    [House Hearing, 114 Congress]
    [From the U.S. Government Publishing Office]

                  GROWING RISKS TO THE BUDGET AND THE ECONOMY

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

                                     HEARING

                                   BEFORE THE

                            COMMITTEE ON THE BUDGET
                            HOUSE OF REPRESENTATIVES

                        ONE HUNDRED FOURTEENTH CONGRESS

                                 SECOND SESSION

                                   __________

               HEARING HELD IN WASHINGTON, DC, SEPTEMBER 14, 2016

                                   __________

                               Serial No. 114-21

                                   __________

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                            COMMITTEE ON THE BUDGET

                       TOM PRICE, M.D., Georgia, Chairman
    TODD ROKITA, Indiana                 CHRIS VAN HOLLEN, Maryland,
    SCOTT GARRETT, New Jersey              Ranking Minority Member
    MARIO DIAZ-BALART, Florida           JOHN A. YARMUTH, Kentucky
    TOM COLE, Oklahoma                   BILL PASCRELL, Jr., New Jersey
    TOM McCLINTOCK, California           TIM RYAN, Ohio
    DIANE BLACK, Tennessee               GWEN MOORE, Wisconsin
    ROB WOODALL, Georgia                 KATHY CASTOR, Florida
    VICKY HARTZLER, Missouri             JIM McDERMOTT, Washington
    MARLIN STUTZMAN, Indiana             BARBARA LEE, California
    FRANK GUINTA, New Hampshire          MARK POCAN, Wisconsin
    MARK SANFORD, South Carolina         MICHELLE LUJAN GRISHAM, New Mexico
    STEVE WOMACK, Arkansas               DEBBIE DINGELL, Michigan
    DAVE BRAT, Virginia                  TED LIEU, California
    ROD BLUM, Iowa                       DONALD NORCROSS, New Jersey
    ALEX MOONEY, West Virginia           SETH MOULTON, Massachusetts
    GLENN GROTHMAN, Wisconsin
    GARY PALMER, Alabama
    JOHN MOOLENAAR, Michigan
    BRUCE WESTERMAN, Arkansas
    JIM RENACCI, Ohio
    BILL JOHNSON, Ohio

                               Professional Staff

                          Richard May, Staff Director
                    Thomas S. Kahn, Minority Staff Director
                                C O N T E N T S

                                                                       Page
    Hearing held in Washington, D.C., September 14, 2016.............     1
    Hon. Tom Price, M.D., Chairman, Committee on the Budget..........     1
        Prepared statement of........................................     3
        Submissions for the record:
            CBO: An Update to the Budget and Economic Outlook: 2016-
          2026.......................................................     8
            CBO: The 2016 Long-Term Budget Outlook...................    91
    Hon. Tim Ryan, a Representative in Congress from the State of
      Ohio...........................................................     4
        Prepared statement of........................................     6
    John H. Cochrane, Ph.D., Senior Fellow, Hoover Institution.......   204
        Prepared statement of........................................   206
    Jared Bernstein, Ph.D., Senior Fellow, Center on Budget and
      Policy Priorities..............................................   220
        Prepared statement of........................................   222
    Douglas J. Holtz-Eakin, Ph.D., President, American Action Forum..   238
        Prepared statement of........................................   240

                  GROWING RISKS TO THE BUDGET AND THE ECONOMY

                         WEDNESDAY, SEPTEMBER 14, 2016

                      House of Representatives,
                               Committee on the Budget,
                                                        Washington, DC.
        The Committee met, pursuant to call, at 10:04 a.m., in room
    210, Cannon House Office Building, Hon. Tom Price, M.D.,
    (chairman of the Committee) presiding.
        Present: Representatives Price, Rokita, Grothman, Renacci,
    Johnson, Womack, Woodall, Palmer, Blum, Sanford, Hartzler,
    Brat, Ryan, Pascrell, and Norcross.
        Chairman Price. The hearing will come to order.
        We want to welcome everybody to the Budget Committee and
    our hearing this morning on growing risks to the budget and the
    economy. We have got a lot of folks here.
        And I especially want to welcome a delegation from the
    country of Sri Lanka. We welcome you to our budget hearing
    today. Thanks for joining us. Maybe you can teach us a few
    things about getting a budget on track.
        This morning's hearing is entitled ``Growing Risks to the
    Budget and the Economy.'' Regardless of one's political
    posture, there are clearly some warning signs before us. In
    many ways, the current budget and the current economy are, in
    fact, risks that are intimately related to each other. The
    Congressional Budget Office itself provides all of us with some
    sobering information, demonstrating that policymakers have
    ample evidence and information revealing just how severe the
    risks are and how much riskier they will become in the not-too-
    distant future.
        Today, the Nation's total debt tops $19 trillion. At the
    end of the 10-year budget window, over the next decade, CBO
    projects we will borrow another $8.6 trillion, accumulating a
    total level of publicly held debt equivalent to more than 85
    percent of our economy. That is twice the average level of the
    past century. It is the highest our Nation has had since the
    end of World War II.
        And, of course, unlike the 1940s, today's debt is not being
    driven by a massive temporary mobilization of military might.
    In 2016, our debt trajectory is being driven by a chronic
    imbalance in our Nation's budget for which there is no end in
    sight under current policy or current law.
        In fact, today's growing debt is not so much the result of
    defeating a threat to America's national security--it is,
    indeed, the threat itself. The fiscal imbalance that we face,
    the uncertainty that is sown into our economy by a looming
    fiscal crisis, all of this weakens our Nation.
        And, yet, despite all of this, there are many who are
    saying that just because interest rates are so low, that we
    just ought to keep borrowing more and more money--run up the
    credit card while credit is relatively cheap. This is, as most
    folks understand and appreciate, horribly shortsighted
    thinking.
        Publicly held debt is over $14 trillion, more than three-
    quarters the size of our economy. We are already past what
    economists say is a sustainable debt burden, let alone
    advisable or fair to leave our kids and our grandkids.
        The fastest-growing component in our budget is not national
    security spending; it is not health care; it is not research
    and development; it is not infrastructure to repair roads or
    bridges; it is not aid to the Nation's poor; it is interest on
    our Nation's debt. Unless something is done to change course,
    in 2026 America will pay $712 billion a year in interest
    payments alone, just shy of what we are projected to spend on
    our entire national defense.
        And interest payments, interest dollars, are dollars that
    can't be used to pay the rent or to send a kid to school or to
    buy a car or to buy a house or to start or to expand a
    business. All the things that the American people say they want
    to do with their money will be harmed by the enormous interest
    payments.
        Annual deficits are projected to exceed $1 trillion in that
    same time period. These deficits will come at a time when
    Washington will be taking in higher-than-average tax revenue.
    This means that we will be taking in more tax money and going
    further in the hole, further into debt. Clearly, the government
    is not being starved of revenue.
        That being said, a stronger economy that creates higher
    revenues is truly the key to addressing our fiscal crisis. If
    our economy were growing today at just the historical average,
    roughly 3 percent annually, instead of 2 percent that is
    projected over the next decade, we would be in a much better
    fiscal position than we are right now.
        According to the Congressional Budget Office, if economic
    growth were just 0.1 percentage points higher per year than
    currently projected, annual deficits over the next 10 years
    would be reduced by $327 billion. Just through better economic
    output, we could reduce future deficits by as much as $3.3
    trillion over the next decade if we were growing at our
    historical average.
        In short, economic growth is a vital ingredient to any
    coherent strategy to get the Nation's fiscal house in order.
    Poor economic policies contribute to the poor fiscal health of
    the Nation, and today we are experiencing the worst economic
    recovery of the modern era.
        The macro effects of slow economic growth, however, are
    only one side of the story. The uncertainty that the country as
    a whole has experienced, due in part to lackluster economic
    growth, is also experienced by millions of individual
    Americans--families, entrepreneurs--in their own lives and in
    their own ways. Many Americans are struggling to make ends meet
    at a time when opportunities are fewer and the cost of basic
    necessities like health care and education are rising.
        And while the headline unemployment rate has dropped to
    under 5 percent, the underemployment rate, that which takes
    into account those who are working part-time because they can't
    find full-time work and those who have just given up looking
    for work, is currently 9.7 percent. That is higher than where
    it was prior to the recession.
        Meanwhile, the rate of participation in America's labor
    market, the percent of the population who are able to work who
    are working, is at levels not seen since the late 1970s, and
    the rate of worker productivity has declined for the last three
    quarters.
        At a time when over 60 percent of the country believes the
    Nation is on the wrong track, it is time we adopted a pro-
    growth policy agenda. And when that is coupled with sound
    budgetary strategy, it will jump-start America's economic
    engine and put us on a sustainable fiscal trajectory.
        House Republicans, led in part by this committee's efforts
    on fiscal and economic matters, have been championing bold
    solutions to achieve those goals.
        And to further this discussion, we are joined today by Dr.
    John Cochrane, a senior fellow at the Hoover Institution; Dr.
    Jared Bernstein, who is a senior fellow at the Center on Budget
    and Policy Priorities; and Dr. Doug Holtz-Eakin, who is
    president of the American Action Forum.
        I want to thank each and every one of you for taking part
    in today's hearing.
        And I am pleased now to yield to the current temporary
    ranking member of the day, Mr. Ryan from Ohio.
        [The prepared statement of Chairman Price follows:]

     Chairman Price Opening Statement: Growing Risks to the Budget and the
                                    Economy

        Good morning.
        The title of this hearing is the ``Growing Risks to the Budget and
    the Economy.'' Regardless of one's political posture--there are clearly
    some warning signs before us. In many ways the current budget and the
    current economy are in fact risks unto each other.
        The Congressional Budget Office (CBO) provides all of us with some
    sobering information--demonstrating that policymakers have ample
    evidence and information revealing just how severe the risks are now
    and will become in the not too distant future.
        Today, the nation's total debt tops $19 trillion. At the end of the
    ten year budget window, over the next decade, CBO projects we will
    borrow another $8.6 trillion--accumulating a total level of publicly-
    held debt equivalent to more than 85 percent of our economy. That is
    twice the average level of the past half century. It is the highest our
    nation has had since the end of World War II.
        Of course, unlike the 1940s, today's debt is not being driven by a
    massive, temporary mobilization of military might. In 2016, our debt
    trajectory is being driven by a chronic imbalance in our nation's
    budget, for which there's no end in sight under current policy and
    current law.
        In fact, today's growing debt is not so much the result of
    defeating a threat to America's national security--as it is the threat
    itself. The fiscal imbalance we face; the uncertainty that is sown into
    our economy by a looming fiscal crisis--this all weakens our nation.
        And yet, despite all of this, there are many who are saying that
    because interest rates are so low that we ought to borrow even more
    money--run up the credit card while credit is relatively cheap.
        This is horribly short-sighted thinking. Publicly held debt is over
    $14 trillion--more than three-fourths the size of our economy. We are
    already past what economists say is a sustainable debt burden--let
    alone advisable or fair to leave our kids and grandkids.
        The fastest growing component in our budget is not national
    security spending; it's not health care; not research and development;
    not infrastructure to repair roads and bridges; not aid for the
    nation's poor. It is interest payments on our nation's debt. Unless
    something is done to change course, in 2026 America will pay $712
    billion in interest payments alone--just shy of what we are projected
    to spend on our entire national defense. And interest payments are
    dollars that can't be used to pay the rent, send a kid to school, buy a
    house, buy a car, start or expand a business--all of the things
    Americans want to do with their money will be harmed by the ever
    increasing interest payments.
        Annual deficits are projected to exceed $1 trillion in that same
    period of time. These deficits will come at a time when Washington will
    be taking in higher than average tax revenue. This means that we'll be
    taking in more tax money--and going further in the hole--further into
    debt. Clearly, government is not being starved of revenue.
        That being said, a stronger economy that creates higher revenues is
    the key to addressing our fiscal crisis. If our economy was growing
    today at just the historical average--roughly three percent instead of
    the two percent projected over the next decade--we would be in a better
    fiscal position than we are right now. According to CBO, if economic
    growth were just 0.1 percentage points higher per year than currently
    projected, annual deficits over the next 10 years would be reduced by
    $327 billion. Just through better economic output, we could reduce
    future deficits by as much as $3.3 trillion over the next decade if we
    were growing at our own historical average.
        In short, economic growth is a vital ingredient to any coherent
    strategy to get the nation's fiscal house in order. Poor economic
    policies contribute to the poor fiscal health of the nation, and today
    we are experiencing the worst economic recovery in the modern era.
        The macro effects of slow economic growth, however, are only one
    side of the story. The uncertainty that the country as a whole is
    experiencing due--in part--to lackluster economic growth is also
    experienced by millions of individual Americans, families, and
    entrepreneurs in their own lives and in their own ways. Many Americans
    are struggling to make ends meet at a time when opportunities are fewer
    and the cost of basic necessities like health care and education are
    rising.
        While the headline unemployment rate has dropped to under five
    percent, the ``under-employment rate''--that which takes into account
    those who are working part-time because they cannot find full-time work
    and those who have given up looking for work--is currently 9.7 percent.
    That's higher than where it was prior to the recession. Meanwhile, the
    rate of participation in America's labor market--the percent of the
    population who are able to work--who are working--is at levels not seen
    since the late 1970s, and the rate of worker productivity has declined
    for three straight quarters.
        At a time when over sixty percent of the country believes the
    nation is on the wrong track, it is time we adopted a pro-growth policy
    agenda--and when that is coupled with a sound budgetary strategy, it
    will jumpstart America's economic engine and put us on a sustainable
    fiscal trajectory. House Republicans--led in part by this committee's
    efforts on fiscal and economic matters--have been championing bold
    solutions to achieve those goals.
        To further this discussion we are joined today by Dr. John
    Cochrane, Senior Fellow at the Hoover Institution; Dr. Jared Bernstein,
    Senior Fellow at the Center on Budget and Policy Priorities; and Dr.
    Douglas Holtz-Eakin, President of the American Action Forum.
        Thank you for taking part in what I hope will be a healthy and
    enlightening conversation.
        And with that, I yield to the Ranking Member, Mr. Ryan.

