[Senate Hearing 115-88]
[From the U.S. Government Publishing Office]
S. Hrg. 115-88
CONCURRENT RESOLUTION ON THE BUDGET FISCAL YEAR 2018
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HEARINGS
before the
COMMITTEE ON THE BUDGET
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
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FEBRUARY 1, 2017--CBO'S BUDGET AND ECONOMIC OUTLOOK
MAY 3, 2017--THE ECONOMY AND PRIVATE SECTOR GROWTH
MAY 10, 2017--GROWTH POLICIES FOR THE NEW ADMINISTRATION
MAY 17, 2017--RUNNING THE GOVERNMENT FOR LESS
MAY 25, 2017--THE PRESIDENT'S FISCAL YEAR 2018 BUDGET PROPOSAL
JUNE 13, 2017--THE PRESIDENT'S FISCAL YEAR 2018 BUDGET AND REVENUE
PROPOSALS
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
________
U.S. GOVERNMENT PUBLISHING OFFICE
26-915 WASHINGTON: 2018
COMMITTEE ON THE BUDGET
MICHAEL B. ENZI, Wyoming, Chairman
CHARLES E. GRASSLEY, Iowa BERNARD SANDERS, Vermont
MIKE CRAPO, Idaho PATTY MURRAY, Washington
LINDSEY O. GRAHAM, South Carolina RON WYDEN, Oregon
PATRICK TOOMEY, Pennsylvania DEBBIE STABENOW, Michigan
RON JOHNSON, Wisconsin SHELDON WHITEHOUSE, Rhode Island
BOB CORKER, Tennessee MARK R. WARNER, Virginia
DAVID A. PERDUE, Georgia JEFF MERKLEY, Oregon
CORY GARDNER, Colorado TIM KAINE, Virginia
JOHN KENNEDY, Louisiana ANGUS S. KING, Jr., Maine
JOHN BOOZMAN, Arkansas CHRIS VAN HOLLEN, Maryland
LUTHER STRANGE, Alabama KAMALA D. HARRIS, California
Eric Ueland, Republican Staff Director
Warren Gunnels, Minority Staff Director
C O N T E N T S
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HEARINGS
Page
February 1, 2017--CBO's Budget and Economic Outlook.............. 1
May 3, 2017--The Economy and Private Sector Growth............... 51
May 10, 2017--Growth Policies for the New Administration......... 117
May 17, 2017--Running the Government for Less.................... 147
May 25, 2017--The President's Fiscal Year 2018 Budget Proposal... 265
June 13, 2017--The President's Fiscal Year 2018 Budget and
Revenue Proposals.............................................. 413
STATEMENTS BY COMMITTEE MEMBERS
Chairman Michael B. Enzi..................... 1, 51, 117, 147, 265, 413
Ranking Member Bernard Sanders.................... 4, 53, 149, 274, 415
WITNESSES
Dodaro, Hon. Gene L., Comptroller General of the United States,
U.S. Government Accountability Office.......................... 151
Prepared Statement of........................................ 154
Questions and Answers (Post-Hearing) from:
Chairman Michael B. Enzi................................. 238
Senator Mark R. Warner................................... 247
Senator Kamala D. Harris................................. 243
Dunkelberg, William C., Ph.D., Chief Economist, National
Federation of Independent Business............................. 66
Prepared Statement of........................................ 73
Questions and Answers (Post-Hearing) from:
Chairman Michael B. Enzi................................. 114
Senator Debbie Stabenow.................................. 116
Gramm, Hon. Phil, Former Senator from the State of Texas......... 120
Prepared Statement of........................................ 126
Questions and Answers (Post-Hearing) from Chairman Michael B.
Enzi....................................................... 144
Hall, Hon. Keith, Ph.D., Director, Congressional Budget Office ..6, 206
Prepared Statement of ...................................... 9, 208
Questions and Answers (Post-Hearing) from:
Chairman Michael B. Enzi .............................. 34, 260
Senator Bob Corker....................................... 42
Ranking Member Bernard Sanders........................... 37
Senator Debbie Stabenow.................................. 46
Senator Sheldon Whitehouse............................... 48
Senator Mark R. Warner................................... 263
Senator Chris Van Hollen................................. 261
Mnuchin, Hon. Steven T., Secretary, U.S. Department of the
Treasury....................................................... 417
Prepared Statement of........................................ 419
Questions and Answers (Post-Hearing) from:
Chairman Michael B. Enzi................................. 447
Senator Patty Murray..................................... 456
Ranking Member Bernard Sanders........................... 449
Senator Mark Warner...................................... 464
Senator Ron Wyden........................................ 460
Mulvaney, Hon. Mick, Director, Office of Management and Budget... 276
Prepared Statement of........................................ 278
Questions and Answers (Post-Hearing) from:
Chairman Michael B. Enzi................................. 325
Senator John Boozman..................................... 327
Ranking Member Bernard Sanders........................... 331
Senator Patty Murray..................................... 341
Senator Ron Wyden........................................ 356
Senator Debbie Stabenow.................................. 394
Senator Sheldon Whitehouse............................... 398
Senator Mark R. Warner................................... 405
Sachs, Jeffrey D., Ph.D., University Professor, and Director,
Center for Sustainable Development, Columbia University........ 80
Prepared Statement of........................................ 83
Strain, Michael R., Ph.D., Director of Economic Policy Studies
and Resident Scholar, American Enterprise Institute............ 55
Prepared Statement of........................................ 58
Questions and Answers (Post-Hearing) from Chairman Michael B.
Enzi....................................................... 112
CBO'S BUDGET AND ECONOMIC OUTLOOK: FISCAL YEARS 2017-2027
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WEDNESDAY, FEBRUARY 1, 2017
U.S. Senate,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to notice, at 10:31 a.m., in
room SD-608, Dirksen Senate Office Building, Hon. Michael B.
Enzi, chairman of the committee, presiding.
Present: Senators Enzi, Crapo, Toomey, Perdue, Gardner,
Boozman, Sanders, Stabenow, Whitehouse, King, Van Hollen, and
Harris.
Staff present: Dan Kowalski, Republican deputy staff
director; Becky Cole, Republican budget analyst; Warren
Gunnels, minority staff director; Mike Jones, minority deputy
staff director; and Joshua Smith, minority budget policy
director.
OPENING STATEMENT OF CHAIRMAN MICHAEL B. ENZI
Chairman Enzi. Good morning. I will call to order the
Senate Budget Committee. Good morning and welcome to our
hearing on the Congressional Budget Office (CBO) budget and
economic outlook for fiscal years 2017 through 2027.
First, let me say thank you for this report. Speaking for
all members of the committee, I appreciate the dedication with
which CBO carries out its responsibilities to Congress under
the Budget Act, but the contents of this report are concerning.
After 8 years of failed fiscal policies and wasteful and
unaccountable spending, America is faced with a mammoth
national debt that totals almost $20 trillion and a sluggish
economy that is holding it back.
This year alone, overspending is projected to be $559
billion and will continue to grow over the next 10 years to
$1,408 billion--that would be $1.4 trillion--in 2027. It is a
$9,426 billion budget hole over the next 10 years. Gross
national debt will hit $30 trillion in 10 years, outpacing our
projected economic growth. As Congress considers our country's
budget over the next decade, we must look beyond the annual
appropriations process. Almost 70 percent of Federal spending
is already on autopilot, and that portion is growing rapidly.
CBO's report states that 70 percent of the total increase
in outlays over the next 10 years is from Social Security,
Medicare, and net interest on America's debt. Social Security
taxes will stop paying for benefits by 2019, which will result
in a $1.06 trillion deficit for 2027. Medicare will be in the
red by 2010. In less than 20 years, automatic spending will
consume all the taxes and revenues the Federal Government
collects.
While many entitlement programs have dedicated revenues to
pay for benefits, the dollars coming in cannot keep pace with
the tsunami of baby-boom retirements that are just now
beginning. About 10,000 boomers reach 65 each day.
Mandatory spending used to mean that there was a dedicated
stream of money sufficient to cover the cost of the program
without dipping into the general fund. I have a chart up there
that shows how we are doing on that score. The blue bars on the
chart are the upward climb of the mandatory spending. The
yellow bars show the slow growth of the dedicated taxes and
fees. And the red line shows the shortfall between the two.
[The referenced chart follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Enzi. Dedicated taxes and fees currently are
paying for less than half of total mandatory spending. As more
of our workforce becomes eligible to retire, the shortfall for
benefits paid by dedicated revenue will only increase.
Where does the growing difference come from? It either has
to be stolen from the future or taken from the present, which
means that even less can be done under the regular budget.
The problem is that Congress is not regularly reviewing
automatic spending programs like Social Security and Medicare.
Our Government makes promises to pay for these programs without
identifying a source of revenue that will ensure their
sustainability.
Congress is also not successfully providing oversight over
the 30 percent of Government spending controlled through the
annual appropriations process. We have only completed
appropriations on time four times in the past 40 years.
Continuing resolutions and omnibus funding bills have become
too commonplace, and they ignore Congress' constitutional duty
to carefully consider how taxpayer dollars are spent, and spent
timely.
Last month, CBO provided another example of spending
without oversight as it released its annual report on
unauthorized and expired programs. By the end of fiscal year
2017, there could be 73 authorizations that will have expired,
but will likely continue being funded regardless. This adds up
to $649 billion for 1 year. We need to get to work and review
these programs before allocating additional dollars.
Over the past 8 years, little has been done to relieve the
pressure of our debt on America's economy and a good deal more
to make it worse. We are left today with enormous debt and
little evidence that we are prepared at all for the troubling
future CBO has been warning against for decades and does again
in this publication. I look forward to our conversation today
about the true drivers of overspending and your thoughts, Dr.
Hall, on what actions Congress could take to foster a stronger
U.S. economy.
Senator Sanders.
OPENING STATEMENT OF SENATOR BERNARD SANDERS
Senator Sanders. Thank you very much, Mr. Chairman, and
thanks for calling the hearing. And, Dr. Hall, thanks very much
for being with us.
Memories are sometimes short, and Senator Enzi talked about
the deficit and the debt, which clearly are very serious
problems, but neglected to mention one of the key--some of the
key reasons as to why we have the deficit and neglected to
mention, in fact, that the deficit now--what is it, one-third
of what it was when President Bush left office? Dr. Hall, is
that about right?
Chairman Enzi. Deficit or debt?
Senator Sanders. The deficit is now about one-third of what
it was when President Obama first came in, I believe, roughly
correct?
Dr. Hall. It may have gone down a little bit.
Senator Sanders. Yeah, maybe. It is a rough estimate. So,
in other words, we have made significant progress. But when we
talk about the debt, we might want to remember that we went
into a war in Iraq that some of us voted against, some of us
voted for; that we gave huge tax breaks to the wealthiest
people in this country that added to the debt; and that we
passed a Medicare Part D prescription drug program, but we
forgot to tell the pharmaceutical industry that we wanted to
negotiate prices with them. All of those factors helped raise
the deficit and the accumulated national debt.
What is always interesting about hearings like this, it is
kind of like somebody saying that the operation was a success
but the patient died. We talk about the budget in the abstract
without talking about the reality of life in America today.
So what do we forget about? We forget about that during the
last 30 years, there has been a massive transfer of wealth--
and, Dr. Hall, if I am saying anything you disagree with,
please jump in--that what we have seen is trillions of dollars
flowing from the hands of the middle class into the top 1
percent; that we now have more income and wealth inequality
than any other major country on Earth.
So we talk about the deficit without talking about the fact
that we are today the richest country in the history of the
world. The richest country. We are not a poor country. We are
the richest country. The problem is the top one-tenth of 1
percent now owns almost as much wealth as the bottom 90
percent. How is that, Dr. Hall? Is that a fair--thank you. All
right.
So my friends are not concerned about that issue. The very,
very rich are getting richer; the middle class is shrinking; 43
million people living in poverty. Not an issue. It is only the
debt and the deficit, and we do not even talk about how we got
there.
Second of all, if you listen clearly to what my friend
Chairman Enzi says--and he is a friend; he is an honest man. If
you read between the lines, what he is saying basically is we
have got to cut Social Security, we have got to cut Medicare,
we have got to cut Medicaid.
Now, No. 1, I would hope that my Republican colleagues
would respect the words of President Trump when he ran for
office when he said exactly the opposite. You did not campaign
on that. I understand that. But he did. And maybe we might want
to have our President keep his campaign promises to the
American people.
But, second of all, is cutting Social Security, whether it
is raising the retirement age, cutting back benefits, is that
the only solution to the Social Security crisis?
Dr. Hall, I introduced legislation, which got verified by
the Social Security administration, which said that if you lift
the cap--that in the midst of massive income and wealth
inequality, if you lift the cap on taxable income from people
making $250,000 a year or more, if you do that, in fact, you
can extend the life of Social Security for 50 years. Nobody but
the top 2 percent would pay a nickel more in taxes, and you can
expand benefits.
I know you do not have those numbers in front of you, Dr.
Hall. Does that sound consistent?
Dr. Hall. Yes, it does.
Senator Sanders. All right. So you have got an alternative.
And the question is: Do we have the guts to tell the
billionaire class who are doing phenomenally well that they are
going to have to pay more in taxes so that we can extend and
expand Social Security? Or do we do what many of my Republican
friends want to do, and that is cut Social Security benefits,
benefits for the disabled, benefits for disabled veterans? So I
think there is a lot of need to broaden the discussion we are
currently having.
Thank you very much, Mr. Chairman.
Chairman Enzi. Thank you, and I hope that you did not
interpret my remarks as saying that we ought to cut things.
Senator Sanders. I did interpret it----
Chairman Enzi. I left the option of everything out there,
which would include----
Senator Sanders. Well, I did interpret it that way.
Chairman Enzi. Which would include what you suggested.
Senator Sanders. Well, then I will tell you I would--and I
say this sincerely. If the chairman now wants to say that he
believes we should not cut Social Security, I would love to
hear him say that, not cut Social Security benefits.
Chairman Enzi. I have tried to keep from cutting Social
Security benefits since I first got here.
Senator Sanders. Well, then you have an ally in me. I would
hope that we can do that. But it is important for you and
others to say we will not cut Social Security benefits. I would
hope you can say that.
Chairman Enzi. And the longer we wait, the less likely we
are to be able to make that promise.
Senator Sanders. I have just introduced an idea that Dr.
Hall has confirmed is accurate, and that if we go the approach
that I suggested, you do not have to cut Social Security
benefits.
Chairman Enzi. I appreciate that. Thank you for your
remarks.
Our witness this morning is Dr. Keith Hall, the ninth
Director of the Congressional Budget Office. The CBO serves an
instrumental role for the Budget Committees. The agency
provides necessary information important to assessing the
budget impact of proposals from both the administration and
Congress. As well, CBO continually examines the state of the
economy and the budget to keep us apprised of the fiscal
context in which we operate.
Dr. Hall has served as Director of CBO since April 2015. He
has over 25 years of experience in various Government
positions, including serving as the Chief Economist and
Director of Economics at the International Trade Commission,
Chief Economist for the White House Council of Economic
Advisers, and Chief Economist for the Department of Commerce.
Dr. Hall has also served in academia with George Mason
University and the University of Arkansas. This morning, Dr.
Hall will be talking with us about CBO's latest baseline, which
is their outlook on the economy and the Federal budget over the
next 10 years as it sits now.
We look forward to receiving your testimony, Dr. Hall. We
all want to understand the reasons for ballooning deficits and
the implications to our standard of living on a national debt
that is expected to grow by almost $10 trillion over the next
10 years.
Welcome, Dr. Hall. Please begin.
STATEMENT OF THE HONORABLE KEITH HALL, PH.D., DIRECTOR,
CONGRESSIONAL BUDGET OFFICE
Dr. Hall. Thank you. Chairman Enzi, Ranking Member Sanders,
and members of the committee, thank you for inviting me to
testify about the Congressional Budget Office's most recent
analysis of the outlook for the budget and the economy. I will
discuss a few highlights of our updated budget and economic
projections which were released last week. After my brief
remarks, I will be happy to take your questions.
The economic forecast that underlies CBO's budget
projections indicates that, in real terms, gross domestic
product (GDP) will expand at an average annual pace of 2.1
percent over the next 2 years if current laws generally remain
unchanged, after rising last year at an annual rate of 1.8
percent. We expect that growth to boost employment, virtually
eliminate the remaining slack in the economy, and drop the
unemployment rate to 4.4 percent by the end of 2018.
Further ahead, according to CBO's projections, GDP will
expand at an average annual rate of 1.9 percent over the second
half of the coming decade. That growth rate remains a
significant slowdown from the average over the 1980s, 1990s,
and the early 2000s mainly because of the slower growth
projected for the Nation's supply of labor, which largely
results from the ongoing retirement of baby boomers and the
relative stability in the labor force participation rate among
working-age women.
As slack diminishes over the next 2 years, we expect the
rate of inflation to rise to the Federal Reserve's goal of 2
percent and to stay there, on average. We also anticipate that
the Federal Reserve will steadily raise the target for the
Federal funds rate and that interest rates over the next few
years will be significantly higher than they are now.
CBO's current economic projections differ a bit from those
it published in August 2016. The agency now expects GDP in 2016
to be modestly lower than it projected last summer. It also
expects lower interest rates in the next 5 years but projects a
higher rate of labor force participation throughout the next
decade than it projected in August.
In fiscal year 2016, for the first time since 2009, the
Federal budget deficit increased in relation to GDP. CBO
projects that over the next 10 years, if current laws remain
generally unchanged, budget deficits will eventually follow an
upward trajectory, the result of three main trends: first,
strong growth in spending for retirement and health care
programs targeted to older people, especially Social Security
and Medicare; second, rising interest payments on the
Government's debt; and, third, modest growth in revenue
collections.
By the end of the period, the accumulating deficits would
drive up debt held by the public from its already high level.
Moreover, three decades from now, if current laws remain in
place, that debt would be nearly twice as high as it is now,
and it would reach a higher percentage of GDP than any
previously recorded. Such high and rising debt would have
serious negative consequences for the budget and the Nation,
including an increased risk of a financial crisis.
Our estimate of the deficit for 2017 is lower than our
August estimate, primarily because we now expect lower
mandatory spending. The current projection of the cumulative
deficit for the 2017-26 period, however, is about the same as
we published in August.
I am often asked specifically about our projections for
Medicaid and Federal subsidies for health insurance purchased
through the marketplaces established by the Affordable Care Act
(ACA). We describe these estimates in this report. They were
prepared before the new administration took office and do not
incorporate any effects of Executive orders or other actions
taken by that administration.
By CBO estimates, an average of 12 million people under age
65 will have health insurance in any given month in 2017 as a
result of the expansion of Medicaid under the ACA. In addition,
CBO and the staff of the Joint Committee on Taxation (JCT)
estimate this year 9 million people per month on average will
receive subsidies for the non-group coverage purchased through
the marketplaces. An additional 1 million people are projected
to be covered by unsubsidized insurance purchases through the
marketplace. We estimate that 27 million people under age 65
will be uninsured on average in 2017.
