[Joint House and Senate Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 114-550
FEDERAL DEBT: DIRECTION, DRIVERS,
AND DANGERS
=======================================================================
HEARING
before the
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 8, 2016
__________
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JOINT ECONOMIC COMMITTEE
[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]
SENATE HOUSE OF REPRESENTATIVES
Daniel Coats, Indiana, Chairman Patrick J. Tiberi, Ohio, Vice
Mike Lee, Utah Chairman
Tom Cotton, Arkansas Justin Amash, Michigan
Ben Sasse, Nebraska Erik Paulsen, Minnesota
Ted Cruz, Texas Richard L. Hanna, New York
Bill Cassidy, M.D., Louisiana David Schweikert, Arizona
Amy Klobuchar, Minnesota Glenn Grothman, Wisconsin
Robert P. Casey, Jr., Pennsylvania Carolyn B. Maloney, New York,
Martin Heinrich, New Mexico Ranking
Gary C. Peters, Michigan John Delaney, Maryland
Alma S. Adams, Ph.D., North
Carolina
Donald S. Beyer, Jr., Virginia
Brian Neale, Executive Director
Harry Gural, Democratic Staff Director
C O N T E N T S
----------
Opening Statements of Members
Hon. Daniel Coats, Chairman, a U.S. Senator from Indiana......... 1
Hon. Carolyn B. Maloney, Ranking Member, a U.S. Representative
from New York.................................................. 3
Witnesses
Hon. Mitchell E. Daniels, Jr., President, Purdue University, West
Lafayette, IN.................................................. 6
Hon. Judd Gregg, Co-Chair, Campaign to Fix the Debt and Former
Chairman of the Senate Budget Committee, Washington, DC........ 8
Hon. Alice M. Rivlin, Senior Fellow, Brookings Institution,
Washington, DC................................................. 10
Submissions for the Record
Prepared statement of Hon. Daniel Coats, Chairman, a U.S. Senator
from Indiana................................................... 30
Prepared statement of Hon. Carolyn B. Maloney, Ranking Member, a
U.S. Representative from New York.............................. 31
Chart titled ``Aging Population Will Drive Increase in
Spending on Social Security and Medicare''................. 33
Chart titled ``Nondefense Discriminatory Spending Falling to
Historic Lows''............................................ 34
Chart titled ``Deficits Spiked Under Bush II; Dropped
Dramatically Under Obama''................................. 35
Chart titled ``Public Investment Is Historically Low''....... 36
Bipartisan letter dated March 15, 2011, to President Obama
submitted by Chairman Coats.................................... 37
Prepared statement of Hon. Mitchell E. Daniels, Jr............... 43
Prepared statement of Hon. Judd Gregg............................ 44
Prepared statement of Hon. Alice M. Rivlin....................... 47
Questions for the Record for President Daniels Submitted by
Senator Tom Cotton............................................. 49
Questions for the Record for Senator Gregg Submitted by Senator
Tom Cotton..................................................... 50
Questions for the Record for Dr. Rivlin Submitted by Senator Tom
Cotton......................................................... 51
Questions for the Record for Dr. Rivlin Submitted by Vice
Chairman Patrick Tiberi........................................ 52
Questions for the Record for Dr. Rivlin Submitted by Senator
Robert P. Casey, Jr............................................ 52
FEDERAL DEBT: DIRECTION, DRIVERS,
AND DANGERS
----------
THURSDAY, SEPTEMBER 8, 2016
Congress of the United States,
Joint Economic Committee,
Washington, DC.
The Committee met, pursuant to call, at 9:30 a.m. in Room
216 of the Hart Senate Office Building, the Honorable Dan
Coats, Chairman, presiding.
Representatives present: Paulsen, Maloney, Hanna, Delaney,
Schweikert, Adams, Grothman, and Beyer.
Senators present: Klobuchar, Lee, Casey, Cotton, Heinrich,
and Peters.
Staff present: Breann Almos, Ted Boll, Doug Branch, Whitney
Daffner, Connie Foster, Harry Gural, Colleen Healy, Karin Hope,
Matt Kaido, Brooks Keefer, Christina King, Yana Mayayera, and
Brian Phillips.
OPENING STATEMENT OF HON. DANIEL COATS, CHAIRMAN, A U.S.
SENATOR FROM INDIANA
Chairman Coats. The Committee will come to order. We
welcome not only our witnesses but the guests who have shown up
here today. I thank my colleagues for being here in the last
few weeks of this Congress before adjourning for the election.
There's an awful lot of things going on. I think members will
be coming and going. But we are really pleased to be able to
have this opportunity to have the three stellar witnesses
before us.
Over the summer, looking toward ending 34 years of public
service, I was going through some--cleaning out some drawers,
and I came across a press release that I had issued in--I hate
to even mention the year--1982 when Senator Gregg and I were
both members of the House of Representatives. And I started
reading through it a little nostalgically. It was titled ``The
Federal Deficit, Can It Be Controlled?'' And this was a message
in August 16th of 1982. And in this message, I recognized the
fact that it was necessary for us to address uncontrolled
mandatory spending if we were ever going to get our budget and
deficit and ever get to a point where our fiscal situation was
under control since we had no ability statutorily on a
budgetary basis on a year-to-year basis in addressing mandatory
spending. I suggested that some reforms needed to be made or
this needed to be addressed, or we would plunge into deficits
year after year, which would put a burden on our debt limits
and significant borrowing. I raised the point that at the time,
mandatory spending on Medicare was an astonishing $46 billion a
year. We are now looking at somewhere near or over $600 billion
a year just for this one mandatory program alone. I won't even
go into all the details on Social Security and Medicaid and
other mandatory programs. So here we are in 2016, and despite
numerous attempts over decades to address this issue, we are
still talking about this as an issue, and obviously, it has
come to the point where serious action needs to be taken before
serious consequences set in.
Now, it's no longer a question of if we need to do this. I
think the question of when we should do it can be answered by--
10 years ago or 15 years ago or one year ago. But it's not
being done, and it hasn't been done. CBO, on an annual basis,
more than an annual basis, warns us of the coming fiscal
catastrophe, and yet, it is discussed for a day or two on the
floor of the House and floor of the Senate, and then we move on
to the business of the day. I am not here to point fingers at
either party. I'm here to basically say Congress has not
achieved the will to take the necessary steps. Administrations,
Republican and Democrat, have not been able to accomplish a
coordinated effort on this. And the warnings are dire. We are
all aware of the CBO warnings, but this is not just a
conservative or not just a nonpartisan basis conclusion as to
what is happening here. The Urban Institute, certainly not a
conservative institute, has warned that in less than 10 years
we will be at a point where 98.3 percent of all federal
revenues are spent on interest entitlements, and on mandatory
spending. That leaves one and a half or so percent for
everything else the federal government does. So regardless of
what your interest is, whether it's building roads, medical
research, basic research, the arts, national defense, national
security, FBI, CIA, given the threats that we have, no matter
what your particular interest is, there will not be money to
address it without going further and further and further into
debt to pay for those functions. Clearly, that's unsustainable.
It has national security implications. Former Joint Chief of
Staff and Navy Admiral Michael Mullen rightfully noted that
``the most significant threat to our national security is our
debt.''
So here we are. We have a stellar cast of witnesses this
morning, which I will be introducing here shortly. But it's
important to note that during election season or year after
year after year, this thing keeps getting pushed away, pushed
down. It will be the next president, the next Congress, we
can't deal with it now, and we've been saying this for decades.
The point of reckoning, the day of reckoning is coming. It
seems to me that we're--there have basically only been two
paths to successfully address this. One is extraordinary
leadership, bipartisan leadership. Think back to 1983 when
Ronald Reagan picked up the phone and called Tip O'Neill and
said ``Tip, we have a problem with Social Security, and if we
don't address it, we are in real trouble, and we need to take
it above politics.'' And there standing outside of the White
House was the President of the United States, the Senate
Majority Leader, the Speaker of the House, and the leaders of
the two political parties saying we're taking this out of
politics, we're imposing this plan. We bought about 30 years of
solvency for the Social Security program. We have not seen that
since.
Secondly, unfortunately, the alternative has been fiscal
crisis. Think EU. Think Greece. This is unsustainable, and the
markets will dictate where we go.
There may be a third way, and I've introduced this morning
a legislation that will impose a civilian BRAC, similar to the
military BRAC, when it was impossible to close any of over a
thousand bases that were no longer needed. They built many of
them in World War II, and afterward, we finally turned it over
to a nonpartisan commission that went through under some
guidance and presented a proposal to the Congress for an up or
down vote only. It has been an extraordinary success in terms
of forcing, forcing action that has not been--had not been
taken either by Congress or by administrations. And I won't go
into the details of that, except we do have a model that may
allow us an opportunity to address this significant problem.
With that, let me turn to our ranking member, Congresswoman
Maloney, for her opening statement, and then I will introduce
the witnesses, and we look forward to your testimony.
[The prepared statement of Chairman Coats appears in the
Submissions for the Record on page 30.]
OPENING STATEMENT OF HON. CAROLYN B. MALONEY, RANKING MEMBER, A
U.S. REPRESENTATIVE FROM NEW YORK
Representative Maloney. I want to thank you for calling
this important hearing and for sharing your perspective and
your remembrances. I must say, in Dr. Rivlin's testimony,
actually in all the panel's testimony, they shared your grave
concern courage and urgency that this is something we have to
come together and work together and solve.
I want to note, we started with a moment of silence for 9/
11. It's the 15th anniversary. And after 9/11, I have never
seen this Congress so united and determined. And we very
quickly restructured our government. It was the largest
restructuring since 1947 to make us more secure with increased
intelligence and all kinds of ways to make us stronger. So when
we come together, we can really make things happen in a
positive way, and I hope that your legislation and that this
hearing will move us a step forward to addressing it.
We know from your testimony what to do. We just need the
political will to work together and make it happen.
I want to start my testimony talking about a number, and
that's $19.5 trillion, the total nominal debt, and it's no
question it's a great deal of money. But as both Senator Gregg
and Dr. Rivlin write in their testimony, a far more important
measure is public debt in relation to the size of the economy,
the debt-to-GDP ratio. And right now, that is almost 75 percent
of GDP. We can improve the debt-to-GDP ratio in two ways: by
decreasing the debt and by increasing economic output. We must
improve both halves of that equation, and let's talk about debt
for a moment. The main driver of increasing debt is the aging
U.S. population. Everyone who studied the debt issue from CAP
on the left to Cato on the right says projected deficit growth
is overwhelmingly the result of long-term trends, the aging
U.S. population, and rising healthcare costs. The baby boomers
are retiring, and it's having a huge impact.
One fact tells much of the story. There are nearly two-and-
a-half times as many people age 65 and over today as 50 years
ago. This means more and more Americans will be receiving
Social Security and Medicare benefits. CBO projects that
spending on Social Security and Medicare will increase as a
share of GDP over the next decade, while all other program
spending is on a track to decline, and that is illustrated on
the chart over there.
In fact, discretionary spending is nearing historic lows.
Spending on nondefense discretionary programs as a share of GDP
is projected to hit its lowest level on record in 2018.
Some point a finger at President Obama for the increase in
the national debt. This ignores the fact that it's
overwhelmingly due to long-term trends and the legacy of the
Great Recession that began on the prior president's watch.
Conveniently, they also forget history. In the late 1990s,
President Clinton presided over four straight years of budget
surpluses, completely erasing the deficit. This allowed us to
pay down a significant portion of our debt.
President Bush inherited a surplus of $128 billion, or 1.2
percent of GDP. But the surplus was spent on two tax cuts,
which increased the debt by $1.5 trillion over 10 years, and
then we were in two wars, Iraq and Afghanistan, and the
projected cost is $4 to $6 trillion in the long term.
And then we presided over the worst economic melt down
since The Great Depression, which crippled the economy and sent
the deficit soaring. In the end, Barack Obama inherited a
deficit of nearly 10 percent of GDP and a very quickly rising
debt.
As Robert Bixby, head of the nonpartisan Concord Coalition
put it, the debt ``would have exploded around 2009 to 2010, no
matter who was president.''
The reality is that the Obama Administration has helped dig
us out from the Great Recession, and the deficit as a share of
GDP fell by nearly three quarters, from nearly 10 percent to
2.5 percent, and that's illustrated on the third chart that's
up there.
Now, I would like to turn to the second half of the
equation, increasing economic output. And to do this, we need
to invest in our nation's infrastructure, workforce, education,
and competitiveness. However, nondefense government investment
as a share of the economy is at the lowest level in more than
50 years. In fact, we're not investing enough to maintain our
existing infrastructure. And that's illustrated in chart 4.
With interest rates at historic lows, it is the ideal time
to borrow and invest in rebuilding our nation's infrastructure
and fund the basic research that will drive the next generation
of innovation. As Dr. Rivlin describes in her testimony, these
investments will make our economy stronger and more productive.
As economist Larry Summers has argued, not making these
investments will place a significant burden on our children and
grandchildren.
History is instructive. Investing in broad-based economic
growth was at the core of America's success in the decades
after World War II, in the 1950s and 1960s. We invested in our
people through the G.I. Bill, and our infrastructure, building
the nation's interstate system, and it paid off. While publicly
held debt more than tripled between 1945 and 1981, it fell by
almost three quarters as a share of the economy.
More recent history is also important to consider.
Excessive austerity in the near term has been pursued in recent
years, and it will slow economic growth and make it more
difficult to bring down the debt-to-GDP ratio over time.
Again, we need to address both sides of the equation. To
tackle our debt, we need a balanced approach that mixes
targeted spending cuts, reforms to social insurance programs,
and revenue increases. And to grow the economy, we must invest
in our infrastructure, education, and innovation.
It is absolutely doable. We need to work on it, and we need
to have the political will to get it done.
Thank you, and I look very much forward to our
distinguished panelists' testimony today.
[The prepared statement of Representative Maloney appears
in the Submissions for the Record on page 31.]
Chairman Coats. Congresswoman Maloney, thank you very much
for your opening statement. Let me now introduce our three
witnesses, each of which carries the title honorable in front
of their name. I see President Daniels questioning whether or
not that applies to him. In his humble and soft spoken way, he
will come back with a good quip about honorable.
But having said that, the Honorable Mitchell Daniels, Jr.,
long-time friend and someone who has distinguished himself
through an extraordinary career. A senior advisor to President
Ronald Reagan, director of the Office of Management and Budget
under George W. Bush, holding top management positions in the
private sector in business. As governor of Indiana, President
Daniels transformed our state's budget and turned deficits into
surpluses within a year by cutting spending and without a tax
increase. Governor Daniels left Indiana's governorship with a
budget in surplus and its first ever AAA credit rating.
Now he is the 12th president of Purdue University, a game
changer in terms of education and extraordinary things also
being done at that university under his leadership. Governor
Daniels, we welcome you back here to testify before us, and we
look forward to hearing about how the federal government can
adopt some of the tools that you have acquired in these various
roles.
