy and Commerce Subcommittee.
    You have testified on sequestration in the House Education 
and Workforce Subcommittee.
    You have testified on energy in the House Energy and 
Commerce Subcommittee.
    You have testified on Bureau of Labor Statistics employment 
data on the House Oversight and Government Reform Committee.
    You have testified on the individual mandate in the 
Affordable Care Act in the House Ways and Means Subcommittee.
    You have testified on national ocean policy in the House 
Natural Resources Subcommittee.
    You have testified on a balanced budget amendment in the 
Senate Judiciary Subcommittee, which actually makes three of my 
committees that you have testified on.
    You have testified on something called Obama's hidden 
marriage penalty in the House Oversight and Government Reform 
Subcommittee.
    You have testified on the future of union transparency on 
the House Education and Workforce Subcommittee.
    You have testified in the Joint Economic Committee on the 
gender pay gap for women.
    You have testified in the House Natural Resources 
Subcommittee on American Samoa fisheries subsidies.
    You have testified in my Senate Judiciary Subcommittee on 
medical bankruptcy reform.
    You have testified on the nomination of John Roberts to be 
an Associate Justice of the Supreme Court.
    You have testified in the confirmation hearings in Senate 
Banking, Housing, and Urban Affairs.
    You have testified on estate and capital gains tax levies 
on farmers.
    And, you have testified on being compensated for overtime 
by taking time off rather than receiving additional pay.
    Ms. Furchtgott-Roth. Oh dear. You are showing everybody how 
old I am.
    Senator Whitehouse. And, fair to say that in every single 
one of those testimonies, you were the Republican witness?
    Ms. Furchtgott-Roth. Absolutely. I worked also for three 
Republican White Houses and I have written five books, the 
latest being Regulating to Disaster: How Green Jobs Policies 
are Damaging America's Economy.
    Senator Whitehouse. Is there any area where you will not 
testify?
    Ms. Furchtgott-Roth. Yes. Yes. I do not testify on anything 
legal. I only testify on economics because I am an economist. I 
am the former Chief Economist of the U.S. Department of Labor, 
and labor issues overlap many of these things that you 
mentioned. For example, in my testimony on behalf of John 
Roberts, I was testifying on the theory of comparable worth, 
not on his qualifications to be a Justice. But, yes, I will 
testify on--
    Senator Whitehouse. We will see you in the Judiciary 
Committee again and we can see whether we are not talking about 
legal issues.
    Ms. Furchtgott-Roth. Only if it is an economic issue. For 
example, I do not testify on things like banking or telecom 
because I do not have expertise in those areas and they do not 
really overlap with labor economics.
    Senator Whitehouse. Very well.
    Thank you, Chairman.
    Chairman Murray. Thank you. I want to thank all three of 
our witnesses for participating today, all of our colleagues 
that are here.
    As a reminder to my colleagues, additional statements or 
questions for the witnesses are due by 6:00 p.m. today, to be 
submitted to the Office of Chief Clerk in Room 624.
    With that, thank you again for all of you participating.
    With that, I call the hearing to a close.
    [Whereupon, at 11:38 a.m., the committee was adjourned.]

 
         INVESTING IN WHAT WORKS: EXPLORING SOCIAL IMPACT BONDS

                              ----------
                              



                         THURSDAY, MAY 1, 2014

                              United States Senate,
Committee on the Budget and the Government Performance Task 
                                                     Force,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:01 a.m., in 
Room SD-608, Dirksen Senate Office Building, Hon. Mark Warner, 
chairman of the Task Force, presiding.
    Present: Senators Warner, Whitehouse, and Ayotte.
    Also Present: Senator King.

              OPENING STATEMENT OF CHAIRMAN WARNER

    Chairman Warner. Good morning, everyone, and welcome to 
today's hearing of the Budget Committee's Government 
Performance Task Force on a very interesting subject, 
``Investing in What Works: Exploring Social Impact Bonds.''
    I mentioned to the panel this morning, we are going to go 
ahead and get started. I know Senator Ayotte is going to join 
us in a few minutes. Senator Whitehouse is on the committee, as 
well--actually, whose idea for the hearing it was--is in a 
Judiciary Committee markup and will be here. So, I particularly 
mention to our guest from the U.K., please do not be offended 
if people float in and out. We often have very short attention 
spans, but when we are here, we are going to be very focused on 
what you say.
    I want to, before we get to our subject, just do a quick 
review for staff and others who have followed this Task Force. 
At our last Task Force hearing, we discussed the need to expand 
financial transparency, and I am happy to report that since 
that last hearing, we have actually made some real progress. 
This month, both the Senate and the House passed our bipartisan 
Digital Accountability and Transparency Act, or DATA Act, and I 
would like to thank all the members of the Task Force for their 
support of the DATA Act, and I do not think he is going to be 
with us this morning, but particularly Senator Portman, another 
member of the committee who was my lead cosponsor on this bill. 
We are soon going to get, actually, a Presidential signing 
ceremony.
    Recognizing that these are sometimes a bit obscure topics 
that we deal with here, but we all talk about how we can try to 
bring better accountability to the government, the DATA Act 
will actually improve transparency and accountability by 
requiring that agencies post all Federal spending data on a 
single easily accessible website. This bill will also require 
agencies to develop financial data standards so that spending 
data is reported to the public in a consistent and accurate 
way.
    I am not sure, Mr. Fisher, whether in the U.K. it is the 
same, but we have, for example, in the Department of Defense, 
200 different financial accounting systems. It is ludicrous, 
trying to push the bureaucracy to get a common standard, common 
data.
    Darrell Issa from the House, who was a lead sponsor, said 
if--and, again, apologies to our guest from the U.K.--but if 
you were in baseball and every baseball team had a different 
way of measuring what a hit was or what an error was or what a 
person's averages were, you would be very hard pressed to 
determine who were the good players and who were not.
    This DATA bill, which has been called the most significant 
piece of government transparency work since the Freedom of 
Information Act, I think is going to really give us a tool.
    What we also do in this bill is reduce reporting burdens 
for the recipients of Federal funds, because we have clearly 
learned--and Senator Ayotte and I are working together on 
legislation in this area--we ask agencies to report time and 
again in different forms. If we can cut back on that, we can 
save resources. Actually, Senator Ayotte and I have legislation 
to try to eliminate some of the duplicative reporting 
requirements.
    Probably not all members of the public would realize that 
we do an annual Dog and Cat Fur Violations Report, which I know 
the public is hanging on each day waiting for that Cat and Dog 
Fur Report that comes out. If there was ever a case of a 
meaningless report--
    Senator Ayotte. Yes, it is riveting. They are waiting.
    [Laughter.]
    Chairman Warner. And it is costing and costing. So, we are 
actually trying to eliminate some of that. This is what, 
really, this Task Force was set up for back in 2009, to say, 
how can we drive down, in tight fiscal times, better 
performance.
    And we have passed the Government Performance and Results 
Modernization Act, again, an obscure piece of legislation that 
most people do not know, but it actually requires agencies for 
the first time to identify not only their best performing 
programs, but their least performing programs, which is always 
hard to get anyone in government to acknowledge that certain 
things may not be working.
    We have also looked at Federal customer service reporting, 
and again, as I mentioned, with Senator Ayotte, we are looking 
at getting rid of some of the duplicative reports. A lot of 
time and money is spent on reports that are not very useful.
    Today, we are going to go into a different area that is 
really very, very brand new. It was suggested, as I mentioned, 
by Senator Whitehouse. We are here to learn more about social 
impact bonds, a new approach to financing government services 
designed to ensure government only pays for what works.
    Frankly, the Federal Government does a poor job of 
understanding what works. Federal agencies often talk a good 
game about measuring results and delivering value for the 
taxpayers, but the truth is that evaluating what works and what 
does not really work is really something the Federal Government 
does not do very well. Maybe we can learn from others about 
this. It is done better elsewhere. But part of that was because 
there is lack of common data standards. Part of that is because 
there is really not a lot of transparency. But this idea of 
social impact bonds is something that may be a new tool. This 
is especially true when linking resources to outcomes, 
something that a lot of us talk about, but, again, we do not 
have very good standards.
    The Federal Government has a practice of what is called 
base budgeting, where discussion and analysis of resource 
allocation is framed by the prior year's funding level rather 
than the outcomes that those resources achieved. We simply 
start with that baseline and build from there rather than 
looking back and saying, did we actually get value for our 
dollar in terms of what was spent in the preceding year?
    Now, we all know that we are going to continue to be faced 
with tight budget times. In these times, we need to make sure 
that we are allocating limited resources to the programs that 
actually deliver results. That is why the recent development of 
social impact bonds is of importance.
    Social impact bonds are not really bonds, but they are 
probably better described as a new type of performance-based 
contracts. Governments use social impact bonds to finance 
social service projects with private and philanthropic capital 
and only repay this investment after an independent evaluation 
confirms the project has achieved the goals. The key here is 
that government does not pay if the project fails to deliver.
    Initially pioneered in the U.K., social impact bonds--and I 
think this was in 2010, Mr. Fisher, when it started--social 
impact bonds have expanded to several States in the United 
States, including Utah and New York, targeting such issues as 
juvenile recidivism and early childhood education.
    The appeal of this approach is growing, in large measure 
because it achieves several important policy goals. It ensures 
accountability, again, making sure that we actually pay for 
what works. It supports evidence-based investments. The tool 
promotes use of high-quality program evaluation to inform 
investment decisions and add to the information based upon what 
works. It incentivizes public-private partnerships. Social 
impact bonds create a mechanism to leverage private and 
philanthropic capital to fund programs that lack sufficient 
funding. And, finally, it results in savings. This has the 
potential to yield long-term savings from reductions in social 
problems that rely heavily on government services.
    Now, this is a new idea and I think we are going to have 
probably a spirited discussion on the panel, where some are 
advocates, some question this tool, and I think coming from, at 
least me, coming at this relatively new, I am excited by the 
concept, but I am also concerned about if we were to embark on 
this on a broader basis, what we should be careful about. So, I 
am again looking forward to the discussions that will happen.
    So, let me very quickly introduce the panel and then call 
on my friend, Senator Ayotte, for her opening comments, and we 
will get right to the testimony.
    First, we welcome Mr. Jeffrey Liebman, the Malcolm Wiener 
Professor of Public Policy at the Harvard Law--Harvard Kennedy 
School. Obviously, it would not be at the Harvard Law School. 
They are not very good at performing results, having been a 
graduate there.
    [Laughter.]
    Chairman Warner. The Director of the Kennedy School's 
Social Impact Bond Technical Assistance Lab. That is a fancy 
title. The SIB Lab provides technical assistance to State and 
local governments exploring the use of SIBs. Mr. Liebman 
previously served at the Office of Management and Budget, first 
as Executive Associate Director and Chief Economist and 
subsequently as Acting Deputy Director.
    And now, we have got the first of two Mark Fishers. This 
may be the first time we have had a panel where we had two 
witnesses with the exact same name. Mark Fisher Number one is 
Social Justice Director with the United Kingdom Department for 
Work and Pensions. In his role, Mr. Fisher heads the 
Department's Innovation Fund, which has entered into ten social 
impact bonds to date that examine different types of social 
investment and delivery models supporting disadvantaged youth 
and those at risk of disadvantage. We particularly thank Mr. 
Fisher from coming all the way from the U.K.
    Next, Mark Fisher number two, who is a member of the House 
of Delegates from Maryland, where he serves on the Ways and 
Means Committee and also from Calvert County, a neighbor of 
ours in Virginia. Again, welcome, Mark. Also, he has got a 
great background in telecom.
    And our final witness is Kyle McKay, an analyst with the 
Texas Legislative Budget Board who previously, again, worked 
for Maryland's Department of Legislative Services.
    We are very excited to have you all here, gentlemen, and 
look forward to a spirited discussion in your statements and 
then in our questions.
    With that, I would like to call on my partner and 
colleague, Senator Ayotte, for her opening statement.

              OPENING STATEMENT OF SENATOR AYOTTE

    Senator Ayotte. I want to thank Chairman Warner for holding 
this important hearing. I want to thank all the witnesses for 
being here.
    And I certainly want to echo some of the comments of 
Senator Warner at the top. I was very glad to be a cosponsor of 
the DATA Act. I am glad that has passed. I think that is a very 
important transparency measure that will help us as we try to 
root out waste, duplication, fraud in the government.
    And I am also very proud to cosponsor our Report 
Duplication Act because it is astounding, the amount of reports 
that often are requested by Congress, but sit on shelves and no 
one is reading, and people put a lot of work into them. So, our 
goal is to--the data we need, we want and we are going to get, 
but we want to eliminate the reports that people are wasting 
their time on that no one is reading. So, I really appreciated 
cosponsoring that with you and your leadership on that.
    And, finally, there are a couple other pieces around here 
that I think are important, as well. I am the cosponsor of a 
bill with Senator Manchin that--you know, GAO does a lot of 
fantastic work identifying duplicative programs, performance 
issues within our government, and often--too often--these 
reports sit on the shelf. And so our act is pretty 
straightforward. It would actually require the executive branch 
within 90 days of the receipt of the annual report card to 
submit to the Congress what recommendations the executive 
branch has for eliminating duplicative programs, consolidating 
for performance measures, and then actually require us, the 
House and the Senate, to vote on it within a very short time 
frame so that we can start acting upon some of these things.
    So, I think that we share the goal in this committee of 
making sure that we can find ways for the government to work 
better for taxpayers, and so I appreciate all of you being here 
today and appreciate the Chairman's focus on this issue.
    And for me, this committee hearing today really is a 
learning opportunity. I do not know a lot about social impact 
bonds, so my focus is going to be, as the Ranking Member of 
this Task Force, pretty simple. I want to know if and why 
social impact bonds are feasible and advisable for the Federal 
Government, what evidence we have that they work in practice 
and not just in theory, and how or if they could help the 
government weed out waste, fraud, and abuse, and have actual 
accountability for the dollars that we would spend to address 
problems.
    In addition, I certainly would like to know whether these 
bonds would further enhance transparency and accountability for 
taxpayers. Government can always use more innovation, and so 
whenever we can get the private sector engaged to helping us 
address important problems, I think that is a very positive 
step for us and we need to be open to new, inventive 
approaches. But, I think we owe it to the taxpayers to 
understand how effective these approaches are to make evidence-
based decisions and to understand if we bring a third party 
into a complex contract arrangement, how will this work to save 
money for the government.
    So, I look forward to hearing from all of you today. I 
think this is an important hearing to really bring this issue 
to the forefront in the Congress and I look forward to hearing 
each of your perspectives on this issue, so thank you.
    Chairman Warner. Thank you, Senator.
    This hearing was born because of Senator Whitehouse's 
interest, and we do want to get to the panel, but, Sheldon, do 
you want to make a comment?

            OPENING STATEMENT OF SENATOR WHITEHOUSE

    Senator Whitehouse. Sure. I would like to join my 
colleagues in welcoming all of you to this discussion. I want 
to thank Chairman Warner for his leadership.
    I think Senator Ayotte asked the right questions. I would 
add one, not just if and why social impact bonds make sense, 
but also when. And I think that there is at least the prospect 
of a real opportunity here when new theories of ways to save 
money can meet the standard of a private investor but cannot 
meet the standard of our dear friends at CBO or OMB, and it 
provides a mechanism for taking a trial and giving it a shot 
with private capital both willing to make the bet and setting 
down the measures of accountability to test whether the results 
have really been achieved. I think it has the capacity to be a 
very significant breakthrough technology, if you will.
    I think once you get past that first stage and the case has 
proven itself, the likelihood that private investors need to 
make money off of regular government operations begins to 
diminish. But, I really do think that that leading edge of 
innovation is where the action is and this could be a very 
useful tool in that regard.
    So, again, my thanks to all the witnesses for being here. 
My thanks to Chairman Warner for his leadership. I would point 
out, the way I always do in this room, that we are spending 50 
percent more on health care than all the other industrialized 
countries in the world and we are not getting better results 
and we are not insuring more people, so there is clearly room 
for some very, very big innovation gains in that sector and I 
hope we can talk a little bit about that. Thank you.
    Chairman Warner. Gentlemen, we are very interested in this 
idea and look forward to your testimony. Dr. Liebman, why do 
you not start us off.

 STATEMENT OF JEFFREY B. LIEBMAN, MALCOLM WIENER PROFESSOR OF 
   PUBLIC POLICY, AND DIRECTOR, SOCIAL IMPACT BOND TECHNICAL 
 ASSISTANCE LAB, JOHN F. KENNEDY SCHOOL OF GOVERNMENT, HARVARD 
                           UNIVERSITY

    Mr. Liebman. Thank you. Chairman Warner, Ranking Member 
Ayotte, Senator Whitehouse, thank you for inviting me to 
testify this morning about Pay for Success contracts and social 
impact bonds.
    Despite spending hundreds of billions of dollars each year, 
our country is not making rapid enough progress in addressing 
social problems, from recidivism to school readiness, and 
obesity to workforce development. And for the vast majority of 
the spending, we have little to no evidence about which 
programs actually improve social outcomes. Instead, governments 
continue to fund the same services year after year, paying 
based on the number of people served regardless of whether the 
programs make a difference in the lives of the people they aim 
to help. We can and must do better to produce more value with 
each taxpayer dollar.
    Starting with the GPRA Modernization Act of 2010, the 
Government Performance Task Force has been at the front lines 
of the effort to strengthen performance management and improve 
how our government works. I believe that Pay for Success 
contracts could be a critical next step in this Task Force's 
efforts.
    Under the most common PFS model, the government contracts 
to obtain social services from a local service provider. The 
government pays entirely or almost entirely based upon the 
provider achieving performance targets, such as a ten percent 
increase in employment or a 50 percent reduction in emergency 
room visits. Performance is rigorously measured by comparing 
the outcomes of individuals referred to the service provider 
relative to the outcomes of a comparison group that is not 
offered the services. If the program fails to achieve minimum 
performance targets, the government and taxpayers do not pay. 
Above the minimum, payments occur on a sliding scale, with 
greater payment for better performance.
    Under this model, there is often a several-year lag between 
when services are delivered and when performance can be 
measured and performance related payments made. Private 
investors bridge this gap, providing capital to fund the up-
front operating expenses of the service provider. The private 
investors get repaid only if the provider achieves the required 
level of performance. This financing arrangement is known as a 
social impact bond.
    Over the past two years, we have observed the Pay for 
Success model improve government performance in three ways. 
First, it improves decision making by bringing market 
discipline to government decisions about which programs to 
expand, as investors will only put their dollars behind 
programs with a strong evidence base.
    Second, it shifts government resources to pay for 
preventative services rather than pay for the remedial costs 
associated with bad outcomes.
    And, third, it fosters multi-year collaborations to tackle 
challenging social problems, something that is very difficult 
to accomplish with conventional annual government budgeting and 
standard government management techniques.
    Dozens of State and local governments around the country 
are exploring this model. My Harvard Kennedy School SIB Lab is 
providing pro bono technical assistance to ten State and local 
governments that are developing PFS projects. These include the 
States of Colorado, Connecticut, Illinois, Massachusetts, 
Michigan, New York, Ohio, and South Carolina, as well as the 
Cities of Chicago and Denver. These governments are developing 
PFS contracts to address a wide range of policy issues, from 
early childhood education to homelessness, and from prison 
recidivism to diabetes prevention. And there are four U.S. Pay 
for Success contracts that are already delivering services, 
including projects in Utah, New York City, Massachusetts, and 
New York State.
    If the Pay for Success model is going to achieve its full 
potential, the Federal Government will need to play a larger 
role than it has played to date. First, in collaborating with 
States in projects that produce Federal budgetary savings. Many 
of the most promising PFS projects being developed by State 
governments will produce Federal budgetary savings along with 
the State savings. This is particularly true of interventions 
that reduce future Medicaid costs. For most of these projects, 
the total Federal and State benefits exceed the project costs, 
but the State savings alone do not. These projects are viable 
only if the Federal Government partners with the State 
government and enables performance payments to be based on the 
combined government benefits.
    Second, the Federal Government has an important role to 
play in areas where nearly all the benefits accrue to the 
Federal Government, because there is little impetus for State 
and local governments to get involved in these sorts of 
projects. Take, for example, an initiative that would enable 
individuals with health impairments to remain in the workforce, 
thereby reducing Federal spending on SSI and Disability 
Insurance. Unless the Federal Government initiatives Pay for 
Success projects in policy areas like this, they are just not 
going to happen.
    I want to emphasize that the President's proposal for a Pay 
for Success Incentive Fund at the Treasury Department is quite 
promising, as is the draft legislation that was released this 
week by Republican Indiana Congressman Todd Young, because both 
envision a range of Federal strategies matched to the 
particular needs of different types of PFS projects.
    Pay for Success is based on the simple premise that 
governments should pay for demonstrated results rather than for 
unverifiable promises. I look forward to working with members 
of this Task Force to further explore how the Federal 
Government can best encourage the use of this promising 
approach.
    Thank you.
    [The prepared statement of Mr. Liebman follows:] 
    
    [GRAPHIC] [TIFF OMITTED] 
    
    Chairman Warner. Thank you, Dr. Liebman.
    Mr. Fisher.

    STATEMENT OF MARK FISHER, CBE, SOCIAL JUSTICE DIRECTOR, 
        DEPARTMENT FOR WORK AND PENSIONS, UNITED KINGDOM

    Mr. Fisher. Thank you, Senator. I should say, it is a 
pleasure to be here. I am Mark Fisher. I am Director for Social 
Justice at the Department for Work and Pensions in the U.K.
    My particular role, which stems from Mr. Ian Duncan Smith's 
tenure as Secretary of State, is the prevention of 
worklessness. How do you stop people drifting onto welfare in 
the first place? How do you prevent those with the most long-
term conditions simply staying in life on welfare? And to us, 
social investment, social impact bonds, have been a powerful 
part of the solution to that for a number of reasons.
    Firstly, they actually are a way of getting investment 
upstream, you know, into the things that stop long-term costs 
happening later in people's lives. Secondly, they bring about 
innovation. And, thirdly, they bring about a powerful 
partnership between the states, investors, and small voluntary 
and community sector charities, people who do the work on the 
ground, all of which are really important to us if you are 
going to prevent welfare dependency. So, right from the start, 
we were very keen to see if we could increase social investment 
and try out some of these social impact bonds.
    Now, the U.K. is trying a number of social impact bonds, 
the famous one in Peterborough Prison, which was the first, 
which was about finding a way of preventing ex-prisoners 
reoffending. We have social impact bonds to increase levels of 
adoption, to increase numbers of adopted children. You end up 
saving taxpayers down the line. We are trying to help prevent 
kids going into care. Again, care is very expensive. If you can 
put an intervention in early that stops a child going to care, 
you are going to save the taxpayer money.
    And the particular one I want to talk about is the 
Innovation Fund. We launched in my team ten social impact bonds 
which are designed to intervene with disadvantaged kids, kids 
who are falling out of school, becoming detached from school, 
who are likely to have a low education attainment. Can you do 
something about those children to increase their educational 
attainment, to reengage them in work or in an apprenticeship or 
training such that they simply do not drift into welfare when 
they get to 18 but actually end up in employment? If you do 
that successfully, you will save the taxpayer money.
    So, we built ten social impact bonds to test that 
principle. We produced some more results yesterday. We have 
something like 10,000 of these children being helped through 
our ten social impact bonds and we are going to evaluate this 
thoroughly to see if it works.
    They rely on a risk share between the taxpayer and the 
provider. The taxpayer is taking a bit of risk if we have not 
got the calculations right. The provider is taking a bit of 
risk if they do not actually deliver results.
    A lot of it depends on this rate card that we produced, 
which was in my testimony, which sets out the precise sums of 
money that we pay for results. For example, if a child's 
attendance improves in school, we think that will end up in a 
long-term saving to the taxpayers. We pay 1,400 pounds for 
that. Sustained employment and entry into employment, several 
more thousand pounds, we pay. And those are all based on 
calculations of what the long-term saving to the taxpayer 
actually is.
    That requires a lot of data. You referred to data. Data is 
key. Data sharing is key. We have had to match data between the 
education system and the welfare system to actually do these 
calculations in the first place. But, obviously, we are now 
going to evaluate it and see if it works.
    We are seeing a growth in the social investment market in 
the U.K. Only yesterday, the Deputy Prime Minister, Mr. Nick 
Clegg, announced an expansion of our scheme and a further 
scheme for young homeless people on the basis, again, that 
these are not only good for--good in themselves, but actually 
do end up saving taxpayers money down the line from this sort 
of preventive activity.
    And the final thing I would say is I think the fundamental 
lessons from us about these schemes are they do bring about 
innovation. They do help social problems. But they can be 
inherently quite complicated.
    And I think the lessons from us, if we are going to see 
expansion, is, that one, you have to find a social problem. You 
have to find a social problem which captivates commissioners as 
well as investors. In our experience, there is no shortage of 
investors wanting to invest in these schemes. The shortage is 
the number of commissioners who are willing to actually 
organize themselves to run contracts with the investors and put 
their own money at risk in terms of results payments.
    Second, you have to make them simple. There are a number of 
complicated ways of doing social investment. I you want to get 
traction with these schemes, you have to keep them simple. Our 
rate card is not perfect. We are going to have to evaluate it 
and change it over time, but at least it is relatively simple 
and the market can understand it.
    I think if you do expand these things, you will see that 
emphasis on prevention, which is really helpful. I think it is 
one of those things that it is a really good thing just to 
start and get going and see how it works and evaluate it over 
time, and I think this thing will get traction simply the more 
you try it and the more you do it, and certainly the practice 
in U.K. does seem to be working.
    Thank you.
    [The prepared statement of Mr. Fisher follows:]
    
    [GRAPHIC] [TIFF OMITTED] 
    
    Chairman Warner. Thank you, Mr. Fisher. I was just saying 
to Senator Ayotte that we share a common language, but usage of 
words would be the difference. I am not sure if we had some 
successful project here we would ever call it a scheme, but--
    [Laughter.]
    Chairman Warner. That may be the right lead-in for Delegate 
Fisher, who may be more critical of some of these, but Delegate 
Fisher, thank you for being here.

  STATEMENT OF HON. MARK FISHER, DELEGATE, MARYLAND HOUSE OF 
                           DELEGATES

    Delegate Fisher. I actually like that word, Mr. Chairman.
    [Laughter.]
    Delegate Fisher. Yes, I am Mark Fisher number two. I feel 
like I am on Austin Powers, you know. I am number two. I am a 
member of the Maryland House of Delegates and I serve on the 
House Ways and Means Committee. I reside in Prince Frederick, 
Maryland, and I am pleased to provide testimony today 
concerning social impact bonds.
    In the 2013 regular session of the Maryland General 
Assembly, Delegate Sandy Rosenberg of Baltimore City introduced 
House Bill 517. Delegate Rosenberg is a professor at the 
University of Baltimore School of Law and served on the House 
Ways and Means Committee. His bill, heard in that committee, 
introduced the idea of social impact bonds. As stated in the 
bill's synopsis, H.B. 517 would enable the State of Maryland to 
issue an RFP for social impact bonds. The goal of the 
legislation was to improve pre-K to 12 public education in 
Maryland.
    Many non-Marylanders might ask a simple question: Why would 
a Delegate introduce legislation for SIBs when his State has a 
top-rated public education system? The answer to this question 
is not so transparent. You see, amongst all of the celebrating 
of Maryland's public education achievements, what may be true 
of a State is not the case in Baltimore City.
    Baltimore City has some of the worst outcomes in public 
education in the United States, yet the city has the second-
highest per pupil spending in the U.S., second only to New 
York, according to the Bureau of the Census. Baltimore spends 
almost $15,500 per pupil, or about double the cost of a private 
or parochial education in the city. It is understandable as to 
why the SIB alternative, given these facts, to the status quo 
was offered.
    In their analysis of H.B. 517, the Maryland Department of 
Legislative Services analyzed numerous factors. They researched 
a program for prisoner recidivism in Great Britain and they 
worked with the Maryland Department of Public Safety and 
Correctional Services.
    In January of 2013, the Department of Legislative Services 
advised against SIBs for the following reasons. SIBs cause an 
increase in budgetary pressure compared to direct program 
financing due to the necessity of funding contingent 
liabilities and the added expense features unique to SIBs. SIBs 
do not produce cost savings when outcomes are achieved, even 
under highly optimistic assumptions. SIBs could effectively 
exclude new providers and program types that do not have a well 
established record of success with investors seeking to 
minimize risk. And, SIBs potentially distort evidence used in 
policy decisions.
    As a member of the Maryland House Ways and Means Committee 
for four years, I have had an opportunity to listen to many 
proposals seeking to improve outcomes in public education. 
While I understand that SIBs could leverage public dollars, my 
concern is that alternative models already exist.
    In the case of public education, why not take a pragmatic 
approach. In those jurisdictions where outcomes are acceptable, 
public dollars keep flowing. But in those jurisdictions where 
outcomes repeatedly are substandard, such as in Baltimore City, 
why not provide tuition vouchers and a school choice program. 
Since Maryland spends twice the amount on public education in 
Baltimore per pupil than private education, why not try a 
voucher system. The cost savings from less spending per pupil 
would more than offset the expenditures of tracking student 
progress, something the State already does.
    In conclusion, SIBs are well intended, but they 
unnecessarily bloat bureaucracies. Moreover, they have the 
potential of leading to crony capitalism. And, as the Maryland 
Department of Legislative Services concluded, they do not save 
money.
    Thank you, Mr. Chairman, for the opportunity to provide 
this testimony, and I would be happy to answer any questions.
    [The prepared statement of Delegate Fisher follows:]
    
    [GRAPHIC] [TIFF OMITTED] 
    
    Chairman Warner. Thank you, Delegate Fisher.
    Mr. McKay.