CBO and JCT currently estimate that in 2017 Federal
spending for people made eligible for Medicaid coverage by the
ACA will be $70 billion and that net Federal subsidies for
coverage obtained through marketplaces will be $45 billion. For
the 2018 to 2027 period, if current laws remain in place, those
two types of costs would total $1.9 trillion.
It is important to note that CBO's baseline is not intended
to be a forecast of what will happen; rather, it is meant to
provide a neutral benchmark that policymakers can use to assess
potential effects of policy decisions. CBO's budget and
economic projections are predicated on the assumption that the
laws that currently govern Federal taxes and spending generally
remain in place for the entire projection period. Even if that
occurred and there are no changes in laws before the end of
that period, it would still not be possible to predict
budgetary and economic outcomes precisely because many other
factors are uncertain. Our goal is to construct budget and
economic projections that fall in the middle of the
distribution of possible outcomes, given both the fiscal policy
embodied in current law and the availability of economic and
other data.
I would be happy to answer your questions.
[The prepared statement of Dr. Hall follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Enzi. Thank you, Dr. Hall.
Now we will turn to questions, and let me take a minute to
explain the process for the committee members before we start.
Each member has 5 minutes for questions, beginning with myself
and then Senator Sanders. Following the two of us, I will
alternate questions between the Republicans and the minority.
All members who were in attendance when the hearing began will
be recognized in order of seniority. For those who arrived
after the hearing, it will be in the order that they arrived.
I want to thank you for your testimony. I do have a few
questions. CBO projects 50 percent of the growth in outlays
over the next decade will be from Social Security and Medicare.
In the past, Congress has balanced a budget using a surplus in
these programs. Now we will need to do it while paying for the
deficits. Congress has had many opportunities to reform
mandatory spending. CBO has been telling us for decades that
the demographic shift will make these programs no longer
sustainable.
I have proposed a Concepts Commission to work on these
matters and propose solutions to Congress, but our annual
budget does not allow Congress to address Social Security under
the budget. So the tools to balance a unified budget are
limited, especially as more of the growth is automatic.
Does it make sense to you that the budget continues to be
balanced as one pot?
Dr. Hall. Well, I think the last Concept Commission from
1967 emphasized that all Federal spending and receipts should
be included in the budget, and I think the quote is something
like, ``Different and competing budgets confuse the public and
congressional understanding and impede decisionmaking.'' So I
think we certainly support the idea of a Budget Concepts
Commission, and we certainly support the idea of producing
estimates like we do as if it is a unified budget for you.
Chairman Enzi. All right. I appreciate that because I have
looked at some of the revenues coming in and find that with
Social Security we are about 18 percent short on what we are
paying out each month. And under Medicare, it looks like we are
about 46 percent short. So we will have to look at those things
evidently under a commission concept since we are limited on
what we can do under budget unless we make some reform changes,
and I think we have talked about that in committee in a
bipartisan way.
Now, I have proposed including long-term debt-to-GDP
targets in the Federal budget process, as have several members
of the committee, which would provide goals for the budgets of
both Congress and the President. If baseline projections do not
comply with the targets, the administration would need to
submit a plan to bring current law projections back into
compliance. In 30 years, CBO projects our debt-to-GDP will be
almost 150 percent. Taking into account the impact of our aging
population, what is a realistic target for long-term debt-to-
GDP? How much deficit reduction is necessary to maintain our
debt-to-GDP ratio currently?
Dr. Hall. Well, we have certainly been consistently saying
and we are still saying that the path of the debt hitting 150
percent in 30 years and, maybe as importantly, it is rising, so
if we extend it from 30 years to 35 years, it gets larger; to
40 years, it gets larger. So it is on an unsustainable path,
and we believe that.
One of the difficulties for us is the idea that how much is
too much is very difficult to define. We do know that as the
debt grows--and it is already at a very high level--it
increases the risk to the financial markets and a risk to the
economy. It is hard to pick a number, however. Because in some
respects it is like any other organization that puts up debt,
it is hard to say how much debt is too much. The United States
is somewhat unique in its ability to sustain debt, but
certainly we are on a path that is very, very difficult.
We certainly would support the idea of helping you use a
target and certainly support you in what sort of changes you
would need to hit that target.
Chairman Enzi. Thanks. I think that will be helpful, and we
will do some research to see what other countries do in order
to have some kind of a constraint on what they do, either in
spending or revenues.
Some in Congress have argued against deficit reduction in a
weak period of economic growth. I think we need to weigh these
concerns against the negative consequences laid out by your
report if we continue to allow high and rising debt. One of
those consequences is that lawmakers would have less
flexibility to use tax and spending policies to respond to
unexpected challenges. What types of policies can Congress
implement that would improve our deficit and our GDP growth
simultaneously?
Dr. Hall. Sure. I think that is actually an important
question. Right now we see the economy, although it is modestly
growing, and we think it will be modestly growing over the next
2 years, that will eliminate all of the slack in the economy.
So in terms of stimulus, stimulus might help us speed that
along, but what would really help in terms of the long-run
deficit would be things that focus on the supply side of the
economy, focus on things that affect the labor supply, affect
productivity, affect innovation, things like that. It is sort
of--almost any sort of increase in spending or decline in taxes
gives you some demand stimulus. But I think the important thing
is the longer-run impacts on the supply side of the economy.
Chairman Enzi. Thank you. My time has expired.
Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. And, Dr. Hall,
it is great to see you, and I just want to echo the comments of
the chairman, thanking you and your team at CBO for your great
work.
We talked a little bit about economic growth and the impact
on deficits. There are some practical things we could do to
both increase economic growth as well as reduce the deficit.
There has been a lot of talk lately about reducing
immigration to the United States, and I think it is important
to remind our colleagues that CBO did an analysis of the
bipartisan immigration reform bill that passed the Senate a
couple of years back. Isn't that right?
Dr. Hall. That is correct.
Senator Van Hollen. And if I have got my facts right, the
economic impact report that you did in June 2013 indicated that
that immigration reform bill would increase economic growth in
2023 by 3.3 percent beyond what would be otherwise anticipated.
Is that right?
Dr. Hall. That is correct.
Senator Van Hollen. And it would continue to grow in 2033.
It would be 5.4 percent greater in that year than otherwise
anticipated.
Dr. Hall. Yes.
Senator Van Hollen. And I remind my colleagues that that
was a piece of legislation that also dramatically increased
border security. In fact, almost $20 billion was invested. In a
letter you sent to Senator Leahy July 3, 2013, you indicated
that the net impact after you take the money for additional
border security, because of the economic growth, you would
actually reduce the deficit over that period of time by $135
billion. Do you recall that finding?
Dr. Hall. I do not, but that sounds right.
Senator Van Hollen. Right, more economic growth, more
reduction in the deficit. In addition to the fact, you found
that it would improve the long-term solvency of Social
Security. Do you recall that as well?
Dr. Hall. I do not, but that sounds----
Senator Van Hollen. More people, right?
Dr. Hall. Yes.
Senator Van Hollen. So I hope that in this, a lot of the
heated rhetoric around immigration, this was a bipartisan bill
which would increase economic growth, reduce the deficit,
improve the solvency of Social Security.
Dr. Hall, just a couple questions with respect to the
Affordable Care Act, because CBO recently issued a report,
January 17th, about the impact of repealing portions of the
Affordable Care Act, and you looked at the 2015 reconciliation
bill that passed the Congress and went to the President. Do you
recall that?
Dr. Hall. I do.
Senator Van Hollen. All right. One of the findings in that
report, as I understand it, is that the number of people who
are uninsured would increase by 18 million in the first year of
the new plan if we adopted that reconciliation bill. Is that
right?
Dr. Hall. That is correct.
Senator Van Hollen. And that the premiums in the non-group
market, the individual market, on policies purchased would
increase by 20 percent to 25 percent in the first year relative
to current law. Is that right?
Dr. Hall. That is correct.
Senator Van Hollen. All right. So just to translate, that
means if you were to adopt the bill, the reconciliation bill,
the Republican repeal of the Affordable Care Act that went to
President Obama, which he vetoed, we would immediately see
premiums go up even further, significantly further, 20 to 25
percent in the individual market, and you would see 18 million
people becoming uninsured in the first year of the plan.
So we have heard over the years it is going to be repeal
and replace. We are all still waiting for the replace, a
replace that would at least make sure those 18 million
continued to have access to affordable care, and that they do
not see their premiums go up even more than they have.
Just in my last minute, I wanted to ask you a question
about tax expenditures and other mandatory programs, because
the chairman referred to mandatory expenditures. I do not see
it in the material here, but I believe when you released your
budget to the press recently, your analysis, you indicated that
tax expenditures were, in fact, the greatest category of
mandatory spending, higher than what we spend on Social
Security on an annual basis, higher than what we spend on
Medicare. Is that right?
Dr. Hall. That is true.
Senator Van Hollen. All right. So that means that,
according to CBO, all those tax credits and tax deductions and
tax breaks, when you add them all up in the Tax Code, that
amount exceeds the amount we spend on an annual basis on Social
Security, right?
Dr. Hall. That is correct.
Senator Van Hollen. All right. And so one of the things
that Senator Sanders has been pointing out is that we can
actually do a lot when it comes to trying to improve the
solvency of Social Security through reducing some of those tax
expenditures and his proposal to raise the cap. And I would
just say I also believe that CBO recently found in your options
report that if you apply the same payroll tax to income over
$250,000 that we currently apply to income below $127,200, that
that would also increase the solvency of Social Security until
around 2041. Is that right?
Dr. Hall. That sounds about right.
Senator Van Hollen. So, I mean, just when we are
considering options, Mr. Chairman, there are options that we
can apply that do not require cutting Social Security benefits,
and that is a very practical one that has been put into the
mix. So I thank you, Dr. Hall. Thank you, Mr. Chairman. And I
look forward to working with you.
Chairman Enzi. Thank you.
Senator Perdue.
Senator Perdue. Dr. Hall, thank you. Here we are again, 2
years in, nothing has changed. But I want to correct the record
about a couple things, Mr. Chairman. You know, we hear these
superficial conversations about growth. You know, there are two
ways, Dr. Hall, to grow GDP, right? You can grow your
population, or you can grow your productivity. That is it.
Dr. Hall. Yes.
Senator Perdue. So, of course, if you say, OK, you know, in
a world of flat innovation and flat technology growth or
whatever, OK, we can grow our population. So the answer is, of
course, more immigration. Well, we are immigrating more people
now, twice--a little more than two and a half times, frankly,
than our 100-year average. And yet in the last 8 years, this
economy has grown on a per capita compound basis 0.61 percent
in the last 8 years. It is the weakest recovery in history.
That is the lowest economic growth of any President in U.S.
history.
My concern, Mr. Chairman, is that we are not talking about
the real issues, and I applaud you for having this hearing, and
I applaud the CBO for what you are doing to remind us again
what you reminded us of last year, that this is not
sustainable. And we know that the two 800-pound gorillas in the
room are Social Security and Medicare. And I want to set the
record straight, Mr. Chairman and Dr. Hall. I for one have
never called for cutting Social Security. You do not have to
cut Social Security benefits for people on Social Security to
solve this. But every year that goes by, the solution gets
harder and more difficult and more painful for people 50 to 100
years from now.
To oversimplify this, I want to get at a couple things. Dr.
Hall, in Social Security there are only a few levers--some
people say four, some people say five, but basically you can
change the age, you can look at means testing, you can look at
the inflator that is embedded in there that is incorrect, and
you can also talk about the revenue formula. Beyond that, if we
were to, for example, on the debt that we have--and I like to
look at the public debt because I happen to think that the debt
that we owe Social Security and Medicare trust funds is real
debt and that we will eventually have to pay the piper there.
And you talk about the interest rate going up. I think the
assumption is it would be at the higher level, about 2.5 or 3
percent, during the life of this.
Dr. Hall. That is right.
Senator Perdue. And so what would happen, Dr. Hall, if
interest rates were to go to their 30-year average of about 5.5
percent on the full--both public debt and the debt owed to
mainly the Social Security trust fund?
Dr. Hall. Well, higher interest rates would have a really
significant effect on our forecast, and it would actually
pretty significantly raise our estimate of the budget deficit.
Because we have such a large and growing debt, raising that
interest rate has a really big impact on the net interest
payments.
Senator Perdue. So the last few years, we have seen the
annual deficit--not the debt, the annual deficit--decline I
would actually say fairly significantly. But the budget that we
are operating under right now under the past 3 or 4 years, that
performance projected out over the next 10 years, as I look at
this, we move right back to $1 trillion annual deficits within
a very short period of time. Is that correct?
Dr. Hall. That is correct.
Senator Perdue. And that the total here is--I have not
totaled it up. Somewhere we are going to add--if we do not do
anything from our baseline budget, which is what we are talking
about at CBO, we will add another $9.5 to $10 trillion to the
current $20 trillion of total debt. Is that fair?
Dr. Hall. Yes.
Senator Perdue. So when I look at the solution, can we grow
our way out of it? Because if that is all we did, hold
everything else constant and all we did was grow the economy,
can we solve that $30 trillion problem?
Dr. Hall. I think the short answer is no.
Senator Perdue. No. Second, if we were to tax the top 3
percent of our earners in this country, the ones demonized by
certain Members on the other side of the aisle, if we were to
take the entire income of those people over the next 20 to 30
years, would that solve the debt crisis?
Dr. Hall. I would have to look at that, but I----
Senator Perdue. We have run the numbers. Directionally, I
am correct. It would not.
Dr. Hall. No.
Senator Perdue. So a single-faceted attempt to solve Social
Security and to solve the debt crisis is really very naive, in
my opinion, as a business guy. And when I look at this, we have
got several areas of opportunity. The one thing I think we all
agree is there are opportunities, but let us get at talking
about the opportunities. The budget process is broken. We know
that. I am not going to have time to lay out all the problems
with that. But I will say this: In the last 42 years, since the
1974 Budget--and, by the way, it took that commission 7 years
to write the Budget Act, and that Budget Act has only worked
four times in 42 years. And over those 42 years, we have only
appropriated--and I want everybody to listen to this. We have
only appropriated an average of two and a half appropriation
bills per year. This is a fraud on the American people, and it
has been perpetrated for 42 years, and it is time we deal with
it. That is just one area that we can use to help arrest this
runaway Government spending. $2.4 trillion is what we spent in
2000. We spent $3.8 trillion last year. And that is constant
dollars. We have got to look at redundant spending. We have got
to grow the economy. I think we have got to save Social
Security and Medicare over the long term, and that makes it
viable for our kids and grandkids. And, last, we have got to
get at the spiraling driver for health care cost inflation.
I am running out of time, Mr. Chairman, but I will hold the
other questions for a second round. Thank you.
Chairman Enzi. Thank you.
Senator King.
Senator King. Thank you, Mr. Chairman. Welcome, Dr. Hall.
Nice to have you here.
Dr. Hall. Thank you.
Senator King. I appreciate your comments, Senator Perdue.
Senator Perdue, in Maine, we have a saying that summarizes
exactly what you were talking about. There is rarely a silver
bullet. There is often silver buckshot. It takes multiple
approaches to solve a problem of these magnitudes, and there is
no single solution.
Dr. Hall, in listening to your testimony and reading it, it
seems to me that underlying a lot of your assumptions is
demographics in a couple of ways: the demographics of baby
boomers retiring, which is a big bulge in the population;
demographics of more people going on to Medicare, I believe
something like 10,000 people a day are now signing up for
Medicare; and the demographics of not replacing those people in
the workforce, which you note on page 4 is the significant drag
on the growth of the economy, which is labor supply. Is that
all correct?
Dr. Hall. That is all correct.
Senator King. And where I would disagree with Senator
Perdue, if the demographics--Congress can repeal a lot of
things, but one of them we cannot repeal is the law of
demographics. And if we are at replacement or below--and in
Maine, for example, we are below replacement now in terms of
our birth rate. The only solution is immigration, isn't it? The
people have to come from somewhere.
Dr. Hall. Well, I do not know what--I do not know if that
is the only solution, but clearly, increasing the labor supply
does have an impact on revenues. There are other sorts of
impacts which one should probably consider, depending on what
kind of immigration that you have.
Senator King. Of course, and I am not saying unlimited,
open the borders, or anything else.
Dr. Hall. Right, right.
Senator King. But to say we can close our borders and stop
having people come to this country and maintain continued
economic growth just does not square with economic principles.
Dr. Hall. Well, certainly we do need to have a continuing
growth in the labor force, and that is sort of the really
simple recipe. You have to have your labor force growing, you
have to have productivity growing.
Senator King. I can tell you, as I talk to businesses in
Maine now, as I travel throughout the State, which I do every
weekend, the No. 1 problem they are telling me is finding
qualified workers.
Now, the important word is ``qualified'' because that
speaks to education, training, improved job training. I think
that is a big part of this. But that is the problem that we are
seeing.
A couple of comments about where the budget has been going.
What we are seeing basically is the entire discretionary budget
being crowded out by entitlement growth and tax expenditure
growth. Tax expenditures back in the 1960s were about 4.5
percent of GDP; now they are 8 percent. Defense spending, for
example, in 1967 was 8.5; it was 5.2 in 1991; it was, I think,
4.7 in 2010; and it is 3.2 today. In other words, a steady
decline, and even a significant decline, almost 25 percent,
since 2010. And also since 2010, we have had China's buildup of
its military, North Korea's nuclear weapons, ISIS, Syria,
Ukraine, Crimea, all of those have occurred. And yet we are
still on this steady downward trend in terms of defense
spending. Do those figures sound consistent with what you are
seeing?
Dr. Hall. Yes, I think they do.
Senator King. And, of course, domestic spending is going in
exactly the same way, from over 4 percent back in 1967, 3.5
percent in 1991, and down to 3.3. Both defense and non-defense
discretionary, as I understand it, are at the low point for the
last 70 years. So that is--what bothers me is a lot of the
debate about the budget around here is about Head Start slots
and aircraft when the real growth is basically in health care
costs, which is driving Medicare, Medicaid, and those
expenditures, and I think that is something we need to be
talking about.
Let me ask a more general economic question. A lot of
people have been talking about 4 percent GDP growth. Is that
realistic in a mature economy? A developing economy can have
those very high growth rates, and 4 percent was what we had.
But do you see any combination of policies that would get us to
4 percent GDP growth?
Dr. Hall. Well, if we are talking about the short term,
just basic stimulus, we could accelerate the elimination of the
output gap over the next 2 years. We could accelerate that. But
for having anything lasting, we need to worry about the supply
side of things.
To give you some idea of how----
Senator King. When you say the supply side of things, you
are not talking about supply side Arthur Laffer; you are
talking about the supply side of like labor force and
productivity.
Dr. Hall. That is right, the labor force, the capital
stock, innovation, those sorts of things.
Senator King. Right.
Dr. Hall. But I wanted to couch this a little bit, and
right now over the next 10 years, we are seeing the labor force
grow at about half a percentage point a year, and we are seeing
labor force productivity grow at about 1.3 percent a year. That
adds up to about 1.8 percent GDP. That is our forecast for
potential GDP. So if you want to get potential GDP up, you have
got to raise----
Senator King. One of those two items.