Next, the Honorable Senator Judd Gregg from the state of
New Hampshire, long-time friend also, served together in the
House and in the Senate. He did not ask for my advice for
anything he did as governor in New Hampshire, which is probably
a wise decision on his part. As Chairman of the Senate Budget
Committee, he authored the Conrad-Gregg legislation in the
Senate, which provided the groundwork for Simpson-Bowles. After
his time in Congress, he's continued to push for deficit
reduction efforts. He's spear headed bipartisan efforts to
address this issue.
And I want to take a moment here just to point out the fact
that it is possible to achieve a bipartisan support for the
kind of reforms necessary to put us in fiscal solvency. Back in
March 15 of 2011, 64 United States Senators, 32 Republicans and
32 Democrats, Senator Klobuchar and I signed this letter as
members of this panel. Senator Lee has his signature on this
letter. As you know, the magic number in the Senate is 60. We
had 64, 32 Republicans, 32 Democrats. Senator Gregg
substituting for former Senator Simpson came in with Erskine
Bowles. We talked through the dire situation that we were in.
And we made a commitment on a bipartisan basis with enough
votes to achieve success in the United States Senate by 64, 32
Republicans, 32 Democrats. I have all the signatures here, sent
to the President of the United States saying we are willing to
work for you in a bipartisan, nonpolitical basis to solve this
particular problem.
[The bipartisan letter dated March 15, 2011, to President
Obama appears in the Submissions for the Record on page 37.]
Unfortunately, we did not get a positive response back from
the White House, and perhaps the best effort that I think was
made to address this maybe in decades just fell by the wayside.
And here we are in 2016, once again trying to look for ways to
address an ever-growing problem. Senator Gregg played a major
role in that effort, and we thank him for it.
And finally, The Honorable Dr. Alice Rivlin, who has also
been before our committee and a member of other committees,
former director of the Congressional Budget Office, director of
the Office of Management and Budget under President Clinton,
vice chair of the Federal Reserve Board. She has cochaired the
Bipartisan Policy Center's task force on debt reduction with
former Senator Pete Domenici, now serves as a senior fellow at
the Brookings institution and as a visiting professor at
Georgetown University. We look forward to hearing from all
three of you in terms of giving us some guidance.
All of you who have been involved and know this issue
deeply, we are at a point where we--the next president, I
think, is going to be saddled with the obligation now as we are
careening toward a situation that simply cannot be sustained.
We need your advice, and we thank you for coming here.
We will start with Governor Daniels and then have Senator
Gregg and then Dr. Rivlin.
STATEMENT OF HON. MITCHELL E. DANIELS, JR., PRESIDENT, PURDUE
UNIVERSITY, WEST LAFAYETTE, IN
President Daniels. Alphabetical order pays off again. I'm
in the odd position--thank you, Mr. Chairman and the Committee.
I am in the odd position of hoping that my comments are of
little value to you because they're so obvious, but let's see.
You know or you should that our deficits have been running at
historically unprecedented levels, so much so that another half
trillion dollars this year, bigger than any year in history
before 2009, was met with a yawn or even by some somehow as a
positive event.
You know, or you should, that our national debt has reached
a peacetime record, heading for territory where other nations
have spiraled into default or into the loss of sovereignty as
creditors use their leverage to dictate terms.
You know, or you should, that public debt this large weighs
heavily on economic growth, crowding out private investment and
discouraging it through uncertainty, and that much faster
growth than today's is the sine qua non of the greater revenues
that will be necessary to meet federal obligations, let alone
reduce our debt burdens.
You know, or you should, that the unchecked explosion of
entitlement spending, coupled with debt service, is squeezing
every other federal activity, from the FBI to basic scientific
research to our national parks to the defense on which the
physical survival of the country depends.
You know, or you should, that the whole problem is getting
worse and fast. Even if reform began this morning, past over
promising and demographic realities do mean that the
entitlement monster is going to devour accelerating amounts of
dollars, all of which are scheduled to be borrowed rather than
funded honestly. You know, or you should, that we are kidding
ourselves, in even the appalling estimates that I just referred
to. The official projections are built on a pile of wishful
assumptions, which repeated experience tells us are bogus.
Productivity assumptions are too high, interest rate
assumptions are too low, revenue too low, spending too high. As
each of these is proven unduly rosy, more zeroes will be added
to the bill we hand the young people of this country.
So I leave to my more erudite colleagues the statistics.
Let me, instead, offer an appeal on behalf of those young
people, the ones I'm so lucky to live among at Purdue
University, all their counterparts, and the new Americans not
yet with us. The appeal is for a shift in national policy to
the growth of the private, productive economy as our all-out,
primary priority, calling all close ones and breaking all ties
in its favor. And for decisive action soon at long last that
begins the gradual moderation of unkeepable promises and
unpayable debt loads, which will otherwise be dumped on coming
generations.
This, I suggest, is not only wiser fiscal and economic
policy, but for the sake of public integrity and the survival
literally of our free institutions.
A national government that year after year borrows enormous
sums and spends them not on genuine investment in the future
but on current consumption, passing the bill down to others,
pretending that the problem is smaller than it really is lacks
not only good judgment, but integrity. It's not hyperbole to
label such behavior immoral.
For a long time, people have come to this Congress decrying
the intergenerational injustice of this policy, but things keep
getting worse, not better.
A near decade of anemic economic performance, the weakest
economic recovery on record, has eroded badly the economic
optimism on which, more than any other factor, Americans' faith
in a better tomorrow has rested. A near majority now believes
that America's best days are behind us, and as this new
pessimism has deepened, it's turned into an ugliness, a
meanness, a new cynicism in our national life with a search for
scapegoats on both left and right.
For almost two-and-a-half centuries, Americans have argued
about a lot of things but shared a resilient determination to
be self-governing, to guard against tyranny at home and, on
occasion, resist by force its spread elsewhere in the world.
But lately, and rather suddenly, there are alarming signals of
a different outlook. A record one in four young people say that
democracy is a, ``bad way to run the country.'' And an even
larger fraction of the citizenry would prefer an authoritarian
leader who did not have to deal with the nuisance of elections.
One in six are sympathetic to a military takeover, almost a
threefold increase from two decades ago.
If national leadership continues to allow our drift toward
a Niagara of debt until solemn promises are broken, as they
would then inevitably be, today's sense of betrayal will seem
tame. When today's young Americans learn the extent of the debt
burden we have left them, they may question the premises of our
self-government, and with good reason. When tomorrow's older
Americans finally understand how they've been actively misled
about the nature and the reliability of our fundamental social
welfare programs, it may be the last straw breaking the public
confidence on which democracy itself depends.
In fairness, a few members in each political party, many in
this meeting room, have tried to address the coming crisis. To
them, all thanks and credit. To those still in denial or even
advocating steps that would make our debts even higher, please
reconsider. Your careers may end happily before the reckoning.
Your reelections may not be threatened by your inaction. But
your consciences will be. You know this, or you should.
[The prepared statement of Hon. Mitchell E. Daniels, Jr.
appears in the Submissions for the Record on page 43.]
Chairman Coats. President Daniels, thank you very much for
a sobering but very truthful statement.
Senator Gregg.
STATEMENT OF HON. JUDD GREGG, CO-CHAIR, CAMPAIGN TO FIX THE
DEBT, AND FORMER CHAIRMAN OF THE SENATE BUDGET COMMITTEE,
WASHINGTON, DC
Senator Gregg. Thank you, Chairman and Ranking Member.
Thank you for having us here. It's a great pleasure to serve on
this panel to try to bring attention to this matter. And I
second everything that Governor Daniels has said. And even
before she says it, I will second everything Dr. Rivlin says.
As Chairman of the Budget Committee and ranking member, I
worked for 10 years on this issue, constantly. This is all
we've tried to focus on. It was not a--Kent Conrad, who was
Chairman and ranking member when I wasn't, we worked together,
and we produced Simpson-Bowles. And why did we do that? Well,
we came to the conclusion that these numbers are overwhelming.
The policies behind getting these numbers under control are
extremely difficult politically, because they involve very
tough decisions. Reducing the rate of growth entitlements
involves tough decisions. Reforming tax laws involves tough
decisions. And we came to the conclusion that the standard
political process was not able to function and do it.
So we worked out what was Simpson-Bowles but was originally
more of a BRAC approach. What I want to talk about today is the
fact that I think you can't get where we need to go, which is
to get our entitlement accounts under control and get our
revenues reformed, unless you have a process which allows you
to get there. And we don't have the process today. The budget
process is dysfunctional. That's a generous term for it.
So my view is we need a two-track approach. And granted, it
is procedure, and that doesn't solve the problem. Leadership
solves the problem. But you need the procedure to drive the
decisions.
The budget is structured to be a partisan document. Nobody
on the minority ever votes on the majority budgets and nobody
on the majority ever votes for the minority alternative. And
the two sides duke it out in the Senate with message amendments
that go late into the night and are almost embarrassing to the
institution. Well, they are embarrassing to the institution.
Secondly, the Budget Committee itself is viewed with some
antipathy, to be kind, by the major committees that it affects,
Finance in the Senate and Appropriations and also some of the
authorization committees, because they see it as interference
with their turf.
So what should we do here? I happen to believe that we need
to restructure the Budget Committee completely. I think it
should be made up of the committees of jurisdiction which have
the most stake in the game. It should be a third Appropriations
members, a third Finance members in the Senate, and a third
should come from the general membership, with the Chairman and
ranking member chosen by the leadership of the respective
parties.
Secondly, I believe that the budget itself should be
structured not around the line items and the appropriations-
centric approach which is taken today. It should be structured
around obtaining goals of debt-to-deficit as a percentage of
GDP, revenues as a percentage of GDP, and spending as a percent
of GDP.
Thirdly, you need to break out the big items which cross
jurisdictional lines, like healthcare, and do them as a
separate functioning item within the budget process so that
it's very clear that when you're dealing with healthcare,
you're dealing with healthcare, you're not dealing with
committees which have a whole variety of jurisdictions.
Fourth and most important, the Committee should be equal
Republican and Democratic membership.
Now, that is a--that seems like a term or an approach which
would be totally antithetical to our present system. But if
there is equal membership on the Committee, there will be a
responsibility of both sides to produce a budget, and neither
side can point to the other side for its failure.
I also think the enforcement mechanisms have to be changed
erratically. No appropriations bill should be allowed to the
floor of the House or the Senate Appropriations, until there's
a budget. And if there's a failure to get a budget, there
should be a penalty, and it should be a 5 percent reduction in
discretionary spending and a 5 percent increase in entitlement
spending and a 5 percent increase in revenues collected under
FICA in the hospital tax. And those types of penalties would be
strict enough and onerous enough so that a budget would, in my
opinion, be reached.
The approach should also make it clear that bipartisanship
is at the essence of this exercise, because all the big issues
that confront us, especially Medicare, Social Security, and tax
reform, cannot be resolved on a partisan basis. The American
people will not accept partisan results on issues which affect
them, because they consider it to be unfair. They need fairness
on those big issues, and fairness in our system is defined by
both sides participating.
The second track has been mentioned and has been introduced
by Senator Coats, which is a BRAC approach. This would be, I
see, as a bridging exercise to when you actually got an
appropriation and budget process and entitlement process which
worked, but it would be an effective way to address it. It
would be drawn up on the same lines as Simpson-Bowles. Simpson-
Bowles was a complete success, except for the fact it never got
passed. Had it been actually a legislative vehicle versus a
commission, we probably would be out of the woods right now on
our deficit and debt issues.
So I do think a BRAC approach makes a great deal of sense,
and I congratulate Senator Coats for bringing it forward, and I
would be happy to discuss it more specifically.
[The prepared statement of Hon. Judd Gregg appears in the
Submissions for the Record on page 44.]
Chairman Coats. Senator Gregg, thank you very much.
Dr. Rivlin.
STATEMENT OF HON. ALICE M. RIVLIN, SENIOR FELLOW, BROOKINGS
INSTITUTION, WASHINGTON, DC
Dr. Rivlin. Thank you. I'm delighted to be back in front of
this committee where civil bipartisan discourse is possible,
which is very reassuring. You all know the debt is high in
relation to the economy, and it's on track to rise continuously
as far as we can see. Now, this is not an imminent crisis. It's
a problem to be managed, and that makes it very difficult for
our political process. It would be easier if something terrible
were going to happen tomorrow because we don't take steps. We
can handle this large debt now, but it's a threat to
sustainable growth. We are counting on the faith of our
creditors around the world, which may not last forever. A large
debt will--debt-to-GDP ratio will restrict our ability to
respond to future recessions or other emergencies. And we can't
count on low interest rates forever. We will have a servicing
problem on this debt we have already as interest rates
inevitably rise.
Now, what matters is the burden of the debt, the ratio of
the debt to what our economy produces, the GDP. And we can
reduce that burden either by growing the economy faster or by
reducing the debt in the future, and we must do both
simultaneously. It's very important for an economy with an
aging workforce to invest heavily in the productivity, the
future productivity of that workforce. Fortunately, we have
plenty of opportunities to do that. We have neglected our
infrastructure. We have neglected keeping the skills of the
future workforce up to what's happening in technology. We have
neglected science.
So we need a major program of public investment, not a
stimulus to create jobs quickly, but a long-term investment
program to increase the productivity.
But, we also need to reduce the future debt, and we must
act on both now. The drivers, as everybody knows, of future
debt are the entitlements programs, especially the healthcare
ones, combined with a rising number of older people, and the
failure of our inefficient tax system to produce enough
revenues in a fair way to keep up with those added spending.
And if you're going to reform Social Security, Medicare,
Medicaid, and the tax system, you need a lot of lead time for
any acceptable, sensible reform.
So as the Chairman said, the time to start is 10 years ago.
We didn't. So the time to start is now.
Now, there are those who say we can't invest in improving
productivity because we have this high debt, and others who say
we must invest but we should not worry about the debt because
interest rates are so low. I believe both are wrong. Growth
alone won't get the debt burden coming down, although we do
need, for many reasons, to grow the economy faster. And debt
reduction takes a long lead time.
So I agree strongly with what my colleagues on the panel
have said. We need to do a serious restructuring of
entitlements and taxes, and we need to start soon. It must be
bipartisan. Neither party can do this alone. Any party that
steps out to do these difficult things gets savaged by the
other party, and it's happened time after time after time.
So some form of bipartisan action with the leadership in
the White House and the Congress as a part of the action has
got to happen.
Chairman Coats's bill sounds promising, and I am very taken
with the restructuring of the process outlined by Senator
Gregg. But the main bottom line is we need to do all of these
things quickly. They must be done by a bipartisan process that
actually produces action and not more gridlock.
Thank you.