  STATEMENT OF KYLE McKAY, ANALYST, TEXAS LEGISLATIVE BUDGET 
                             BOARD

    Mr. McKay. Chairman Warner, Ranking Member Ayotte, and 
members of the Task Force, my name is Kyle McKay. I am 
currently an Analyst with the Texas Legislative Budget Board 
and was previously an Analyst with the Maryland Department of 
Legislative Services, though the views here today are my own. 
Thank you for the invitation to appear before you today to 
discuss social impact bonds.
    For governments facing revenue constraints, social impact 
bonds may appear to be the silver bullet for social services. 
However, the benefits may be based largely on wishful thinking, 
yet the risks and cost to governments from engaging in this 
type of model are real, which is why an in-depth study that I 
led at the Maryland Department of Legislative Services resulted 
in a recommendation that the State not pursue social impact 
bonds.
    Based on my research in Maryland, I think it is important 
to closely examine some of the common claims made about social 
impact bonds, the first of which is that social impact bonds 
will provide new capital for programs. Forgive me for stating 
the obvious here, but if a program funded by a social impact 
bond works, the government will have to pay for the program. 
Thus, governments should budget for this potential payment by 
appropriating funds in advance.
    Though it may be technically possible to appropriate funds 
after outcomes have been demonstrated, in spite of fiscal best 
practices and balanced budget rules in States and local 
governments, investors will likely seek a secured source of 
income for repayment. This is why the governments of 
Massachusetts, New York City, and the U.K., among others, are 
pre-funding their potential outcome payments with government 
funds.
    Because the government may have to pay back investors with 
interest and a bonus or a return on investment and the 
mechanics of this model require a large number of consultants 
and intermediaries, the government must budget for the 
potential payment using an amount that is greater than the 
investors provide to the program.
    In Massachusetts, for example, the State is liable for up 
to $27 million in payments for their social impact bond pilot 
program, yet the investors are providing only $12 million in 
funding. The social impact bond will, therefore, add pressure 
to a cash-strapped budget.
    The second claim is that governments pay only for success. 
The investors must face a real risk, as a program with a very 
high likelihood of success would result in a risk premium to 
investors bearing no risk. In addition to the challenge of 
selecting a program with something approximate to a 50 percent 
chance of success, the government must also have a high degree 
of confidence in the commitment of the private investors to 
realize a loss if the program fails. However, as the consulting 
group RAND found in the Peterborough pilot, the complexity of 
the model means that, in some instances, that, quote, ``the 
actual transfer of risk is not clear.''
    Attempting to manage social services through an all or 
nothing payment to a host of intermediaries will inevitably 
produce a contract that is complex and, therefore, subject to 
unforseen weaknesses, so I am not sure this is an escapable 
problem.
    And the third claim is that the programs will save 
governments money. Proponents argue that social impact bonds 
will result in decreased expenditures and, thus, cost savings 
to the State. There is a basic mathematical problem with this 
claim, though. Pilot programs do not operate at a scale large 
enough to produce significant cost savings to the government. 
In Maryland, we used well established cost estimation 
techniques with our State agencies to model a high impact pilot 
program. The program came nowhere close to paying for itself, 
which is consistent with RAND's finding that Peterborough is 
too small to produce savings.
    Though the benefits may not be as obtainable as advocates 
claim, the appeal of innovation may still attract many. But it 
is important to consider a number of significant risks to 
governments engaging in this model before making a decision to 
experiment. These risks have been shown to be persistent and 
problematic across a large number of policy areas following 
decades of attempts to link payments to outcomes. Whether it is 
teaching to the test in education or creaming in health care, 
we have seen over and over again that heightened levels of 
pressure on outcome indicators can backfire. Not only can the 
pressure reduce the validity of the indicator, it can produce 
unintended consequences that overshadow the benefits of, quote, 
``paying for success.''
    In all of these historical experiences, the percentage of 
payment at risk represented less than 50 percent of the income 
to the actors. Simply adding an investor will not erase these 
problems. Instead, there is a risk that the introduction of an 
investor will just exacerbate the problems typically 
experienced as the amount of funding at risk increases and the 
investors assume a primary role for establishing what 
constitutes evidence.
    Now, these risks are substantial, but the one that should 
be the most concerning is the opportunity cost. Building a 
highly sophisticated contracting and financing mechanism to 
focus on one small program may impede the capacity of agencies 
to engage in broader policy evaluation and change.
    In short, it is my personal opinion that social impact 
bonds are expensive and risky. They may also distract 
governments from a more comprehensive, sustainable approach to 
improving public policy. Across a variety of policy areas, we 
have learned that measuring outcomes and using monetary 
payments to incentivize behavior change is difficult and often 
produces mixed results. Simply throwing investors into the fray 
will not resolve the ongoing limitations and problems. Instead, 
it may very well exacerbate the challenges.
    Thank you.
    [The prepared statement of Mr. McKay follows:]
    
    [GRAPHIC] [TIFF OMITTED] 
    
    Chairman Warner. Well, thank you, gentlemen.
    I have to tell you, I am a little surprised how the 
responses are lining up, if there is kind of a left to right or 
conservative to liberal on this. I would have actually thought 
that we might have had the reverse kind of opinions, because I 
think about many of the advocates, and, for example, in our 
State government we outsourced private collections and other 
things which kind of fell more on the traditional--would be 
viewed as a more conservative approach that was maybe not a 
social impact bond, but the same concept of a pay for 
performance. I would have thought there would have been maybe 
people more on the kind of view of the Democrats as government 
advocates, that this has the possibility of being much more 
disruptive, and consequently might have been feared more from 
the kind of establishment. And, so, it is curious how people 
are lining up.
    I understand, Mr. McKay, your view that you have got to get 
the contracting right and you have got to have the expertise, 
and I would argue on some level, that would argue that--you 
know, we have used in Virginia, for example, a great use of 
public-private initiatives in the transportation field. Some of 
those projects work. Some of those projects, we get skinned 
because we do not have the expertise to go toe to toe with Wall 
Street. So, having some concentrated--if you are going to go 
down this field, you are going to have to have some level of 
concentrated expertise.
    I would also think that one of the things that government 
does not do well, and one of the purposes of this panel has 
been how do we get more transparency? How do we push agencies 
to identify what is working and what is not working? And the 
notion of private capital coming in there, putting their, in 
effect, money where their mouth is in terms of trying to 
deliver would seem to me inherently a more market-driven 
approach.
    So, I am going to start with Dr. Liebman, I guess. One, 
since this is also happening in Utah, it does not sound like it 
is following--it is just in more liberal States, number one. 
Number two, what are the general size and character of the 
people who are putting up the private capital? Are they 
generally advocates for a particular cause? What is their rate 
of return expected? Why do we not start with some of those.
    Mr. Liebman. Thank you, Mr. Chairman. I think you are right 
that there is not a consistent alignment between the left-right 
partisanship and people's interest in this tool. At the Kennedy 
School SIB Lab, we are working with Republican Governors in 
South Carolina, Ohio, and Michigan, and with Democratic 
Governors in Colorado and Illinois and Connecticut. I think if 
you know the story of the U.K., the initiative originally was 
the Labor Government, but just as it was leaving office, the 
Conservative Government said, we want to take credit for this, 
essentially, and has been expanding it greatly. So, I do not 
think there is any particular--and I think that is probably--
your committee already knows this, that that interest in making 
government more efficient and in trying innovation is not a 
particularly partisan issue.
    The particular projects that are being done, in some 
States, they knew from the beginning what issue they wanted to 
tackle. South Carolina knew they wanted to do early childhood 
education. In other cases, they knew they wanted to innovate 
and they started a process where they both did a public request 
for information to get ideas for projects from the public, and 
then, also, internally, the government met with all the people 
in the human service areas and said, where is it that we are 
missing opportunities to invest in prevention and save money.
    And what typically happens in those processes is you end up 
with 35 ideas, and about half of them basically run into 
trouble for one of the good critiques that Mr. McKay put up. 
For one reason or another, they are not a good fit for this 
model, and you are down to about 18. And then what happens is 
you say, you know, we are really only going to be putting in 
the effort on something like this, just as Mr. McKay said, 
because there is an opportunity cost, if it is a top priority 
of the Governor or the mayor, and that whittles it down to 
three or four. And then you really do the hard numbers on those 
and make a choice about which ones to do. And part of that 
discussion has to do with, do you think you can raise enough 
private capital in that policy area--
    Chairman Warner. And who usually makes up--are the private 
capital usually--I do not want to use a term that would sound 
pejorative, but social do-gooder capital? Is it kind of--
    Mr. Liebman. It is about--in the U.S. project now, I would 
say it is about half and half. So, both in New York State and 
in Massachusetts, there was big commercial involvement. In the 
New York State one, Bank of America, Merrill Lynch basically 
did the total investment and then they did not keep it on their 
own books, they actually sold it to their high net worth 
individuals. And the particular high net worth individuals who 
got involved, I would say, are a mix of people who--
    Chairman Warner. And what was the rate of return they were 
looking for, if there were--
    Mr. Liebman. The rate of returns are in the high single 
digits or low double-digits--
    Chairman Warner. Let me just make one last comment, because 
I want to make sure everybody gets their shot here.
    Mr. Liebman. Yes.
    Chairman Warner. I would think--I could understand Mr. 
McKay's concern when it is such a large purpose as overall 
student achievement. But, it would seem to me that if you had a 
narrow focus on some of these--recidivism, or actually 
workforce training programs where you have way too many--and 
there are areas where, if we narrowed the focus, I just think 
this has some value. I know Senator Whitehouse, I am sure, is 
going to get into discrete areas in health care, which is his 
passion.
    Senator Ayotte.
    Senator Ayotte. Thank you, Chairman.
    So, we heard a pretty divergent set of views from the panel 
here on the efficacy of the social impact bonds and performance 
bonds, so can you help me understand. The example that was 
given in Massachusetts, the $12 million is really the 
investment given, and then a $27 million cost to the 
government. Why is that, and how would you contrast--I am not 
sure what they were doing in Massachusetts in terms of what the 
performance measures were or what they were trying to 
accomplish, but how does that compare to--in terms of rate of 
return and how much the taxpayers are paying versus what is 
invested, compared to some other projects you would deem more 
successful on this side?
    So, I want to hear the sort of side first on how do you get 
in this situation, because that does not seem like a good value 
to me, as you describe it, and why do you think that that ends 
up being the way it was in Massachusetts, whatever they were 
trying to accomplish. And then, also, you are being an advocate 
over here. I would love to hear some examples of where you felt 
that there was a value to it, that there was a cost savings, 
that there was a contrast to what they are presenting over 
here, I mean, because, ultimately, if it is going to cost us 
more to do this, then I do not see a value in doing it. So that 
is an issue I am trying to get at.
    Mr. McKay. Yes. So, the government does not know in advance 
whether or not it has to make an outcome payment, and in an 
operating budget, it is not a good idea to create a speculative 
debt instrument or a contingent liability without budgeting for 
the potential of making that payment.
    So, in Massachusetts, I put a reference to the 
appropriations bill in my written testimony where it basically 
shows that, each year, the government has to appropriate in 
advance of each year that the program operates, before they 
know whether or not the outcomes have been demonstrated, and 
because they may have to make a payment that includes a return 
on investment to the investors and the service providers, the 
government has to budget more money than the investors are 
providing. So, that is why the government is liable for up to 
$27 million worth of payments but they are only getting $12 
million from investors.
    Senator Ayotte. So, what is your counter to that, because, 
obviously--
    Mr. McKay. I do not know--
    Senator Ayotte. --you are probably familiar with the 
project, because you--
    Mr. Liebman. Absolutely. We were involved in the 
Massachusetts project. I do not think Mr. McKay is giving you 
the right perspective on that project. Basically, what is 
happening in the Massachusetts project is about 90 percent of 
the funds are going directly to deliver services and there is 
maybe ten percent that is going to things that you might call 
extra costs because we are using this model, but those are 
things that would have value.
    So, for example, the fact that it is being rigorously 
evaluated costs some money, but I would say spending two or 
three percent of the amount you are spending on a project to 
find out whether it works or not so that if it does not work, 
you can stop spending money on it, that is a bargain.
    And, similarly, the intermediaries that are helping to 
manage the project and bringing private sector expertise into 
the project, and, frankly, more human capital into the project 
than the government has on its own side, typically, they are 
adding two or three percent to this project, but they are also 
delivering value and--or, at least we are going to find out. If 
the project works and we suddenly are getting much better 
results than we have had before, then we will know this model 
is working. If it does not give us good results, the taxpayers 
do not pay and we should not be doing any more.
    Senator Ayotte. Can I ask you a question? So, when a 
project is undertaken, you have to have some expertise on the 
government end to be able to manage this kind of project, 
because I know that Mr. Fisher has talked about the complexity 
of the projects as a challenge on the government end. So, as we 
look at sort of resource efficacy, when you are undertaking 
this type of project, are you actually saving resources on the 
government end? So, in other words, you are getting an influx 
of resources on the private sector end, but limit resources and 
what we can spend our hours on on the government end also. Are 
you then saving the work done on the government end? Or are we 
putting in the same amount of work on the government end and 
then also investing in the private end?
    I do not know if I am asking this question properly, but 
thinking about all the things we could spend our time on, if we 
are spending the same amount of government time and also 
investing the private time and then we are paying more, that is 
what I am trying to get at, is are we actually leveraging--what 
does it take in terms of resources to manage this kind of thing 
on the government end?
    Mr. Fisher. Okay. Should I answer that? I would also like 
to just say something about the resourcing issue. I mean, we--
our Innovation Fund, which are these ten social impact bonds 
for kids' disadvantaged education, we are putting 30 million 
pounds in to pay the returns. Investors have put ten million 
pounds up front. But, the 30 million is not a net cost to the 
taxpayer. If this works, the saving to the taxpayer in the 
longer run exceeds 30 million pounds, even on a discounted 
basis. So, there is a net saving to the taxpayer for doing 
this. The risk is that we have not got those calculations quite 
right. There is a quite large margin of error in that.
    On the resources we put in, the resources, basically, are 
resources actually of my own team. We ran this--I have got 
about three people running this scheme on an ongoing basis and 
there was a commercial team of about ten who actually did the 
contracting at the point in time when we actually had to let 
the contract. So, these were not hugely resource intensive as 
far as the public sector was concerned. I think they can get 
resource intensive. Here we are talking about one single 
scheme, you know, just one single scheme, which goes to the 
importance of doing them at reasonable scale.
    So, if you do them at reasonable scale, A, it helps the 
commissioners, in this case, the Department of Work and 
Pensions, and it also helps the investors, because one of the 
biggest bits of feedback we had from investors were they did 
not like putting a cost-benefit on their side for one small 
scheme in one place. They like to see scale. So, I think scale 
is important, if that is helpful.
    Senator Ayotte. Thank you. Thank you.
    Chairman Warner. Senator Whitehouse.
    Senator Whitehouse. Although there is some disagreement on 
the panel on a number of issues, there seems to be agreement on 
two points that I would like to confirm. One is that it is 
possible for a State, a government, to get in over its head if 
it has not chosen the program wisely and then the investors 
know more about the project than the government does and they 
start to get spun because the investigators have a different 
motivation. That is a risk. Everybody concedes that?
    [Witnesses nod.]
    Senator Whitehouse. Yes, everybody concedes that. Okay.
    The second is that there appears to be a common 
understanding that there is, or may be, a value during what you 
might call an innovation period for bringing in private capital 
to do something. But once the model has proven itself, assuming 
the model has proven itself, then you should move that capital 
on to other innovations and not leave it in that area because 
it is less efficient to run a program with private capital that 
has to be paid than simply to do it through regular government 
services. Is that also agreed by everyone?
    [Witnesses nod.]
    Senator Whitehouse. Yes, with one hesitation from Mr. 
Fisher one, Mr. Fisher the first. Go ahead.
    Mr. Fisher. Should I just say something about that? I think 
the fundamental principle is possibly right in the sense that, 
for example, if our ten social impact bonds work, then--
    Senator Whitehouse. Why would you go back to have more 
investors do it--
    Mr. Fisher. Government does have choices about what it then 
does. It might simply decide, aha, we have--we are simply 
under-investing in children's education at that time in their 
lives and there are then other ways of addressing that issue.
    On the other hand, the benefit of the social impact bond is 
you have schools and voluntary community sector bodies doing 
the work on the ground as opposed to state employees, which it 
may well be a positive. And, also, you do have the discipline 
of the investor working with a charity and there is a benefit 
to that, too. So, this is one of the issues that we--
    Senator Whitehouse. I guess my theory is that the 
innovation that is sponsored by the social impact bond, if it 
proves itself, will then naturally migrate into policy, and 
once it has migrated into policy, it no longer needs a social 
impact bond to support it. It just becomes the way the system 
works. And investing in the trial to try to make that move is 
what makes sense. Do I have agreement on that?
    Mr. McKay. Yes. I would add one thing, which is that the 
Center for Law and Social Policy, they just released a report 
where they looked at most of the social impact bonds that have 
been implemented to date and what they found is that, quote, 
``investors appear to be sticking to models that have already 
been extensively evaluated,'' which is sort of consistent with 
what you would expect if investors are trying to minimize their 
risk.
    Senator Whitehouse. But, that does not necessarily dispute 
my proposition, because this is Congress. We have lots of 
things that have been consistently evaluated and most people of 
good sense and good motivation believe them to be true. And 
yet, for a variety of reasons, we cannot get them done in 
Congress. There is politics involved. There are scoring issues 
with CBO involved.
    There are hazards--just because something has been 
evaluated, I think it is, frankly, good if something has been 
well evaluated, private capital comes behind it, they move that 
evaluated practice into government in a way that probably makes 
them money and shows that this is a savings technique, and 
then, boom, we have proven the proposition and it is way easier 
to pass that reform because, frankly, you might even find from 
CBO you have got some savings that they will now document based 
on that government experience. So, I take your point, but I do 
not think it rebuts the, at least the window of utility that I 
see this potentially having.
    Dr. Liebman.
    Mr. Liebman. Senator, I think your premise is 95 percent 
right. The one thing I would add is, often, when we evaluate 
something, we do a single snapshot that tells us something 
worked in one location 15 years ago. And an important feature 
of the social impact bond projects is it gives you ongoing, 
real-time assessment of how things are performing.
    Senator Whitehouse. Yes.
    Mr. Liebman. And if the conversion from the social impact 
bond back to traditional government funding loses that ongoing 
monitoring and learning, things could be changing so that the 
program is no longer as effective because circumstances are 
different or how it is being implemented and we might not know.
    Senator Whitehouse. Got it.
    Mr. Liebman. And so--
    Senator Whitehouse. You can flub the transition--
    Mr. Liebman. Exactly. So, government has to learn not 
only--
    Senator Whitehouse. --or we might never have gotten to that 
transition--
    Mr. Liebman. Exactly.
    Senator Whitehouse. --if you did not have the social impact 
bond in the first place.
    Mr. Liebman. You have got it.
    Senator Whitehouse. Okay. You seem to have agreement there.
    I would ask you guys, if you do not mind, this is a 
question for the record, but it is an option one. If you have 
other things to do, do not feel obliged. But if you do, I would 
be interested in having you reflect a little bit on our health 
care system. We run the most disgracefully wasteful health care 
system in the world, probably by a factor of 50 percent, maybe 
more. Norway and Switzerland are the two most expensive health 
care systems in the world per capita. We beat them both by 50 
percent. And we do that leaving a lot of people uninsured. We 
do that leaving hundreds of thousands of people dead from 
hospital-acquired infections and other medical errors. If you 
want to find a place where there is room for improvement, take 
a look at the American health care system.
    So, if you have any ideas about what might be good points 
of entry, because what we find is it is very hard to get 
anything scorable until it is up and running, and then by then, 
they tend to have kind of built it into the baseline, and so 
the government support for innovation is challenging at the 
legislative level. So, that is my QFR, and thank you, Chairman. 
My OQFR, optional question for the record.
    Chairman Warner. Senator King, who has also been a leader, 
as a former Governor, in trying new things.
    Senator King. Thank you. I am--
    Senator Whitehouse. Is his State as well managed as 
Virginia?
    Senator King. I am trying to think this through, and I have 
a radical idea. Instead of contracting out and social impact 
bonds and everything else, why does not government try to get 
it right? I mean, this whole scheme--I take your term--is a 
gigantic admission that government cannot do stuff, and I think 
that is a valid criticism. But, to me, the answer is not to go 
through--the only thing government does worse than execute 
programs is execute contracts. That is--and I know that as a 
Governor. This whole idea of contracting out is the worst of 
both worlds. It costs as much or more and you lose 
accountability and control.
    I just--I do not get this at all. I think this is an 
admission that government cannot do what it is supposed to do, 
and I think it is an admission that we, as political leaders, 
generally pay more attention to passing the bill than executing 
it. In my view, execution is as important as vision, and this 
is an admission that we do not do that, and I think we ought to 
start doing it. And instead of the contract holding the 
contractor accountable, how about the President or the Governor 
holding the Superintendent of Schools accountable?
    This just strikes me as--it is a fancy way of contracting 
out, and as I say, I do not believe government contracts very 
well. And defining the outcomes are going to be very difficult 
and they are going to be--and it just--I am just--why does the 
President not pay for results, you know. I mean, Mr. Liebman, 
what do you--I just do not get this.
    Mr. Liebman. Yes. I think--
    Senator King. I come to this unburdened by knowledge, by 
the way, which is--
    Mr. Liebman. No, I think you are onto something here, which 
is that if government--a lot of the things being accomplished 
by this model could in theory be accomplished if government 
operated the way we wish it operated. But, in fact, it does 
not. We have been trying for years and years to get it to do a 
lot of the things like measure outcomes and allocate resources 
to things that work and it is not. And what people are finding 
in these State governments is that this is a leadership tool 
that is allowing Governors and State Budget Directors to shake 
things up and actually get people to do the things that, you 
are probably right, they should be doing anyway, but we cannot 
get them to do anyway. And so let me give you--
    Senator King. But, you are inserting a whole level of cost, 
of consultants and analysts, and the government is always going 
to be outfoxed on the contracts, in my experience.
    Mr. Liebman. I do not think that is what we--I mean, my 
role is to give pro bono assistance on the government side so 
they do not get outfoxed, so maybe I do not have the completely 
neutral view on this--
    Senator King. Pro bono is good.
    Mr. Liebman. Yes, exactly. But, here is an example. In one 
of our States, we put a bunch of options in front of a State 
Budget Director for a social impact bond, and one of the 
options was that there was an intervention, which was a health 
care intervention, where they thought that if you put 
caseworkers in senior centers, making sure that people took 
their medicines and made it to their doctors' appointments, you 
could save on Medicaid costs down the road.
    And we put this on the table as a potential social impact 
bond project and the State Budget Director said, ``Can I not 
just put this in the budget?'' And we said, ``Yes.'' And he 
said, ``Done.'' And that is great. If social impact bonds cause 
that to happen and we do not do social impact bonds, that is 
just as good. I mean, what we need to do is shake things up and 
have those kind of conversations such that this kind of 
innovation happens.
    Senator King. Yes. Okay. Any other thoughts?
    Mr. Fisher. If I may, I think your premise is entirely 
right. I mean, just another example. I think when we evaluate 
the social impact bonds for disadvantaged school children, we 
will find that we may well prove the fact that the taxpayer is 
simply under-investing in this particular part of the system, 
and if schools and the taxpayer invested more in disadvantaged 
children, that might also achieve the benefit. We might find 
other practical things, too.
    But, the point is, at the moment, that is not happening at 
the moment for various reasons. Too many children in our 
country are turning 18 and going straight into welfare. That is 
happening because that part of the school system is not working 
well enough to address that issue. So, this does give a boost 
to a particular problem at a particular point when something 
can be done about it.
    But, I do want to agree, in the longer run, it may not be 
the right answer to that particular social problem. But, in a 
short transitional way, it can be a really helpful boost, and 
it may well be, also--the evaluation might prove this is also a 
more efficient way of spending this particular money for 
results than, you know, just giving the money to schools. I 
mean, there are a number of ways which will come forward in the 
evaluation. So, the jury is slightly out, I think.
    Senator King. Well, I understand what you are saying, but 
it just seems to me that a good administration would say, okay, 
we have this problem and we need to do some pilots in different 
cities and see what works and then go from there. In other 
words, the same result could be achieved without the 
complexity. I mean, the only way this works in terms of the 
taxpayers is if the funders take a substantial risk of not 
getting paid. But if they take that risk, their risk premium is 
going to be so high that it cannot--it really cannot work out 
for the taxpayers very well.
    I am a great believer--for example, in terms of the Federal 
Government funding education, I do not think the Federal 
Government has a big role in funding education. I think what 
the Federal Government ought to be doing is funding pilot and 
experimental programs and then disseminating the results across 
the country and finding out what works. If somebody really 
found a great way to teach social studies in Boise, Idaho, the 
Federal Government can have an important role in acting as a 
clearinghouse so every other school district in the country 
does not have to reinvent that program.
    But this, the idea--I mean, I just, like I say, I think we 
are essentially throwing up our hands and saying, government 
cannot do it right, so we are going to try something else. It 
may be more expensive, but what the heck. I just--
    Chairman Warner. Everybody is going to get another bite at 
the apple very quickly, but let me just quickly try to respond. 
Again, everybody is surprising me here this morning in terms of 
where I thought they were coming from, because I spent a lot of 
time in the private sector. We created, for example, in greater 
Washington something called the Venture Philanthropy Partners 
to try innovative models on delivery of services for at risk 
youth in greater Washington, a very cool project.
    We had a series of initiatives. What we did not have was 
common evaluation across those. What we did not have was the 
ability to say, since we did not have the common evaluation, 
how do you take to scale? And I guess that in enormously 
constrained budget times, my fear is that--you cannot take a 
dollar away from any school right now, because, oh my gosh, 
that is going to cause a huge decrease in services, or we 
cannot try any innovation at all, and this may be a tool to 
leverage innovation--and I think Mr. McKay and Delegate Fisher 
put forward some good points--if the project is too big--we are 
going to solve all of K-12's problems--I would have some qualms 
about that. Mr. McKay's questions about the ability to contract 
and evaluate, but we do not do a very good job on that, as 
well.
    If there is some private capital in there, there is 
discipline, I think, that private capital brings on evaluation 
that maybe we do not have on the public capital side, and this 
may be a way to leverage, more experimentation, and if it is 
done within this kind of--some upside model, and I agree with 
Sheldon that if it proves out, then it ought to become 
governmental policy. But it would seem to me this would be a 
way to leverage more ideas and perhaps have the common 
evaluation standards that we lack.
    The votes start in about ten minutes, so this is going to 
turn into less questions--
    Senator Whitehouse. Mr. Chairman, the one point that I 
would add on what you said is that one of the things I do not 
think we do very well in government anywhere is the prototyping 
function, and it is even harder to do a prototyping function 
when it costs money and you are trying to go into an existing 
budget and compete for funds that are already being used. So, 
you can facilitate the prototyping function if you can find 
other capital to kick it off.
    I would also expect that private capital would bring a 
business perspective to their provision of funds that could be 
actually a helpful defense against prototypes, so-called, that 
are, in fact, driven by ideology, or loyalty to an interest 
group, or some of the other things that kind of infect 
politics. So, you might actually find value in it as a screener 
of really bad ideas that nobody would put money behind, but in 
our political world could get momentum because an interest 
group or a lobby group or an ideology selects them. So--
    Chairman Warner. One of the things--
    Senator Whitehouse. --anyway, I think this has been a great 
hearing--
    Chairman Warner. Well, let me let Senator Ayotte get the 
last word, and if any of the panelists want to, too. I do not 
know how we get enough kind of venture capital ideas into 
government. This would seem to be a way.
    Senator King. How about by the leaders of government doing 
it? I mean--
    Chairman Warner. But you also know, as a Governor, there is 
always that resistance. Trying something new in today's 
constrained environment, since there is no new capital, means 
you have got to take something away from an existing 
initiative. And, when we think about evaluation, I remember--
the last point I will make and then turn to Kelly--is that when 
I was Governor, we tried something that said, at some national 
level, we spend billions and billions of dollars on education, 
yet our evaluation budget in education on a nationwide basis is 
less than one percent of the dollars we spend on education. 
From any business background, that is a stupid basis going 
forward.
    Kelly.
    Senator Ayotte. Kelly is fine. You know, I really have to 
agree with the comments of Senator King, because as I sit here 
and I think about this, we have--what we do very little of in 
government is actually measure the effectiveness of the 
programs. And rather than eliminating a program that has never 
achieved a result, we just keep adding the layers on instead of 
saying, you know, make the call. It has not gotten a result. We 
have not gotten achieved what we needed to from it, so we need 
to do something different.
    So, I think that we need performance measures on the 
government programs, and also, you know, I think that phrase 
that Ronald Reagan once said, there is nothing closer to 
eternal life than a government program, I mean, we have got to 
get beyond that, because I see why the private sector 
innovation in terms of looking at new ways to do things and 
more measurement-focused ways of what comes from these 
proposals is so critical. It is just that, I agree, this is 
what we need to work on as leaders, to do things differently. 
Thanks.
    Chairman Warner. Does not private capital bring some of 
that discipline? Everybody, we have only got a couple more 
minutes, but if everybody, and we will start with Mr. McKay and 
go in reverse order this time, if each of you want to make kind 
of a closing out--
    Senator Whitehouse. Final sentence.
    Chairman Warner. --final minute comment apiece, or minute 
and a half--
    Mr. McKay. Sure--
    Chairman Warner. And thank you all.
    Mr. McKay. I guess the thing I would add is that you need 
to be really careful that the investors are bringing a 
discipline that is valuable to the government, because if the 
investors are telling the government what it should already 
know to implement programs that have already been proven, then 
you are going to privatize the savings of that program to the 
investors. And so if you are going to go down this path, you 
really have to make sure that there is a substantial risk that 
the investors bear in piloting a program that has not already 
been proven to work. But what we have seen so far, according to 
several analysts, is that most of the programs are focusing on 
things that already work, or we know already work, because 
investors do not want to take that large of a risk in a pilot 
program. Thank you.
    Chairman Warner. That would mean that you are really 
defeating--the investor is not willing to be the tip of the 
spear on experimentation. I think your premise is right.
    Delegate Fisher.
    Delegate Fisher. Yes. Thank you, Mr. Chairman. Senator King 
said something, I think, that I have seen in Maryland that 
really kind of underscores the problem, and that is, is that 
coming from the private sector and serving just my first four 
years in Annapolis, it is remarkable how poor government 
negotiates contracts, and that expertise is needed now more 
than ever. You know, in Maryland, it is not a secret about our 
health care exchange. I mean, we are going to scrap our 
quarter-of-a-billion dollar health care exchange and adopt 
Connecticut's.
    But, notwithstanding that, I have always admired Virginia's 
P3 idea on highways and even put in legislation to try to 
outsource Maryland's Welcome Centers and Maryland's rest stops. 
But, the problem in Annapolis is that is completely against the 
institution to try to outsource those. There is no contractual 
knowledge in the bureaucracy to know how to do those kinds of 
contracts, and as a result, when we have done that in Maryland, 
when we have engaged in these kinds of outsource projects, they 
have, unfortunately, not done so well, and that is my primary 
reason. So, thank you.
    Chairman Warner. Are you mentioning Virginia, the 
nationally best managed State in the country? Is that the one 
you are--
    [Laughter.]
    Delegate Fisher. Well, it--
    Chairman Warner. Started by a certain Governor.
    Delegate Fisher. Yes, Senator, and Maryland losing $5.5 
billion of taxable income, so I actually agree with you.
    [Laughter.]
    Chairman Warner. The only thing is, we have not always got 
it right, and it is one of the challenges. When we think about 
P3, though, and one of the reasons, again, off topic a little 
bit, but I think there needs to be a--since we have an office 
in the Treasury Department that advises American pension funds 
how to invest in Europe, because we do not have the expertise 
in America to go toe to toe with Wall Street.
    Mr. Fisher, you have come a long way, and then Dr. Liebman.
    Mr. Fisher. All I would add is that our schemes are being 
fully evaluated. We are spending over a million pounds on 
evaluation of the ten social impact bonds we are running. That 
evaluation will, I think, help answer some of the questions 
about, you know, is this better value than alternative ways of 
spending the same amount of money? Have we got the calculations 
right? And, obviously, we will share those observations with 
colleagues here as they emerge, because I think this is a 
debate that will run and run, actually, and I think some 
schemes are going to be more effective than other schemes.
    The only thing I would finally say is, to me, the key is, 
if we are going to make a success of this, we have to keep 
these things relatively simple. I think there are quite a few 
social impact bonds out there which, in my humble opinion, are 
simply too complicated. I think if these are getting any 
traction at all, keeping the models basically simple is going 
to be quite important.
    Mr. Liebman. I think the bottom line here is we have about 
a dozen Governors from both parties that are finding this tool 
useful for breaking through the political, financial, and 
bureaucratic obstacles to doing the kinds of reforms, the 
venture capital and prototyping activities that you described. 
And they are coming up with projects that are going to produce 
Federal savings, particularly through Medicaid, and unless the 
Federal Government partners with those innovators, the projects 
are not going to happen. And so whether or not you think this 
is the perfect tool or the only tool to change government, we 
have this opportunity right now. We are on the ground and 
people are trying to innovate and they need some Federal help. 
And so I hope your Task Force will think hard about whether you 
can partner with these States that are trying these things on 
the projects that have these Federal payoffs.
    Chairman Warner. Can you get us data on the status of those 
12?
    Mr. Liebman. Yes, absolutely.
    Chairman Warner. And then, colleagues, last word, anybody?
    Senator King. I want Mr. Fisher to realize that we are not 
the same as the House of Lords.
    [Laughter.]
    Senator King. Welcome. We are delighted that you came, and 
thank you very much, all of you. This is a very interesting 
discussion, and I think provocative and very helpful. Thank 
you.
    Senator Whitehouse. I agree. This has been a very useful 
discussion. I thank the Chairman and the Ranking Member for 
holding it.
    Senator Ayotte. Thank you. I appreciate it, and I look 
forward to further discussions from this. So, I think we all 
share the same goal. We want government to actually achieve 
things in a measurable way and the most cost effective way, so 
thank you.
    Chairman Warner. I believe this is the first time this 
subject has been raised at the Federal level, so you are 
getting first impressions, and again, I think it has been very 
curious. On the traditional ideological front, I would have 
expected almost the reverse, so I think that is provocative, as 
well, which I am--so, if you have got more information, if you 
have got more data, help us.
    I do think Dr. Liebman's point that if there is real value 
savings, but because of the State-Federal match on Medicaid, 
States are not doing it because there is not that ability to 
kind of garner savings on both sides of the ledger, that is a 
bad business proposition. Now, you have got to prove that there 
is a savings, but that might be an area, and Sheldon left 
already, but I know he is passionate about.
    I think all of us--I do not want to be presumptive here--we 
are open to ideas. This group, by virtue of being on this 
committee, are willing to be a little more disruptive. I think 
we all realize there is a lot we can do better, and we are 
going to be in constrained times. And with $17 trillion in debt 
going up $4 billion a night, you know, if we do not find a 
better way, we are really up the creek. That is a technical 
political term.
    [Laughter.]
    Chairman Warner. With that, the hearing is adjourned.
    [Whereupon, at 11:18 a.m., the committee was adjourned.]
    
    [GRAPHIC] [TIFF OMITTED] 

      EXPANDING ECONOMIC OPPORTUNITY FOR WOMEN AND FAMILIES

                              ----------                              -




                         TUESDAY, MAY 13, 2014

                              United States Senate,
                                   Committee on the Budget,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 10:31 a.m., in 
Room SD-608, Dirksen Senate Office Building, Hon. Patty Murray, 
Chairman of the Committee, presiding.
    Present: Senators Murray, Wyden, Baldwin, Kaine, King, and 
Sessions.
    Staff Present: Evan T. Schatz, Majority Staff Director; and 
Eric Ueland, Minority Staff Director.