Dr. Hall. One of those two things, or both. That is right.
Senator King. I am out of time, but I think hopefully, Mr.
Chairman, we will have additional time for questions.
Chairman Enzi. Certainly. We do not want to pass up an
opportunity like this with an expert.
Along the same lines that Senator King was asking about, do
you have any projections on what our unemployment is and what
our actual unemployment is? Senator Sanders usually puts this
in his speech.
Dr. Hall. I do not have that handy, but in some respects,
the unemployment rate is being a little bit misleading because
the unemployment rate is already below what we think is the
potential full employment. And the reason it is below is
because there are so many people still out of the labor force.
We still think there are a good million and a half people who
are not even in the labor force that we need to find jobs for
to hit that full employment.
So if you wanted to do some sort of calculation, I suppose
you could take the current unemployment rate and add in about a
million and a half people into the unemployment, and it gives
you some number that maybe gives you some idea of how short we
are of full employment.
Chairman Enzi. Yes, which goes back to Senator King's
comment that his employers were having trouble finding
qualified employees. And from my time in business, that was
always a problem. And I go to a lot of businesses in Wyoming
when I am there on the weekend and ask them what kind of
decisions they have to make, how long in advance they have to
make them, and what some of their biggest problems are. And the
biggest one there is qualified employees, too. We have got some
training programs, and we need to take a look at those and see
if they are actually effective.
We had a question earlier about increase in interest
payments, and I think the largest percent increase in spending
is a projected tripling of the interest payments in your
document, almost doubling relative to GDP. And that is with the
interest rates remaining low. Do you have an effect on CBO's
projections if the interest rates move up further, perhaps to
the historic average?
Dr. Hall. Yeah, we have some good rules of thumb to give
you some idea. If interest rates, say, are 1 percentage point
higher per year for the next 10 years, then that adds something
like $1.6 trillion to the deficit. So that almost doubles it.
So it is a really significant increase going forward. And on
something related, at the end of 10 years we anticipate just
the net interest payments are going to hit something like 2.7
percent of GDP. That is a really high number. And, again, it is
because the debt is so high, and you raise that, you really
raise our forecast, I think.
Chairman Enzi. I went to one of our bond sales and was
surprised at how fast they got snapped up and found out that
some people are actually bidding a negative interest rate at
the moment because they have so much confidence in our
Government that they will get their money back, even though
they had to pay a little bit for us to keep that secure. The
interest rate depends a lot on how much people think we are
secure, I assume, and how much debt we have got per person. We
are a lot worse off than Greece.
Dr. Hall. That is right, and one of the things that we
anticipate would happen if the deficit continues to grow is it
is going to put pressure on that interest rate and increase
that interest rate and raise the cost of our already existing
debt, let alone new debt.
Chairman Enzi. Thank you.
Changing a little bit, in the last Congress CBO and the
Joint Committee on Tax produced dynamic cost estimates for
major legislation, including the tax proposals. How would
comprehensive tax reform affect GDP growth? How can we make our
tax system more efficient so growth is not impeded by our Tax
Code?
Dr. Hall. Well, any sort of estimate, of course--I want to
tip my hat to the Joint Committee on Taxation. They would be
doing the scoring on that. But there are certainly things in
the Tax Code that we could do that would impact the efficiency
of taxes and would maybe impact productivity going forward if
it helps eliminate some misallocation of resources that are
sort of created by the Tax Code now. That certainly is one of
those sources of policy choices that would impact potentially
long-run growth in the economy.
Chairman Enzi. Tell me a little bit more about
misallocation of resources.
Dr. Hall. Right, well, you know, a lot of it is the impact
on capital, capital investment. For example, doing something
like reducing taxes on the capital stock would potentially help
productivity and help long-term growth. Doing something to
increase the tax base, you know, right now there are lots of
things that sort of cause the tax base to decline over time,
like offshoring sort of behavior, that sort of thing. Those
would all potentially impact productivity and help the long-run
growth.
Chairman Enzi. Thank you.
Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. Again, Dr.
Hall, thank you for your testimony.
Just when we talk about the aging of the population and the
immutable law of demographics, we have talked about
immigration, I just think when we are talking about this within
the budget context, it is important that we remember that no
matter what we do in the budget, those costs are going to grow
in aggregate for the country and for the people. In other
words, health care costs will grow. The costs of long-term
health care will grow. And so really the debate here is how
much of that cost should be shouldered by the average American
and how much should be shouldered by trying to shore up things
like Social Security, Medicare, and other things. Isn't that
one way to look at it?
Dr. Hall. Yes.
Senator Van Hollen. So someone is paying for this at the
end of the day, and the question is how we as a society decide
to allocate those costs and whether or not we should ask folks
at the very high income scale to, for example, pay more payroll
taxes because if they do not, the costs are going to go up to
seniors who are on retirement, on Social Security. And it is
not that there are not other things we can do, but that has to
be a major part of this conversation.
In terms of productivity, we talked about different levers,
and obviously there are productivity gains through the private
sector. We have talked, you and I in the past, about the
different kinds of Federal investments, and some Federal
investments can make a greater impact on innovation and
potentially productivity than others.
If you were looking at the set of discretionary spending
options and investments, have you done any analysis at CBO as
to which could most impact in a positive way on productivity?
Dr. Hall. We do not have a lot on that because, frankly,
the literature is very thin on the impact of different kinds of
investment. One of the things that is really clear is different
kinds of Federal investment have really different effects, but
we just do not know that much about how the different kinds
differ on things.
Senator Van Hollen. Is that something that could be
determined through analysis, do you think? Is that something
that CBO--for example, investing in education, which we believe
increases productivity if you have a more educated workforce.
Is there a way for CBO to do that kind of analysis? After all,
a lot of the research and development investment that helped
innovation--DARPA and the Internet--a lot of those things began
at least with Federal investment, not that the private sector
does not quickly come in with a lot of its own. Is that
something that CBO could undertake as a guide to the Congress
with respect to investments that we might want to look at?
Dr. Hall. I am happy to get that question out because we
have, in fact, been doing some work on that, and we are very
close, for example, to putting out a little blog post talking
about what we see in the evidence on the effects of something
like education on productivity and some of those good things.
And it is generally pretty positive. One of the issues, of
course, with education is how much lag there is before it has
an effect. But we do talk about the evidence in there, and we
have something coming out actually very soon on that.
Senator Van Hollen. Good. I look forward to seeing it.
Thank you.
Thank you, Mr. Chairman.
Chairman Enzi. Senator King.
Senator King. Thank you. A couple of different questions.
I think I remember there was a report several years ago
that the overall analysis--and I think it was by the CBO--of
the deficit impact of the Affordable Care Act was positive,
that it would reduce the deficit over a 10-year period
something like $1 trillion. Have you done any recent analysis
of what the repeal, what a full repeal--which included repeal
of all the taxes and fees that support the subsidies--what a
full repeal would mean in terms of its economic effect on the--
--
Dr. Hall. Yeah, we, in fact, did that last in--to be
honest, I cannot remember if it was June of last year or June
2015. I think it was maybe 2015. We did do an estimate of the
full repeal, and we did have the dynamic analysis as part of
that.
Senator King. Could you give us a summary of what you
found? Was it a net or a--was it a negative or a positive?
Dr. Hall. It was a positive. So the exercise was if you
eliminate the ACA, it would actually have a negative impact and
make the deficit worse on the whole.
Senator King. OK. That is important. If you eliminate the
ACA, it would make the deficit grow. Is that correct?
Dr. Hall. That is right.
Senator King. OK. If you could supply that study, I would
appreciate it.
Dr. Hall. Absolutely.
Senator King. No. 2, with regard to investments, I have
always thought, looking historically, that the GI bill is
probably the best single investment that the U.S. Government
ever made in terms of economic growth after World War II, and
that may be a model for us.
Vice President Cheney once famously said, ``Reagan proved
deficits do not matter.'' Do deficits matter?
Dr. Hall. We think they do, and I think our deficit is at a
high level, and the debt is at a high level, and I think it is
already having an effect. It does create a drag on the economy
and a drag on growth.
Senator King. I agree with you. My problem is deficits
around here seem to matter sometimes and then not others, and
it seems to me if we could establish a consensus that deficits
are a problem, are a drag on the economy, and do ultimately
have to be paid back, we could then start to move toward
solutions. I think they do matter, and I hope we can establish
that kind of consensus.
We have got two levels of debt: the so-called public debt
and then, as Senator Perdue mentioned, the Social Security debt
that we owe. Why aren't they the same? I mean, I think,
frankly, the picture is worse than it looks because we do not
count Social Security as part of public debt. Most people want
checks in the mail, not IOUs.
Dr. Hall. Actually, in our numbers we do include all the
debt together. So our debt held by the public does include
that, and that is sort of why we focus on that because we think
that is the important number for the economy.
Senator King. And the other issue is: How do we--again, to
get back to my silver buckshot image, there is no single
solution. We have to have economic growth. That would help
considerably. We also have to have control of spending in a
variety of areas. But there may be a question, again, because
of the demographics. We are in a moment of a huge increase in
demand on our Social Security and Medicare. Maybe we have to
talk about where revenues are. Revenues historically for 50
years have been 17.4 percent of GDP. But for 50 years, we did
not have 10,000 people a day signing up for Medicare. Do you
see what I mean?
Dr. Hall. Yes.
Senator King. That there needs to be an adjustment in our
thinking about revenues to adjust to the reality of the
demographic tidal wave that we are facing. Would you agree?
Dr. Hall. Well, that is right, although I do want to say
the growth in revenues is already historically at a high level.
Senator King. By about four-tenths of a percent.
Dr. Hall. Right, and they are projected to grow. So we are
already starting from a high level on revenues. We are at an
even higher level on spending. So it is sort of this race
really of both things, and spending is just outpacing revenue.
Senator King. But the spending growth is in the Social
Security and Medicare, not in discretionary, defense, and Pell
grants and those areas. I think it should be clear.
Dr. Hall. Right.
Senator King. We need to make it clear that those are
actually declining.
Dr. Hall. That is right, they are. As a share of GDP, they
are declining.
Senator King. Finally, do you know of any economic studies
or evidence that tax cuts stimulate economic growth? Because
that is a kind of theological position around here, and I in my
own research have not been able to find the data to support it.
The evidence from the Bush tax cuts did not seem to stimulate--
significant tax cuts in the middle of the last decade and in
the State of Kansas where they have gone through this kind of
giant economic experience, it does not seem to be working. You
do not have to answer now, but if there is economic data on
that, I would like to see it.
Dr. Hall. There is research on that, and we do think that
tax cuts generally do, in fact, stimulate the economy, do
increase growth. One of the big questions sort of is how much.
You know----
Senator King. Well, I can see a tax cut from President
Kennedy when it was 90 percent down to 35. The question I would
have is: Does going from 35 to 28 or 31, a kind of marginal
change, does that have the kind of effect that, frankly, many
people represent?
Dr. Hall. Well, we do think it has an effect, and I would
be happy to give you some of the literature that we have
written up about it, and we would actually be happy to come by
and talk about it and talk our way through what we think the
evidence is on it.
Senator King. Because I think that is important, because
that is a principle that drives a lot of the debate around
here, and I think we ought to try to get to the data that
underlies it. Thank you. I appreciate it.
Dr. Hall. Sure.
Senator Van Hollen. Mr. Chairman, could I just ask the
Director for clarification? Just on the revenue level, I think
you mean in aggregate terms the absolute dollar amount. But as
a percent of GDP, we are still like in the early 2000s, 2001,
where it was 20 percent, 19 percent of GDP. So it is not higher
as a percent of GDP today, right?
Dr. Hall. Well, it is higher than the average over the last
50 years.
Senator Van Hollen. Right.
Dr. Hall. But it has been higher before.
Senator Van Hollen. Thank you. I just wanted that
clarification.
Chairman Enzi. Senator Boozman.
Senator Boozman. Thank you, Mr. Chairman. I apologize for
sneaking out. We have an Environment and Public Works hearing
going on at the same time.
Thank you for being here. As you know, Congress has become
increasingly reliant on short-term continuing resolutions (CRs)
to fund the Government. Can you talk briefly about the impact
that the CRs have on the debt long term, and then, also, just
on the efficiency of Government in general with the agencies?
Dr. Hall. Sure, sure. I suppose in my mind one of the
things with the CRs constantly is there is sort of no plan
there. There is no effort to sort of plan on what you are going
to do over the next 10 years or something like that. So it
winds up being perhaps very short-run thinking.
With respect to affecting the Government, I can draw back
on my experience. I run an agency----
Senator Boozman. So it affects your agency.
Dr. Hall. Well, it affects our agency, and I spent some
time heading the Bureau of Labor Statistics, and I know what it
is like for an agency not to know what their budget is going to
be. And maybe more importantly at some point getting halfway
through the fiscal year before you know if you have got any
money to finish the year out, that makes it hard to have as
efficient a Government as we should have.
Senator Boozman. Right. Very good. In 2027, discretionary
spending will be at the lowest level as a percentage of GDP
that it has been since 1962. Despite this, both deficits and
the overall debt are expected to increase dramatically. Is it
correct then to say that Congress' current approach to reducing
the deficit--that is, only reducing discretionary spending--is
sustainable in the long term?
Dr. Hall. That will be very difficult, and I can give you a
good example. Right now, in 10 years we forecast that the
deficit is going to be about $1.4 trillion. Total discretionary
spending in 10 years will be about $1.5 trillion. So it is
essentially--if you did it all with discretionary spending,
both defense and non-defense, you would wipe out all the
discretionary spending to balance the budget.
Senator Boozman. One final thing. Is there a risk of
inflation rising past the 2 percent target set by the Federal
Reserve? If that happens, you know--and, again, you can
evaluate the risk. If so, what impact would it have on the
national debt? And then, also, that triggering interest rate
rise, you know, what impact would that have on the national
debt?
Dr. Hall. Sure. Well, we already anticipate that the Fed is
going to raise the Federal funds rate to try to keep inflation
under control, and that is a big part of our forecast that
interest rates are going to rise.
Senator Boozman. So what does a 1 percent, half percent
rise cost?
Dr. Hall. About a 1 percent rise in interest rates over the
10-year period, it comes out to be something like $1.6
trillion, which is a really big number. So that interest rate
is one of the more important things on the debt.
Senator Boozman. And, traditionally, the service of the
debt is so much higher than it is--what is it today, 2 percent,
something like that?
Dr. Hall. Yeah, it is pretty low.
Senator Boozman. So, historically, I think it is 5, 6
percent. So, you know, that is not an imaginary scenario. That
is something that has a very real chance, you know, of coming
back up where we are going to increase 2 or 3 percent, which
would cause what kind of troubles?
Dr. Hall. Well, it is certainly going to raise the debt
service, the net interest, and we are going to start seeing the
net interest payment being a really big chunk of the Federal
budget. It is going to do a lot of things not only sort of
restricting your flexibility to do things with the budget, but
also those rising interest rates affect the economy. It
probably crowds out some private investment. We probably do not
get as much capital stock, and we probably do not have the
productivity growth that we would like to have in terms of
long-run growth.
Senator Boozman. All right. Thank you, Mr. Chairman. Thank
you.
Chairman Enzi. Senator Whitehouse.
Senator Whitehouse. Thank you, chairman. Welcome back,
Director. Good to see you.
Dr. Hall. Thank you.
Senator Whitehouse. With a new Congress and a new
administration, I wanted to just briefly review the bidding
with you on some of the issues that we have talked about in the
past. The first is whether you still believe that tax
expenditures remain a form of Federal spending.
Dr. Hall. Well, I do not want to make a judgment on that,
but tax expenditures are a very large number, and they do dwarf
a lot of categories of Federal spending.
Senator Whitehouse. And a tax expenditure of $1 has the
same effect on the debt and the deficit as direct spending of a
$1.
Dr. Hall. Right, right. And this is, you know--well----
Senator Whitehouse. All other things being equal,
obviously, being the understood----
Dr. Hall. Yes.
Senator Whitehouse. Second, do you continue to believe that
reform of the delivery system in health care has promise to
reduce health care costs on a going-forward basis?
Dr. Hall. We certainly think that about some of the reforms
that have happened as part of the ACA. We still--it is very
hard to forecast. We still see the health care costs continuing
to grow faster than GDP does, so it is going to start taking--
continue to take a bigger and bigger share of the pie, and that
is----
Senator Whitehouse. Adjusted for the demographic change or
incorporating the demographic change?
Dr. Hall. Yeah, even adjusted for the demographic change,
we still see expenditure per person or per patient being one of
the growing parts of the budget.
Senator Whitehouse. Well, I think it is a great place for
us to continue to work on, because I am seeing primary care
provider groups in Rhode Island that have declared themselves
accountable care organizations within the program that the ACA
set up who are changing the way they do business and changing
the way they are paid by different payers, and the result has
been happier customers, better-served patients, and a lower
cost per capita of their patient network. And there have been
very significant shared savings between the Federal Government
and these practices, and I think this is really just the
leading edge, because they are kind of cutting-edge providers
who have worked terribly hard to do this. But the fact that
they are already seeing significant results, big numbers by
Rhode Island standards, I think gives us some confidence.
Last September, I asked you what CBO was doing to study how
the ACA has affected Federal health spending, and you replied
that, ``We are going to be getting data and looking at real
data.'' Since September to now, give us an update on where you
are on that project.
Dr. Hall. Sure. We are getting--obviously, we are getting
data. We are getting--obtaining it to adjust our estimates of
the spending. I think right now our current estimate is that
spending on the Medicare expansion is about $70 billion, and I
think on the subsidies it is about $56 billion. So we are--we
have actually been pretty accurate in our forecasts on those
things.
Senator Whitehouse. I think we were talking more about this
graph, which I think is yours, that shows the adjusted forecast
Federal spending, and CBO has repeatedly dropped the forecast
since the ACA was passed. And the question was: To what extent
has that reduced forecast of Federal spending in the out-years
been connected to programs contained within the Affordable Care
Act?
Dr. Hall. Yeah, I see----
Senator Whitehouse. But it shows $3.3 trillion in net
savings just in the 2018-2027 window vis-a-vis the 2010
projection. So if I could make a question for the record to get
an update on where you are in terms of evaluating that
connection, that would be helpful.
Dr. Hall. OK.
Senator Whitehouse. And the last question is that climate
change portends out-year costs for the Federal Government that
ought to be budgeted, does it not?
Dr. Hall. Well, we have certainly just recently put out a
report on the likely impact of climate change on hurricane
frequency and sea levels and what that means for the Federal
budget with some recommendations about what you all can look at
to impact that.
One of the issues, of course, is that it is looking 30
years ahead, and a lot of the impact is perhaps beyond 30
years. But we do have some estimates of that. I do not have
them handy.
Senator Whitehouse. Mr. Chairman, we just got the updated
report from the National Oceanic and Atmospheric Administration
(NOAA) on the anticipated sea level rise for Rhode Island by
the end of this century, and they have raised it from 6 feet to
9 feet. And while it makes a shorter drive to the beach for
somebody in Wyoming, it is a very deadly serious matter for
Rhode Island. And I hope that we can look forward to a day when
we can have a sober and sensible discussion about that here in
Congress.