[The prepared statement of Hon. Alice M. Rivlin appears in
the Submissions for the Record on page 47.]
Chairman Coats. Thank you. I think the panel would join me
in selecting the three of you to be the first part of the BRAC
commission that needs to be formed, because you each brought, I
think, some very insightful policies and messages relative to
our current situation here. But more importantly, all three of
you have the experience necessary, I think, to fully understand
where we are, how we got here, and what measures need to be
taken to go forward, and each of you presented, I think, some
very, very important points and interesting things.
Let me just start briefly, and I want to turn to my
colleagues here. President Daniels, you are nationally, if not
internationally famous now for taking over a state that was in
deficit, a government that was inefficient, a government that
was in debt and had to borrow. You learned principles, I'm
sure, as director of OMB, as an advisor to the president,
through your private sector work and so forth.
What principles were necessary--did you apply in order to
take us from a deficit to a surplus and tough credit rating to
a stellar credit rating and put us on the path to very
significant growth taking place in our state? And are those
principles applicable at the federal level? It was a state
government. Obviously, there's some differences. You aren't
saddled--you do have some mandatory payments that have to be
made.
But give us some insights into what we can do on the basis
of what you've learned to make this government more effective
and efficient without compromising the necessary things that
government needs to do.
President Daniels. Some lessons apply and some don't,
Senator. I think the task is so much easier at a state level
than the one that you face, and I would not--I would over claim
the things we did, and I wouldn't equate them with the mention
of the problems you're facing.
There are some basic principles. You can subscribe to them
or not. I said you would be amazed how much government you
would never miss, and it's true. We all know, there's a very
animated and committed and sincerely committed interest group
behind every dollar in the federal budget. To them, it's the
end of the world. To the rest of the country, they wouldn't
notice. I would be astonished. So sometimes bold and quick
action is--turns out not to have the deleterious consequences
that some people fear.
We were not saddled in our case with quite the problems
that the federal government certainly has or that even other
states have. We had an upside down budget. It's true, we did
not have the pension overhang that now threatens some states.
We are here today talking about trillions of federal debt, but
there are several trillion dollars of unfunded liability
sitting out on state books that sooner or later may be a
problem for this--for some future Congress. We didn't have
that.
We also had a Medicaid system that had not yet devoured the
rest of our discretionary budget, and we were able to move
quickly to keep that under control. It's still down in the low
to mid-teens as a percent of the Indiana state budget. Whereas,
it's risen into the thirties, last I looked, in some states.
Therefore, they don't have money for public education. They
don't have money for infrastructure. A parallel problem to what
you're facing here.
I guess I--one lesson, I think, of application is you can
do more than you think you can. And boldness and decisiveness
can be rewarded. You can live to tell about it. I'm a fan of
country music, and I like the probably apocryphal song if I
shot you when I should have, I would be out of jail now. And I
would encourage some Congress some day to act boldly and be
rewarded.
Chairman Coats. Thank you. I think some of us will steal
that country western title, because it applies in a lot of
instances.
Senator Gregg, I know you've continued to be active in
working with--on a bipartisan basis, in working with both the
Senate and the House who have the responsibilities for budget
reform.
Can you give us what you can say relative to the
possibility of achieving what you have laid out? It makes sense
listening to it on a theoretical basis. But looking at it from
a political standpoint, how easy is this going to be to be
accomplished? I think there's probably agreement here that, as
I mentioned in my opening statement, without bipartisan
support, we're not going to get there.
Senator Gregg. Thank you, Senator. As the Senator knows and
everybody on this panel knows, moving from thought and ideas
into execution in the legislative process is extremely
difficult. And so the ideas that I've put out, I think, do make
sense, obviously, or I wouldn't have mentioned them. But to
translate them into actual legislation, it's a heavy lift.
I will say this: I and former Senator Conrad had a chance
to meet with the working committee of the budget, and I believe
there are people who weren't on the Budget Committee who
joined, and about 10 or 12 senators participated. It was
entirely bipartisan, headed up by Senator Enzi and Senator
Whitehouse and I was really impressed with the enthusiasm,
energy, and dedication of that group to try to get budget
reform in place, and they were listening to everything. I hope
that group comes forward with a proposal. We suggested our
ideas. The BRAC approach, which you've outlined, was discussed
at some length, because I think it's a rational approach, and
we came so close to do it under Simpson-Bowles. The original
Simpson-Bowles was a BRAC concept. That's where we got it from.
And so I do think the opportunity is there. It comes down
to leadership, and I believe in the Senate at least--I haven't
had a chance to deal with the House folks on this, but in the
Senate at least there is a working group headed up by Senator
Enzi and Senator Whitehouse trying to move in that direction,
and clearly this committee deserves tremendous credit for it.
Chairman Coats. Thank you. Lastly, Dr. Rivlin, I just want
to pursue the point--I want to make sure I fully understood it.
My understanding of what you were saying is that the effort
here has to be inclusive in order to obtain both growth and
success in a more efficient, effective use of taxpayer dollars
for discretionary spending and incorporating the essential
aspect of some type of entitlement reform.
Am I correct there that all of these ought to be in
parallel? Particularly, I'm thinking about tax reform, which
hasn't been reformed, the tax code, since 1986, and is a
massive effort, obviously, but so would entitlement reform be
and the other aspects of this. So do you see this sort of
following a dual or a triple path and wrapped into one major
process?
Dr. Rivlin. Yes. I think we have to do all of these things
at once. Now, you don't have to do everything. Maybe you have
stages of tax reform. But I don't think you can solve the long-
run budget problem on the spending side alone. We do have a lot
more older people, and healthcare is expensive, and the notion
that we are going to have to spend more over time to support
older people means we're probably not going to cut the
entitlements, even in the long-run future, back very far. So
we're going to need some more revenues, but we need to raise
them in a much more pro-growth and more efficient way. And
these various commissions that we've talked about really
thought that could be done, and I agree. But it has to be done
altogether, the entitlements, the taxes, and the up front
investment.
Chairman Coats. Thank you. My time is more than expired.
Congresswoman Maloney.
Representative Maloney. Thank you so much, and thank you to
all of you for your important statements about what an
important problem and challenge this is. And I watched the
debate last night. No one raised this issue, nor do I believe
it was raised in any of the debates, nor do I believe it has
ever been a question from the press to the candidates, nor has
it been a platform or a talking point of candidates on what
they would do to address this critical issue. And all of us
that have been elected know that if the public isn't aware of
it and if the public is not talking about it as a concern, it's
very hard to move it.
As you were discussing your proposal, which I loved, but I
started getting a headache thinking about how would you pass
this, having tried to do this. But I would invite any of you to
comment on how we can bring this debate out into the public and
elevate it.
But specifically to Dr. Rivlin, in your testimony, you
stress very much the need for long-term debt reduction and for
economic growth and the importance of economic growth to really
secure debt reduction in a healthy economy.
And during the Clinton years, when you were a part of that
economic team, we had four straight budget surpluses. And also,
it was one of the--and there was a lot of investment and
spending during that. But also, after World War II, in the
1950s and 1960s, we had massive infrastructure and public
expenditure in education. We had the envy of the world. We had
the best infrastructure in the world. Now our infrastructure,
we're not spending enough to maintain it. Our bridges are
crumbling. The whole world has high-speed rail. We're woefully
behind. I would like to ask you, Dr. Rivlin, a lot of people
say we can't invest, this is an argument we have before
Congress, infrastructure. I support it long term. I believe it
brings innovation and efficiency and quality of life and good
jobs. But a lot of people argue that we can't because our debt
is too high. And what do you think about investing in
infrastructure education research to help to strengthen our
economy? And I invite anyone to comment on that. And also,
during my lifetime, the best economy we ever had was the
Clinton-Gingrich economy, which was very much a bipartisan
effort that brought us 22 million jobs, reduced the deficit,
erased it. It left us with a surplus and just a booming
economy.
Couldn't we make that happen again? Can we bring the same
chemistry together if we could work together and have this
bond?
But it's a huge challenge when even the candidates aren't
talking about what many in this room think is one of the most
pressing issues of the decade and one of the most important
decisions we could make for Homeland Security, economic
security, economic growth, and prosperity for our people.
So I invite everyone to respond, but I always--I am very
pleased to see a woman with such a distinguished career. All of
your careers are distinguished, but she has been a role model
to me and a trailblazer, and I want to thank you, all of you
for your distinguished careers.
So Dr. Rivlin.
Dr. Rivlin. Thank you very much. I agree that it's
extremely important, as I said in my testimony, to invest in
infrastructure and skills in science. I think all of those
things go together. We have great opportunity because we've
neglected these things. So the opportunity to do better is
there. The contrast with the late 1990s is interesting. I, too,
am proud of the bipartisan effort that I participated in, and
it was a Clinton-Gingrich effort together.
One of the things that made it easier was that the
productivity growth was growing fast during that period, not
quite as fast as right after World War II, which also helped
with bringing the debt down, but pretty fast. And that helped
us to get to a balanced budget. But we did not really take the
long run view. We knew the baby boomers were going to retire,
but it was a bit in the future, and we did not take on the
reform of the entitlement programs or the reform of taxes that
we need.
So I think one can look back, perhaps, and feel that was a
golden age, but it was a golden age with fewer problems.
Representative Maloney. Any other comments.
Senator Gregg. I think on the capital budget side, yes,
infrastructure improvement is critical in a lot of different
areas. But my view is that if you're going to do it, you should
do it in a separate budget structure, and you should find
sources to pay for it, because you can argue that it's one of
the few areas where you can actually borrow and make sense
because it's a capital investment. But we're already borrowing
far too much in ordinary, daily expenses. So I would want to
see it paid for.
Representative Maloney. I agree with you. Most of the
infrastructure we are financing in New York is paid for through
fines and fees and other things.
Senator Gregg. Things which are very difficult to do, like
the gas tax, which hasn't been raised in a long time, and our
road system reflects the fact that the highway fund is now
invading the general fund, and therefore, you're borrowing to
finance it.
Representative Maloney. We have a continuing resolution
coming up. We can try to stick it in there.
Senator Gregg. I don't think that's going to happen. On the
bigger issue of the 1990s versus today, I do think there is
structural differences, and the structural differences were
that we were in an Internet bubble boom. Are we in another
bubble boom? We may actually be in an equities bubble boom now
because the Fed is monetizing debt so quickly, and it's forcing
people into the equity markets.
But a lot of that economic growth was driven by a bubble,
and I don't really think we want to revisit that.
Representative Maloney. And Senator Gregg, do you think
there should be a balanced budget amendment? And if not, what
do you think our fiscal goal should be, aside from----
Senator Gregg. I have always been supportive of the
balanced budget amendment. But you're talking about putting
something by the next eon of life cycle, political life cycle.
To pass a balanced budget, as a constitutional amendment would
take if you were even to get consensus around it, would take
10, 15, 20 years. So our problem is gonna be honest long before
we get a balanced budget amendment passed. I mean, I'm for it.
It's a great talking point. It's a great political talking
point. But substantively, it's not going to impact our problem,
in my opinion.
Representative Maloney. We have 43 seconds left. President
Daniels, how can we elevate this argument to a national level
where we build a consensus of national support.
President Daniels. I am going to say a double amen, and
thank you for both your comments which were very cheering to me
Congresswoman.
On the first question, as it happens I'm a member on the
Commission of Presidential Debates. I've written all my federal
commissioners and suggested one of the debates should be solely
addressed to this subject, to the fiscal and the economic
future of the country, but I'm not sure that's going to happen.
I quite agree, it's very discouraging that we are having the
one forum where this--where the public could learn things the
public deserves to know. It's not the American people's fault
that they don't understand the fix we're in and the possible,
very practical ways we could work our way out of this. So I'm
still hopeful that one way or another those coming debates will
be one place where that happens.
If I'm permitted, I do want to also agree, at least in
large part, offer a thought on infrastructure, which is--which
was a major part of our endeavors in Indiana. It was the theme
of our second year as soon as we got the operational budget in
shape. And the two thoughts I would suggest--by the way, CNBC
recently rated our state's infrastructure number one in
America. So it can be done.
In addition to other thoughts already offered, here are
two. One is, there's an ocean of private capital that would
like to participate, especially at a time of incredible low
yield and environment which we are at least temporarily in, and
we ought to do much more than we have to invite that capital in
the so-called public/private partnership mode. We can build a
lot more, a lot faster, and by the way, a lot more efficiently
and innovatively with their involvement.
And related to that, it's almost comical how long it takes
to build things, given the encrusted rules and regulations and
obstacles which we have allowed. So if there's to be another--
if there's to be a national infrastructure program, I would
recommend a sweeping exemption of its activities from a variety
of acts, which right now, it takes years and years to do what
we used to do in a month.
Representative Maloney. My time has expired. Thank you.
Chairman Coats. Thank you. Congressman Hanna.
Representative Hanna. Thank you. Thank you all for being
here. It seems to me--and Senator Gregg, we spoke earlier, you
said that all of this was predictable. I would go a little
further than that. Having been here for three terms, my sense
is, as long as we can borrow more money to not deal with these
issues, that's the easy solution. And it's a shame. All of
this, in a way, is ironic, because as Dr. Rivlin said, at the
very time we need to make investments in pre-K, people and
assets and science and STEM and infrastructure, those things
that grow our economy, the collision course that we are on is
actually preventing us from doing that.
You talked about funding honestly and funding the Highway
Trust Fund honestly and how we might go about that. It seems to
me that one of the things we've become incapable of doing is
being honest with the American public about the trajectory that
we are on and that it's always easier to give benefits than it
is to take them away. And ultimately, we are trying to adjust
them in a way that provides those benefits and costs less, but
we're not really even doing that.
I want to talk to you quickly about the debt ceiling,
because I have always supported raising the debt ceiling, and I
know a number of my colleagues take great pride in not
supporting it. So I would like to have someone, perhaps Dr.
Rivlin--what would happen if we didn't raise our debt ceiling?
Dr. Rivlin. We would not be able to deliver on the
commitments that the Congress has already made, and that is a
very serious thing. I do not believe the debt ceiling is a
proper weapon to force action, although I very much want action
on the debt. But the debt ceiling is not a good tool for doing
that, because it says the Congress has already passed all these
appropriations and borrowed to finance them, and now we're not
going to even pay the interest on the debt or deliver on our
obligations. We can't do that.
Representative Hanna. Senator Gregg.
Senator Gregg. In the end, you have to pay the debt ceiling
because otherwise the government can't function, and the effect
of that would be catastrophic. The debt ceiling fights occur
because it's one of the few forcing mechanisms that comes to
Congress. Debt ceilings and vacations are the times when
Congress wants to act.
Representative Hanna. Someone also mentioned that there was
no possibility of growing our way out of this, that our
demographics are such that our bills are growing, not
declining.
