    [Senate Hearing 115-22]
    [From the U.S. Government Publishing Office]

                                                             S. Hrg. 115-22

                           THE EFFECT OF BORROWING ON
                                FEDERAL SPENDING

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

                                    HEARING

                                   BEFORE THE

                        SUBCOMMITTEE ON FEDERAL SPENDING
                       OVERSIGHT AND EMERGENCY MANAGEMENT

                                     OF THE

                                  COMMITTEE ON
                             HOMELAND SECURITY AND
                              GOVERNMENTAL AFFAIRS
                              UNITED STATES SENATE

                         ONE HUNDRED FIFTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 MARCH 29, 2017

                                   __________

                       Available via http://www.fdsys.gov

           Printed for the use of the Committee on Homeland Security
                            and Governmental Affairs

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                                  __________

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            COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

                        RON JOHNSON, Wisconsin, Chairman
    JOHN McCAIN, Arizona                 CLAIRE McCASKILL, Missouri
    ROB PORTMAN, Ohio                    THOMAS R. CARPER, Delaware
    RAND PAUL, Kentucky                  JON TESTER, Montana
    JAMES LANKFORD, Oklahoma             HEIDI HEITKAMP, North Dakota
    MICHAEL B. ENZI, Wyoming             GARY C. PETERS, Michigan
    JOHN HOEVEN, North Dakota            MAGGIE HASSAN, New Hampshire
    STEVE DAINES, Montana                KAMALA D. HARRIS, California

                      Christopher R. Hixon, Staff Director
                   Margaret E. Daum, Minority Staff Director
                         Laura W. Kilbride, Chief Clerk
                        Bonni Dinerstein, Hearing Clerk

      SUBCOMMITTEE ON FEDERAL SPENDING OVERSIGHT AND EMERGENCY MANAGEMENT

                         RAND PAUL, Kentucky, Chairman
    JAMES LANKFORD, Oklahoma             GARY C. PETERS, Michigan
    MICHAEL B. ENZI, Wyoming             MAGGIE HASSAN, New Hampshire
    JOHN HOEVEN, Montana                 KAMALA D. HARRIS, California
                         Brandon Booker, Staff Director
                    Zachary Schram, Minority Staff Director
                          Kate Kielceski, Chief Clerk

                               C O N T E N T S

                                     ------
    Opening statement:
                                                                       Page
        Senator Paul.................................................     1
        Senator Peters...............................................     3
        Senator Hassan...............................................    18
        Senator Lankford.............................................    21
    Prepared statement:
        Senator Paul.................................................    29
        Senator Peters...............................................    33
        Senator Daines...............................................    37

                                   WITNESSES
                           Wednesday, March 29, 2017

    Hon. David M. Walker, Former Comptroller General of the United
      States, U.S. Accountability Office.............................     5
    Veronique de Rugy, Ph.D., Senior Research Fellow, The Mercatus
      Center, George Mason University................................     7
    Mark M. Zandi, Ph.D., Chief Economist, Moody's Analytics.........     9

                         Alphabetical List of Witnesses

    de Rugy, Veronique Ph.D.:
        Testimony....................................................     7
        Prepared statement...........................................    47
    Walker, Hon. David M. Ph.D.:
        Testimony....................................................     5
        Prepared statement with attachments..........................    38
    Zandi, Mark M. Ph.D.:
        Testimony....................................................     9
        Prepared statement...........................................    56

                                    APPENDIX

    Chart submitted by Senator Paul..................................    68

                  THE EFFECT OF BORROWING ON FEDERAL SPENDING

                                  ----------

                           WEDNESDAY, MARCH 29, 2017

                                     U.S. Senate,
                            Subcommittee on Federal Spending,
                        Oversight and Emergency Management,
                        of the Committee on Homeland Security
                                      and Governmental Affairs,
                                                        Washington, DC.
        The Subcommittee met, pursuant to notice, at 2:33 p.m., in
    room 342, Dirksen Senate Office Building, Hon. Rand Paul,
    Chairman of the Subcommittee, presiding.
        Present: Senators Paul, Lankford, Peters, and Hassan.

                  OPENING STATEMENT OF SENATOR PAUL\1\

        Senator Paul. I call this hearing of the Federal Spending
    Oversight Subcommittee to order.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Senator Paul appears in the Appendix
    on page 31.
    ---------------------------------------------------------------------------
        Two weeks ago today, the Federal Government reached its
    credit limit. As a Nation, we owe almost $20 trillion, about
    $60,000 for each American alive now, including children. Yet we
    are told that $20 trillion is not that much, and that it may
    well grow, and that sometime soon we are going to have to ask
    again to raise the debt ceiling.
        This is what we want to explore here today: what is our
    debt situation, how does it impact our budget, and how should
    we respond?
        Some argue that raising the debt should just be automatic;
    we really should not debate about it; that any debate or
    amendments would suggest the possibility of default, and that
    that would be dangerous.
        I do not want to default, but I also think it is wrong for
    Congress to approve more borrowing without necessary reforms
    and without making it a point to try to find a chance to fix
    some of the situation we have.
        I think it is a mistake also, though, to scare the markets
    and to talk of default and say default will occur if we do not
    have this vote immediately.
        If you look at our monthly average cash-flow, the Federal
    Government is able to actually pay its interest on the debt,
    salaries for our troops, Social Security, and really much more,
    even if we did not raise the debt ceiling. In fact, on an
    annualized basis, we can fund 86 percent of government without
    net borrowing. So default is not necessarily an unavoidable
    occurrence if the debt limit is not raised.
        Now, some scholars would argue that we should not worry; we
    do not really need to ever pay back our debt. Keynes said not
    to worry about the long run because in the long run, we will
    all be dead.
        Others have argued, the debt can be stabilized or simply
    inflated away. I do not share these views, but even for those
    who do, the one thing we cannot outlive or inflate away is the
    interest on our debt. This year alone, we will pay $295 billion
    in interest. This is more than we spend this year on seven
    Cabinet Departments, the White House, Congress, and the courts
    combined. More concerning is how ongoing deficits mean interest
    will consume more and more of the budget.
        I want to draw attention to this chart\1\ we have over here
    on the screen. It shows our share of Federal spending that goes
    to interest on the debt, discretionary spending and mandatory
    spending over the last 30 years.
    ---------------------------------------------------------------------------
        \1\ The chart referenced by Senator Paul appears in the Appendix on
    page 70.
    ---------------------------------------------------------------------------
        What we see is shocking. Today, the American worker sees
    roughly seven cents of their tax dollar going to interest and
    30 cents to discretionary spending. But by the time a recent
    graduate today is near retirement, interest and discretionary
    spending will be taking an equal share of the tax dollar,
    roughly 19 cents. So under the current course, interest will
    progressively squeeze out discretionary spending. So what do we
    get for interest? Really nothing, not one hour of work and not
    one sticky note.
        Now, we always hear that spending today is an investment
    and that cutting anything would be too devastating. We hear
    this really from both sides, both the right and the left. This
    is not a Republican/Democrat problem. This is a both-parties
    problem.
        We hear right and left. We are always told, ``You know
    what? We will be fiscally responsible tomorrow,'' but tomorrow
    never comes. We simply cannot continue to rack up the debt at
    the rate we are.
        So just two months ago, I proposed a budget that would
    balance in five years, without touching Social Security and
    without an actual spending cut. Simply by freezing spending
    over five years, we would balance the budget. Yet only 14
    Senators had the courage to vote for such a budget.
        So this brings me to my last point. Doing the right thing
    is hard and often not politically expedient. Congress rarely
    makes simple, unpleasant choices, which means we end up facing
    difficult and unavoidable catastrophic problems. We only act
    when circumstances force us to.
        This is why the debt limit is important. It is our internal
    credit limit, not that of our creditors. It is an opportunity
    to reassess our spending and ask, ``How did we get here, and
    how do we get out of this mess?'' Answering those questions as
    part of past debt limit debates has spawned most, if not all,
    major Federal process reforms. The most notable example is the
    1974 Budget Act, but Gramm-Rudman-Hollings, pay as you go, all
    of the sequester, all came out of the debt limit debates. So
    when people say, ``Oh, no, no. We should just hurry up, hurry
    up and raise the debt limit without any reforms,'' it is
    exactly wrong. It is historically wrong, and every time we have
    ever gotten any process reform to try to fix it, it has been
    with a debt limit debate. So I think we should not shy away
    from having a real debate when we raise the debt limit.
        The Budget Act of 1974 was supposed to be an improvement
    and fix problems, but big spenders have over 40 years to figure
    it out, and they largely have evaded it now.
        My hope is that, once again, as we debate raising the debt
    ceiling, though, that we can reform spending and have
    significant reforms that will put us on the right course.
        With that, I would like recognize Ranking Member Peters for
    his opening statement, but before I do that, I would just want
    to note that this is Senator Peter's first hearing as Ranking
    Member of this Subcommittee. I would like to welcome him and I
    look forward to working with you. Senator Peters.