Thank you, sir.
Chairman Enzi. We have a little bit of room yet in Wyoming
for a few additional people if they want to move to higher
ground.
Senator Whitehouse. Well, interestingly, the Majority
Leader's home State did a study that showed that Kentucky might
actually expect an influx of population from people fleeing
battered coasts as a result of climate change. So even Kentucky
sees it coming. They just see it in a different light.
Chairman Enzi. In light of climate change, Wyoming has been
completely underwater three times.
Senator Whitehouse. So you sympathize with what I see
coming.
Chairman Enzi. Absolutely, yes. It can be easier to get
sailing lessons there. I have been there, done that.
I am going to change the topic pretty dramatically here in
my questions, because we are dealing with some pension deficits
in the private sector that are huge, and we have required the
private sector to do some substantial investment so that they
could keep ahead of that. But that prompted me to worry a
little bit about how States are handling their pensions, and
that led me to worrying about how the Federal Government is
handling its pensions.
What kind of resources do we have set aside to handle the
pensions? At the last hearing that we had, I was shocked to
hear--and I do not know whether it is an accurate figure, but I
imagine it is pretty close--that one-third of our Federal work
force will retire by 2020. What kind of assets do we have set
aside to be able to fund our pension plans?
Dr. Hall. You know, I do not have that information in front
of me, but we have actually been doing some work on sort of
forecasting looking at that. So we can follow-up and see what
we can get you on that.
Chairman Enzi. OK. Do you have any idea where that pension
money comes from now?
Dr. Hall. Why, I presume it is part of spending.
Chairman Enzi. Part of the general fund?
Dr. Hall. Yes.
Chairman Enzi. We have no money set aside for----
Dr. Hall. Oh, I am sorry. I see where you are going. That
is right. We do not have any money set aside. That is right.
Chairman Enzi. So part of the deficit problem that we have
will be when one-third of the Federal work force retires and
expects their pensions.
Dr. Hall. That is right.
Chairman Enzi. And that is probably another pension crisis
that we better be figuring on.
Did you have some more questions, Senator King?
Senator King. Just one more. I would be interested--and
maybe this has to be done for the record--in what your
estimates are or what your assumptions are that are built into
these projections of health care inflation? I noticed, for
example, that Medicare, adjusted for October 1st, was about a 5
percent increase last year, and the general economy was--
inflation was 1.5 percent. What I am interested in is a
sensitivity in the projections to various estimates of health
care inflation. My impression is that, of all these things we
are talking about, one of the most important factors in growth
of the Federal deficit is health care inflation, and if that
could be held, for example, to half of 5 percent through a
variety of changes, that would be a significant--that would
improve these numbers considerably. Isn't that so?
Dr. Hall. Yeah, I think that would have certainly a
noticeable effect, and I would be happy to follow-up and see
what we can tell you about what our forecast is and give you
some idea.
Senator King. What I would like to see is, you know, a
range.
Dr. Hall. Sure.
Senator King. Starting with your similar interest rate
assumption to 5, 6, or whatever you are using. I think it
points to an underlying issue that we really need to be talking
about. With all the debate of the Affordable Care Act and the
issues surrounding it, we are not really talking about the
underlying cost of health care, which is going to be a driver
of our economic stress, both in our Federal budget and in our
household budgets, regardless of who is paying, of what the
insurance mechanism is. And I am concerned that we have not
really focused sufficient attention on that, and delivery
mechanisms and how the system can be made--because we are, as
you know, paying about twice per capita for health care as any
other developed country in the world. And that is an underlying
problem that it seems to me we need to address.
Dr. Hall. Sure. Like I say, we would be happy to follow-up.
Senator King. Thank you.
Thank you, Mr. Chairman.
Chairman Enzi. Senator Boozman, do you have any additional
questions?
Senator Boozman. No, sir. Thank you, though.
Chairman Enzi. I have one additional one that I see here,
and that is, it is often said that the longer we wait to reform
Social Security, the more difficult it will be. In 2015,
Congress had an opportunity to reform the disability program.
Instead, we punted and transferred money from the retirement
program and postponed reform. The latest CBO estimates show the
disability trust fund will be exhausted in 2023. Can you give
us a sense of how much more difficult it will be to reform
Social Security if we wait until 2023?
Dr. Hall. It would be a lot harder, and this is one of the
recurring themes, I think, of our entire report. It is Social
Security, it is disability. These are problems that we have
seen coming for decades, and they are getting closer now. And
absolutely the quicker we do something, the better. If we look
at achieving, say, a 75-year solvency for the Social Security
trust funds, just right now that would require a 33 percent
reduction in benefits. And if we wait 6 years, something like
that, that goes up to 38 percent. So it goes up about 5
percentage points every 6 years, something like that.
So there is a real cost to waiting, because the longer we
wait the bigger the cut in benefits or the increase in taxes
that we need.
Chairman Enzi. Thank you. In conjunction with Senator
Sanders, we will have some additional questions on the levers
on Social Security. I invite Senator Boozman and Senator King
to be a part of that, too, because I think it is some
information that we really need to gather quickly.
Thank you very much for----
Dr. Hall. Thank you.
Chairman Enzi [continuing]. Being willing to do this and
for your answers and for the conciseness of your answers.
Now, if anybody has additional questions, those are due by
6 p.m. today, with a hard copy delivered to the committee in
624, and we would ask that you respond to those as quickly as
possible.
So with no further business, this meeting is adjourned.
Dr. Hall. Thank you.
[Whereupon, at 11:45 a.m., the committee was adjourned.]
ADDITIONAL COMMITTEE QUESTIONS
[The following submitted questions were not asked at the
hearing but were answered by the witness subsequent to the
hearing:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
THE ECONOMY AND PRIVATE SECTOR GROWTH
----------
WEDNESDAY, MAY 3, 2017
United States Senate,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to notice, at 10:31 a.m., in
room SD-608, Dirksen Senate Office Building, Hon. Michael B.
Enzi, chairman of the committee, presiding.
Present: Senators Enzi, Crapo, Johnson, Perdue, Gardner,
Kennedy, Boozman, Strange, Sanders, Wyden, Kaine, King, Van
Hollen, and Harris.
Staff present: Eric Ueland, Republican staff director; and
Warren Gunnels, minority staff director.
OPENING STATEMENT OF CHAIRMAN MICHAEL B. ENZI
Chairman Enzi. I will go ahead and call this hearing to
order, mostly because we have a 10:45 vote this morning, and
that will add a degree of difficulty to it. So I will go ahead
and make my opening statement. If Senator Sanders is here, he
can give his when I complete mine. Otherwise, we will do some
introductions and get started on the testimony. And then when
the vote starts, we will have a quick recess to run over and
vote and come right back again, because there is just one vote
in the process.
Good morning, and welcome to our hearing on the economy and
private sector growth. First, let me thank the witnesses for
agreeing to testify this morning. It is important for
Government to focus on policies that promote private sector
growth. As we enter into a period of higher than historic debt
with projected economic growth below average, Congress must
debate how to encourage business growth without raising our
spending deficits.
The good news is hard-working families finally have a
Congress and a President focused on addressing these critical
issues. The Congressional Budget Office (CBO) recently
published a report on the macroeconomic and budgetary effects
of Federal investment. The Federal Government considers annual
spending bills and authorizations on a regular basis, which
allocates dollars toward goods and services that are expected
to increase private sector productivity. This includes
infrastructure, education, training, research, and development.
CBO finds the increase in productivity that results from
Federal investment boosts economic output, but only gradually.
The macroeconomic effects of Federal spending depend on how
those dollars are financed. The Federal Government has been
operating in deficits for over a decade. We have been financing
investment spending by increasing Federal borrowing. While
increasing Federal spending boosts demand and the gross
domestic product (GDP) in the first several years, the
Government cannot create long-term growth through
appropriations alone.
According to CBO, the increase in Federal borrowing reduces
the amount of money available for private investments,
dampening GDP in later years. We cannot spend our way out of
these fiscal challenges. Instead, we have to look to the
private sector to create long-term growth, and often the
policies needed to encourage business investment are as simple
as getting out of the way--regulatory relief, tax reform, and
simplification, and reducing uncertainty. These policies
promote business investment and private sector growth.
As a former small business owner myself, I know firsthand
the risks and rewards of entrepreneurship. Tough economic times
make business investment more risky, and the uncertainty
surrounding Government policies makes it difficult to implement
a surviving business strategy.
The U.S. economy has not yet recovered since the last
recession, and CBO projects long-term economic growth to be
substantially lower than historic averages. Government needs to
incentivize entrepreneurship and innovation, not regulate and
tax it. We need to lower the barriers to entry and simplify
compliance requirements.
Our witnesses today will discuss a variety of policy
options to support economic growth. Regulation reduction and
tax reform probably ought to be front and center.
A new study from the Mercatus Center at George Mason
University finds that regulation distorts investment choices.
This lack of efficiency reduces innovation and creates a drag
on the economy. The study finds that over a period of 35 years,
regulation has reduced the average annual GDP growth rate by
eight-tenths of a percent, and had regulation been held
constant at levels observed in 1980, the U.S. economy would
have been about 25 percent larger.
Our uncompetitive and complex Tax Code also restricts
growth. The Tax Foundation's analysis of the Republican tax
reform proposals shows the increase in the long-run size of the
economy from 5 to 9 percent. The Joint Committee on Taxation
has consistently shown potential economic growth when scoring
past comprehensive tax measures, including proposals that have
no loss of revenue to the Federal Government.
Increasing GDP from private sector growth provides
additional dollars to the Treasury. According to CBO, a one-
tenth percentage increase in productivity growth would reduce
the deficit by $273 billion over a 10-year period. As Congress
considers the daunting task of getting our deficits under
control, growth policies must play a role in getting to
balance.
I look forward to our conversation today with the panel of
these national economists on how Government can foster a
stronger U.S. economy.
Senator Sanders.
OPENING STATEMENT OF SENATOR BERNARD SANDERS
Senator Sanders. Thank you very much, Mr. Chairman, and
welcome to our guests. And, Dr. Sachs, thank you so much for
being here. Two points.
You mentioned, Mr. Chairman, the Mercatus Center. To the
best of my knowledge, it is funded largely by the Koch
brothers, and if, in fact, the tax program initiated by the
President, repeal of the estate tax, I think that the Koch
brothers get about a $30 billion--their family will get a $30
billion tax break. So I can understand why those guys might
think that this is very good economics. I do not think most
Americans do, but that is the case.
But before I get started, I would like to note, Mr.
Chairman, that it has now been 7 long weeks since the Trump
administration came out with its budget, and yet our committee
has not held a single hearing on what he has proposed. Not one.
This is unprecedented. In 2001, the day after President
George W. Bush released his preliminary budget, this committee
heard testimony from the Treasury Secretary, followed up by
three other hearings with the Budget Director, the HHS
Secretary, and the Secretary of State. In 2009, after President
Obama released his preliminary budget, our committee held three
hearings with the Budget Director, the Treasury Secretary, and
the Energy Secretary. Up to this point, we have held zero
hearings.
Moreover, under Section 300 of the Congressional Budget
Act, Congress is supposed to complete its work on the fiscal
year 2018 budget resolution no later than April 15th. It is now
May 3rd, and we have not even started.
Now, maybe there is a good reason for this, and maybe you
will explain it to us. But maybe it is also simply the fact--
and I can understand this--that your side of the aisle is not
particularly interested in defending a budget which gives
hundreds and hundreds of billions of dollars in tax breaks to
the top 1 percent while at the same time it would end an after-
school program--my God, after-school programs, mothers all over
the country worried about where their kids are after school--
would end the after-school program. It would take away student
financial aid, Pell grants, from 1.5 million college students
and eliminate other college grant programs.
Maybe your side of the aisle is not interested in defending
a budget which would throw more than 200,000 Americans out of
their homes by cutting affordable housing programs by more than
$6 billion or taking away hot nutritious meals from vulnerable
senior citizens by cutting the Meals on Wheels program. And my
guess is that many members of this committee actually do not
want to do that, but that is what is in the President's budget.
Or maybe to talk about a budget which would force over 6
million Americans to go cold in the winter by eliminating the
Low Income Home Energy Assistance Program (LIHEAP) or throw
some 90,000 kids off of Head Start by cutting that program by
more than 10 percent.
But, Mr. Chairman, while the Trump budget may be
indefensible, that is not an acceptable excuse for Republicans
not to hold any hearings on it or to work with us to come up
with a different and better budget. That is our job, and we
should accept that responsibility.
Further, Mr. Chairman--and this is really quite
incredible--just yesterday, as you know, President Trump sent
out a tweet--we are a Government by tweet--which threatens to
shut down the Federal Government. Mr. Chairman, how many jobs
would be lost if President Trump follows through on his threat?
How many disabled veterans would not receive their benefits on
time? How many families would not receive health care, child
care, education, or nutrition assistance? What would happen to
our military? How many people could be placed at risk?
Mr. Chairman, I think we need to make it clear to President
Trump that we will not under any circumstances shut down the
Federal Government and endanger the lives and economic well-
being of millions of Americans.
Now, Mr. Chairman, when Donald Trump campaigned for
President, he told the American people that he would be a
different type of Republican. He said that he would stand up
for the working class of this country and take on the political
and economic establishments. That is what he said.
Unfortunately, that is not what he did.
President Trump said that he understood the pain that
working families across this country were feeling, and there is
a lot of pain. But when you propose a budget which increases
military spending by $84 billion over 2 years while slashing
program after program that addresses needs of working families,
of the elderly, the children, and the poor, you are not
addressing the needs of the working class of this country.
Mr. Chairman, at a time of massive wealth inequality--this
is unbelievable--Trump wants to repeal the estate tax for
people who have over $5.4 million in wealth, a $353 billion tax
giveaway to the richest two-tenths of 1 percent. And I would
like the American people to listen to this: At a time when the
middle class is in decline, 43 million people living in
poverty, what Mr. Trump wants to do is give a tax break to the
Walton family of Walmart, the wealthiest family in America, of
up to $53 billion. We cannot afford Head Start, child care,
after-school programs, but we can afford to give $53 billion in
tax breaks to one family.
The Koch brothers, our good friends who fund much of the
Republican Party, would get a tax break, their family would get
a tax break of up to $35 billion.
Sheldon Adelson, who only put $5 million into the
President's inaugural program, will get a tax break of up to
$12.6 billion.
And, coincidentally, last but not least, Donald Trump's own
family will get a tax break of up to $4 billion.
Mr. Chairman, I think those are issues that we might want
to discuss right here on this committee, and I hope and look
forward to the opportunity of doing that. Thank you.
Chairman Enzi. Thank you, and we will have that opportunity
when the President's budget, actual budget comes out. We will
have hearings on it. There are a number of things you mentioned
that I would like to talk about, but I feel obligated to get
the testimony from our folks that have given some of their time
to present their ideas, and I think we can all agree that
Congress has to address economic growth as an integral part of
the quality of life for all Americans. So we need to consider
how growth affects the Federal budget. As CBO has pointed out
in their reports year after year, the more we overspend, the
less flexibility future policymakers have for the economic
downturns. I am looking forward to hearing from our panel this
morning on the importance of getting our private sector growing
again.
Our first witness this morning is Dr. Michael Strain, who
is the director of economic policy studies and resident scholar
at the American Enterprise Institute (AEI). Before joining AEI,
Dr. Strain worked in the Center for Economic Studies at the
U.S. Census Bureau and in the Macroeconomics Research Group at
the Federal Reserve Bank of New York.
Next is Dr. Bill Dunkelberg, who has served as chief
economist for the National Federation of Independent Business
(NFIB) since 1971. Dr. Dunkelberg is also a professor of
economics at the School of Business and Management at Temple
University and served as the dean there from 1987 through 1994
and as director for the Center of Advancement and Study of
Entrepreneurship.
Our third witness is Dr. Jeffrey Sachs, a university
professor and director of the Center of Sustainable Development
at Columbia University. Dr. Sachs served as the director of the
Earth Institute from 2002 to 2016, and prior to joining
Columbia, he spent over 20 years as a professor at Harvard
University.
We look forward to receiving the panel's testimony. I want
to thank all of you for joining us to share your expertise on
this important subject.
When the vote starts, at the completion of one of the
testimonies we will run over and vote and then come back so
that everybody has the opportunity to hear the testimony.
With that, welcome, Dr. Strain, and you can begin.
STATEMENT OF MICHAEL R. STRAIN, PH.D., DIRECTOR OF ECONOMIC
POLICY STUDIES AND RESIDENT SCHOLAR, AMERICAN ENTERPRISE
INSTITUTE
Dr. Strain. Thank you, Mr. Chairman.
Chairman Enzi, Senator Sanders, and members of the
committee, thank you for the opportunity to be here today to
discuss economic growth. Few issues are as important to the
future of the United States. It is an honor to be here.
A growing private sector economy is central to the health
of society. Economic growth drives increases in living
standards and quality of life. This is perhaps most easy to see
over long periods of time. Compare life 200 years ago with life
today. Economic growth facilitated dramatic reductions in child
mortality rates and poverty rates, increased access to
education and medical care, increased life spans, and the
amenities of the modern world we enjoy today.
It is tempting to say that at this point the Nation is rich
enough, that the economy is large enough, and that we need to
worry more about redistributing wealth and income than about
creating them. But imagine if our forefathers in 1817 had said
the same. We owe our posterity in 2217 what we received from
our forefathers, just as we owe our children and grandchildren
and ourselves.
Of course, some level of redistribution is clearly
desirable. Economic growth allows for redistribution to be more
palatable by increasing the resources that can be
redistributed. More generally, economic growth is important
because it mitigates distributional conflict. Without growth,
the only way for me to do better is for you to do worse. With
growth, I can do better and you can stay the same. Ideally, of
course, growth allows you and me both to do better.
Public policy can affect the growth rate. A specific goal
of labor market policy should be to increase the rate at which
adults participate in the workforce. This would increase the
economy's overall growth rate, among other benefits.
It is reasonable to argue that labor market regulation is
suppressing the workforce participation rate, for example,
minimum wages. Economists debate the employment effects of
minimum wage increases, but in my view the balance of the
evidence suggests that by regulating wages Congress is
suppressing employment. And raising the Federal minimum wage to
$12 per hour, as has been discussed, would, in my view, have a
non-trivial effect on employment.
Beyond regulation, current labor market policies should be
reformed. Two important policies in need of reform are the
Social Security Disability Insurance program and the
Unemployment Insurance program. Between 1989 and 2009, the
share of working-age adults receiving SSDI benefits doubled, at
the same time that workplace safety increased, service sector
employment increased, and the quality of health care increased.
A just society makes provision for disabled workers, but it
seems clear that the structure of SSDI is unnecessarily
discouraging workforce participation and has become for some
workers a permanent unemployment program.