              OPENING STATEMENT OF CHAIRMAN MURRAY

    Chairman Murray. Good morning. This hearing will come to 
order. I want to thank my Ranking Member, Senator Sessions, and 
all of our colleagues who have joined us. And thank you to our 
witnesses. We have AnnMarie Duchon, the associate director of 
accommodation services at the University of Massachusetts, 
Amherst; Dr. Heather Boushey, the executive director and chief 
economist at the Washington Center for Equitable Growth; and 
Sabrina Schaeffer, executive director of the Independent 
Women's Forum.
    We are glad you are able to join us today to discuss ways 
we can help working women succeed in today's economy and the 
reasons why their success is so important to family, economic 
security, and to the economy as a whole.
    Over the last four decades, the economy has seen a lot of 
change. American businesses and workers have had to compete on 
an increasingly global scale. Far too many of the middle-class 
jobs workers could support a family on have moved overseas, and 
the gap has widened between those at the very top of the income 
scale and everyone else.
    All of this has put an increasing burden on working 
families, but in the face of these challenges, one of the most 
significant shifts we have seen in the last few decades has 
actually eased some of the burden, and that is the increasing 
participation of women in the workforce.
    As working families have felt more and more strained, 
women's economic contributions have made a huge difference, 
both to family budgets and to our broader economy. Federal 
Reserve Chair Janet Yellen, who attended our hearing last week, 
has called the increasing participation of women in the 
workforce ``a major factor in sustaining growing family 
incomes.'' And Dr. Boushey found in a recent study that between 
1979 and 2012, the U.S. economy grew by almost 11 percent as a 
result of women joining the labor force. And, of course, that 
kind of economic growth has important outlooks and implications 
for our budget as well.
    As we think about ways to support growth in the 21st 
century, it is absolutely clear our country's economic success 
and that of middle-class families goes hand in hand with 
women's economic success. This means we have a lot more work to 
do because, despite all the progress that has been made, all 
the glass ceilings that have been broken, women still face 
barriers that are holding them, their families, and the economy 
back.
    Even though the majority of women are now full-time workers 
and two-thirds of mothers are either earning all or a big part 
of what their families depend on to make ends meet, women 
overall still earn 70 cents to the dollar for doing the same 
work as men. Over just 1 year, that adds up to $11,600 in lost 
wages per household. I believe AnnMarie will be speaking about 
what kind of difference it means to her family's budget.
    And because women are still more likely to be the primary 
caregiver in a family, the lack of paid leave at most jobs 
means they experience higher turnover and lost earnings and are 
more likely to be passed over for promotions that would help 
them advance.
    In addition, our outdated Tax Code works against married 
women who choose to go back to work as a second earner. Because 
their earnings are counted on top of their spouse's, they can 
actually be taxed at a higher rate. This can deter some mothers 
from choosing to re-enter the workforce, especially when you 
consider the high costs and lack of access to high-quality 
child care and other costs associated with work.
    These kinds of challenges are especially pronounced for 
women, and particularly mothers, who are struggling to make 
ends meet.
    Two-thirds of minimum wage earners are women, and their 
jobs are disproportionately unlikely to offer any flexibility 
when, for example, a child gets sick and needs to be picked up 
early from school. And their earnings are quickly swallowed by 
costs associated with work like child care and transportation.
    It is also important to note that our outdated policies 
disproportionately affect women when it comes to their 
retirement security. Because women on average earn less than 
men, accumulate less in savings, and receive smaller pensions, 
nearly three in ten women over 65 depend only on Social 
Security for income in their later years. I think all of my 
colleagues and I are alarmed that the average Social Security 
benefit for women over 65 is just $13,100 per year. That is 
hardly enough to feel financially secure.
    The impact of these barriers is increasingly clear. Over 
the last decade, the share of women in the labor force has 
actually stalled, even as other countries have continued to see 
more women choosing to go to work. Experts believe that a major 
reason for this is that, unlike many other countries, we simply 
have not updated our policies to reflect our 21st century 
workforce and help today's two-earner families succeed.
    At a time when we need to be doing everything we can to 
grow the economy and strengthen our middle class, that is 
unacceptable. Women need to have an equal shot at success. 
First and foremost, that means we need to end unfair practices 
that set women back financially. We took a good step forward 
with the Affordable Care Act, which now prevents insurance 
companies from charging women more than men for coverage.
    But we need to do more to make sure women are getting equal 
pay for equal work. My colleague Chairwoman Mikulski has led 
the way on the Paycheck Fairness Act, which would provide women 
with more tools to fight pay discrimination. Giving the 
millions of women earning the minimum wage a raise would also 
go a long way toward that effort. And we also need to update 
our Tax Code so that mothers returning to the workforce do not 
face a marriage penalty.
    In addition to expanding the earned income tax credit for 
childless workers, the 21st century worker tax cut that I 
introduced would provide a 20-percent deduction on the second 
earner's income for working families with young children to 
help them keep more of what they earn.
    As we get rid of discriminatory practices, we should also 
recognize the challenges that working parents face and put in 
place a set of policies that help them at work and at home. A 
big part of this is investing in expanded access to affordable, 
high-quality child care. Parents deserve to know that their 
children are safe and thriving when they are at work.
    So I hope our witnesses today will share some thoughts 
about steps Congress could take through our Tax Code and by 
building on successful programs like Head Start to give them 
some peace of mind.
    Finally, we need to build on and strengthen Social Security 
with policies that make it easier for women and their families 
to build a secure retirement.
    There is, of course, much more we need to do in addition, 
but any of these changes would make a huge difference for 
working women and their families. Acting to expand economic 
opportunity for women is the right thing to do. It is part of 
our ongoing work to uphold our country's most fundamental 
values. But as our country's recent history shows, it is also 
an economic necessity, both for those families and for our 
broader economy. I hope that in the coming weeks and months we 
will be able to work together on some of these ideas which 
would do so much to strengthen our country right now and into 
the future.
    So, again, I thank all of our witnesses for joining us 
today. We look forward to your testimony. But first I will turn 
it over to my Ranking Member, Senator Sessions.

             OPENING STATEMENT OF SENATOR SESSIONS

    Senator Sessions. Thank you, Madam Chairman. We appreciate 
the witnesses that will be before us today. This is an 
important issue, and we look forward to your testimony.
    There is no question that the state of our economy remains 
poor and that millions of American families are barely scraping 
by. And despite some progress, women do still face challenges, 
unique challenges, and discrimination. We must have in America 
a fair and equal workplace for all our citizens.
    The workforce participation rate for women is now at its 
lowest level in 23 years. We had a surge of women coming into 
the workforce in the 1970s and 1980s. That is being altered 
today. For every one job added last month, nearly three people 
left the workforce entirely. Real wages for women have been 
stagnant since 2009.
    I think, Madam Chair, there is a marriage penalty on a 
spouse who decides to go to work. We need to look at that.
    Median household income in America has dropped a stunning 
$2,268 since 2009 after adjusting for inflation. And Chairman 
Yellen told us last week lamenting twice in her remarks that we 
are facing a slack labor market.
    So these statistics paint an alarming portrait of economic 
hardships facing Americans. Working moms are struggling 
valiantly every day to support their kids, pay bills, and raise 
a family, often by themselves, and to set aside a little money 
for the future. That is very difficult. They are heroes in the 
American economy. There is no doubt about that.
    Every day this administration, however, every day it 
continues to advance policies that make it more difficult for 
Americans to find a job, to earn a living, to see their wages 
go up is a detriment to all, including women.
    Women especially are rightly concerned about the economic 
futures facing our young people. The statistics there are grim. 
Nearly one in two recent college graduates is underemployed. 
The unemployment rate for Americans age 20 to 24 is 10.6 
percent. Teenage unemployment has been at or above 20 percent 
since 2009. Hispanic youth unemployment is 21.7 percent. 
African American youth unemployment is 36.8 percent.
    We have borrowed $8 trillion, running our debt past $17 
trillion total, and yet incomes are down, wages are down, and 
workplace participation is down.
    Over the past year, we have held a number of informative 
hearings in the Budget Committee, all leading to one 
conclusion, it seems to me: American workers are suffering 
under President Obama's economy. Every major policy action, 
virtually every major policy action tends to weaken job 
creation and wage progress, lowering wages.
    Here is the economic agenda that we are facing today: an 
anti-energy policy that drives up prices of energy and sends 
good-paying jobs overseas; excessive Government regulation that 
always destroys jobs and weakens productivity; a burdensome Tax 
Code that undermines the ability of American workers and 
industry to compete on the world stage; a Government health 
care expansion that is shrinking the workforce and forcing 
people, too many, into part-time jobs; a weak trade policy that 
fails to defend the American worker effectively on the world 
stage and insists that our trading partners comply with their 
agreements; and an immigration plan that would import twice as 
much new guest workers at a time when record numbers of 
Americans are not working at all, pushing down wages and 
increasing unemployment; and a massive maze-like welfare state 
that helps Government bureaucrats but traps families in 
poverty; out-of-control deficit spending and debt undermine 
economic confidence and erode stability.
    So these policies, I suggest, are hurting Americans, not 
helping us, all ages, women particularly, and in all walks of 
life. We must stop this. Everyone agrees American workers are 
suffering. We need a new economic strategy that grows the 
middle class, and not the Government, and puts the needs of 
women and all workers first.
    Madam Chair, thank you for the hearing, and I look forward 
to hearing from the witnesses.
    Chairman Murray. Thank you very much.
    With that, we will turn it over to our witnesses. Dr. 
Boushey, we will begin with you.

  STATEMENT OF HEATHER BOUSHEY, PH.D., EXECUTIVE DIRECTOR AND 
 CHIEF ECONOMIST, WASHINGTON CENTER FOR EQUITABLE GROWTH, AND 
          SENIOR FELLOW, CENTER FOR AMERICAN PROGRESS

    Ms. Boushey. Thank you. Thank you, Chairman Murray, Ranking 
Member Sessions, and the rest of the Committee for inviting me 
here today to testify.
    My name is Heather Boushey. I am executive director and 
chief economist of the Washington Center for Equitable Growth. 
The center is a new project devoted to understanding what grows 
our economy, with a particular emphasis on understanding 
whether and how rising levels of economic inequality affect 
economic growth and stability.
    It is an honor to be invited here today to discuss how 
working women are critical for economic growth and the role of 
Federal policy in advancing their economic progress. My 
testimony highlights the many aspects of our economy where 
gender inequality and economic inequality go hand in hand, and 
also where economic inequality among women threatens family 
well-being and economic growth. Government policies can address 
these gaps in order to help women succeed so our economy can 
succeed.
    There are three conclusions I want to highlight from my 
testimony.
    First, women, their families, and the economy have greatly 
benefitted from women's entry into the labor force.
    Second, barriers to women's work manifest themselves 
differently across the income distribution.
    Third, there are a variety of ways that Federal policy can 
encourage women's labor force participation, among them tax 
credits, family leave, early childhood education programs, all 
of which can increase women's contribution to family income and 
grow our economy.
    Today most women work and they work full time. About two-
thirds of mothers are family breadwinners, bringing home either 
all of their family's earnings or at least as much as their 
partners or co-breadwinners.
    Women's increased work is important for family incomes and 
for economic growth. My colleagues and I found that between 
1979 and 2012, our Nation's gross domestic product increased by 
almost 11 percent due to women's greater hours of work. This 
translates into about $1.7 trillion in output in today's 
dollars, roughly equivalent to our combined Federal spending on 
Social Security, Medicare, and Medicaid in 2012.
    Over the past few decades, women have made enormous 
economic gains. Between 1960 and 2000, women's labor force 
participation steadily grew, and the gender pay gap steadily 
shrank. But progress on both has stalled for more than a 
decade. The United States has fallen from being the 6th highest 
country in terms of female labor participation among developed 
economies to the 17th in 2010. And while some women have made 
gains in the workforce, too many have been left behind. Between 
2000 and 2007, higher-wage women saw their real wages increase 
by four times the amount of women with poorly paid jobs.
    One reason for these kinds of disparities is that while 
some women have made progress entering into professional or 
male-dominated occupations, many women continue to toil in 
female-dominated jobs that still pay low wages. But also within 
occupations, there are disparities, in no small part due to 
differences in flexibility in terms of hour and location.
    Policies to address conflicts between work and family are 
too often available only to women at the top of the wage 
distribution, and too often women have to quit their jobs in 
order to provide care, which harms their future earnings 
potential and limits their retirement benefits.
    Policies such as paid sick days, paid family leave, and 
scheduling flexibility would fill an important inequality gap 
for workers, especially women and especially caregivers.
    It is important to recognize that employers have not on 
their own stepped in to provide these important benefits. Last 
year, only 61 percent of workers had employer-provided paid 
sick days, and only 12 percent of workers had access to 
employer-provided paid leave which could be used to recover 
from a serious illness or care for a family member. These are 
issues that are especially important for low-wage workers who 
disproportionately lack these benefits.
    Federal budget policies can encourage women's work and 
increase family income. The Murray-Ryan budget agreement has 
helped to promote women's economic progress in the workforce, 
but there will be more to do after that deal expires.
    In my written testimony, I focus on six policies that have 
been tailored to achieve the results we need for our families 
and our economy. Here this morning I want to just highlight 
three.
    First, the earned income tax credit, child tax credit, and 
child independent care tax credit are very important to the 
financial security for all American families, especially low-
income families. But we must expand them and, importantly, make 
the child independent care tax credit refundable.
    Second, the 21st Century Worker Tax Cut Act would let two-
earner families keep more of what they earn and increase the 
earned income tax credit for childless low-wage workers. 
Importantly, it will encourage mothers' workforce participation 
and help them to better financially support their families and 
give low-wage workers a better shot at entering the middle 
class. It is estimated that this tax cut would benefit 7.3 
million working families and 13 million childless workers.
    Finally, the Family and Medical Leave Insurance Act of 2013 
will create an insurance program for nearly every U.S. workers 
when they need leave to care for a child, a seriously ill 
family member, or to recover from a serious illness. It draws 
on what we have learned from three States that have family 
leave insurance: California, New Jersey, and Rhode Island. From 
their experiences we know what an effectively run program looks 
like. Paid leave makes it easier for women to work, improves 
their lifetime earnings, and can help close the wage gap 
between workers who provide care and those who do not, while 
having benefits in terms of productivity and business outcomes.
    To conclude, Federal policy can do more to help all women 
realize their full economic potential. But policies must 
acknowledge that barriers to women's work manifest themselves 
differently across the income distribution, because when all 
women succeed, America succeeds.
    [The prepared statement of Ms. Boushey follows:] 
    
    [GRAPHIC] [TIFF OMITTED] 
    
    Chairman Murray. Thank you very much.
    We will turn to Ms. Duchon.

      STATEMENT OF ANNMARIE DUCHON, ASSOCIATE DIRECTOR OF 
  ACCOMMODATION SERVICES, UNIVERSITY OF MASSACHUSETTS, AMHERST

    Ms. Duchon. Thank you, Chairwoman Murray, Ranking Member 
Sessions, and all the Senators and staff here today. My name is 
AnnMarie Duchon, and I am a member of MomsRising. I am honored 
to be here today to tell you my story and to give voice to the 
women who cannot be here today to share their experiences.
    My work environment is not the sort of place where you 
would think we would have a problem with unfair pay practices. 
I work at a progressive public university that prides itself on 
its commitment to diversity. I am the associate director of an 
innovative disability services office, and I love my job. I am 
continuously learning and growing, and I get to work 
collaboratively with colleagues that I greatly respect. Every 
day I oversee programs that we have designed to assist people 
with disabilities gain full access to the university 
environment. However, even in an environment like this, wage 
discrimination based on gender still existed.
    I am telling my story not because I hate my job or because 
I have any ill will toward my employer or toward the male 
colleague who made a higher salary than I did. In fact, we are 
very good friends. But this story is not about him; it is about 
me. And it is a story that is all too common for women, and 
moms in particular, who face gender wage discrimination. It is 
unfair, it is bad for our economy, and, to borrow a phrase, it 
is time to put an end to the ``Mad Men'' era policies.
    I began working for the disability services office at the 
University of Massachusetts, Amherst in 2004. I was originally 
hired as a member of a team of consumer managers. From the 
moment I was hired, I made less than a male coworker doing the 
same job. This was the case even though our resumes were nearly 
identical. We both have master's degrees and comparable 
professional experience. In fact, we even graduated from the 
same University on the very same day.
    When I became aware of this wage disparity, I asked my 
employer if I could be paid more. She said no. I was told that 
because my male coworker had accepted a pay cut to take this 
job, he should be paid more. But here is a fact: I, too, had 
taken a pay cut to accept this position, and my family depends 
just as much on my wages as my coworker's family depends on 
his. This is the sort of ridiculous stereotyping--the 
assumption that because my male coworker needed the higher 
salary and I did not--that is still prevalent in too many 
workplaces today and is used to justify wage discrimination. My 
raise was denied, and I was being paid less because I am a 
woman.
    After 5 years, my male coworker and I were promoted at the 
very same time. Since 2009, we both have held the position of 
associate director. And although I do love my work, it really 
hurt to know that my contributions were worth less than his 
were. Initially, I was hopeful at the time of the promotion 
that my employer would finally acknowledge my work and equalize 
my pay. But instead, I was disappointed to learn that the wage 
gap increased by approximately $1,400.
    Recently, my husband's teaching job was threatened due to 
budget cuts. This situation made me really think about what 
those lost wages were costing my family. When I added those 
lost wages up and calculated that my family had lost over 
$12,000 in income, it was heartbreaking. My husband and I are 
both first-generation college students. We have crushing 
student loan debt. On paper, we look like we are doing just 
fine. But in reality, money is tight. We pay as much on our 
student loan payments each month as we do for our mortgage. Our 
daughter Gracie is in full-time daycare because neither of us 
can afford not to work. $12,000 in lost wages accounts for a 
year's worth of child care or 10 months' worth of our mortgage 
or 10 months of student loan payments--all our expenses that we 
struggle to pay for.
    So I tried again. I approached my employer again this time 
with a visual chart that showed the stark salary difference 
between my coworker and me. And I repeated my case that I 
should be paid fairly. This time, my employer agreed to raise 
my salary to equal my male coworker's. And 5 months later, I 
received a paycheck that finally reflected equal pay.
    I was eventually able to get paid fairly, but it took more 
than 7 years of difficult conversations and cost me thousands 
in lost wages--all of this in an environment where I could have 
open conversations about my salary without fearing 
repercussions.
    I was thrilled last month when President Obama took 
Executive action to ensure that Federal contractors are barred 
from retaliating against employees who discuss their salary 
information. But we still need Congress to pass the Paycheck 
Fairness Act, which would allow all workers to talk about their 
salaries to their coworkers without the fear of being fired.
    Millions of women trying to raise families while working 
minimum wage jobs have not seen an increase in years. Congress 
has the opportunity to right these wrongs. It is time to 
increase minimum wage, time to do something about the student 
loan crisis, and it is long past time to pass the Paycheck 
Fairness Act.
    I hope that by the time my daughter Gracie is able to 
understand what wage discrimination is all about, it will have 
long since been resolved. According to recent research, at the 
rate we are going, if we do not take action, the wage gap will 
not close on its own until my 5-year-old girl is 48. Forty-
eight. Instead, I hope that the idea of Mommy being paid less 
than a man while working at the same job will be a relic 
concept for her, kind of like life before the iPhone.
    I am honored to be here today, and I thank you again for 
the opportunity to testify.
    [The prepared statement of Ms. Duchon follows:] 
    
    [GRAPHIC] [TIFF OMITTED] 
    
    Chairman Murray. Thank you very much.
    Ms. Schaeffer?

    STATEMENT OF SABRINA L. SCHAEFFER, EXECUTIVE DIRECTOR, 
                   INDEPENDENT WOMEN'S FORUM

    Ms. Schaeffer. Chairman Murray, Ranking Member Sessions, 
and members of the Committee, thank you for inviting me here 
today to discuss what I view as a serious shortcoming to the 
proposed Paycheck Fairness Act.
    My name is Sabrina Schaeffer, and I am the executive 
director of the Independent Women's Forum. We are a nonprofit 
organization, and our mission is to increase the number of 
women who value and understand free markets and personal 
liberty. And we respond to those who portray society, and 
especially the workplace, as inherently unfair to women because 
we know it is simply not true.
    I come to this issue not just as the head of IWF but also 
as a working mother. I have three young children ages 6, 5, and 
2, and I understand the very real need for plentiful jobs, fair 
wages, and workplace flexibility. And I am aware of the 
different factors women weigh when making decisions about what 
types of jobs to pursue and how to balance work and family 
responsibilities.
    It is those decisions and tradeoffs that should be at the 
heart of the discussion about workplace fairness. But 
proponents of the Paycheck Fairness Act usually begin their 
argument by citing the faulty 77-cent wage gap statistic--that 
women only make 77 cents for every dollar a man earns. But to 
have an honest conversation about the workplace and about 
women's earnings, we need to stop blindly repeating this 
number.
    We all know that this statistic is grossly overstated, as 
every serious study has demonstrated, including those done by 
liberal groups like the American Association of
    University Women and the 2009 CONSAD Research commissioned 
by the Department of Labor under this administration.
    The Department of Labor statistic compares the earnings of 
average full-time working man to average full-time working 
woman, which shows that women actually earn about 81 percent of 
what men earn. But this is not the equivalent of comparing 
coworkers performing the same job. It is a comparison of 
averages, and it is like comparing apples to oranges.
    This number does not take into consideration any of the 
many important factors--from college major, work history, 
industry, specialty, hours spent working each day, to name a 
few--which have a significant impact on how much someone earns, 
because when those factors are taken into account, the pay gap 
shrinks to as little as 4 cents.
    Discrimination may explain some of this remaining gap, and 
there are bad employers out there, although there could be 
other causes, such as women being more reluctant than men to 
negotiate starting salaries and to ask for raises. And knowing 
this is important so I can help close that small remaining wage 
gap by being more proactive on my own behalf and by teaching my 
daughters to be comfortable talking about money.
    Even the White House conceded on Equal Pay Day this year 
that the wage gap statistic is misleading. Betsey Stevenson, a 
member of the White House Council of Economic Advisers, said 
she ``completely misspoke'' when suggesting that gap was 
evidence of discrimination.
    Still, President Obama, Democrats here in Congress, and 
progressive women's groups continue to use this statistic to 
try to convince women that they are routinely suffering massive 
wage discrimination to justify growing Government in the name 
of protecting women.
    And that is how they sell the Paycheck Fairness Act. They 
suggest that it would advance the cause of pay equity and help 
women earn more. But the bill's sponsors rarely mention what 
the legislation would actually do and whom it would really 
benefit. And that is probably because the legislation's focus 
is not on increasing economic opportunity for women, which we 
all want, but it is on facilitating more lawsuits against 
employers.
    Consider what would happen if this law were to pass. 
Employees would be forced to opt out of, rather than into, 
class action lawsuits, making it easier for lawyers to get a 
class certified and increasing the potential for a jackpot 
award.
    Currently, victims of workplace discrimination can receive 
back pay for the earnings they were denied, as well as punitive 
damages of up to $300,000. The Paycheck Fairness Act would 
allow unlimited punitive damage awards, including for 
unintentional discrimination. This dramatically increases the 
motivation for both lawyers and employees to sue in hopes of 
windfall payouts.
    Most importantly, the proposed law would severely limit how 
employers could justify compensation decisions. Currently, 
businesses can justify differences in pay on factors like 
experience and job responsibilities. But under the Paycheck 
Fairness Act, employers would only be justified in paying men 
and women differently if they can prove to the Government that 
it is a ``business necessity.'' Such ambiguity would be an open 
invitation to trial lawyers. Employers would be targets of 
potential lawsuits for essentially any compensation decision--
whether it is giving a bonus for superior performance or 
offering an employee more flexible hours in exchange for 
reduced compensation.
    Ultimately, employers would have the incentive to create 
rigid, one-size-fits-all compensation packages which would hurt 
both men and women.
    The Paycheck Fairness Act is not necessary because equal 
pay is already the law. The Equal Pay Act and the Civil Rights 
Act protect employees from gender-based wage discrimination. 
The Lily Ledbetter Fair Pay Act extends the amount of time a 
worker has to bring a suit against her employer.
    So what is the alternative? Well, women make up nearly 50 
percent of the workforce today and are incredibly valuable to 
businesses. The workplace is changing quickly and for the 
better. Providing fair pay, sensible leave policies, and more 
generous benefit packages are increasingly being used to 
attract and retain women.
    And where businesses lag behind, there is a robust industry 
devoted to not just helping women sue, like the Paycheck 
Fairness Act does, but to overcoming remaining hurdles in the 
workplace. 85 Broads, Negotiating Women, She Negotiates--these 
all help women maximize their success at work.
    The goal of public policy ought to be to give women and men 
equal opportunities to pursue their vision of happiness. But we 
should not be fixated on creating equal outcomes. Some people 
will choose to take lower-paying jobs they find personally 
fulfilling; others will be willing to work 80-hour weeks to 
maximize their pay. That is why job creation and growth--not 
more lawsuits--is the real key to expanding economic 
opportunity for women and their families.
    Thank you.
    [The prepared statement of Ms. Schaeffer follows:] 
    
    [GRAPHIC] [TIFF OMITTED] 
    
    Chairman Murray. Thank you. Many of you know I care a lot 
about making sure that children have access to high-quality 
early childhood education, including child care. And I often 
talk about the long-term benefits that these programs have for 
the children who experience them. But it is really important to 
remember that child care is a vital work support for mothers as 
well. We know that mothers who have access to reliable child 
care have less absenteeism and tardiness from work and they are 
more productive.
    However, we also know that child care is still 
prohibitively expensive for many families. For example, in 
every State in the U.S., center-based care for an infant 
exceeds 25 percent of median income for single parents.
    So, Dr. Boushey, I wanted to ask you, can you speak to the 
economic impacts of these challenges that families face in 
accessing child care?
    Ms. Boushey. Certainly. Thank you. I believe, you know, in 
some ways AnnMarie here to my left actually very eloquently 
described her own challenges that I think are important to sort 
of recognize, that child care is so costly for families. I 
believe you said it was $12,000 a year. When you look across 
the country, you see that the average cost for a 4-year-old in 
center-based care ranges from less than about $4,000 to more 
than $15,000 or even $20,000 a year. And with most working 
women earning less than $30,000 a year, that is an enormous 
cost for families to have to bear.
    But let us also put this into a bit of a broader context. 
Most families that need child care for very young children are 
young families. Half of women have their first child by the age 
of 25. When people enter the labor force, that is when their 
wages are lowest. It is also when they have their biggest 
student loan debt if they went to college, regardless of 
whether or not they graduated if they started college. And I 
will note that women are more likely than men to take out 
student debt, and when they do, they take on larger amounts of 
loans.
    So all of this compounds for workers at the start of their 
careers, making it very difficult to afford child care and 
pushing a lot of families into this very false dichotomy 
between her working and not working, and the impact on the 
family budget.
    Let me be very clear. Those years that women lose in the 
labor force, if it is not by choice--or even if it is by 
choice--have a lifetime impact on their earnings, on their 
retirement security, on their ability to grow and develop their 
careers. This is not just a choice that families make when that 
child is 2 or 3 and that mom is young and that family is young. 
This is a decision that affects the rest of her career, their 
family economic security, and feeds right into how we think 
about whether or not Social Security is providing that family 
with enough benefits. Those are years that she has lost paying 
into. So that is on the work side.
    I also want to stress that, as an economist, one of the 
things that we now is that early childhood education is one of 
the most important things we need to do to be developing our 
Nation's human capital. And the fact that we are leaving this 
unattended to in such a large way and so different than other 
developed countries is shooting ourselves in the foot for the 
next generation of workers.
    Chairman Murray. Well, thank you very much.
    Ms. Duchon, I assume that your experience reflects what you 
just heard.
    Ms. Duchon. Absolutely. I just want to add, one of the ways 
that we have tried to keep costs down is we have my mom watch 
my daughter once a week. It sort of keeps our cost down by 
about $2,400 a year. But she does not live close, so she drives 
almost 4 hours a day to do that.
    Chairman Murray. So child care access impacts on lots of 
people there.
    Dr. Boushey, I also wanted to ask you about retirement 
security. About half of our workers in the private sector have 
access to an employer-based retirement plan. That is a figure 
that drops to about 30 percent for workers and businesses with 
fewer than 100 employees. And, surprisingly, in such a wealthy 
Nation, about 45 percent of all workers report that they have 
no retirement assets at all. So that is pretty bad news for 
everyone, but in particular, it leads to worse retirement 
conditions for women. Among people 65 and older, women have 
less retirement income, face a greater risk of poverty than 
men, and one in three women depend on Social Security as their 
sole source of income.
    So I think it is no exaggeration to say that we face a 
retirement crisis, particularly for women, and, Dr. Boushey, I 
wanted to ask you, there are a lot of policy steps that could 
be proposed. Give me your top two to address this.
    Ms. Boushey. Well, I would start by looking at women's 
labor supply, so I would focus on policies that help women move 
up the job ladder and stay in the labor market--policies such 
as addressing child care, policies such as the family and 
medical leave insurance legislation that has been put on the 
table, policies that make it possible for women to earn a fair 
day's pay. So that basket, if you care about retirement 
security, you have to care about what is happening when people 
are in the labor market.
    But then, of course, we also need to attend to making sure 
that Social Security is a vibrant and strong program. There are 
a lot of new proposals out there that people are talking about 
to make sure that people that have their savings in 401(k)s are 
getting a good deal. That is one of the challenges. We have 
moved from a pension system which got a pretty good deal for 
workers and their families to these 401(k)s where often there 
are exorbitantly high fees and where people are sort of left on 
their own to make decisions about investments that are 
challenging even for a Ph.D. economist to know what kinds of 
investments you should be focusing on.
    So the USA Retirement Funds Act and the SAFE Retirement 
Plan that the Center for American Progress has put together, 
both focus on how is it that we can make 401(k)s a better 
financial tool for families. So I would focus there as well.
    Chairman Murray. Thank you very much, and I am out of time. 
Senator Sessions?
    Senator Sessions. Thank you. Senator Wyden is a member of 
this Committee and chairs the Finance Committee. He and I have 
been talking about retirement savings and the need for that and 
the importance of it, Ms. Boushey, so I think it is something 
to look at. And I am concerned about fees. Fees can erode 
significantly a person's savings over time, and I do not think 
a lot of people understand that. The Federal thrift program is 
probably one of the best because it has such low fees, and I 
would like to see more of that.
    Senator Wyden believes that we can start saving younger and 
that would help everybody learn more about savings. And he and 
I are talking about some of the things that we could do there.
    Ms. Schaeffer, you have been frank about some of your 
concerns about the way we have approached this issue. I think 
some of the points you make are valid and should be heard. As 
we establish public policy, it is awfully difficult to do so. I 
am confident there are women being taken advantage of today, 
and there are men being taken advantage of sometimes, too, not 
really knowing, like Ms. Duchon, to stand up and defend 
themselves.
    But tell us what you think are some of the things that 
would be most helpful to allow women to fulfill their highest 
values to make the choices they would like to make for 
themselves or their families. And are there any policies that 
the Government could carry out that would help that?
    Ms. Schaeffer. Thank you. And I agree that discrimination 
occurs. I agree that there are bad employers out there. But I 
do not think that the Paycheck Fairness Act will solve that 
problem.
    I think the very best thing for women, for men, and their 
families is strong economic growth and job creation. This gives 
all workers flexibility, right? If you are in a bad job, you 
have the opportunity to look for a new job. So I think it is 
much better for us to focus our resources and our attention on 
growing our economy so that people have more choices. Because 
as I tried to identify, everybody is going to want to lay out 
their life plan in a different way, and we cannot have sort of 
these top-down Government-run solutions because it simply will 
not work.
    I think better than many of these Government-run ideas is 
to allow a market in education so that women can more easily 
get educated themselves and have more choices for their 
children at an earlier age. We currently do not have that. Most 
supporters of the Paycheck Fairness Act have stood up and 
blocked most educational freedom bills in their States.
    I think we need to stop picking winners and losers in the 
energy industry so that women can afford quality goods that are 
at lower prices, so that they can afford to fill up their car 
and get to work every day.
    We need to streamline our Tax Code so that women and men 
are taking home more of their take-home pay.
    We need to make sure that women and men own and control 
their health care dollars, so I would call for repealing 
Obamacare.
    These are all real solutions that would require reining in 
what I view as the progressive State and allowing individual 
families and individuals to have more control over the choices 
in their lives.
    Senator Sessions. Ms. Boushey, as you look at women and the 
choices they make, which are good for America if they choose to 
invest a lot of their time and effort in raising children in 
the next generation, that can put them behind financially. Do 
you have any thoughts about how we can deal with that in a 
realistic way?
    Ms. Boushey. Well, I think a couple of things. Certainly it 
is important--right, we have to start from the premise that 
family is, of course, very important, and raising the next 
generation is a critically important job both for families but 
also for our economy more generally.
    The United States stands alone in not supporting families 
as they actually live and work today. The reality is that most 
parents are in the labor force, most children are being raised 
by a family that does not have a stay-at-home caregiver, and 
that poses challenges for children. But, of course, at the 
other end, it means that most families do not have someone at 
home who can help when an elder may need a little bit of help. 
Somebody has got to take time off work. And we have not thought 
enough deeply about how to update our labor standards and our 
social insurance programs and our child-care systems to really 
help families.
    So I would focus on making sure that families actually have 
a choice, that child care is high quality and accessible to 
everybody, not just the very wealthy. And one of the things we 
forget about child care is you cannot scrimp on it. You cannot, 
you know, get cheaper-cost child care and think that that is 
just going to be okay for your kids, right? The kind of care is 
the kind of care that you need. You need a qualified teacher. 
It has got to be of sufficient quality. And we do not go far 
enough to make sure that every child in America and every 
family in America has access to that kind of quality at a cost 
that families can afford, again, when they are young and they 
do not have a lot of money. This is something that we need to 
step in and really help them with so they can make those 
choices honestly.
    Senator Sessions. Thank you.
    Chairman Murray. Senator Kaine.
    Senator Kaine. Thank you, Madam Chairwoman, and thank you 
to the witnesses. A lot of topics of interest. Let me just ask 
about one that I am really focused on, which is sort of 
nontraditional career fields and career and technical 
education. Senator Baldwin and I, Senator Portman and others 
are doing some work in this area, and we are having a 
fascinating debate now in the Armed Services Committee about 
the opening up of all these combat MOSs that have heretofore 
been gender exclusive for men, opening them up to women and 
providing women opportunities to meet the same standards that 
men meet in those areas.
    Traditionally, women have been underrepresented in some of 
what we call ``nontraditional fields''--construction, 
engineering, manufacturing areas. The Perkins Career and 
Technical Education Act requires States to set targets for 
representation of women in these nontraditional career fields.
    But I would like just each of you to talk about kind of 
workforce training as advancing employment opportunities for 
women, and particularly, you know, what we could do in the 
career and technical education or workforce training area that 
would help women be more equitably represented across the whole 
spectrum of professions and jobs. I just would like each of 
your thoughts on that.
    Ms. Boushey. I will go first and be brief. I think that is 
an enormously issue. It is one that we have been working on for 
quite a long time, trying to get women into a wider array of 
occupations. And I would just sort of add one other point to 
that, and I am happy to also follow up in writing on some 
specifics on what we can do in that area. But one of the things 
that we are learning from the literature is that it is not just 
about getting women into different occupations. It is that 
inequality is actually occurring within occupations.
    Claudia Goldin, who is a professor at Harvard, has written 
an enormously important new study that just came out 
documenting how it is actually the working conditions in terms 
of hours and flexibility that make all the difference for 
inequality within occupations. So I do think we need to make 
sure that we are opening up all sorts of professions to women.
    Just one more stat, and then I will stop. There is a 
Stanford professor and some folks from the University of 
Chicago that had this amazing study that came out a year and a 
half ago that found that between 1960 and 2008, a fifth, a full 
fifth of U.S. economic growth was because of the opening up of 
professions to women and minorities. This is enormously 
important, and I can follow up in writing with some specifics.
    [The information follows:] 
    