Just for conjecture sake, what kind of growth rate would we
need to stay on the path that we are on and not increase our
debt?
Senator Gregg. I don't have that off the top of my head, to
be honest with you.
Representative Hanna. Ms. Rivlin, do you have an idea.
Dr. Rivlin. It would be, I don't know, 6, 7, 8 percent
growth rate, which we're just not going to have.
Representative Hanna. So clearly, we need to deal with
this. It's a myth. And we can't do it through tax reform, which
is something we desperately need and also we're not addressing.
Dr. Rivlin. We need tax reform, but we also need
entitlement reform.
Representative Hanna. President Daniels, what do you think.
President Daniels. Which question? I agree completely. I
understand the frustration of people who haven't found another
lever to force real attention to this issue. But anyone who has
been in business understands the phrase no option, no problem,
and there's not an option. You have to pay the bills that
you've accumulated, and the consequences would not be
acceptable.
On the growth front, as I said, this ought to be something
that everyone agrees on. In fact, the more you believe in a
large, very active federal government, the more you need the
growth of the private sector and the more wholehearted your
support ought to be for policies that get us there. We can
agree on the basic principle, first stop digging. Right now,
we're digging, rather we are heaping barriers and burdens and
costs on those who would invest and create jobs.
Representative Hanna. So what you are really suggesting is
we need to unleash the private economy.
President Daniels. It's a start. There are real problems,
and Alice is best to speak to them, but productivity is growing
very slowly, if at all right now. You get growth out of
productivity and population growth, and we don't have either.
And there's no magic answer that I can find that will
dramatically increase productivity, but clearly, these things
that have been talked about all need to be pieces of it.
Again, I think we have to make every single decision until
further notice in favor of growth for all the reasons we're
gathered here about today. It doesn't mean that other
priorities, environmental protections and so forth, are not
important. Of course, they are. But we've got a transcendent
problem facing us, and we can't get out of the starting blocks
with the policy mix we have today.
Representative Hanna. Thank you. My time is expired.
Senator Gregg. I know it's over the time, but you touched
on something that is critical, and it hasn't been explored very
much, which is the fact that the Fed is monetizing the debt.
The implications of this though should be staggering. If you
continue to pump billions and trillions of dollars into the
system, at some point you've got to get inflation. Apples fall
from trees. And as a very practical matter, when this happens,
the acceleration of federal debt is going to be cataclysmic.
And we may be the best horse in the glue factory today, but we
won't be when that happens.
Representative Hanna. Thank you very much.
Chairman Coats. With that sobering analysis, I turn now to
Senator Klobuchar.
Senator Klobuchar. Thank you. I want to thank all of you,
and especially welcome back, Senator Gregg. Thank you for your
incredible work with this. I was a member of one of the groups
that got the process in place for Simpson-Bowles. Obviously,
we've been disappointed that we haven't been able to put all of
this together. The sequester is just so focused on the spending
cuts, which I think it's like a 4-to-1 ratio of spending to
revenue, and a lot of the other reports that we've gotten out,
Simpson-Bowles was 3-to-1, 2-to-1, depending on the version.
Rivlin-Domenici was 1-to-1 with cuts to spending and revenue.
So that to me has been one of the challenges in how we take
this opportunity, because we've been governing from crisis
through the downturn, and it's really hard to get this stuff
done when you're in a crisis. Now we are governing from
opportunity. The economy is stable. And this should be the time
at which we go back and tackle this, especially with the
enormous need for tax reform.
So I would start with that with you, President Daniels.
Since my in-laws met at a social dance class at Ball State and
my husband was born in your State and went to IU law school, I
have to ask you a question first.
On the infrastructure front, Dr. Rivlin has pointed out,
trying to combine this targeted investment in research or
infrastructure. One of the ideas we've tossed around with the
tax reform is to bring back some of that money oversees. The
way the government looks at this, is that it won't save any
money because we would be bringing the tax rate down whether we
do it hopefully in the long term instead of just a one-shot
deal. But we bring that money back, and then we invest part of
that, if it's voluntarily brought back, in an infrastructure
bank. Congressman Delaney and others have been working on this
issue here. But can you talk about that and how you see that as
one of the levers we can use to try to get infrastructure
investment, but also tax reform overseas.
President Daniels. I think it's a reasonable idea to
consider. And I would say that a cardinal principle of one-time
money is you only spend it on one-time things, and this would
qualify, that is to say, capital investment. So the danger
would be that Congress would approve repatriation of that money
and then spend it on today, and we would be worse off than
before.
But if we had your direction, yes. I think there's some
practical questions about infrastructure bank, but I think the
idea of investing in infrastructure is important.
One thing I would say, in addition to the two points I made
earlier, that we really, if you want this thing to have any
near-term effect--these investments are meant to benefit the
nation over a longer term. But I hear a lot of people talk
about it as a way to boost the economy in the near term. Well,
there are two reasons that that's unlikely to happen, given the
status quo. One is, only so many jobs are really involved. How
many people in the room can drive a road grader. So there's
that.
Secondly, from having done an awful lot of this, this
problem is not a small one. As I say, there are almost comical
examples. Please read Philip Howard's work and others who have
chronicled how incredibly tedious it is to get anything
actually done.
Senator Klobuchar. I understand. Though when the I-35W
bridge collapsed in Minnesota, we built that highway in less
than a year.
President Daniels. We can do it if we want. I'll finish
with one quick answer. We found revenue--construction in
Indiana, a huge amount of money. We built a few small things
just with our own money. Some of them were, as I called--
they're called bike trails, one-half the time and about one-
half the cost of the federal rule----
Senator Klobuchar. Got it. I just want to go broadly to the
debt here, Dr. Rivlin, Senator Gregg, this issue I brought up
with the spending to revenue ratio. You talked about
entitlements as a piece of it. When it comes to taxes, we talk
about a lot of things. The capital gains change, the Buffet
rule, some of these other things. But how do you think that we
do this so that we bring in some revenue in addition to making
the spending cuts.
Dr. Rivlin. Well, I believe that both Simpson-Bowles and
Domenici-Rivlin had the right idea on tax reform, broaden the
base of both the individual and the corporate tax and lower the
rates. You can make the individual code much more progressive
if you phase down some of the tax expenditures that go very
heavily to upper-income people. Particularly, I would change
the mortgage deduction to a credit. You have to do that slowly
over time, and I would phase down the exclusion of health
benefits from income.
Senator Klobuchar. Senator Gregg.
Senator Gregg. I do believe that the deficit and the debt
and the spending and revenue should be expressed in the budget
process in terms of percent of GDP, and those should be your
targets. You have to reach what they are. Simpson-Bowles, I
think we went to 21 percent spending, 19.5 percent revenues,
and we presumed a structural deficit that would stabilize at
about 60 percent of GDP.
Senator Klobuchar. This last thing is--put it on the record
here, immigration reform. I once called Grover Norquist for
this committee as my witness, just because he's so focused on
that as a way of helping to bring down the debt. According to
the CBO immigration reform could save $158 billion in 10 years,
and in 20 years, immigration reform could save $685 billion, in
that range. Just one more thing we could be doing. Thank you.
Chairman Coats. Thank you, Senator.
Senator Lee.
Senator Lee. Thank you all for being here and for your
testimony. I would like to start with you, President Daniels,
if I could.
Our current stock of debt will undoubtedly be a significant
burden on future generations, but the extent of that burden,
how significant it is, I think, really will depend on one
critical factor, and that is whether even though we're
accumulating debt, regardless of the fact that we're continuing
to accumulate some debt, the real economy continues to be
supported by a growing, productive capital stock. In other
words, our own economic growth is crucial to how we weather
this.
But there's a lot of reason to be concerned about this,
because as you're aware, I'm worried about the fact that not
only are we driving up the government's debt with costly
decisions in Washington, but the current regulatory environment
seems to be dampening growth so that the debt burden on our
kids is going to be heavy, is going to be that much heavier.
And private investment has been falling recently, and that
increases the risks as well.
So you know, it's one thing to hand over--what's compared
to a business, it's one thing to hand over a business to your
kids with the corporate credit card maxed out, with a steady
income stream and a growing income stream going into the
business. That's one thing. But it's another thing to hand them
that same credit card without a thriving, growing business.
So I'm really hopeful that my children and other
millennials understand this dynamic and understand the severity
of the potential burden they could face.
So I wanted to ask you, as a university president, as
someone who works with and serves millennials, do you think the
current generation, our current generation of college students,
understands the urgency of the situation and the burden they
will face? Is our current model for higher education adequately
preparing students to face those challenges?
President Daniels. Purdue University is.
Senator Lee. Exactly, that goes without saying. Other than
Purdue.
President Daniels. No, I don't think they understand at all
what awaits them. Even if we act decisively, I don't think they
understand that. And as I said earlier, it bothers me that, as
they've inevitably come to see it, that they will feel that we
didn't serve them well and that they will suspect not just
those of us who might have done something about it but the
whole system, which somehow, as the skeptics of history have
said, government by consent of the governed has inherent
problems. As someone said, it's a lot easier to make promises
than pay for them.
So I do worry about that, and yet, I have to tell you, you
would expect me to say this, I guess, but young people, at
least those who make it to campuses like ours, are incredibly
talented, incredibly purposeful. They're very innovative.
They're going to devise ways to make our economy more
productive that I'm not capable of envisioning. I have every
confidence in that, but that doesn't lead me to a blind faith
that the economy that they produce will be up to--will be able
to sustain the burdens we've placed on them.
Senator Lee. One of the things that I do worry about, about
millennials and about all generations of Americans, for that
matter, relates to what could happen in this sort of doomsday
scenario that keeps me up late at night, the scenario in which
we suddenly find that our interest rates return to their
historical average. Even assuming there's no rebound,
reflecting the fact that we've been significantly below that
historical average for the past few years, even if there's no
rebound, when the interest rates return to their historical
average, what does that do to us? What practical consequence
does that have for our government.
President Daniels. Dr. Rivlin can give you the update, but
last I checked on the sensitivities of this, every 1 percent
above what we're expecting is about a trillion dollars over 10
years. So if you return to normal, which would be a few percent
over what's now projected, you can see how much you've added to
the problem. As I said, there are a lot of assumptions in our
forward forecasting that I think are too cheerful, and that's
one of them.
Senator Lee. I wish I had more time to explore this with
Dr. Rivlin and Senator Gregg. But I thank you for being here,
and I just add to that that our interest payment on our debt
has been relatively stable in the last 20 years. It's been in
the range of 200, 250 billion dollars a year or so,
notwithstanding the fact that our actual debt has increased six
or sevenfold during that time period. So the only reason our
interest payment has remained more or less the same is we're in
this odd valley where our interest rates are at all-time
historic unnatural lows, and that scares me to death.
Thank you.
Chairman Coats. Thank you, Senator.
Dr. Adams.
Representative Adams. Thank you, Chairman Coats and Ranking
Member Maloney, for hosting the hearing today on the national
debt, and to our panelists, thank you very much for your
testimony and for being here.
This is a topic that's vitally important in preserving and
protecting our national economy, but even more important as we
operate within the larger global economy.
I want to start my questions today by addressing the idea
of spending cuts as a way to tackle our national debt. But in
particular, I want to ask about whether there are spending cuts
that would harm rather than help our debt burden and the
economy.
Dr. Rivlin, can you discuss the impact that additional
spending cuts to federal investments in the near term would
have on future economic growth and the long-term debt burden?
Dr. Rivlin. Yes. I think we can't afford to cut productive
investment. We have already cut discretionary--domestic
discretionary spending below historic levels. Congresswoman
Maloney put up a very nice chart earlier in the hearing that
shows the real plunge in relation to the size of the economy of
domestic discretionary spending, and that's where the
investment mostly is. So we've cut already there, way below the
Simpson-Bowles recommendation and the Domenici-Rivlin
recommendation. So that's, in my opinion, not the place to cut.
The place we need spending restraint is in the entitlement
programs and in the future.
Representative Adams. Thank you very much. So does it make
sense to make major cuts to programs that help provide economic
stability to our nation's low-income families and individuals,
as well as specialized demographics such as students and small
businesses, because of concerns about the long-term debt.
Dr. Rivlin. No, I don't think that's the place to cut it,
although some of that money can be better spent. We should be
trying to do it as effectively as we possibly can. It's not
sensible to have a rule that says no government spending can
ever be cut, even if it goes for worthy purposes. We need to
examine all of the spending.
Representative Adams. So when I think of economic growth, I
think of investments in infrastructure, support for our
nation's small businesses, as well as tackling the student loan
debt crisis that we have in our country. I had the distinct
pleasure of serving on a college campus, small woman's college
in Greensboro, North Carolina, Bennett College. So I'm very,
very sympathetic and understand what students go through.
But having arrived here at the Congress fairly recently, it
appears to me that my colleagues on the other side of the aisle
have a problem with actually supporting legislation that will
provide critical funding and resources for these groups.
So how important do you think it is to fund programs that,
first of all, create jobs and opportunities, especially for new
graduates, in order to stabilize our national debt as a share
of the economy?
Dr. Rivlin. Well, I'm for helping students get
opportunities in many different ways. But I think that has to
be an ongoing effort taken in the context of doing these hard
things on taxes and entitlements to bring the future debt down.
Because those students are the ones who are going to bear that
future debt.
Representative Adams. Thank you very much. I have some time
to spare, and I yield back, Mr. Chair.
Chairman Coats. Thank you, Doctor.
Representative Schweikert.
Representative Schweikert. Thank you, Mr. Chairman.
Doctor, you won't remember this, but maybe 18, 20 years
ago, you were doing some seminars here in D.C., and I sat
through those. I still have my notes from some of those and you
were actually very kind to me. But there's some observations,
and one day I'm going to go find those notes and provide them
to you.
One of the things on some of the charts that were being
provided was hey, here's what GDP is going to be over the next
quarter century, here's what economic expansion, here's our
world, our trade. And something went horribly wrong in the last
10, 15 years, when we start to look at our productivity curve
and even our GDP and so I have a sensation that many of the
models that are built on right now--I've only been here five
years, and five years ago, this was--right after we did
sequestration, the world is going to come to the end, this
year, we're going to have about $245 billion shortfall, and
this year, we're going to have $590 billion shortfall.
So the numbers in many ways are much worse than we tell
each other, than we tell our constituents. Think of this. You
know this. This year, every dime of nondefense discretionary is
borrowed, and this is supposed to be one of the good years. How
realistic is our modeling when, for almost a decade, we haven't
come close to much of our GDP modeling?
Dr. Rivlin. If you go back--I'm glad you have this nice
memory of my seminar. But if you go back that far, certainly--
I'm not sure exactly what GDP protections were. Nobody can
project GDP for a very long time. You have to do the best you
can.
What was not predicted was the crash of 2008, which, in my
opinion, was totally avoidable, but it certainly wasn't
anything that could be factored into models.