Unemployment insurance could also be reformed to increase
workforce participation. The long-term unemployed who live in
local labor markets characterized by high unemployment and low
employment could be offered financial assistance to move to a
stronger local labor market. This would likely lead to shorter
unemployment spells, possibly to fewer Federal expenditures on
unemployment insurance, and to fewer workers leaving the
workforce altogether. Other safety net programs should be
evaluated to see whether pro-work reforms could help
beneficiaries get back to work.
Public policy should increase the workforce participation
rate by increasing the number of highly skilled immigrants
allowed to live and work legally in the United States. In
addition to increasing the growth rate of the economy through
increasing the growth rate of the labor force, immigrants start
more businesses than native-born workers. New businesses create
jobs, strengthening the economy. And occasionally we hit the
jackpot and an immigrant starts a Google.
Public policy should increase workforce participation
through increasing the generosity of the earned income tax
credit (EITC). The EITC is an earnings subsidy. Because it
supplements earnings, it only goes to households that work.
Because eligibility is conditioned on household income, the
subsidy only goes to low-income households. Previous expansions
of the EITC have been shown to significantly increase the
workforce participation rates of targeted populations.
Expanding the EITC again would, I believe, have similar
employment effects.
In addition to increasing workforce participation, public
policy should increase the productivity of the workforce
through increasing the skills of workers. Work-based learning
offers a promising path toward increasing skills. Such programs
combine on-the-job training with classroom learning, often at a
community college. In the case of apprenticeships,
participating firms post vacancies and hire an apprentice only
if the hire makes business sense. In this way, the market is
determining where workers get trained and the content of on-
the-job training. Having the market determine the content of
training is much superior to traditional, Government-run
training programs.
In addition, international trade allows for specialization
here at home, which increases productivity. The United States
should maintain a posture of openness toward trading with other
nations and should not embrace protectionist policies. The
Congress has a critical role to play in this effort.
Finally, I would like to highlight the importance of
corporate tax reform. It has been encouraging to see some
progress on that front, and that would certainly help the
growth rate and should be at the top of the list of policies
Congress is considering. And I would like to echo the Chairman
in pointing out the importance of entitlement reform to get the
debt under control. A growing Federal debt is certainly an
increase to long-run economic growth.
Thank you.
[The prepared statement of Dr. Strain follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Enzi. Thank you, and the vote has started, so we
will have a recess until 5 minutes after 11:00. Then we will
resume again. But if you can hurry back, we may be able to
start quicker than that to hear the other two testimonies. I
apologize to the witnesses. We do not have control over the
votes. They sure mess things up. It is like it was something
important to do.
[Recess.]
Chairman Enzi. We will resume the hearing, and now we will
hear from Dr. Dunkelberg. Thank you for your patience in
waiting for us to do our vote.
STATEMENT OF WILLIAM C. DUNKELBERG, PH.D., CHIEF ECONOMIST,
NATIONAL FEDERATION OF INDEPENDENT BUSINESS
Dr. Dunkelberg. Thank you, sir. I appreciate the
opportunity.
Just a word about the National Federation of Independent
Business (NFIB). NFIB is the Nation's leading small business
representative. We represent our 325,000 member firms in
Washington and in all 50 States. We do surveys, regular surveys
and special interest surveys, of a sample of our 325,000
members to find out what is going on in the part of the economy
that is not covered by the financial news on TV, but it is a
very, very important part of that economy. So we have done that
for 42 years, and I have been fortunate enough to be directing
those surveys for that long, so I am still alive and well.
I think that the topic is very good. You talked about the
budget issue. Well, obviously, to support the budget we need
revenue, and the revenue comes from the private sector. We, of
course, all like the Fortune 500. They get a lot of attention.
But we have to keep in mind that half of the private sector
jobs are at small businesses. Census says that 90 percent of
the employer firms in the U.S. have under 20 employees. So
small business collectively is very big business. There are 28
million firms of various sizes out there that are basically
characterized as ``small businesses.'' So when you want to talk
about revenue and revenue base, these people are very
important.
Now, if I could have Slide 1 put up there, if you look at
the last 10 years, you can see that we have really had a subpar
recovery. This is the Index of Small Business Optimism. It is
basically based on 10 questions, forward-looking questions,
like: Do you plan to hire, make capital expenditures? Do you
think the economy is going to be better or worse? Those kinds
of questions. And you can see that we have had a terrible time
in this recession, much worse than the 1980-82 period. Optimism
is back. And then you did notice that, starting in November,
optimism soared, really jumped up. We hope that that will
continue and that will translate into spending because that, of
course, will give us GDP growth and employment growth that will
improve revenues. A healthy economy means healthy revenues for
the Government, and that is what we would like to see.
[Slide 1 follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Now, we ought to ask ourselves: Well, why did we get this
subpar performance from this half of the economy? It did not do
well at all. Obviously, it dragged down the overall GDP
numbers. If you think about averaging the big firms with the
little firms, the little firms were not performing up to par.
And we asked them why. We said, ``What are the most important
issues that you have?'' Something we have done every 4 years
since 1982.
The top issues were: one, the cost of health care
insurance; number two, the cost of complying with all the
regulations that we have; and, number three, taxes on our
income, which is the only place we get capital to grow. We do
not issue stock. We cannot go out and borrow. We cannot do any
of those kinds of things. We have to keep in mind that dollar
for dollar, every dollar we spend on compliance is a dollar we
cannot spend on investing in growth of the firm and in
productivity-enhancing equipment and knowledge and technology.
And that is not happening.
So on the taxes side, you know, the profits are the source
of capital that we have, and the things that really are the
most bothersome things that make the top 10 list are the
complexity of the Tax Code--you have got to pay a lot of money
just to get help to file your taxes. Most of us probably do--
and, of course, frequent changes in the Code.
So what we forget when we look at all of this regulatory
stuff is that the most important asset these firms have is the
time of the entrepreneur, the owner. And the more of that time
we divert into all this compliance time, the less time they
have to think about growing the firm and financing the capital
expenditures that we need to have growth.
If I could have Slide 2 up there, we all know the growth
equation. Basically, growth is the function of productivity
gains and population growth. So population growth is going to
do what it is going to do. Productivity--that is the issue that
we have to really worry about, and that is a function of, of
course, capital expenditures, getting new knowledge, new
techniques, investing in all these kinds of things which
improve the output per worker hour, and that is productivity,
and that is the thing that makes it possible to pay workers
more, is when they produce more per hour.
[Slide 2 follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
So if you look at the sentiment we have had, the chart we
just looked at, we have not been optimistic about where the
economy is going to go for 10 years. And when you have a
pessimistic view about the future, you do not bet on the
future. You are not going to put your money, your own personal
money down when you are not really sure that the economy will
support it. As you spend money, invest in growth, you need to
have customers come and grow, and, of course, that will help
create jobs.
So we really need confidence, which we now seem to have,
and then, of course, we need incentives. And one way to get
incentives, of course, is to remove disincentives, and the
regulatory structure that small business owners face not just
at the Federal level but also State and local are impediments
to growth.
So tax reform is certainly one of the things that we would
like to see. It is very complicated. I do not have to tell you.
We have all seen the stories about how high the stack is and
how complicated it is. It costs a lot of money. It would be
really nice to have a simple Tax Code where we all paid the
same tax rate, we all knew what it was. Over the 40 years that
I have been collecting data from NFIB members, we have seen
them switching their status from self-employed or single
proprietorship to some kind of an incorporated thing because
the tax rates were different. And it is just a waste of
resources for us to be jumping back and forth and changing our
status, getting an attorney, doing all that. Why? Let us just,
you know, have a simple Tax Code that we can understand and we
can all believe in and not waste our money doing--
simplification would be great.
We would like to see a set of budget priorities that make
sense to us. You know, you need us to grow, we need to grow,
and so we need to see a sensible set of budget priorities which
will improve the regulatory process. We would like to see more
cost-benefit analysis. That is not done except in a few cases.
If you look at a small firm out there, they can have half a
dozen different regulators. None of those regulators is looking
at what the other regulators are doing. None of them is really
asking the question: Is this regulation I am going to impose
going to really be beneficial compared to the cost? Because
they do not really worry about the costs they impose on the
firm. And so if you want to get something done, there are two
ways for the Government to do it. One is to tax us and then use
the money to get something done. Or they can make us do it, and
that seems to be a popular strategy.
So when you talk to our people, a third of them say that
the cost of compliance is just one of their biggest issues. It
costs an awful lot of money, and as I pointed out, dollar for
dollar, every dollar we spend on compliance is a dollar we
cannot spend on new equipment, on a new truck, on new whatever
we need to improve worker productivity.
Half of them worry about the volume of regulations. There
are so many. They say they spend way too much time, have to
spend way too much time trying to figure them out. For one in
five, they said they just really cannot figure out what the
regulation is requiring them to do and how to comply with it.
So all this entrepreneurial time is being wasted by really a
not very effective set of regulatory policies, and we really
need to straighten that out.
So when we get a change in the management team, obviously,
we liked it. You saw the first chart with the index spiking
from below 95 reading, which is 3 points below the 40-year
average, to 106 in the last few months--105, 106. We have not
seen that since 1983 when we came out of the last recession
that had 10 percent unemployment rates. So this is an
opportunity for us to get something done. These people are
ready to go. They have got the energy. They have been kind of
sitting around for the last 8 years with slow growth. We have
certainly had a very rough time. We lost, you know, tens of
thousands of firms in the 2008-09 period, and now, you know, we
are there, but we need a reason, and if we have it, why, if you
will give it to us, I think we can really--so we are prepared
to grow, produce jobs, and produce revenue. We just need to see
action from Congress to remove the disincentives, give us some
incentives, and stop using so much of our capital complying
with regulations of doubtful value in so many cases. So we
really need to have a hard look at that.
Government cannot create new jobs, right? Only the private
sector can do that. The Government can help by getting things
out of the way. There are certain areas in the economy where we
do not think the markets work as well as they should and the
Government has to intervene there. But if Congress will allow
the private economy to grow, I think we can help you a lot on
the budgetary issues.
If I could have my last chart here, this is a result of our
last 4-year survey. It was done almost a year ago now; it was
early 2016. You can see those are our top issues. The one
interesting thing about this chart is that, for the first time
since 1982, when Paul Volcker was at the top of the list,
right? Credit availability and so on was the top. This is the
first time we have seen a real kind of business problem show
up. In the top 10, finding qualified workers is a real issue.
That is not something I think the Government should be dealing
with. It just is something they told us was their major
concern. But we are happy to have you address these issues, and
then we will get busy and help you get the revenue you need to
get the budget done.
[Slide 3 follows:]
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[The prepared statement of Dr. Dunkelberg follows:]
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Chairman Enzi. Thank you.
Dr. Sachs.
STATEMENT OF JEFFREY D. SACHS, PH.D., UNIVERSITY PROFESSOR, AND
DIRECTOR, CENTER FOR SUSTAINABLE DEVELOPMENT, COLUMBIA
UNIVERSITY
Dr. Sachs. Mr. Chair, thank you very much, and Senators, it
is a great honor and privilege for me to be here. And I want to
say that the decisions before our country on the budget are
probably the most significant in at least a generation, if not
more. We are in a very precarious situation as a Nation, and
the budget being out of alignment with our national needs is a
very, very important part of this reality.
We are in the midst of very deep structural change, and we
have not addressed that in our country as a society or
politically in an appropriate way. Our country has become two
countries, and I am sure that you know that among your
constituents.
If you have a bachelor's degree or better, you are doing
well in this country. In fact, incomes at the very top are
soaring. The restaurants are packed. The entertainment is
booming. If you have a high school degree or less, you are
suffering, if not literally dying in this country. We alone of
the high-income countries have soaring mortality of white, non-
Hispanic population, middle-aged, opioid epidemics, suicide,
depression, falling wages, lack of attachment to the labor
force. And every one of your constituents, constituencies,
every State, every congressional district, has this divide. And
the divide is widening.
And there are deep reasons for that. I had a look, Mr.
Chair, at your State, our national producer of coal. Coal
production more than doubled from the 1980s until today, but
the employment in the coal sector fell to one-sixth of what it
was because you had the biggest automated machines, the
highest-tech mining imaginable. There are no jobs in that
industry. Very, very few, about 6,000 left in your State, I
believe, and nationwide a tiny number, because basically we
have gone to autonomous mining, autonomous vehicles, autonomous
driving in the mine sites. And the remaining jobs are going to
disappear as well.
Whoever owns that stuff might be doing very well, so the
stock markets are booming, profits are high. The number of
billionaires we are creating is beyond imagining. I live in
their neighborhood. I see what it means in Manhattan. It has
never been better.
But if you just look a little bit farther along, we have a
disaster brewing at the bottom half of our country, and it is
showing up--can you imagine America with rising mortality rates
of middle-aged Americans, with a suicide epidemic in this
country? We never have seen anything like this in a century.
Now, the other problem we have is that our public debt is
soaring because, in my view, both parties have been
irresponsible in managing the public sector for 40 years. Both
parties have been addicted to tax cuts, and the only argument
is tax cuts for who? Maybe on the Republican side it is for
companies or for high tax brackets. On the Democratic side, it
is for working-class Americans. But nobody wants to pay taxes.
Of course not. But how can you run a Government without
revenues?
And so just in the last decade, the public debt as a share
of GDP doubled--unbelievable--from about 37 percent of GDP to
75 percent now. It will be 77 percent before the end of this
year. And if you look at the CBO baseline, which I think is as
good as any, we are on our way to 140 percent of GDP on our
current baseline because we are getting older, because of
health care costs, because we have burdens. And then we have
proposals for more tax cuts. I cannot think of anything less
timely, more weird, except for the greed of the top--the
richest people in this country. I do not know what they want to
do with their extra billions, but absolutely from a public debt
point of view, this would destroy our budget. And so this is
why this is such an absolutely fundamental crossroads for us.
Let me say just very briefly a couple of points.
Tax cuts are not useful when they open up big budget
deficits, reducing national saving rates, and basically burden
the future generations. So it is an attack on young people if
these proposals go through. It is just a war on the young who
are going to have a hard enough time finding jobs in this
automated economy.
Second, please let us get out of our minds the typical,
what used to be true--I used to teach it at Harvard for 20
years--that growth and job creation is the same thing. It is no
longer the case. Smart machines, artificial intelligence,
robotics mean that growth and jobs have been separated. We can
have growth that is absolutely job-destroying now, and we are
seeing a lot of it. So the idea that growth means jobs means
income of your constituents, it is no longer an automatic
linkage. And that is why the share of labor and national income
is plummeting right now, and the share of income to the wealth
holders is soaring right now, because this is a deep,
technological transformation that we are living through right
now.
The third point I want to emphasize is the difference of
jobs and decent jobs. You can always create jobs if people are
working at basically unlivable incomes, have no benefits,
cannot cover any of their basic needs. Sure, you can find a job
if the difference of that is starvation. Jobs will be created.
Markets are wonderful. They will pay workers almost nothing,
and people will struggle. But what we want is decent jobs. And
for decent jobs, you need decent skills and you need decent
benefits. And in our country, we make a mistake that no other
country makes. We tell the small businesses, ``You have to
provide the health coverage.'' In every other high-income
country, the government finances the health coverage by taxing
people who can afford it, and then the small businesses do not
have to cover the health costs. That is how every normal
country does it except for ours. And so we put this very heavy
burden, and we think that jobs is the point, but what we are
after is decent jobs.
And a final point I want to make is regulation. You know,
there is regulation and there is regulation. And the idea that
deregulation unleashes something, well, deregulation often
unleashes monsters, like when we repealed Glass-Steagall. It
unleashed Citigroup. That was a monster for our economy 10
years later because it was a creation that never should have
been there. It was a gift to a few powerful constituents, and
it ended up creating the calamity of our time.
So I do not personally like to think of regulation as a
category so broad that it is good or bad. It is a matter of
content, and the financial deregulation was a disaster at the
end of the 1990s. We know the history of it so thoroughly
because we have examined every nook and cranny of it since the
2008 financial crisis. We should not think of deregulation as
some job spur, as a gimmicky slogan. We should think about what
rules do we want to have a decent society, one that is creating
safety for people and livable incomes and decent opportunities.
To conclude, if I may, Mr. Chair, tax cuts and anything
that gives up net revenues right now is marching our country in
a disastrous direction. It is so untimely, it is unbelievable.
We do not have the revenues we need to run the Government as it
is right now. We do not have the revenues we need to run a
decent country as it is right now. And to give it up on some
slogan that we are going to get growth out of it is a nightmare
in my mind. It has no economic merit, it will create nothing
good for our country, and it will basically tell young people,
``There is no hope for you.''
Thank you.
[The prepared statement of Dr. Sachs follows:]
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Chairman Enzi. Thank you. I thank all of you for your
testimony.
We will begin with the questions now. I think everybody
understands the order that we go in with the questions, making
one slight change, and that is, I am going to relinquish my
time to Senator Johnson, who I know has another committee that
he needs to be at.
Senator Johnson. Thank you, Mr. Chairman.
I was in manufacturing for 30-some years, and certainly
what I found out, what I needed to grow my business and create
really good, high-paying jobs was I needed labor and I needed
capital. And so I think Government policies, I mean, to make it
simple, we ought to do everything we can to make sure we have
enough labor, and I am actually going to talk about a guest
worker program governed by the States to make sure we have the
labor in the States in the right industries. And we have to
have capital. Two things that obviously affect our stock of
capital are overregulation and overtaxation.
But I want to use two analogies, a little bit talking to
Dr. Sachs' point. Would anybody argue that America would be
better off if we had the same composition of our workforce as
100 years ago where so much of American labor was directed
toward growing food? Because of capital, because of
productivity gains, machinery, we have a much smaller share of
Americans producing the food that feeds the world. That is a
good thing. The same thing is happening in manufacturing today.
The other analogy or the other anecdote was Milton Friedman
visiting China, when he saw, you know, people digging a ditch
with shovels. Why aren't they using equipment? Well, it is a
jobs program. Well, then give them spoons.
So I want to talk about, first of all, taxation. Dr. Sachs,
I agree with you. I am highly concerned about the deficit. I
think that is very harmful in terms of economic growth. If you
are a family and you are in debt over your head, you cannot
grow your economy. You are paying for the basics and then
servicing your debt. Well, the same thing is true on a national
basis.
I just gave a short summary to Senator Wyden about my
corporate tax reform, which would tax corporate income at the
ownership level. You know, Dr. Dunkelberg, 81 percent of
American businesses are pass-through entities. It would be a
true Warren Buffett tax, by the way. It would eliminate double
taxation of dividends. It would allow more efficient allocation
of capital. I do believe there is some growth-oriented aspects
to it; 100 percent expensing, I want to talk a little bit about
that, to get the different opinions on that. It could be
revenue neutral based on the economic activity it provides. So
I am hoping Senator Wyden--I have given that to an awful lot of
my fellow Senators--will take a look at that as one method of--
and here is what we ought to be talking about, instead of tax
reform, tax simplification and tax rationalization, because I
am highly concerned about the deficits.
There is a debate whether 100 percent expensing is really
pro-growth or would we be better off lowering tax rates, you
know, if we are going to see a static score that is going to
lose revenue but we are going to hope to regain that revenue
through economic growth.