        Mr. Ryan. Thank you, Mr. Chairman. I would like to thank
    our witnesses for being here. Please excuse my voice. I got a
    little cold from my 2-year-old son after his first week at
    school. Germ factory. We need a hearing on that, I think, Mr.
    Chairman.
        There are few tasks more fundamental to the function of
    this Committee than to discuss the budget and economic outlook,
    and I think this is really one of the few committees that is
    still having very, very serious discussions about the future of
    the country. In this charged political climate, it is hard to
    get a rational discussion in many quarters these days. So I
    hope today's panel will shed some light for us on approaches
    Congress should consider to improve the lives of Americans
    going forward.
        We have all known for some time that we are facing a
    daunting fiscal future. Baby boomers are reaching retirement
    age, and our retirees, current retirees, are living longer. So
    this demographic shift drives the increases in the cost of
    health care, retirement programs, and budget deficits projected
    by CBO over the next 10 years and beyond.
        Similarly, CBO's projected slowdown in economic growth is
    driven by slower-than-past growth in the labor force and
    productivity. Again, we have seen these trends coming for
    decades.
        These are major concerns that deserve our attention. We
    must get the economy moving so our hard-working Americans can
    enjoy a rising standard of living. And we must adjust our
    fiscal policies to lessen future budget deficits, which are
    unsustainable without responsible action. So I am glad we are
    all in agreement here, as Democrats and Republicans, that this
    is a major issue that we need to address.
        Now, Congress has the fiscal policy tools, I believe, that
    we need to act. And we did it at the start of the recession.
    President Obama inherited the weakest economy since the Great
    Depression, and, together, we acted swiftly to turn things
    around.
        Within 6 months, the economy began to grow again. We are
    now in the fourth-longest economic expansion in American
    history. We have added 15 million private sector jobs and cut
    the unemployment rate in half. Economists have estimated that
    without the aggressive policy response implemented by the
    President and Congress and the Federal Reserve, the recession
    would have lasted more than 3 years, cost twice as many jobs,
    and pushed the unemployment rate to 16 percent rather than the
    10 percent we actually saw.
        Had we not employed the fiscal policy tools in our toolkit,
    we would have a weaker economy and larger deficits today.
        So if we look at the economic situation in Europe, which
    our panelists know all too much about, Europe responded to the
    economic crisis with austerity, and this approach undermined
    their recovery, the deep cuts. And, unfortunately, Congress has
    also undermined our economy over the past 6 years by blocking
    additional proposals by President Obama and insisting on
    spending cuts, the kind of austerity measures that have failed
    elsewhere. President Obama's jobs bill still languishes here in
    Congress.
        Democrats have a different approach. We want to enact
    forward-looking policies that will strengthen the main drivers
    of our strong economy. We want sustained investment. And while
    we have to make tough choices to deal with the deficit and the
    debt, we must remain committed to responsibly funding our
    national priorities, because these priorities lead to the
    growth that the chairman was talking about.
        We must promote long-term job growth by modernizing
    transportation networks--that takes investment; repairing aging
    infrastructure--that takes investment; investing in workforce
    education--that takes investment; and supporting the research
    and development of advanced manufacturing technologies which
    will lead to the next generation of good-paying jobs in
    America.
        This will create the millions of jobs, this will grow our
    economy, facilitate American exports, create a level playing
    field for American workers, and increase the return on taxpayer
    investment.
        By contrast, our Republican colleagues continue to push an
    agenda that returns to the same failed policies that created
    and prolonged the recession: deregulation, new tax breaks for
    the wealthy, and austere spending cuts. And under President
    Bush, we actually lost private sector jobs. Under President
    George W. Bush, who fully implemented the supply-side economic
    theory, we lost private sector jobs.
        These tactics do little to expand the workforce or improve
    productivity. I think we can all agree that a stronger economy
    is the single most important factor that would improve the
    budget and fiscal outlook, even if we differ on the best
    approach to stimulate growth across the economy.
        Democrats are eager to discuss this, Mr. Chairman, and any
    additional efforts to reduce future deficits, but we need a
    willing partner, not a party that seeks to disinvest in
    America's future and threaten our vital society and our social
    safety net without regard to the damaging impact of austerity
    on our economy and its recovery.
        [The prepared statement of Tim Ryan follows:]

                   Representative Tim Ryan Opening Statement

        Thank you, Mr. Chairman. I would like to thank our witnesses for
    being here. Please excuse my voice. I got a little cold from my 2-year-
    old son after his first week at school. Germ factory. We need a hearing
    on that, I think, Mr. Chairman.
        There are few tasks more fundamental to the function of this
    committee than to discuss the budget and economic outlook, and I think
    this is really one of the few committees that is still having very,
    very serious discussions about the future of the country. In this
    charged political climate, it is hard to get a rational discussion in
    many quarters these days. So I hope today's panel will shed some light
    for us on approaches Congress should consider to improve the lives of
    Americans going forward.
        We have all known for some time that we are facing a daunting
    fiscal future. Baby boomers are reaching retirement age, and our
    retirees, current retirees, are living longer. So this demographic
    shift drives the increases in the cost of health care, retirement
    programs, and budget deficits projected by CBO over the next 10 years
    and beyond. Similarly, CBO's projected slowdown in economic growth is
    driven by slower than past growth in the labor force and productivity.
    Again, we have seen these trends coming for decades.
        These are major concerns that deserve our attention. We must get
    the economy moving so our hard working Americans can enjoy a rising
    standard of living. And we must adjust our fiscal policies to lessen
    future budget deficits, which are unsustainable without responsible
    action. So I am glad we are all in agreement here, as Democrats and
    Republicans, that this is a major issue that we need to address.
        Now, Congress has the fiscal policy tools, I believe, that we need
    to act. And we did it at the start of the recession. President Obama
    inherited the weakest economy since the Great Depression, and,
    together, we acted swiftly to turn things around.
        Within 6 months, the economy began to grow again. We are now in the
    fourth longest economic expansion in American history. We have added 15
    million private sector jobs and cut the unemployment rate in half.
    Economists have estimated that without the aggressive policy response
    implemented by the President and Congress and the Federal Reserve, the
    recession would have lasted more than 3 years, cost twice as many jobs,
    and pushed the unemployment rate to 16 percent rather than the 10
    percent we actually saw. Had we not employed the fiscal policy tools in
    our toolkit, we would have a weaker economy and larger deficits today.
        So if we look at the economic situation in Europe, which our
    panelists know all too much about, Europe responded to the economic
    crisis with austerity, and this approach undermined their recovery, the
    deep cuts. And, unfortunately, Congress has also undermined our economy
    over the past 6 years by blocking additional proposals by President
    Obama and insisting on spending cuts, the kind of austerity measures
    that have failed elsewhere. President Obama's jobs bill still
    languishes here in Congress. Democrats have a different approach. We
    want to enact forward looking policies that will strengthen the main
    drivers of our strong economy. We want sustained investment. And while
    we have to make tough choices to deal with the deficit and the debt, we
    must remain committed to responsibly funding our national priorities,
    because these priorities lead to the growth that the chairman was
    talking about.
        We must promote long term job growth by modernizing transportation
    networks--that takes investment; repairing aging infrastructure--that
    takes investment; investing in workforce education--that takes
    investment; and supporting the research and development of advanced
    manufacturing technologies which will lead to the next generation of
    good paying jobs in America.
        This will create the millions of jobs, this will grow our economy,
    facilitate American exports, create a level playing field for American
    workers, and increase the return on taxpayer investment.
        By contrast, our Republican colleagues continue to push an agenda
    that returns to the same failed policies that created and prolonged the
    recession: deregulation, new tax breaks for the wealthy, and austere
    spending cuts. And under President Bush, we actually lost private
    sector jobs. Under President George W. Bush, who fully implemented the
    supply side economic theory, we lost private sector jobs.
        These tactics do little to expand the workforce or improve
    productivity. I think we can all agree that a stronger economy is the
    single most important factor that would improve the budget and fiscal
    outlook, even if we differ on the best approach to stimulate growth
    across the economy.
        Democrats are eager to discuss this, Mr. Chairman, and any
    additional efforts to reduce future deficits, but we need a willing
    partner, not a party that seeks to disinvest in America's future and
    threaten our vital society and our social safety net without regard to
    the damaging impact of austerity on our economy and its recovery.

        Chairman Price. I thank the gentleman.
        As background for this hearing, the Congressional Budget
    Office has their August update as well as their long-term
    budget outlook. And I ask unanimous consent to insert into the
    record the CBO reports ``An Update to the Budget and Economic
    Outlook: 2016 to 2026,'' published on August 23, 2016, and the
    ``2016 Long-Term Budget Outlook,'' published on July 12, 2016.
        Without objection, so ordered.
        [The information follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Price. Dr. Cochrane, Dr. Bernstein, Dr. Holtz-
    Eakin, we want to welcome you. We thank you very much for
    taking time today. Your prepared remarks will be made part of
    the record. Each of you will have 5 minutes to present your
    opening statement.
        And, Dr. Cochrane, you may begin when ready.