But let me say one other thing. Not all the projections
have turned out to be too rosy. One of the things that's rather
heartening is that back when we were doing Simpson-Bowles, we
were much more worried about the growth of healthcare spending
in the future and the explosion of Medicare than we are now.
There has been sometimes good things happen.
Representative Schweikert. When we're charting that curve,
as you've started to see, we're hitting now an inflection
again, at least maybe temporary, but in the last 12, 18 months
we see that inflection on some of that data.
Dr. Rivlin. Yes. We're starting from a lower baseline, as
the economists like to say.
Representative Schweikert. In this next little bit, it may
be more to my brothers and sisters on the panel. Some of our
calculations, Social Security, disability, the trust fund is
gone in about 40 months. Medicare, Medicare, the trust fund is
gone, in my calculations, in about seven years, seven months.
In my calculations, Social Security trust fund is empty 12, 13
years. And you think about today we have, what, about $2.8
trillion in that trust fund, and we're going to burn through
that in 13 years, just the recapitalization of such huge trust
funds.
How do I get--and look, you've dealt with my kind for a
very long time, you know that hold public office. But one of my
greatest shocks here is the number of people that actually own
calculators around this place. They don't do math here. We talk
and talk. We define borrowing substantial portions of our
budget as austerity. If you could do one thing, would it be
walking in the door and saying here's an alternative--here's a
reform of Medicare, is this an occasion where we've got to do
everything all at once?
Dr. Rivlin. Personally, I think we need to do everything,
but if I had to do one thing up front and get it out of the
way, it would be Social Security. It's not hard. It's not
conceptually difficult. Tip O'Neill and Ronald Reagan did it.
We can do it. It's a bipartisan conversation about known
quantities.
Representative Schweikert. To brothers and sisters around
here, please take a look at the Reid Ribble bill. It has a few
hiccups, but it is as close as I think we can get to a piece of
legislation we can do today. It is written. That would deal
with Social Security and if you're interested, within about
three or four days, we're going to have a major rewrite that
provides optionality in Medicare. Actually, in many ways, it's
based on some of the work you've all done so you can stay in
traditional or also have a more optionality model, and
apparently, that really bends the curve. But you would be
shocked how hard it is getting fellow members who talk about
this to be willing to put their names on those pieces of
legislation.
With that, I yield back, Mr. Chairman. Thank you.
Chairman Coats. According to our rules, those that arrive
after our gavel we recognize in terms of our arrival and I've
just been handed this note here. I'm told that Representative
Beyer, that you could be next, but you can't, but you're next
next. So Representative Grothman, you're on.
Representative Grothman. Thank you very much. First, I want
to make a brief statement in response to Representative Hanna.
I believe it was him. I do not think the studies would show
that government-funded preschool is necessarily helpful. But
above all, I don't know how you can read the Constitution and
say it's the federal government's business. And I think one of
the problems we have around here is we should have a little bit
more respect for the Constitution and the 10th Amendment and
educate the public that there are certain things that may or
may not be good, but if they are good, it's not the federal
government's business. Until we do that, we're going to have a
hard time getting a hand on things.
First off, I'm going to lead off with Senator Gregg. I
couldn't disagree with something you said more. I'm a freshman
here, but one of the things that amazes me is that, despite the
fact we have the majority in the Senate, we can almost do
nothing in the Senate. By that, I mean the Republicans. The
need to have 60 votes means, as a practical matter, everything
we do in the Senate is bipartisan. Every appropriations bill is
bipartisan. Other things, like the docks or the transportation
bill, all of this stuff is bipartisan. It seems to me as
freshman here, the way you get these bipartisan agreements is
get everybody to spend more. That's what they do. When I was a
state legislator in Wisconsin, we had the majority. We balanced
our budget. We didn't have to get a bunch of, you know, free-
spending people all together and keep spending more and more
and more.
So I'm going to ask you to comment on your idea of what you
mean more by bipartisan, or perhaps if we change things so that
51 votes can get something out of the Senate, maybe that
wouldn't be better. It seems to me on the face of it it's
easier to get 51 voting than 60. And I think the fact that
we've had to get 60 votes is the reason why we've had such
bloated spending this millennium.
Comment?
Senator Gregg. I would suggest that on issues that involve
all Americans, where pretty much everybody is affected,
Medicare, Medicaid, Social Security, and tax reform, that if
you push forward in a partisan way, at least 50 percent, maybe
a little less, than the country is not going to be believe what
you did is fair.
The classic example of this is ObamaCare. It was pushed
through on a partisan vote. It was brought on the floor of the
Senate on a Saturday before Christmas. It was voted out on
Christmas Eve. No substantive amendments were allowed. And from
that day forward, there was absolutely no support from the
Republican membership and from a large percentage of this
country for that proposal. Had it been a bipartisan package, it
probably would have been fundamentally better, and it would
have had national support, and it probably would have saved
much more money.
I recognize that, as a conservative Republican, if I were
in charge of the Senate with 51 votes, I would get a lot more
through, but I may not be the majority in the Senate. So I
might lose a lot of votes, and things would happen which
weren't constructive.
I happen to think that if you're going to do budgets and
you're going to pass budgets on a partisan basis, the budget
becomes irrelevant, because one side just basically is on
opposition all the time on the budget. If you put the
fingerprints of everybody on that budget, then everybody is
vested in trying to do something and make it work.
Representative Grothman. I think the three most significant
bills that affect overall spending in the last year and a half,
the omnibus bill, the dock fix, and the transportation bill all
couldn't have been more bipartisan. And I think a good case can
be made that all three moved us in the wrong direction. Maybe
you had different experiences when you were here years ago.
Now I'm going to switch to Dr. Rivlin. Over the weekend--
part of the answer to the budget deficit has to be to grow
revenue, have a growing economy. Over the weekend, I ran into a
CPA telling me about how his clients are working less so they
get their ObamaCare subsidies, another poorly designed program
to discourage people from working hard. Of course, the harder
you work, the more you lose the subsidy. This is the way we do
things around here. I don't care whether it's food stamps, low-
income housing. Pell Grants, everything is designed to
encourage people not to work hard so they get more government
money.
You've been following this institution for a long time. To
what degree do you feel our economy is not growing anywhere
near as fast as it should be, because people are intentionally
not working as hard as they can to get more government
benefits, ObamaCare being the newest one.
Dr. Rivlin. I don't agree with that. I don't think there's
very many such people. I really don't. There may be a few. But
I want to associate myself with Senator Gregg's remarks on, if
ObamaCare, which was designed as a bipartisan bill and appeals
to many Republicans in that it's using the private sector
competition, if ObamaCare had been passed by a bipartisan
majority, it would have been, I think, a rather similar bill
but much more successful.
Representative Grothman. You mean you don't believe that
people are intentionally holding down their income to get their
ObamaCare subsidies? You don't believe that.
Dr. Rivlin. I do not believe that.
Representative Grothman. Okay. There's part of our problem.
Chairman Coats. Thank you, Congressman.
Congressman Beyer, last but not least.
Representative Beyer. Thank you, Mr. Chairman, very much.
Senator Gregg, thank you so much for the idea on the plans
reforming the way the budget works and the--it was very
thoughtful, very constructive.
I would like to follow up on one thing Mr. Schweikert was
talking about, the challenges of dealing with entitlement
reform. Everything that I think I know about how we move
towards a balanced budget begins and ends with entitlement
reform because of the overall structure. Mr. Schweikert
mentioned the Reid Ribble bill. I'm not sure if this is the
same as John Larson's Social Security 2100. I think both are
very responsible approaches that make Social Security good
through the year 2100 and bring the millennials back on board.
But I'm very concerned about what we do about Medicare and
Medicaid. Governor Daniels talked about Medicaid being 30, 35
percent of some states' budgets. We have this dilemma that our
pharmaceuticals keep getting better and better but also more
expensive, our surgical approaches better and better but more
expensive.
When you look at the Ryan budget, not to be unfair to our
speaker, but he essentially threw up his hands and said let's
do block grants on one and vouchers on the other and see what
happens, which probably is inevitably a formula for scarcity?
What's the most responsible way to approach entitlement
reform on Medicare and Medicaid?
Senator Gregg. Healthcare is the essence of the issue which
we're talking about. If we were able to manage our healthcare
accounts in a responsible, fiscally affordable way, our deficit
and debt issue would essentially be handled also.
I would also like to see major tax reform along the lines
of Reagan-Rostenkowski.
And the problem with healthcare is that it is a massively
complex matrix. It's a moving target all the time. It's not
like Social Security which has four or five moving parts, we
know how to fix them. Alice and I have been on innumerable
commissions where we come to the same conclusion on how to do
it. Simpson-Bowles had a great proposal.
But healthcare is always going to move. You can't--there's
no magic wand to deal with that. I think the essence, though,
looking at it from 60,000 feet, are the proposals that are
coming out today from groups like the Dartmouth Institute,
which essentially say that instead of rewarding cost-plus
healthcare, which is what we do today, we reward outcomes and
value-based healthcare and we move towards a capitation system,
so that essentially the work of delivering healthcare and
whether you get paid in healthcare is tied to the outcomes you
produce at the price you produce. And there have been studies
after studies that have shown that the variation in price for
the same procedures across this country is staggering. For
example, it costs five times what it costs to do a full hip
replacement in Florida for what it costs in Minnesota, but the
outcomes aren't any better. In fact, they're probably worse.
So there has to be the incentive of our Medicare and, to
some extent, our Medicaid system which should be dealt with
differently. It has to be to promote outcomes value-based
healthcare and recognize that, no matter what you put in today,
maybe three or four years from now, you're going to have to go
back and take another look at it to see if it's working and
producing the results you want.
It's such a moving target and so complex.
Representative Beyer. Thank you, Senator. Dr. Alice Rivlin,
I'm impressed that the amount of money we spend on tax
expenditures is greater than what we spend on Medicare or
Medicaid or Social Security or nondefense discretionary. At 1.2
trillion in tax expenditures, even half of that would close the
budget deficit that we have on an annual basis right now.
Is that the lowest hanging fruit for us.
Dr. Rivlin. I think that tax expenditures are a very
important part of tax reform. Not only are they large, but they
are designed to go differentially to upper income people, so
that sensible reforms of the major tax reform--major tax
expenditures, mortgage interest, the exclusion of healthcare,
and a couple of others, would help make our tax system more
progressive at lower rates, and lower rates are important to
growth. So I think we can do that.
Representative Beyer. Thank you.
Dr. Rivlin. If I can take one more second.
Representative Beyer. Yes.
Dr. Rivlin. I subscribe to Senator Gregg's emphasis on
value-based reimbursement. I think we're making progress on
Medicare. It's not hopeless.
Representative Beyer. Good. Thank you. Mr. Chairman. I
yield back.
Chairman Coats. Well, I want to thank our members here, and
I want to thank our witnesses, in particular. This has been one
of the most substantive, meaningful hearings that this
committee has held, at least under my chairmanship. I think we
have successfully--and I know that my ranking member shares
this thought, that it's hard to think of what three other
people could have given us a better view, better analysis than
what we have had from the three of you. So we are very grateful
for that.
What is somewhat discouraging is that here in an election
year where this issue may be the most pressing issue that the
next President of the United States is going to have to deal
with, and the only thing I can think that may transcend this or
equal this is a terrorist attack attached to some kind of
weapon of mass destruction. But looking at it from the domestic
policy side, I can't think of a more challenging issue that
will face this next president, and yet in this presidential
election year, this is not even being debated. This is not an
issue that's being presented to the American people in any way
except we're not making any changes anywhere, folks, so don't
worry. If you're concerned about Social Security, we're going
to give you more. If you're concerned about healthcare, don't
worry, we're going to give you more, your retirement pay and so
forth and so on. So that's very disturbing. I really hope and
pray, I think, that the suggestions that have been made here
today can be taken up by the Congress next year, because it's
the only rational way to deal with this problem. It wasn't that
long ago I was meeting with Christine Lagarde, former finance
minister of France and now IMF director, and it was at the time
of the situation in Europe where they had hit a financial
crisis. And I asked the question, do you think the reforms that
are being offered and imposed now in the European Union would
have taken place without the crisis, and she said in all my
years of experience, she said I'm sorry, but I have to say no,
I don't believe it would. She said I've come to understand that
the revolver needs to be at the temple of the politician with a
finger on the trigger before they're willing to say no to
anyone.
There are rational, reasonable ways, if we can make our
case to the American public, to address the situation. I
encourage Dr. Rivlin by saying doomsday doesn't have to be
tomorrow, and doomsday hopefully doesn't have to be a financial
crisis. Christine Lagarde said and you will make terrible
mistakes by rushing to judgment in terms of slashing this and
slashing that and not doing it in a rational way.
So that's the challenge before us. Hopefully this
committee's hearing will help spark some--at least some debate
on this, and hopefully, we can inject some of this. The ranking
member and I have been talking about how--perhaps how we can
encourage the debate commissions--and that suggestion was made
by our witness here--to make this a key issue for the
presidential election.
So with thanks to my colleagues, thanks to our witnesses,
the Committee adjourns.
(Whereupon, at 11:13 a.m., the hearing was concluded.)
SUBMISSIONS FOR THE RECORD
Prepared Statement of Hon. Daniel Coats, Chairman, Joint Economic
Committee
Over the summer, I was cleaning out some old documents, and I came
across a press release from 1982, when I was a Member of the House for
the 4th District of Indiana.
Thirty-four years ago, I wrote about how we need to balance the
federal budget, and how that cannot be done without slowing the growth
of mandatory spending. I was alarmed at the rate of growth in mandatory
programs and how Washington's autopilot-spending had allowed Medicare
to grow to the point where it reached $46 billion.
Yes, $46 billion.
Sadly, that seems like pennies on the dollar today when we are
projected to spend more than $588 billion this year on Medicare alone.
Because previous Congresses and Presidents have failed to kick
Washington's spending addiction, our debt is quickly approaching $20
trillion, and as a share of our economy, is on a path to reach record-
level highs.
In fact, the latest numbers from the Congressional Budget Office
indicate that our gross federal debt is once again larger than the size
of our economy.
It is no longer a question of IF we will ever have to finally
address our gargantuan debt, but when.
In only 10 years, the cost of mandatory programs and interest on
the debt will consume over 96 percent of all federal revenues. This is
expected even though, on average, the federal government is expected to
take a larger share of revenues each year for the next decade than it
has over the past 50 years.
This means that if we are going to be able to pay for other
priorities, like national security and medical research, almost every
bit of it will be on borrowed dollars.
Without a strong economy or government finances, the nation and the
American public's security is in danger.
Former Chairman of the Joint Chiefs of Staff U.S. Navy Admiral
Michael Mullen rightfully noted that ``The most significant threat to
our national security is our debt . . . That's why it's so important
that the economy move in the right direction, because the strength and
support and the resources that our military uses are directly related
to the health of our economy over time.''