I just want to ask the panel: What is better, 100 percent
expensing so that manufacturers, if they are encouraged to
invest in equipment, have that capital and can grow their
business, or is cutting tax rates better? I will start with
you, Dr. Strain.
Dr. Strain. Well, thank you, Senator. I think the devil is
in the details on a lot of these things. I think expensing is a
good idea. It is certainly worth discussion and worth further
consideration. It creates some issues. You know, what happens
if you purchase capital equipment that is well in excess of
what your tax revenues are? You know, are we comfortable with
refunds and things of that nature? But I think moving the tax
system away from a tax system that taxes savings, that taxes
investment, that taxes income, and toward a tax system that
taxes consumption is good public policy. I think it will make
the economy bigger. I think that along the path to that bigger
economy we will have increased economic growth.
How that stacks up against tax rate reductions I think
depends a lot on how the tax rate reductions are financed. It
depends a lot on how large the tax rate reductions are. You
know, on the corporate side, I think we should be looking at
lower tax rates. I think our corporate tax rate is----
Senator Johnson. We are just simply uncompetitive. I mean,
if you benchmark--I am running out of time. I did want to get
to the kind of labor part of this. And, Dr. Dunkelberg, I am
interested in your latest survey that says locating qualified
employees is now for the first time since 1982 in the top 10
concerns. Not one manufacturing company I have visited in
Wisconsin in 6 years can hire enough people. I would fault two
things. We tell all of our kids, ``You have got to get a 4-year
degree,'' which implies, oh, factory work, that is not good
enough for my kid, as well as we pay people not to work. There
is an extremely good article written by Nick Eberstadt in
Commentary magazine going through this dramatic, drastic
reduction in labor force participation rate, talking about, for
example, our Government policies that pay people not to work. I
would recommend everybody read it.
But can you just talk about how that is a really big
problem, severe problem for especially small businesses? It is
not that we do not have enough jobs for people. We do not have
enough workers.
Dr. Dunkelberg. That is right. Just a quick comment on
expensing. You know, if we do not get rid of the concept of
depreciation, then really, you know, over time I either can
write off 100 percent of my capital asset now and really lower
my taxes, right, if I expense it, or I spread it over some
period of time. But if you think about----
Senator Johnson. It is just a timing difference.
Dr. Dunkelberg. Yeah, I mean, it is really--expensing is
simpler. Let us go for that.
Senator Johnson. I like that.
Dr. Dunkelberg. Because we really like that idea.
Expensing, we do not have to do the bookkeeping and accountants
do not have to do it.
On the employment side, if you look now at the detail in
our survey, you know, the highest percentage of our firms are
complaining about not finding qualified workers is in
construction. Then, of course, the number two group is
manufacturing, no surprise, and then professional services and
then on down the list.
We asked a couple years ago--we did a special survey and
said, ``Well, what makes people unqualified?'' And, of course,
about 50 percent said typically it is you do not have the right
skill set. That makes sense. But what was astounding to us is
about 20 percent said lack of social skills, poor appearance,
unreasonable wage expectations, you know, take a bath. All
kinds of stuff that these people could fix if they wanted to
and did not have some other way to support themselves, they
could fix and get a job. A lot of these people apparently are
looking for a job because they have to to qualify for, you
know, the other kinds of support that they are getting.
So, you know, when we are paying people not to work, make
it comfortable enough for a person that does not have a lot of
ambition to work, that is the problem. So you do not have to
have a college degree to make a lot of money. The last 2 weeks
reminded me, my electrician makes a ton of money, and my
mechanic makes a ton of money. I mean, there are so many jobs,
and we have made a mistake of--you know, the baby boomers, we
probably did it--saying go to college, take anything you want,
get a degree, and you will be happy. Well, not a lot of jobs
for art history majors at the undergraduate level out there. So
we really need to focus on that.
In terms of attracting people and solving this problem, we
are doing it the best way we can. We have record numbers who
are raising worker comps, so the way the market solves that
problem is try to offer more money to get you to come. But, of
course, there are all kinds of other complicating issues,
including are you where the jobs are and so on, that are
slowing that down. So we have lots of openings. We would love
to hire people, and we are going to figure out how to do it.
Senator Johnson. Thank you.
Thank you, Mr. Chairman.
Chairman Enzi. Time has expired. Senator Wyden.
Senator Wyden. Thank you, Mr. Chairman.
First, a question for you, Dr. Sachs, with respect to this
tax proposal, because there is much that troubles me about this
Republican proposal that came out last week. But I am
particularly concerned about one feature of the proposal, and I
want to kind of walk you through it because it strikes me as a
prescription for more inequality in America, and I want to get
your reaction.
Right now, the mom-and-pop small business that operates
locally pays taxes as an individual. That is how it works for
them. It is called ``tax pass-through.'' The new Republican tax
proposal creates a giant loophole for the super wealthy to
abuse pass-through policy so, in effect, they can avoid paying
their fair share of taxes as well as shortchanging Social
Security and Medicare. The way this works is that they can, in
effect, recharacterize their salary income as investment income
that gives them a lower rate than lots of working people would
have, and at the same time lets them skip out on their fair
share of contributions with respect to Social Security and
Medicare.
I would be interested in your reaction because my take--and
I have gone through this now several times as the Ranking
Democrat on the Finance Committee--is this really is a
prescription for more inequality in America.
Dr. Sachs. Everything we know, Senator, about the scoring
of these proposals is that, though we have not seen all the
details of the White House proposals, what we have seen and
what, I would say, the consensus view is that the overwhelming
benefits would go to the top of the income distribution at a
time when we have more income inequality than at any time in
our modern history. So the specific provisions you mentioned,
the kinds of loopholes that are hidden in these proposals, but
the whole point of deep cuts of the corporate tax rate and the
personal tax rates by themselves would overwhelmingly accrue to
people who have done very well at a time when most Americans
are facing income stagnation or decline.
I think the discussion we just had about jobs is very
anecdotal but not correct, and this is important to understand.
High school graduates in this country have had falling real
incomes now for more than 30 years. That is the overwhelming--
you can find maybe your plumber is doing better, but if your
advice is do not worry about that college degree, there are
plenty of jobs out there, this is absolutely false. We have a
divide in this country that is serious, real, and unaddressed.
And the way we have handled it is today it was reported that 70
percent of our kids from high school are going on to college,
which is a record, which is great. But a large proportion of
those will fail because they will end up with student debt,
crushing debt, and they will not be able to continue, and they
are not finishing their 4-year degrees.
And so we have created a mountain of $1.2 trillion of debt
on young people who do not finish the degree, cannot find a
decent job, and end up getting crushed for decades. This is not
the right advice, with all respect.
Senator Wyden. Let me see if I can get another question
that builds on your comment, Dr. Sachs, for you and your
colleagues. So Senator Johnson said that people he meets--and
there is a study I guess he is citing that people do not want
to work because somehow they are being paid not to work. I can
tell you, in my State people overwhelmingly want to work, and
the big challenge--and I think it relates to something I have
talked to NFIB about--involves workforce issues and
particularly technology and automation. Those are the driving
factors in this workforce challenge. When we go out and meet
employers and they say, ``I have got to have workers,'' and the
workforce needs have changed dramatically because of technology
and automation.
So why don't any of you who has a fresh idea in terms of
how we ought to tackle this, because we are looking at this on
the Finance Committee and, obviously, here in the Budget
Committee, we are really open for fresh ideas because that is
the intersection, workforce and technology, for people to
really go up the path to get a high-skill highways job. Anybody
have a fresh idea?
Dr. Sachs. If I could just quickly come in, Senator, our
manufacturing output is rising in this country. We have a
strong manufacturing base, and employment has declined from 19
million to 12 million. Those jobs are not coming back because
we have a productivity soaring through--especially now through
automation and artificial intelligence. And the kind of jobs
that are being created in that sector are skilled jobs, highly
skilled jobs. But if you have a high school degree, you will
not find decent work except if you are extremely lucky. And we
will have two countries, which is what we have right now, and
we need to help kids complete their education because we are
the only country that piles on $1 trillion of debt on the back
of our young people rather than paying for the tuition. That is
the first point.
And, second, we need to take on through the budget burdens
like job training or like health care that are now on our
companies that cannot afford them, and so we need absolutely a
budget that is able to pay for that. We are going in exactly
the opposite direction.
Senator Wyden. Let your colleagues take a crack at it. A
fresh idea with respect to technology and automation, the
driving factors in the workforce.
Dr. Dunkelberg. Well, you pointed out that the big issue is
kids coming out of the high school. Other countries do have
different plans to get kids trained in the kinds of things that
we need.
I remember when I became dean of the business school at
Temple. We did not have any computers, and we really should
have had, so we had to do computer labs and so on. And then I
said to the faculty, ``You have to use computers in the
curriculum,'' and they were, like, shocked. But, anyway, they
did not know how because they were all older people who did
not--you know, had not been brought up--so one of the problems
we have in the high schools, we are finding that doing
financial education as well, and nobody can teach it. But also
on the technology side, it is really hard to get that switched
over because the people there need to be trained. You know, the
students are trainable. They are there. But the people in the
schools resist this kind of thing. They do not want to change.
They do not want to do it because that is hard. So we really--I
do not have a fresh idea how to make them do it. I gave my
staff a free computer if they would do it. You know, that is a
budget problem I had to deal with.
So we have to give them the incentive to change what they
are doing, because they can.
Senator Wyden. The Chair was gracious enough; because of
the importance of this question I will not talk, Dr.
Dunkelberg.
Dr. Strain. Senator, I certainly think it is a very
important question. You know, right now we have basically two
tracks for young people who are in high school. You can
graduate high school and go to college, or you can graduate
high school and enter the workforce. We need a third option,
which is to graduate high school and to get some training and
build some skills beyond what are taught in high schools but
that do not involve a traditional 4-year college experience
where you spend time as an art history major or doing whatever
else.
Other countries are able to do this. If you look at
Germany, for example, they are very successful with
apprenticeship programs. If you look at Great Britain, they are
very successful with apprenticeship programs. I talk a little
about this in my testimony, in the written testimony, for a
paragraph or two. Work-based learning as a postsecondary option
that builds credentials, that involves classroom time, but that
also involves on-the-job training to get people into
occupations that are skilled--not as skilled as being a brain
surgeon, but more skilled than being a cashier--that I think is
of critical importance.
Senator Wyden. Many thanks. Thank you, Mr. Chairman.
Chairman Enzi. Thank you.
Senator Perdue.
Senator Perdue. Thank you, Mr. Chairman, and thank you,
guys, for being here.
I am really confused. I think the evidence is there that
the connection between bigger Government and more equality has
been disproven not just here in the United States, but in other
mature Western economies, over time, not just in the last
decade, over the last 100 years. I would argue that the Great
Society was our attempt at a bigger Government solution to
something we all wanted to solve, and that is poverty. And yet
the poverty rate today is exactly the same as it was in the
1960s.
So I am really confused at the debate here about whether
growth is good or bad. The connection between growth, job
creation, and income is a precept that I personally subscribe
to.
Now, I recognize that when you are coming from the ag
industry to an Industrial Age to an Information Age--and the
cycle of that change is much more rapid today than either of
those other two changes, but I have a hard time believing that
making a buggy whip survivor--or a company survive because it
has X number of jobs today and if we bring in an automobile
manufacturer and that is going to create fewer buggy whip
makers, I do not get that logic in terms of solving the growth
problem. And the reason you want growth is to keep people
working, let people have a viable way to provide for themselves
inside our Government. But let me--or inside our economy. But
let me highlight a couple concerns I have.
This Federal Government has grown from $2.4 trillion to
$3.9 trillion under the last two Presidents--one Republican,
one Democrat. And yet we have got nothing to show for it
basically except a burnt-up military after two wars we
perpetrated and a dead economy right now.
The last 8 years we have generated a recovery that is the
worst in 70 years. We have allowed 4 million women to fall into
poverty. This is not a formula for success in my mind, and both
parties are guilty.
But I want to talk about the debt, and this is the question
I am getting to. I argue that it is $20 trillion. I actually
believe that we actually do owe that money to Social Security
and Medicare. So when you guys talk about it being 70 percent
of GDP and, you know, $14 trillion, that is wrong, in my
opinion. The total debt is approaching $20 trillion. I have a
debt clock in my office, and it is going to turn any day now to
$20 trillion. And we know right now that over the next decade
the baseline budget we have that both Democrats and Republicans
have authored will add another $10 trillion to that debt.
We have heard people tell us that we cannot tax our way to
solve that. We have heard people in this room tell us we cannot
cut our way to solve that. And we have also now heard people
tell us that we cannot grow our way out of here.
My question to all three of you, very quickly, is: What are
the three things that you would do with regard to this debt
crisis as it relates to growth and the well-being of our
citizens to, within that, help solve this debt crisis? Which,
by the way, all of our discretionary money today is borrowed,
by definition, because of the size of our mandatory side of the
equation. So just be very brief. I have got about 2 minutes
left. I dedicate the rest of it to you guys.
Dr. Strain. Yeah, thank you, Senator, and I agree with you
about the importance of the debt.
The first thing I would do is get our entitlement programs
under control, Social Security and Medicare, middle-class
entitlement programs.
The second thing I would do is try to reform our health
care system in such a way that there is downward pressure on
costs. And if you look at what is driving increases in the
debt, those really are the two main factors.
Dr. Dunkelberg. Well, I think the best measure of the
burden of Government, you know, the tax burden is really the
Government budget plus all the regulatory stuff that we do not
measure very well. I mean, I think you have to ask yourself,
isn't Government really too big and doing the wrong things? And
so we really are going to depend on you to ask those questions
and get answers from us and streamline what the Government is
doing. It is wasting a lot of resources.
Senator Perdue. So the model right now, we are about a
little less than 18 percent of our GDP as the Federal
Government. You know, European nations went as high as--some 30
percent, some a little higher than that. Is the argument today
that we are at 18 percent, do we need to be at 25 percent? I
mean, what is the question? How big is Government going to be?
And then how is it going to spend the money? And every dollar
that the Government spends is a dollar that is sucked out of
this equation that created this economic miracle in the last 70
years, in my opinion, is innovation, capital formation, and the
rule of law. So that is the question that I have.
Dr. Sachs, do you have a comment?
Dr. Sachs. First, Senator, nobody should talk about trying
to protect the buggy whip industry. The point I am making is a
different one, which is that the nature of economic growth
which expands the pie is also slicing it in a different way
now. So you can have growth, but you are not getting good jobs
alongside it.
Senator Perdue. Great, but isn't that the transition we are
talking about coming out of an Industrial Age into an
Information Age?
Dr. Sachs. Not quite. It is the difference of machines that
can do the job of what----
Senator Perdue. So are you saying that we should stop
technological development and innovation?
Dr. Sachs. No. No, no, no. What I am saying is that when
you have a bigger pie and some are losers of it, you should
redistribute.
Senator Perdue. And how would you redistribute?
Dr. Sachs. First, I would make sure that all our kids can
get the education they need without the student debt of $1.2
trillion.
Senator Perdue. You know, I worked my way through college.
I have to tell you, I am offended by that argument personally.
And I have a lot of good friends who worked their way through
college.
Dr. Sachs. What was the tuition you paid at that point,
Senator?
Senator Perdue. In current dollars?
Dr. Sachs. Yes.
Senator Perdue. About exactly the same at that institution
as it is today.
Dr. Sachs. That surprises me, because the real cost of
tuition----
Senator Perdue. In constant dollars.
Dr. Sachs [continuing]. Has soared.
Senator Perdue. In constant dollars.
Dr. Sachs. Tuition has soared.
Senator Perdue. Agreed. So have wages.
Dr. Sachs. No. No, wages have been stagnant. If you are a
high school grad----
Senator Perdue. Over that long period of time----
Dr. Sachs [continuing]. Wages have been stagnant for 35
years.
Senator Perdue. I was not a high school grad. I had college
education.
Dr. Sachs. For 35 years now. But on your question, so if we
have our mega wealth earners, if we have the Googles and the
Microsofts and the Apples and the Amazons putting all their
profits in the Cayman Islands and Bermuda, where they do right
now, or in Ireland, so they do not pay their taxes, so the
bigger pie has escaped taxation, which is exactly what has
happened. And I can tell every one of those companies what they
have----
Senator Perdue. I would like to have a longer--I am out of
time, but I would like to have a longer discussion about the
corporate tax rate.
Dr. Sachs. Then we cannot fund our Government. But you ask
a very good question, Senator, which is: What tax should we
have? We are the lowest-taxed country, measuring tax as a share
of GDP, of any high-income country.
Now, I spent a lot of time in Germany, in the Netherlands,
in Sweden, in Denmark. The average person there is living
better than the average person in the United States. They have
vacation time. They have guaranteed health care. They have free
tuition. They have 6 weeks off in their summer vacations, paid
leave, because they are taking care of themselves; whereas, we
are letting the bottom half of our country fall to pieces in
opioid epidemics and in suicide and in depression and in
falling real incomes, because no one is taking care of them,
all the benefits are going to the top. We need to tax some of
that income so that we can share it with all of Americans and
help people get the help that they need to be able to survive
this transition.
Senator Perdue. Thank you. I am out of time, but I do want
to make one comment real quick, and that is, if the Government
has done such a great job, then why isn't the VA doing a better
job? And look at what we have done with regard to how we spend
the money solving the poverty issue. That is all. Thank you.
Chairman Enzi. Senator Kaine.
Senator Kaine. Thank you, Mr. Chairman. Thanks to the
witnesses.
You know, I think everybody on this committee, anybody in
the Senate, believes economic growth is very important. If I
could sort of summarize, you do have two sort of different
theories. The Republican position tends to be that you get
growth by less taxes, less regulation. The Democratic position
tends to be that you get growth through better skills, better
jobs, and better wages.
Now, we do not, as Democrats, say taxes and regulation are
irrelevant, and I am not saying the Republicans say skilled
jobs and wages are irrelevant. But we just have a fundamentally
different view about the way to promote economic growth. If it
was less taxes, less regulation, we would not have had the big
bust in 2008. We had a big bust after deregulating and less
taxes, the worst since the 1930s. Deregulation did not help us.
Deregulation hurt us.
There is good agreement on this panel. You have agreed--two
of you have agreed that the earned income tax credit is good
for promoting labor force participation in your written
testimony. I think you all agree that innovation and
creativity, we should do things that promote that. That is such
a strength. You all agree that we in Congress ought to do a
better job of debt management. You all agree on career and
technical education. So there is some uniformity there.
I want to talk about something that this committee hates. I
am like Johnny One Note in this committee. I grew up in a small
business household, helped run a small business. I was a mayor,
I was a Governor. I think a huge drag is uncertainty.
Could you put up Dr. Dunkelberg's list? Here are the 10
things that businesses are concerned about in 2016, small
businesses. Number four is uncertainty over economic
conditions, 25 percent. Number six is uncertainty over
Government action, 26 percent. That is 50 percent uncertainty.
But if you look at the others, cost of health insurance,
what is the premium going to do next year? It is not just the
cost. It is the volatility of the cost. Look at number two,
unreasonable Government regulations, regulations that are being
written, are they going to come out or aren't they? There is an
uncertainty factor there.