    [GRAPHIC] [TIFF OMITTED] 
    
    Senator Kaine. Thank you.
    Ms. Duchon. Well, as the mom of a young girl, I would like 
to say that knowing that those opportunities are available from 
the start and having young people grow up in good-quality 
educational environments where they see women taking on those 
roles and they can imagine that for themselves, just the sheer 
modeling of that both from a parental perspective as well as an 
education perspective I think is truly important.
    Senator Kaine. Ms. Schaeffer?
    Ms. Schaeffer. Thank you for that question, because I 
actually think this is a very interesting one. I tend to be 
careful that we do not characterize sort of our schools as 
somehow providing one thing for the male students today that is 
different from the girls. I have two girls and a son, and I 
know that they are all being treated the same way.
    That being said, I know that for many, many years now, we 
have been pouring money into the STEM field and trying to 
encourage more women to go into it. And recently I took a look 
at MIT and what the female students and the male students were 
majoring in. And I thought, of any school out there, MIT, we 
have some of the brightest science and math minds. And it was 
very interesting to see the way men and women are sort of 
falling. Men were still overrepresented in areas like petroleum 
engineering and computer science, while women were 
overrepresented in the social sciences and biology and 
architecture.
    So I think that there is a point at which we have to accept 
that men and women are different, they are going to make 
different choices, and that might be okay. And we have to maybe 
also ask ourselves, is there a reason that we are not looking 
at sort of the underrepresentation of men, for instance, in 
nursing or in English or in psychology? Should we be concerned 
on that side of things?
    And one last thing is just that we have a lot of women now 
who are in these leadership positions, and I agree it is not as 
high as with men, but we have women who have come up the ranks, 
like a Virginia Rometty at IBM. We know that 75 percent of 
veterinary students are now women. These are numbers that we 
should not ignore because I think it is sometimes painted as 
sort of black or white, women go into the humanities, men go 
into the sciences, that is the problem. So I think it is a 
little bit--a little grayer.
    Senator Kaine. Thank you, Madam Chairwoman.
    Chairman Murray. Thank you.
    We do have a vote called, and I am going to give Senator 
King and Senator Baldwin 5 minutes each, and we should be able 
to wrap up before we get over there. Senator King?
    Senator King. Thank you. Before getting into some 
questions, Ms. Boushey, could you supply that Goldin study to 
us? That sounds very interesting, the one that you mentioned. I 
would appreciate that.
    Senator King. As I have traveled abroad, and did so 
particularly as Governor, going on trade missions, it was one 
of my conclusions that one of the parts of the secret sauce of 
America's success is the openness of our business community to 
women. You go to other countries, you go to business meetings, 
chamber of commerce meetings, zero women. And you realize that 
these societies are missing a huge part of the talent. That is 
what America is all about, is giving this opportunity.
    The challenge, it seems to me--there are two challenges. 
One is how do we harness this enormous power that half of our 
population brings to the table, at the same time accommodating 
the special needs, particularly around motherhood.
    Now, part of it is the tradition that it is moms who are 
responsible and not dads. I mean, that is something we ought to 
be thinking about and talking about. You know, why is it 
assumed that the woman has to deal with the child care and the 
sick child and all of those kinds of things?
    I guess the question is: What are the factors, the 
flexibility policies that are most important for us to adopt? 
And the secondary question is: Does this have to be by Federal 
law or will this take place in the marketplace as companies 
say, hey, we want this talent, we have, therefore--a company I 
visited in Maine a few weeks ago has an in-house daycare 
center. Why? Because they want to have good people working 
there, and that is one of the things that they have had to do.
    So two questions. What are the important policies? And, 
two, do they have to be mandated by Federal law or can the 
marketplace take care of it? And if so, how long will that 
take? Ms. Boushey, do you want to take a crack at that?
    Ms. Boushey. Yes, thank you. That is an excellent question. 
I have a bunch of answers for you.
    So, first, you know, thinking in terms of workplace 
flexibility, there are a lot of things that we could do. San 
Francisco and Vermont have both just implemented new policies 
that give workers the right to request a flexible schedule. It 
is a soft-touch law, meaning that it is not a mandate, but it 
says that a worker can go to their boss and say, ``Hey, I need 
this kind of flexibility,'' and the employer is obligated to 
respond to that request and give a good reason why they want to 
deny it.
    We have seen this to be enormously successful in the United 
Kingdom and in New Zealand and other countries, and it is 
something that might be able to be effective here, and I am 
very excited that these two places are doing this so that 
people like me can study it. So I encourage you to look at 
that, and that is something that is happening at the State and 
local level.
    Second, there is an experimentation in States right now 
with family leave insurance. California, New Jersey, and Rhode 
Island--
    Senator King. You mentioned that. Who pays--when you say 
``insurance,'' it implies somebody is paying a premium.
    Ms. Boushey. Yes. So this is employee paid for, so it is a 
new small tax on employees.
    Senator King. Like unemployment insurance.
    Ms. Boushey. Like unemployment insurance, or in those--
there are five States that have longstanding temporary 
disability insurance programs that provide up to a year in some 
places, benefits when you get sick, and those three States have 
added family leave onto that benefit. And it is paid for 
entirely by employees.
    The FAMILY Act, the family and medical leave insurance bill 
that Senator Gillibrand has introduced, would create a Federal 
system for that. The big challenge of doing that one at the 
State level is beyond these five States that have these 
longstanding systems, the startup costs are very high. And so 
the Federal Government could play a role there in helping with 
startup costs.
    Senator King. I want to get Ms. Schaeffer into this 
discussion. You had trenchant comments about the Paycheck 
Fairness Act. Are there other policies that could be adopted, 
flexibility policies, daycare flexibility, hours, those kinds 
of things that you think are important, and your thoughts on 
whether these should be Federal law, marketplace? And the 
problem with--I suspect you are going to say marketplace, but 
then we get to Ms. Duchon's comment that it will take 43 years 
to get there.
    Ms. Schaeffer. Well, you know, I am not sure if it will 
take 43 years, and the reason is because I think women are 
beginning to outpace men. We know that women are now earning 57 
percent of bachelor's degrees, 59 percent of master's degrees, 
the majority of Ph.D.s. They are overrepresented in law schools 
as well as medical schools. So the demand is--the workplace is 
really changing. The demand for flexibility, not for just women 
but for men as well, is changing. And, you know, as one of my 
colleagues says, I think that toothpaste is out of the tube, 
right? People have sort of gotten a taste of what flexibility 
means and what it looks like, and they like it. And employers 
want to respond to that, so I will give you two examples.
    One is very small, and that is the Independent Women's 
Forum. We are a very small organization. We used to have very 
fancy office space. We are now a virtual office. And one of the 
reasons for that is that we have a lot of moms, and it simply 
did not make sense for them to waste an hour getting into the 
office and parking and getting settled at a desk and wasting 
another hour at the end of the day when we realized that we had 
a team of very hard workers who could do their job from home. 
Now, it works for us. It might not work for the next think 
tank, but it does work for us.
    Another example, though, is Walmart, a much larger example. 
They started in their legal department with a flexible work 
arrangement. What they found is that people really liked it. 
They were more productive workers, and to the extent that they 
could integrate that into other departments, they were trying. 
Obviously, you always have to have somebody at the checkout 
line, but that does not mean that other parts--there are other 
ways in which you could have job sharing and flexible work 
arrangements.
    So I think that the marketplace is going to respond to both 
women's and men's needs for flexibility.
    Senator King. Thank you very much. We are running close--
    Chairman Murray. Yes, I want to make sure that Senator 
Baldwin has a chance.
    Senator King. I will follow up with some questions.
    Chairman Murray. And we do not want to miss the vote, so, 
Senator Baldwin?
    Senator Baldwin. Thank you. I really appreciate your 
holding this hearing.
    There are a number of non-compensation barriers to economic 
opportunity for women that have come up. One that I do not 
believe has come up but yet is a major barrier to economic 
empowerment of women is the unacceptable reality of workplace 
discrimination, including harassment and sexual harassment 
specifically. And I think it really continues to limit the 
opportunity to succeed at the workplace.
    According to the Equal Employment Opportunity Commission, 
annually there are average claims of about 10,000 cases of 
sexual harassment, yet according to numerous studies, this is 
supposed to be drastically underreported, so in reality there 
is a belief that it occurs in much higher levels.
    Last summer the U.S. Supreme Court in my opinion worsened 
an already difficult situation by stripping away some crucial 
protections for people who are harassed in the workplace in a 
case called Vance v. Ball State University. What happened in 
Vance is the Court made it harder to hold employers accountable 
when harassment is being perpetrated by a supervisor who does 
not have specifically hiring and firing authority. So if you 
have a supervisor who is directing all of your daily 
activities, choosing what hours you have to report, whether or 
not you get overtime or can get absences, you know, all sorts 
of conditions of your work, but that person expressly does not 
have hiring and firing authority, there is no employer 
accountability. And I fear what that is going to do in terms of 
people's recourses and weakening of Federal workplace 
protections.
    So with that quick introduction, Dr. Boushey, I would like 
to ask you how does workplace harassment limit the economic 
opportunities of women and their families. I know that is a 
very broad question, but how will this case, the weakening of 
these workplace protections make it more difficult for women to 
succeed economically?
    Ms. Boushey. Well, we live in a country where employees, 
you know, most of the rights that they get they get from the 
Federal Government. Very few workers--7 percent of private 
sector workers these days--are represented by a union, so that 
means that these laws are incredibly important in protecting 
workers. And I think AnnMarie's story for me is so compelling 
in some ways because she was able to talk to her colleagues and 
her employer about what was going on. But for so many people, 
they cannot do that, and they fear being laid off or they fear 
being fired. Most people--you know, so many Americans work in 
States--you know, right-to-work States, and you do not have a 
lot of recourse.
    So I actually think this is fundamentally and profoundly 
important, and I think there are a variety of ways of getting 
at it. I think now you have talked about some legislation, the 
Fair Employment Protection Act, which I think would be very 
important. There are also some new policies going on at the 
State level and something that just happened a couple of days 
ago. Massachusetts became the fourth State to pass a Domestic 
Workers' Bill of Rights, which gives domestic workers, in-home 
workers, rights that they do not have under the Fair Labor 
Standards Act, and one of them, of course, importantly, are 
issues around harassment, where I think that this could 
actually play--this could actually be one of the more important 
areas where we could see this happening.
    So I think that understanding the importance of jobs in 
people's lives and that if you do not have choices and you are 
stuck, well, then, you are going to put up with it, and that is 
just not right or fair.
    Chairman Murray. Thank you very much. I really want to 
thank our colleagues for participating today, and I especially 
want to thank our three witnesses for your time today.
    As a reminder to our Committee members, additional 
statements and questions are due in by 6:00 p.m. today. We will 
submit these to you for your response. And, again, thank you so 
much.
    With that, we will call this hearing to a close. Thank you.
    [Whereupon, at 11:28 a.m., the Committee was adjourned.] 
    
    [GRAPHIC] [TIFF OMITTED] 
    

    THE IMPACT OF STUDENT LOAN DEBT ON BORROWERS AND THE ECONOMY

                              ----------                              -




                        WEDNESDAY, JUNE 4, 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, Wyden, Nelson, Stabenow, 
Whitehouse, Warner, Merkley, Baldwin, Kaine, King, Johnson, and 
Ayotte.
    Staff Present: Evan T. Schatz, Majority Staff Director; and 
Eric Ueland, Minority Staff Director.

              OPENING STATEMENT OF CHAIRMAN MURRAY

    Chairman Murray. This hearing will now come to order. I 
want to thank Senator Johnson, who is filling in today for my 
Ranking Member, Senator Sessions. Welcome to you and to all of 
our colleagues who are joining us today, as well as a room 
full. Welcome to all of you on a really important topic today.
    We are going to be talking about a challenge that 40 
million people around our country face today. And for many 
Americans who want to further their education and build their 
skills, taking out student loans has become a college 
prerequisite. But that debt can have lasting consequences for 
borrowers and weaken their chances of getting ahead.
    Ensuring more Americans get a fair shot is something many 
of us here in the Senate are very focused on. And a bill that 
is coming to the floor very soon, which will allow borrowers to 
refinance their school loans, is an important part of that Fair 
Shot Agenda.
    I will be discussing that legislation a bit more later. But 
first I want to thank our witnesses who are here with us today 
who will help shed some light on the challenges that mounting 
student debt can pose for borrowers and for our economy.
    Today we are going to be hearing from Rohit Chopra. He is 
the student loan ombudsman for the Consumer Financial 
Protection Bureau.
    And I am very pleased to welcome Brittany Jones today. She 
is a recent graduate and the former president of the Student 
Virginia Education Association.
    We are also going to be hearing from Richard Vedder. He is 
a Distinguished Professor Emeritus of Economics at Ohio 
University.
    A college degree is a worthwhile investment, and for many 
it can be a ticket to the middle class. We know that on 
average, college graduates earn more, and they tend to have 
lower unemployment rates than their less educated peers.
    A highly educated workforce is also good for our country. 
It strengthens our middle class. It strengthens the workforce 
we will need to compete in the 21st century global economy.
    More and more, jobs of the future will require 
postsecondary credentials or degrees. And, in fact, in the 
coming years, as many as two-thirds of all jobs will require at 
least some college education, according to the Center on 
Education and Workforce.
    But to afford college, many people have to turn to student 
loans to help finance their education. In just a few moments, 
you are going to hear from Brittany Jones. She is going to be 
talking about how taking out student loans made it possible for 
her to get a college degree. And, Brittany, I look forward to 
hearing more about your experience, as you have now worked to 
start a teaching career and at the same time paying down that 
student loan that got you through college.
    Of course, Brittany is not alone. Dealing with overbearing 
student debt has become a reality for a growing number of 
Americans. The statistics are staggering. Today the average 
college graduate will have to pay back around $30,000 in 
student loans. And a record number of young households owe 
student debt.
    Back in 1989, 16 percent of young households had student 
debt. By 2010, that figure had more than doubled, according to 
the Pew Research Center. More young people than ever before are 
dealing with more student debt than ever before, and that can 
have lasting consequences.
    Americans who took out school loans can find it difficult 
to save and accumulate wealth. A recent study found that 
college graduates without student debt had accumulated seven 
times more wealth than those who are paying back school loans.
    Crushing student debt is not just hurting borrowers. There 
is mounting evidence that student debt is also holding back our 
economy. Historically, young Americans have been a source of 
economic activity as they set up their households and start 
their own careers. But today many are finding it difficult to 
save even for a downpayment on a home. And the high monthly 
bills to pay back student loans can disqualify many people from 
even getting a mortgage.
    When first-time homebuyers are not able to get a mortgage, 
it can adversely affect the housing industry as a whole. That 
is why groups like the National Association of Realtors and the 
Homebuilders Association have expressed concern about the 
overbearing financial weight of student loans.
    Student debt can stifle entrepreneurship. Young people who 
dream of starting up their own businesses are not able to take 
the risks and the business loans that are usually needed when 
they launch a startup.
    Paying off student loans can prevent young people from 
saving for retirement or making the kinds of purchases that 
help further our economic recovery.
    Mr. Chopra, I know these economic consequences are what 
you, and others at the Consumer Financial Protection Bureau, 
have called the ``domino effect,'' and I am looking forward to 
hearing more details in your testimony about those negative 
economic impacts.
    To address these challenges, as a starting point, we need 
to ensure that student loan servicers--those are the companies 
who handle billing and track borrowers' payments--are treating 
those borrowers fairly and responsibly.
    Unfortunately, there have been alarming reports of student 
loan servicers mistreating borrowers. Some people have 
discovered their student loan servicer has not properly 
processed payments. There have also been complaints that 
private student lenders have put borrowers into default if a 
cosigner dies, despite the borrower being current on their loan 
payments.
    And I was very troubled to hear recent reports that Sallie 
Mae was overcharging military members on their student loans. 
Sallie Mae now has agreed to pay nearly $100 million in fines 
after charging military members higher interest rates. And I 
have asked Secretary Arne Duncan to investigate to make sure 
other student loan servicing companies are not doing the same.
    But we can do more to help borrowers. The Bank on Student 
Emergency Loan Refinancing Act is a bill from Senator Elizabeth 
Warren that I have cosponsored, along with several of our 
Democratic colleagues. That bill will allow borrowers to 
refinance their Federal student debt. The Congressional 
Research Service estimates that this bill would let borrowers 
save $4,000 on average.
    Passing that legislation would put more money in borrowers' 
pockets so they can make ends meet, make downpayments homes, or 
start new businesses and help grow our economy.
    Right now, people can refinance their home loans or their 
business loans when interest rates drop. This bill will let 
borrowers with Federal student debt do the same. And this 
should be a bipartisan issue.
    Just last year, for example, Republicans and Democrats came 
together to pass the Bipartisan Student Loan Certainty Act. 
That bill allowed new borrowers to take advantage of lower 
interest rates established by the free market. This refinancing 
legislation would use those same free market principles to help 
those with existing student loans.
    At a time when higher education is more important than ever 
to our Nation's long-term competitiveness, a college degree 
should not drown borrowers in debt.
    Now, and in the future, we need to make sure that people 
who choose to further their education and build their skills 
are better able to afford college and manage their student 
debt. It is an economic imperative.
    To strengthen our middle class, to strengthen our 
workforce, and to help spark economic growth, Congress needs to 
address these challenges.
    So I am very delighted to have this hearing today, and 
before I turn it over to our panel of witnesses, we would like 
to hear from Senator Johnson.

              OPENING STATEMENT OF SENATOR JOHNSON

    Senator Johnson. Thank you, Madam Chair. I appreciate you 
holding this hearing. This is, I think, an extremely important 
issue. I think it is a tragedy that we have enticed our 
children to incur now about $1.2 trillion in student loan debt 
collectively.
    I had a finance professor in college who, before he would 
ever talk about cost of capital and all the complex issues with 
corporate finance, would spend a day just talking about 
personal finance. He said, ``The reason they call a debt 
instrument a bond is because when you go into debt, you put 
yourself into bondage. And you want to really avoid that.'' So 
I certainly took that to heart.
    I, of course, had the advantage of growing up and going to 
college in the 1970s when college was a whole lot cheaper. I 
worked full-time, and rather than leaving college with close to 
$30,000 in debt, I actually left college with $7,000 in the 
bank. So I wish that were more possible.
    I would like to start with a chart that I have prepared, 
and I have actually been using this in my PowerPoint 
presentations as I travel around the State of Wisconsin. Just 
laying out some facts and a little food for thought here.
    What this chart shows is that in 1963 the total cost of a 
4-year undergraduate degree in a public college was about $929 
per year. That is room, board, and tuition. Now, by 1988, the 
actual cost had risen to $4,678, which was 27 percent higher 
than had it just grown at the rate of inflation. But you can 
see as of 2012 the cost of college outstripped the rate of 
inflation by almost two and a half times. So rather than 
costing about $7,000, which is what it would have been if it 
just would have grown by the rate of inflation, one year of 
college now is about--in 2012, it was $17,474, two and a half 
times the rate of inflation.
    I guess the question I am asking is, ``Why?'' What is so 
different about what colleges and universities spend their 
money on that their costs would outstrip the rate of inflation 
by 2.5 percent? And, by the way, two of the components, room 
and board, you know, food and shelter, in the rest of the 
economy--not necessarily on college campuses. In the rest of 
the economy, those have actually grown at a lower rate than 
inflation because we have become so much more productive in 
those sectors of our economy. Obviously ``productivity'' is not 
exactly a word we use in education, which is a real shame.
    So, again, just kind of asking the question of, you know, 
why. All of our good intentions--and let us face it, what we 
spent in college, around college in terms of student aid, which 
is about $2 trillion since 1963, was all well intentioned, but 
it had a very serious negative unintended consequence. In other 
words, in trying to make college more accessible, did we 
actually make it less accessible because we have made it so 
much more unaffordable?
    Oh, by the way, just, you know, to add a little more detail 
to that chart, of the $2 trillion we have spent over that time 
frame, about $200 billion was spent between 1963 and 1988; $1.8 
trillion was spent as college costs really skyrocketed and 
soared. Again, cause and effect, I will leave that for the 
reader to judge. And I think Mr. Vedder is going to talk a 
little bit about that as well.
    Madam Chair, you were correct. It is a shame that in 2011, 
which is the latest figures I have from the College Board, 
average student loan debt after 4 years of college is $25,000. 
Of those, 57 percent of the students that actually incurred 
debt in a private institution it is about $29,900, and 65 
percent of private college students incurred debt.
    Another interesting statistic is how long it is taking our 
students to graduate. About half graduate pretty much in the 4-
year time period. In other words, they graduate within 52 
months, about 4.3 years. But the other half raises the average 
time to graduate to 6.3 years. Again, just asking the question: 
Why is that, particularly when you have so many kids leaving 
high school with college credits in the bag? Have we made 
college funds available so readily that people can dither in 
college? It is just a question I am asking.
    Now, I know part of this hearing is to talk about, you 
know, other types of pieces of legislation to supposedly solve 
the problem. One thing I think is important for us to talk 
about, though, is how those proposals might be scored. 
Currently the CBO is constrained by having to score the cost of 
these college aid programs under the Federal Credit Reform Act, 
and under that scoring, for the 10-year period 2015-24, because 
it does not account really for varying economic conditions or 
loan defaults, it is actually showing that the student loan 
program saves the American taxpayer, in other words, reduces 
the deficit by $135 billion over 10 years.
    But if you use a fair-value basis, if you actually account 
for tougher economic times, varying economic times, and 
defaults, it would actually cost the Federal Government $88 
billion over that 10-year time frame.
    So I think it is important, if we are looking at pieces of 
legislation, that we actually take a look at the fair-value 
cost and the effect it has on the deficit.
    And then I think finally the only thing I want to talk 
about is another potentially unintended consequence of some of 
these programs designed to forgive loans. In 2007, Congress 
passed into law the College Cost Reduction and Access Act of 
2007. It established a new public service loan forgiveness 
program that discharges any remaining debt after 10 years of 
full-time employment in the public service. The borrower must 
have made 120 payments a part of the direct loan program in 
order to obtain this benefit. In other words, they have to keep 
their--you know, they cannot be in default over the 10-year 
period while they are working for the public sector.
    Now, Politico wrote a column on this and said that law 
schools looked at the new laws and saw an opportunity. Income-
based monthly statements are lower than standard payments so 
the schools could cover graduates' payments entirely for the 
first 10 years. The money for law school repayment assistance 
programs usually comes out of tuition mostly paid with Federal 
student loans. Do you understand what I am saying there? So the 
law school is gaming the system. They are saying, ``Oooh, so 
all we have to do is we will make the loan payments for our 
graduate students for 10 years, and at that point the American 
taxpayer will pay for our law degrees?''
    At Berkeley, for example, it is part of the fee that all 
professional degree students pay. At Georgetown, 350 borrowers 
are taking advantage of this program. At Berkeley, there are 
263.
    By the way, the average student debt of a law graduate of 
Georgetown is $150,000. At Berkeley, it is $115,000.
    And the Wall Street Journal wrote about this, too. It is 
not just Berkeley and Georgetown. Columbia University and 
University of Chicago are also doing that. And until recently, 
Georgetown had on its law school website basically talking 
about how the school's aid combined with the Federal plan 
``means public interest borrowers might not pay a single penny 
on their loans ever!'' A school spokesman has said the 
statement was removed this year.
    So, again, I understand that this $3.5 trillion a year 
entity called the Federal Government and the student loan 
program and all these aid packages are all well-intentioned 
programs. But I think we have to honestly take a look at the 
reality of the situation and look at the very severe and 
serious negative unintended consequences of our good 
intentions, part of that being that we have collectively 
enticed our children to incur $1.2 trillion in student loan 
debt that now we are trying to figure how to solve that problem 
that the Government has caused.
    Thank you, Madam Chair.
    Chairman Murray. Thank you.
    We are going to turn to our witnesses. Again, Ms. Jones, 
thank you for coming and sharing your personal experiences. We 
are going to start with you.

STATEMENT OF BRITTANY JONES, FORMER PRESIDENT, STUDENT VIRGINIA 
                     EDUCATION ASSOCIATION

    Ms. Jones. Good morning, Chairwoman Murray, Senator 
Johnson, and members of the Committee. My name is Brittany 
Jones, and I thank you for inviting me here today.
    My story starts as a second grade student at Birdneck 
Elementary School, when the decision was made. I, Brittany 
Jones, self-proclaimed mathematician and resident drama queen, 
declared to the world that I would become a second grade 
teacher. With little deviation, I pursued this plan throughout 
my studies, then as a teacher intern in Henrico County Public 
Schools, followed by receiving my bachelor's degree from 
Virginia Commonwealth University in early and elementary 
education.
    It was during high school when our counselors first began 
the conversations about attending college. They talked in 
detail about scholarships and grants and financial aid awards. 
Naturally, I assumed everyone could attend college. It was not 
until I was accepted and learned the amount of financial aid I 
would be offered that I feared I could not attend. After 
conversations with my financial aid counselor and various chats 
with my parents regarding the necessity of a college degree, I 
made the decision to enroll with the assistance of student 
loans and pursue my dream of becoming a teacher. Unfortunately, 
the cost of attendance constantly increased while the grant 
funds decreased.
    Upon graduation in 2011, the joy of completing the first 
portion of my program was overshadowed by the truth that I had 
borrowed well over $70,000 in student loans from various 
sources--Federal subsidized, unsubsidized, Perkins, and 
personal loans. And still, I needed to complete another year of 
school, which was required to get my teaching certification. I, 
like many of the students I encountered as the Student Virginia 
Education Association President, was facing the difficult 
decision of whether to continue my education and follow my 
dream of being a teacher or seek immediate employment.
    I recall one student who, having borrowed the maximum 
amount of student loans allowed for one school year, was unable 
to fill the gap in his cost of attendance. He later withdrew 
from the university and never returned. Another student, who, 
ironically, served as our chapter treasurer, also left school 
for financial reasons. A full-time student in the master's 
program, she also had a job in sales and was offered the 
position of store manager. Faced with the decision of incurring 
more student loan debt, she decided becoming a teacher was no 
longer the career path she would follow. For me personally, 
when confronted with the decision to borrow another 20 grand, 
$20,000, to complete my program, I decided it was best to 
postpone attendance.
    Immediately after commencement ceremonies, I drove to an 
interview for a preschool teaching job, got it, and began 
teaching the following Tuesday. I was excited to have a 
position, despite the low wage of $10 an hour, because unlike 
many of my colleagues, I was working in my desired field. I was 
the lead teacher in my own classroom. I was elated--until the 
loan statements started to come.
    Because I owed approximately $60,000 in Federal loans at 
the time and I was working full-time, I had to start paying 
them back. This proved problematic. They figured I would be 
able to afford paying $600 a month. I was making $10 an hour 
and paying over $900 in rent and insurance and other expenses a 
month Fortunately, my parents were able to help with some of 
the payments to keep the loan in good standing.
    This continued for a few more months until I lost my job. 
In 2012, I received notice that I had defaulted on the 
remainder of my Federal loans, totaling approximately $58,000. 
A nice gentleman from the loan company called and requested the 
date by which I could send the $58,000 check or money order. 
After a laugh or two, he then said he would be happy to help 
set up a payment plan. He put in the calculations and 
determined I would be able to pay $653 a month. At this time I 
was working as a pre-kindergarten teacher making $13 an hour 
and paying $783 in rent, with more payments for utilities and 
insurance bills. Again, simple math: the numbers did not add 
up. I worked as many as three jobs at once just to make my 
monthly payments.
    Now, 2 years later, I was finally cleared to apply for 
financial aid and return to school to pursue my master's. As 
you can imagine, the ordeal I went through with my student 
loans made this decision a weary one. So the search for 
alternative programs began. I did not want to collect any more 
student debt. My goal is to become a classroom teacher, not a 
teacher with more loan debt than she makes in a year.
    This search led me to find the Denver Teacher Residency 
program. Through this program, which I will begin this summer, 
I will become a highly qualified educator with a master's 
degree. All fees associated with the cost of attendance will be 
repaid upon completion of the program, which includes 4 years 
teaching in Denver Public Schools.
    This program is promising, and it is an exciting time in my 
life. Yet almost $50,000 still awaits repayment. Student loan 
debt has been the driving force of my decisions for the last 8 
years of my life, and according to my current repayment plan, 
it is projected to be for the next 25 years of my life, well 
into the years for which I should be planning a retirement. It 
should not be this way.
    Senators, you have the power to make sure that it is not 
this way any longer. You can take actions to help make college 
more affordable so that students have a fair shot at pursuing 
their dreams. Degrees not debt should be our collective goal. I 
urge you to help increase student aid, especially for those who 
need the most financial help. I urge you to help make student 
loans more affordable, including by allowing refinancing of 
those loans, as legislation from Senator Warren would do. And I 
ask you to look for ways to make careers in public service, 
like teaching, more attainable by expanding loan forgiveness 
programs.
    Thank you, Chairwoman Murray, and the members of this 
Committee for the opportunity to share my story today.
    [the prepared statement of brittany jones follows:]
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    [GRAPHIC] [TIFF OMITTED] T0876.226
    
    Chairman Murray. Thank you very much for coming and sharing 
that with us.
    Mr. Chopra?

STATEMENT OF ROHIT CHOPRA, ASSISTANT DIRECTOR AND STUDENT LOAN 
        OMBUDSMAN, CONSUMER FINANCIAL PROTECTION BUREAU

    Mr. Chopra. Chairman Murray, Senator Johnson, and members 
of the Committee, thank you for the opportunity to testify 
today about the potential impacts of student debt.
    You know, the financial crisis destroyed trillions in 
wealth for families preparing to send a child to college and 
contributed to large increases in student debt owed by 
Americans who have already graduated.
    In addition to considering how to make college affordable 
for future students, we cannot ignore the impact of the $1.2 
trillion already owed by more than 40 million Americans.
    There has been growing consensus that today's $1.2 trillion 
can have repercussions that threaten the broader economy. The 
Treasury Secretary remarked that student debt is ``hampering 
our economy across multiple sectors of society,'' and the 
Federal Reserve identified student debt as a risk to aggregate 
household spending.
    Executives in the banking industry have also cautioned that 
the condition of the student loan market ``is now having a 
significantly negative impact on students, the economy, and 
taxpayers.''
    According to a survey by the National Association of 
Realtors, 49 percent of Americans cited student loan debt as a 
``huge obstacle to homeownership.'' And the National 
Association of Home Builders noted that student debt can impair 
the ability for graduates to qualify for a mortgage.
    Higher debt burdens might not only delay household 
formation but also other large purchases. America's largest 
auto maker has cited the overhang of student debt as a key 
factor explaining the low levels of car purchases by young 
people.
    Student debt can hamper entrepreneurship. Preliminary 
research on student debt and small business formation finds a 
negative correlation between changes in student loan debt and 
formation of certain small businesses.
    It may also have a longer-term effect on future retirement 
security. Young workers who save early for retirement can 
generate significant retirement assets over the course of their 
careers. But student debt may be stopping workers from even 
contributing at all.
    The same can be said about the impact on labor market 
outcomes. The American Medical Association noted that high debt 
burdens can impact the career choices of new physicians, 
leading some to abandon primary care altogether. Student debt 
can impact the availability of other professions critical to 
the likelihoods of farmers and ranchers in rural communities. 
For example, veterinary students are graduating with debt 
averaging over $150,000 per borrower, making it less likely 
they can make ends meet in a dairy medicine or livestock 
management practice. And the list goes on and on.
    There are several areas that warrant attention: servicing, 
loan restructuring and refinancing, and data availability.
    First, to servicing. As the financial crisis unraveled, 
many Americans faced improper foreclosures due to mistakes from 
their mortgage servicer. And I am concerned that inadequate 
servicing may be contributing to our growing student loan 
default problem, now topping 7 million Americans in default on 
over $100 billion in balances.
    Last month, after referrals from the CFPB, regulators 
ordered Sallie Mae to pay nearly $100 million for violating 
multiple laws, including illegal treatment of servicemembers 
with student loans.
    Second, unlike other markets, refinance opportunities for 
student loan borrowers are few and far between. When mortgage 
borrowers see broader interest rates plummet, their own incomes 
rise, and their credit profiles improve, they try to refinance. 
Responsible student loan borrowers rarely have these options.
    Third is student loan market transparency which we must 
address. As Fed Chair Janet Yellen has noted, regulators 
``missed some of the important linkages whereby problems in 
mortgages would rebound through the financial system.'' 
Currently, financial regulators and the public lack fundamental 
information on student loan origination and performance. 
Unsurprisingly, the drivers of prepayment, delinquency, and 
default in the student loan market are not well understood, and 
we must work to close the transparency gap.
    In conclusion, we must ask ourselves: How do we preserve 
the drive to succeed for so many who feel that the dream is 
just now out of reach? Ignoring the warning signs may prove to 
hold back not only the future growth and dynamism of our 
economy but also our entrepreneurial spirit. Addressing these 
concerns in the near term may pay dividends for many years to 
follow.
    Thank you again for inviting me to participate today, and I 
look forward to your questions.
    [The prepared statement of Mr. Chopra follows:] 
    
    [GRAPHIC] [TIFF OMITTED] 
    
    Chairman Murray. Thank you very much.
    Dr. Vedder?