                 OPENING STATEMENT OF SENATOR PETERS\1\

        Senator Peters. Well, I thank you, Chairman Paul. Thank you
    for the welcome, and it is a pleasure to serve with you, and I
    look forward to having many productive hearings in the months
    and years ahead and for bringing us here today to discuss,
    certainly, this very critical topic of the national debt and
    the pressing matter of the debt ceiling.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Senator Peters appears in the
    Appendix on page 35.
    ---------------------------------------------------------------------------
        I would also like to give a sincere thank-you to our
    distinguished panel of guests. Your perspectives on both the
    national debt and the debt ceiling is absolutely critical to us
    as policymakers.
        And today, we will consider what I think are two
    significant, distinct, and most importantly, solvable problems.
        Perhaps I am an optimist, but I am finding sustainable
    solutions for our Nation's debt as well as finding a path
    forward on the debt ceiling are both problems that can and
    should be solved in a responsible, bipartisan manner.
        To me, working in a bipartisan manner on these issues is
    the only path forward. It is what I believe we were sent here
    to do: to find the solutions that put America on a path toward
    a sustainable fiscal future.
        As 2017 progresses, we are going to hear many School House
    Rock explanations of the debt limit, the statutory and
    arbitrary constraint on the amount of money the U.S. Treasury
    can borrow.
        Much of the conversation will be focused on questions like:
    When is the right time to talk about solutions for the long-
    term debt and deficits? We should be constantly working toward
    fiscal responsibility. This is not, and should not be, a
    seasonal debate, and I am sure the Chairman certainly shares
    that sentiment.
        But just as we should be constantly engaged in discussions
    about how to solve our long-term issues, it is wholly
    irresponsible to turn this debate into one that threatens the
    full faith and credit of the United States.
        The global economy relies on the fact that at the end of
    the day, no matter the chaos in the rest of the world, the U.S.
    Government will fulfill its obligations and pay its bills.
        On March 16, 2017, under the Bipartisan Budget Act of 2015,
    the previously suspended debt ceiling was reinstated at just
    over $18 trillion. Immediately on March 16, Treasury Secretary
    Mnuchin wrote to Congress to inform us that the United States
    Treasury was taking extraordinary measures to avoid a breach in
    the debt ceiling.
        According to analysis of the debt limit conducted by both
    the Congressional Budget Office (CBO) and the Bipartisan Policy
    Center, the Treasury Department's extraordinary measures may be
    able to extend the date to which the U.S. Government can
    fulfill its financial obligations into the fall of 2017,
    perhaps October or November.
        However, Congress can and should immediately begin
    discussions to address our obligations. After having been
    through numerous debates on the debt limit since 2011, it would
    be the height of irresponsibility to let this debate slip into
    the midnight hour.
        I remind my colleagues, while a breach of the debt ceiling
    would have unprecedented and potentially catastrophic, impact
    on the global economy, brinksmanship alone has the potential to
    hurt everyday working families.
        In 2011, as Congress struggled to reach an agreement at the
    last minute, the U.S. debt was downgraded, consumer confidence
    fell sharply, and the stock market and credit markets took
    months to fully stabilize.
        To some, though, the debate in Washington may seem
    abstract, but if we yet again engage in brinksmanship, we are
    jeopardizing the chance for a working-class family to purchase
    their first home or take out a loan to buy a much needed
    automobile. We are risking thousands of Americans' retirement
    savings that they have built up over a lifetime of hard work.
    This is simply not acceptable.
        If there is to be renegotiation on the debt ceiling, I ask
    my colleagues, let it happen now. We cannot afford to let our
    differences risk the financial future of everyday Americans.
    Failure to act is also not an option when it comes to long-term
    debt and deficit reduction.
        Solving this challenge will take bipartisan cooperation,
    and it will require a comprehensive approach that addresses all
    three fundamental factors of deficit reduction: cutting
    spending, reforming taxes, and investing in economic growth.
        Budget plans that shift the burden onto one group at the
    expense of another or that ignore any of these three basic
    factors will not solve the problem. We need to support economic
    growth. We need to find real solutions to curbing long-term
    health care costs. We need to reform our Tax Code into one that
    promotes job creation and investment here at home in America.
    We need to make government more efficient, and we need to find
    responsible ways to cut spending.
        I hope today serves as an open forum on these issues, both
    our long-term debt as well as the debt limit, and I know that
    each of our witnesses are very well informed and highly
    respected on these topics.
        So I hope you use this forum to give us a very honest
    assessment of these challenges. We may not agree on some of the
    proposals that we hear, but it is only by engaging in
    bipartisan, collaborative fashion that we are going to find the
    solutions that America deserves and the American people are
    expecting us to come up with.
        Thank you.
        Senator Paul. Thank you, Senator Peters.
        With that, I will begin by introducing our first witness,
    the Honorable David M. Walker. Mr. Walker is the former
    Comptroller General of the United States and head of the U.S.
    Government Accountability Office (GAO). He also served as
    president and Chief Executive Officer (CEO) of the Peter G.
    Peterson Foundation and founded the Comeback America
    initiative. Mr. Walker has written three books and is also the
    subject of the documentary ``I.O.U.S.A.,'' about government
    debt, the topic of today's hearing.
        So we are happy to have you here, and we would love to hear
    your thoughts on the issue. Mr. Walker.

         TESTIMONY OF THE HONORABLE DAVID M. WALKER,\1\ FORMER
        COMPTROLLER GENERAL OF THE UNITED STATES, UNITED STATES
                    GOVERNMENT ACCOUNTABILITY OFFICE

        Mr. Walker. Thank you. Chairman Paul, Ranking Member
    Peters, Senator Hassan, thank you very much for the opportunity
    to testify today.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Walker appears in the Appendix on
    page 40.
    ---------------------------------------------------------------------------
        The title for this hearing is ``The Effect of Borrowing on
    Federal Spending.'' The shorter answer is there are several
    implications of our current Federal spending and borrowing
    practices. They include, first, additional debt results and
    higher interest costs that can serve to crowd out other Federal
    spending, especially discretionary spending, and/or increase
    pressure for tax increases.
        The CBO has projected that interest cost will be the
    fastest growing expense in the Federal budget on a percentage
    basis over the next 10 years, and what do we get for interest?
    As the Chairman said, nothing.
        Excessive levels of debt as a percentage of the economy can
    serve to reduce economic growth and job opportunities. It can
    also cause a crisis of confidence in the U.S. dollar and much
    higher interest rates if the market ever decides that the
    Federal Government has lost control of its finances and is not
    willing to regain control of them.
        Additional debt serves to mortgage the future of our
    children, grandchildren, and future generations at a time when
    they will face increasing competition in a much more
    interconnected and competitive global marketplace.
        From a broader perspective, the United States has strayed
    from many of the key principles and values that it was founded
    on and which made us great. Since 1913, the Federal Government
    has grown from two percent of the Nation's economy to about 21
    percent and increasing.
        In addition, in 1913, the Congress controlled 97 percent of
    all Federal spending annually. The only thing they did not
    control was interest. Today, in fiscal 2016, 69 percent of
    Federal spending, including interest, was deemed to be
    mandatory spending. Shockingly, the 31 percent of Federal
    spending that was controlled included all of the express and
    enumerated responsibilities outlined for the Federal Government
    under the Constitution and all investments in our future.
        Discretionary spending is coming under increasing pressure
    since mandatory spending is increasing at rates faster than the
    economy due to known demographic trends and rising health care
    costs. The bottom line is that Congress has lost control of the
    budget. Our debt burdens have now escalated to imprudent
    levels, and our collective future is now at risk.
        The Federal Government is still adding debt faster than the
    growth rate of the economy, and interest rates have started to
    rise. The CBO now estimates that interest expense will be the
    fastest growing category of spending, as I mentioned before,
    all the more reason why the Treasury Department should consider
    issuing 50-plus-year bonds as the GAO and I recommended over 10
    years ago.
        Since the beginning of our Republic, there have only been
    two times in our history that Federal public debt as a
    percentage of the economy has exceeded 40 percent--at the end
    of World War II and the immediate aftermath and today.
    According to the GAO, the percentage of debt held by the public
    is on a path to rise to levels far in excess of the Nation's
    high, absent a major correction in course.
        Defusing our Nation's debt bomb will require an
    unprecedented public education and engagement effort as a
    prelude to major budget, tax, Social Security, Medicare/
    Medicare, health care, defense, government organization
    operations, and yes, even political reforms.
        The primary mechanism that Congress has used to control the
    level of debt in the past is the debt ceiling limit. However,
    it has not proved to be effective in limiting the growth of
    Federal debt, forcing a reconsideration of the proper role of
    the Federal Government, including the need to reform mandatory
    spending programs and tax expenditures.
        In addition, the Federal debt, subject to the debt ceiling,
    will soon pass $20 trillion, which his 105 percent of gross
    domestic product (GDP) and 3.5 times higher than it was in the
    year 2000.
        In my view, given the recent history, the debt ceiling
    limit needs to be replaced ultimately with a stronger statutory
    set of budget controls and a constitutional amendment that
    would limit public debt to GDP with specific targets and
    automatic enforcement mechanisms if the targets are not met.
        As you Senators may be aware, there is currently an effort
    to achieve a State-led convention under Article V for a fiscal
    responsibility provision. My view is debt to GDP is vastly
    preferable to a balanced budget for a variety of reasons.
    Twenty-nine States have now ratified that out of the 34 that
    are required.
        Speaking of the States, ultimately when the Federal
    Government restructures, bad news flows downhill. A typical
    State relies upon the Federal Government for about a third of
    its finances, as Senator Hassan knows having been a Governor,
    and we have also started to look at the financial condition and
    relative competitive posture of the States.
        I provide in Exhibit C, the Members of this Subcommittee,
    their States' rank from a high of number two in relative
    financial position to a low of number 49. It is important that
    the States get their act together too.
        In summary, we live in a great nation, but we have strayed
    from the principles and values that made us great. We are
    currently on an imprudent and unsustainable fiscal path. We
    need to be honest with ourselves and with the American people.
    Tough choices are required on the spending and revenue side of
    the budget in order to restore fiscal responsibility, enhance
    growth, and create a better future. The sooner we start making
    those choices the better, so the miracle of compounding can
    start working for us rather than against us as it is now.
        I would be happy to answer questions after my colleagues
    have an opportunity to testify. Thank you again.
        Senator Paul. Thank you.
        Our next witness is Veronique de Rugy, who is a Senior
    Research Fellow at Mercatus Center at George Mason University
    and a nationally syndicated columnist. In 2015, she was named
    the Politico Magazine's Guide to the Top 50 thinkers, doers,
    and visionaries transforming American politics. That is just
    one of her many accomplishments.
        Dr. de Rugy has written extensively on the issues before
    this Committee today, including the dangers of our debt and the
    drivers of it. She has also put forward some ideas on how to
    get our budget in order, one of which is dear to me, the
    rooting out and eliminating waste.
        Dr. de Rugy, thank you for being here, and we look forward
    to your testimony.