Number three, Federal taxes on business income. We have
been talking up here for years are we going to do tax reform or
not. People do not know what tax policy will be.
Number five, tax complexity. Complexity generates
uncertainty.
Number seven, frequent changes in Federal tax laws and
rules. The first seven all have an uncertainty element to it.
Should Congress try to give as much certainty about policy
as we can if we want to have strong economic growth? Does
anybody disagree with me on that proposition?
Dr. Dunkelberg. I will jump in and just say yes. I mean,
again, the time of the owner of this small firm, all 25, 28
million of them, you know, needs to be not spent figuring out
what the tax changes are going to be, not waiting until
December to find out whether we can expense or not, et cetera,
et cetera. None of that. That is bad stuff. It wastes our time,
wastes our valuable resources. And they would be devoted to
much more productive use.
Senator Kaine. And do you generally agree, Dr. Sachs and
Dr. Strain?
Dr. Strain. Yeah, I----
Senator Kaine. We should reduce uncertainty if at all
possible?
Dr. Sachs. The biggest uncertainty we have right now is we
have no fiscal framework for the next 15 to 20 years. We do not
have a vision that the debt is going to remain under control.
In fact, if the President had his way, we would destroy the
budget for a generation to come. And so there is such basic
uncertainty right now that nobody can plan.
Senator Kaine. Dr. Strain?
Dr. Strain. In a one-word answer, yes, I think Congress
should do much more to create an environment of certainty. I
agree that a fiscal framework is part of the issue. I think
that businesses had a lot of uncertainty about the Affordable
Care Act and what shape----
Senator Kaine. Especially this week.
Dr. Strain. Sure. And that uncertainty has continued in the
new administration and was present in the previous
administration, and it just makes it hard to plan.
Senator Kaine. I support a number of the budget process
reforms that the Chair is promoting. He is promotion the notion
of 2-year budgets. States and cities do it. I think that would
be great. I think we ought to do a calendar year budget instead
of doing an October 1 budget, and when we do budgets, it is
always in December, so, you know, build the sidewalk on the
place where people are walking. You know, we are doing budgets
when we do them in December. Why not more certainty?
But here is my last point. Yesterday morning the President
tweeted this out: ``Our country needs a good shutdown in
September to fix the mess.'' I mean, a good shutdown. This is
the CEO, this is the Commander-in-Chief. This is the Chief
Executive of the Article II branch of the greatest Government
in the history of the Earth. Is there one good thing a shutdown
would do to promote certainty in this economy? We lived through
a shutdown in 2013. It was a 13-day shutdown. And I could go
small business after small business that were near the
Shenandoah National Park during leaf season, and then the park
closed down, and they lost their best season of the year. Or
contractors or others who had contracts, and now they did not
know whether they could meet them, or people who were getting
furloughed from their jobs, 170,000 Federal employees in
Virginia, many getting furloughed from their jobs.
A shutdown is the worst thing we could do to this country,
and I cannot imagine why a President is promoting a shutdown.
You are saying here what I believe to be true and what any
reasonable economist would say. We should be in the certainty
improvement business, not in the uncertainty wrecking ball
business. And I will just close with that comment. Nobody
should be using a shutdown as a good thing for this country,
especially the Commander-in-Chief.
Thank you, Mr. Chair.
Chairman Enzi. Thank you for being the closest to
maintaining your time.
[Laughter.]
Chairman Enzi. Senator Boozman.
Senator Boozman. I will try and do the same thing. Thank
you, Mr. Chairman. And thank you all for being here. I think
this is really a very, very good discussion.
I want to ask about community banks for you to comment on
that because I think that is a huge problem in much of America.
But the one thing about education is I think when I went
through, probably the State paid for 70 percent, I probably
paid for 30 percent. We have reversed that now. You know, the
student is paying for 70 percent, the State is paying for 30
percent. And the way that we have allowed that to go on to make
it work is by giving them loans. They cannot be refused. There
is no counseling at all regarding that. And it truly is
financial malpractice.
The other problem is that we have not done anything to
really look at what is feeding the inflation in higher
education. What is the frustrating thing for us here, I think,
is you push more money to the States, invariably, to higher
education or whatever, you do not get ahead because the State
then--because they are all broke. Most of them have balanced
budget amendments. All that is going to prison, it is going to
K-12, and their Medicaid budget. So it is something that we
need to look at.
I agree totally, you know, that education is the answer. I
do not know what you do as an unskilled laborer these days, or
not so much now but looking at 10 years ago. And the one thing
I do do that I think is so important--I used to be on the
school board, and I tell these school board members, ``You need
to go to a factory now, and the first thing you do when you are
there is you wonder where everybody is at,'' you know, because
you have got these big places, and then the skill set that it
takes to run the equipment and fix it. So often people in those
positions are my age, a little bit younger, whatever, a little
older. They look back at a factory how it was 10 years ago. So
I think education in that regard to our educators is a key
component.
I want to ask you, though, about the community banks. I am
out and about as much as anybody. I agree totally, you know, as
far as regulating the big entities. But a lot of that
regulatory atmosphere really has come down on our community
banks. I hear stories about the regulators come in and they
literally have to get card tables out because there are more
regulators there than there are employees in the bank.
My brother was an ophthalmologist. I am an optometrist. We
started a little practice. It grew to where we had 75
employees. I do not think now if we went down to get that
loan--we had an education, but that was all. I do not think we
would be able to check the boxes to get that business, which
became--you know, those were good-paying jobs. We could not
have gotten that started.
So can you comment about that? Why don't we start with you,
Dr. Sachs, if that is okay?
Dr. Sachs. Senator, I am not really an expert on community
banks, but I do want to agree with you on----
Senator Boozman. But one of the things----
Dr. Sachs. But may I just say one word about----
Senator Boozman. No, but let me just finish my thought in
the sense that--because my thoughts just kind of come. What we
are trying to do is take the risk out of capitalism, and you
just cannot do that. Now, you can diminish it some when
appropriate, but go ahead, sir.
Dr. Sachs. I was going to come back to your financing of
college because I think you put your finger on it exactly. We
are imposing a burden for exactly the skills that are needed
that cannot be sustained. And you are also right that costs of
higher education could come down because technology now permits
us to do things better, more cheaply. So you could combine more
financing with ceilings on tuition, and that is the direction
we should go.
Same with health care, by the way. Our biggest problem with
health care in this country is that we empower monopolies all
over the place--our drug companies, our local providers--so
that the costs of health care in this country are at least $1
trillion a year more than you would pay for exactly the same
services in any other country. In other words, we have put
about 5 to 6 percent of GDP extra because we allow a company to
charge $1,000 for a pill that costs $1 to make, and we call it
a ``market'' when there is no market. They have a patent for 20
years, exclusive monopoly. And then we say we do not negotiate
with them because that is about R&D. Well, this is a little bit
of an aside. If you want to save money, save it through putting
price controls on the health system. We are out of control. We
tell these monopolists, ``Charge anything you want.'' We do not
say a word.
Senator Boozman. Talk to me about community banks real
quick, guys, or the Chairman is going to yell at me. Actually,
he going to gavel me.
Dr. Dunkelberg. Let me talk briefly. First, I would point
out that, you know, I used to be able to earn my tuition and
some extra money with a summer job, which is an impossible
thing. Having been the dean of a business school and been in
this business for a long time--maybe Jeff would agree with me--
professors are either overpaid or underworked, in general. I do
not know where all that is coming from. And we are also turning
our campuses into amusement parks with lazy rivers and climbing
walls and all kinds of wonderful things that are really
expensive, and that is--anyway, okay.
So now I will put on my hat. I am chairman of the board of
Liberty Bell Bank. We started about 11 years ago. We have now
been making money for a couple years. We are happy we got
through the bad thing. We have three branches and 40 employees,
and we serve basically small businesses. You know, your story
about the regulators coming in, the amount of time we spend. I
mean, almost all of our board meeting time is spent putting
things into the minutes to show the regulators that we talked
about this or that.
All of our staff hiring over the past couple years has been
to hire more people to check that all the boxes and the
mortgage applications were done right, et cetera, et cetera.
There is no value added here to the consumer, but our costs
just keep going up. So you see the small banks are disappearing
because we cannot support that overhead. So we are operating
under a set of regulations designed for a Citigroup, and we are
not Citigroup. There are 6,000 of us out there doing community
stuff, and it is going to be hard for us to do that in the
future.
Senator Boozman. Thank you, Mr. Chairman.
Chairman Enzi. Thank you.
Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. And I want to
thank all of you for your testimony today. As Senator Kaine
said, there are some points of overlap that I think we can work
on going forward.
I do want, Mr. Chairman, to point out that a comment was
made earlier that a lot of the efforts we have undertaken since
the mid-1960s to fight poverty have not been successful. It is
absolutely true that we have a big poverty problem in the
United States.
On the other hand, as a result of things like Social
Security, Medicaid, and food nutrition programs, we saw 38
million Americans who were not in poverty who would otherwise
have been in poverty. We had a big conversation about this just
a few years ago, and it was pretty clear that if you were to
eliminate a lot of those programs, you would have close to 40
million more Americans in poverty.
I want to pick up on something, Mr. Chairman, where it
sounds like people are on the same page, and I do want to cite
the report from the CBO 2 months ago, and I am quoting: ``Large
and growing Federal debt over the coming decades would hurt the
economy and constrain future budget policy. The amount of debt
that is projected under the extended baseline would reduce
national savings and income in the long term.''
My question for each of you: Do you each agree with that
CBO conclusion?
Dr. Sachs. That is absolutely correct, and we have been on
a path that is already not in control. If you take into account
what we also all agree on, expanding earned income tax credits,
expanding support for training, for education, and so on, we
need more revenues, not lower revenues. And I am shocked by the
very idea that we might give up net revenues. And if you give
it up on some guise of dynamic scoring--I have now been through
that, because I am old enough to know that trivial gimmick,
several times in the last 30 years. Please do not do it again.
This is bogus. It is a fig leaf for giveaways to rich people.
And dynamic scoring is not the point here. The point here is
there is no space for losing revenues right now, and it would
cripple us for another generation.
Dr. Dunkelberg. Well, I think it is a well-established
principle that if you borrow money and do spending today, you
cannot do it tomorrow if you have to pay the money back. The
silly game we are in, nobody asks us to pay the money back, so
we can just pile it up and people seem happy. We pay them a
pretty good return on all those bonds out there. But, you know,
Greece found out that did not work, and everybody else is going
to find--and we may be the last ones to find out that does not
work. But it will not. So we just really need to get sensible
about how we are financing Government and what it does and how
we allocate the funds. We want the money to be used
effectively, not just thrown away.
Senator Van Hollen. Right. Do you agree with the CBO
conclusion?
Dr. Strain. I do agree with the CBO conclusion. At the same
time, I think it is important not to be hysterical about it. I
mean, we are not going to wake up--we are probably not going to
wake up next week and have some sort of a terrible debt crisis
on our hands. There are reasons that the United States is very
different than other nations. Dollars are where people put
their money in U.S. Government bonds or where people put their
money when they are concerned about risk, et cetera, et cetera.
But I think there is no question that the debt is on an
unsustainable trajectory under current law, and I think that
there is no question that getting it on a sustainable
trajectory should be a top priority of Congress. I think the
right place to start with that is reforming----
Senator Van Hollen. Let me just ask, if I could ask--let me
just ask this, though, and I think Dr. Sachs has already
answered this question. And I am going to give the other two
witnesses the benefit of the doubt her. Let us say CBO does use
dynamic scoring--and I agree with Dr. Sachs' conclusion about
that. But let us say CBO looks at whether it is President
Trump's plan or the Republican plan, and even with that little
extra bump, they conclude that it adds to our Federal debt,
would that be a bad idea, to adopt a tax plan that adds to the
Federal debt under CBO's conclusion, even if they include
dynamic scoring?
Dr. Sachs. This would be a terrible idea right now given
the baseline is already out of control.
Senator Van Hollen. Thank you.
Dr. Dunkelberg.
Dr. Dunkelberg. Well, the dynamic scoring is not going to
solve the problem. I mean, it gives you a bump, but as you
point out, it does----
Senator Van Hollen. Right, so my question is: Under those
circumstances, should we add to the debt with a tax reform
plan?
Dr. Dunkelberg. We should try not to add to the debt, but
not just on the tax side. How about on the spending side?
Senator Van Hollen. Okay. But the fundamental question is
we hear a lot of talk, which I agree with, about the dangers of
accruing debt, so----
Dr. Strain. Yeah, so I agree that the spending side is
really the most important side, particularly----
Senator Van Hollen. So if I can just stop you, so debt from
your perspective, it is not a problem with debt, it is a
problem with spending. In other words, debt is debt. Right? And
how you work that out, to Dr. Sachs' point, is a fiscal
question for the Congress, whether it is revenue or whether it
is cuts. My question is not how you would do it. My question
is: Whatever tax plan may come before the Congress, whether it
is Donald Trump's or somebody else's, if even after the CBO's
dynamic scoring it adds to the Federal debt, should the
Congress still support that given the situation we are in?
Dr. Strain. I think the devil would be in the details.
Senator Van Hollen. No, this is not devil-details question.
Dr. Strain. I would not----
Senator Van Hollen. Just does it add to the debt?
Dr. Strain. I would not support a debt-financed reduction
on labor income taxes. I think if we put together a good
corporate tax reform and there was a projection that it would
add to the deficit, but the projections were modest, then that
might be a sensible thing to do because our corporate tax rate
is so high, and we do not really know what the economic effects
would be from a 15-percentage-point reduction in the corporate
tax or a 10-percentage-point reduction in the corporate tax.
But I think the right way to do tax reform is to do it revenue
neutral.
Senator Van Hollen. Thank you.
Thank you, Mr. Chairman.
Chairman Enzi. Thank you.
I have not taken my turn yet, but I will not right now. Go
ahead, Senator Harris.
Senator Harris. Thank you, Mr. Chairman.
Dr. Sachs, you are probably aware that the President's
skinny budget is cutting the Department of Labor's budget by 21
percent, and the Department of Labor has many responsibilities,
including job training and employment grants and senior
employment programs and things of that nature.
Given that there is that significant cut to the Department
of Labor, how do you suggest that we as the Federal Government
and perhaps through the budget create incentives for retraining
these populations of folks that are losing their jobs even
though there is a growing economy, as you have described?
Dr. Sachs. We know that we need more than ever active labor
market policies that include job training and support for
higher education and also other ways to supplement income and
help make work, jobs, more decent for those who have low
earnings. The idea that we would cut the Labor Department at
this moment when we are in a jobless growth environment or a
growth environment even if it produces jobs, it is not
producing decent jobs; even if it is producing some decent
jobs, it is not producing decent jobs for many millions of
people. It is simply the wrong approach.
Senator Harris. And I heard your testimony earlier, which I
agree with, about the need for decent jobs, which requires
decent skills and benefits.
Dr. Sachs. Yes.
Senator Harris. With the emphasis at this moment being on
the skills piece and the training piece.
Dr. Sachs. I think for the Department of Labor it would be
on skills and, also, since so many workers are abused at work,
they do not have rights, they are not protected by unions
because we basically have so little union coverage in this
country, the other area where the Labor Department has a
special role to play is defending basic rights of workers,
which is against sexual harassment, against an unsafe physical
environment. And given how the bottom is falling out of the
bottom half of our country, we should be bulking up the Labor
Department, not cutting it back.
Senator Harris. Please talk with me about your thoughts
about how we will train the American workforce to take on the
jobs of the so-called 21st century. As we understand,
automation is taking hold around a lot of industries. Where are
the jobs of the 21st century? I know that there has been
testimony by all three of you about manufacturing and
construction and then professional services.
So here is my question: For that population of people right
now who are between the age of 30 and 50, who want to work and
are unemployed, how do we train them to take on those jobs
where we have a demand for skilled labor? Is there a way to
transition them, they who are now between the age of 30 and 50,
who are going to have a life expectancy of about another 30 to
50 years, how do we transition them into the jobs that we
actually need to be performed? Because I cannot believe we are
going to have to give up on them. I have to believe that there
is a way and there is a plan that you all might recommend for
how we transition them smoothly and rather swiftly to take on
those jobs.
So I would like the ideas from each of you, and I will
start with Dr. Sachs.
Dr. Sachs. I think that there are two parts to keep in
mind. Because of this technological transformation, the
earnings that many people will face will not be very good. They
may be stagnant or even falling, even with training, because we
are really moving in a period where there is an elimination of
a lot of jobs, and we are just in the beginning wave of that.
And the way that countries are successfully handling it--not
our country--is that the job is only one part of their broader
income. The government is guaranteeing the health coverage. The
government is guaranteeing tuition for their kids. The
government is guaranteeing early childhood development, pre-K.
The government, in other words, is providing through that
growing pie--because this is productivity gain, so the income
is going up. But it is saying to Larry Page and Sergey Brin and
others, you pay taxes and then we can share the benefits of
your miracles broadly so that even if the market earnings are
not great, the life of the people is good. That is what we need
to offer, where a $60,000 average income economy per capita
income in our country is still rising a lot, but it is all
going to the top.
So it is not only the job training, but it is also ensuring
that around whatever working-class people earn, they are not
desperate. But we forgot all about that coverage around the
jobs.
Senator Harris. Mr. Chairman, if I can just have a minute
from each of the other two panelists on this point?
Chairman Enzi. Okay.
Senator Harris. Thank you.
Dr. Dunkelberg. Well, I will just quickly suggest that, you
know, we have to--it has to really be in our high schools that
we change really dramatically what we are doing there, because
that is where----
Senator Harris. The 30- to 50-year-old right now is the
population I am talking about.
Dr. Dunkelberg. That is where we get started, I mean----
Senator Harris. The 30- to 50-year-old right now, that is
what I am--that is what keeps me up at night, thinking about
those folks. They are beyond high school.
Dr. Dunkelberg. They are beyond high school, but you have
to--you know, if you do not--you want to focus on them, then
how are you going to backfill if you do not fix that problem?
You have to start it there, making sure that we do not roll
this problem further.
Senator Harris. I am still waiting for the training
solution for transitioning the 30- to 50-year-old today. Maybe
our last panelist can give me that answer.
Dr. Strain. I think we need to do a much better job with
work-based learning. And so if you are a 35-year-old guy or a
40-year-old guy and, you know, you lost your job and you want
to enter into a profession that requires skills, there should
be pathways to do that where you can spend some time in a
classroom and earn a credential, but at the same time you can
fill a vacancy as an apprentice or as some sort of a trainee
with a plumbing company or with an electrical company or with a
construction company. And at the end of your training, you will
have spent a lot of time actually working, and you will have
earned some kind of a credential that is not actually a degree.
Now, in order to make that work, we have to take a hard
look at minimum wage laws, and we have to take a hard look at
other labor market regulations, because we need to make it
attractive for the business to actually want to hire the
person, and it has to make good business sense for that to
happen. But if we create that kind of a framework, then the
labor market itself is determining the content of job training
as opposed to the Department of Labor, which has a pretty bad
track record at determining the content of job training.