STATEMENT OF RICHARD K. VEDDER, PH.D., DISTINGUISHED PROFESSOR 
 EMERITUS OF ECONOMICS, AND FACULTY ASSOCIATION, CONTEMPORARY 
 HISTORY INSTITUTE, OHIO UNIVERSITY, AND DIRECTOR, CENTER FOR 
             COLLEGE AFFORDABILITY AND PRODUCTIVITY

    Mr. Vedder. Thank you, Senator Murray, Senator Johnson, and 
other members of the Budget Committee. I wish to make three 
points.
    First, the current student loan debt crisis would never 
have happened had college costs increased at the general rate 
of inflation. The primary cause of the student debt problem is 
increased university fees. You must deal with the root cause of 
this, namely, runaway college cost inflation.
    Second, there are many reasons for this university price 
inflation, several of which I mention in my written statement. 
But one that is relevant here is that rising tuition fees are 
partially caused by Federal student financial assistance 
programs themselves. The programs themselves are part of the 
problem. Any significant successful solution to the problem of 
rising college costs will work only if you radically change the 
nature and magnitude of Federal finance.
    Third, we are at or near a tipping point, where fundamental 
change will come to higher education. These changes are 
starting to happen. I believe many policy proposals gaining 
prominence these days do not fundamentally address the broader 
problems and, indeed, would likely worsen rather than improve 
the situation.
    Now, Table 1 looks at the inflation-adjusted increases in 
tuition fees for various years over the last 75 years, along 
the lines of Senator Johnson's earlier comments. We see that 
for the first half of that period, tuition fees tended to rise 
about 1 percent more than the overall inflation rate; but since 
1978, inflation-adjusted tuition growth has about tripled to 
well over 3 percent a year.
    If college tuition inflation since 1978 were what it had 
been before that day, say 1 percent a year, tuition levels 
today would be almost 60 percent lower than they actually are. 
Public 4-year university tuition levels would be in the $3,000 
to $5,000 range instead of $7,000 to $12,000. Student loan 
volume would be dramatically less.
    It is a bigger burden, for example, for a citizen of 
Indiana to send their child to Purdue University today than at 
the end of the Great Depression. Even room and board charges 
far outdistance food and housing inflation rates. Solve the 
tuition fee problem, you will dramatically reduce the student 
loan debt crisis.
    Now, there are many explanations for rising tuition fees, 
and three are discussed in my written testimony, but the most 
relevant here is the explosive growth in Federal student 
financial aid, and this has contributed importantly to rising 
tuition fees. There will be no permanent solution to the debt 
crisis without reining in Federal programs.
    There are many ways to downsize these programs to make them 
more progressive, which liberal Democrats should like, but also 
smaller and cheaper, which Republicans should like. Existing 
programs have failed miserably in providing greater access for 
lower-income Americans. The proportion of recent college 
graduates coming from the lowest quartile of the income 
distribution is smaller than it was in 1970--before Pell grants 
or huge student loan programs. Rising income inequality has 
been associated with more Federal student financial aid 
assistance, and I do not think that is coincidental.
    In my written testimony, I show concerns about several 
administration initiatives, including the college rating system 
and gainful employment regulations. But I want to briefly 
comment on the proposal of Senator Warren to lower interest 
rates on loans to past borrowers. I think this is a bad idea, 
for several reasons, beginning with the fact that it does 
utterly nothing to address college tuition inflation. 
Conscientious payers of debt obligations end up getting 
punished relative to non-payers who get lower interest rates. A 
bad message. It will also add tens of billions of dollars to 
the deficit and national debt. There are other objections as 
well.
    We may be, as Senator Johnson hinted, overinvesting in some 
ways in higher education. The advantages of getting a degree 
are actually starting to decline, not increase, particularly 
for young graduates. We need to reduce our aid programs, 
probably doing away with tuition tax credits and PLUS loans and 
constraining other grants.
    There are no painless solutions, but merely doing more of 
the same, lower interest rates, more loans, will worsen this 
situation and probably enhance, not reduce, income inequality 
in America.
    Thank you very much.
    [The prepared statement of Mr. Vedder follows:] 
    
    [GRAPHIC] [TIFF OMITTED] 
    
    Chairman Murray. Thank you very much. I really appreciate 
all of our witnesses today.
    For your information, there is a lot of attendance today, 
obviously a discussion that many people are interested in. We 
do have a series of four votes beginning in about a half-hour, 
so I am going to be very strict with the time clock today and 
allowing 5 minutes to each Senator, and we will be calling on 
people in order of arrival.
    So, with that, Ms. Jones, I wanted to start with you, and 
thank you for sharing your story and being here today to 
testify. Your story really resonates with me. All of my 
brothers and sisters and I went to college on Pell grants and 
student loans to finance our education, and I taught young 
children early on in my career, which is what got me into 
politics. But the financial burden of student loan debt is 
considerably more than when I graduated, so I share your 
understanding and appreciate your being here.
    In your testimony, you said that you paid over $600 a month 
to cover your Federal student loans. How much was your monthly 
take-home pay at that time?
    Ms. Jones. At that time my monthly take-home was roughly 
$1,500.
    Chairman Murray. Okay. And do you have any money saved?
    Ms. Jones. I do not. I have been using my savings to pay 
back the loans that I have taken out for my undergraduate 
degree.
    Chairman Murray. When you ran into difficulty repaying all 
of your loans, did your servicer offer any alternative 
repayment plan, like the income-based repayment option?
    Ms. Jones. They did not. I did not learn of the program 
until very recently, and I believe had I been offered that 
program, my payments would have been roughly $150 a month as 
opposed to the $600 a month I was paying.
    Chairman Murray. So if you had been able to take advantage 
of the IBR, you would have reduced that payment to $150?
    Ms. Jones. Yes.
    Chairman Murray. Do you know how much you would save if you 
had been allowed to refinance your student loan?
    Ms. Jones. Over 10 years, I would have been able to save 
more than $4,000.
    Chairman Murray. More than $4,000. How would that have 
impacted your life?
    Ms. Jones. Well, as educators, you know, we always have to 
buy materials for the classroom because funding is limited, so 
I think having the extra funding available would make life 
easier. Definitely I would be able to save for the future, and 
I would be able to plan for retirement as opposed to wondering 
if it will be possible.
    Chairman Murray. So I have to speculate that if you had 
known about IBR, you would be in a much better place today. But 
nobody told you.
    Mr. Chopra, thank you for being here as well. You have 
worked directly with a lot of student loan borrowers, and your 
reports have talked about some of the macroeconomic 
consequences. But let me ask you, have you encountered a lot of 
stories like Brittany's?
    Mr. Chopra. Yes. One of the top issues that a borrower has 
identified is difficulties repaying, restructuring, and rolling 
in loan modification programs and staying current to avoid 
delinquency and default.
    Chairman Murray. So our servicers are not reaching out and 
helping young people, or even adults, learn what their options 
are today?
    Mr. Chopra. Well, we learned a very painful lesson in the 
years around the financial crisis and the mortgage servicing 
market. There is some fundamental incentive misalignment where 
what may be good for the loan owner or the investor and what 
may be good for the borrower is not actually the outcome. And 
market forces, due to modern structured finance, can often 
cause terrible outcomes for everybody.
    Chairman Murray. I have heard from a lot of people today 
who are paying back loans that they do not know how much they 
owe; they are having trouble getting that information; they do 
not get yearly statements. Brittany is nodding her head. Is 
that something that you hear a lot as well?
    Mr. Chopra. Well, I think it is not actually just not 
knowing about it. It is also--we hear from many borrowers, and 
we see it in the data, that a number of borrowers are reaching 
out and are seeking help, but are often told to choose 
forbearance. You know, we have continued to hear complaints 
from servicemembers and military families that they call about 
their Servicemembers Civil Relief Act benefits and are simply 
told, ``Well, you know, you just do a military forbearance.'' 
That option will keep interest accruing. It will make the debt 
burden harder. But it is certainly easier for the servicer to 
accomplish rather than actually walking them through the steps 
to enroll in their legal entitled benefits.
    Chairman Murray. So it is hard for them to get good 
information personally about what they should be doing. Okay. I 
have about 50 seconds left. Tell me, in the last 50 seconds, 
some of the larger implications for our economy.
    Mr. Chopra. Well, in our discussions with the banking 
industry, particularly the housing industry, there is general 
concern about increasing debt-to-income ratios. So while the 
advantages of going to college, the differential between 
college graduates and non-graduates, is growing, most of that 
is growing because non-college graduates' wages are slipping. 
So if college graduates' wages are still much higher but 
generally flat when controlling for inflation, but debt, which 
is growing actually even faster than tuition costs, that means 
that less ability to create new credit, whether it be for 
mortgages or to use those funds for other productive purposes.
    Chairman Murray. Okay. Thank you, and my time is out.
    Senator Johnson?
    Senator Johnson. Ms. Jones, first of all, thanks for coming 
to testify, and to all the witnesses. Did any either high 
school or college counselor ever go through the calculation of 
taking on student loan debt and how you would be able to repay 
it based on the type of profession you were looking at?
    Ms. Jones. They did not. Actually, when we started the 
conversations about college, they simply, you know, let us know 
you can apply for millions of dollars in scholarships and 
grants; they are available, you just have to apply for them, 
and you can talk to your financial aid counselor about the 
other options for paying for college.
    Senator Johnson. So did you ever talk to a financial aid 
counselor that talked about, you know, the ability to repay?
    Ms. Jones. Not in the initial stages. They simply were 
saying you have this much of a balance, you can pay with it 
using this financial aid package of your subsidized or 
unsubsidized loans, and you can take them if you want, or you 
can borrow from your family.
    Senator Johnson. Do you wish you would have had, like I 
had, a finance professor kind of talk about--I mean, in other 
words, if you could go back in time, would you do the same 
thing over again? Would you incur this much debt? Would you try 
and figure out maybe a different solution?
    Ms. Jones. In my experience and for my profession, a 
college degree was absolutely necessary. There was not--the 
option to not get a degree was not available. So I would do it 
because ultimately my goal is to become a teacher.
    Senator Johnson. Have you ever heard of the College of the 
Ozarks? They go by the moniker of ``Hard Work U.'' It is 
basically a college university set up where all the students 
work, and it is really set up so that nobody incurs debt. Does 
that sound like kind of a good idea to you? Would you like--
again, to get a college degree, I agree with you, we are all 
talking about it is a great investment. But if it is a great 
investment, the amount of loans ought to match it so you ought 
to be able to handle those when you get all done.
    Ms. Jones. It should, and that is why I think being able to 
refinance the loans that we have would be a great benefit for 
students like me because the loans made it possible. There was 
no other funding available to go to school. And, of course, we 
have to have our degrees to teach.
    Senator Johnson. Right.
    Ms. Jones. You do not want an unqualified teacher in the 
room, and I do not see myself doing anything else. So whatever 
it takes to get to a classroom, that is what I will do. But I 
think we need to look at what we can do to make it possible for 
everybody to get the degree they want and not the loan debt to 
go along with it.
    Senator Johnson. First of all, God bless you for being 
willing to teach our kids, and, you know, we certainly all wish 
you the best of luck.
    Mr. Chopra, you said that student debt is hampering our 
economy, hampering entrepreneurship, hampering a lot of good 
stuff. How would shifting this debt from a select few to all of 
our kids and grandkids, how would that help our economy, help 
entrepreneurship? Because that is all we would be doing here, 
right? Really shifting the debt burden from those that incur 
the debt to all of our kids and grandkids, because we are 
already in deficit and we cannot afford it and it is just going 
to be piling additional debt on our kids and grandkids, 
correct?
    Ms. Hoover. Well, being able to refinance a loan in other 
product markets, such as the mortgage market, when broader 
interest rate environments change, it is common not only for 
homeowners but also for the corporate sector as well as the 
Government to be able to match their debt to something that 
potentially reflects better their own broader interest rates, 
their credit profile--
    Senator Johnson. Let me interrupt. Let me interrupt. Are 
you supportive of the--I am trying to think what--that act I 
was talking about, the 2007 act that basically forgives student 
loan debt after 10 years of working in the public sector? Are 
you in favor of that?
    Mr. Chopra. We do not know the results of that yet. Nobody 
has actually received forgiveness from that program.
    Senator Johnson. But, again, forgiveness will come on the 
backs of the American taxpayer or additional debt burden on our 
kids and grandkids, correct?
    Mr. Chopra. Well, that is Congress' decision about how to 
allocate--
    Senator Johnson. I understand. I am just asking, are you 
supportive of that program? And, again, I am going to your 
comment. How does that not hamper our economy, not hamper 
entrepreneurship, if we shift the debt burden from a select few 
to all of our kids and grandkids? I am just trying to point out 
what is actually happening here.
    Mr. Chopra. Well, the distribution of the debt burden, it 
will come in multiple different sectors, but I think the 
marginal propensity to consume for young people who are at 
prime ages of homeownership, who are at prime ages of purchases 
of durable goods, this is something that is of great worry to 
the financial sector, to a number of other industries--
    Senator Johnson. But our debt burden is not--so there may 
be higher propensity to spend in some sectors, but there will 
be a lower propensity because of the debt burden.
    Let me ask you, are you disturbed about the Politico and 
the Wall Street Journal stories I was reading about, how the 
law school graduate schools are gaming that program? Does that 
concern you? Because it sure concerns me.
    Mr. Chopra. As we saw in the run-up to the financial 
crisis, the incentive misalignment between those who broker 
loans or offer loans and their alignment with investors or 
others can lead to very disastrous consequences. I do not know 
the specifics of the schools that you mentioned, but aligning 
incentives between schools, between financial services 
providers, and others is critical to ensure that market 
outcomes are efficient.
    Senator Johnson. Okay. Thank you.
    Thank you, Madam Chair.
    Chairman Murray. Thank you.
    Senator Whitehouse?
    Senator Whitehouse. Thanks very much, Chairman.
    One of the noteworthy things about student loans--and they 
stand out from virtually all other debt in this respect--is 
that somebody wangled a provision into the Bankruptcy Reform 
Act years ago, a somebody who has left no fingerprints on the 
amendment--I think it was actually snuck in in conference--and 
to this day nobody takes credit for it. But it snuck in and 
became the law of the land, and it provides that student loan 
debt is not dischargeable in bankruptcy. Bankruptcy is provided 
for in the Constitution. It is one of the sort of elemental 
principles of American entrepreneurship and success, that you 
have the ability to fail, to pick yourself up and get back in 
there and do it again. And virtually every type of debt is 
dischargeable in bankruptcy except student loan debt.
    Mr. Chopra, is there an economic justification for 
bankruptcy debt being treated differently than any other kind 
of debt in that respect? Or was that more in the nature of an 
unexpected blessing to the then largely privately held student 
loan industry?
    Mr. Chopra. Well, pursuant to a report that was required by 
Congress for CFPB and the Department of Education to publish, 
we analyzed data related to student loan originations, 
particularly private student loans, throughout the past 15 
years or so. And the 2005 change in the Bankruptcy Code, one 
would anticipate that in an ordinary marketplace prices would 
come down as Bankruptcy Codes become more strict. But, in fact, 
we saw that prices actually went up, and this suggests that 
broader capital markets' conditions may be larger contributors 
to pricing in some of these markets. And it also suggests that 
as a general matter the Bankruptcy Code is operating in a very 
different way in the student loan market as it compares to 
other consumer financial product markets.
    Senator Whitehouse. We have had representatives from the 
private student loan industry come in and testify that it would 
be wrong to unwind this stealth provision that was snuck in the 
dark into this provision because it would upset the settled 
expectations of the loan industry, which is--I mean, Congress 
is a hall of irony from time to time, but it is particularly 
ironic that an industry that snuck this in in the middle of the 
night, upsetting every settled expectation of borrowers as to 
how their loans would be treated, now try to defend themselves 
by the rule of settled expectations. I hope that this is an 
issue that we can address, because I do not believe that there 
is any rational distinction between student loan debt and other 
kinds of debt.
    Ms. Jones, thank you for your testimony. You have been a 
terrific witness that has brought a real dose of reality to 
this hearing. How has your student loan debt affected other 
personal decisions in your life, like to own a home, to have a 
family? How has that burden of debt changed what you might do 
with your life?
    Ms. Jones. I have this conversation with my mother a lot, 
because she has now asked maybe 15 times why is it that I am 
still pursuing the education field. Actually to pay for some of 
my college education, she borrowed against her own retirement 
so that I could, in fact, become the teacher I want to be. And 
the decision to stick with education was driven because of the 
desire to want to see the future generations have the same 
chances we had.
    I will say the decisions to take out more student loans 
made going back to school a hard decision to make, as 
referenced in my testimony. I could not justify using more of 
my mom's retirement even just to pay for the master's.
    Senator Whitehouse. And what has it done to your likelihood 
of owning a home?
    Ms. Jones. Well, considering I do not have any funds right 
now for a downpayment, that has been put off for a few years. 
But hopefully in the future I can work something out or we can 
work something out with the refinance bill so that I can start 
saving again.
    Senator Whitehouse. Thank you, Ms. Jones.
    Thank you, Chairman.
    Chairman Murray. Senator Ayotte.
    Senator Ayotte. I want to thank the Chair.
    I wanted to just ask, Mr. Chopra, do we know--do we have an 
estimate by the administration yet as to how many student loan 
borrowers would actually take up the potential option to 
refinance their pre-July 2013 student loans? And so do we have 
a sense of what numbers we are talking about? And, also, do we 
have an estimate of what that will cost? I just think it is 
important so we understand given the challenges we are facing 
as a Nation as we look at this piece of legislation. Do we know 
what those numbers are yet?
    Mr. Chopra. Senator, the CFPB is actually an independent 
agency, not part of the administration, so I do not have that 
type of analysis available. What I can say is that we do know 
from our experience in various mortgage financing programs that 
the economic impact of individual mortgage refinancings, 
according to a study by the Department of Housing and Urban 
Development, led to approximately $25,000 of economic impact 
per homeowner who was able to refinance.
    Now, that being said, a mortgage is a much larger loan, but 
then, again, a younger person with student debt may have a 
higher likelihood to be in prime age for certain purchases. 
But, again, I cannot speak to that.
    Senator Ayotte. Yes, I mean, what I am just trying to get 
at are the basics. How much more are we going to add to the 
debt? How much more is this going to cost? I mean, we ask this 
important question about every piece of legislation because it 
is basic information.
    Dr. Vedder, perhaps with your background, let us start with 
100 percent of borrowers. And we do not know that 100 percent 
of borrowers will adopt this, and certainly there will be some 
ratio to that effect. But if 100 percent of borrowers were to 
refinance their pre-July 1, 2013, loans, or a large percentage, 
what kind of impact--do we have any numbers that we can think 
about here?
    Mr. Vedder. I have not personally done any estimation of 
that. However, you can do--the math suggests the numbers could 
be very large. We have, what, 40 million borrowers, not all of 
them prior to 2013, but most of them. So you have close to 40 
million borrowers borrowing on average $25,000 or $30,000. So 
you are talking over $1 trillion.
    Just say for the heck of it you lowered interest rates 2 
percentage points on $1 trillion, that is $20 billion a year. 
That is real money. It is probably less than that.
    I have seen one estimate of the deficit effects measured in 
the tens of billions of dollars over a long period of time. So 
I think it is a consequential amount of money.
    Senator Ayotte. I think it is an important piece of 
information that I would hope we would have.
    Mr. Chopra, I wanted to ask you about this issue that Dr. 
Vedder raised because I think it is a very important issue. In 
fact, it is an issue that I hear from parents and students. We 
are going to get to a point where if the rate of increase of 
what it costs to get a college education keeps going up at that 
rate, no matter what we invest, the Federal Government, if we 
are thinking that we are going to be able to help, you know, 
the debt burden of someone like Ms. Jones, then if it is going 
up higher than--you know, I do not know. It may not be going up 
higher than health care, but, you know, this is a big issue in 
terms of how high it is going. How do we get at that issue? And 
if we are going to with our investment, how do we get to more 
accountability for these institutions to actually have to 
really be market-based, think innovatively, and deliver quality 
education at a more reasonable price? Because to me this is a 
big issue that is going to just hit us all no matter what we do 
here.
    Mr. Chopra. Senator Ayotte, I completely agree. The rise in 
college costs is an American tragedy, and we should do 
everything we can to make sure that those people who are going 
to college this fall, the class of 2018, the class of 2019, 
that they do not incur a lot of debt. But we cannot ignore the 
class of 2008 and the class of 2009 who graduated almost by no 
fault of their own when they were--started as freshmen in 2004, 
they could not probably imagine that they would graduate into a 
financial crisis. And that is something that we have to work on 
both ends, and it is not just looking at one of those issues 
but both.
    Senator Ayotte. Well, I appreciate that. But obviously we 
are going to look back on all of pre-July 1, 2013, loans as a 
large number of people, and it seems to me I would like to take 
that--have you answer that question for the record. We are 
investing already--regardless of what we do in legislation--a 
lot to help students in this country get a good education. And 
I would like to know what your thoughts are on how we hold 
these institutions more accountable, how we force them to 
actually make--
    Chairman Murray. Senator Ayotte, we have a lot of Senators 
and votes coming, so I will have him answer for the record.
    Senator Ayotte. I appreciate that. Thank you.
    Chairman Murray. Senator Baldwin.
    Senator Baldwin. Thank you, Chair Murray and Senator 
Johnson. I appreciate both of you for hosting this hearing on 
such a critical issue.
    The statistics are staggering nationally with $1.2 trillion 
in student debt. I look at the statistics for my home State of 
Wisconsin: 70 percent of students in Wisconsin are graduating 
with an average today of $28,000 in debt. And these numbers I 
think starkly demonstrate that there is a student loan debt 
crisis facing our Nation.
    Again, in Wisconsin, individuals with a bachelor's degree 
report making average monthly payments of about $350; graduate 
and professional degrees are making average monthly payments on 
their student loans of $448. And that is just an average 
figure. Obviously it varies below and above.
    The length of student loan debt obligations was nearly 19 
years for persons with bachelor's degrees and over 22 years for 
persons with professional degrees. And as we have heard through 
your testimony and the questions so far, this fact, these 
statistics are underscored by millions of personal stories and 
anecdotes, and they affect personal decisions, as I have heard 
testimony in roundtables that I have held in Wisconsin on this 
issue, people literally deciding whether and when to start a 
family because of the impact of this debt, the career decisions 
that Ms. Jones has talked about. You know, there are a lot of 
folks who are getting a higher education because they want to 
teach or because they want to do public service or work for a 
nonprofit or a community-based service organization. And yet 
the level of debt constrains their career decisions and career 
choices.
    And then financial decisions, we have heard a little bit of 
testimony and discussion on that. You know, you get out of 
college and start a business or put that off. Do you get out of 
college and do you rent? Do you buy? Do you move back home with 
your parents? I have heard a lot of people facing those choices 
in their late 20s, early 30s. Do you buy a used car? Do you buy 
a new car? All of those have rippled effects throughout our 
entire economy.
    And so I am glad, Ms. Jones, that you have been talking 
about it in, you know, your own--sharing your own story, and so 
many have stepped forward to do that, because this is a crisis 
we need to confront.
    I have in my very limited time just sort of two questions I 
wanted to pose to Mr. Chopra about a couple of realities in our 
current law on student aid. I have heard from a number of 
students who have to hold down part-time work, sometimes almost 
full-time work, while studying. And they are hit with something 
that is known commonly as ``the work penalty'' because their 
incomes may exceed the income protection allowance that is part 
of the eligibility calculation for Federal financial aid under 
the Higher Education Act.
    I am working on legislation that deals with this work 
penalty, that would raise the income protection allowance, but 
I wonder if you can speak to the importance of the availability 
of financial aid to working students.
    Mr. Chopra. Well, there is no question that an enormous 
number of people return to higher education after being 
displaced from the labor force in the Great Recession and took 
on part-time jobs to support their families, and that is 
something we would be happy to discuss with you further.
    Senator Baldwin. Okay. Well, I certainly know that that has 
been a reality in my home State, and many of the factories that 
were closed, you know, there were not a supply of a jobs 
without significant retraining. So we have heard a lot about 
that.
    The other thing I wanted to follow up on is the work you 
have done regarding servicers, you know, anything from simply 
failing to provide quality customer service to ignoring some of 
the legal obligations around notice and payment options and 
fees to certain borrowers. I have heard from people in 
Wisconsin about the challenges about getting quality 
information and the frustrations and the additional costs that 
come along with simply trying to pay back what they owe.
    A constituent from Marshfield wrote me recently about loans 
she took out for her daughter's education and believed that she 
had finished paying it off years ago, only to find out of the 
blue that there were claims that she still owed money.
    I am wondering if you can speak to how stronger 
requirements for student loan servicers like the ones--could 
give students valuable information?
    Mr. Chopra. Well, as I mentioned earlier, we learned a 
valuable lesson from the breakdowns in the mortgage servicing 
market. But I would also add we have learned as financial 
regulators from the past 10 years another very important 
lesson. In 2004, the Student Loan Marketing Association was 
privatized and operated as a private company for the past 10 
years. It has since restructured and is a different entity. But 
despite the significant public benefits and subsidies that the 
successor corporation received, Sallie Mae was ordered in 2008 
to stop breaking multiple laws. They continued to break those 
laws--
    Chairman Murray. Mr. Chopra, I am going to have to move on. 
We have got a lot of Senators who are waiting to ask questions, 
and votes are going to be called shortly. So if we could get an 
answer in writing on that, I would really appreciate it.
    Chairman Murray. I want to thank both Senator Warner and 
Senator Kaine for helping us get a witness from Virginia today, 
and I know that you both have questions, but we are going to go 
to--we still have Senators Merkley, Stabenow, Kaine, Warner, 
King, and Wyden, and a vote is going to be called shortly. So 
if any members want to go vote and come back, we will keep 
going as the votes are called. But we will go to Senator 
Merkley now.
    Senator Merkley. Thank you very much, Madam Chair.
    Mr. Chopra, one of the statistics that I find very 
interesting is that, in comparison to Germany, a year of 
college in Germany costs 4.3 percent of the country's median 
income. Here it is 51 percent of the country's median income. 
How does that affect kind of the aspirations of students in 
those two nations?
    Mr. Chopra. Well, you know, the lack of affordability of 
college may not only impact the students themselves, but it 
also might impact the broader family balance sheet.
    As we saw, the rise in student loan debt was not only 
because college was increasing in cost, it was also because 
students themselves are bearing a larger share of total college 
costs compared to their parents or other sources. That means 
that because people had less equity, they had less savings, 
they dealt with unemployment themselves, those costs got 
shifted to students, so it may actually impact not only the 
student but the family's aspirations themselves about how they 
will prosper economically over the long term.
    Senator Merkley. Does this reflect kind of a philosophical 
issue over whether education is a public good that not only 
benefits individual children but strengthens society as a 
whole?
    Mr. Chopra. Well, I am not a philosopher, but I believe--I 
get your point there, that the positive externalities of a more 
educated population benefits all of us. There is some empirical 
literature to suggest that. But at the same time, we need to 
make sure that people are completing, people are able to repay 
their student debt and their student debt does not displace 
other productive spending.
    Senator Merkley. Let me put it a different way. If 
colleagues of Ms. Jones are looking at the challenge of debt 
and are deciding, ``I cannot pursue a path where I have the 
possibility of a millstone, a debt equal to a home mortgage, a 
millstone of debt around my neck pulling me down because of the 
consequences of the struggle that is seen,'' that not only 
impacts the individual, but doesn't that impact the future 
prosperity of our entire society if folks in our own 
generation, in our student generation do not reach the fullness 
of their potential and their contribution back to the economy?
    Mr. Chopra. Yes, I think behind all the facts and 
statistics is a broader question about, you know, the American 
tradition of entrepreneurialism and risk taking, and, 
unfortunately, too many people feel that they cannot take those 
risks; they cannot start that small business out of their 
garage; they cannot start a family. And that is something we 
should think about.
    Senator Merkley. Well, let us think about how this 
amplifies, if you will, the inequality of wealth. If our 
students are unable to begin purchasing a home early in their 
life and, therefore--and homeownership is the major builder of 
personal family wealth for working Americans, doesn't that 
amplify the inequality of wealth in our society?
    Mr. Chopra. Well, as I note in my testimony, there is a 
large gap in certain simulations of graduates who do have 
student debt and those who do not in terms of what those final 
outcomes might be for their retirement balances. So 
traditionally younger workers have been able to stash cash away 
for a home downpayment or saving for retirement, but if they 
are not able to make those early contributions, they lose those 
compounding effects. And so student debt, if it is soaks up 
some of that ability to invest and save, the long-term 
repercussions could be real.
    Senator Merkley. May amplify the inequality in wealth. 
Thank you. I just wanted to make that point.
    The thing that I am most concerned about is the impact on 
aspirations. I live in a working-class community. My children 
go to the same public high school that I went to. And what I am 
hearing is a feeling among high school students that there is 
not a path in which they have an opportunity to thrive, that 
is, to pursue their potential, which then affects actually 
their behavior in high school as to whether or not they are 
going to--how hard they are going to work to make that path 
possible.
    My concern here is that this is the heart of the American 
dream, that there is a full opportunity to thrive for every 
American, whether they are the child of a mechanic or the child 
of a janitor or the child of a CEO. Given this huge hurdle of 
college debt, is that really compromising that vision?
    Mr. Chopra. I mean, the change in aspirations from the 
stories that we are constantly submitting to the public record 
illustrate many of the themes you just discussed.
    Senator Merkley. Ms. Jones, would you like to comment on 
that?
    Chairman Murray. And I am going to have to interrupt 
because we do have votes occurring right now, and we will let 
you answer that for the record. But I appreciate the question.
    Chairman Murray. The Senators next to be recognized are in 
this order: Stabenow, Kaine, Warner, King, and Wyden will be 
returning. I am going to go vote and come back. I would suggest 
anybody who is on the end of that list go with me and come 
back, and we will continue this through the votes.
    Senator Stabenow?
    Senator Stabenow. Thank you very much, Madam Chair, for 
hosting this critically important hearing.
    First, Ms. Jones, thank you for working hard and sticking 
in there and doing what is right, what everybody says, to work 
hard. And like most people, most of us when I was school, I did 
not have the capacity to turn to my parents and say, hey, can I 
borrow $20,000 or $30,000 or $5,000, or whatever it was. So 
most people are not in a situation where they have a lot of 
other options, I assume. And from what you are saying, you 
would be in the situation that I was. Fortunately for me, in 
the 1970s, we did a whole lot more on scholarships. I would not 
have gone to college. I was fortunate to get a bachelor's and 
master's, but top of my little 93-person graduating class in 
Clare, Michigan, my dad was very sick, we did not have a lot of 
money, and I qualified for a tuition-free scholarship for 4 
years, and that got me to college. We do not have those 
anymore.
    When I look at the numbers, you know, unfortunately, the 
State of Michigan now is one of the highest in the country at 
cutting higher education, over 32 percent of the funding to 
universities and community colleges.
    Interestingly, the public universities have not increased 
tuition by that same 32 percent. Now, they have increased it 
about 19 percent, and that is more than we certainly would like 
to see. But they are taking significant cuts.
    What I find interesting is that the for-profit universities 
actually have increased their tuition twice as much as public 
universities. Twice as much. And 57 percent of the for-profit 
school grads are coming out with $30,000 or more in debt--57 
percent rather than 12 percent of public schools.
    So there are a lot of things involved in this, all of which 
we need to be looking at. But I do not think that we should say 
that in the meantime students should not have the same 
opportunity that all the rest of us have had when we want to 
finance a house, which is to get the lowest interest rates that 
are out there today. And I do also want to say before asking 
questions that the good news for this refinancing bill, unlike 
other things that Congress has done over the years--the bank 
bailout, all kinds of other things--you know, this is paid for. 
That is the good news on this one. So this is not adding to the 
deficit. What we are proposing is actually to ask everybody to 
chip in, pay their fair share to grow the economy and create a 
fair shot for everybody. So it is fully paid for.
    Dr. Vedder, I just have to say--I have to turn to you and 
say I am so very surprised at your testimony in terms of saying 
that we should reduce the Federal role and that we have too 
many graduates in our economy. Wow. I have to tell you, in 
Michigan, for Michigan, the Georgetown Center on Education and 
the Workforce has said there is going to be--out of the 1.5 
million jobs expected to be created in Michigan alone in the 
next 6 years, a million of the million and a half will take 
education beyond high school.
    When I look at the National Association of Manufacturers 
who say there are 600,000 jobs available right now that we 
cannot match up skills, not all those are 4-year, maybe 2-year, 
in terms of community college, but when we look at the need on 
STEM, on science and technology and engineering and match, and 
where we are going as an economy and so on, I am amazed that 
you think that we have too many graduates going into our 
economy. And I wonder if you might speak about that.
    Mr. Vedder. Certainly. If you look at the Bureau of Labor 
Statistics data, of people who are working with college degrees 
in the United States today, nearly half of them are in jobs 
that the BLS at least has characterized as jobs that do not 
require 4-year degrees.
    Now, that statistic has to be taken with a little bit of a 
grain of salt. I am the first to admit there are judgment calls 
of what is and what is not. The unemployment rate among college 
graduates 21 to 24, just right out of college, last year was 
above the overall U.S. unemployment rate.
    Ms. Jones' story, which I think is a compelling story, is a 
story of someone who has worked hard and so forth, but she is 
making $10 an hour or $13 an hour. And this goes back to 
actually Senator Wyden's great bill that wants to bring more 
information to the students before they make these wrong 
decisions. I think there is a huge information problem here. I 
see we are out of time--
    Senator Stabenow. Yes.
    Mr. Vedder. Although I do not know who is running the 
hearing now, so maybe we are not out of time.
    Senator Stabenow. I think Senator Wyden is.
    [Laughter.]
    Senator Stabenow. Let me just say in conclusion that I do 
not hear anywhere from any business or anybody that I work with 
right now that we need less education for folks. But thank you 
again, Ms. Jones, and we are going to do everything we can to 
give you a fair shot to lower those costs so you can actually 
buy a house.
    Senator Wyden. [Presiding.] Senator Kaine.
    Senator Kaine. Thank you, Senator Wyden, and thanks to the 
Committee members.
    Ms. Jones, as a Richmond resident like you, I really 
appreciate your testimony, and let me just read for the record 
again something you read, but I do not want it to pass 
unnoticed: ``Student loan debt has been the driving force of my 
decisions for the last 8 years of my life, and according to my 
current repayment plan, it is projected to be for the next 25 
years of my life well into the years for which I would be 
planning for retirement.'' That is a powerful statement. That 
is a powerful statement.
    I would like to be a student in your class because somebody 
who wants to be a teacher as much as you do, somebody who has 
been willing to take on your shoulders that much debt and still 
fight to achieve your dream of being a teacher, somebody who is 
willing to move halfway across the country to get a master's 
degree, you are going to be--I know you are and are going to be 
one fantastic teacher. So I thank you for your commitment.
    I really want to focus on the cost of this equation, as Dr. 
Vedder did, bringing down the cost of higher education. I 
support so many of the issues on loans, the ability to 
refinance a student loan, but I really am focused on these cost 
issues. And I think we probably have done a disservice to 
students and their families by not laying out in a more clear 
fashion as a public policy matter lower-cost ways to get the 
kinds of skills or degrees that you need to succeed.
    So, for example, one kind of skill you can get is not a 
college degree but a license or a professional credential. The 
Georgetown Workforce Center says that 27 percent of young 
workers with licenses or certificates earn more than those with 
bachelor's degrees. It is not that you do not get education 
after high school, but sometimes the right education is an 
American Welding Society certificate--my dad was a welder--a 
Cisco Systems Administrator certificate. I do not think we 
coach and counsel our young people that there are ways to get 
the credentials to enable you to work that are not the same as 
higher education degrees. And most of our financial aid 
policies, you know, you cannot use, for example, military 
tuition assistance benefits, $4,500 a year to active-duty 
military, for college or community college courses, you cannot 
use those benefits to pay a $300 certification exam. It is 
foolish.
    Second, we have dual enrollment possibilities for students, 
and more and more States are embracing the notion that students 
while they are in high school should be able to get dual 
enrollment credits. You cannot use Pell grant credits, you 
cannot use the current Pell grant program to pay for college 
credits that you can obtain for a really cheap cost in high 
school with dual enrollment. That is a cheaper way to get 
college credit. I was able to graduate from college in 3 years 
because of dual enrollment, and it was enormously helpful to my 
family. My family could not afford the colleges I got into when 
I first applied, and they had to tell me when everybody else 
was celebrating their colleges, ``You are going to have to go 
talk your way into someplace late, because everywhere that 
accepted you is too expensive for us.''
    But dual enrollment is a way to reduce college costs. AP 
credits are a way to reduce college costs. Two Plus Two 
programs, Ms. Jones, you know, a lot of students now today--
this was not happening so much for me, but a lot of students 
now in your shoes are going to J. Sergeant Reynolds for 2 years 
and then going to VCU. And when they do that, their total cost 
shrinks. But for them to do that, somebody has had to sit down 
with them and counsel them about this as a path. You can get a 
4-year degree from the same college you did, and it will be 25 
or 30 percent cheaper if you start at the local community 
college.
    What this tells me is--I am concerned about debt, but I am 
probably most concerned about this college cost issue. And I do 
think there are already a number of pathways for people to get 
college degrees or the credentials and certificates that will 
enable them to work. But we have an obligation to provide 
better information. And we also have an obligation to provide 
policies that do not discourage or treat as sort of second-
class education some of the things like the professional 
certificates and certifications.
    I would like to ask both Mr. Chopra and Dr. Vedder, in 
terms of the information provision--I know, Dr. Vedder, you 
have some concerns about the grading system, and I do, too, 
because I think grades could obscure more than they reveal in 
terms of quality. But in terms of providing students and 
parents with information earlier in their lives so they can 
make decisions, what more can we do at the Federal level using 
the leverage of the investment we make?
    Mr. Chopra. Well, one of the things that we have noted is 
that it is also very difficult to even compute what the cost, 
true cost of college is for many families. Not only do tuitions 
change from year to year, but also it is a challenge to project 
what your monthly payment will be when you take on a certain 
amount of debt this year.
    So just like we saw in the mortgage market, where interest 
rates might reset or conditions change, people really are 
rolling the dice. The CFPB has created a number of tools to 
assist with this, but, of course, there can be more that should 
be done.
    Senator Wyden. The time of the gentleman has expired.
    Our Chair has come back, and, Angus King, you are up.
    Senator King. Thank you, Senator Wyden. Very good 
testimony. Thanks to all three of you.
    It seems to me that one of the things that we have talked 
about--and, Ms. Jones, you touched on this in your answer to 
questions from Senator Murray--is that there are programs like 
the income-based repayment that apparently have a very low 
uptake rate. Isn't one of the things we should do, regardless 
of what we do about interest rates or refinancing, to make more 
information available to borrowers, both at the beginning and 
at the end of their schooling so they know what these options 
are? Ms. Jones, that would have helped you dramatically, 
apparently.
    Ms. Jones. It definitely would have helped in the beginning 
to know instead of--well, to know what I was getting into when 
I signed my promissory notes. I think at the beginning you are 
so--you were told, ``This is what you need to get through 
college, and if you use this, then you can deal with it 
afterwards. But right now, you will not be incurring interest 
on your subsidized loans, take those first. Then you will take 
your unsubsidized loans, and we will talk about that more once 
you take your exit exam and your exit counseling upon 
graduation.'' But what I realize is that in doing--even in not 
knowing, we are losing potentially great teachers. They are 
walking away from the profession because they cannot afford the 
education they need.
    Senator King. Right, but there may be options that they 
have that they do not even know that they would have that would 
help them stay in the profession, which is absolutely what we 
want.
    Mr. Chopra, what about it? You have worked in this field. 
There are something like seven different repayment options. How 
about streamlining those, making it more available, making more 
information available? Isn't that one thing we ought to do 
regardless of what else we do here?
    Mr. Chopra. Yes, simplicity of how to repay your loans I 
think is a very important goal. I am also struck by--I recently 
heard from a former employee, a student loan servicer, and they 
had told me that, you know, they are evaluated partially on how 
quickly they can get someone off the phone who calls them for 
help. So that can lead to very quick interactions or being 
transferred, and you might get the short cut answer rather than 
the answer that ultimately is better for the owner of the loan, 
for the borrower, and maybe even the economy more broadly if it 
avoids default. So addressing those incentives is also a major 
concern.
    Senator King. I think that is something we really need to 
look at regardless of what else we do.
    Mr. Vedder, I enjoyed your testimony. I will share with you 
a story that you can use next time.
    Mr. Vedder. Okay.
    Senator King. In a former life, I was a talk-show host, and 
I interviewed in the late 1970s a financial aid officer at one 
of our colleges in Maine. And we talked about college tuition 
and how it goes, and he said an interesting thing. He said, 
``You know, for the past 40 years, the cost of a good private 
college has been about the same as a new Ford.'' In the 1940s, 
it was $1,000, and it gradually went up in the 1960s to $3,000. 
But something happened, because a new Ford today is about 
$20,000, and the cost of a private college education is 
approaching $60,000.
    I think we need to explore, Madam Chair, why that happened, 
have colleges come and tell us why what they sell has increased 
two and three times the rate of inflation and what it is they 
are buying that costs so much that is causing college costs--
because we are talking about the financing costs, but the real 
underlying problem is the cost of the product. And as you 
pointed out, if tuition had risen at the rate of inflation 
since 1978, we would not be having this hearing.
    Mr. Vedder. Exactly.
    Senator King. And so we have got to be focusing on that. 
But I am concerned, and part of it is accountability. But I 
want to be sure when we talk about accountability and holding 
schools accountable that we apply standards such as gainful 
employment and graduation rates and those things, that we do 
not penalize those institutions that are taking higher risks 
with lower-income and not-college-experienced students.
    Mr. Chopra, would you comment on that?
    Mr. Chopra. The CFPB is not--we are not exploring that 
specific regulation. That is the Department of Education. What 
I can say is, though, aligning the incentives between the 
schools, whatever loan programs or financial services 
institution, and the students are important. And we want to 
examine how we can increase accountability so that outcomes are 
improved for everybody, regardless of where they come from.
    Senator King. I think we all want to increase 
accountability. All I am saying is I think we have to be 
careful how we do it, that we do not inadvertently penalize the 
very students we want to get into the system by placing 
requirements that would be--that would disincentive--that is 
not really a word, that would punish schools that are taking 
the risks to bring those students--to give those students an 
education.
    Thank you all very much. Thank you, Madam Chair.
    Chairman Murray. [Presiding.] Thank you very much.
    Senator Wyden?
    Senator Wyden. Thank you, Chair Murray, and thank you for 
your years of passion and commitment to this effort. And it is 
particularly timely right now. I think we understand that our 
students are just getting smothered with these costs and these 
bills. They are up to their eyeballs in debt, and this is 
having a huge effect on their ability to have the productive 
life that they would want, and it takes a toll in a myriad 
array of ways.
    Recently, I was making a tour of college campuses in Oregon 
and talked about a piece of legislation I will describe in a 
minute, and a young woman came up to me and said, ``You know, I 
owe $50,000, $60,000. What I want to do more than anything else 
is I want to have a family, and I am not convinced somebody 
will marry me when I am carrying around those kinds of debts.''
    And, you know, she teared up, and we talked about various 
kinds of options. But I think that is pretty representative of 
what is going on out there. This is taking an enormous toll, in 
effect putting students and young people in shackles. And it 
seems to me there are two kind of pieces to the puzzle. The 
first is we have got to help the students who are underwater, 
and I appreciated what you and other students have had to say 
about that, Ms. Jones, and whether it is refinancing, income-
based repayments, I am open to a variety of different 
approaches.
    The second is a different kind of issue, and that is, 
making sure that not only do we get students in the door, but 
they get more value for their education. And Senator Rubio, 
Senator Warner, and I have introduced a piece of legislation 
called ``The Student Right to Know Before You Go Act.'' So for 
the first time it would be possible for students to get this 
information in one place and, heaven forbid, when students and 
families find out about a school that is doing a good job in 
terms of graduation rates, a lack of needed remedial education 
which you earn at a school, if a school is doing a good job and 
another school is not doing a good job, the other school better 
clean up its act or, you know, heaven forbid, market forces 
would kick in and that would, in effect, advance the schools 
that are doing a good job.
    My understanding--and I want to start with you on this, Dr. 
Vedder, but I know all three of you have views on this. To get 
the kind of data you need to really do this right, it is going 
to take a piece of legislation, whether it is the bill that 
Senator Warner, Senator Rubio, and I have or something close to 
it--and, by the way, other Senators have bills that, you know, 
for purposes of Government work it is close enough. And I think 
this is what is needed. Are we going to be able to get the data 
that we need to really set up this kind of seamless opportunity 
for students to get more value for their education along the 
lines of what I have kind of capsulized here this morning?
    Mr. Vedder. Well, Senator, first of all, let me say I am 
very, very pleased that you have introduced this legislation, 
and I have written on it publicly on several occasions. It is 
ironic that the universities that are in the knowledge business 
are sometimes very reticent about providing knowledge about 
their own students, what they are learning, what they are 
earning after they graduate. Of course, the colleges themselves 
do not often have that information.
    The IRS could provide enormously useful information on the 
earnings of graduates by majors, by institutions, and so forth, 
in this modern age without violating privacy or anything. Why 
don't we do that? I mean, we collect all this data. The Social 
Security Administration has the capacity to provide a lot of 
information.
    If part of the problem is student financial burden, 
shouldn't the students know at least what is the probability 
they are going to earn a certain amount of money when they 
graduate? And so I think information bills are important. I 
think they are low cost. They are consumer friendly. Markets 
work better when there is more information around by all 
parties, and I think the efforts that you and Senator Rubio and 
Senator Warner and others are making is one of the few positive 
developments in this area right now.
    Senator Wyden. I want to let Senator Murray have a chance 
to summarize, because we are going to have a vote in a minute. 
I am something of a privacy hawk around here. You can see that 
with the NSA and a whole host of other issues. So we have tried 
very hard to have significantly stronger privacy protections 
than you have today under a variety of these programs. And my 
last request, you know, Ms. Jones, I have followed your good 
work. We would very much like to work with you and the other 
students on this so we really get this right, we lock in the 
privacy that your generation deserves, we deal with the 
refinancing or repayment or whatever is necessary, and we in 
particular get the counsel you students who, as I described it, 
are getting smothered and really facing these problems because 
there has been so much foot dragging here. And I think now is 
really the time. And, Chair Murray, again, for all your 
leadership, my thanks, and I look forward to working with you.
    Chairman Murray. Well, I want to thank our witnesses for 
being here today. I really appreciate your input on this. I 
want to thank all of our members. There was a very high 
participation rate today I think because this is an issue that 
is impacting so many families and communities and future 
economic possibilities for our country. It is one we have got 
to address. I am looking forward to working with all of you to 
do that. So, again, thank you.
    Thank you to Senator Johnson for filling in today. I gave 
him an A as a former teacher for how he performed today.
    [Laughter.]
    Chairman Murray. But thank you again to all of our 
witnesses, and this is a topic that we will continue to have 
much discussion around. Thank you.
    [Whereupon, at 11:30 a.m., the Committee was adjourned.]
    