       TESTIMONY OF VERONIQUE DE RUGY, PH.D.,\1\ SENIOR RESEARCH
          FELLOW, THE MERCATUS CENTER, GEORGE MASON UNIVERSITY

        Ms. de Rugy. Thank you, Senator. Chairman Paul, Ranking
    Member Peters, and Members of the Subcommittee, thank you for
    the opportunity to testify before you today.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Ms. de Rugy appears in the Appendix
    on page 49.
    ---------------------------------------------------------------------------
        I would like to make three points. First, since the debt
    ceiling showdowns of 2011 and 2013, we have actually come a
    long way in understanding what options are available to us when
    a debt ceiling crisis occurs.
        Second, we still need to recognize that the fights over the
    debt ceiling are only a symptom of a more problematic disease--
    government overspending. The Federal Government spends too much
    money, which drives the need to increase its borrowing
    authority so much and so regularly.
        Third, the State of affairs is unsustainable. We must
    address the explosion and mandatory spending and, in
    particular, in entitlement spending. Thankfully, there are a
    number of institutional reforms and entitlement reforms that
    can be implemented to check the spending that drives the growth
    in our debt, and a debt ceiling debate is a good time to demand
    these changes.
        So let me start. First, during the 2011 debt ceiling
    debate, my colleague Jason Fichtner and I wrote a paper that
    explained that when the government reaches the debt ceiling and
    the Treasury can no longer issue Federal debt, it would still
    have a way to stage off a regrettable default while giving time
    to Congress to reach an agreement about implementing some
    reforms that would get us on a more sustainable fiscal path. At
    the time, we explained that the Treasury Department had several
    financial management options to continue paying the
    government's obligation, including prioritizing the debt,
    liquidating some assets to pay government bills, and using the
    Social Security trust fund to continue paying Social Security
    benefits.
        The previous administration, however, initially rejected
    these options, but now there are actually recognized acceptable
    procedures by Treasury, the Congressional Budget Office, and
    even the Federal Reserve of New York.
        Now, I would like to note that we never advocated for any
    particular measures, and we often lamented that this path had
    to be pursued because they have a cost. However, we also noted
    that it was much more responsible than defaulting on our debt
    or raising the debt ceiling without making any changes to the
    State of our finances.
        While there are several instances where Congress has used
    the debt ceiling as an opportunity, as you have said, Senator,
    to implement other reforms, for the most part, the debt ceiling
    was raised without any attempt to control spending, and the
    result has been a Federal debt that has ballooned from less
    than $5 trillion in 1993 to almost $20 trillion today and
    growing.
        Deficits are also going up. Over the coming decades, the
    deficit will double to almost five percent of GDP, and CBO
    predicts that cumulative deficits in the next 10 years will be
    a total of $10 trillion.
        Academic and international organizations have warned us
    against the negative consequences of not getting our long-term
    debt under control. Indeed, the consequences would be low
    economic growth, higher taxes, lower standard of living which
    would hurt the neediest of Americans, and the real threat of a
    debt crisis.
        Real institutional reforms as opposed to a one-time cut
    would change the trajectory of fiscal policy and put the United
    States on a more sustainable path. I believe we should adopt a
    constitutional amendment to limit spending, but there are
    reforms that could be implemented immediately such as adopting
    a strict cut-as-you-go system or creating a Base Realignment
    and Closure (BRAC)-like commission for discretionary spending.
    However, Congress must implement reforms to take control of
    mandatory spending. Without reform, the rate of spending under
    Medicare, Medicaid, and Social Security will have devastating
    effects on these programs, but also other government programs
    in our national economy.
        Again, without reforms today, vast tax increases will be
    needed to pay for the $75 trillion unfunded promises we have
    made to a steadily growing cohort of seniors.
        Fortunately, many workable solutions are available to
    lawmakers, like turning Medicaid into a true safety net or
    modernizing Medicare to address fiscal and structure
    challenges.
        Also, rather than focus just on insurance as the only
    solution to our country's health care challenges, we can pursue
    changes in regulatory policy that can generate the type of
    health care innovation and provider competition that can break
    the health care cost curve to bits rather than simply bend it
    temporarily.
        Thank you for the opportunity to testify before you today,
    and I am looking forward to your questions.
        Senator Paul. Thank you.
        Finally, I would like to introduce Mark Zandi. Dr. Zandi is
    the Chief Economist of Moody's Analytics, a well-known provider
    of economic research. He should be familiar to just about
    anyone who has followed fiscal and economic issues for any
    amount of time. He has testified numerous times before Congress
    on fiscal matters and is a regular on the financial networks.
        Thank you, Dr. Zandi, for coming.