When Admiral Mullen made those remarks, our debt was around $13
trillion and looming threats from ISIS didn't exist, so it stands to
reason that our debt is an even larger security threat today.
However, the ability to fund these basic programs will be further
compromised because at around the same time--just a decade away--CBO
expects that Medicare Part A, which pays for hospital services for
millions of seniors, will be bankrupt.
Shortly thereafter, the Social Security trust funds will be
exhausted.
By that time, the accumulation of an additional $8 trillion in debt
will bring us over $28 trillion, which is nothing short of reckless.
While this spending addiction is a bipartisan problem, President
Obama has added more to the federal debt in less than 8 years than his
43 predecessors combined did over 218 years.
Whether it is this administration or the next, this Congress or the
next, eventually our nation's fiscal day of reckoning will come.
Just last month, CBO again stressed that such high levels of debt
will increase the likelihood of a fiscal crisis in the United States,
as lawmakers have less flexibility to respond to unexpected challenges.
CBO also warned that the debt will directly harm the economy by
reducing private capital and lowering productivity, while families will
feel the very real consequences through lower wages.
As dire as the situation is, we still have time to act.
But, the real question is whether Congress is willing to act
entirely on its own.
In my years of serving in Congress, it seems that there is never a
politically convenient time to address mandatory spending, so we
continually kick the can down the road.
I strongly believe that Congress needs a catalyst to force members
and the President to take action before it's too late.
Only twice in my career have I seen Congress actually step up to
the plate and force itself to take politically painful major actions.
The first is the 1983 agreement between Ronald Reagan and Congress
to shore up Social Security. At the time, the Social Security program
was facing bankruptcy, and President Reagan joined with a Democrat-
controlled Congress to put politics aside and take steps to shore up
the program--actions which extended the life of the program for over 30
years now.
Unfortunately, we are once again approaching a crisis point in
Social Security, as well as Medicare, and to date Congress and the
Administration have proved unwilling to once again put politics aside
and address the problem.
The other example is the defense BRAC process, where an independent
commission makes recommendations to improve the Department of Defense's
efficiency.
Given Congress' repeated failure to act on its own beyond these two
limited examples, I recently introduced legislation that I believe will
provide the ``push'' needed for Congress to make the tough decisions
required to stabilize our finances.
My bill, the Mandatory BRACC Act, would establish a civilian BRAC
specifically for mandatory programs--the true drivers of our spending.
This concept takes the best ideas from Defense BRAC, Simpson-
Bowles, Rivlin-Domenici, and others, and would create a panel of
private sector experts to streamline mandatory programs and make them
more efficient.
The recommendations would then be put before Congress for an up-or-
down vote--without any procedural gimmicks or stall tactics.
However, I believe Congress is still also capable of developing its
own ideas to stabilize spending, as an alternative to the Commission's
recommendation.
This, along with a Balanced Budget Amendment, could prevent the
upcoming debt implosion if we act soon.
If we fail to act, our nation's ability to pay for essential
government functions will be severely constrained, our economy will
suffer, and our national security will be at risk.
Today's hearing provides us with an opportunity to identify ways to
achieve our bipartisan goal of a prosperous America.
We have the privilege of hearing from distinguished experts on this
topic, and I look forward to their testimony examining why and how we
should solve our federal debt crisis.
__________
Prepared Statement of Carolyn B. Maloney, Ranking Democrat, Joint
Economic Committee
Chairman Coats, thank you for calling today's hearing.
I want to start with a number that's often talked about. And that's
$19.5 trillion--the total nominal debt. No question, that's a lot of
money.
But, as both Senator Gregg and Dr. Rivlin write in their testimony,
a far more important measure is public debt in relation to the size of
the economy--the debt-to-GDP ratio. Right now that is about 75 percent
of GDP.
We can improve the debt-to-GDP ratio in two ways--by decreasing the
debt and by increasing economic output.
We must improve both halves of that equation. Let's look at the
first--debt.
The main driver of increasing debt is the aging U.S. population.
Everyone who has studied the debt issue, from CAP on the left to Cato
on the right, says projected deficit growth is overwhelmingly the
result of long-term trends--the aging U.S. population and rising health
care costs.
One fact tells much of the story: there are nearly two and a half
times as many people aged 65 and over today as 50 years ago. This means
more and more Americans will be receiving Social Security and Medicare
benefits.
CBO projects that spending on Social Security and Medicare will
increase as a share of GDP over the next decade, while all other
program spending is on track to decline.
In fact, discretionary spending is nearing historic lows. Spending
on nondefense discretionary programs as a share of GDP is projected to
hit its lowest level on record in 2018.
Some point a finger at President Obama for the increase in the
national debt. This ignores the fact that it is overwhelmingly due to
long-term trends and the legacy of the Great Recession that began on
the prior president's watch.
Conveniently, they also forget history.
In the late 1990s, President Bill Clinton presided over four
straight years of budget surpluses, completely erasing the deficit.
This allowed us to pay down a significant portion of our debt.
President George W. Bush inherited a surplus of $128 billion, or
1.2 percent of GDP.
But he quickly squandered the surplus on two tax cuts, which
increased the debt by $1.5 trillion over 10 years.
Then he led the United States into wars in Iraq and Afghanistan,
projected to cost $4 to 6 TRILLION dollars in the long term.
Then he presided over the worst economic meltdown since the Great
Depression, which crippled the economy and sent deficits soaring.
In the end, George Bush left Barack Obama with a deficit of nearly
10 percent of GDP and a rapidly rising debt.
As Robert Bixby, head of the nonpartisan Concord Coalition put it--
the debt ``would have exploded'' around 2009 to 2010 ``no matter who
was president.''
The reality is that the Obama Administration has helped dig us out
from the Great Recession, and the deficit as a share of GDP fell by
nearly three-quarters, from nearly 10 percent to 2.5 percent.
Now I'd like to turn to the second half of the equation--increasing
economic output.
To do this, we should invest in our nation's infrastructure,
workforce, and competitiveness.
However, nondefense government investment as a share of the economy
is at its lowest level in more than 50 years.
In fact, we are not investing enough to maintain our existing
infrastructure.
With interest rates at historic lows, it is the ideal time to
borrow and invest in rebuilding our nation's infrastructure and fund
the basic research that will drive the next generation of innovation.
As Dr. Rivlin describes in her testimony, these investments will
make our economy stronger and more productive. And as economist Larry
Summers has argued, NOT making these investments will place a
significant burden on our children and grandchildren.
History is instructive. Investing in broad-based economic growth
was at the core of America's success in the decades after World War II.
We invested in our people through the GI Bill, and in our
infrastructure, building the nation's interstate highway system.
It paid off. While publicly held debt more than tripled between
1945 and 1981, it fell by about three-quarters as a share of the
economy.
More recent history is also important to consider. Excessive
austerity in the near term, as has been pursued in recent years, will
slow economic growth and make it more difficult to bring down the debt-
to-GDP ratio over time.
Again, we need to address both sides of the equation.
To tackle our debt we need a balanced approach that mixes targeted
spending cuts, reforms to social insurance programs and revenue
increases.
And to grow the economy, we must invest in infrastructure,
education, and innovation.
It's doable. It's up to us to do it.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Prepared Statement of Mitchell E. Daniels, Jr., President, Purdue
University, and Co-Chair, Committee for a Responsible Federal Budget
My gratitude to the committee for the invitation to discuss our
national debt and its implications for our nation's future. In my view,
this issue transcends all the others before us; put another way, if we
get this wrong, nothing we deal with successfully will matter very
much.
On receipt of the invitation, I started preparing another fact-
heavy, statistics-laden description of the problem, its near and long-
term effects on the economy and on the ability of the federal
government to discharge its many legitimate duties. But I decided that
was not a good use of my time or yours. First, my fellow panelists are
far more expert and current on the details of today's fiscal picture.
Second, you've heard it all before.
You know, or you should, that our deficits have been running at
historically unprecedented levels, so much so that another half
trillion dollars this year, bigger than in any year in our history
before 2009, was met with a yawn, or even by some, somehow, as a benign
event.
You know, or you should, that our national debt has reached a
peacetime record, and is heading for territory where other nations have
spiraled into default, or into the loss of sovereignty as creditors use
their leverage to dictate terms.
You know, or you should, that public debt this large weighs heavily
on economic growth, crowding out private investment and discouraging it
through uncertainty. And that much faster growth than today's is the
sine qua non of the greater revenues that will be necessary to meet
federal obligations, let alone reduce our debt burdens.
You know, or you should, that the unchecked explosion of so-called
entitlement spending, coupled with debt service, is squeezing every
other federal activity, from the FBI to basic scientific research to
our national parks to the defense on which the physical survival of the
country depends.
You know, or you should, that the whole problem is getting worse,
and fast. Even if reform began today, past overpromising and
demographic realities mean that the entitlement monster is going to
devour accelerating amounts of additional dollars, all of which are
scheduled to be borrowed rather than funded honestly.
You know, or you should, that we are kidding ourselves--except that
it's no joke--in even the appalling estimates I just referred to. The
official projections of growing indebtedness are built on a pile of
wishful assumptions which repeated experience tells us are bogus:
productivity assumptions are too high, interest rate assumptions too
low; growth too high, spending too low. As each of these is proven
unduly rosy, more zeroes will be added to the bill we hand to the young
people of this country.
So, I will spare us all the statistics. Let me instead offer an
appeal on behalf of those young people, the ones I am so lucky to live
among at Purdue University, all their counterparts, and the new
Americans not yet with us. The appeal is for a shift in national policy
to the growth of the private, productive economy as our all-out,
primary priority, calling all close ones and breaking all ties in its
favor. And for decisive action soon, at long last, that begins the
gradual moderation of unkeepable promises and unpayable debt loads
which will otherwise be dumped on coming generations. This I suggest
not only as wiser fiscal and economic policy, but for the sake of
public integrity and the survival, literally, of our free institutions.
A national government that, year after year, borrows enormous sums
and spends them not on genuine investment in the future but on current
consumption, passing the bill down to others, pretending that the
problem is smaller than it really is, lacks not only good judgment but
integrity. It is not hyperbole to label such behavior immoral. For a
long time, people have come to this Congress decrying the
intergenerational injustice of this policy, but things keep getting
worse not better.
A near-decade of anemic economic performance, the weakest recovery
on record, has eroded badly the economic optimism on which, more than
any other factor, Americans' faith in a better tomorrow has rested. A
near majority now believes that America's best days are behind us.\1\
As this new pessimism has deepened, it has turned into an ugliness, a
meanness, a new cynicism in our national life, with a search for
scapegoats on both left and right.
---------------------------------------------------------------------------
\1\ Rasmussen Reports (2015). ``Do America's Best Days Still Lie
Ahead?''
---------------------------------------------------------------------------
For almost two and a half centuries, Americans have argued
strenuously about many things, but shared a resilient determination to
be self-governing, to guard against tyranny at home and, on occasion,
to resist by force its spread elsewhere in the world. But lately, and
rather suddenly, there are alarming signals of a different outlook. A
record 1 in 4 young people say that democracy is a ``bad way'' to run
the country, and an even larger fraction of the citizenry would prefer
an authoritarian leader who did not have to deal with the nuisance of
elections. One in 6 are sympathetic to a military takeover, almost a
three-fold increase from two decades ago.\2\
---------------------------------------------------------------------------
\2\ Foa, Roberto Stefan, and Yascha Mounk. ``The Democratic
Disconnect.'' Journal of Democracy 27.3 (2016): 5-17.
---------------------------------------------------------------------------
If national leadership continues to allow our drift toward a
Niagara of debt, until solemn promises are broken as they would then
inevitably be, today's sense of betrayal will seem tame. When today's
young Americans learn the extent of the debt burden we have left them,
they may question the premises of our self-government, with good
reason. When tomorrow's older Americans finally understand how they
have been actively misled about the nature and the reliability of our
fundamental social welfare programs, it may be the last straw breaking
the public confidence on which democracy itself depends.
In fairness, a few Members in each political party, some in this
meeting room, have tried to address the coming crisis. To them, all
thanks and credit. To those still in denial, or even advocating steps
that would make our debts even higher, please reconsider. Your careers
may end happily before the reckoning. Your reelections may not be
threatened by your inaction. But your consciences should be. You know
this, or you should.
__________
Prepared Statement of Senator Judd Gregg
Chairman Coats, Ranking Member Maloney, and Members of the
Committee, thank you for inviting me here today to discuss the
important topic of our national debt. The fiscal challenges we face are
significant, and I appreciate the opportunity to discuss the types of
solutions that can move us toward a healthier economy. I spent much of
my career focused on addressing our nation's debt as Chairman and
Ranking Member of the Senate Budget Committee and I now serve as Co-
Chairman of the nonpartisan Campaign to Fix the Debt.
At $14 trillion, or over 75 percent of Gross Domestic Product
(GDP), the national debt held by the public is currently near record
levels. As a share of the economy, debt is higher than any time other
than around World War II, and is nearly twice the 50-year historical
average. Even more concerning, the aging of the population and
continued growth in health costs are primary causes for the debt to
indefinitely grow faster than the economy. As a result, the publicly
held debt will continue to increase rapidly, reaching 86 percent of GDP
in 2026 and exceeding the size of the economy by 2033. This is
obviously not sustainable.
Although deficits have declined by 70 percent in recent years--a
point the current administration likes to point out--that decline
followed a nearly 800 percent increase in deficits. Moreover, the
temporary decline in deficits has ended, with the deficit expected to
increase by more than one-third over last year to nearly $600 billion
in fiscal year 2016. The Congressional Budget Office (CBO) projects
that deficits will essentially continue to increase as far as the eye
can see, exceeding $1 trillion by 2024 and continuing to rise from
there.
At the heart of our budget problem is the misalignment between the
promises we have made and the revenues available to pay for them,
promising more in benefits and other spending than we will collect in
revenues. According to CBO, the growth in spending on Social Security
and Medicare as the baby boom generation ages along with spending for
interest on our debt will cause spending to grow from 20.7 percent of
GDP in 2015 to 23.1 percent in 2026. Meanwhile, revenues will increase
modestly from 18.2 percent of GDP today in 2015 to 18.5 percent of GDP
in 2026. These trends will continue, with the gap between spending and
revenues continuing to grow.
The sooner we act to begin addressing the debt, the better. Yet
there seems to be a near endless list of excuses for not doing anything
to get our debt under control.
At some point, unsustainable debt falls on the heads of a
government that has created it and of the people who have elected the
government's officials. In its recent budget update, CBO warned that
``such high and rising debt would have serious negative consequences
for the budget and the nation,'' including increased spending on
interest, lower wages, reduced flexibility to deal with new crises or
pursue new opportunities, and an increased risk of a fiscal crisis.