        STATEMENTS OF DOUGLAS J. HOLTZ-EAKIN, PH.D., PRESIDENT,
    AMERICAN ACTION FORUM; JOHN H. COCHRANE, PH.D., SENIOR FELLOW,
    HOOVER INSTITUTION; AND JARED BERNSTEIN, PH.D., SENIOR FELLOW,
                 CENTER ON BUDGET AND POLICY PRIORITIES

                     STATEMENT OF JOHN H. COCHRANE

        Mr. Cochrane. Chairman Price and Mr. Ryan and members of
    the Committee, it is a real honor to talk to you today.
        Yes, sclerotic growth is our country's most fundamental
    economic problem. If we could get back to the 3.5 percent
    postwar average, we would, in the next 30 years, triple rather
    than just double the size of the economy, and also tax
    revenues, which would do wonders for our debt problems.
        So why has growth halved? The most plausible answer is, I
    think, simple and sensible: Our legal and regulatory system is
    slowly strangling the golden goose of growth.
        How do we fix it? Harder. Our national economic debate just
    makes the same points louder, over and over again, and is going
    nowhere. So let's look together to find novel and effective
    policies that can appeal to both sides of the argument.
        Let's get past too much regulation or too little regulation
    and fix regulation instead. Regulation is too discretionary.
    People can't read the rules and know what to do. Regulatory
    decisions take forever. Regulation has lost its rule of law
    protections. Agencies are cop, prosecutor, judge, jury, and
    executioner all in one. And most of all, regulation is becoming
    more politicized.
        Congress can fix this. Let's get past spending more or
    spending less on social programs and fix the programs instead.
        Often, if people earn an extra dollar, they lose more than
    a dollar of benefits. No wonder people get stuck. If we fix
    these disincentives, we will help people better, we will
    encourage growth and economy, and, in the end, we will spend
    less.
        Now, spending is a serious problem, but just moving
    spending off the books doesn't help. For example, we allow a
    mortgage interest tax deduction, but that is exactly the same
    thing as collecting taxes and then sending checks to
    homeowners, but larger checks for high-income people, larger
    checks for people who borrow a lot, and larger checks for
    people who refinance often. You would never do that.
        Suppose we eliminate the mortgage deduction and put housing
    subsidies on budget instead. The resulting homeowner subsidy
    would surely be a lot smaller, help lower-income people a lot
    more, and would be better targeted at getting people in houses.
    You would both be happy. The budget would look bigger, but in
    reality, we would be spending less and growing more.
        Taxes. Tax reform fails because arguments over the level of
    taxes, subsidies, or redistribution torpedo sensible
    simplifications we all know we should do. We could achieve tax
    reform, then, by separating the four confounding issues.
        First, determine the structure of taxes, just to raise
    revenue with minimal economic damage, but leave the rates
    blank, then separately negotiate the rates, put all the tax
    incentives and deductions in a separate subsidy code, and
    preferably as visible on-budget expenditures, and then
    separately add an income redistribution code.
        If you did these four things separately, the necessary big
    fights over each one need not derail progress on the others.
        I should say, a massive simplification of the Tax Code is,
    I think, more important than the rates and easier for us all to
    agree on.
        Debt and deficits. Each year, the CBO correctly declares
    our long-term debt unsustainable and not much happens. Yelling
    louder won't work.
        So let's, first, face the biggest problem, a debt crisis,
    when the U.S. really needs to borrow trillions of dollars and
    suddenly can't; a debt crisis, not a predictable rise in
    interest rates or something we can see coming. Crises are
    always sudden and unexpected, like earthquakes and wars. Even
    Greece could borrow at remarkably low interest rates--until,
    one day, all of a sudden it couldn't.
        The answers are straightforward. Sensible reforms to Social
    Security and Medicare are on the table. Address underfunded
    pensions, huge credit and bailout guarantees, and other things
    that might force the U.S. to need a lot of money suddenly.
        Buy some insurance. Every homeowner shopping for a mortgage
    chooses between a floating rate, lower initially, and a fixed
    rate, higher initially, but forever stopping the chance of
    interest rates going up and blowing their budget.
        The same for the U.S. Fixed rates, borrowing longer, would
    forever insulate the budget from interest rate risks, and those
    are the essential ingredients of a debt crisis.
        Above all, undertake simple pro-growth economic policies
    and grow out of the debt.
        You may object that fundamental reform of this sort is not
    politically feasible. Well, what is politically feasible
    changes fast these days. Winston Churchill once said, Americans
    can be trusted to do the right thing after we have tried
    everything else. Well, we have tried everything else, so let's
    do the right thing.
        [The prepared statement of John H. Cochrane follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Price. Thank you, Dr. Cochrane.
        Dr. Bernstein, you are recognized for 5 minutes.

                      STATEMENT OF JARED BERNSTEIN

        Mr. Bernstein. Thanks very much, Chairman Price, and thank
    you, Mr. Ryan, for the invitation to speak to you today.
        My testimony makes three simple points. First, as recent
    labor market, income, poverty, and health coverage data reveal,
    the American economy actually has significant strengths. The
    U.S. economy is in the seventh year of a recovery that began in
    the second half of 2009, meaning that we are in the midst of a
    relatively long expansion. Businesses began adding jobs on net
    in late 2010, and since then, private sector employment is up
    15 million jobs, the longest streak of total job growth on
    record.
        The tightening job market has meant faster wage growth, and
    not just for high-wage workers, but for middle- and low-wage
    workers as well. As my first figure shows, the real wage of
    blue collar workers in manufacturing and for non-managers and
    services is up 5 percent since its trough in late 2012.
        My second figure uses data from the New York Federal
    Reserve to show another favorable shift in the recent job
    market: Middle-skill job growth is now outpacing that of job
    growth in low- and high-wage occupations.
        Now, these labor market trends helped to generate
    remarkably positive real income gains last year as reported
    just yesterday by the Census Bureau. My figure 3 shows these
    real gains were largest at the low end of the income scale, a
    characteristic pattern of tightening labor markets as they
    disproportionately lift the incomes of the least advantaged.
        I should note that contrary to some of the very negative
    comments that have been made so far today, the 5.2 percent
    increase you see in this figure is the fastest 1-year growth in
    real median household income on record in the Census Bureau
    series, which dates from the mid-1970s.
        Poverty also fell significantly last year, though the
    poverty rate, at 13.5 percent, is still above its 2007 level.
        Figure 4 shows the dramatic decline in the share of
    Americans without health coverage that began with the
    implementation of the Affordable Care Act. These very positive
    developments for middle- and low-income households derive from
    the one-two punch of tighter labor markets and progressive
    healthcare policy.
        My second point, however, is that trend productivity growth
    is too slow, and that suggests the need for an investment
    agenda. Though the U.S. economy is growing faster than most
    other advanced economies, real GDP growth has been slower in
    this recovery than in prior ones. An important reason for this
    outcome is that productivity growth has also slowed. And one
    reason that productivity growth has slowed is due to less
    capital deepening, as in not enough investment in capital per
    hour worked.
        Now, recent Congresses, including the current one, have
    been extremely reluctant to plan and execute public investment
    in needed areas, including basic research, water quality, human
    capital, including preschool, and transportation
    infrastructure.
        This is a bipartisan complaint, one I hear regularly from
    the business community that depends on productivity-enhancing
    infrastructure.
        My final point is that while we face serious fiscal
    constraints, lower interest rates and slower-growing healthcare
    costs, even as many more people have health coverage, are
    providing desperately needed fiscal oxygen. Together, these two
    factors explain five-sixth of the improvement in the long-term
    forecast of the debt ratio.
        My last figure underscores the health savings point. It
    shows a 4 percentage point decline in projections for public
    health spending as a share of GDP between the 2010 projections
    and the most recent ones, savings that are partly attributable
    to healthcare delivery efficiencies promoted by the Affordable
    Care Act.
        Given the investment agenda I recommend, I want to express
    my concern regarding sequestration cuts to nondefense
    discretionary programs, including education, job training,
    infrastructure, scientific and medical research, veterans
    health care, and more. Such funding is projected to fall to
    historical lows as a share of the economy in coming years.
        Similarly, the budget of the House majority features
    particularly severe cuts in programs to help poor families and
    others of limited means. Sixty-two percent of its spending cuts
    come from programs that serve low- and moderate-income
    families, including Medicaid, nutritional support, and Pell
    Grants.
        Such budgeting would not only lead tens of millions of
    people to lose health coverage and basic food support, but it
    would also undermine the positive public investment agenda we
    very much need.
        Thank you.
        [The prepared statement of Jared Bernstein follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Price. Thank you, Dr. Bernstein.
        Dr. Holtz-Eakin, you are recognized for 5 minutes.

