[Senate Hearing 115-22]
[From the U.S. Government Publishing Office]
S. Hrg. 115-22
THE EFFECT OF BORROWING ON
FEDERAL SPENDING
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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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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
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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
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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.
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\1\ The prepared statement of Senator Paul appears in the Appendix
on page 31.
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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.
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\1\ The chart referenced by Senator Paul appears in the Appendix on
page 70.
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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.
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\1\ The prepared statement of Senator Peters appears in the
Appendix on page 35.
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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.
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\1\ The prepared statement of Mr. Walker appears in the Appendix on
page 40.
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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.
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\1\ The prepared statement of Ms. de Rugy appears in the Appendix
on page 49.
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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.
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\1\ The prepared statement of Mr. Zandi appears in the Appendix on
page 58.
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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.]
A P P E N D I X
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