     TESTIMONY OF MARK M. ZANDI, PH.D.,\1\ CHIEF ECONOMIST MOODY'S
                               ANALYTICS

        Mr. Zandi. Thank you, Chairman Paul, Senator Peters,
    Senator Hassan. It is very kind of you to give me the
    opportunity to participate today.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Zandi appears in the Appendix on
    page 58.
    ---------------------------------------------------------------------------
        I should mention for sake of disclosure, I am not employed
    by the rating agency, Moody's Corporation is made of two
    entities Moody's Analytics and Moody's Investor Service. I am
    not part of Moody's Investor Service, the rating agency.
        I am also on the board of directors of the Mortgage
    Guaranty Insurance Company (MGIC), a large mortgage insurer,
    and vice chair of the board of a nonprofit community
    development financial institution that makes investments across
    the country in underserved communities.
        I would like to make three points as well. I think we have
    all learned that that is about as many as we can make and
    people can digest.
        Point No. 1, you have a lot of work to do, a lot of budget
    issues dead ahead, one coming up in a few weeks. You will have
    to extent authority, spending authority for the government by
    the end of April.
        But I think the biggest budget issue this year is the
    Treasury debt limit. It is very important that that is resolved
    in a timely way. By my calculation, this has to be done by
    October 5, give or take, but I do not think any longer than
    October 5.
        Not addressing the debt limit in a timely way will be very
    costly. Not for a while, because I think markets have become
    conditioned to believe that when push comes to shove, you are
    going to act and solve this problem. So it is not going to be
    an issue today, it is not going to be an issue a month from
    now, but as we get closer, at some point, this is going to
    become a very significant issue. And it will be very costly,
    even if we do not breach the debt limit.
        We did a study looking at the last time we went through
    this, back in late 2013. Interest rates did rise, as we came up
    to the limit. If you do a bit of work and calculation, we found
    that it cost taxpayers about a half a billion dollars, just
    that brinkmanship around the limit and the effect that it had
    on interest rates.
        Of course, the limit was increased. If we solve that
    problem, the issue is resolved, and we move forward, and
    everything was OK. But if we actually do not solve this issue
    and we have reached the debt limit, I do not agree. I do not
    think there is any way to prioritize here. Maybe you can do it
    in a technical sense, but effectively, I think financial
    markets will crater, and it will have very serious implications
    for economic growth, jobs, and the cost to taxpayers will be
    enormous, a very bad idea.
        Point No. 2, I would recommend that you do away with the
    statutory debt ceiling. It is a bad idea. It is anachronistic
    and can be very disruptive. I do not think it helps in terms of
    making good policy decisions.
        If that is a step too far, I would recommend perhaps
    adopting ability-to-pay rules. The idea would be that every
    time you have a bill for spending, taxes, annual appropriation
    bill, you have to make sure that you have sufficient tax,
    future tax revenue, and borrowing authority to be able to meet
    the deficit requirements as calculated by the Congressional
    Budget Office.
        I think this would impose some discipline. You would have a
    debate around this issue every time you voted for a spending
    bill or a tax bill that added to the future budget deficit, so
    still very important, but it does not lead to the situation
    where we have coming up now and we have this drop-dead date and
    a lot of havoc can be created by breaching it. So I would
    recommend eliminating the debt ceiling, but if barring that,
    ability to pay.
        Finally, a third point, we have very serious long-term
    fiscal issues. I think both of the other folks here testified
    and did a very nice job of explaining that, so we have to make
    some changes.
        And I do think that will require some entitlement reform,
    particularly around the growth in health care cost. That is the
    key to Medicare/Medicaid and really the budget going forward.
        But I do think the best thing we can do in the most
    immediate future is focus on things that can improve economic
    growth. Just to give you some numbers, for every .1 percentage
    point increase in GDP growth, that will reduce budget deficits
    over a 10-year period by $300 billion. So if we can enact
    policies, for example, that raises expected growth over the
    next 10 years from 2 percent per annum GDP to, let's say, 2.5
    percent, that will save $1.5 trillion off the 10-year budget,
    $150 billion a year.
        So the work you are doing now with regard to corporate tax
    reform, immigration reform will be very important,
    infrastructure. Those are the kinds of things, I think, we need
    to really focus on, get that done, get growth up, and that will
    help to address our long-term fiscal issues. They will not
    solve them, but that, I think, is the best approach at the
    current time, to focus on those things.
        Thank you very much for the opportunity.
        Senator Paul. Thank you. Thank you all for your testimony.
        I do not think anybody, Republican or Democrat, wants to
    approach default or approach the deadline, and I agree with
    Senator Peters. If we began working on this with advanced
    notice, which, we should--we are big boys and girls--we ought
    to be able to get it done in time.
        But if you get rid of deadlines, do you get rid of sort of
    the impetus to do anything? And there have been reforms that
    have come from having the debt ceiling debate, and, actually,
    the reforms, I think, most of the time have been good reforms.
    The problem has been the people. The people do not obey their
    own rules, meaning Congress does not obey their own rules.
        We have had five or six significant budgetary reforms--
    Budget Act of 1974, Gramm-Rudman-Hollings, pay as you go. I
    remember when I first ran, pay as you go, I think they said
    they broke it 700 times in the first three years. It is sort of
    lack of resolve on our part, both parties, and both parties
    have their sacred cows they want to spend money on, so the
    blame, there is plenty of blame to go around.
        But I think if you had no limits, if you had no debt
    ceiling, we would have no impetus to sort of force the issue to
    say we have to do something about it?
        Everybody knows we have this exploding entitlement problem,
    and nobody is doing anything about it. The only thing that ever
    forces us to do anything about it is the debt ceiling deadline.
        In 2011, we had a big fight. The conservatives, we proposed
    cut cap and balance. We actually had a balanced budget that had
    a percentage of spending of GDP. We did not win the day, but
    actually, I think we forced the issue enough that we got the
    sequester, which I did not think was enough at the time, but
    turned out to probably be the best thing we did in the last 10
    years. And now it has been defeated by right and left, with
    both sides at fault. Military wants more money, the left wants
    more domestic spending, and lo and behold, the sequester has
    been evaded every time.
        I think Mr. Walker had the most important point that I
    heard. It is that at one time, Congress controlled 90 percent
    of the spending, and now nearly 70 percent of it is not under
    our control. The point is we have to do something about
    entitlements. My side is as guilty of this as the others, and
    some of these are simply mechanistic things.
        It is demographics. It is nobody's fault. We have more
    older folks now and fewer younger folks. We have to figure out
    how to do it. We are having fewer children. We have to do
    something about raising the age of eligibility, and Republicans
    and Democrats did it together in the 1980s.
        But I guess what I would like to hear from each of you is
    your comments on how we fix the situation, how we address the
    entitlement problem, or your comments on whether a process type
    of reform, like a Budget Control Act of 1974 or something like
    that, will work.
        We will start with Mr. Walker, and we will work our way
    down.
        Mr. Walker. Well, first, I think that we have to be honest
    how we keep score. We have this number up here, $19.854
    trillion. The real number is about $80 trillion, because when
    you end up looking at unfunded Social Security, Medicare,
    unfunded civilian/military pensions, retiree health care,
    environmental cleanup costs, et cetera, most of which are in
    the financial statements, but they are not on the balance
    sheet--and those numbers are bigger, and frankly, they are
    growing faster than this number. So we have to be honest about
    what the nature and scope and magnitude of the problem is.
        Second, I think we also have to work with our terminology.
    I think sometimes we cause our own problems because we call
    things, for example, ``entitlements.'' There is only two things
    guaranteed under the Constitution of the United States, only
    two: first, debt issued by the United States, which I would
    argue is both debt issued to the public and debt issued to the
    so-called trust funds; and second, Union Civil War pensions.
    And I think we have paid all of those. I am from Alabama. They
    did not guarantee our pensions. I think I know why, but those
    are the only things that are guaranteed.
        Now, what do we do? In 2012, I went on a 10,000-mile, 27-
    State national fiscal responsibility bus tour, and in two
    States in particular--Ohio, which was a swing State in the
    North, and Virginia, a swing State in the South--Alice Rivlin
    and I addressed a demographically representative group of
    voters in those two States with the facts, the truth, and the
    tough choices, and after doing that asked them to give us
    electronic confidential feedback on reforms in the following
    areas--budget process and controls, Social Security, Medicare/
    Medicaid, health care, defense, taxes, government organization
    operations, and political reforms, specific illustrative
    reforms designed to get debt to GDP down to 60 percent by then,
    at that time, 2030, now 2035, and to be able to do it with
    everything on the table.
        Senator Paul. And so you asked these groups like a focus
    group? What did they say?
        Mr. Walker. They were demographically representative.
        Senator Paul. What did they say about raising the age of
    eligibility for Social Security?
        Mr. Walker. Correct. And we got 77 percent to 90-plus
    percent support for packages of reforms in all the areas that I
    just talked to you about. OK?
        Senator Paul. Including even allowing the age of
    eligibility to rise?
        Mr. Walker. Correct. And we were able to do it because we
    got them to agree first on three things. Are we on an improved
    and unsustainable path? Ninety-seven percent said yes after
    they had the full story.
        Second, should our goal be to stabilize debt to GDP at a
    reasonable and sustainable level? That way, it is pro-growth
    but with fiscal responsibility. I think about 90 percent agreed
    on that.
        And then six principles and values to guide reform: pro-
    growth, socially equitable, culturally acceptable, mathematical
    integrity, politically feasible, and meaningful bipartisan
    support. Now, there is details I can go into, if you want.
        But after doing that, after agreeing there is a problem,
    here is the goal, here is the principles and values, then we
    showed them a range of solutions designed to achieve that. And
    we got 77 to 90-plus percent support. That is not how things
    were done in this town. OK?
        Senator Paul. It does not seem to be working here. Dr. de
    Rugy.
        Ms. de Rugy. I agree. It is a difficult act to follow, and
    I agree entirely with what you were saying. It is interesting
    because it echoed a lot of polling that I have seen also that
    shows that when you actually present people with the tradeoffs,
    when you say, for instance, ``Do you want this government
    service?'' people will say, ``Oh, yes.'' ``Do you want more of
    it?'' ``Oh, yes.'' But when you say, ``At which price?'' then
    people are more willing to start actually talking about the
    kind of tradeoffs they would be willing, what they would be
    willing to sacrifice, whether they actually would want to see
    that program cut.
        So it is kind of interesting, and I think, unfortunately,
    in this town, there is not a lot of interest to talk about real
    tradeoffs.
        The other thing that is pretty clear is we know how to
    reduce debt-to-GDP ratio. First, we know there is an impact on
    growth, and I agree that we need to grow the economy, but we
    are not going to get our way. I agree that it is a priority,
    and it is a priority for everyone, but we cannot overstate how
    important it is for low-income Americans to see the economy
    grow.
        But if you want to reduce debt to GDP--we are not going to
    grow ourself out of this debt. We are going to have to address
    our spending, and we know how to reduce our debt-to-GDP ratio.
    If you do a review of the literature on fiscal adjustments,
    what you find is that the countries that have actually
    implemented fiscal adjustment packages, that are made mostly of
    spending cuts and particularly and not surprisingly of the
    social transfers, the so-called entitlement spending, which you
    are totally right--I mean, we know we are not entitled to them;
    that has been proven by the Supreme Court, and Congress can
    just change the law at any time--those countries actually
    manage to reduce their debt-to-GDP ratio.
        On the other hand, countries that try to do kind of a
    halfway thing of raising taxes and cutting spending did not
    succeed, and one of the reasons is because they would raise
    taxes and not really follow through on the spending. And they
    would not actually do the spending cuts where they needed to
    be, meaning do fundamental structural changes.
        And the thing that is important is that--so we know what to
    do. There is multiple ways to do it, multiple solutions, and
    what is important is also going back to economic growth. There
    is always a lot of people saying, ``Well, if you implement
    these type of packages''--right?--``it is going to have a
    depressive effect on the economy.'' Well, actually, economists
    agree. There is a consensus that in the long term, it is
    actually beneficial for the economy. And there is still a
    debate on the consequences in the short term.
        But the question is like--while I will agree also with Mr.
    Zandi that, yes, reaching the debt ceiling or even have some of
    these
    conversations or getting that close has a cost. In a sense, we
    are getting a taste of what is going to happen to the American
    people if we do nothing, and it is just like simply pushing
    back and kicking the can down the road--and the name that it
    has a cost today--is irresponsible, and we absolutely need to
    do something.
        And if I can say one more thing, reducing the cost of
    health care is important, and unfortunately, a lot of the
    conversation in this time is actually--places focus in the