                  STATEMENT OF DOUGLAS J. HOLTZ-EAKIN

        Mr. Holtz-Eakin. Thank you Chairman Price, Ranking Member
    Ryan, and members. It is a privilege to be here today. My
    written statement makes three points at length. I will make
    them quickly and then look forward to your questions.
        Point number one is that the U.S. can and must do better on
    both the Federal fiscal outlook and the economic growth
    outlook, and they are intimately related.
        Point number two is that one part of doing better is to
    change the kind of policy mix away from temporary targeting
    measures associated with stimulus to long-term structural
    changes to help the economy grow at a faster trend rate growth.
        And then number three is a list of key structural reforms
    that I think are important for the Congress to consider.
        Let me talk about each in turn.
        On the growth and budget challenges, there are many ways to
    characterize this. You have heard some already. I think on the
    growth front, the key fact is that from the end of World War II
    to 2007, the U.S. economy grew fast enough on average, about
    3.2 percent, that even with population growth, total GDP per
    person, a rough measure of the standard of living, would double
    on average every 35 years.
        And so in one person's working career, you can imagine the
    standard of living doubling, and that would be the route to
    whatever your version of the American dream might be--sending a
    child to school, to college for the first time, or a vacation
    home, whatever.
        At current projected rates of growth, 2 percent, combined
    with projections of population growth, that measure of the
    standard of living would double roughly every 70 to 75 years.
    And so the pace at which we achieve the American dream has cut
    down dramatically and is disappearing over the horizon. I think
    this is the preeminent policy challenge of our time.
        It is closely related, of course, to the budget challenge,
    because, as the chairman pointed out, every tenth of a
    percentage point of faster growth translates into about $300
    billion in budgetary improvement over the 10-year budget
    window.
        And we have a dire fiscal outlook, one in which, the CBO
    correctly points out again and again, the debt levels are
    rising at unsustainable rates, one where, over the next 10
    years, we are going to have the deficit rise to be $1.2
    trillion in 2026, where interest will be $700 billion, over
    half of that deficit, where the debt-to-GDP ratio is going to
    continue to climb and be 80 percent.
        All of these things are quite troubling and something that
    the Congress should take on. And in doing so, they will have to
    do some structural reforms, and those reforms will have to
    start with the entitlement programs.
        There are really three reasons to worry about the
    entitlement programs. The first is genuinely the budget
    outlook. These are programs that are growing at, say, Social
    Security 6 percent, or Medicare a little under 6 percent, 5.9
    percent, when the nominal economy is going to grow at something
    like 4 percent. So they are growing faster than resources can
    permit to support them. But that is the green eye shades
    argument, and it will, I promise you, having made it my entire
    career, resonate not one bit with anyone.
        So the second reason to fix them is that these programs on
    their merits are not good programs. Our Social Security program
    is kept solvent on the books, and the trustees are permitted to
    issue reports, because we have promised to cut benefits 25
    percent across the board when the trust fund exhausts in a
    little under two decades. That is a horrific way to run a
    pension program.
        And so if you go through Social Security, Medicare,
    Medicaid, the Affordable Care Act, the large drivers of the
    spending increase that is our deficit problem, those programs
    all could be improved, they are not delivering at sensible
    costs the services that we have promised.
        And the third reason is that the explosion in entitlement
    spending and the associated rise in debt invites economic
    problems.
        If you are an investor looking at the United States and you
    see a fundamental mismatch between spending growth and
    revenues, you know one of three things is going to happen.
        One, the U.S. could do nothing, there will be a predictable
    fiscal crisis, and that is not a pro-growth policy.
        Number two, you could try, as that crisis approaches, to
    close that gap quickly by raising a trillion dollars in taxes
    each year, and that is hardly a pro-growth policy.
        Or three, you can take on the spending challenge that is
    the entitlement programs, and that would be a way to, in a pro-
    growth fashion, address the fiscal challenge and invite
    investment and expansion in the United States.
        So this is something that is central to our success. It is
    also the way to free up the resources for national security,
    basic research, infrastructure, education, all of the things
    the Founders saw as the basic role of the Government of the
    United States. Those are being squeezed out of the budget as we
    speak.
        So I think that is where it starts, and it goes through a
    list of tax reforms, regulatory reforms, education reforms,
    trade agreements, immigration reforms, all of which could allow
    the economy to perform much better and which should be on the
    agenda for the Congress.
        So I look forward to your questions. I would be happy to
    elaborate on any of those.
        [The prepared statement of Douglas J. Holtz-Eakin follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Price. I thank all three of you for your opening
    statements. And I think that the prepared remarks that you had
    are very enlightening in many, many ways, and we appreciate
    that.
        We will start questioning with Mr. Rokita. You are
    recognized for 5 minutes.
        Mr. Rokita. I thank the gentlemen for their testimony. Good
    morning.
        Dr. Holtz-Eakin, starting with you. Picking up where you
    left off, it seems like you have the right recipe there. Let's
    reform these programs. Let's get spending under control. Let's
    drive the debt down. Let's continue pro-growth policies of
    getting regulations under control, as Dr. Cochrane mentioned,
    and reforming our Tax Code, et cetera, et cetera.
        Mr. Ryan, my good friend, the ranking member today,
    complained, though, that Europe committed the crime of
    austerity. How is what you are saying different from austerity?
        Mr. Holtz-Eakin. So I think you want to recognize that----
        Mr. Rokita. ``Crime'' is in quotes, by the way.
        Mr. Holtz-Eakin. Yes. Looking forward, the key issue is not
    recovery from a recession. The bulk of that has been
    accomplished--at a slow pace, but it has happened. The key
    issue going forward is what can raise the trend long-term rate
    of economic growth. And that is not a matter of stimulus or
    austerity, that is a matter of what will enhance productivity,
    what will enhance the rate of labor force participation, and
    the kind of components that go into GDP growth. Those are
    issues associated with structural reforms, as I said, to have
    better incentives, whether they are in our social safety net or
    in our Tax Code.
        Mr. Rokita. Thank you.
        And setting up for my next question, could you, please,
    just for the record, give us and folks watching at home,
    millions of readers who will be reading the transcript of this
    hearing, what is the definition, what is the difference between
    public debt and total debt?
        Mr. Holtz-Eakin. There is debt in the hands of the public,
    and then there is total debt, which includes, debt in, for
    example, the Social Security trust fund within the government.
    And the total debt is larger as a result.
        Mr. Rokita. Right. So then the question is, since the
    projected rise from an already elevated 76 percent of public
    debt to GDP will become more than 85 percent in 2026, twice the
    average level of the past 50 years, which was only 39 percent,
    and considering that CBO's long-term projections show the
    public debt level would jump to 141 percent in 2046 under
    current law, the highest debt we have ever had, what would be
    the impact on the economy and the average American family if
    this fiscal future became a reality, realizing that the 141
    percent is still not even the total debt?
        Mr. Holtz-Eakin. There is a large literature that,
    regardless of which way you measure the debt, demonstrates that
    if you have a high debt-to-GDP ratio you pay a growth penalty.
    And the U.S. is now in the range--there is a fight about what
    the range is, obviously--but it is now in the range of paying
    that growth penalty, and we have slow growth.
        So every American family is getting less in the way of
    income increases, has had a harder time finding a job because
    of slower economic growth. That is a very tangible loss in
    economic opportunity, and that is what I alluded to in my
    opening remarks, the pace at which you see the standard of
    living rise. That is the price. It will get worse as the debt
    gets higher.
        Mr. Rokita. Turning to you, Dr. Cochrane, regarding the
    slow growth, we are estimated to have 1 percent growth this
    year, the last several years have been 2 percent growth, the
    average growth for this mature economy is, prerecession, is 3
    percent. What do you think is weighing on the economy? You
    mentioned regulations. You mentioned tax reform. You want to go
    in any more detail, or is there something else?
        Mr. Cochrane. Well, I did want do want to emphasize what
    Doug just said, which is we are in a very slow-growth moment,
    and this seems to be emerging as the new normal. What counts
    here is not a little year or 2 stimulus or whatever, but it is
    the new normal of 2 percent rather than 3.5 percent, which
    compounds forever. Growth comes from productivity, and
    productivity, unfortunately, mostly comes from new ideas, new
    companies, new ways of doing things, not just government
    investment.
        So ask businesses why things are slowing down. Well, they
    can't get the permits anymore.
        Mr. Rokita. Right. So it is just regulations?
        Mr. Cochrane. No. We have sand in the gears of the economy
    all over the place, regulation, law, taxes. Look for lots of
    places where, unfortunately, the government is getting in the
    way of this unpleasant process. Remember, when somebody invents
    a new idea, has a new company, puts the old guys out of
    business, it is unpleasant. That is why they come to Washington
    asking for protection. But it slows down the process of growth.
        Mr. Rokita. So we shouldn't settle for 2 percent, 3 percent
    growth, even though this is, like I said, a mature economy. We
    are not a new republic anymore, we shouldn't expect 10 percent
    growth a year, anything like that. What should be our goal?
        Mr. Cochrane. I think we can do much, much better. A
    precise number is hard to come by. But if you look across the
    world, notice, for example, the World Bank's ease of doing
    business index is correlated with astonishingly large levels in
    the difference of people's welfare. So unless you think this
    country is perfect, making the ease of doing business here
    could have similarly large effects.
        Chairman Price. The gentleman's time has expired.
        Mr. Pascrell, you are recognized for 5 minutes.
        Mr. Pascrell. Thank you, Mr. Chairman.
        Mr. Chairman, you have really assembled three great
    testimonies today. We have three great economists. I trust each
    one of them. I may not agree with them, but that is immaterial.
    I say that with a full heart.
        So Mr. Bernstein referred to the U.S. Census report
    yesterday. I think that is important, significant stuff,
    because, Mr. Chairman, if we are ever going to come to a
    resolution of any of these problems, we have to look at the
    pluses and minuses. Sometimes I listen to you folks on the
    other side of the aisle, and then we are ready to throw in the
    towel. And I know you are not a throw-in-the-towel guy. But in
    order for us to get resolution, we have to come to an
    agreement, we have to come to a resolution. Would you agree?
    Very good.
        So I reject the doom and gloom. There is no denying America
    is getting stronger economically. The budget projections
    reflect that as we see more revenue from individual taxes, as
    working Americans make more money.
        But what you don't see going up are revenues from anywhere
    else. They are flat and they are declining. Corporate income
    tax revenues in 1952 accounted for 33 percent of all revenue.
    In 1986, it was down to 23 percent, Mr. Chairman. Today, it is
    11 percent.
        Now, that is a, to me--I will stand corrected--a huge shift
    on where we get our revenue in order to run the government.
    Despite U.S.-based corporations seeing record profits, they are
    contributing very little to the Federal revenue, when you look
    at those numbers. I didn't make them up.
        Tax reform in 1986 also made it more appealing for our
    businesses to structure themselves as pass-through companies.
    You have written, you have talked about this, I know, a few of
    you on the panel. You pay lower than individual tax rates.
        [Chart]
        Mr. Pascrell. Now, I am going to put a chart up here. You
    tell me. And this is revised every year. It is my favorite,
    favorite, favorite chart of all time. This chart shows what
    contributes to our deficit. It destroys the myths that we hear
    many times in this very room.
        So what is the major part of our problem since we, as
    Democrats and Republicans, have reduced the deficit in the past
    few years? And look at this chart. The situation from the tax
    cuts of 2001 and 2003 are going to be contributing
    proportionately a greater portion of the problem that exists
    with the deficit that we have in this country. You cannot deny
    where our budget and where our policy priorities are.
        I think that this is a very revealing chart. I don't put
    charts up much when I speak, but I think this is a very
    revealing chart of where we are heading that highlights the
    need for comprehensive tax reform and modernizes our Tax Code
    and catches income earned by U.S.-based companies in a way that
    is fair and puts us on a path to fiscal sustainability. And I
    think that is the key word. Each of you mentioned it in manner,
    shape, or form.
        We can modify the funding stream for Social Security, as an
    example. I would agree. We have to address it. I mean, we can
    hide it. We can hide under the desk. When you are a mayor of a
    town, you don't hide under the desk, they will come and get
    you. And we do that in Congress, we hide under the desk.
        I support the Social Security 2100 Act. I ask you all to
    look at it, tell me where it is wrong, where it is right. John
    Larson, many people are cosponsoring it. It would reinstitute
    the employment tax for Social Security at incomes above
    $400,000 to shore up the trust fund. Representatives Sanchez
    and Honda and Pocan are leading another bill to phase out the
    cap on taxing income above $118,000.
        As income inequality grows, the rich pull away from
    everyone else in terms of income. It no longer makes sense to
    cap the Social Security.
        And in conclusion, simply say this. When you examine what
    we taxed 30 years ago, 40 years ago, and to see the shift to
    attacking personal income and taxing personal income, we have
    to work on this. To me, I believe we are going in the wrong
    direction on this.
        Chairman Price. The gentleman's time has expired.
        Mr. Pascrell. Thank you, Mr. Chairman, for your courtesy.
        Chairman Price. Thank you, sir.
        Mr. Renacci, you are recognized for 5 minutes.
        Mr. Renacci. Thank you, Mr. Chairman, and thank you for
    holding this important hearing to remind us of the consequences
    of an unsustainable fiscal path.
        As the father of three, I believe that we are responsible
    to leave our children and grandchildren with a country that is
    financially stronger than the country we inherited.
    Unfortunately, though, Washington too often chooses to kick the
