[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:]
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    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:]
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    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:]
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    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.]