    wrong place. Constantly talking about how we can reform the way
    we provide health insurance is the wrong thing to talk about. I
    am not saying it is not important, but it kind of ignores the
    fact that third-party payer, whether it is the government or
    insurance, actually contributes to the problem.
        One of the things that would be better to do is, sure, the
    government provides for the neediest in terms of health
    coverage, but also bring as much innovation and free the supply
    side of health care in order to bring the kind of emulation
    that we have seen in other sectors like technology and many
    other sectors, which raises quality and reduces prices. And
    that is, unfortunately, a conversation we are not having
    enough.
        Senator Paul. Dr. Zandi.
        Mr. Zandi. I will give you four suggestions. This first
    suggestion is I do not think I would use the debt limit as a
    way to effectuate change. It is a matter of benefit and cost,
    and I think the costs are very significant, particularly if you
    breach the debt limit. We have obviously not gotten there yet,
    but the costs there are obviously uncertain, unknown. But a
    prudent planner would want to go down that path, and therefore,
    it is not really credible to think that is going to have a
    significant effect on the behavior in terms of solving these
    long-term fiscal issues. It is a judgment, but I think the
    costs there could be quite substantive and should not be
    discounted, particularly given the uncertainty around those
    costs.
        The second thing I would say is, at this point in time, I
    think, just to reiterate the point in my oral remarks, I would
    focus on growth. You are thinking about policies that could
    help promote growth. Corporate tax reform is a very good idea.
    I think immigration reform is the most obvious way. More highly
    skilled immigrants into the country is the most obvious way to
    lift growth and address our long-term fiscal issues, as you
    brought to your point about demographics. And infrastructure
    spending is also key.
        Third, if I were King for the Day and you are focusing on
    Social Security and how you would solve that and you are
    proposing raising the age of retirement, the path I would take
    would be different. I would say let's raise the payroll cap. It
    has eroded over time. When Social Security was put on the plan
    in the 1930s, it was 90 percent-plus of eligible earnings. Now
    we are down to 80. Let's just put it back to 90.
        And the second thing I would do is I would adopt a chain-
    weighted Consumer Price Index (CPI). That would affect Social
    Security benefits. It would also affect the Tax Code and some
    of the parameters in the Tax Code.
        So if I were going to solve Social Security, if that is
    what you are focused on, those are the kinds of things I would
    do before raising the retirement age.
        Finally, the real solution in my view to solving our long-
    term fiscal issues is really the growth in the cost of health
    care. That is the key thing, but that is not going to be
    something you are going to solve today, next year, or the year
    after, just given the situation that we are in and the politics
    of all this.
        So my advice would be let's do these other things. They are
    doable. They will have significant benefits. And let's come
    back to this when we are a few years down the road and take
    another crack at it because these long-term fiscal problems,
    they are not going away. They are here for 20, 30, 40 years.
    Let's do what we can do, not beat our heads against some of
    these other smaller things that are not going to really make a
    difference. It is really about the growth in health care cost.
        Senator Paul. Senator Peters.
        Senator Peters. Thank you, Mr. Chairman, and again, thank
    you to the panelists, your testimony, and the conversation that
    we are having here, it is refreshing to have a hearing like
    this where we can really just have a conversation back and
    forth, not as formal as these usually are. I appreciate the
    frankness of all of you.
        First off, Mr. Walker, I listened with great interest in
    the panels that you held around the country with a variety of
    groups. I listened to that with interest because I have done
    that myself in my district, not for a few years, but a few
    years ago, we had a number of sessions where we had cross-
    sections of folks. A lot of this was a few years ago when I was
    in the House, the Tea Party movement was in full bloom, and the
    folks who were there were heavily represented. Tea Party folks
    were heavily represented, but it was all sorts of groups of
    people who came together.
        I will tell you my results were different than your results
    at each of those meetings, where there was not that sort of
    consensus that came out of it, as folks were saying we added
    the tax element, you talked about a little bit, Mr. Walker. But
    folks were all for tax cuts. They thought those were pretty
    good until they realized it was not solving their issue with
    the deficit, and they could not do that. Then when it talked
    about cuts, most of them were all in favor of cutting foreign
    aid. That was the top of their list, but they realized that did
    not have much impact whatsoever on the budget.
        They were not really excited about cutting Social Security
    or Medicare, and so in the end of it, we did not get that kind
    of consensus. I would love to talk with you more at some point
    in the future as to how we bring folks together because that is
    kind of the crux of the problem. How do we bring America
    together to have this kind of comprehensive adult conversation
    that we need to have and understand in order to deal with this?
    I always explain that this is a three-legged stool. We cannot
    talk about dealing with the deficit unless we are dealing with
    all three legs, which are tax policy, spending, and growth.
    None of those by themselves will work. You cannot raise taxes
    enough to deal with it. You cannot cut enough to deal with it,
    and you cannot grow yourself out of it. You have to do all
    three, and that is where you then run into the politics of
    people just wanting tax cuts. They do not want to have anything
    that is revenue-neutral or raises more revenue or they think we
    can grow our way out. I think that has been pretty clear by our
    panelists that this is a complex issue that we have to handle,
    particularly when you are dealing with entitlements.
        I have heard a couple of you say that we know that these
    are not entitlements. I will tell you, ask any person of my
    constituents--and I agree with them. These are entitlements.
    These are things that people have paid in their entire life,
    and if you tell them that they have paid into a system for
    their entire life, that they should get something back, like
    their pension plan. If they have been contributing to their
    pension plan and to say, ``Well, we have changed the rules. We
    know you have paid into this for the last 30 years, and we know
    you are counting on a dignified retirement, but, hey, we
    changed the rules,'' that is not something that is going to be
    palatable to nearly everybody. And I agree if you pay into the
    system, those are the rules, and you played by the rules, you
    should expect that it will actually be there for you.
        So these are things that we grapple with and why it is
    difficult to bring all of our colleagues together, but let me
    ask a more specific question on the debt limit to Dr. Zandi.
        You have talked about the costs associated with debt
    limit--because we have to figure out how to force this. I agree
    with all three of you. We have to force these kinds of
    decisions. I would agree with the Chairman. We have to force
    this, but the question is, is this tool the appropriate one?
    Because I am afraid we are heading toward another crisis, and
    the pattern has not been very good, that we have actually had
    these kinds of frank discussions.
        I agree. I do not think we are likely to eliminate the debt
    limit. That is probably not going to happen, but I think we
    should understand the costs associated with it.
        You talked about the impact of the markets and the cost of
    the last crisis--although I know in your testimony, you also
    talked about the fact that markets are now starting to realize
    Congress should just do this. This is all games that they play,
    and they go back and forth, and it is just another example of
    the dysfunction that exists in the U.S. Congress that we get to
    those crises, but they are going to just pass it as soon as it
    comes to that crisis point.
        So my question is, if that is the case, is this even losing
    its viability as a tool, and the fact that in the past, the
    markets would react negatively? My colleagues would say, ``Oh,
    my gosh, we better do something here because the markets are
    performing badly. This is having an impact on the economy.''
        Mr. Zandi. Yes.
        Senator Peters. ``We better get our act together.'' But now
    it is not like we are even getting that pressure until the very
    end, and then it is too late. And then it could be
    catastrophic, potentially. Is that a fair assessment of where
    we are and why this is kind of a dangerous thing to be thinking
    about right now?
        Mr. Zandi. Yes. That is an excellent point. I mean, if you
    think back to the 2011 experience, December 2011--you mentioned
    that in your opening remarks about the downgrading of the debt
    by Standard & Poor's (S&P)--as soon as the letter was written
    by--I believe it was Treasury Secretary Geithner--I cannot
    remember to whom Congresswoman Pelosi--the markets had already
    started to react. You could actually see it in the markets, and
    the tension in markets started to build pretty quickly.
        And that you would think started to put pressure on
    policymakers, ``Oh, we have to do something here, or otherwise
    markets are going to cave.''
        But now they have been conditioned. We have gone down this
    path a number of times, again in 2013, and the letter was sent.
    Secretary Mnuchin sent a letter to House Speaker Ryan, and no
    one is even talking about it. It is like, literally, no one is
    talking about it. This would have been news in 2013 and big
    news in 2011.
        So I think the markets are being conditioned here to expect
    that you finally solve this, and there is no pressure. The
    markets do not react. The stock prices are not going down. The
    credit spreads are not gapping out. The credit default swaps
    spread are not widening. Where is the pressure?
        But at some point--and there will be a point--everyone is
    going to wake up and say, ``Oh, my gosh, what is going on?''
    Boom. And at that point, it is going to be very costly to
    taxpayers because we are all going to pay--we are talking about
    interest on the debt. Well, interest rates are going to spike,
    and it is going to cost us. All that short-term money that the
    Treasury issues is going to be issued at a much higher interest
    rate, and that is going to cost taxpayers. And to what end? We
    are going to do something with
    the Treasury debt limit, and everyone knows it. So I am not
    sure--again, it is a matter of judgment, but my sense is this
    is not the way to achieve the kinds of things you want to
    achieve here, and it could be very costly.
        Senator Peters. Just before I get to Mr. Walker, if I may,
    the complacency works, I think, two ways. One is that
    policymakers think, ``Well, we do not have the pressure because
    the markets are not reacting this way to do it,'' and then
    there is the complacency not to do anything. Then there is also
    the feeling, ``Well, then maybe it is OK if we breach the debt
    limit because the markets do not seem to be reacting to any of
    this.''
        Mr. Zandi. Right.
        Senator Peters. If we are not seeing any pressure and then
    it adds to the danger level as well--and we heard a lot of
    conversations, ``Well, the markets really are not reacting.
    Maybe we can find other ways to get through this and
    prioritize,'' which I think is potentially very problematic.
    Mr. Walker.
        Mr. Zandi. Can I make one other point? We actually did
    default on debt briefly because of a technical mistake, it was
    back in early 1970s, where the Treasury, because of a computer
    glitch, did not actually pay on time. And there has been
    academic research that shows that, in fact, that raised
    interest rates for a very long period of time, just that
    technical error.
        So if you actually get to a point where we do not pay, that
    would be very costly to us, and at the end of the day, the
    triple-A credit of the United States is the bedrock of the
    global financial system. We just should not mess around with
    that. That is a given, and messing around with that could be
    very significantly costly.
        Senator Peters. My time expired, but we want to hear from
    you.
        Mr. Walker. A couple things quickly. First, I used to be a
    trustee of Social Security and Medicare, one of the prior hats
    that I had. While Social Security, you are paying a payroll tax
    during your working life and while Part A under Medicare, you
    are paying a payroll tax during your working life and so is the
    employer, you are not for B and D. Part B and Part D under
    Medicare are the ones that are the most underfunded, and people
    do not pay for that until they are actually eligible for the
    program to begin with. And most of the costs of those programs
    are funded out of general revenues.
        Second, I think the big difference between the results that
    you got in your session and I got is that you did not have a
    representative group of voters. You basically had adverse
    selection, people who wanted to come, including the extremes
    tend to come disproportionately. And so having a representative
    group was important to try to get better results because,
    unfortunately, the extremes from both sides tend to be
    disproportionately represented in our political process.
        The last thing is the process matters, and I will give you
    one example. In 1998, President Clinton wanted to reform Social
    Security, and that was right before I was appointed as
    Comptroller General of the United States. And I had been a
    trustee of Social Security and Medicare. The American
    Association of Retired Persons (AARP) and the Concord Coalition
    came together, worked with the White House to try to do several
    forums, where experts like myself stated the facts, spoke the
    truth, talked about the options, engaged people with electronic
    confidential balloting, and the elected officials observed.
    They did not talk; they observed. That resulted in some
    dramatic evidence that people were willing to accept some
    tradeoffs, and I believe that we would have had Social Security
    reform before the beginning of this millennium had there not
    been a personal problem of the President, which caused him to
    lose political capital.
        Quite frankly, the kind of reforms that we would have done
    back then, because I was part of that, pretty much can be the
    same kind of reforms that ultimately we do. The question is,
    When are we going to do it?
        Senator Peters. Thank you.
        Mr. Walker. The process matters.
        Senator Peters. Right. Thank you, Mr. Walker. Thank you.
        Senator Paul. Senator Hassan.