    can down the road and not address the challenges we face.
        Absent serious reforms, these challenges aren't going away.
    However, I am very concerned that many here in Congress still
    don't understand the seriousness of this problem.
        Dr. Cochrane, your testimony discussed the dangers of this
    mindset. You said: ``Debt crises, like all other crises that
    really threaten an economy and society, do not come with
    decades of warning. Do not expect slowly rising interest rates
    to canary the coal mine. Even Greece could borrow at remarkably
    low rates. Until, one day, it couldn't, with catastrophic
    results.
        ``The fear for the U.S. is similar. We will have long years
    of low rates. Until, some day, it is discovered that some books
    are cooked and somebody owes a lot of money that they can't pay
    back, and people start to question debts everywhere.''
        Mr. Cochrane, you also stated: ``Debt crises are like
    earthquakes. It is always quiet. People laugh at you for
    worrying. Buying insurance seems a waste of money. Until it
    isn't.''
        I agree that we need to tackle problems now before the debt
    earthquake hits. But before tackling the problem, Members of
    Congress must really start fully understanding it.
        That is one of the reasons why I introduced a piece of
    legislation, a Bipartisan Working Group, entitled the Fiscal
    State of the Nation, to provide Members of Congress and the
    American people an annual update on the long-term financial
    health of the country. Our Nation's finances are one of the
    most important pieces of information that lawmakers should
    consider when setting policy agendas for each Congress, but too
    often I believe that many here in Washington are willfully
    blind to the subject.
        I was a businessman for 28 years. I can tell you that every
    year, along with every month, I looked at balance sheets and
    income statements to determine what policies we were going to
    move forward with, and those became one of the most important
    reasons that we made decisions we make. We don't do enough of
    that.
        The Fiscal State of the Nation resolution is simple. It
    just requires the Comptroller General of the United States to
    present the financial report of the United States to a joint
    session of Congress on an annual basis. It allows lawmakers and
    the American public to receive the information in an accurate
    and timely manner within 45 days of when our country's audited
    financial statements are issued. Many members on the panel are
    already cosponsors.
        Dr. Cochrane, you note in your testimony that every year
    the Congressional Budget Office declares our long-term promises
    are unsustainable. I hear it all the time as well. Yet,
    Congress continues to just kick the can down the road.
        Do you agree that a Fiscal State of the Nation would better
    help all Members of Congress to understand the pressing
    financial issues facing our country?
        Mr. Cochrane. You are asking me to comment on a bill I
    haven't read. The general idea, from what you have described,
    sounds very useful, in particular because a lot of the
    accounting for the U.S.'s fiscal situation is quite murky, even
    by private sector standards.
        In addition to what is written down, we have our promises
    of Social Security and Medicare, which are many times the
    actual national debt. We have implicit guarantees that we are
    going to stand behind a bunch of loans and credits and bail
    people out that pose a danger to the fiscal stance of the
    United States.
        So, yes, being clearer about the numbers might help a lot.
    Unfortunately, like wars, an army seems like a very expensive
    thing until suddenly you need it, and the same is true of debt.
    Our interest rates are very low right now, so it is hard to
    marshal a campaign that we have to worry about interest rates
    rising. Well, like wars, keep that powder dry, because you may
    need it some day.
        Mr. Renacci. Sure. It is interesting, you used the word
    ``murky.'' I have been here 5\1/2\ years. I have tried to
    understand the 700, 800 pages of financial information
    presented. I have tried to get it simplified to a simple
    balance sheet so people could understand it. That has been a
    difficult charge after 5\1/2\ years. It is one of the reasons
    why I just want somebody to come and explain it all to Members
    of Congress, because I do think it is an important place.
        You also said the rising interest rates on our debts would
    be less likely the canary in the coal mine but rather more like
    a looming earthquake. Can you explain that?
        Mr. Cochrane. Yeah. There is a picture that large debt sort
    of slowly, inexorably drives up interest rates and you can see
    what is happening. That is a possibility. But I think the
    larger danger is, one, the U.S. borrows relatively short term,
    we roll over our debts about every 2 years.
        So we are sort of like a household that has taken the
    floating rate mortgage, and then if interest rates go up, all
    of a sudden our payments double and our income hasn't changed.
    And typically, that is going to happen at a moment when the
    U.S. also has to borrow a lot of money to fight a recession,
    fight a war, bail out of a bunch of banks, and whatever we want
    to do.
        So we are in that situation that the rising interest rates
    could make the deficit much less sustainable than it already
    is. That is the key of what happened in Europe in many ways.
    You are fine with low interest rates. If interest rates go up,
    you can't afford anything. So you are very vulnerable to a
    sharp rise in rates.
        Chairman Price. The gentleman's time has expired.
        Mr. Renacci. Thank you, Mr. Chairman.
        Chairman Price. Mr. Ryan, you are recognized for 10
    minutes.
        Mr. Ryan. Thank you, Mr. Chairman.
        Dr. Bernstein, you talked a little bit about research,
    water quality, transportation. Can you explain to us, in a very
    elementary way, why you believe that those investments will
    lead to growth? Because that is the big rub here. We have tax
    cuts. And I think Mr. Pascrell showed it. I talked about it a
    little bit. We saw the Bush tax cuts, two rounds of them, we
    saw deregulation, and we didn't grow jobs.
        You are saying make these investments, that is a better
    approach. Can you tell us why?
        Mr. Bernstein. Yeah. Thank you for the question.
        There are well-established needs and uses for what
    economists call public goods in an economy like ours, and these
    are investments that the private sector, left onto itself,
    won't make optimally deep enough investments.
        Now, when it comes to investing in private production, no
    question that is by definition a private sector function. But
    when it comes to education, for example, or basic research,
    basic R&D, which I should note is at historically low levels in
    terms of Federal expenditures, or when it comes to safety net
    programs or the kind of countercyclical programs that you
    articulated in your opening statement, there is no private firm
    that will provide them. And extensive work has shown that these
    are complementary investments to private sector productivity
    growth.
        And to make it very simple, the private sector is going to
    do lots of applied research. They won't do basic research. The
    private sector is going to invest in private plants. They are
    not going to build roads and bridges. The private sector will
    invest in some worker training, but a suboptimal amount, and
    they certainly won't invest in public education to the extent
    that we need it.
        So if Congress does not appropriate the dollars for
    adequate investments in public goods, that will show up as
    slower productivity growth.
        Now, we have two things going on: suboptimal investments in
    public goods and slower productivity growth. I am not saying by
    any means that is the only reason. Economists actually are hard
    pressed to explain these changes in productivity growth. But I
    am convinced it is an important one.
        Mr. Ryan. So when we talk about basic research, why does
    the public need to do that? Why doesn't the private sector, we
    will cut taxes, and let them go do basic research?
        Mr. Bernstein. That it is a good question. The reason the
    private sector suboptimally invests in all of the things I
    mentioned--I will get to your basic research point--is because
    there is no way for them to either make the scale of the
    investment needed or to claim the kind of returns on those
    investments with any certainty that they can be assured of.
        So the Internet. The Internet was a project that began in
    government, in the Defense Department, specifically. There is
    no private sector firm that could have on their own funded that
    kind of seed research. Now, once it takes off, the private
    sector joins in. But I think it is a pretty classical example
    of an investment that has ultimately been very important to our
    economy and our growth.
        Mr. Ryan. Dr. Holtz-Eakin, do you agree with that on the
    basic research side, that the government has some role in doing
    these kind of things that the private sector can't do, they
    just don't have enough money to do it on their own?
        Mr. Holtz-Eakin. Yes. I think, qualitatively, Jared has
    summarized the economic argument in favor of the provision of
    public goods exactly right. My only caution would be to harness
    your expectations appropriately for the kinds of rates of
    return and actual impacts on economic growth that you will get.
        If you were, for example, to fix the roads between my home
    and my workplace, something I really would like to see the
    District of Columbia think about, I would be able to leave
    later and get to work on time, and I could leave work and get
    home earlier, and my life would be quite good. But my measured
    productivity, what I do at the office, wouldn't change a bit.
    You wouldn't see any impacts in economic growth.
        And in my written research, I have a long summary of the
    research on the productivity effects of public infrastructure.
    It is usually touted as something we can just do real quick and
    we will get these great returns. I would urge you to think it
    won't happen quickly and you won't get great returns. You will
    have to pick projects sensibly, not through the typical
    political process, and you will have to target them effectively
    at the Federal level.
        Because the really big returns that you find in a lot of
    public infrastructure comes when Connecticut steals firms from
    Massachusetts or vice versa. That doesn't help the Nation as a
    whole. And so national productivity growth through this route,
    the impacts are going to be very small.
        Mr. Ryan. Well, I think of, like, the space race, right? I
    think of NASA in the early days. I can't even fathom a
    President today saying, ``Hey, let's go to the moon and spend a
    bunch of money,'' what would happen politically, no matter how
    good looking you are, how pretty your wife is, and how much
    money you have. I just don't think it would fly today. But if
    you look at the economic impact of NASA and the spinout of
    technologies and companies and quality of life and all the
    rest, that seems to me like a pretty worthwhile investment.
        And I would say even the example that you used, from your
    house to your work. I mean, if you have terrible roads, your
    car breaks down, you are not showing up to work, you have to go
    get it fixed, it is money out of your pocket that you could
    have put somewhere else and spent in the economy, on and on and
    on, I think there is an argument to be made these are very
    important investments. And it is not just about you, it is the
    about the multiplier effect, and you are basically subsidizing
    businesses in a lot of ways too, right?
        Mr. Holtz-Eakin. So three things, probably in reverse
    order. Number one, ignore multiplier effects. Those common, if
    at all, only when you are recovering from recession. And this
    is about long-term trend growth, not about business type of
    fluctuations.
        Number two, yes, there are lots of things that we do in the
    public sector that make the quality of life better, and that is
    important, but they don't show up as GDP growth. And if you
    want to make the argument you want to go from 2 percent to 3
    percent or 3.5, this isn't the route to doing that.
        Mr. Ryan. How can you say that? Mr. Bernstein's example of
    the Internet, which was billions of dollars, how can you make
    the argument that that does not have long-term growth effects
    on the broader economy?
        Mr. Holtz-Eakin. Looking back and picking the big successes
    isn't what we are going to do going forward. We are going to
    fund lots of things, including failures. And the average rate
    of return is not going to look like the Internet or NASA. It is
    going to look like those plus a lot of failures, at best. So
    you have to be realistic about what you will get out of this.
    And I think that is the key.
        And, remember, at every point when you do this, you are
    taking money from the private sector, and it has genuine
    investment opportunities with rates of return, and the things
    you get out of public infrastructure should have at least that
    good a rate of return, if not better, to make it worthwhile.
    Otherwise, you are actually subtracting. Even if you get a
    positive rate of return, it has to be positive enough to make
    it worthwhile to take the money from the private sector. That
    is the key test.
        Mr. Ryan. Mr. Bernstein, your response?
        Mr. Bernstein. So a number of responses. I mean, first of
    all, I agree with a lot of what Doug said, particularly about
    expectations and investing cautiously. Certainly, no one would
    challenge the statement that government investments can be--or
    no one should challenge that government investments can be
    productivity enhancing or they can be wasteful. We want to do
    more of the former and less of the latter.
        However, there is some really low-hanging fruit. For
    example, the transportation example is a good one, because
    while quality of life isn't the same as GDP, if you apply that
    to moving goods through the supply chain, that really does have
    a productivity effect. It really does matter if trucks sit on
    the expressway, not getting their goods to market. It really
    does matter if our ports are not as functional as they could
    be.
        But, secondly, here is the thing I want to talk about.
    Preschool, quality preschool education, has been shown to have
    a particularly large bang for the buck in terms of much later,
    by the way--obviously, you are not going to help a 4-year-old
    today and see productivity results tomorrow. But we are, I
    think all of us, talking about the importance of long-term
    investments.
        There is no question in my mind, I believe this is a
    bipartisan consensus, at least among researchers, that that
    kind of investment will be undermade, particularly by low-
    income families who can't afford the quality kinds of preschool
    education that they need.
        That is a great example of not only low-hanging fruit, but
    in contrast to Doug's taking from the private sector. The
    private sector will underinvest in quality preschool,
    particularly with low-income families who don't have the kinds
    of deep pockets needed for that.
        Mr. Ryan. I have a question for you.
        Are we going to do another round of questions, you think?
        So I have a question, Dr. Cochrane. You talked about new
    innovations, new ideas, new efficiencies. We have so many
    people--and I represent Ohio, old Rust Belt--we have got
    business incubators that are publicly funded, they are kicking
    out companies. We have business accelerators. We have the first
    invasion manufacturing center, public-private partnership. We
    have a lot of these burgeoning companies that don't have access
    to capital, the valley of death that everyone talks about.
        Is there a role for the government in these areas to help
    grow these new ideas, these new companies?
        Mr. Cochrane. So access to capital is an important problem.