    [GRAPHIC] [TIFF OMITTED] 
    
   THE COSTS OF INACTION: THE ECONOMIC AND BUDGETARY CONSEQUENCES OF 
                             CLIMATE CHANGE

                              ----------                              - 
- -


                         TUESDAY, JULY 29, 2014

                              United States Senate,
                                   Committee on the Budget,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 10:03 a.m., in 
Room SD-608, Dirksen Senate Office Building, Hon. Patty Murray, 
Chairman of the Committee, presiding.
    Present: Senators Murray, Stabenow, Whitehouse, Coons, 
Kaine, King, Sessions, Crapo, Johnson, and Wicker.
    Staff Present: Evan T. Schatz, Majority Staff Director; and 
Eric Ueland, Minority Staff Director.

              OPENING STATEMENT OF CHAIRMAN MURRAY

    Chairman Murray. Good morning. This hearing will come to 
order. And I want to thank the Ranking Member, Senator 
Sessions, and all of our colleagues who are joining us here 
today. And I would especially like thank all of our witnesses 
for taking the time to be here as well.
    Today we are going to hear from Mindy Lubber, the president 
of Ceres, Inc., an organization that works with businesses, 
investors, and other groups on issues like climate change.
    Alfredo Gomez joins us from the Government Accountability 
Office, where he leads the Natural Resources and Environment 
Division.
    Sherri Goodman is senior vice president and general counsel 
at CNA Corporation, and she is also the former Deputy Under 
Secretary for Defense for Environmental Security.
    We also have Dr. David Montgomery. He is senior vice 
president for NERA Economic Consulting.
    And Dr. Bjorn Lomborg also joins us, the director of the 
Copenhagen Consensus Center.
    Again, thank you to all of you for taking the time to do 
this today.
    It is well established, from the overwhelming majority of 
climate scientists, that climate change is for real. And, in 
fact, today we are already seeing its negative effects in the 
United States.
    Warming temperatures are disrupting weather patterns, 
causing our sea levels to rise, and creating the conditions for 
destructive extreme weather events.
    But we are not here today to have a discussion on the 
settled science of climate change; rather, today we are going 
to be focusing on some of the consequences that have not 
received as much attention: the economic and fiscal impacts of 
climate change.
    This is not just an environmental issue. It poses serious 
risks to our economy and the Federal budget. And if we fail to 
address these threats, it will weaken economic growth and 
increase costs for our Federal Government.
    These costs are too important to ignore, and it is time for 
the Budget Committee to begin to assess the damage climate 
change will have on our budget and our economy.
    I know there are skeptics who do not believe the climate is 
changing, or believe that addressing this issue will be too 
expensive in the short term.
    But what we are hearing from a growing chorus of experts, 
including the White House Council of Economic Advisers, the 
Risky Business Project, former Secretaries of the Treasury, as 
well as our witnesses today, is the costs of inaction will be 
far greater.
    A recent report by the Risky Business Project found that 
climate change will have, and I quote, ``specific, measurable 
impacts on our Nation's current assets and ongoing economic 
activity.''
    It will increase risks and add costs for businesses, making 
it more difficult for them to succeed, which is something that 
Mindy Lubber and her organization have been looking into for 
years. And I look forward to hearing more of her testimony 
about the risks to businesses and investors.
    Budget experts are also starting to see rising costs on our 
Federal balance sheet. Take disaster relief, for example. 
Climate change is causing more destructive and costly extreme 
weather events--such as Hurricanes Sandy and Katrina. Those two 
disasters alone cost the Federal Government about $100 billion.
    The Government Accountability Office has been investigating 
the ways climate change would add costs for the Federal 
Government, and I know Mr. Gomez from GAO will discuss those 
findings in more detail during his testimony today.
    I think every member of this Committee should be worried 
about the vulnerability of our Nation's roads and bridges and 
waterways due to rising sea levels and changing weather 
patterns.
    In addition to the vulnerability of our infrastructure, 
U.S. military installations and operations are also threatened.
    Bases on the coast in my State and across the country face 
rising sea levels and will need significant adaptation and 
mitigation measures to remain viable bases and meet their 
operational needs.
    Climate change will also disrupt vulnerable populations' 
access to basic resources like food and water. Because of this, 
the 2014 Quadrennial Defense Review identified effects of 
climate change as ``threat multipliers'' that will aggravate 
stressors abroad such as poverty, environmental degradation, 
political instability, and social tensions.
    Climate change will increase the resources our military 
will need to meet these new challenges, maintain its readiness, 
and carry out its mission. So, Ms. Goodman, I am looking 
forward to hearing more during your testimony about the 
findings in your organization's report.
    Taken together, the impacts of climate change will have 
major implications for our Nation's economy and budget. Across 
Federal, State, and local governments, it will further strain 
budgets that are already being stretched. And its threat to our 
economy and budget will only add to an already challenging 
fiscal picture.
    While budget projections have improved significantly in the 
near and medium term, we still face long-term fiscal 
challenges. But the added costs of climate change impacts are 
not adequately accounted for in current long-term budget 
outlooks. And the longer we wait to address climate change, the 
worse its impacts will get.
    Failing to act now will only make it more difficult to 
solve this problem later and will force us to divert resources 
away from other priorities.
    So let me be clear on this point. Anyone who, like me, 
wants to tackle our long-term fiscal challenges fairly and 
responsibly needs also to worry about the impacts of climate 
change.
    There are those who say tackling climate change will cost 
too much. But given what we know about the consequences of a 
warming planet, inaction is far more costly.
    Curbing emissions to prevent the more severe impacts of 
climate change and adapting to the impacts that we cannot avoid 
are our lowest-cost options. And if we want to fulfill our 
responsibility to leave behind both a strong and stable fiscal 
foundation and a safe and healthy environment for our children 
and our grandchildren, we need to move forward with those 
options now.
    So I really want to thank all of our witnesses for coming 
today. We look forward to your testimony and appreciate the 
time that you are spending with us today.
    With that, let me turn to my Ranking Member, Senator 
Sessions, for his opening remarks.

             OPENING STATEMENT OF SENATOR SESSIONS

    Senator Sessions. Thank you, Madam Chairman. This is the 
first hearing I am aware of that we have had in the
    Budget Committee on global warming. I think it is not a bad 
idea. We need to talk about it. We are spending right now 
indeed a significant amount of money on this project, and even 
more, we are requiring huge expenditures of the private sector. 
Why? Because greater costs are ahead if we do not act now, we 
are told. We need to spend more money now. That means an impact 
on our budget.
    So today we will openly, I hope look at some of the costs 
and the benefits that would accrue from such a policy. Surely 
if one has money, some wealth, that money should be applied for 
the maximum benefit for the maximum number of people. We 
certainly are not unlimited in the amount of wealth that we 
have in our country that we can apply to any problem.
    So ``The Costs of Inaction'' is the hearing title. Maybe 
the better title should be ``The Costs of Action and 
Inaction.'' Inaction costs may be real, but certainly they are 
distant and somewhat uncertain. But the costs of action are 
certain right now. They are real and immediate.
    Government expenditures, economic slowdown, higher prices 
all result from many of the proposals that are out there today. 
These are indisputable costs right now. The economy is not 
healthy. Wages are down; workforce participation is at a rate 
as low as the 1970s; and we cannot hammer this economy, in my 
opinion, with any unnecessary costs.
    So, first, the temperature is not matching the computer 
models. It is just not. It has been going on for a good long 
time now, maybe 15 years, basically flat. We have had fewer 
storms, not more storms. It has been 3,100 days since we have 
had a Category 3 hurricane. That goes back to 1900. We are not 
having more hurricanes. And, actually, tornadoes are flat or 
down also.
    So Dr. Lomborg believes that there is some warming 
occurring in our country as a result of human activities, but 
says let us not panic, let us be careful; let us consider 
wisely what we do before we allocate a large part of our wealth 
to the problem and how we should handle it. And costs can be 
huge. Regulations like a tax impose burdens on the economy. 
Economically, there is no difference--there is no difference--
in the Government taxing the American people to replace a coal-
fired plant than the Congress and the Government just telling 
the company to spend the money. We act like it does not cost 
anything to mandate these changes, and it absolutely does cost 
to do this. And we have to consider this.
    These costs for businesses and people, they reduce profits, 
reduce tax revenues to the Government, and drive up costs for 
everybody.
    So the point is this: Every global warming action has 
costs, often hidden but very real, and we must acknowledge 
those costs and decide whether the wealth expended gets the 
maximum results considering all the needs of America--and all 
the needs of humanity, for that matter. That is why we get paid 
the big bucks around here.
    So there is some common ground. Let me say this: There are 
places we can do. We can reduce CO2 in a way that is rational, 
I think. More energy efficiency. We have made some real 
progress on that. There is some more progress that can be done. 
But it is not as easy. The low-hanging fruit has been taken in 
many areas.
    We need less and can unite around less harmful pollution--
the particulates, the NOX and SOX.
    We need more American energy. I believe all of us can agree 
on that.
    We need more nuclear power. I think we all can agree on 
that. But consistently we keep throwing up blocks, blocking 
more nuclear power and driving up costs.
    We need more cost-effective alternative sources, 
absolutely, but we need to maybe do more research. I think we 
can work on that to have better research and understand what we 
can impose that makes sense economically. Prove technology 
before mandating it.
    So it is important, Madam Chairman, to consider our budget, 
the cost of aggressive U.S. policy in this area and the 
benefits we might reasonably expect and when we might see those 
benefits.
    Government expenditures, taxes, and regulation all fall 
ultimately on the American people, the people of this country. 
It is not enough just to say the danger is great; therefore, we 
are free to demand the Nation spend whatever is necessary, 
whatever the cost, to be a leader in the world on these issues.
    So I disagree with that policy. I believe that Dr. Lomborg 
and Dr. Montgomery are cooler heads, and we should listen to 
some of their practical advice.
    The predictions of experts have not been proven true so 
far. They are off pretty significantly when it comes to 
temperature. The basis for dramatic demands on our budget and 
economy have been these computer prognostications that have 
been produced by wizards. If they for 15 years have been off, 
then it is time for us to be a bit cautious, I suggest. Those 
who raise questions, who challenge some of the orthodoxy cannot 
be and will not be silenced. This is a free country. We need to 
have the best advice we can get from whatever area it comes 
from.
    So I felt it reasonable to assume that CO2 and other human 
activities cause warming. It seems to be. Scientists tell us 
so, and I do not see any reason to dispute that fundamentally. 
But this Nation and the world have many challenges in working 
to make life better in our country and on this planet.
    So I propose we work harder to work together to find things 
that can improve our planet, improve the quality of our life, 
that we can do in a way that is bipartisan and actually get 
done.
    Thank you, Mr. Chairman.
    Chairman Murray. Thank you very much, Senator Sessions.
    We will now turn to our witnesses for their comments, and I 
just want to remind everybody that we are not here to debate 
the science. We are here to talk about the fiscal costs of 
climate change. So I appreciate, again, everybody coming to 
this hearing.

          STATEMENT OF MINDY LUBBER, PRESIDENT, CERES

    Ms. Lubber. Thank you. Chairman Murray, Ranking Member 
Sessions, and members of the Committee, it is delightful to be 
here. I am honored.
    My name is Mindy Lubber. For the last 10 years, I have been 
running an organization called Ceres that works directly with 
110 investors, some of the largest asset owners, public pension 
funds, as well as asset managers, and with 70 companies who 
understand that climate is a risk, a financial risk, as well as 
an opportunity, and are beginning to act on that.
    The companies are firms like Nike and Mars and Starbucks, 
Owens Corning, Jones Lang LaSalle, eBay, VF Corporation, and 
General Mills. It is not just small green companies. And the 
investors and the rating agencies who are looking at climate as 
a fiduciary and a financial risk with us are some of the 
largest investors in the country. This is no longer just an 
environmental issue, although that it is.
    And the risks are across our economy. For apparel giants 
like VF Corp. and Nike, climate change poses risks to cotton 
and other commodities that are being affected by reduced water 
availability and drought. And for Jones Lang LaSalle and Owens 
Corning, climate change poses risks to buildings and their 
enormous use of electricity and growing vulnerability to 
coastal flooding and insurance costs. And for General Mills and 
Starbucks, climate change poses risks to coffee, to corn, and 
to other crucial crops that are experiencing more volatile 
growing conditions, oftentimes meaning higher food prices, 
which I will get to in a moment.
    Climate risk is a risk across our economy. The hundreds of 
companies and investors we work with believe that it is not a 
choice between protecting the climate and protecting the 
economy. We cannot build a stable--without a stable climate, we 
cannot build an economy that is stable. Surprises, massive 
storms, not enough water depletion of natural resources are not 
good for business. They are not good for our economy.
    We have done extensive research over the years. I am going 
to try and zero in on a few areas. One is the public resources 
that are being spent due to climate change.
    On the public side, we have identified five Government 
disaster relief and recovery programs where the costs of 
inaction on climate change are pronounced and profound.
    First, Federal disaster assistance appropriations. One 
conservative estimate puts the average bill that taxpayers can 
expect to pay at $20 billion a year. That is funding to help 
our communities from storms and hurricanes. And one storm could 
push that up to $100 billion. Hurricane Sandy was a $60 billion 
price tag.
    Secondly, our National Flood Insurance Program, currently 
in debt to the U.S. taxpayers for approximately $30 billion. 
This vital program collected about $3.6 billion in premiums and 
paid out over $7.8 billion in Hurricane Sandy losses and other 
losses. We are seeing more storms. There will be more of a pull 
on our National Flood Insurance Program.
    Or our Federal Crop Insurance Program, vital to our 
farmers. From the year 2001 through 2010, we saw a record- 
setting $10.8 billion in 2001. And the devastating heat waves 
and drought in 2012 shattered even those records when the 
program paid out $17.3 billion in crop losses.
    And our wildfire protection costs have grown, tripled since 
the 1990s.
    And our State-run insurance plans. In the insurance sector, 
we are seeing private companies pull out of markets that are 
most at risk, and State and Federal programs have to step in. 
State-run programs, backstopped by State taxpayers, ultimately 
have seen loss exposure grow from $54 billion in 1990 to $884 
billion in 2011. Insurance companies are seeing the risks. 
Where it is too risky, they pull out. When they pull out, the 
State governments and Federal Government step in, costing our 
taxpayers and costing our consumers. When insurance companies 
stay in, the prices rise.
    And it is not only through these increases of Federal 
programs. We are paying for it at the grocery store. Let us 
take this down to our homes. Prolonged droughts in California, 
the Great Plains, and the Southwest have diminished the U.S. 
cattle herd to its smallest since 1951, causing beef prices to 
increase by 10 percent from a year ago.
    In decisions which have devastated many Texas communities, 
Cargill and other major livestock producers have been forced to 
shut down feedlots. As a Cargill spokesman put it, the drought-
depleted beef cattle supply is devastating.
    Extreme weather is also contributing to prices for fresh 
fruits and eggs, rising by 5 to 6 percent, twice the 2.8 
percent of food price rises over the past 20 years. And when 
agriculture dies and cattle die, it is not only increased costs 
to all of us at our homes, at our grocery stores, at our 
restaurants; it is lost jobs, farm workers, truckers, and many 
others in those industries.
    And that is going to keep growing. Our corn industry, which 
is the bedrock of our food supply, needs water and, climate 
change is creating more drastic water problems as we see every 
day.
    As climate change increases the risks of extreme weather 
events, our Federal and State disaster relief and insurance 
programs will become increasingly unsustainable. By one 
estimate, the net present value of the Federal Government's 
liability for unfunded disaster assistance over the next 75 
years could be greater than the net present value of the 
unfunded liability for the Social Security program. We have got 
to take this out from the closets and into the public 
discussion, as you all are doing, and look at what are the real 
costs of action and the real costs of inaction.
    And the risks, while very real, are starting to be 
addressed. Financial leaders, investors, and businesses 
understand these risks. They are starting to act. Sixty percent 
of the Fortune 100 companies have goals for renewable energy or 
greenhouse gas reductions.
    Chairman Murray. Ms. Lubber, if you can wrap up real quick, 
we want to make sure everybody has a chance.
    Ms. Lubber. Thank you. Companies and investors are acting. 
They are making a difference. They are factoring this into 
their portfolio assessments, their analysis. The rating 
agencies are looking at climate risk because this is real, it 
is profound, and it is now. And in each case, from the public 
sector to the private sector, the risks are causing greater 
economic impacts, and the data shows they are growing every 
single year.
    Thank you very much.
    [The prepared statement of Ms. Lubber follows:]
    
    [GRAPHIC] [TIFF OMITTED] 
    
    Chairman Murray. Thank you very much.
    Mr. Gomez?