People point out facts like this all the time. But they are
ignored. Unfortunately, our children and our nation will pay a dear
price for this indifference.
The primary legislative action Washington has been able to muster
in recent years is spending money we do not have to address issues that
no one wants to pay for. Gridlock prevails in preventing changes to
mandatory programs that will continue to grow on autopilot until
lawmakers take action. It is of course much easier to borrow from our
kid's futures than to pay for new spending and tax breaks, let alone
reduce the deficits already in place.
It is clear that Congress and the President must take action to
bring spending commitments in line with revenues to address the growing
national debt. The longer policymakers wait to take action the more
difficult the choices will be, with less time to gradually phase-in
changes and an increasingly larger magnitude of changes that will be
required to put the country in a good fiscal place. The can should not
be kicked down the road to avoid making difficult choices, particularly
on entitlements. While Congress and the President have enacted limits
on discretionary spending and higher taxes on upper income taxpayers,
they have done virtually nothing to control the growth of entitlement
spending that is the core driver of our debt.
The primary reason that the congressional budget process is not
functioning is that it requires difficult decisions to bring spending
and revenues in line. This is something the Congress and the President
are not good at.
As a former elected official, I know how much we like to talk about
good news: tax breaks, new spending initiatives, and preserving
benefits. But we are far less interested in talking about the bad news
and hard choices on the horizon as the federal debt continues on its
unsustainable upward path. We don't see big constituencies for that
kind of news and no special interests give you credit when you discuss
it with voters.
Policymakers and voters alike need to recognize that changes will
be necessary in the years ahead as an aging population, rising health
care costs, and a flawed tax system put more and more pressure on the
federal budget. We need leaders to make the case to the public that
everyone will benefit if we come together to make tough choices in all
parts of the budget to put our nation on a fiscally sustainable course.
The budget process as it is currently structured and implemented
guarantees significant partisan and turf confrontations.
The budget is the only major legislation that is produced purely
along partisan lines by design. The majority party must write and pass
a budget with essentially only its members supporting it. This
guarantees significant systemic opposition to any budget by the
minority. Consideration of the budget resolution on the floor of the
Senate devolves into late-night ``vote-a-rama'' sessions where dozens
of political messaging amendments geared to produce fodder for campaign
commercials are considered, while there is little debate on the ways to
address the real problems at hand: the long-term drivers of our debt.
The highly politicized nature of the budget debate is not conducive to
the bipartisan agreement necessary for major tax and entitlement
reforms.
Other committees, especially Finance and Appropriation in the
Senate, view the Budget Committee and the budget resolution as a threat
to their jurisdiction and areas of responsibility. Authorizing
committees join forces with constituency groups to resist efforts to
reduce spending on programs within their jurisdiction. The budget
inevitably runs into and is often undermined by the need and desire of
other committees to protect their ``turf.''
Thus, the country often does not have a federal budget and even
when it has had some semblance of a budget over the last decade or so,
the budget has had little practical impact in enforcing discipline on
federal spending or tax policy. Since 1998 there have been 10 fiscal
years in which Congress has not approved a budget resolution. Even when
budgets are adopted, they are often political documents that lawmakers
never expect to implement or enforce. This is clearly an absence of
budget enforcement and fiscal discipline that our country needs.
The country's substantial long-term challenges underscore the
problems with the budget process, as an increasing portion of the
budget is on autopilot and continues to grow at an unsustainable rate
that threatens long-term fiscal sustainability. In 1973, the last full
fiscal year before the Budget Act was signed, Social Security and
Medicare spending was 4.2 percent of GDP and tax expenditures, or
spending through the tax code, were about 5 percent. In 2015 those
numbers had jumped to 8.6 and 7.6 percent, respectively, each larger
than the entire discretionary budget which equaled 6.6 percent of GDP.
To address these challenges, we need a budget process that rewards
setting goals and enforcing long-term debt stability. While budget
process reform isn't a panacea, a budget process that makes it easier
for Congress to be fiscally responsible can help spur further
bipartisan action on the substantive policy changes needed to fix the
debt.
To fix this problem and actually have Congress produce budgets that
are meaningful and effective, we need fundamental changes. The right
budget process should provide a structure for policymakers to confront
the trade-offs in the budget, make decisions, and reach consensus about
priorities. It should also give policymakers useful information about
the effects of legislation, encourage transparency and accountability
in budget decisions, and include effective enforcement tools for the
budget goals as Congress considers other legislation. Process reforms
are not a substitute for the political will to make difficult
decisions, but an improved framework could lead to more responsible
decision making.
The current form of the budget does make visible the core problems
that it should address because it is too centered on appropriations and
does not formally engage the debt problem. The budget has no
comprehensive way to address major federal spending areas--like
healthcare--that cut across multiple committees and involves both
discretionary and entitlement spending. It is simply dysfunctional in
its structure.
In order to address these issues we need a new approach for
developing the federal budget. The Budget Committee itself should be
reconstituted with the senior members of committees most affected by
the product. This would create a greater likelihood of agreement from
these powerful committees and reduce the forces that are naturally at
odds with the effort in producing and enforcing the budget. One-third
of the Budget Committee should be from Appropriations, one-third from
Finance/Ways and Means, and one-third from the general membership. The
respective party leaders should choose the chairperson and ranking
member from the general membership.
The Budget Committee should be a bipartisan committee. It should
have its membership divided equally between the parties with the
chairperson being from the majority. This would require both parties to
take responsibility for producing a budget or face blame for failing to
do so. A truly bipartisan Budget Committee would also reduce
partisanship in the execution and enforcement of the budget,
significantly increasing the likelihood of reaching consensus on
complex issues like entitlement and tax reform.
The budget should be required to set short- and medium-term fiscal
goals for the deficit and debt as a percentage of GDP. It should also
set targets for spending and revenues as a percentage of GDP that are
consistent with the fiscal goals for the debt and deficit. The budget
should include reconciliation instructions and other enforcement
mechanisms to meet the fiscal goals and spending and revenue targets in
the resolution.
No appropriation bills should move to the floor without a budget
resolution. That prohibition should apply to omnibus appropriations.
This would ensure that appropriations are considered in the context of
an overall fiscal plan and it would give members of the Appropriations
Committees an incentive to work toward agreement on a budget
resolution.
There should be consequences for failing to adopt a budget
resolution. Spending on discretionary accounts and major entitlements
should be reduced by 5 percent from the prior year and payroll taxes
should be increased by 5 percent if no budget is passed. This would put
pressure on the bipartisan committee and the entire Congress to produce
and pass the budget resolution.
There should be a separate budget item for the largest areas of
federal entitlement spending and the Budget Committee should have
authority to ensure that reforms are made in these programs to reach
the spending goals necessary to achieve the target debt to GDP ratio.
This new structure should cross committee lines of jurisdiction and
engage all the affected committees in a single process of review.
A budget process that coordinates spending on capital investments
among all the committees of jurisdiction should be added. A capital
budget must be accompanied by strong accounting rules that take into
account capital asset depreciation as well as the value of new capital
expenditures. A capital budget should not be used as an excuse to
authorize additional borrowing for capital expenditures on top of
current borrowing for consumption.
The number of votes required to waive points of order for violating
budget limits should vary depending on the size of the violation, with
67 two-thirds majority votes required to waive large violations. Senate
Budget Committee Chairman Mike Enzi put this idea forward in the
outline of potential budget process reforms that he released in July.
If the budget resolution is to be a meaningful document imposing fiscal
discipline, it should also be harder to pass legislation that violates
the budget than to pass legislation that complies with it. If Congress
wishes to increase spending or reduce revenues relative to current law,
it should account for the costs of doing so in the budget. Making it
harder to waive significant Budget Act points of order will encourage
Congress to honestly account for the costs of policy changes in the
budget that it intends to later consider. At minimum, this would make
it harder to pass budget-busting legislation that adds to the debt.
Finally, Congress needs a process that allows it to work in a
bipartisan and comprehensive manner on complex and politically charged
problems like healthcare spending, entitlements, and major tax reform.
An approach based on the Base Realignment and Closure (BRAC) Commission
(BRACC) is a strong and effective option. All spending (discretionary
and mandatory) and all tax policy should be reviewed, with the primary
goal of putting the federal budget on a path to solvency by limiting
the growth of the national debt. The approach, as with BRACC, must be
bipartisan in nature and require an up-or-down vote on the entire
package without amendments. Chairman Coats has introduced legislation
based on the BRACC approach and so has Senator Joe Manchin. Budget
Committee Chairman Enzi also included this concept as an option in his
outline of potential budget reforms discussed by the Budget Committee.
A budget process organized around these concepts would dramatically
increase the likelihood that the largest government in the world, a
government that is spending almost four trillion dollars a year, would
actually have a functioning budget. It would provide a disciplined
approach to spending and tax policy and increase the American people's
confidence in their government.
Such an event would be revolutionary, and it would also be a nice
way to govern.
__________
Prepared Statement of Alice M. Rivlin, Brookings Institution and
Georgetown University \1\
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\1\ Alice M. Rivlin is a Senior Fellow in Economic Studies at the
Brookings Institution and a Visiting Professor at Georgetown
University. The views in this statement are strictly her own and do not
necessarily reflect those of staff members, officers, and trustees of
the Brookings Institution or Georgetown University.
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Mr. Chairman and Members of the Committee:
I am happy to be back testifying before the Joint Economic
Committee, one of the few venues on Capitol Hill where serious
bipartisan discussion of economic policy happens. The JEC deserves
great credit for having the fortitude to refocus attention on the
budget future and the national debt--major economic policy challenges
that have dropped from sight in this contentious election.
As the CBO has recently reminded us, our national debt is high in
relation to the size of our economy and will likely rise faster than
the economy can grow over the next several decades if budget policies
are not changed. Debt held by public is about 74 percent of GDP and
likely to rise to about 87 percent in 10 years and to keep rising after
that.
This rising debt burden is a particularly hard problem for our
political system to handle because it is not a crisis. Nothing terrible
will happen if we take no action this year or next. Investors here and
around the world will continue to lend us all the money we need at low
interest rates with touching confidence that they are buying the safest
securities money can buy. Rather, the prospect of a rising debt burden
is a serious problem that demands sensible management beginning now and
continuing for the foreseeable future.
What makes reducing the debt burden so challenging is that we need
to tackle two aspects of the debt burden at the same time. We need
policies that help grow the GDP faster and slow the growth of debt
simultaneously. To grow faster we need a substantial sustained increase
in public and private investment aimed at accelerating the growth of
productivity and incomes in ways that benefit average workers and
provide opportunities for those stuck in low-wage jobs. At the same
time we need to adjust our tax and entitlement programs to reverse the
growth in the ratio of debt to GDP. Winning broad public understanding
and support of basic elements of this agenda will require the
leadership of the both parties to work together, which would be
difficult even in a less polarized atmosphere. The big uncertainty is
whether our deeply broken political system is still up to the
challenge.
The American economy is the strongest in the world. It has shown
great resilience in recent years and recovered much better than others
from the devastation of the Great Recession. But with an aging
population, slow productivity growth, lagging wages, and increasing
inequality we cannot afford policy gridlock. We need aggressive
economic policies to grow the economy faster and create more and
better-paying jobs. We do not lack for opportunities to do this. In
recent years we have neglected our public infrastructure, allowed
roads, bridges, rail, and water systems to fall into disrepair. We have
failed to modernize our airports and air traffic control systems to
keep up with the volume of flights or to invest adequately in public
health. We have failed to keep the skills of our workforce growing in
step with changing technology and to prepare young workers, especially
those from low-income families, for the jobs the economy requires. And
we have reduced the flow of funding into basic research on which future
technological progress depends.
After years of neglect and under-investment, opportunities abound
for public investment and public-private partnerships to increase
future productivity growth and open new opportunities for current and
future workers. We would be stupid and irresponsible not to take
advantage of these opportunities to enhance the future productivity and
income growth needed to keep the American economy strong and enhance
American ability to be an effective world leader.
These growth-enhancing investments will require substantial public
resources over quite a long period. What is needed is a well-planned
and executed program of investment in knowledge, skills, and basic
infrastructure, not a short-term stimulus designed to create as many
jobs as possible quickly. Even if part of this spending is offset by
reducing lower priority spending or rising revenues--as it should be--a
sufficiently aggressive investment program will likely increase the
near-term deficit. It will create additional jobs and take some of the
burden off the Federal Reserve and monetary policy, which has recently
borne the sole policy responsibility for keeping the economic recovery
from stalling.
Opponents of undertaking a major productivity-increasing investment
program argue that we can't afford the additional spending because
government is already spending too much and the debt burden is already
too high, so any additional spending must be fully ``paid for'' in the
near-term. Proponents, by contrast, argue that we should borrow as much
as we need for investment at current low interest rates and worry about
the debt burden later. Both are wrong. Investment in future growth is
essential to a prosperous future, but must be undertaken simultaneously
with actions to reduce the growth of future debt. Faster growth alone
will not reduce the debt to GDP ratio in a society that has already
committed itself to benefits for a growing older population--benefits
that will increase more rapidly than revenues even at hoped-for higher
rates of GDP growth.
Why can't we focus on investments now and worry about the debt
problem later? The main reason is that the adjustments that we need to
reduce the growth in entitlement spending and increase tax revenues in
the future take time and must be well designed and phased in slowly.
Moreover, unless a credible longer-run debt reduction plan is put in
place, it will be impossible to build bipartisan support for the needed
investments or to deal effectively with another recession when one
occurs. Moreover, without enactment of a credible long-run deficit
plan, our creditors may gradually--and understandably--lose their faith
that the United States is a creditworthy nation. Then we would be faced
with the far more serious problem of paying much higher interest rates
on a larger debt.
There are three necessary elements of a long-run debt reduction
plan:
Putting the Social Security program on sustainable track
for the long run with some combination of higher revenues and
reductions in benefits for higher earners.
Gradually adjusting Medicare and Medicaid so that federal
health spending is not rising faster than the economy is growing.
Indeed, we should use these programs to transform the whole American
health delivery system, so that total health spending no longer absorbs
a growing portion of total resources.
Adjusting our complex, inefficient tax system so that we
raise more revenue in a more progressive and growth-friendly way and
encourage the shift from fossil fuels to sustainable energy sources.
Such a tax reform program could involve limiting or restructuring tax
expenditures that differentially benefit high-income people in exchange
for lower marginal income tax rates; corporate tax reform aimed at
taxing a broader base at lower rates; a carbon tax that starts low, but
rises predictably over time; and possibly a progressive consumption
tax.
You will notice that I do not believe that cutting discretionary
spending further should be part of a long-run plan to reduce the debt
burden. We need to work hard to increase the effectiveness of both
domestic and defense spending (and we can argue about the balance
between the two), but I believe that the Budget Control Act of 2011 cut
discretionary spending too much. The investment program I outlined
above would increase discretionary spending above the current caps.