    And I think I would point to a lot of the restrictions of the
    Dodd-Frank Act, which are really making it hard to get capital
    to companies like this.
        Mr. Ryan. This was a problem well before the Dodd-Frank
    Act.
        Mr. Cochrane. And the Dodd-Frank Act is just cream on the
    cake of too much financial regulation getting in the way of
    exactly the problem you are pointing to.
        On the bigger question, we all agree that basic science is
    worth subsidizing, economists in particular, but basic science
    is a drop in the bucket of Federal spending. You could double,
    triple it, and not even notice it in Federal spending.
        There, too, the problem is you tend to invest in junk
    science sometimes.
        Mr. Ryan. Can you say that again for my Republicans
    friends?
        Mr. Cochrane. Basic science is a drop in the bucket of the
    Federal----
        Mr. Ryan. So we wouldn't even notice it if we doubled or
    tripled it?
        Mr. Cochrane. Absolutely. However, there is a tendency to
    invest in things like demonstration programs and getting things
    up to scale. That is very expensive and has proven not nearly
    as effective as basic science.
        I think the big argument we all have that we should talk
    about is how investments are made, not just how much. There is
    a tendency to build roads and bridges to nowhere, not the
    needed roads and bridges. Preschool might be useful, but
    education is a place where we have all seen you can pour money
    down rat holes and not improve the process.
        So if you improved how you spend infrastructure money, I
    think you might get a lot more of it more willingly.
        Chairman Price. The gentleman's time has expired.
        Mr. Johnson, you are recognized for 5 minutes.
        Mr. Johnson. Thank you, Mr. Chairman.
        And thank you, gentlemen, for joining us today.
        I share the concerns that have been expressed by other of
    my colleagues. You know, I can remember as far back as 2010 or
    2011 when then Chairman of the Joint Chiefs of Staff Admiral
    Mullen said that the greatest threat to our national security
    is our national debt. In spite of that, it continues to go in a
    vertical direction at an alarming rate.
        Publicly held debt is projected to rise from an already
    elevated 76 percent this year to more than 85 percent by 2026,
    twice the average level of the past 50 years, which was 39
    percent. CBO's long-term projections show that level will jump
    to 141 percent in 2046 under current law, and that would be the
    highest debt burden in our Nation's history.
        So, Dr. Cochrane and Dr. Holtz-Eakin, is this fiscal path
    sustainable?
        Mr. Cochrane. No.
        Mr. Holtz-Eakin. What he said.
        Mr. Johnson. What he said. Both emphatically no. Okay.
        What would be the impact--and I will give you a chance to
    expand on that--what would be the impact on the economy and the
    average American family if this fiscal future were to become
    our reality?
        Dr. Cochrane, you can go first.
        Mr. Cochrane. Yeah. What is unsustainable eventually isn't
    sustained. And the question is, how does it blow up? And as
    soon as you fix it----
        Mr. Johnson. What does the blowup look like? We have never
    had a blowup of that magnitude. I mean, we have never been in
    this kind of debt. You know, 141 percent will be the largest in
    our Nation's history.
        What, in your opinion, does a blowup look like at that
    point, and what would the impact be on the American people?
        Mr. Cochrane. If it leads to a debt crisis where suddenly
    interest rates spike, the U.S. needs to borrow, and bond
    markets say ``no,'' it looks a lot like Greece, or Greece with
    inflation, take your pick. That is unpleasant.
        The danger of focusing on deficits too much is it leads to
    ``let's raise taxes.'' This is what Europe did. Its austerity
    was not cutting government spending. Its austerity was raising
    taxes, and, as usual, raising--marginal tax rates--adding the
    disincentives to, God forbid, hire somebody or start a new
    company. And no wonder that didn't work.
        So the temptation would be massive increase in taxes, which
    just slows the economy down even more. You don't get the
    revenue. And you end up in a very slow economy for a long time.
        Mr. Johnson. Yeah.
        Dr. Holtz-Eakin.
        Mr. Holtz-Eakin. I would concur in that. I would also point
    out that it undermines the ability of the Congress to do its
    job, which is to respond to what voters want this country to
    try to accomplish. If you are locked into spending the money on
    interest, because you must honor those obligations, and you are
    locked into spending on entitlements, there is no room for
    discretion. And it seems quite wrong in a representative
    democracy to, in 2016, dictate exactly what we are going to be
    doing in 2026, 2036, and 2046, even in the absence of a crisis,
    which will also then happen.
        Mr. Johnson. Sure. I agree.
        Quickly, with interest rates at historically low levels,
    some are calling for more borrowing and deficit financing of
    government spending--for example, infrastructure spending--to
    get the economy turned around. With interest expenses poised to
    become the fastest-growing segment of the Federal budget, do
    you think that adding to the debt by borrowing more is the
    answer to our economic ills? Quickly.
        Mr. Cochrane. If the borrowing really did lead to positive
    rate of return projects, you could pay it back. And I would
    encourage borrowing to be long term so that if interest rates
    go up, you are not exposed to it.
        The danger is borrowing that, then, gets thrown down the
    rat hole of stimulus rather than actually investing something
    that produces higher tax revenues in the future.
        Mr. Johnson. Okay.
        Dr. Holtz-Eakin.
        Mr. Holtz-Eakin. A way to think about it is, they are
    saying now is a good time to do something because interest
    rates are low. First ask: Is that something you want to do? Is
    that an infrastructure investment that generally has
    productivity effects that are larger than what you get out of
    the private sector? That is the key question, not the timing
    issue, and we are making bad choices all the time in the
    infrastructure area.
        Mr. Johnson. Okay. I have got 5 seconds to ask this
    question. Is every dollar that we spend, that we borrow, that
    is a dollar no longer available for economic growth? Is that a
    safe statement? Yes or no?
        Mr. Cochrane. Yes.
        Mr. Holtz-Eakin. Yes.
        Mr. Johnson. Okay.
        Chairman Price. The gentleman's time has expired.
        Mr. Johnson. Thank you, gentlemen. My time has expired.
        Chairman Price. Mr. Grothman, you are recognized for 5
    minutes.
        Mr. Grothman. I will give you a general question. And we
    actually had a panel on a similar topic on Joint Economic
    recently.
        Part of our problem is that income growth is not as rapid
    as it should be. And I would like you guys to comment on the
    degree to which that is caused by us currently discouraging
    work. I got home a couple weekends ago, ran into a CPA, telling
    me about all the people who were intentionally working less to
    get their ObamaCare subsidy. And, clearly, the ObamaCare
    subsidy was designed to encourage people not to work very hard.
        The same is true about the wide variety of what you call
    welfare programs, earned income credit, clearly designed to
    discourage people from working hard, food share, low income,
    everything.
        I would like you guys to comment on that and the degree to
    which the slow growth of our economy and, as a result, lower
    growth in revenues than anticipated, is caused by this seeming
    policy of the Federal Government today to discourage work.
        Mr. Cochrane. I will start, and I will be quick.
        I think ``designed'' is unfair. It is an unintended
    consequence that when you phase out a benefit, then that gives
    a disincentive to work.
        More than just work versus not work, it gives you a
    disincentive to invest in human capital, to make hard
    investments today that will pay off tomorrow.
        Even the CBO report mentioned the ACA as one of the many
    disincentives to be in the labor force. And the labor force
    participation rate, I think, is one of our biggest worries.
    Even prime age males, the numbers of them who are even looking
    for a job is very low. I think a lot of people are stuck in
    social programs because of those cliffs. Yes, it would help a
    lot to get people back to work and back into better jobs.
        Mr. Bernstein. So I would like to challenge the premise a
    bit. In my testimony, which you may not have heard initially,
    we learned that yesterday, from the Census Bureau, that median
    household income grew 5 percent last year--real terms. That is
    the largest growth in household income in the full history of
    this series that starts in 1967. We have the longest period of
    job growth on record, 15 million jobs. It started growing in
    2010. We have real wages growing, the unemployment rate down by
    half.
        So I don't think that the actual empirical data would bear
    out some sort of story that says there are disincentives that
    are discouraging work when we have a job market that is not
    only generating historical job gains, but historical income
    gains as well.
        Mr. Holtz-Eakin. And I am kind of----
        Mr. Grothman. Well, go ahead. I am sorry.
        Mr. Holtz-Eakin. I just have to yell at my good friend,
    Jared, for a while, if you would let me.
        Take the report actually with a grain of salt. Remember,
    this is one data point in a sea of zeros. And it is just hard
    to understand where you get 5 percent real in this report where
    there is nothing else growing at 5 percent real in the economy.
        If you dig into that report and you look at the increases
    in earnings of full-time full-year workers, for men, it is 1.6
    percent real, for women, it is 2.2 percent real. That is the
    economy that we are in. We are in a 2 percent economy. The
    rest, the 5 percent, comes from some additional workers in each
    household, part-time work, things like that. That is not going
    to persist. That is not a route to success in the future.
        On the question you asked, there is a large literature of
    the disincentive effects of phaseouts of benefits and other
    parts of our social safety net, and I think this merits a close
    examination, because the dividing line between poverty and
    nonpoverty in the United States is work. If you are working,
    your probability of being in poverty is low; if you are not, it
    is 25 percent.
        So everything that we do should be pro-work. We have low
    labor force participation, we have a low employment-to-
    population ratio, and we ought to think hard about work
    incentives.
        Mr. Grothman. I will have to respond and ask Dr. Bernstein
    here. Do you ever talk to any accountants out in the real world
    to tell you, or maybe people in the income maintenance area, or
    employers who deal with people in the $10 to $15 an hour range?
    I mean, if you just talk to a few people in that area, you will
    again and again and again find employers or accountants who
    will tell you stories in which people are not taking a second
    job or turning down overtime or turning down wages because it
    will affect all their benefits. You can do a study, and who
    knows whether the study is done accurately or not. All you have
    to do is talk to people and the stories just come like a
    waterfall out of them.
        Mr. Bernstein. If I can respond, I would like to, but if
    not, I can----
        Chairman Price. The gentleman's time has expired.
        You may quickly respond if you would like.
        Mr. Bernstein. Yeah, I do talk to those people, and one of
    the things they tell me is the earned income tax credit, which
    is a very important low-wage subsidy, is very pro-work, and
    they find that that very much pulls people into the job market
    and increases their incentives to work. So it kind of pushes
    the opposite way of some of the ideas you are suggesting.
        Chairman Price. Time has expired.
        Mr. Woodall, you are recognized for 5 minutes.
        Mr. Woodall. Thank you, Mr. Chairman, and thank you for
    calling the hearing. I knew it was going to be a good one when
    Mr. Pascrell rejected doom and gloom right from the outset.
        I have not been disappointed. There has been a lot of head
    nodding going on up there. And candidly, I was feeling a little
    bad about us as an institution, because I thought, golly, if
    these guys can all get along on these topics, why can't we? And
    then you all start arguing about data points in the census
    report. And I think that is right, that we spend so much time
    around here arguing about data points too.
        But the truth is folks didn't disagree with Dr. Holtz-
    Eakin's point on transportation. Yes, we don't need to improve
    his commute through the suburbs, we need to improve the 2 of
    the top 10 most congested freight byways in the country, which
    run through metro Atlanta, and that is going to have a real
    productivity increase. And we agree, let's do double National
    Institutes of Health.
        For Pete's sake, you call yourself the grumpy economist,
    Dr. Cochrane, but every time the agreement comes up, I see a
    big smile come across the face, that there is opportunity
    there. Newt Gingrich and Bill Clinton did it. We can do it too.
        Tell me this, Dr. Cochrane. When I was with the Bureau of
    Public Debt, they said, we are going to push out maturity as
    far as we can. I know we are at record highs now north of 70
    months. But they say, we can't push it out too far, because
    liquidity is going to become a problem if we do. Do you have
    any concerns about us pushing it out too far too fast?
        Mr. Cochrane. I think we can push it out a lot farther a
    lot faster. We are actually in the strange position that the
    Treasury has started to lengthen the maturity to debt, and the
    Fed turned right around and bought that stuff back up again.
        We need Treasury and the Fed to get together on who is in
    charge of this crucial question. And even the Treasury is not
    that clear that part of their job is to manage the risks to the
    budget of what if interest rates go up. They kind of think of
    their job as try to borrow at the lowest level possible, but
    not really this crucial question every household faces.
        The fixed-rate mortgage, we know what we are paying; the
    floating-rate mortgage, it looks a little lower, but we could
    really be in trouble. And not even the Treasury is really in
    charge of that question.
        I think liquidity is overstated. Queen Victoria raised her
    money on perpetuities that were an infinite maturity debt, and
    those were very low interest rate. Markets get used to stuff
    pretty quick.
        Mr. Woodall. Dr. Cochrane mentioned in his opening
    statement that he thought getting to tax simplification was
    going to be easier than getting to lower rates. I have found
    the opposite to be true. I can talk to folks about a percentage
    point, but if I try to take away your cutout, your carveout,
    your exemption, your exception, suddenly the pillars begin to
    rumble.
        Dr. Holtz-Eakin, I know you have been active in terms of
    how we can--we don't have to compete on low wages, we don't
    have to compete on a dirty environment, we can compete on a
    competitive international tax code. I feel like this is our
    opportunity to get that done, I feel like we are getting that
    consensus on both sides of the aisle. How high does that rank?
        I listened to Mr. Ryan's opening statement. I am thinking,
    for Pete's sake, I don't like paying taxes either. Let's just
    have Wal-Mart and the big guys pay them all and everything will
    be great. But I know we can't compete that way in a global
    economy.
        How important is fundamental tax reform and increasing the
    incentive to perform those tasks in America rather than
    elsewhere?
        Mr. Holtz-Eakin. I think tax reform is extremely important.
    Fixing the corporate code is top of the list. The corporate
    code has reached this sort of trifecta of failures, where it is
    a big impediment to growth and competitiveness, it is