 STATEMENT OF ALFREDO GOMEZ, DIRECTOR OF NATURAL RESOURCES AND 
       ENVIRONMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Gomez. Good morning, Chairman Murray, Ranking Member 
Sessions, and members of the Committee. I am pleased to discuss 
GAO's work on Federal fiscal exposures posed by climate change 
and extreme weather events.
    Last year, we added limiting Federal fiscal exposures from 
climate change to our list of high-risk issues needing 
transformation. According to the latest U.S. National Climate 
Assessment, extreme weather has become more frequent, more 
intense, including heat, heavy downpours, floods, and droughts. 
In addition rising sea levels pose risks to coastal areas. 
While scientists cannot link individual events to climate 
change, observed changes in recent years have shown that these 
events can affect the economy, including governments' budgets, 
as it has already been stated.
    Implementing resilience measures now creates additional 
costs but could also provide benefits later. For context, the 
U.S. spends hundreds of billions of dollars on infrastructure 
each year, so making good choices now could prevent future 
losses.
    My testimony today discusses two areas: first, fiscal 
exposure to critical infrastructure and public lands; and, 
second, the need for improved Federal technical assistance to 
all levels of Government.
    First, regarding infrastructure and public lands, DOD has 
about a half million facilities with replacement value of about 
$850 billion. DOD's 2014 Quadrennial Defense Review said that 
the impacts of climate change may undermine the capacity of 
domestic installations to support training.
    In May, we reported on the impact of wildfires and extreme 
weather on military readiness and infrastructure. We found that 
drought contributed to wildfires in an Alaskan base that 
affected readiness because of delays in training. We also 
described an extreme rain event at a base in the desert 
Southwest where a year's worth of rain fell in 80 minutes, 
damaging 160 facilities and causing $64 million in damage.
    Hundreds of thousands of other large Federal facilities 
face similar vulnerabilities. For example, NASA has 5,000 
buildings and other structures valued at $32 billion, and many 
are located in vulnerable coastal areas.
    Regarding public lands, the Federal Government manages 
nearly 30 percent of the Nation's land. These assets are 
vulnerable to changes in the climate, including the possibility 
of more frequent and severe wildfires.
    Our work has found that appropriations for wildland fire 
management activities have tripled, averaging approximately $3 
billion annually in recent years, up from about $1 billion in 
1999.
    My second main point focuses on the need for the Federal 
Government to improve climate-related technical assistance to 
all levels of Government. With respect to the information needs 
of Federal agencies, we have found that agencies have started 
to assess their vulnerabilities, but they still need assistance 
building resilience into their infrastructure and planning 
processes.
    For example, we reported that DOD personnel conducting 
infrastructure planning efforts did not have information 
necessary to accounts for the risks of climate change. We 
recommended that DOD provide more information to installation 
planners, and DOD agreed.
    Regarding State and local governments that spend billions 
of dollars on infrastructure, our 2013 high-risk designation 
described challenges in developing a cohesive Federal approach 
to information sharing that can inform all levels of 
Government. Providing the best available information to State 
and local governments can help them address climate-related 
impacts when planning and building infrastructure.
    Much of this infrastructure is designed to last long into 
the future, but may have to be rebuilt or replaced if planners 
do not account for future risks.
    We have ongoing work assessing governmentwide options to 
meet the climate-related information needs of all levels of 
Government. We also have work underway that may identify other 
steps the Federal Government could take to limit its fiscal 
exposure.
    It is worth noting that our work has not involved 
forecasting or modeling the specific budgetary impacts of these 
events. Instead, we have identified examples of actual and 
potential vulnerabilities that we should consider to minimize 
any future adverse impacts.
    Chairman Murray, Ranking Member Sessions, members of the 
Committee, this concludes my statement.
    [The prepared statement of Mr. Gomez follows:] 
    
    [GRAPHIC] [TIFF OMITTED] 
    Chairman Murray. Thank you very much.
    Ms. Goodman?

    STATEMENT OF THE HONORABLE SHERRI W. GOODMAN, EXECUTIVE 
             DIRECTOR, CNA MILITARY ADVISORY BOARD

    Ms. Goodman. Thank you very much, Chairman Murray, Ranking 
Member Sessions, and Committee members. It is a privilege to be 
with you today.
    I am Sherri Goodman with the CNA Corporation, a not- for-
profit, independent--
    Chairman Murray. Can you pull your microphone closer?
    Ms. Goodman. --research and analysis organization 
supporting national security and public sector leaders and 
organizations. I am privileged to serve as the founder and 
executive director of CNA's Military Advisory Board. In this 
capacity, I am here today representing not only my own views 
but the collective wisdom of the 16 generals and admirals who 
serve on CNA's Military Advisory Board.
    The board first convened in 2006 to look at pressing 
national security issues, including climate change. Our first 
report, published in 2007, identified climate change as a 
threat multiplier, especially in fragile regions of the globe. 
Since that first report, we have had over 30 generals and 
admirals serve on the on the board, collectively with more than 
1,000 years of experience in evaluating security threats and 
mitigating risks.
    Our most recent report, which I submit for the record along 
with my written testimony, identifies the accelerating risk of 
climate change and observes that in some circumstances climate 
change has and will increasingly serve as a catalyst for 
conflict.
    From a national security framework, the costs of inaction 
on climate change can be grouped into three areas:
    First, how climate change may cause increased instability 
around the world, which will likely lower economic prosperity 
and trade opportunities while increasing demand for U.S. 
military and diplomatic involvement;
    Second, changes we are seeing in the Arctic today as a 
special case, an important case;
    And, finally, how climate change will impact our military.
    My discussion today is informed by the MAB and reflects our 
most recent findings, but what follows are my own views and 
observations.
    In the 7 years that have passed since our initial 
assessment, we have witnessed more frequent and intense weather 
events, including heat waves, sustained heavy downpours, floods 
in some regions, and droughts in other areas. Nine of the ten 
costliest storms to hit the United States have occurred in the 
past 10 years, including Hurricane Katrina and Superstorm 
Sandy. Speaking for the MAB, we assess that the nature and pace 
of observed climate changes post severe risks for our national 
security.
    Having served for 8 years as Deputy Under Secretary of 
Defense for Environmental Security, and 8 more years as 
executive director of the Military Advisory Board, I have 
learned how our senior military leaders approach risk and 
uncertainty. To them, managing risk is seldom about dealing 
with absolute certainties but, rather, involves careful 
analysis of the probability of an event and the consequences, 
should the event occur. When it comes to our national security, 
even low-probability events with dire consequences must be 
considered and addressed.
    Today the risks posed by predicted climate change in the 
MAB's judgment represent even graver potential than they did 7 
years ago and require action today to reduce risk tomorrow.
    It is undeniable that the world around us in changing. In 
recent years, we have observed changing weather patterns 
manifest by prolonged drought in some areas and heavier 
precipitation in others. In the last few years, we have seen 
unprecedented wildfires threaten homes, habitats, and food 
supplies--not only across the United States, but also in 
Australia, Europe, Central Russia, and China. Low-lying island 
nations are preparing for complete evacuation to escape rising 
sea levels. Globally, we have seen recent prolonged drought act 
as a factor driving both spikes in food prices and mass 
displacement of populations, each contributing to instability 
and eventual conflict.
    The MAB is concerned about the projected impacts of climate 
change over the coming decades on those areas already stressed 
by water and food shortage and poor governance. In the medium 
term, those areas threatened by rising sea level are most at 
risk. There will be only so much we can do to keep the sea out, 
and in some areas the sea will not flow over the walls we 
build. It will flow under or around and make the land and 
aquifers not usable. Low-lying islands in the Pacific and great 
deltas, including the Mekong, the Ganges, the Nile, and the 
Mississippi are at increasing risk of not being able to support 
the populations that live there. Migration will become a larger 
form of adaptation.
    The Arctic is a case that deserves special attention. Allow 
me to tell a short sea story to illustrate.
    While serving as Deputy Under Secretary of Defense in the 
aftermath of the Cold War, I led the U.S. team that worked with 
Russia, Norway, and others to manage waste streams from 
decommissioned Russian nuclear submarines, including some that 
had been dumped into the Kara Sea, north of the Arctic Circle. 
In the course of that work, I became acutely aware of the 
unique Arctic environment. Today, with increased shipping and 
greater opportunities for extraction of resources in the 
Arctic, the risk for a manmade crisis or disaster, such as a 
major oil spill, is rising.
    A recent report by the National Research Council finds that 
a spill the size of Deepwater Horizon would have devastating 
effects and last for decades. The world is not yet prepared to 
respond to a major accident in the Arctic.
    Some great work has been done to plan for increased future 
operations in the Arctic. The problem is that the increased 
human presence is happening now. Seventy-three ships sailed 
through the Northwest Passage in 2013, up from just four in 
2007. And preparations for energy exploration are well 
underway. My colleagues on the MAB warn that today we do not 
have the communications equipment, navigation aids, and 
sufficient hardened-hull ships to respond to natural or manmade 
disasters in that fragile area or to protect our vital 
interests in the region.
    Finally, the MAB has found that projected climate changes 
will have three major impacts on the military: more demand, 
challenges to readiness, and new and harsher operating 
environments.
    We expect to see an increased demand for forces across the 
full spectrum of operations. Domestically, responses to extreme 
weather events and wildfires in the U.S. will increase demand 
for the National Guard and Reserves. The frequency, severity, 
and probability that these events may happen simultaneously 
will also likely increase demand for active-duty forces to 
provide defense support of civil authorities. This concerns 
us--
    Chairman Murray. Ms. Goodman, if you can wrap up, we want 
to make sure we have time for questions.
    Ms. Goodman. Sure. All right. In a leaner military, many of 
our capabilities reside in the Guard and Reserve, and if they 
are being used domestically, they are less available to respond 
to worldwide crises.
    In addition to more demand, this will itself stress 
readiness. Our bases will be increasingly at risk from the 
effects of climate change. Our bases are vulnerable to sea 
level rise and extreme weather, including drought and wildfire. 
These vulnerabilities were assessed in that recent GAO report.
    On the positive side, we have seen increased awareness of 
climate risks in communities around the U.S. and constructive 
planning underway in various regions--
    Chairman Murray. Ms. Goodman, I am going to have to have 
you wrap up.
    Ms. Goodman. Okay.
    Chairman Murray. We have two more witnesses and a lot of 
questions.
    Ms. Goodman. I will conclude by quoting the foreword to the 
CNA MAB report, written by former Secretary of Homeland 
Security Mike Chertoff and former Secretary of Defense Leon 
Panetta, our most important message for this Committee is that 
this is a bipartisan call to action. We make a compelling case 
that climate change is no longer a future threat. It is 
happening now. Actions to build resilience against the 
projected impacts of climate change are required today.
    Thank you.
    [The prepared statement of Ms. Goodman follows:] 
    
    [GRAPHIC] [TIFF OMITTED] 
    
    Chairman Murray. And I would remind everyone, all of your 
testimony is printed in the record. All the members have had a 
chance to see it as well, so, again, thank you.
    Dr. Montgomery?

STATEMENT OF W. DAVID MONTGOMERY, PH.D., SENIOR VICE PRESIDENT, 
                    NERA ECONOMIC CONSULTING

    Mr. Montgomery. Thank you, and thank you for your 
invitation to appear before the Committee today.
    I am senior vice president at NERA Economic Consulting. I 
have spent most of the past 25 years working on studies of 
climate change issues, ever since I was Assistant Director for 
Natural Resources and Commerce at CBO and we did a study of the 
economic impacts of the carbon tax. And I have continued with 
that kind of work since then. I was the principal lead author 
of the Second Assessment Report of the IPCC. I and my team have 
been part of the Integrated Assessment Modeling Consortium. We 
have published a number of studies on climate change issues.
    And what I would like to do today, as I tried to do when I 
appeared before the Committee for CBO, is to clarify some 
policy choices that I think the Budget Committee in particular 
faces in dealing with climate change.
    I do not think it is helpful to catalog all of the terrible 
things that climate change might do. The question for designing 
policy is what damages would be avoided by particular policy 
choices and at what cost, and that involves looking at real 
alternatives, including inaction.
    The example that I took in my testimony is something that 
is not exactly a fully fleshed out plan, but it is clearly 
stated and present. That is the Climate Action Plan announced 
by the President. Its goal is to reduce greenhouse gas 
emissions from the United States to 17 percent below 2005 
levels by 2020.
    It and the kind of actions of the past few years by the 
administration make it clear that the approach will all be 
regulatory. It will be command-and-control regulations from EPA 
on the electric power sector, fuel economy standards, renewable 
fuel standards on transportation, energy efficiency standards.
    I understand that Dr. Lomborg is going to talk about the 
potential costs and avoided damage from an ideal global policy. 
Well, we have found in our research that this kind of a 
regulatory approach would cost four times or more what that 
ideal policy would cost. And so the estimates that I have made 
for this hearing today are that by 2010 implementing the 
Climate Action Plan goals in this way would reduce Federal tax 
revenues by about $150 billion. It would cost households about 
$1,000 per year in real disposable income. It would probably 
involve a 7-percent or more increase in electricity prices. And 
I would be happy to supply the Committee with more details of 
this analysis.
    And that is not even taking into account the revenue 
effects of potentially extending tax breaks for renewable 
energy, potential impacts of loan guarantees on the budget, all 
of which are rationalized as part of climate policy.
    Now, what would the effects of this be? I have to say even 
the IPCC has concluded that it is not possible in the current 
state of the art to do a calculation that goes from changes in 
emissions to changes in global damages. It is just beyond the 
state of our empirical knowledge and modeling capability. 
Nevertheless, I think we can tell the difference between big 
numbers and small numbers.
    When I calculate the cumulative emission reduction that the 
U.S. would achieve through the Climate Action Plan achieving 
its goal versus cumulative global emissions over the next 50 
years, I see what we would achieve with the Climate Action Plan 
is about a 2-percent reduction in global cumulative emissions.
    That is assuming, and I think quite realistically, that 
China, Russia, and India continue on the course that they are 
already committed to for economic growth, in Russia's case 
territorial expansion and use of exports of fossil fuels to 
fund its adventurism.
    Anyway, this 2-percent change in global emissions would at 
most, based on the IPCC's own calculations, produce about a 
difference of a tenth of a degree in global average 
temperatures. It is beyond the capability of any model of 
impacts to tell the difference that that would make in the 
global impacts.
    So based on this, I think it is a very good idea to focus 
on adaptation, and the Climate Action Plan does. We do not face 
the obstacles that poor countries around the world face to 
adaptation, but we do have policies in place that increase our 
vulnerability. In particular, flood insurance, crop insurance, 
our method of disaster relief all create moral hazards, and 
they, I think, make a substantial contribution to what the IPCC 
itself recognizes as being the cause of the concern about 
weather events that we have been talking about for the last 15 
or 20 minutes.
    In its Fifth Assessment Report, the IPCC states, ``Economic 
losses due to extreme weather events have increased globally, 
mostly due to increase in wealth and exposure, with a possible 
influence of climate change (low confidence in attribution to 
climate change).''
    So it is the choices that we have made as private citizens 
to put our residences at risk. And if we are going to adapt 
effectively in the U.S., I think we need to pay careful 
attention to what is the proper role of Government and what is 
it that can be done best by the private sector and needs to be 
left to the private sector.
    I think that we can protect ourselves and our property 
quite well if we are not insulated by Government programs from 
the consequences of our choices. I live on the Chesapeake Bay, 
and I know the risks that I am taking there. And I get very 
cheap flood insurance from the Flood Insurance Program that I 
should pay a lot more for.
    And once this is sorted out, then I think there certainly 
are public goods. There is public infrastructure that only the 
Government can invest in efficiently. But I would simply here 
issue a warning that we are looking at things--we are looking 
at public investments in things like roads, public health, 
bridges and dams, flood protection, fire protection. All of 
these have their own constituencies, agencies that carry them 
out, and congressional appropriators who deal with them. And I 
would just suggesting it would be a very good role for the 
Budget Committee to look critically at these proposals for 
increased spending for adaptation to make sure that they are 
not just agency creep and really are focused on doing 
something.
    Thank you, and I will stop.
    [The prepared statement of Mr. Montgomery follows:]
    
    [GRAPHIC] [TIFF OMITTED] 
    
    Chairman Murray. Thank you very much.
    Dr. Lomborg.

  STATEMENT OF BJORN LOMBORG, ADJUNCT PROFESSOR AT COPENHAGEN 
BUSINESS SCHOOL AND DIRECTOR OF THE COPENHAGEN CONSENSUS CENTER

    Mr. Lomborg. Thank you very much, Chairman Murray and 
Honorable Members. I was asked and I think we were all asked to 
talk about the cost of inaction, and so I have tried to look at 
one of the global integrated models that actually tried to 
estimate and approximate an answer to your question. So let me 
just take you through.
    You know, first of all, as you point out, global warming is 
manmade; it is a long-term problem. Just to give you a sense of 
proportion, this particular model from Yale, the Nordhaus 
model, the so-called RICE model that indicates what is the cost 
for climate change, also for the U.S., indicates that the total 
cost of global warming to the U.S., discounted back until 
today, for all the next five centuries, is on the order of 1.2 
percent.
    Now, again, I think we should be very careful. This is an 
order of magnitude. There is no way this is the absolute 
correct number, but it is one model, and I actually argue why 
this is probably a slightly pessimistic model, so it does give 
us an impact.
    Also, let us just remember it is not just GDP, but it is 
impacts on a lot of other things, as we were told before. 
Agriculture, wetlands, storms, even catastrophic climate change 
is in included in this.
    So it gives us a good sense of what is the damage impact we 
are talking about. So I think it is important, perhaps first 
marker, to say this is a problem; it is not the end of the 
world. So let us try and remain calm, and also I think David 
made a good point in saying we need to think not just about, 
oh, there are all these terrible things happening, but we need 
to talk about what can we do.
    So the Committee asked me, What is the cost of inaction? 
This is likely the cost of inaction in this century. So over 
the next 100 years, this is a percentage cost of GDP for the 
U.S. This very clearly shows that by the end of the century, 
the cost will be about 1.8 percent of global--sorry, of U.S. 
GDP. That is a significant impact. That certainly would make a 
lot of say we should do something about it. But, of course, we 
need to think about what are the alternatives.
    Now, let me show you, because the beauty of these models is 
that you can actually try and see what are the ways that we can 
make smarter policies. A lot of us would like to believe that 
we can cut carbon emissions, and quite cheaply. But I would 
like to point out, as the Ranking Member also pointed out, 
there is also a cost to action. This is one graph, one data 
point, I think it summarizes very clearly that there is a 
strong correlation between more CO2 emissions and higher GDP 
growth. So we have--and this is in all the economic models. You 
can cut your CO2, but it has a cost.
    Now, it does not mean you go down to zero growth, but it 
means you have a lower growth. And I think this is very well 
established in the track record for all nations across time.
    So there is a cost. That is the cost the models indicate. 
So this was the cost of inaction I just showed you.
    If we manage to get the best possible policy for the entire 
world, we can get this action cost instead. Notice it is 
slightly higher in the first half of the century because we 
actually have to take action. But it also rewards us by having 
slightly fewer damages in the far future. It will actually 
overall be a net benefit.
    The problem, of course, is this requires pretty much 
everyone in the world to do all the smart things all the way 
through with no policy changes that have any negative 
externalities. That is probably fairly unrealistic.
    Let me show you another--and I describe it more in my 
paper--a more realistic option where the U.S., European Union, 
Japan, a few other of the rich countries take the lead and also 
do so in the way that the European Union--we have good data for 
how much that costs in the European Union. This is the cost, I 
would surmise, for realistic action.
    So my point here is simply to say there is a small space 
where you can actually achieve a net benefit if you make 
action, but there is a huge space where action can end up 
making everyone worse off. And that I think is the real danger 
we need to talk about.
    If I could just show you this as a summary point, this is 
the cost of inaction to climate change. The first bar, you see 
the $3.4 trillion it is going to cost. But the cost of action, 
as you can see, is both the remaining climate damage and the 
climate policy.
    If you look at the first one, you can actually achieve to 
cut the damage from $3.4 trillion to just $3.2 trillion. that 
would be wonderful, but it would require you to get China, 
India, Namibia, and every other country in the world to 
implement an efficient carbon tax in the next couple of years. 
In some ways, good luck with that. I do not think that is going 
to happen.
    And so we need to look at the fact that if we approach, for 
instance, a more realistic action, we could end up spending 
$7.6 trillion instead over this century, and that is really--
and let me just skip behind this. That is why I think we need 
to have a conversation about how do we fix global warming in 
the longer run.
    We do need to fix global warming in the longer run. I help 
run the Copenhagen Consensus where we bring together more than 
100 of the world's top economists, seven Nobel Laureates. We 
looked also on climate policy, and basically what we found was 
the solution cannot be to try to make fossil fuel so expensive 
nobody wants it. It is infeasible. Certainly we have seen that 
in the U.S. But it is also very, very hard to do in China and 
India and elsewhere. It is also bad economics.
    What we need to do is to make green energy so cheap that 
everyone will want it, and that happens to be about innovation. 
Yes, it is going to take more time. We would all love to get 
started today. But I think the real value of this exercise and 
looking at the cost and benefits is to recognize that there is 
not just costs from inaction, there are also costs from action. 
And we need to make sure that we make smart decisions, and that 
is, of course, up to you to hopefully make the smart decisions 
that will actually make us all better off.
    Thank you very much.
    [The prepared statement of Mr. Lomborg follows:]
    
    [GRAPHIC] [TIFF OMITTED] 
    