                  OPENING STATEMENT OF SENATOR HASSAN

        Senator Hassan. Well, thank you, Chairman Paul and Ranking
    Member Peters. I am really glad to be here for my first Federal
    Spending Oversight and Emergency Management Subcommittee
    hearing. It is a privilege to join this Subcommittee, and thank
    you to the panelists. It is nice to see you again, Mr. Walker.
        I do have a couple of questions. First, starting with Dr.
    Zandi, I would like to talk about the cost of government
    defaults and shutdowns and how that impacts our national debt.
    In your testimony, you warn that if the Treasury were to
    default on its obligations, the economic impact would be
    devastating, potentially more severe than the Great Recession.
        In addition to the incredible damage that would cause to
    our families and businesses in New Hampshire and all around the
    country, it seems to me that the damage to our economy--you
    estimated a possible five percent decline in GDP--would also
    reduce tax revenues and then, therefore, increase the national
    debt considerably. Is that an assessment you agree with?
        Mr. Zandi. Yes. That is exactly right, and that was a
    scenario where we breached the limit. So October 5 is the
    limit.
        Senator Hassan. Right.
        Mr. Zandi. We breach it, and we go on for another month
    without resolving it, and we do not make Social Security
    payments. And that is the scenario that you are describing.
        And you are right. Just to give you a context, the 5
    percent decline in GDP that you cited for the scenario is equal
    to roughly the decline during the Great Recession. In the Great
    Recession, the debt-to-GDP ratio of the United States rose by
    35 to 40 percentage points, so that gives you a sense of the
    magnitude of that kind of a recession and what kind of impact
    it would have on the budget.
        Senator Hassan. OK. So that description is one of the
    reasons I am hopeful that both parties can come together to
    deal with the debt ceiling well before the deadline, without
    manufacturing a crisis by bringing in unrelated political
    issues that really force impossible choices. I think people in
    both parties would agree that they get put in a situation when
    political issues get added on.
        I am also concerned that government shutdowns can have much
    of the same effect. I lived through the shutdown in 2013 as the
    Governor of New Hampshire, watching the White Mountains
    National Forest shut on Columbus Day weekend, which is one of
    our prime tourist periods in the State.
        To that point, Dr. Zandi, you previously said that the 2013
    government shutdown resulted in a $20 billion hit to our
    Nation's GDP, as default shutdowns have a real impact on
    families and businesses and also reduced tax revenues, once
    again, increasing our national debt.
        So, Dr. Zandi, do you agree that costly shutdowns increase
    the Federal debt, and that if Congress is serious about cutting
    the deficit and reducing our debt, as I am, that we should be
    avoiding those kind of costly defaults and shutdowns that hurt
    our bottom line?
        Mr. Zandi. Yes, absolutely. Just to give you a rule of
    thumb, for every week that the government shuts down, it costs
    20 basis points of annualized GDP growth. So you can do the
    arithmetic.
        And here is another really good rule of thumb. For every
    lost dollar of GDP, the deficit will increase by 40 to 50
    cents. So the arithmetic here is pretty daunting.
        Senator Hassan. Well, thank you. I am truly hopeful that
    the threat of these kinds of consequences will help ensure that
    Senators from both sides of the aisle can come together and
    work out a clean budget deal without any poison pills.
        This is a question to the full panel, as it is a related
    point. Dr. Zandi notes in his testimony that political
    uncertainty in Washington is already very high and has been
    since the shutdown in 2013. As this uncertainty grows,
    businesses are more reluctant to invest or hire workers.
    Families become more cautious in their spending, and GDP growth
    slows.
        So if each of you could address how uncertainty can impact
    economic growth and long-term investment, and can you discuss
    how Congress creates uncertainty when it passes short-term
    continuing resolutions (CR) rather than annual appropriations
    or when it threatens defaults or shutdowns for political
    purposes?
        And, Mr. Walker, I would start with you.
        Mr. Walker. Believe it or not, I am 65 years old. Congress
    has passed timely budget and appropriation bills four times in
    65 years. That is an F minus. OK?
        Business relies upon some reasonable ability to predict
    what the future might be, and the absence of that reasonable
    ability to predict, there is a cost. There is clearly an
    economic cost. There is clearly an opportunity cost, et cetera,
    and so clearly, we need budget reforms.
        Frankly, the only thing under the Constitution of the
    United States that is express and enumerated for both houses of
    the Congress to do every year there is only one and that is
    appropriations. Yet it does not do it.
        At the same point in time, rules like pay-as-you-go rules
    are not adequate because that assumes that we are in a
    sustainable position, and all we need to do is pay for new
    stuff when, in fact, we cannot afford what we already have.
        So I think, yes, we need more certainty, but we also need
    to start treating the disease----
        Senator Hassan. Yes.
        Mr. Walker [continuing]. Rather than the symptoms, and that
    is part of what this hearing is all about.
        Senator Hassan. Thank you. Doctor.
        Ms. de Rugy. I mean, I agree. Uncertainty is a problem.
    Markets do not like uncertainty. It creates paralysis, but I
    will also say that, It is not the only way by adopting
    continuing resolution, time and time again, that Congress
    creates uncertainty.
        The Tax Code is replete with temporary tax provisions,
    which require to be extended or not. I mean, the drama every so
    often over the tax extenders--it was supposed to be a one-time
    thing in 1988, and it has been happening all the time ever
    since, creates uncertainty. Writing massive regulations that
    will take years to write all the regs create massive amount of
    uncertainty. So the government has this tendency of, yes,
    creating massive uncertainty, and it is not a good thing.
        That being said, I will say again there is no doubt, so
    default shutdowns are not--they are not desirable things at
    all. The waiting is not an option. The government is not going
    to meet its promises under any circumstances right now, and it
    is certainly not going to meet its promises with this level of
    debt.
        Take Social Security, for instance. When the trust funds
    are empty, we know what is going to happen. By law, benefits
    are going to be cut by 25 percent. We know this, and people,
    the lowest-income Americans, those who really truly depend on
    Social Security are going to be hurting. And the idea that we
    can push that can down the road because Congress is going to
    change the law, once again, I think is foolish because by then,
    the debt-to-GDP ratio will be 150 percent. It is going to be
    already $30 trillion gross debt in 2017, 140 percent. I do not
    think you guys will have the luxury of actually changing the
    law to say we keep everything.
        So I just think that I would rather for my children and
    future generations that we assume--I mean, that we are
    responsible today and start passing the reforms, and if we need
    to do it by using the debt ceiling, again, there are ways to
    not default. The idea of threatening of default all the time as
    if, and which is, by the way, the conversation in 2011 was one
    where there was no way to actually use extraordinary measures.
    There was no way to do prior writing--I mean, it is not that
    these are desirable things, but it is not true. We know it is
    not true, and if it allows us to not continue pushing this can
    down the road--in the name of my children, I would rather take
    that risk and rock the boat a little bit today.
        Senator Paul. Thank you. Senator Lankford.