    impossible to administer and comply with, and it raises almost
    no revenue. So it makes no sense in its current form.
        Lots of evidence that if we could get the rate down to
    something like 20 percent, internationally competitive, get the
    base to look like every other one of our competitor countries,
    that that would benefit workers in America, because
    increasingly they pay the price of a bad corporate code by
    losing jobs that have good wages and good benefits, and it
    would benefit the attractiveness of the U.S. as a location for
    investment. It would end this inversion nonsense overnight. It
    is something that you just should do.
        Mr. Woodall. I know you opened your comments with saying
    you always say it and nobody ever pays any attention, so you
    move on to point number two.
        Mr. Holtz-Eakin. I have been at this for 30 years. I
    haven't changed one thing.
        Mr. Woodall. Absolutely. I just feel like it is not hot air
    this cycle.
        Mr. Holtz-Eakin. I hope you are right.
        Mr. Woodall. I feel that necessity is pushing us there.
        And, Dr. Bernstein, I will ask you, again, lots of head
    nodding going on up there at the panel, from my side of the
    side of the aisle, we may have called you here to be the
    antagonist, but there is lots of agreement in the space.
        Is there a short list, as you look at your peers from the
    left to the right in the economic structure, that say, you know
    what, if Congress--not if Congress, Congress can, the American
    people are in a place where we can go through steps one, two,
    and three right now?
        Mr. Bernstein. I think it is a great question. I think some
    areas where we agree, investment in basic research. Maybe, I am
    not sure how much we agree, but I think investment in
    productive transportation would be a useful place to go. And I
    think there was some consensus on the idea that investment in
    particularly education, maybe at the preschool level, where
    families don't often have the resources, that has a long-term
    payback. And I know that folks around here didn't necessarily
    want to look at the President's budget, but he does have, I
    think, a very smart preschool program in there.
        Chairman Price. The gentleman's time has expired.
        Mr. Woodall. I thank the panel.
        I thank the Chairman for his indulgence.
        Chairman Price. Mr. Blum, you are recognized for 5 minutes.
        Mr. Blum. Thank you, Chairman Price.
        And thank you to our distinguished panel of economists. As
    I sit today looking at you all, I am reminded of Harry Truman's
    famous line of asking to be sent a one-armed economist, because
    he grew tired of economists saying, ``On the other hand.'' So I
    have not heard that much today, so much to your credit.
        Dr. Cochrane, the grumpy economist, I guess, to be called,
    people have said that politics has become a joyless profession.
    I didn't know economics was the same.
        Our economy, as someone said in their opening remarks, is
    growing at 50 percent of the post-World War II average--50
    percent. What do you think is holding back the economy?
        Mr. Cochrane. Lots of sand in the gears. Every single
    market----
        Mr. Blum. Give me some of those grains of sand, briefly.
        Mr. Cochrane. Overregulation, tax--not just the tax rates.
    I think actually, if you could spend 5 minutes filling out your
    taxes and it was a high rate and it was a predictable rate,
    that wouldn't be so bad. I think the complexity is, in fact,
    really hurting the growth, because lots of businesses are
    structured around taxes and everybody is in Washington coming
    to get their special deal as opposed to just the tax rate.
        So, yeah. Regulation. Regulation and economic law. Labor
    law. We put so many barriers between your desire to hire
    someone and how much money he or she takes home and their
    ability to work. There is just sand in the gears everywhere.
        I would like to come back for just a second, though. On the
    corporate taxes, we have got to remember, every cent of
    corporate tax comes from higher prices, lower wages, in theory
    lower returns to shareholders, but they just go overseas if
    they don't get what they want. So almost all comes from people,
    higher prices or lower wages, and typically those aren't high-
    income people.
        So, in fact, if you reduce corporate taxes and tax the
    people who get the profits, you even get a more progressive Tax
    Code, as well as reducing all the incentives for all of those
    guys to be here every December to come down and ask for some
    special credit or deal.
        Mr. Blum. Dr. Holtz-Eakin, this is somewhat of a lightning
    round. I have got six quick questions for you. They are all
    about growing the economy.
        Would reducing the corporate tax rate----
        Mr. Holtz-Eakin. Yes.
        Mr. Blum [continuing]. Which is the highest of developed
    nations, would it help grow the economy?
        Mr. Holtz-Eakin. Yes.
        Mr. Blum. Would reducing the regulations on the private
    sector help grow our economy?
        Mr. Holtz-Eakin. Yes. Can I expand on that?
        Mr. Blum. Yeah. Absolutely.
        Mr. Holtz-Eakin. I just want to emphasize, we do a lot of
    work on measuring the regulatory burden at AAF. Sam Batkins has
    that portfolio.
        If you just take what the agencies report as the cost of
    final regulation--I am not even saying they are right, I have
    good reason to suspect they are too low--and simply add up the
    cumulative costs of the regulatory burden since 2009, it is
    $800 billion in new burden costs. That is a $100 billion
    disguised tax increase every year for 8 years.
        I know there are benefits to regulation, but it is hard to
    imagine that that is not harming the growth rate of this
    economy.
        Mr. Blum. Would reducing uncertainty in the private sector
    help grow the economy?
        Mr. Holtz-Eakin. Yes.
        Mr. Blum. Would reducing deficits help grow the economy?
        Mr. Holtz-Eakin. Particularly the long-term deficits that
    lead to the unsustainable rise in the debt, yes.
        Mr. Blum. Would fully developing all American energy
    resources help grow this economy?
        Mr. Holtz-Eakin. Yes.
        Mr. Blum. Would enacting tort reform--we are the most
    litigious society in the world--help grow the economy?
        Mr. Holtz-Eakin. Yes.
        Mr. Blum. Well, that was quick. Thank you for your answers.
        My last question, Dr. Bernstein. If we continue to increase
    our debt as a percentage of GDP, what is going to happen 10
    years from now, 20 years from now? Because I think the American
    public, they hear us all talk about this, and they say: Hey,
    the sky hasn't fallen today, I don't see any negative impact of
    this, doesn't seem nearly as bad as everyone says.
        What is going to happen.
        Mr. Bernstein. So I actually--I am the opposition witness
    here--but I agree with my colleagues that it is an
    unsustainable trend when you start looking at numbers that are
    really in the stratosphere in the outyears.
        Mr. Blum. What will happen? What will happen? What can I
    tell my constituents?
        Mr. Bernstein. I think I am probably closer to John on
    this, that it is really hard to predict that there will be some
    sort of an interest rate spike, that is the traditional
    assumption, but I find that very hard to tease out of the data.
        I think you are just two things. You are more vulnerable to
    the kind of debt crisis that John talks about. But, secondly,
    when you do hit a rough patch--and there is a recession out
    there somewhere, we don't know where, it is out there
    somewhere--it makes it much harder for Congress to implement
    the kinds of discretionary spending that is very much needed to
    offset that when you start from such a high debt level.
        But let me say one thing about this, sir, if I can just
    take half a second, I have this in my testimony. While we are
    all bemoaning the increase in the debt, we all agree on that,
    if you actually look at the improvement in the trend, say,
    since 2010, it is quite significant. The debt was, like,
    unbelievably unsustainable before; now it is unsustainable.
        So I am not saying that that is a great outcome, but
    improvements have been made, and they have been made largely
    through the channel of low interest rates, but also from the
    slower growth of healthcare spending, which I attribute in part
    to the Affordable Care Act. Now, we may disagree on that, but
    that is a really important point, in my view.
        Chairman Price. The gentleman's time has expired.
        Mr. Blum. Thank you. I yield back the time I do not have.
        Chairman Price. Mr. Sanford, you are recognized for 5
    minutes.
        Mr. Sanford. Thank you, Mr. Chairman.
        And I know the focus of this hearing is on economic growth,
    but economic growth doesn't wake people up. I want to go back
    to a degree what my colleague Mr. Blum was getting at, Mr.
    Johnson was getting at, which is people sort of lull themselves
    to sleep. I believe we are walking our way into a debt crisis.
    We are sleepwalking our way in that direction.
        And so I want to, again, bore down just as to where he was,
    into not just marginal difference in economic growth, but if
    you have a debt crisis, what happens to the economy overall,
    what happens to people's savings, what happens to the worth of
    the currency? We may not be able to predict interest rates, to
    your point, but, I mean, frankly, what happens to our political
    infrastructure?
        I would like to hear from each one of you, do you know of
    an instance wherein there has been a soft landing, or a benign
    deleveraging, if you want to call it that, in the wake of a
    debt spiral and debt spike?
        Mr. Bernstein. Can I start, because I will be very brief?
    Actually, I do, and that would be World War II. That was when
    we had our maximum debt-to-GDP ratio, 106 percent, and a
    relatively few years later, it was down in the 30 percent
    range, and that had to do with very much the kinds of growth in
    productivity enhancements, full employment economy that many of
    us are all arguing for.
        Mr. Sanford. I will argue that point. I mean, wouldn't that
    be as a consequence of Pax Americana? I mean, at the end of the
    day, we were in essence the only economy standing. If you look
    at American GDP as a percentage of world GDP right now, it is a
    very different picture than what we saw in the wake of World
    War II. And so I would argue that while that is certainly true,
    it is a very different example, given Pax Americana that
    existed and the rebuilding, in essence, that we did around the
    world at that time.
        Mr. Bernstein. I think you make a great point, but my only
    point is that one of the themes of my testimony today is public
    investment can be helpful here. I actually think public
    investment--now, it happened to be around a military buildup--
    but public investment was demonstrably important back then. I
    am not saying the two examples are analogous, but I do think
    you can pull out that point.
        Mr. Sanford. Let me ask one point, though. Prior to that,
    were we a debtor or creditor nation?
        Mr. Bernstein. Well, we were much more of a creditor than a
    debtor nation, sure.
        Mr. Sanford. Which is very different, again. Prior to that
    point, did the Fed have a balance sheet of about $4.5 trillion?
        Mr. Bernstein. No, that is new.
        Mr. Sanford. So, in other words, I could go with a whole
    host of different examples that would say--so outside of that
    example, can you give me one? Can anybody give me one?
        Mr. Cochrane. Yeah. So the U.K. grew out of, like, 200
    percent debt-to-GDP ratio or more following the Napoleonic
    Wars. I mean, you can grow out of large debts if you are not
    running larger and larger deficits on the way.
        Mr. Sanford. The case would be the case of Zimbabwe,
    Argentina, Venezuela go down the list.
        Mr. Cochrane. Oh, yeah.
        Mr. Sanford. I mean, I think there has been pretty
    interesting data, I think Berman actually wrote it up, that in
    the wake of every debt crisis there has been a fall in
    purchasing power by 99 percent. So if you had a dollar of
    purchasing power, at the end of the debt crisis you got about a
    penny, which would fit with Venezuela. I mean, you could go
    down a long list of examples.
        Which is to say, how do we wake people up, whether we come
    from the left or right in our political perspective, to the
    fact that there is really serious threat, not just to a drag on
    the economy. And I think there is conclusive data from IMF,
    from the European Union, a variety of different folks that say,
    yeah, there is a drag on the economy when you get up and around
    certain levels with regard to debt-to-GDP.
        But I think the even more pronounced problem is the one
    that we are not talking about, which is if we play this thing
    out, we can end up in real trouble. And I would argue that
    maybe we are much closer than we think, because I saw some
    interesting numbers the other day.
        If you look at household net worth to GDP in this country,
    we have been at a band around--there has been sort of a trading
    range, if you want to call it that, 440 to 540, somewhere in
    that range. It has jumped up around 640 only three times in the
    last 60 years, one, just prior to the tech bubble bursting;
    two, just prior to 2008 and the housing bubble bursting; and
    now we are up around 640 percent.
        In other words, I just think that there are a number of
    cards that could fall that could cause this thing to come much
    sooner than we think.
        You were about to say something. I apologize.
        Mr. Cochrane. Well, I wanted to help you appeal to your
    colleagues on the other side of the aisle.
        What certainly will happen is a fairly chaotic cut in
    benefit. What happens to countries when they run out of their
    fiscal ability is people who are counting on Social Security,
    their cuts come big and heavy and unpredicted. Look at poor
    Russians, they are stuck. Those pensions went. Health care is
    going to get rationed and really cheap, and people who are
    counting on Medicare aren't going to get it.
        So you want to reform those programs predictably ahead of
    time and not when you run out of the ability to borrow money
    and suddenly people who are counting on it are thrown out on
    their own. That is what will happen.
        Chairman Price. The gentleman's time has expired.
        Mr. Brat, you are recognized for 5 minutes.
        Mr. Brat. Thank you, Mr. Chairman. I have to go testify on
    health savings accounts, but I just wanted to ask one quick
    question, and it will be suggestive, and then I have got to run
    out.
        But a lot of times up here we talk economic growth, and
    then you get the usual pattern of political responses tied to
    government programs that already exist instead of going back to
    first principles and what causes economic growth in the first
    place, and then asking yourself, are you in the ballpark on
    those fundamentals or are we just making up kind of new clever
    things that are trendy politically and trying to hit those in
    the short run.
        So we mentioned R&D, NIH funding, preschool initiatives,
    infrastructure. So those are examples of the in-vogue kind of
    things, right? Obama has been doing infrastructure for 7 years
    and the economy has grown at 1 percent the last couple
    quarters. So I am unconvinced.
        Sand in the gears, I think we are all agreed on that. The
    regs are huge, and how we overcome that is tremendously large.
        So I just want to ask you, if you go back to economic
    theory from scratch, give me just your top three causes of
    economic growth, the three variables on the right-hand side of
    an equation, in order, right, starting with number one, the
    number one proximate cause of economic growth, number two,
    number three. If they are cultural, if they are capital, if
    they are traditional economics, I don't care. But just give me
    your top three, what do you got.
        Why don't you start off, Dr. Cochrane?
        Mr. Cochrane. There is a great quip: Growth started when
    ideas started having sex. So ideas, new processes, new