    Chairman Murray. Thank you very much to all of our 
witnesses today.
    We will now start a round of questions, and, Ms. Lubber, I 
wanted to start with you. You talked in your testimony about 
some of the issues that businesses and investors will face as a 
result of climate change. What reasons do companies that you 
work with cite when they decide to address climate change?
    Ms. Lubber. Companies and investors are averse to risk. I 
mean, risk, as we all know, is an intimidating factor for 
companies and for the investors who invest in them, when they 
look at the depletion of natural resources. Can you run a 
manufacturing facility if there is not enough water? From the 
west coast and certainly California, where this is not about 
models, it is not about the future, it is about today, 
companies, ranches, agricultural farms do not have enough 
water. They are seeing catastrophic risks, financial risks 
today to companies, to consumers, to shareholders, and to 
investors. So certainly physical risks is a big issue.
    For large landowners, for people who are worried about the 
impacts, whether you are Jones Lang LaSalle or any other large 
company, the fact of the matter is the impact on real estate 
matters, depending on where the real estate it.
    So it varies sector by sector, but some of the largest 
issues are physical risks, certainly some reputational risks, 
litigation risks.
    Chairman Murray. So they are looking at their bottom lines.
    Ms. Lubber. It is all about the bottom line. The investor 
network that we run is 105 investors, $13 trillion in assets 
under management, who say climate risk is an issue they need to 
address, they need to analyze, and they need to begin to invest 
taking advantage of. None of them are environmental. They may 
be environmentalists, but they have got shareholders, they go 
to work having to make money and beat the guy down the block, 
and they are focusing in a way different than we have ever seen 
before on climate risk as a financial risk.
    Chairman Murray. Thank you.
    Ms. Goodman, my home State of Washington is home to a lot 
of military installations that, as you know, are vital for our 
military operations, both in the Pacific and the Arctic 
regions. We have Naval Base Kitsap, which is the Nation's third 
largest naval base, by the way, and it is an essential element 
of the Nation's Strategic Defense Command and will need to 
address threats that are now posed by rising sea levels. And as 
you discussed, the Coast Guard's entire ice-breaking fleet and 
other key assets for operations are in the Polar region. Those 
are based in my State as well.
    Based on what you have seen at other facilities, what kind 
of resources will be needed to ensure these facilities and 
others across the Nation are protected from the increasing 
threat of climate change and are able to continue to support 
the men and women in uniform?
    Ms. Goodman. Thank you very much, Senator. The types of 
resources that will be needed across our military and our force 
structure will be, first and foremost, to maintain the vital 
and critical infrastructure such as those in Washington State, 
in Alabama, in Virginia, throughout all of our States, where we 
have critical military installations that are at risk from 
rising sea levels and extreme weather events. So we need to 
build in now those metrics that will allow us to sustain that 
military infrastructure, and that work is beginning to be 
underway. I have seen it begin to happen in the Pacific 
Northwest, in Virginia where there are efforts underway to 
develop the new standards that will support that 
infrastructure, and then new types of training as well to 
ensure that our men and women have the types of training they 
need, they can train under various and different conditions.
    There is a very rigorous adaptation effort underway in the 
Department of Defense today to identify those vulnerabilities. 
The GAO report cited some additional methods. The challenge is 
going to be ensuring in a very tight budget time that there are 
the resources needed to support that.
    Chairman Murray. Well, with the increased traffic and 
competition in the Arctic and with the variety of worsening 
threats actually in the Asia Pacific region, how critical, in 
your opinion, is it to maintain a strong presence at facilities 
like Naval Base Kitsap and Fairchild Air Force Base and Joint 
Base Lewis-McChord if the U.S. is going to be able to respond 
effectively to those challenges?
    Ms. Goodman. Well, it is vitally important that we maintain 
and augment our ability to respond to the changes of the Arctic 
region, first and foremost, by addressing navigation and 
communication needs; secondly, by looking at the types of 
infrastructure we will need there; and then, thirdly, by 
looking at the types of capability in terms of ice-hardened 
vessels and related capability that we will need in the future.
    Chairman Murray. So we need to maintain our presence there, 
and in order to do that, we need to deal with the effects of 
climate change soon.
    Ms. Goodman. Yes. Yes, Senator.
    Chairman Murray. Thank you.
    Senator Sessions?
    Senator Sessions. Thank you.
    Colleagues, I really think we are going to have to do a 
better job of dealing with science, and the three Democratic 
witnesses here continue to say things like ``Superstorm 
Sandy.'' Well, Sandy was not even a hurricane when it hit 
shore. It was a tropical storm. We have not had an increase in 
hurricanes. And I am going to ask some questions about it. I 
want to see the data that shows we have had an increase in 
hurricanes. We have had a decrease in Hurricane Sandy. While 
temperature projections were going up, they have not gone up. 
Tornadoes are not up. The IPCC says that droughts are not up 
worldwide and that the soil moisture content under the Palmer 
Index is better than it was previously.
    So I do not--what is that? Do you speak to speak?
    Senator Whitehouse. I was talking to Senator Stabenow, but 
I am happy to say what I said--
    Senator Sessions. All right. No, that is okay.
    Senator Whitehouse. --if you want me to say it to the 
group.
    Senator Sessions. So those are things I have not heard 
disputed, and so maybe Senator Whitehouse has data that would 
dispute those facts. So now we have to decide what our policy 
is going to be. We can ask a lot of serious questions about it, 
what we should do, what we can do, what will work, and what is 
cost-effective.
    Dr. Montgomery, I understood you to say that the model of 
action to deal with the threat of global warming is inefficient 
and could cost four times as much as it ought to cost. Is that 
what you indicated?
    Mr. Montgomery. Yes, it is, and that I think is something 
that we have found consistently in doing research on climate 
policy for many, many years, that as Dr. Lomborg said, the 
consensus among economists is that in order to achieve 
reductions, substantial reductions in greenhouse gas emissions, 
it takes a price on carbon that applies to every way that 
carbon dioxide is generated, and that means basically a tax on 
fossil fuels; that moving from such a politically infeasible 
approach to a regulatory program will increase the cost by 
ranging from, you know, several times to orders of magnitude, 
depending on how well the program is developed. We see this in 
California, where studies have shown that California's reliance 
on ``complementary measures,'' as they call them, to achieve 90 
percent of the reductions in their Climate Action Plan have 
substantially increased the cost over what it would have been 
if they had gone with a cap-and-trade program. And that is just 
talking about implementing in the United States. If we talk 
about doing something worldwide, once again, it is--you know, 
we have always used the phrase, ``where flexibility.'' Unless 
everyone is involved, every source of emissions, trying to 
cut--do something about climate change with either narrowly 
focused regulations or by focusing just on a couple of 
countries multiplies the cost by four times or more.
    Senator Sessions. Dr. Lomborg, you produced a chart that 
shows the action that we take would have a minimal impact. And 
using models that are pessimistic, which by that I think you 
mean that more severe projections in the future than many think 
are likely to occur, that is pretty interesting to me. I would 
ask you to comment a little bit more about that, and also as to 
whether or not you think the United States is more or less 
vulnerable than other places in the world if climate change 
continues as projected.
    Mr. Lomborg. Well, to answer your last question first, 
there is no doubt that rich countries are less vulnerable, and 
the U.S. is probably also less vulnerable. For instance, much 
of Southern Europe is more vulnerable; Australia is more 
vulnerable; and very clearly, most poor nations are much, much 
more vulnerable to climate change. So you actually have, as I 
also indicated, the global cost of global warming is probably 
on the order of 1.4 percent of GDP; whereas, the cost for the 
U.S. is 1.2. So you are less vulnerable.
    If we look at the costs of action and inaction, it really 
is a question--as David also pointed out, it is a question of 
realizing we need to get very careful legislation. And in some 
ways, we can use the European Union as a good example of how 
not to do this.
    The European Union obviously has large amounts of leg-- I 
cannot say that word, sorry. Leg--sorry about that. Yeah, that 
approach. But they have--but, clearly, they are not as 
integrated as the U.S., and yet they have managed to make an 
incredibly inefficient climate program. Fundamentally, instead 
of having one carbon tax across all areas, they have at least 
29 different carbon taxes, and that still only covers quite a 
few of the sectors. So you have a number of other ways that you 
have, so you probably have hundreds, maybe thousands of 
different carbon taxes. That leads to huge inefficiencies 
because obviously where you have high carbon taxes, you cut 
more, and where you have low carbon taxes or negative carbon 
taxes, you cut a lot less, or you even start to emit more.
    So the reality here is the costs are needlessly expensive. 
We have good estimates that indicate the European Union's costs 
are at least twice what they need to be. And that goes back to 
the point of realizing between action and inaction there is a 
very small gap where you can actually make good policy and 
achieve a lower outcome where you can reduce climate impact so 
much more that the increased costs of the policy will not 
outweigh that entirely. But that requires all of you to be 
really, really good. And I would urge you, if you want to take 
a look, the OECD has done a study for all of their member 
countries looking at all of the energy policies in all of these 
areas and looking at what is the implicit carbon tax on all of 
these areas, and basically all countries, including the U.S., 
have incredibly varying carbon taxes across all these different 
areas.
    So we are fundamentally very, very inefficient, and it is 
very hard to get it right.
    Senator Sessions. Madam Chairman, thank you for the 
hearing. Colleagues, I think Dr. Lomborg's paper and that of 
Dr. Montgomery would be valuable to us to study. If we are 
going to enter this field, we have got to know what it is going 
to cost and how best to achieve the goals. Dr. Montgomery noted 
his background. Mr. Lomborg is cited as Time Magazine's one of 
the 100 Most Influential People in the World. So we are glad 
that you are here. Esquire Magazine has you as one of the 75 
Most Influential People and 50 People Most Likely to Save the 
Planet by the U.K. Guardian. And so you, Dr. Lomborg, have been 
an international voice of, I think, common sense and wisdom on 
these issues, and thank you for coming to the United States 
today to participate at this hearing.
    Chairman Murray. Thank you.
    Senator Stabenow?
    Senator Stabenow. Thank you, Madam Chair, and thank you to 
all the witnesses. This is an incredibly important topic to all 
of us, obviously in the short run and in the long run.
    Let me just start by--I do not know where to start, 
actually, Madam Chair. There are so many things here.
    Let me just start by saying that if 97 percent of the 
climate scientists surveyed in the proceedings of the National 
Academy of Sciences agreed that climate change is real, 
probably real. If 97 percent of the doctors said I was sick, I 
would probably pay attention to that. So I think that we need 
to start from that knowing there may be some variations on how 
we got here.
    As Chair of the Agriculture, Nutrition, and Forestry 
Committee, I also want to start by just saying that, Ms. 
Lubber, you are talking my song here about what is happening in 
agriculture. We just wrote a 5-year farm bill, and the very 
first thing we had to do was use the permanent Livestock 
Disaster Assistance Program because of the droughts all over 
the country. And we have forestry provisions to look long term 
at preventing forest fires and dealing with disease. We are 
stealing all the money from those preventative efforts to fund 
fires. And so there is a huge cost.
    I do have to say, Dr. Montgomery, I was very surprised to 
hear you say that things like crop insurance have caused the 
problem. You could also say farming has caused the problem. If 
we did not eat, did not farm, we would not need to worry about 
these things. But crop insurance is there to make sure we 
actually have the safest, most affordable, most reliable food 
supply in the world, which we do, and the costs, yes, are going 
up. But they are going up because-- not that we have never had 
storms, but as we heard testimony in the Agriculture Committee, 
and we now have a USDA Climate Office we never used to have 
before because of impact on agriculture and forestry, but what 
we heard is it is more intense, it is more volatile, it is 
longer term. It is not that we have never had storms, but the 
storms are different now and more intense and causing more 
damage.
    But I want to take my time to ask a question regarding how 
we deal with this. I mean, we are dealing in the Agriculture 
Committee with paying for crises, which we are doing every day 
now, and we better all care about that if we are care about 
food for our families and the food industry, which is a huge 
job creator. Sixteen million people work because of 
agriculture.
    But let us say that we just put aside the debate on climate 
change and just talk about how to create jobs, how to move 
forward, clean energy because it would create jobs. And I guess 
I would ask Ms. Lubber about that, and first say this: We have 
had in place since at least 1916 permanent incentives for the 
oil industry, oil and gas industry, embedded in the Tax Code. 
It worked well. Folks say do not pick winners and losers. We 
picked a winner, and they won, and so for 100 years we have 
given tax incentives at, for 30 years now, for the last 30 
years, about $166 billion after adjusted for inflation that we 
have invested in the fossil fuel industry. And then we now go 
to the fact that DBL Investors Report says that Federal 
spending on oil in the first 15 years of deployment was five 
times greater than what we are spending on renewables, and 
certainly renewables are stop-start, stop-start.
    So could you give us more detail about the investments you 
see businesses making in new energy technologies, energy 
efficiency, why on its own--I should say, by the way, I say so 
many times there are 8,000 parts in a big wind turbine. 
Somebody has got to make every single one of those. That is 
manufacturing jobs. We, by the way, can do that in Michigan. 
But why is it from an economic standpoint important that we get 
these tax incentives right, with or without talking about 
climate change?
    Ms. Lubber. Right. Well, I do think markets and the economy 
respond to honest pricing signals, so starting with the pricing 
signals and then getting to the fossil fuels versus renewables.
    The pricing signals right now are distorted. Fossil fuels 
have had huge subsidies for decades and decades, and every time 
we want to consider the wind energy tax credit or the 
production tax credit, we renew it every year--some years we 
do, some years we do not. Every person in that industry says 
the stop and the start, the not knowing is there going to be a 
tax credit or not, has hurt them. Now, despite that we are 
seeing progress. But without question, we need to either cut 
back fossil fuel subsidies or certainly equalize them with 
renewable energy.
    The second pricing signal--and I am not here today to talk 
about a price on carbon, but the reality is when you price 
something appropriately, capital markets work beautifully. And 
if things are priced inappropriately, they do not. We know that 
carbon pollution, regardless of whether we think it is 99 
percent or 97 percent likely, carbon pollution has a price, an 
enormous price to society. We have talked about that today. But 
we do not put a price on carbon pollution. When something is 
free--carbon pollution is--you get more of it. So we are seeing 
carbon emissions in different parts of the world go up. So I do 
think we have got to get those pricing signals and fossil fuels 
right.
    When we look at now, right now, $860 billion is going into 
looking for new fossil fuels, fossil fuels that we may never be 
able to burn. There may be stranded costs because we are going 
to stay at a 2-degree world, we already have more fossil fuels 
mined than we will ever be able to burn. But we are about to 
invest $860 billion a year into more fossil fuels, much of 
which will become stranded if we do not stop and think.
    So what we are seeing, though, which is the good news side 
of it, the International Energy Association says we need $1 
trillion in investments in renewables by the year 2030. That 
means a half a trillion by 2020. Right now we are at a quarter 
of a trillion dollars of investments in renewable energy, and 
that is growing. Solar energy is now cost competitive, price 
competitive. It is growing enormously all around the country. 
Wind energy is growing. And let us look at who is producing it. 
It is Siemens, it is General Electric. These are not anymore 
only the small, little shops in somebody's garage.
    And whether it is a small solar company, though, or a 
large, the installations are local. They are in our country. 
They are jobs that are here on the ground. They are not jobs in 
other parts of the world, and they are productive.
    I sit on an advisory board to Jeff Immelt, to GE. The 
largest producing revenue stream at GE is Ecomagination, their 
line of products that are about renewable energy or about 
greener technology.
    So there is growth. We need to see more of it. We will see 
more of it if we adjust the subsidies and we get the market 
signals correct. If we continue to say carbon pollution is free 
or price it as if it is free, free things, we get lots more of 
it. We need to get less of it.
    Chairman Murray. Thank you.
    Senator Whitehouse?
    Senator Whitehouse. Thank you, Chairman.
    Mr. Lomborg--first, one question. It appears to me that 
everybody on this panel agrees that climate change is real, it 
is really happening, and it relates to carbon emissions. Is 
that true across the board of all five of you? Yes? Okay. Very 
good. That is a start. That is a start.
    Mr. Lomborg, let me ask you to look at Figure 1 in your 
testimony, which is a graph that shows, even using your 
numbers, that by 2070, the cost of global warming turns 
negative, and my question to you is: On that graph, once you 
get past 2070, there is a very apparent trajectory of that line 
downward, and then the graph ends at 2100. What is your 
expectation for the continued trajectory of that graph further?
    Mr. Lomborg. It will definitely go down and further down. 
We do not--
    Senator Whitehouse. At a similar rate, do you think, 
roughly? Do you have any reason to think it will vary from that 
angle of descent?
    Mr. Lomborg. Well, it depends a lot on the projections of 
what are we going to do in the 22nd and 23rd century, which is 
probably very, very hard to make any, you know, reasonable 
estimates on. But that is obviously why I say we do need to fix 
global warming. The question is not whether we should do it. 
The question is whether we should do it now or whether we 
should do it with better technology.
    Senator Whitehouse. And, of course, what you are 
representing there is a net harm.
    Mr. Lomborg. Yes, there is the net harm--
    Senator Whitehouse. So a farmer in Siberia will do better 
as things get warmer up there. Africa, Asia, places like that, 
will suffer a great deal. Correct?
    Mr. Lomborg. Yes.
    Senator Whitehouse. Turning to your Figure 4, there is a 
lower line, a curve that you describe as the cost of 
unavoidable global warming. I assume that is the cost we have 
already baked in by not having taken action already. Is that 
correct?
    Mr. Lomborg. Yes.
    Senator Whitehouse. And then you have a higher cost, which 
is the cost of unmitigated global warming, if we do nothing. 
And at 2100 those two graphs end. It is denominated in 
percentage of GDP. Could you give me a U.S. dollar equivalent 
value for the gap between the bottom line and the top line at 
2100?
    Mr. Lomborg. I am trying to think. It is like 1.6, 1.8 
percent, and the U.S. GDP is about $100 trillion. So it is a 
little less than $2 trillion.
    Senator Whitehouse. A little under $2 trillion, all right. 
And then similarly, in Figure 6, there is a cost- benefit curve 
on the difference between an optimal climate policy cost and 
benefit, and by 2100 would that be the same number if you were 
to translate the gap between your cost line and your benefit 
line into a U.S. dollar equivalent--
    Mr. Lomborg. No, not at all, because that is one of the 
points, that--
    Senator Whitehouse. So what would that number be?
    Mr. Lomborg. It would be about--and, again, I am just 
making this on the fly, but about $400 billion.
    Senator Whitehouse. $400 billion.
    Mr. Lomborg. Because most of the damage will still be 
there.
    Senator Whitehouse. And we are not exactly certain how this 
unprecedented change to our atmosphere and oceans is going to 
work out entirely, are we?
    Mr. Lomborg. You are asking me whether these numbers are 
absolutely true? No, of course they are not. It is a model.
    Senator Whitehouse. In some of the hypotheticals as 
scientists look forward, there is a credible view that in the 
out-years there are really actually potentially catastrophic 
effects, are there not?
    Mr. Lomborg. Well, there is a lot of conversation on the 
catastrophic impact, and this has actually been incorporated in 
an economic perspective into this model.
    Senator Whitehouse. That is my question, because when you 
incorporate a catastrophe for humanity in out-years, do you 
discount that?
    Mr. Lomborg. You both discount it and you also look at what 
is the probability. And can I just--
    Senator Whitehouse. No, stop, because you have gotten me 
right to the point that I want to get to, which is the question 
that I have. An American family living in this country in 2114, 
let us say, 100 years from now, if they are experiencing the 
effects of climate change and if it is a harsh effect, will 
they be experiencing a discounted effect or they will be 
experiencing the full-on effect that we will have caused them?
    Mr. Lomborg. They will be experiencing full-on effect, but, 
of course, they will also be experiencing the benefits of all 
the technology and all of the leftovers that we have left them 
with, the technology that will make them--you know, we will 
have--
    Senator Whitehouse. Do you agree--
    Mr. Lomborg. --$100 trillion--
    Senator Whitehouse. Do you agree that there is at least a 
moral choice being made when we discount harm to future--there 
is something selfish about discounting that because we are not 
going to be around for it. It is going to be other people 
suffering--
    Mr. Lomborg. Oh, we do that all the time. I believe the 
U.S. has a very, very high debt, which, of course, is a very 
explicit way of saying we do not care all that much about the 
people who are going to be paying that debt later on.
    Senator Whitehouse. It is a little bit different when you 
are dealing with a financial characteristic that you can invest 
against versus a change in the very operation of the planet's 
oceans and atmosphere, no?
    Mr. Lomborg. Unless we are talking about something that 
basically eradicates humanity, I would say, you know, we have 
looked and we have good models, for instance, on what is the 
impact, for instance, of a 5-meter sea level rise. If I could 
just give you another example--
    Senator Whitehouse. My time has expired, so I will have to 
let the other Senators take on the rest of the time. Thank you.
    Mr. Lomborg. Madam Chairman, can I just make a very short--
    Chairman Murray. If you can do it very short, because we 
have a number of Senators who are waiting.
    Mr. Lomborg. Professor Nordhaus has actually looked at a 
similar issue where we know that there is a chance that 
asteroids are going to hit us, and we know what is the cost of 
ensuring that we can find another 9 percent of those asteroids. 
We have not paid that price. So we have a very clear example. 
We pay for finding 90 percent, but we do not want to pay for 
finding 99 percent. That is an indication of how much we care 
about the planet.
    Senator Whitehouse. Not only an international celebrity, 
but an expert on asteroids. I am impressed.
    Chairman Murray. Senator Johnson.
    Senator Johnson. Thank you, Madam Chair.
    I am certainly somebody on this Committee that has tried to 
look out 30 years in terms of our own debt and deficit, and 
with a fair amount of humility, realizing even 30 years is 
pretty hard to predict. And I also come from the State of 
Wisconsin, though, and when we are looking at literally 100 
years out and beyond in terms of what is going to be the mean 
temperature, you know, what is climate going to look like, I 
think it is just kind of hard to predict, and I am not buying 
into the consensus myself.
    What I would like to do is I would like to just take a look 
at what we know what has happened in the past. And we did get 
this slide up here for me. I appreciate that, the Budget staff. 
This is a chart, a graph showing temperature differences from 
the Vostok ice core data description, conducted in 1999, which 
shows over the last 422,000 year-- and that is what we are 
talking about here, geologic time. I am not a scientist. I am 
not quite sure how they do this. They have got their methods. I 
believe this has been pretty well verified that this is about 
as good as we can do, trying to determine this. But whether you 
buy the complete accuracy, it shows one, two, three, four--and 
we are in the fifth cycle of mean temperature change, somewhere 
in excess of 15 degrees over the last 422,000 years.
    I mentioned I am from Wisconsin. Twenty-three thousand 
years ago, Wisconsin was covered by a glacier, kind of 
estimates somewhere in the 5,000 to 6,000 feet thick--23,000 
years ago.
    Now, something caused that glacier to recede. I know there 
were men back then. I do not think there were enough men 
building campfires to create fossil fuel CO2 emissions to cause 
it. Something else caused that. I think this is just common 
sense.
    Now, if you take a look at this chart, we are up on an 
upswing over this 422,000-year period. I guess I am just 
asking, anybody else ask themselves this question: What caused 
this? I know there are a number of theories. I know everybody 
kind of raised their hand and said, oh, this is for sure 
manmade. Again, I will not doubt that--I will not deny that man 
has an effect on our environment. But what caused this?
    And with these types of long-term climate change trends--I 
get accused of being a climate change denier. I am no denier. I 
fully acknowledge we have had climate change over geologic 
time. Other things are at play here.
    So I will just kind of go down the line. What is your 
response to this type of chart, these types of long-term facts? 
Not trying to project out 100 years but really taking a look at 
the last 422,000 years, we have seen some pretty dramatic 
changes in climate. Let us start at the very end there.
    Ms. Lubber. Sure, thank you. And I am on my way to 
Wisconsin following this testimony to the SC Johnson Wingspread 
Conference Center, so I will be in your State.
    As I said at the beginning, I am a lawyer; I am not a 
scientist. I am cognizant of the 99 percent of the scientists 
who say that climate change is now, it is manmade, it is 
happening, and we are seeing increased changes in our 
climatic--
    Senator Johnson. Okay. Is there anybody here with a little 
bit more of a scientific background, or is it all pretty much--
sir?
    Mr. Montgomery. I am not a scientist, but I have been 
participating in work--
    Senator Johnson. Turn your microphone on.
    Mr. Montgomery. I have been participating in the work of 
the integrated assessment modeling community and talking to 
effects researchers and the MIT climate scientists for a long 
time. I think what I would say is, yes, there is general 
agreement among climate scientists that anthropogenic emissions 
affect greenhouse gas concentrations in the atmosphere and that 
affects temperature.
    I think there is a lot less agreement about whether what we 
are observing--and I think there is general agreement, yes, 
what we are observing today is probably associated with 
manmade--anthropogenic emissions. But I think if you got the 
climate scientists to be honest about it, they would all agree 
that but right now it is making very little difference. And I 
think if you eyeball the data, you see that. It is still very 
hard to distinguish the signal from the noise.
    Senator Johnson. That is what--I am trying to just put 
things in perspective here. I mean, over geologic time, yeah, 
we have had climate change. Glaciers have receded. Water levels 
have risen. And that is always going to happen whether--you 
know, it is going to happen long past man, the time of man on 
Earth. Isn't that true? Okay. That is all the questions I have. 
Thank you.
    Chairman Murray. Senator King.
    Senator King. Senator Johnson, I will see your 422,000 and 
raise you a million. I am asking my staff guy to bring over to 
you--I do not have the chart that you have, but the answer to 
your question, why does it change? Over the last million years, 
as you will see on the chart that I am about to give you, it is 
almost an exact correlation with levels of CO2 in the 
atmosphere. CO2 goes up, temperature goes up. CO2 goes down, 
temperature goes down.
    On the other side of the chart, what you see is the last 
million years of CO2, and, yes, CO2 over the last million years 
has varied widely, just as your chart does, up and down, for 
all kinds of reasons. It was not people making campfires. It 
was probably volcanoes and all other kinds of natural forces 
that were going on.
    But the real point is that in about 1860 that variation 
that you see was always between about 200 and 300 parts per 
million of CO2. In 1860, it took off, and this summer, for the 
first time in 3 million years, it reached 400 parts per 
million.
    And if, in fact, the correlation between CO2 and 
temperature holds that your chart demonstrates over into the 
short-term future, we are in a crisis situation. It is all 
about CO2 and the relationship with temperature, and I think 
the data is pretty clear. Yes, there has been a variation, but 
about the time we started burning fossil fuels in large 
quantities, it goes up very dramatically, from a top level 
prior of about 320 parts per million to this past spring 400. 
That is the dig deal.
    And I think Mr. Lomborg's testimony is fascinating, and I 
think it really gets to the question of inaction versus action. 
And to me it comes down to a formula. Divide the cost of 
inaction times some kind of X factor for risk divided by the 
cost of action. If the result of that formula is 1.0 or better, 
then we need to act.
    You would argue that it is below 1.0, at least under 
various considerations. And, of course, the big question here 
is: What is the rest of the world going to do?
    I have a hard time telling people in Maine they have got to 
pay $6 for a gallon of gas if China and India do nothing.
    On the other hand, the question is: What is going to 
provoke them to do something? And I am sure that our doing 
nothing is not going to provoke them to do something. This is a 
global issue, and it has to be dealt with on a global basis.
    But somebody has got to lead, and it seems to me, as you 
have pointed out, we are the wealthiest country in the world; 
we are in the best position to lead, but not be stupid. I think 
your analysis is very interesting.
    There is another factor, though, and that is, the risk of 
catastrophic climate change. The scientists at the University 
of Maine that study this, we have a school, a division studying 
climate change, studying Greenland ice cores. The last time I 
was there, they used a word that scared me. The word was 
``abrupt.'' And apparently in history things like the Ice Ages 
did not start--I always thought it took thousands and thousands 
of years. In fact, it took decades. And if we have abrupt 
climate change that is triggered by this extraordinary rise in 
CO2 that does something like, for example, the melting of the 
Greenland ice cap and that changed the route of the Gulf 
Stream, your country would be uninhabitable along with Britain, 
Scotland, and all the rest of Scandinavia. That is what worries 
me, is the X factor.
    And I guess, Mr. Montgomery, here is my question: Do have 
homeowners' insurance on that house at the Chesapeake?
    Mr. Montgomery. Yes, I do.
    Senator King. And what do you reckon the risk of your home 
burning down is? Once every how many years? A hundred years? 
Fifty years?
    Mr. Montgomery. My wife worries about it more because she 
actually had her home burn down around her when she was a 
little girl. But it is--I think that the insurance is 
actuarially worth it. It covers enough risk.
    Senator King. But it is a pretty remote risk, but you are 
paying $500 to $1,000 a year--and I do not know what your GDP 
is, but $1,000 is probably a measurable percentage of it--to 
ensure against a remote but yet enormously consequential risk. 
It seems to me that is the analysis that we have to go through 
here.
    Dr. Lomborg, your thinking?
    Mr. Lomborg. You are absolutely right. The question and the 
crucial part of that analogy is you have to actually get your 
money back. That is what you do from the home insurance. But we 
are actually more likely--
    Senator King. But you never get it back if your home does 
not burn down.
    Mr. Lomborg. No, no, no. But you do get it back if it does 
burn down, and, unfortunately, the risk insurance--it is better 
seeing this as a risk reduction because there is nothing paying 
back. We are simply reducing the risk of, for instance, 
catastrophic climate change if we make more action. So we are 
reducing the risk, but we are not actually getting a premium. 
There is nothing, you know, paying back the Earth if it burns, 
if you will.
    Senator King. But I guess--we know that there are costs, 
but we also know that there are risks. And I guess the question 
is: Who--don't you sometimes make expenditures in the short 
term to avoid a drastic, unlikely but very dire consequences 
risk rather than hope that that does not happen? I mean, it 
seems to me that is the calculus. And, again, I come back to my 
failure. It is cost of action divided by cost of inaction. But 
you have got to multiply the cost of inaction by this X factor 
for catastrophic risk.
    Mr. Lomborg. Of course. And if you will allow me to 
trivialize the metaphor a little bit, my problem is that there 
is a real risk we will end up paying more than what the house 
is worth, but actually to get less than the house back if it 
burns.
    Senator King. And I think that is a very valid point, and 
what you are saying is--and I think you used this term-- we 
have to be smart about this.
    Mr. Lomborg. Yes, yes.
    Senator King. We cannot just throw the kitchen sink at it. 
We have got to really think about what are the costs and the 
benefits.
    Mr. Lomborg. And, Senator, could I just briefly point out, 
I think the U.S. has one thing to really show the Chinese and 
everybody else, because you have actually invested over the 
last 30 years about $10 billion in fracking technology, and 
fracking technology--now, let us leave aside all the other 
issues that I am sure we can come up and talk about. It has 
dramatically reduced U.S. carbon emissions. And it is 
probably--we estimated in 2012 it reduced about 300 megatons of 
CO2. Remember, all the solar and wind in the entire world has 
cut 275 megatons. So you have actually cut more with fracking.
    So, you know, the short-term solution over the next 10, 15 
years and the only realistic way, if we could get China and 
Argentina and many other countries to frack, they would switch 
from coal to gas, and we would see a dramatic reduction in CO2.
    Senator King. I am so glad you said that because--let the 
record show that hydrofracking was invented using Federal 
subsidies and Federal loan guarantees, and it is, as you say, a 
dramatic benefit both for our economy and our environment. So 
thank you very much for your testimony, and I just want to end 
by saying I thought Senator Whitehouse made a very important 
point. We have got agreement here that climate change is real 
and that people have something to do with it. That is progress. 
Now we are arguing about how to fix it. I am all in on that 
discussion.
    Thank you very much, all of you.
    Chairman Murray. Thank you.
    Senator Kaine?
    Senator Kaine. Thank you, Madam Chairwoman, and to the 
witnesses, and I want to pick up with the same point. We so 
rarely have a hearing in this place where the majority and 
minority witnesses agree on an important threshold question, 
especially one that is as controversial on the floor of this 
body as this question is. But the five of you have basically 
agreed that climate change is real, that it is a legitimate 
problem that needs to be solved, that it is significantly 
manmade. I mean, it is just not that hard. It is just not that 
hard to say it. And I am so happy that the witnesses were 
willing to come and agree on that basic proposition, because we 
cannot even have a meaningful debate about that. People will 
not even use the phrase ``climate change'' on the floor of this 
body.
    Now, questions remain: How serious? What to do about it? 
Over what period of time? But what you have just said is what 
my constituents believe. Virginians are science people. The 
person we most admire, the Virginian we most admire was the 
preeminent scientist of his day--Thomas Jefferson. We are pro-
science people. And those who attempt to argue against the 
scientific consensus and pretend that mankind does not have 
anything to do with these climate issues, they do not get very 
far in my Commonwealth. And they should not get far here.
    And so I am really refreshed to hear--I mean, when--I am 
just looking at Dr. Montgomery's testimony. When one of the 
minority witnesses says, page 2, ``In the past few years I have 
taken a particular interest in the relative merits of 
mitigation and adaptation as responses to climate change risks, 
and in particular in the role of political and economic freedom 
in making it possible for poor countries to grow economically 
and at the same time to reduce their carbon intensity and 
become more resilient in adapting to climate change.'' You are 
working with poor countries to help them be less carbon 
intense. Good on you. To be more resilient to climate change, 
good on you. I hope we have these kind of witnesses, Madam 
Chairman, at every hearing we have.
    So the question is: What do we do? What do we do?
    Dr. Lomborg, I am going to start with you. I think the last 
bullet on your last slide was basically kind of ``Make green 
cheap,'' right? Figure out--and I think you are a pro- 
innovation, pro-technology guy. And I understand from your 
answer to Senator King that maybe you are saying natural gas to 
do fuel switching is the short-term, next-20-year strategy, 
while we continue to plow investments into lower carbon--either 
low- or non-carbon energy alternatives. Is that essentially 
your pitch?
    Mr. Lomborg. Yes, the fundamental point is if we could make 
solar and wind so cheap everybody wanted them, you know, we 
would get China and India to do it in a day.
    Senator Kaine. And is there any reason to doubt that solar 
and wind will follow other--the computer example, other kinds 
of technological examples? When they are new technologies 
battling against mature incumbent technologies, their per unit 
cost will be higher, but the more we deploy the investments and 
learn from them and then make refinements and adjustments, the 
gap in per unit cost drops. Is there any reason to doubt that 
the same thing would happen with wind and solar, that the costs 
of these energies, these low- and no-carbon energies, will 
continue to come down?
    Mr. Lomborg. There are two caveats to that argument. One is 
if you take the computer analogy, it is a question of when do 
you subsidize it. Remember, the computer--we subsidized the 
research and development for a very long time. We did not go 
out and say everybody in America should have a computer in 
1960. Sure, it would have made it a lot cheaper, but it would 
probably have been phenomenally costly to do that, to produce 
all those computers. So we bought a few of them, and we put a 
lot of money into research and development.
    The second part is to remember--
    Senator Kaine. So but the notion of a subsidy to some 
degree, that was necessary, doing the subsidy the--
    Mr. Lomborg. Yes, but the subsidy was to the research.
    Senator Kaine. To the research.
    Mr. Lomborg. But the point is to make them efficient so 
that--
    Senator Kaine. So we should not be cutting research budgets 
if we are going to be going after.
    Mr. Lomborg. No. The second part is that there is a 
significant problem with solar and wind and other that they are 
intermitting.
    Senator Kaine. Episodic.
    Mr. Lomborg. And so basically we need to have much more 
battery technology if solar and wind is going to cover a large 
proportion. Remember, right now--and this I think is some of 
the numbers that we do not generally recognize. The world gets 
0.25 percent of its energy from wind. The rich world gets 0.7 
percent of its energy from wind. Very, very low proportions. 
Even the International Energy--
    Senator Kaine. But I think I heard a stat that about 35 
percent of the power added to the grid in the United States 
since 2005 has been wind. So it was not an technology that was 
really used. It still as a proportion of the total is pretty 
small, but it is coming on quickly.
    Mr. Lomborg. It definitely is rising, but just to give you 
a sense of proportion, the International Energy Agency 
estimates that by 2035, which very optimistic assumptions, we 
will get like 3 or maybe even 4 percent of our energy from wind 
and solar.
    Senator Kaine. I want to ask Dr. Montgomery a question. You 
mentioned the Chesapeake Bay, so I just cannot resist since I 
am a lover of the bay. So you are focusing on--we all have a 
consensus here, but what is the right way to do it, and you say 
adaptation rather than mitigation, or at least that may be the 
most cost-effective way. How would you restructure the Flood 
Insurance Program?
    Mr. Montgomery. I do not have a specific design for it, but 
I think that the first thing would be to make the insurance 
premiums actuarially fair; that is, the more we think climate 
change is going to increase the severity of storms, the higher 
the premiums get, so that people make--
    Senator Kaine. Make everybody who lives in a floodplain, 
even though those floodplain maps are dramatically expanding, 
pay the full freight.
    Mr. Montgomery. Pay the full freight.
    Senator Kaine. That would be your proposal.
    Mr. Montgomery. That would be--I mean, I am sure other 
things need to be done, but that would be the basic principle.
    Senator Kaine. You talked about politically infeasible on 
some of the other things up there. I think making a whole lot 
of people, including, you know, poor people who live in places 
that were not floodplains when they bought the house, suddenly 
bear the full freight of flood insurance. That is as 
politically infeasible as a carbon tax. We have got a lot of 
tough choices coming up here.
    Senator Whitehouse. More so, say some of us.
    Senator Kaine. All right. Thanks. Great testimony.
    Thank you, Madam Chair.
    Chairman Murray. Senator Coons.
    Senator Coons. Thank you, Madam Chair. Thank you for the 
opportunity to have a robust and hopefully constructive 
conversation on this difficult issue, but one that really does 
have an impact on the long-term Federal budget, on State and 
county and local budgets, on family budgets, on our national 
security, and one that we really on the Budget Committee should 
be engaging in and taking seriously.
    On the train down this morning from Delaware, I got a 
chance to talk to my Governor, Jack Markell, who is testifying 
at one of the EPA public hearings about the new Climate Action 
Plan today. He and I represent the lowest mean elevation State 
in America, so while Florida and Louisiana certainly have their 
exposures, we are one of the first to go as sea level rise 
becomes a reality. And Delaware has invested a great deal in 
actually mapping out and understanding what the impacts of 
climate change may well be to our State, and under some 
scenarios, rising sea levels will submerge more than 10 percent 
of our State by the end of this century. This is not hundreds 
of years away or--it is, frankly, within the lifetime of my 
children, and the areas that will be submerged are really 
significant because--since they are along our major rivers and 
at the center of our major cities, they are concentrated areas 
of major economic impact.
    If I could, to Director Gomez, to what extent do you think 
it is important for the Federal Government to help States and 
localities model and predict and prepare for what are, I think, 
likely significant impacts on their economy, on their 
infrastructure? We can get to the issues of sort of global 
security and competition later. I used to be a county 
executive. Our Governor and I spent a lot of time hardening our 
State against incidents like Superstorm Sandy. Here on the 
Budget and Appropriations Committees, I have been very 
concerned about our coastline. What kind of role do you think 
the Federal Government ought to have in helping prepare for 
these impacts?
    Mr. Gomez. Sure. Thank you for that question. So that is a 
very important thing to make sure that it happens. There are 
about $300 billion that are invested annually across the 
country on infrastructure. About 25 percent of that is Federal 
dollars. But it is very important for the Federal Government to 
provide technical assistance to those local and State 
decisionmakers that are making decisions about how to build 
that bridge, for example, or that seawall.
    The Federal Government produces a lot of information. GAO 
currently has ongoing work looking at ways in which the 
Government can organize itself in terms of data that can be 
useful to these communities. So I would say--and that is also 
an area that we have in our high-risk designation, the need for 
good technical assistance, not only to provide it but to 
translate it to these officials who may not know exactly how to 
use the information or where the find it. But also important is 
for these officials, local and State officials, to start 
integrating and using the information in their planning 
processes so they can build resilience into their structures, 
whether it is maintaining them or building new structures.
    Senator Coons. That is right. In my county government role, 
one of the challenges we faced was the future expense of health 
care and pension plans. One of the greatest challenges we face 
in our Federal budget is the future growth in entitlement 
costs. And as we have often debated around this hearing room, 
the sooner we begin to tackle long-term costs and the rate of 
growth in costs, the easier the difficult choices will be.
    Isn't there a clear parallel here with climate change, the 
sooner that State and local government, the Federal Government 
gets serious about tackling this issue, the less burdensome and 
difficult the long-term consequences will be of those changes 
in direction?
    Mr. Gomez. Again, in our high-risk designation, it is very 
much focused on limiting the Federal Government's fiscal 
exposure by better managing climate change risks. And so we 
identify a variety of areas, which you have all spoken about 
already, whether it is the Federal Government as the property 
owner of facilities, whether it is the Federal Government as 
the provider of property insurance or flood insurance, crop 
insurance, the Federal Government as the provider of disaster 
assistance which is not incorporated into the budget. So we are 
very focused on finding places and ways in which the Federal 
Government can limit these exposures.
    Senator Coons. I am very struck, Ms. Goodman, by your 
testimony where you cite that the QDR, the Quadrennial Defense 
Review, has literally identified climate change as a threat 
multiplier and a catalyst for conflict. In my role as the 
Africa Subcommittee Chair on Foreign Relations, I have seen the 
steadily increasing challenges of growing famine, of changes in 
climate in a lot of different ways on the African continent.
    Do you think this poses a long-term security risk to the 
United States if we do not deal with it responsibly now?
    Ms. Goodman. Yes, Senator. Thank you for your question. 
Yes, we do. The Military Advisory Board believes that climate 
change is both a threat multiplier and a catalyst for conflict, 
particularly in Africa, a region already racked by poor 
governance, terrorist threats, and now increasingly natural 
resource strains from drought that have pitted herders against 
farmers and exacerbated conflict in a number of regions, from 
Sudan to Mali to other parts of Africa. Yes, it is a serious 
concern and one that needs to be addressed to face our own 
threats to our own country.
    Senator Coons. Thank you. And the last question, if I 
might. In the exchange you had with Senator King, the metaphor 
I think you were working through Senator King was home 
insurance--I am sorry. It was with Dr. Montgomery, forgive me--
how much home insurance do you pay for fire even though the 
risk of a fire burning your house down is right in--and the 
conversation and the back and forth was about risk mitigation.
    I would suggest, Ms. Lubber, the constellation of companies 
that are involved in Ceres might give you better insight into 
this than I Have. That is really not the right metaphor. A 
slightly more complicated metaphor is the one that I think we 
ought to be looking at, because this is not just risk 
avoidance, it is also seizing an opportunity. Because in the 
same way that climate change poses real security threats to the 
United States and to our national security infrastructure, to 
our communities and our States and our physical infrastructure, 
it poses those same threats to our competitors globally. And in 
my view, the country that invests in the research and the 
development and the deployment of climate change adaptation and 
climate change mitigation technologies will dominate the global 
marketplace for everything, from transportation to 
infrastructure, power generation in the future.
    And so if we invest, it is really more like investing and 
figuring out how to make the next generation fire truck that 
puts out the fire faster so that we do not just have passive 
insurance that we are investing in and we get no return unless 
there is a catastrophic event. But it is literally proactively 
investing in the technologies that will mitigate our losses and 
create new market opportunities for us globally.
    Is that what the companies that have helped form Ceres see, 
is a market opportunity for us?
    Ms. Lubber. We are seeing it not only--
    Chairman Murray. You have to turn your microphone on.
    Ms. Lubber. We are seeing that magnified every day. Let me 
give you a few examples.
    In a recent report we did on clean energy, we are seeing it 
becoming the mainstream for U.S. corporations, some of the 
largest corporations; 60 percent of the Fortune 100 companies 
have goals for renewable energy and greenhouse gas reductions. 
Through the initiatives, 53 of 100 Fortune 100 companies said 
that through their own energy saving and investing in renewable 
energy, they have saved for themselves $1.1 billion annually, 
and their collective reduction in emissions decreased their 
annual CO2 emissions by the equivalent of retiring 15 coal-
fired power plants.
    Companies are seeing this is an opportunity to save money 
and to look at resources. When they invest in renewable energy, 
their employees love it. Their shareholders are starting to 
love it. Their consumers like it. Even the utility sector that 
makes up a third of the carbon emissions, we just released a 
study showing how major utility companies in every part of the 
country can both live with regulations and are starting to act 
even now to increase massive--massive increases in selling 
energy efficiency to their customers and renewable energy.
    And think about it. It hedges our bets against erratic oil 
and gas markets. It is saving utility companies money as well 
as the largest companies. And it is being passed on to 
consumers in many instances.
    It is no longer whether they should do it, from Microsoft 
to Dell to Time Warner. Companies are looking at reducing their 
carbon footprint and saving money and investing in renewable 
energy.
    Senator Coons. Well, thank you. And in my own home State, 
DuPont, one of our longest established--
    Ms. Lubber. Major leader.
    Senator Coons. --and major manufacturing and innovation 
company, they have a chief sustainability officer, a 
sustainability plan. This is not just something they do to 
sound good in the press or to satisfy environmental critics. 
This is a bottom-line, performance- enhancing business 
opportunity for them, and I am pleased to hear bipartisan 
enthusiasm for energy efficiency, an area where I really think 
the United States can competitively grow our market 
opportunities.
    Thank you so much for your testimony.
    Chairman Murray. Thank you very much.
    I want to thank all of our colleagues and our witnesses. 
This has been a very important and interesting discussion 
today, and I especially want to thank all of our witnesses for 
coming here and joining us and giving your expertise as well.
    As a reminder to everyone, additional statements and 
questions for the witnesses are due by 6:00 p.m. today, 
submitted to our chief clerk.
    Thank you again to all of your for participating. With 
that, this hearing is closed.
    [Whereupon, at 11:45 a.m., the Committee was adjourned.]
    
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