                 OPENING STATEMENT OF SENATOR LANKFORD

        Senator Lankford. Thank you.
        Can we set some context real quick? When we are talking
    about interest and debt issues, what do you anticipate the
    interest payments will be 10 years from now for the United
    States?
        Ms. de Rugy. Can I tell you?
        Senator Lankford. Go ahead.
        Ms. de Rugy. Right now, projected by CBO, it is going to be
    close to $800 billion. That assuming that the interest rates
    stay what it is projected to be modest.
        Senator Lankford. Right, modest growth. Modest growth in
    interest rates.
        Ms. de Rugy. So almost $800 billion.
        Senator Lankford. Mr. Walker, anything you want to mention?
        Mr. Walker. That sounds right. Right. That is modest growth
    in interest rates, not returning to the levels of the 1990s, by
    the way, but below that. Interest rate risk is arguably one of
    our highest risks. It is the fastest-growing expense on a
    percentage basis, and we get nothing for it.
        Senator Lankford. Right. It has been one of the areas that
    I try to push a lot of people that I talk to, to say it is the
    creeping element in the budget that no one can pay attention to
    because you assume it is never going to get that high, but it
    is coming. It actually squeezes out all discretionary spending
    just for interest, which we will do.
        So let me ask a question: How are other nations handling
    issues like debt limits?
        Mr. Walker. I do not know of any other nation that has a
    debt limit. There are nations that have what I advocated, which
    is a debt-to-GDP limit, with automatic targets and triggers and
    enforcement mechanisms if you violate it. Things have to
    happen. Right now, things do not happen, and so, as a result,
    we have gone from $5.7 trillion in total debt, subject to the
    debt ceiling limit, to almost $20 trillion since 2000. And we
    still have not done anything to deal with the structural driver
    of the fiscal imbalance.
        Mr. Zandi. Yes. Relative to other developed economies, we
    have a very anachronistic, unusual approach to this. There is
    no other country that has anything that comes close to a debt
    limit or even shuts the government down over these issues.
        Senator Lankford. Right. So I asked the same question to
    several other international leaders last year and I was aware
    there is no debt limit out there anywhere else in the world,
    that we do it very different. But I asked a question of another
    international leader and said, ``What happens if you get to the
    end, and then you tip over, and you have a government
    shutdown?'' He laughed. He said, ``We have a new election the
    next week, because all of us are out. Parliament dissolves, and
    everybody is out and done. This did not work, and we are all
    gone. That is how we handle it, to be able to make sure that we
    actually take advantage of our responsibility.''
        Mr. Zandi. And, of course, they do not. So if you look at
    the debt to GDP of almost every developed economy in the world,
    it is higher than the United States at this point in time.
        Senator Lankford. Right.
        Ms. de Rugy. I was going to say, I mean, it is hard to
    think of a country we should use as a model, so I think a debt
    ceiling or not is really----
        Senator Lankford. So the question is the combination of
    several things here. I have proposed several areas to be able
    to get on top of this. Several Members of this Committee have
    as well. One is we have to avoid the constant fear of a
    government shutdown. That does not help us. That does hurt our
    economy every single time. We have to have a way to be able to
    solve that, but we also have to be able to bring fiscal
    responsibility.
        I have a bill called the Government Shutdown Prevention
    Act, which puts the consequences on Congress and the executive
    branch, holds harmless every other agency, but puts the
    pressure where the pressure should be for us to get to
    appropriations, and so we can finally get to doing
    appropriations bills and to be able to move on.
        I have noticed in the short time that I have been here that
    Congress only acts when it has a deadline. If there is no
    deadline, we never seem to get to action items; hence, things
    like immigration reform and so many things we discuss year
    after year. But with no deadline, there is no time to do it.
    That is why a debt ceiling suddenly creates this false
    deadline. That is why you have all these other entities when
    you deal with budget times, that it creates a deadline. So it
    is important, I think, that we actually accomplish something
    with that to be able to move, to not have a shutdown, to be
    able to keep maintaining where we are, but to be able to solve
    some of the issues.
        I want to ask about the issue about a debt ceiling. I
    believe Congress will always expand the debt ceiling. We will
    find a way every time to do it for fear of default and what
    that means internationally to the international economies. The
    question is, Is it useful to us to be able to actually
    accomplish something with it and to be able to find a way to be
    able to say, how do we get hold of our interests and our debt
    payments at some point?
        So, Mr. Walker, you have mentioned several times debt to
    GDP or other mechanisms. Is there a way that we can deal with a
    debt-ceiling vote that also has a marker on it saying the debt
    ceiling increases if our deficit numbers decrease by a certain
    percentage? So let's say Congress were to say, at this point,
    two years from now, our deficit decreases 10 percent. Then the
    debt ceiling increases, and it sets specific targets for
    Congress to be able to work toward. When trying to work toward
    this, not just we have debt-ceiling votes, because I think we
    are always going to have debt-ceiling votes, and there will be
    a way that Congress finds to pass it every time, but to have a
    meaningful process that is a marker to say, ``We are failing to
    get on top of this. How do we get us back to balance and to
    start bringing this down?''
        Mr. Walker. If you are going to have metrics--and I am for
    metrics and mechanism--targets, triggers, and enforcement
    mechanisms--I really think you ought to change, rather than
    deficits and rather than total debt, to go to debt to GDP. And
    why do I say that? That is what really matters. That way, you
    could pursue pro-growth policies, and we have talked about a
    number, but you have to have fiscal constraint. And that fiscal
    constraint requires everything to be on the table. It requires
    discretionary spending to be on the table. It requires
    mandatory spending to be on the table, and it requires tax
    expenditures to be on the table, which is $1.2 trillion a year
    and largely not looked at, at all. So I think you need to move
    toward that approach.
        The other thing, there is a group that I am the national
    co-founder of. It is called No Labels, and one of the things
    that it advocated with regard to the budget and appropriations
    process is no budget, no pay. That if the Congress does not
    pass a budget and the appropriations bills by a certain date,
    that Congress does not get paid until it does.
        Now, there are States that have done that. I think
    California is one of them, and they have not had a problem
    since then. They have other problems.
        Senator Lankford. Lots.
        Mr. Walker. But they do not have that problem.
        Senator Lankford. I would not exactly pull California as a
    model on efficiency in spending.
        Mr. Walker. No, no, no. No, they are not, but they are
    ranked number 40 out of----
        Senator Lankford. But they have found way--and not to go
    pick on California because their folks are not here to be able
    to defend themselves. But what their legislators had done as a
    result of that is find a way to be able to hide their debt in
    other places and to be able to bury it in other ways.
        Mr. Walker. And we do that too.
        Senator Lankford. I agree. That has been the challenge that
    I have faced, and when you do a debt to GDP, every time you do
    debt to GDP, there is some way to be able to fudge the numbers
    and to be able to fudge exactly which GDP number that is and
    how you figure it and what you do. I am trying to find a way
    that you cannot fudge the numbers.
        So when I look at specific targets--I understand economic
    growth has got to be a major priority, but if you look at
    percentage, reduction of the deficit, that assumes you are
    going to find a way to have economic activity and growth. You
    are going to have to control spending. You are going to have to
    find a way to be able to do that. Whether it is revenue or
    whether that is cutting, you have to find a way to be able to
    do that, but that is a clean number. That if you set a date,
    you cannot fudge it.
        And in this town, everyone fudges the numbers. I am trying
    to find a clean way to say let's do a number no one can hide.
        Mr. Walker. It may have to be a transition. Yes. You may
    have to do something like that.
        Ms. de Rugy. Can I add something about fudging?
        Senator Lankford. Sure.
        Ms. de Rugy. You are so right. I mean, like debt-to-GDP
    limit has not worked for Europe very well.
        Mr. Walker. It is because they do not enforce it.
        Ms. de Rugy. Yes, they do not enforce it. But it ultimately
    boils down to this: implementation. And how do you tie the
    hands of Congress? That is a real--that is a $20 trillion,
    going on $40 trillion question, is how do you tie the hands of
    Congress? That is really hard.
        I just wanted to say something about tax expenditure. I do
    not entirely disagree with you, but we have to be very careful.
    Now those $1.2 trillion should be on the table because some of
    those tax expenditures are meant to mitigate the double
    taxation that exists in the Tax Code. So I think we have to be
    careful and not looking at them all as a potential source of
    revenue, unless we fundamentally reform our Tax Code and adopt
    a flat tax and get rid of double taxation of saving and----
        Senator Lankford. I am over time, but let me make one quick
    comment. Where we are right now in budgeting, I am not sure it
    is how do you tie the hands of Congress. It is how do you untie
    the hands of Congress because most everything is on autopilot
    around here, and if you get to the end of a budget year, you do
    a continuing resolution. Even discretionary spending ends up
    being on autopilot. So this is a matter of giving Congress a
    deadline when they have to act and do something and cannot just
    sit back and say status quo will work and status quo is driving
    us over the cliff.
        Mr. Zandi. I have a suggestion for it if you want to hear
    it.
        So the ability-to-pay rules in every piece of legislation,
    that adds to projected budget deficit. So ability to pay is
    equal to projected tax revenues plus borrowing authority must
    cover the deficits the CBO expects over the 10-year budget
    horizon, and that would be for every piece of legislation. That
    would add to future budget deficits. So every time you vote for
    a piece of legislation that will add to deficits, you have to
    also vote for the borrowing authority to achieve that.
        Senator Lankford. How is that different than the PAYGO
    rules that already exist that are waived by Congress routinely?
        Mr. Zandi. If you waive them, you waive them, but that
    would be a rule that instead of having a Treasury debt limit,
    where it is cataclysmic if you go over it and, therefore, it is
    not credible that you will go over it, then you have this is
    something that would impose discipline every single time you
    voted for something.
        Senator Paul. Thank you. I think that illustrates a lot of
    the problem, is it is not that we have not tried, not that we
    do not have processes in place. It is a people problem.
        Senator Lankford. Right.
        Senator Paul. We do not obey our own rules.
        But I think Mr. Walker made a good point earlier when he
    said that basically 70 percent of the budget is not controlled
    by us. We need to untie our hands. We need to have our hands in
    all of it, but we just let the mandatory spending go on and on
    and on.
        I actually think there are some things we could do. I mean,
    Democrats and Republicans did raise the age of eligibility back
    in 1983, and they raised taxes. Really, to my mind, as far as
    Social Security, we had a bill that I put forward six years
    ago. Two-thirds of the problem was fixed by raising the age
    over like a 20-or 30-year period. That fixed two-thirds of the
    shortfall. The remaining third, we did by means testing. You
    could argue whether you should raise the taxes or means-test
    it. They are still taking the bite from the wealthy more. The
    only reason I prefer means testing over taxes is means testing
    is on the tail end when you are not really creating jobs. You