    products, new ways of doing things, from fundamental research,
    from applied research, but then that can translate into new
    companies, new ways of doing things. That is the hard part.
        Mr. Brat. Good.
        Yep, Jared. Sorry, Dr. Bernstein.
        Mr. Bernstein. Sure. Productivity growth, which relates to
    the kind of innovations you just heard about. Labor supply, so
    the idea of deporting 11 million immigrants is probably a bad
    idea. And, three, robust consumer spending fueled by a full
    employment job market, so middle class and lower-income people
    are also getting a slice of the pie. That is a problem when you
    have the kind of inequality we have seen in recent years.
        Mr. Brat. Good.
        Mr. Holtz-Eakin. I think the ideas innovation and turning
    that into new companies and high-quality competition. The
    biggest indicator of a problem we have right now is that the
    firm creation rate fell below the firm death rate for a couple
    years recently. That has never happened before. If you just
    keep your eye on startups and make sure we get adequate
    startups, a lot of things will take care of themselves. And
    past that, you need capital, access to capital.
        Mr. Brat. Good. The immigration, in 30 seconds, I will just
    say, south of the border immigration, average tenth-grade
    education level on the human capital side. I am not aware of
    any growth studies that show average person at the Federal
    level, welfare benefits $37,000 a year, according to Heritage,
    $26,000 a year if you have got two kids in school. Productivity
    growth is low.
        But let me go back to my first series of questions. So I
    love the ideas, right? One of my favorite economists, Chicago,
    I am going to blank on her name, virtue, she is the virtue one.
    Anyway, going on to your thing----
        Mr. Cochrane. Deirdre McCloskey.
        Mr. Brat. Yeah. Deirdre, right.
        To get at this, what should the Federal Government be doing
    if we wanted to think way outside of the box, not at the
    margin, the margin is not working? What do we do to really
    reinvigorate the private sector in a big way using the limited
    tools we have right now?
        Mr. Cochrane. A whole lot of get out of the way.
        Mr. Brat. Yeah.
        Mr. Cochrane. And I would add to your immigrants, high-
    skilled immigrants want to come to this country, build new
    companies, hire Americans, and pay off Social Security, and we
    keep them out. At least we could agree on that.
        Mr. Brat. Right. No, that is correct, right.
        Dr. Bernstein.
        Mr. Bernstein. So I think that the sand in the gears idea
    that we are hearing a lot about, I think we have to be much
    more specific there. And I think somebody asked, give us some
    granular examples of what we are talking about. I wouldn't want
    to leave this hearing with the suggestion that every regulation
    is a bad regulation and every regulation should be torn from--
    but you actually have to go one by one. And I haven't seen
    nearly enough evidence to substantiate some of John's claims
    that this is our biggest economic growth problem.
        In fact, one of the things you can observe is that we have
    had actually a boatload of these regulations over time, and
    growth has been fast and then slow. And so I think you have to
    kind of get much more granular and less broad.
        Mr. Brat. Yep. Good. And then, Doctor.
        And I will just say, we have got $2 trillion in regulatory
    overreach that has been categorized already.
        Mr. Bernstein. That is just not evidence. I take your
    point, and there may be a relation there, but correlation is
    not causation.
        Mr. Brat. Right. Got you.
        Doctor, 5 seconds.
        Chairman Price. Quickly.
        Mr. Holtz-Eakin. Ozone rule, clean power plan, fiduciary
    rule, overtime rule. I can go on.
        Mr. Brat. Right. I know that well.
        Mr. Holtz-Eakin. I will give you a list.
        Mr. Brat. That is it. Good. Thank you all very much. Sorry
    to run.
        Chairman Price. The gentleman's time has expired. Thank
    you.
        I want to visit a couple points that were made by Dr.
    Bernstein and our friends on the other side of the aisle, and
    to start with this infrastructure spending. I share an adjacent
    district to the one that Mr. Woodall has. I know that if those
    trucks that I am behind on the highway every single day got out
    of my way because they could move through faster, then I could
    get where I needed to get faster and they could too, and that
    would increase productivity.
        But the fact of the matter is that a study done by the
    Congressional Budget Office in June of this year concludes
    that, quote, ``Productive Federal investment has an average
    annual rate of return of 5 percent, or half the agency's
    estimate of the average rate of return on private investment,''
    and that if one assumed that $50 billion was spent over 10
    years, $500 billion total increase, the CBO concludes that the
    output would increase slightly, but it would also boost
    deficits.
        In fact, the quote is, ``The negative effect on output from
    crowding out would be stronger than the positive effect from
    increased productivity.''
        So, again, we all, both sides of the aisle, want
    infrastructure spending, targeted, appropriate, wise, smart
    infrastructure spending. But when we look back on what was done
    in the stimulus, you talk about something that wasn't targeted,
    wasn't wise, wasn't logical, didn't have the results that our
    friends on the other side thought it was going to have--we
    predicted that it wouldn't--then we are really suspect about
    this notion of infrastructure spending expanding the economy.
        Second, I want to touch on what my friend from New Jersey
    said at the beginning as he was bemoaning, almost crying over--
    even though he had lost his doom and groom--but he was almost
    crying over the fact that corporate taxes only result in 11
    percent of the overall revenue coming to the Federal
    Government.
        So, Dr. Holtz-Eakin, what if we were to increase, let's
    increase the percent of revenue to the Federal Government,
    let's double it, let's double the corporate income tax, what
    happens?
        Mr. Holtz-Eakin. First, I would just echo the point that
    John Cochrane made about who is really going to pay that tax.
    It is not corporations, it is going to be lower-income
    Americans. And if that is the policy that people want, then
    fine, but that is what you are going to do.
        The second thing that will happen is you will accelerate
    the loss of headquarters companies from the U.S., without a
    doubt. This is the most tax-inhospitable place to be
    headquartered on the globe, and it is a matter of inevitability
    that headquarters are going to leave, you will just have that
    happen faster.
        Chairman Price. We have been trying to bring focus in this
    committee to the imperative of growth, part of the reason for
    this hearing, obviously, but the consequences of debt.
        [Slide]
        Chairman Price. And if you put up the first slide, I think,
    which demonstrates the growth in interest, we harken back to
    the halcyon days after World War II when we had a debt-to-GDP
    ratio of 106 percent or whatever it was. But the fact of the
    matter is that, as Mr. Sanford cited, none of the other
    dynamics out there were the same as they are right now and
    things were trending in a good direction both from a spending
    standpoint and from a growth standpoint.
        This is the coming decade, this is the next 10 years of
    what happens to interest payments, an increase of 187 percent
    over that period of time, the largest increase in our spending
    here at the Federal level.
        And, Dr. Cochrane, what are people able to do with those
    dollars that are spent on interest?
        Mr. Cochrane. I think you are pointing it out. Now,
    somebody might look at that graph and say, well, maybe we would
    get lucky like Japan and interest rates would stay low and we
    wouldn't spend that, to which I think you might ask, but what
    if interest rates are higher than that projection? Now we are
    in really deep trouble.
        A hundred percent debt-to-GDP ratio means that a 5 percent
    interest rate means the deficit every year is 5 percentage
    points of GDP higher. It is the risk, I think, more than the
    forecast.
        I would like to also put in another thing to something you
    said earlier. We have been talking about infrastructure and is
    it good, is it not. But our growth rate got cut in half. Now,
    there are potholes. I don't like potholes. But there is no case
    that potholes and traffic jams are what cut the U.S. growth
    rate in half. I may have flubbed the question of did
    regulations really add up to it or not, but there is just no
    case that we have cut in half growth rate because the roads and
    bridges are bad.
        Mr. Bernstein. That is true.
        Chairman Price. This is a little bit of a tangent, but let
    me touch on the issue of regulation, because I think it was
    you, Dr. Holtz-Eakin, who mentioned the $800 billion of new
    regulatory costs.
        We all, we jump up and down and sputter and spit about the
    corporate income tax rate and how it is harming growth in the
    economy, and it brings in, as Mr. Pascrell said, about 11
    percent, about $320 billion dollars a year out of a $3.8
    trillion budget or thereabouts. And the compliance costs of
    regulation in this country, the compliance costs of regulation
    in this country estimated to be $1.8 trillion a year, six times
    the cost of the corporate income tax.
        I noticed that on this long laundry list of items each of
    you suggested would invigorate the economy and create growth,
    that regulation wasn't one at the top of the list. But wouldn't
    getting regulation--again, we all want regulation, smart
    regulation, wise regulation that does something that actually
    inures to the benefit of the American people instead of punish
    the folks who are out there trying to create jobs and institute
    their better ideas--wouldn't decreasing the costs of
    regulation, compliance costs, Dr. Holtz-Eakin, have a
    significant effect on the economy?
        Mr. Holtz-Eakin. I think so, yes. And one channel that
    doesn't get talked about enough is that it is the large
    incumbent firms that are most easily able to deal with
    regulatory complexity and cost. They have been around, they get
    it, they have their lawyers. If you are trying to start a
    business, it is overwhelming.
        And I genuinely worry about the competitive pressures that
    are missing because firms aren't starting up and the
    innovations that are not getting put into the economy because
    of the poor startup rate.
        Chairman Price. Yeah.
        Dr. Cochrane.
        Mr. Cochrane. Oh, boy, how many horror stories of
    regulation do you want to hear. But I do think we need to get
    past the rhetoric of too much or too little to the broken
    structure of regulation, not just the costs of compliance, as
    if you can just hire this out and fill out some forms, but the
    uncertainties. You put your drug application into the FDA, who
    knows when it will come in or out.
        That is something that changes the structure of the
    business and makes a whole idea unprofitable, not just there is
    this compliance cost, which bad enough as it is.
        Chairman Price. Yeah. No, we had a hearing last week on
    CMMI, Center for Medicare and Medicaid Innovation, that many of
    us believe is usurping a lot of the legislative authority, the
    policymaking authority. But the regulations that they are
    putting in place, the uncertainty of what they are doing, the
    capricious nature with which they act are the kinds of things
    that significantly harm growth in our economy.
        I was struck, Dr. Cochrane, by one of the statements you
    made. I think you said we could grow out of large debts with
    growth if we weren't increasing our deficit at the same time.
    So it is just kind of a self-evident truth.
        Mr. Bernstein. Chairman Price, may I make one comment about
    the regulation point?
        Chairman Price. Quickly, yeah.
        Mr. Bernstein. So here is a horror sorry about regulation.
    The implosion of the housing bubble, which was very much a
    function of underregulated financial markets, that is the other
    side of the coin. And I just want to be clear that--and you
    said it yourself--I just want to be clear, we have to think
    about both sides. Underregulation can also be devastating to
    our economy.
        Chairman Price. Let me suggest that the housing bubble was
    created by the Federal Government, one could argue, by
    regulations that the Federal Government put in place that
    required the outlay of capital in a risky way.
        Mr. Bernstein. Obviously, I disagree.
        Chairman Price. I suspect so.
        Dr. Cochrane, I want to put in my final minute and a half
    here, I want to put a face on all of this, because at some
    point the growth rates that are now down 50 percent, and the
    projections over a 10-year period of time are down by fully a
    third, and I suspect it will be less than that unless something
    changes, the fiscal crisis that we have talked about coming
    forward, and that you can't read the tea leaves, you can't
    predict when that is going to happen, but when it happens--
    because if we don't change policy, it is going to happen--when
    it happens, what does that look like to Mr. and Mrs. American
    Public?
        Mr. Cochrane. It already starts bad, because it happens
    because we failed to grow. So Mr. and Mrs. American Public's
    income is 20, 30 percent or more less than it would have been
    otherwise. We are talking about huge numbers when we talk about
    growth, more than anything else. Yes.
        And then you live in chaos. Look what happened in Greece
    after its debt crisis. You start with a sclerotic economy, you
    get a dysfunctional government, then all of a sudden the
    government grabs everything it can.
        Chairman Price. The promises that we have already made will
    not be fulfilled. Social Security.
        Mr. Cochrane. You are going to default on something.
        Chairman Price. Medicare.
        Mr. Cochrane. Those things will have to get cut
    chaotically.
        Chairman Price. Medicaid.
        Mr. Cochrane. Yes. Along with savings and businesses and
    everything else. Don't let it happen.
        Chairman Price. The Budget Committee has a program ongoing
    called Restoring the Trust for All Generations, and it is
    trying to put a face on it, it is trying to say these are the
    consequences if we don't get our fiscal house in order. And
    this is certainly a bipartisan project, and I was struck by
    some of the agreement that we had on the panel today.
        I want to thank each and every one of you for coming.
        Mr. Ryan. For 30 seconds. Dr. Holtz-Eakin said about
    startup businesses, and I would hope that this would be an area
    of agreement. We don't need to talk about the big corporations
    who maybe have the wherewithal to work the Tax Code, and we all
    know the game.
        But if places like Youngstown, Ohio, or Akron, Ohio, are
    going to have any renaissance, we need startup businesses. And
    I agree with you with some of these regulations that some of
    the smaller startups have to deal with, including getting them
    capital.
        Chairman Price. As Dr. Holtz-Eakin mentioned, I think, we
    have gone through a period now where there are more small
    business deaths than births, and that is a dangerous place to
    be for an economy.
        So I look forward to working with you as we move forward,
    because we have to tackle this. The American people expect it
    and they have a right to expect it and have us get our job
    done.
        Dr. Cochrane, Bernstein, Holtz-Eakin, I want to thank you
    so very much for appearing before us today. Please be advised
    that members may submit written questions to be answered later
    in writing and that those questions and your answers will be
    made part of the formal hearing record.
        Chairman Price. Any member who wishes to submit questions
    or any extraneous material for the record may do so within 7
    days.
        [Whereupon, at 11:43 a.m., the committee was adjourned.]