Reaching agreement on the politically sensitive changes necessary
to reduce the debt burden will take bipartisan negotiation and strong
leadership in the White House and Congress--leadership committed to
working together to get the economy growing faster and the debt burden
coming down. In a country with a Constitutional structure that requires
consensus and compromise, there is no way that the needed changes in
taxes and entitlements can be made without bipartisan cooperation and
compromise.
The major elements of such a plan closely resemble those of all the
bipartisan plans seriously discussed in recent years--Simpson-Bowles,
Domenici Rivlin, Obama-Boehner, the Super Committee, and the ``gangs''
of Six or Eight or whatever. The arithmetic of the budget drives all
bipartisan problem-solvers to the same general conclusions and much of
the staff work has already been done. However, I am not suggesting
another grand bargain--at least not another attempt to wrap all these
complex adjustments into a single piece of legislation to be voted on
at once. That is too heavy a lift and would not produce the necessary
buy-in. Instead, I am suggesting that the new Administration and
Congressional leadership work out a general framework for investing in
growth and getting the debt/GDP ratio coming down over time. Then the
relevant committees can get to work on the major components (investment
in infrastructure, skills, and knowledge; restoring Social Security
solvency; reforming Medicare and Medicaid; and transforming the tax
code). All this will be difficult and contentious and no-one will be
fully satisfied with the result, but the point is to break out of
gridlock and start working on constructive solutions.
Thank you for listening. I would be happy to answer questions.
__________
Questions for the Record for President Daniels Submitted by Senator Tom
Cotton
1. Mandatory Spending programs and interest payments are expected
to grow in the years to come and consume increasing amounts of the
federal budget. CBO projects by the year 2026 that 96% of revenues will
be spent on mandatory programs and debt interest. How do you expect
this to effect the primary responsibility of the federal government,
which is funding our military and protecting our national security?
Whether one prefers big government or limited government, a social
welfare state or a market economy state, has nothing to do with the
fact that no enterprise--not a family, a small business, or a modern
nation-state--can survive, let alone thrive, while carrying the
incredible debt burdens we are about to confront. This is not a matter
of opinion based on a preference for limited government. It's a
brutally objective fact of life.
In the next 10 years, the United States will spend more on interest
for its debt than it does for its military. And even as federal
spending continues to grow, the average income for the American worker,
who ultimately shoulders the burden of our spending spree, has
essentially flat lined. All the appropriate and noble pursuits of our
government are threatened by the debt burden amassed and continuing to
grow--and the country will rely on a generation personally indebted by
individual pursuit of a brighter future.
The Wall Street Journal recently reported that there are roughly 7
million men in prime working age (25-54) who are not holding paid jobs
nor seeking work. The work rate for that age group is 84.4%--lower than
in 1940, 86.4%, at the end of the Great Depression. How large of an
impact do you believe this has on the federal deficit and how can
Congress address the crisis of working-age Americans who have given up
seeking employment?
The percentage of Americans with a job is near the lowest in
decades. One in five men of prime working age, and nearly half of all
persons under 30, did not go to work today.
We can't build a middle class out of government jobs paid for with
borrowed dollars. In fact, it works the other way: a government as big
and bossy as this one is maintained on the backs of the middle class,
and those who hope to join it.
Those punished most by the wrong turns in recent years are those
unemployed or underemployed, and those so discouraged that they have
abandoned the search for work altogether. And no-one has been more
tragically harmed than the young people of this country, the first
generation in memory to face a future less promising than their parents
did.
The routes back to an America of promise, and to a solvent America
that can pay its bills and protect its vulnerable, start in the same
place. The only way up for those suffering, and the only way out of the
dead end of debt into which we have driven, is a private economy that
begins to grow and create jobs, real jobs, at a much faster rate than
today.
__________
Questions for the Record for Senator Gregg Submitted by Senator Tom
Cotton
1. Mandatory Spending programs and interest payments are expected
to grow in the years to come and consume increasing amounts of the
federal budget. CBO projects by the year 2026 that 96% of revenues will
be spent on mandatory programs and debt interest. How do you expect
this to affect the primary responsibility of the federal government,
which is funding our military and protecting our national security?
Answer: Admiral Mike Mullen, former Chairman of the Joint Chiefs of
Staff, has said our debt is our greatest national security threat
because it jeopardizes our ability to fund defense and undermines the
economic security that is a critical part of national security. A
nation with our current levels of unsustainable debt cannot hope to
maintain military strength or influence in world affairs.
As you noted, spending on mandatory programs and interest on the
debt are consuming an increasing percentage of our budget. This will
only accelerate as society ages and the interest rate we pay to service
our debt normalizes. The vast majority of spending growth over the next
decade is a result of rising costs for health care, Social Security,
and interest on the debt. These three categories are responsible for 84
percent of nominal spending growth over the next decade and 165 percent
of spending growth as a share of GDP (with other budget categories
shrinking). According to the CBO long-term outlook these three
categories will consume every dollar of revenue raised by the federal
government by 2038, with every dollar for defense or other spending
financed by borrowing.
Failure to address the growth of entitlement spending and our debt
will make it harder for Congress to find the resources to fund the
military, and will eventually squeeze out funding for other investments
in the domestic discretionary side of the budget. A large and growing
debt will also reduce the fiscal space available to respond to
emergencies such as a major military conflict without risking a fiscal
crisis. We are already seeing the negative effect of a budgetary
squeeze with the sequester, which imposes deep cuts on defense and
nondefense discretionary spending because of the failure of Congress to
address the deficit in a responsible manner.
Failing to address our debt will also threaten national security by
harming economic security. U.S. national security in the 21st century
rests upon both economic and military strength, for our military might
and diplomatic muscle ultimately depend on a vibrant economy. Economic
growth is the foundation of that strength, without which it cannot
exist.
Our strong economy is the core of our nation's foreign policy
power. Unless we change course, our huge and growing debt will
undermine our economic growth, our military strength, and our global
leadership. Absent a new, sustainable fiscal outlook, America's
standing in the world and its national security will surely, if perhaps
slowly, decline. We must resolve our immediate crisis in a way that
drives the completion of a comprehensive long-term fiscal plan which
supports America's continuing economic strength and global leadership
role.
2. The Wall Street Journal recently reported that there are roughly
7 million men in prime working age (25-54) who are not holding paid
jobs nor seeking work. The work rate for that age group is 84.4%--lower
than in 1940, 86.4%, at the end of the Great Depression. How large of
an impact do you believe this has on the federal deficit, and how can
Congress address the crisis of working-age Americans who have given up
seeking employment?
Answer: Since the Great Recession began in 2007 the employment rate
for prime-age males has declined. But, as you note, that decline is
part of a much longer-term fall in the share of men taking part in the
workplace. The decline has been largest among less-educated men and
larger among African Americans than among whites and Hispanics.
The reduction in labor force participation by working-age men has a
direct negative effect on the budget, both in terms of foregone taxes
received by the government and additional government benefits, such as
SNAP, paid out to some (though not all) of these nonworking
individuals. The impact on revenues is particularly pronounced for
entitlement trust funds that are funded by payroll taxes from workers.
Declining labor force participation exacerbates the declining ratio of
workers paying into Social Security and Medicare to the number of
beneficiaries.
Economic growth is essentially a function of how many people are
working and how productive workers are. The decline in labor force
participation limits the growth in the workforce which is necessary for
a growing economy. Our economic output generally rises and falls with
the number of Americans in the workforce. The more Americans who are
working, the more wealth our society generates both in terms of GDP and
in terms of tax revenue that can be used to pay for spending. But the
larger cost is to these men, who lose the opportunity to become self-
sufficient, contributing members of their communities.
There are a number of causes for falling male labor force
participation. Employment rates for men have declined even after
controlling for individuals who report being in school or college. And
nearly one-quarter of unemployed men report not working in the previous
year as well, making it less likely that they will re-enter the
workforce and build a successful career.
Disability benefit applications have also increased, with larger
increases among less-educated individuals according the studies done by
Mark Duggan and David Autor. Applications are increasingly based upon
mental illnesses and musculoskeletal pain that are difficult to verify.
Disability applications rise and fall with the unemployment rate,
making it reasonable to conclude that fewer job opportunities for less-
skilled men have increased their likelihood of going on disability
benefits. Once an individual begins receiving Social Security
Disability Insurance benefits it is unlikely they will ever return to
the labor force.
One reason for falling labor force participation by prime-age males
is the well-documented decline in demand and wages for less-skilled
individuals. Many jobs that once allowed a high school graduate to earn
a decent living often no longer exist. And for those who can find jobs,
wages have stagnated. At the same time, there is also an element of
choice in falling employment by prime-age males. A rising number of
nonemployed males tell the Census Bureau's Current Population Survey
that they don't want to find a job.
In short, there are many reasons for the decline in labor force
participation, and policy can only reasonably address some of them. But
Congress could pursue a number of strategies designed to increase the
rewards to work and encourage nonworking men to re-enter the labor
force which would in turn improve economic growth and improve our
budget outlook. For example, increasing enforcement of work
requirements for SNAP benefits and other social transfer programs could
reduce the incentive to not work.
Targeted investments in education and job training, offset by
reductions in spending for consumption, can help increase labor force
participation by better preparing individuals for the workforce.
Reforms to the Social Security Disability Insurance program that
encourage individuals to remain in the workforce instead of going on
SSDI, would help increase labor force participation. So would reforms
that encourage SSDI recipients' return to work, such as those included
in the Return to Work Act that you introduced with Senator Lee.
Congress can also encourage individuals to return to the workforce
by promoting economic growth through business tax reform and individual
tax reform, especially addressing very high effective marginal rates at
some point of the tax code.
__________
Questions for the Record for Dr. Rivlin Submitted by Senator Tom Cotton
1. Mandatory Spending programs and interest payments are expected
to grow in the years to come and consume increasing amounts of the
federal budget. CBO projects by the year 2026 that 96% of revenues will
be spent on mandatory programs and debt interest. How do you expect
this to effect the primary responsibility of the federal government,
which is funding our military and protecting our national security?
The projected growth of mandatory spending and interest payments is
indeed a serious challenge. If policies are not changed discretionary
spending (including defense) will be squeezed to dangerous levels, and
deficits will rise rapidly. In my opinion we need to restrain the
growth of mandatory spending, especially health care spending, and
increase revenues from a more pro-growth tax system. If we can do both,
interest payments will fall, and economic growth will pick up!
2. The Wall Street Journal recently reported that there are roughly
7 million men in prime working age (25-54) who are not holding paid
jobs nor seeking work. The work rate for that age group is 84.4%--lower
than in 1940, 86.4%, at the end of the Great Depression. How large of
an impact do you believe this has on the federal deficit and how can
Congress address the crisis of working-age Americans who have given up
seeking employment?
I agree that low labor force participation among ``working-age''
men is a threat to prosperity. There are probably multiple reasons,
including lack of well-paying jobs, reduced incentives to work in
multiple-earner families, etc. We need to find out more about who is
not working and why and then make a big effort to induce more potential
workers to join the labor force and stay in it. The focus should not
just be on prime-age males. We have lower female labor-force
participation rates than many advanced countries. We also need to find
ways of keeping older workers employed at suitable jobs.
__________
Questions for the Record for Dr. Rivlin Submitted by Vice Chairman
Patrick Tiberi
CBO estimates that Medicare outlays will double over the next
decade. By 2026, net of offsetting receipts, outlays for the Social
Security program, and major health care programs will grow at an
average annual rate of 6.0 percent. Those programs account for 63
percent of the total increase in CBO's projected federal outlays
between 2016 and 2026.
Having social safety net programs available to help the elderly and
the sick is vitally important. Yet such programs are not free, nor are
funding solutions so simple. We cannot just ``raise taxes,'' because
that would harm our sputtering economy. Our approach to funding these
programs must account for how the economy will respond. Namely, to fund
the programs, we need to pursue a fiscal policy that encourages private
sector fixed investment and other components critical for economic
growth.
In your testimony before this Committee, you recommend reforms to
Social Security first and Medicare/Medicaid second.
Would you agree that responsible budgeting dictates that we focus
on these largest two cost contributors first?
Yes, but we also need tax reform to raise more revenue from a more
pro-growth tax system. A rapidly growing older population will require
addition spending for Social Security, Medicare, and Medicaid. We need
to retrain that growth (primarily by making health care delivery less
wasteful) and raise more revenues at the same time.
Would you also agree that the Social Security program is relatively
easy to fix--at least compared to Medicare--and therefore should be the
first priority?
Yes.
Also according to CBO, outlays for Social Security will total 4.9
percent of GDP in 2017, rising to 6.0 percent of GDP in 2026; and
outlays for Medicare rise from 3.1 percent of GDP to 4.0 percent in
2026. It is further projected that the average annual growth rate for
real GDP will hover around 2 percent over the next decade.
If annual economic growth were a full percentage point--or even a
meager half percentage point higher--how beneficial would that be
toward both funding Social Security and Medicare programs and
stabilizing their GDP percentages?
Higher growth is highly desirable, because it reduces the burden of
public spending generally on taxpayers. However, if higher growth
generates higher wages, which one would expect, it will not help the
Social Security Trust Fund much, because higher wages mean both more
payroll tax revenues and higher benefits for future retirees.
To accelerate economic growth, in your testimony you emphasize
infrastructure and public investment and mention corporate tax reform,
though not regulatory reform.
Would you agree that the fastest way to get a jump in economic
growth is lower tax rates, especially the corporate tax rate, and
reduce federal regulation of the private economy?
Yes, we need to design smarter regulations that accomplish the
goals with much less drag on growth.
__________
Questions for the Record for Dr. Rivlin Submitted by Senator Robert P.
Casey, Jr.
(1) Dr. Rivlin, I think we share the belief that we must work
toward creating an economy that ensures all Americans have a fair
shot--one where workers can find jobs that pay family sustaining wages.
Can you discuss how wage stagnation can create drag on economic growth,
and how overall wage growth can help economic growth?
Yes, higher wages will stimulate demand for products and services
and create incentives for hiring and business investment--a virtuous
circle as long as inflation does not appear on the horizon.
(2) Dr. Rivlin, I believe one of the most critical long-term
investments we can make is early childhood education. I like to say
that when children learn earlier in life they earn more later. We need
to start concerted investments today to ensure we are producing the
type of workforce we need 10, 20, and 30 years down the road.
Reflecting on your time in federal service and your time working on
debt reduction, do you think spending on early childhood education is a
worthwhile investment and one which warrants increased spending? Can
you discuss your views on ensuring our workforce remains competitive,
particularly as we see rapid changes in the demands on our workforce,
many of which may accelerate over time?
Yes, I think the evidence is mounting that good quality education
and nurturing pays off creating healthier, higher-functioning adults
with greater opportunities, especially in low-income neighborhoods.