    have all your wealth, and you just take a little bit less
    Social Security. Taxes on the early side, I think, can have a
    disruptive effect on the market if we tax everybody on the full
    extent of their wealth.
        I would rather have rich people get a lot less Social
    Security to pay for it, but you can fix it. I do not think
    those are emotional things, but we just keep putting it off.
        But how come we do not fix it? Senator Peters, tell us how
    to fix it and why we do not fix it.
        Senator Peters. So now that I am a member of the panel.
    [Laughter.]
        Senator Paul. It is a friendly question.
        Senator Peters. It is a friendly question.
        Well, I think when you talked about some of the things
    related to Social Security reform, one of the increasing the
    age limit, the problem with that is that not everybody can work
    longer. It is a situation for those of us who are blessed to be
    able to sit at a desk in an air-conditioned environment and
    engage in our profession. I think many of us will probably work
    beyond 70 years old for obvious reasons.
        A lot of the folks I represent lift heavy objects for a
    living, and their body does not necessarily last until 70
    years. They are outside in the cold and the extremes, and so it
    does have a disproportionate impact based on what people's jobs
    are. So I find there is generally more acceptance for raising
    the retirement age for folks who are in office jobs and who are
    usually very well paid versus everyday folks who are struggling
    and are concerned about that.
        The problem is the underlying premise, and Dr. Zandi
    mentioned this fact. When Ronald Reagan and that group figured
    they would solve Social Security for the future, they came
    together bipartisan. It was a great compromise. They came
    together. But as you mentioned, roughly 90 percent of all
    income was captured by that Social Security tax that paid in.
    It was based on the premise that everybody pays in, everybody
    gets it back. It captures most of the revenue.
        But what has happened since those Reagan years, as we all
    know, is that there has been an acceleration of income
    inequality at an accelerating rate. So it is the fact that the
    folks at the very top have now--I do not have the numbers in
    front of me here, but a very large percentage of total income
    goes to the folks at the very top. If you really want to
    solve--the ideal way to solve Social Security in my mind is you
    raise everybody's income up--we get back to the 90 percent so
    we do not have this great gulf of not only income inequality
    but of wealth inequality, which is even greater than the income
    inequality, which causes the problem.
        So to have a means test would generate revenue, but you
    would need to generate an awful lot from that means test. It
    would not be just not getting your Social Security. That would
    not be enough, in my mind. I would have to run the numbers. You
    probably have run the numbers. It is not going to make up the
    difference, given the fact that you have had such a drop in the
    amount of income that is covered because of growing inequality.
    So that is why it has to be more comprehensive.
        Let me ask a question of the panel, after I have answered
    the question from the Chair. Mr. Walker, you wanted to make a
    comment. Do that as well, please. But as I mentioned in my
    opening question, this is a three-legged stool. We have not
    talked a lot about taxes, and yet that is actually what is
    pending before us here or likely to be pending before us in
    Congress very shortly as we look at tax reform. There are folks
    who would like to see if there is tax reform, and there are
    certainly ways that we should make this Tax Code a lot more
    efficient. We should get rid of this thick document and
    simplify it--I am all about that. We should bring more
    certainty and deal with some of the uncertainties associated
    with that.
        I do not know how we deal with this if we are not dealing
    with at least deficit-neutral. We probably need to do more than
    deficit-neutral as long as we are also cutting spending and
    growing the economy, but we will probably need to raise some
    revenue, ideally. But at a minimum, we should be deficit-
    neutral, and we will only make this problem worse.
        If you look at President Trump's proposal, it was in the
    trillions of dollars, at least during the campaign, which does
    not seem like it fixed the problem. Folks around here love to
    give tax cuts. That is a fun thing to go back home, but it is
    increasing the deficit dramatically, and that is more abstract.
    But we know it is very real. It is not abstract in terms of the
    everyday world that we live in.
        So to kind of get your sense on this tax proposal, are you
    concerned if it is something other than at least deficit-
    neutral?
        Dr. Zandi, you are shaking your head, but I would like all
    of you to respond to it. Dr. Zandi.
        Mr. Zandi. Sure. I would be supportive of revenue-neutral
    corporate tax reform. I think the House Republican plan, the
    proposal that has been put forward by Congressman Brady, is a
    pretty good plan. There are things to be worried about,
    particularly with regard to the border adjustment tax and some
    of the issues around transition and whether it violates WTO
    rules. But broadly speaking, on a reasonably dynamically scored
    basis, that would be a reasonable proposal. It is revenue-
    neutral, roughly.
        Other than that, I would not be supportive of cuts in
    personal income taxes at that point, unless you could do
    revenue-neutral kind of taxation to lower marginal rates and
    broaden the base. But I think that should be the key criteria
    that this--when it is all said and done, currently Federal
    revenue to GDP is 19 percent. That is where it should be. I
    think we should work toward that and try to make the Tax Code
    more efficient, work for us in a better way, promote growth,
    but I do not think we should reduce it. That has been the
    average amount of revenue raised, and as a percent of GDP for
    35 or 40 years, I do not think that should at this point in
    time.
        Ms. de Rugy. I agree with you that tax cuts should be
    deficit-neutral, not revenue-neutral, and there is just a lot
    of things we could cut, especially if we are talking about 10
    years. The House Republican bill is a good bill, especially the
    growth, the part that grows the economy, but the border
    adjustment tax is actually a terrible idea. It is something
    that is completely untested, with extremely large amount of
    risks. And I could go on and on and on about this.
        But I think the goal--and outside the border adjustment,
    there is other ways in the bill, other provisions to raise
    revenue. I think a proper tax reform will do a little bit. If
    you cut some rates, you expand the base, so you do some revenue
    increase too. But I think deficit neutrality should be the
    goal, not revenue neutrality.
        Senator Peters. If I may just briefly.
        Ms. de Rugy. Yes.
        Senator Peters. Your opposition to the border tax, if that
    is taken out, the math does not work real well for the tax
    plan. Do you agree or----
        Ms. de Rugy. Yes. It does not work. It does not work
    really. That is true.
        Senator Peters. At all, in fact.
        Ms. de Rugy. But you could do a smaller package too. This
    discussion right now is as if this is the only--we need that--I
    mean, yes, the part outside of the border adjustment tax is
    great. If we cannot pass this, we go to something smaller. We
    will get a lot of growth from it, especially on the corporation
    tax. I mean, I would love to see reforms on the individuals'
    side and reduction of rates, but this is not a priority. The
    corporation tax side--I mean, our system is absolutely awful.
    It is anti-competition. We have the highest rate of all the
    Organisation for Economic Co-operation and Development (OECD)
    countries. We have a worldwide tax system. This needs to
    happen, and a lot of growth will come from this. But, yes, the
    math does not work.
        On this, you also bring some spending cuts to the table,
    which the plan does not address at all.
        Senator Peters. Thank you. Mr. Walker.
        Mr. Walker. It should be deficit-neutral, and one of the
    real questions would be is whether and to what extent you
    consider economic growth in calculating that as to whether or
    not it is deficit-neutral.
        With regard to Social Security, coming back to that real
    quick, keep in mind two things about 1983. They had no choice
    but to reach an agreement in 1983 because the trust fund was
    going to zero within a matter of months. If it went to zero,
    tens of millions of people would have their checks cut. That
    was not politically feasible or acceptable. They had no choice.
        But second, when they made the reforms in 1983, they did
    not consider known demographic trends. They only achieved
    actuarial balance over 75 years. They forgot that we have gone
    from 16 to 1 people working to retired to three to one, going
    to two to one by 2035. Next time you reform Social Security,
    you have to recognize demographic realities, demographics or
    destiny.
        And last, what we tested for Social Security reform--again,
    not advocating that this is necessarily the right answer, but
    what got 77 percent support for Social Security reform of a
    demographically representative group of voters was the
    following: Raise but not eliminate the cap, considering 90
    percent of taxable wages, which is what Reagan did back in the
    80s.
        Mr. Zandi. Seventy percent, did you say?
        Mr. Walker. Ninety percent of taxable----
        Mr. Zandi. No, but the support was 70 percent?
        Mr. Walker. Seventy-seven percent for a package. Now, you
    have to keep in mind--and that is how you have to do it. If you
    do individual things, forget it. You are not going to get
    people to come together. You have to vote on packages. All
    right?
        Raise the cap. Gradually raise the retirement age two years
    over 20 to 30 years, but provide an exception for certain
    occupations where they are not white collar occupations. You
    have to do that. You have to recognize that reality. Make the
    benefits more progressive. So give a higher replacement rate to
    people near the poverty level, a somewhat lower replacement
    rate for people that are higher income, but do not fully means-
    test it to make it a welfare program, and then consider going
    to an alternative form of CPI. Those got 77 percent support,
    which is even good enough in the Senate, I think.
        Mr. Zandi. Can I make one point about corporate tax reform
    that is going to be relevant to the debate, I think? I think it
    would be a mistake to try to get around the budget rules by
    sunsetting any tax proposal after a 10-year budget window, that
    particularly with regard to growth, if we go to corporate tax
    reform and the idea here is to promote growth, if in fact you
    sunset it after 10 years just to make it work from a
    reconciliation perspective, that will--because back to the
    policy uncertainty--significantly reduce the economic value of
    that kind of proposal. You are not accomplishing what you need
    to approach. In my view, that would be an error to go down that
    path. If you are going to do it, you have to do it in an honest
    way.
        Senator Paul. Well, I want to thank the panel for coming. I
    think we have had a good discussion, and I hope this is a
    beginning. I wish we had sort of a standing committee that was
    actually looking at entitlements. If I were in charge, there
    would be a committee looking at Social Security and Medicare
    and saying, ``How do we come together?'' And it would be a
    permanent committee, and it would be the most important
    committee around here. And we would devote time and resources
    day in and day out. And I think we could. I think we eventually
    could come to some arrangement. The idea that it is harder for
    people to do physical work, that there may be some
    accommodation, sure. I am sure we could find an agreement
    there. Does the age have to go up, though? The age has to go
    up. It is an enormous part of how you fix cost.
        Two-thirds of the Social Security shortfall can be wiped
    out by raising the age. Can you have some exceptions for people
    who are not able to work as long? You could. But there are all
    kinds of things.
        Which is worse? Raising taxes on everybody or means
    testing, or are they kind of the same thing? They are kind of
    the same thing. We could figure out how to do this, but we are
    not having the discussion.
        So I was pleased with the discussion today. This is a
    beginning. I appreciate you taking your time to come in, and
    thank you, Senator Peters, for being part of it.
        [Whereupon, at 3:59 p.m., the Subcommittee was adjourned.]

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