So I think there are things we could do. We just have to,
you know, try them out and see how they work.
Senator Harris. Mr. Chairman, thank you for your
generosity.
Chairman Enzi. You are welcome, and thank you for your
questions. In fact, I appreciate everybody's questions, and I
will mention that anybody can turn in questions, too, until the
close of business today.
I also have some questions that I will be submitting, and
then when I get answers, I will share them with everybody that
was here and was not here. I will also be giving a little bit
of a summary, and I will do that right after Senator Kennedy
asks his questions. So I appreciate anybody that comes and has
some questions.
I would mention on this job training thing that there are a
lot of job training programs out there, and we are just not
getting the people into them. That is a huge disappointment to
me. I think we have too much duplication in the kinds of job
training out there, and we ought to be picking out the best and
funding those better and then putting more concentration on
getting people into them. But it also had to do with our
attitude toward different kinds of work.
I visited schools in Sweden, and in Sweden, when you
graduate from high school, you go to tech school. If you finish
tech school, you can go to college. And then while you go to
college, you can be working part-time on weekends and paying
part of your debt. But the biggest thing that it does over
there is take the stigma off of normal jobs, and I think that
helps a lot.
As far as automation, I have been trying to get my computer
on the floor of the Senate for 20 years now.
[Laughter.]
Chairman Enzi. And we still cannot do it. People have told
me that they do not know how to type, so if I did it, they
would have to learn how to type, and they do not want to do
that. So thank you for your questions.
Senator Kennedy.
Senator Kennedy. Thank you, Mr. Chairman. I apologize for
being late. I was in another, less important committee.
I want to talk to you just for a few minutes about Dodd-
Frank and its impact on the American economy, and specifically
community banks. And by community banks and small credit
unions, I mean institutions of less than $10 billion.
I asked Chairwoman Yellen in a Banking Committee hearing a
few months ago--I am going to paraphrase, but I think it is
pretty close. What did the community banks do wrong in 2008?
And her response was, ``Nothing.''
Dr. Strain, what do you think about the idea of exempting
community banks and credit unions that are less than $10
billion in assets from Dodd-Frank?
Dr. Strain. Well, Senator, I am not an expert in Dodd-
Frank, and I cannot offer an expert opinion about that. My kind
of generalist understanding is that Dodd-Frank is hurting the
abilities of community banks to make loans and to service
customers and to provide a valuable function to local
economies. And to the extent that we can change regulatory
requirements to allow that type of important economic activity
to take place, I think that is important.
You know, whether or not that means exempting some banks
from regulations and enforcing regulations for other banks or,
you know, where the cap should be drawn, things of that nature,
I cannot say.
Senator Kennedy. Doctor?
Dr. Dunkelberg. Well, I am the chairman of the board of a
$200 million community bank with three branches that has
survived. We are living under regulations designed for
Citigroup and half a dozen other very big firms with all the
risk rating problems that we have, what we can count, what we
cannot count, and the complexity of having to deal with all
that, you know, gobbles up huge amounts of our time. We seem to
have regulators in our bank more often than not, and it takes
up huge amounts of staff time. We hire staff just to keep
records to make the regulators happy so that we can pass the
Bank Secrecy Act (BSA) or we can get the Community Reinvestment
Act (CRA)----
Senator Kennedy. If I could interrupt just a second, and I
apologize for that, but we have to be mindful of time
constraints. You are a $200 million institution?
Dr. Dunkelberg. Not big.
Senator Kennedy. You are not exactly a threat to the
American economy.
Dr. Dunkelberg. No, I do not think so. If we went down, we
probably would not be missed except by our community----
Senator Kennedy. Of course.
Dr. Dunkelberg [continuing]. That we are very much involved
in and all the local stuff. And, of course, we can do a better
job--our loan committee is so good, I mean, they know the whole
market really well. They know the people who are going to come
in and apply.
Senator Kennedy. It is called ``relationship banking.''
Dr. Dunkelberg. Exactly.
Senator Kennedy. Excuse me for interrupting, but----
Dr. Dunkelberg. Go ahead. I am done.
Senator Kennedy. Thank you for those comments.
Doctor?
Dr. Sachs. Senator, no doubt the regulations should be both
different and less onerous on small banks, and the attention
should be on the large financial institutions.
Senator Kennedy. Would you support exempting them?
Dr. Sachs. Probably not exempting them, because small banks
also fail, and then they hurt their communities. The basic
principle of finance is you are using other people's money,
which means that you tend to have a tendency to get into
trouble and too many bad accidents happen. I subscribe to
financial regulation, but I feel this man's pain. And I am sure
that it is right that it is onerous when you have the
regulations for mega institutions apply to small institutions.
Senator Kennedy. Let me just ask you a philosophical
questions, Doctor, and I do not mean this--if this comes out as
in some way pejorative, I do not mean it. It is an honest
question. What makes you think, why do you believe that people
who work for the bureaucracy in Government know better than
everybody else, know better than the private sector, know
better than the people who choose to invest in a small bank or
not? What is it--I mean, honestly, why do you believe--I work
with a lot of folks in the bureaucracy--I do not use that
critically--every day at the Federal level, and I worked with
them for 16 years at the State level. I do not think they are
vastly superior to people who make their own decisions in terms
of intellect or insight or knowledge. Why do you believe what
you do?
Dr. Sachs. I do not think it is a matter of intellect. I
think it is a matter of incentives. I know a lot of people on
Wall Street. Many of them are crooks. They use other people's
money. If they are not regulated, they will steal. I know them.
I sit with them. I eat with them. I deal with them. I do not
trust them for a moment, and yet they have billions of dollars
under their control.
I do not feel the same way about Federal regulators. I do
not----
Senator Kennedy. Can I just interrupt? What percentage?
Dr. Sachs. Well, I could introduce you to a lot of them.
Senator Kennedy. No, I mean what percentage of--it is a
pretty bold statement you made, and I know a lot of people who
believe that. But of all the folks on Wall Street, what
percentage do you believe are crooks?
Dr. Sachs. I think enough of people in the hedge fund
industry that gives--scares the wits out of me.
Senator Kennedy. But, I mean, is it like 1 percent or 10
percent or 80 percent?
Dr. Sachs. I could put it this way: enough to make a
calamity of our economy. Because it is not the proportion, it
is what resources they command. And 2008 did not just happen by
itself. It happened by malfeasance, massive malfeasance. Almost
nobody paid the price for it, by the way. The Obama
administration protected them. The Justice Department was
afraid. The Securities and Exchange Commission (SEC) does not
go after individuals. And so a lot of crooks walked away, and I
see them at gala dinners in New York, and I do not trust them
to turn my back on them.
Senator Kennedy. Do you blame President Obama for that?
Dr. Sachs. Certainly I do, President Obama and President
Bush, both of them. And President Clinton, by the way, because
he was President when this was deregulated. It was dangerous
then. President Bush continued this. Alan Greenspan let it
happen. And President Obama in my view did not exercise justice
after the fact.
Senator Kennedy. I have gone way over. I am sorry, Mr.
Chairman, but I found all three of you interesting. Thank you.
Again, I am sorry I was late.
Chairman Enzi. That is okay, and those were different
questions than we had had before. So I will add that to my
list.
One overriding thing that I saw through the whole thing was
a lot of comment about debt and how much in debt we are and how
that is affecting the economy. I do not get invited to speak
many places because I am too depressing. I know those numbers.
And I agree that it is overwhelming and we are passing it on to
the next generation, and people do not even know how we are
passing it on to the next generation. We have a custom user fee
that we like to use for offsets for different things. But we
have already spent that through 2025 to do current projects. So
as that money comes in, there is not really anything to spend
it on. But we will. We will spend it again. So now we are
spending the money from the year after that to do another
offset. There are just so many things that are really piling
debt on to the next generation, some of it not even showing.
But enough of depression. I was glad to hear the comments
about budget reform. We really have to do that. And Senator
Kaine has talked a lot about the debt-to-GDP ratios with
guardrails. I hope we can institute that; biennial budgeting,
calendar year, and something that we are just beginning to talk
about, which is portfolio budgeting. We have 160 housing
programs administered by 20 agencies. No agency is in charge of
any one of those programs. So nobody is setting goals. Nobody
is doing oversight. I think we could do it with five agencies
and--five programs. Of course, that would mean that we would
get complaints from 155 managers that they might be losing
their job. But it is money that could be put into housing
people instead so I hope we will begin to talk about that.
I think that my overseas tax plan is beginning to reemerge,
and it was mentioned that there is a lot of money in the Cayman
Islands. I do not know where all the money is, but I know that
yesterday there was an article about $250 billion in cash, and
I realize that a lot of companies overseas do not have their
money in cash, so my international tax plan makes us more
competitive overseas, but it also gives some incentive to
return the money to the United States over a period of time--or
pay the taxes. They can return it at any time they want.
I could ask some questions. I do not have the audience of
the Senators that I would have if I had used my time right at
the beginning, but as I said, I am going to submit some
questions which may have some more import now than they would
have even then, and I will share those answers with my
colleagues.
Chairman Enzi. I want to thank you for your time and your
expertise. If you have any publications you want to suggest
that I read, I am happy to do that. I read about 100 books a
year and do a book report on each of them. That saves me having
to go back and re-read them again unless I want to review what
I read before. I find it very helpful, as you have been, so
thanks for your time and your preparation and your testimony,
which I will encourage people to read as well. And keep those
ideas coming.
Thank you. The hearing is adjourned.
[Whereupon, at 12:32 p.m., the committee was adjourned.]
ADDITIONAL COMMITTEE QUESTIONS
[The following submitted questions were not asked at the
hearing but were answered by the witness subsequent to the
hearing:]
Questions Submitted to Dr. Michael R. Strain by Chairman Michael B.
Enzi
Question. Decreasing taxes on individuals and businesses has a
well-established demand effect. In the case of labor, reducing taxes
increases wages and the trade-off of work to leisure. In the case of
capital, reducing taxes increases profits and incentivizes investment.
How would tax simplification, even if it is revenue-neutral, create
economic growth? Does certainty in tax structures support long-term
investment?
Answer. Tax simplification would have important efficiency
properties that would result in a larger economy, and an increased rate
of economic growth as we move from today's economy to that larger
economy.
Eliminating or reducing tax expenditures--for example, the mortgage
interest deduction and the state and local tax deduction--would, even
if part of a revenue-neutral reform, result in a more efficient
allocation of scarce resources. Concretely, some money that Americans
would spend today on larger houses would be spent in a different way.
To the extent that the decision to spend money on larger houses today
is driven by the mortgage interest deduction, spending that money in a
different way would increase the productive capacity of the economy,
and would result in an increase in income per capita, which would be
reflected in the short-term growth rate.
Regarding the second part of your first question, yes, I think it
is safe to say that certainty in the tax code supports long-term
investment. Senator Kaine made this point very well during the hearing:
the Congress should have as a goal to provide an environment of policy
certainty so that business decisions are not driven by concern and a
lack of clarity over the future course of public policy.
Question. The American workforce has a variety of labor policies
adopted based off the laudable goal of protecting workers--minimum
wage, unemployment insurance, and occupational licensing. Dr. Strain,
your testimony references how these types of policies can actually
impede economic growth. How does economic growth support the average
worker?
Answer. Economic growth supports the average worker because a
growing economy is an economy in which businesses are creating new
jobs, labor markets are tight, and wages and incomes are rising.
Of course, longer term, structural issues are still at play in an
economy with economic growth. And those issues--for example, the
automation of jobs requiring ``routine tasks,'' and downward pressure
on wages in industries exposed to international trade--still affect
many American workers. But those structural issues are easier to manage
in a strong-growth environment.
It is also the case that in a strong-growth environment incomes for
some workers rise more rapidly than incomes for other workers. But this
argument does not mitigate the desirability of broad-based growth.
Having said that, in my view public policy should complement
economic growth in an effort to increase economic opportunity for
American workers. I discussed many policies that I think would increase
opportunity--for example, EITC expansion, a greater emphasis on work-
based learning, and reforms of existing policies--in my written
testimony, and during the hearing. To support American workers, we
should not rely only on economic growth. But economic growth is
critical in that effort.
Thank you again for the opportunity to appear before the committee.
It was an honor. And I am eager to be helpful to you and to any member
of the committee in the future.
GROWTH POLICIES FOR THE NEW ADMINISTRATION
----------
WEDNESDAY, MAY 10, 2017
U.S. Senate,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to notice, at 10:30 a.m., in
room SD-608, Hon. Michael B. Enzi, chairman of the committee,
presiding.
Present: Senators Enzi, Crapo, Johnson, Corker, Gardner,
Kennedy, Boozman, and Strange.
OPENING STATEMENT OF CHAIRMAN MICHAEL B. ENZI
Chairman Enzi. We will go ahead and call this hearing to
order. I will go ahead and do my opening statement, and if
Senator Sanders makes it, whenever Senator Sanders makes it
here, we will allow him to do his opening statement. There was
a vote this morning, and I am not sure exactly how it came out
yet, but I know that has got quite a bit of interest over
there. But they should be back here pretty quick.
So good morning, and welcome to our hearing on Growth
Policies for the New Administration.
First, I want to thank Senator Phil Gramm for agreeing to
testify this morning. He has always been one of my heroes of
the Senate. He was one of the first people that I met when I
got to Washington, and after listening to a few of his debates,
when I could see terror in the face of his opponents, I
actually got to sit down and visit with him about some critical
issues.
I was on the Banking Committee that he was the chairman of
at the time, and I learned a lot. And I wanted specifically to
have him here for a hearing because of his past experience, not
while I was in the Senate, but before that, when he worked with
Rudman and Hollings to do some specific stuff with the budget,
and that has had a carryover effect on us today. And that was
quite a while ago, so there needed to be some revisions in it,
and so we will be relying on him and others who have chaired
the Budget Committee to come up with some solutions that will
make it more possible for us to actually get control of the
budget while we improve the economy.
So Senator Gramm's decades of experience serving as an
elected official, both in the House and then in the Senate,
both as a Democrat and as a Republican--not at the same time,
of course--provide insight into which policies have
historically led to growth upon implementation as well as which
are most politically attainable for the new administration and
for Congress.
The rules that govern budget information are incredibly
outdated. The last time Congress updated its accounting rules
was long before any of us here in the committee were in Federal
office. The last comprehensive change was 50 years ago. I am
proud to say that last month, the members of the committee
unanimously approved reforms to the broken budget process that
will lead to more orderly, meaningful, and transparent
consideration of budget resolutions in the Senate Budget
Committee, not on the floor yet. We will handle that one later.
In addition to the budget process reforms adopted by the
committee, I have also proposed a budget concepts commission to
review Government budget rules and ensure that they keep pace
with advances in economics, with accounting, and with finance.
This should be a bipartisan exercise, with each party
receiving an equal number of appointments. The commission of
experts should comprehensively review the quality of budget
information used by the executive and legislative branches.
Congress writes policies based on their budgetary impact. All
of us want to ensure that legislative estimates are clear,
concise, and accurate.
For example, past scoring practices did not include the
reaction of the general economy to major policy changes. We
know, however, that big policy changes can and do alter the
size of the economy. Dynamic scoring can add missing economic
information that static scoring does not provide, making the
score more complete. This is critical information for
policymakers to better understand how legislation affects the
economy as a whole, how macroeconomic feedback or dynamic
scoring interacts with Congress' official cost of legislation,
which is important for the committee to discuss.
These budget rules are particularly relevant when Congress
considers policies with the goal of increasing economic growth.
Tax reform is a prime example. In last week's hearing, we
discussed with national economists how taxes influence economic
growth. Both the Congressional Budget Office (CBO) and the
Joint Committee on Taxation (JCT) recognized the link between
taxes and output of the economy. According to the JCT, tax
policy can directly influence the level of labor supply, the
physical capital, the human capital, and technology in an
economy by changing the after-tax returns to certain economic
activities or changing the cost of pursuing them.
Our Tax Code is a mess, and it is riddled with
inefficiencies and loopholes. People are demanding some
simplicity. Reform that makes it simpler and fairer for
everyone would require bold policy changes, not tweaking around
the edges of a broken structure. Broadening the base and
lowering tax rates will limit Government distortion of market-
based decisions. It will increase efficiency and growth of
business.
Our projected economic growth is below average, and we need
to continue discussing the root causes of our lethargic economy
in order to promote policies that grow it.
As you can see from this graph, a 1 percent increase in
gross domestic product (GDP) significantly changes the
trajectory of expected Federal revenue. The blue line is the
current level, and the orange line is the revenue with higher
growth. The gray line is Federal outlays. Regardless of growth,
our spending still exceeds our income. Cutting the growth of
spending is something this committee will continue to address.
[The referenced graph follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
I look forward to our conversation today on how Congress
can work with the new administration to foster stronger U.S.
economy and the impact of that growth on the Federal budget.
So since Senator Sanders is not here, I will go ahead and
introduce our witness. Our witness this morning is the former
Senator Phil Gramm, a visiting scholar at the American
Enterprise Institute (AEI). Senator Gramm served 6 years in the
U.S. House and 18 years in the U.S. Senate. His legislative
record includes landmark bills like the Gramm-Latta Budget,
which mandated the Reagan tax cut; and the Gramm-Rudman Act,
which placed the first binding constraints on Federal spending.
As chairman of the Banking Committee, Senator Gramm steered
through legislation, modernizing banking, modernizing
insurance, and modernizing securities law, which had been
languishing in Congress for 60 years. That is our normal pace,
I think.
Phil Gramm holds a Ph.D. from the University of Georgia in
economics, the subject he taught at Texas A&M University for 12
years. He has published numerous articles and books on subjects
ranging from monetary theory and policy to private property and
the economics of mineral extraction.
This morning, Senator Gramm will testify on growth policies
and how a new Congress and administration can get our economy
going again. We have talked, not only about the chart that I
had up, but other times, with how much a slight increase in the
economy makes it bring in more revenue.
So I look forward to hearing your testimony. Senator Gramm.
STATEMENT OF THE HONORABLE PHIL GRAMM, FORMER SENATOR FROM THE
STATE OF TEXAS
Senator Gramm. Mr. Chairman, thank you so much. I am
obviously very honored to be here.
I remember first meeting you as this young accountant who
had this annoying habit of wanting things to add up. For the
last two decades, I have watched your career, as I am sure the
people of your State have watched it, and as a person who
worked with you when you were a very young Senator, I am very
proud of your career and what you have done.
Today, I want to talk about the budget. I have always taken
an interest in the budget because behind these numbers with a
sort of endless row of zeroes behind them is a vision for
America's future. I have always thought the budget, in trying
to set out what we wanted Government to be and, therefore, what
we wanted America to be, was very important. So from my very
first day in the House until the day that I left here in 2002,
I have paid very close attention to the budget.
What I would like to do today is to talk about where we are
in the economy, why the economy is performing poorly today, at
least from my perspective, and how we change it. I realized in
trying to write this testimony that when you are talking about
the performance of the economy during the Obama presidency and
you are talking about the Reagan program and the performance
following the implementation of the Reagan program, that no
matter how you want to be nonpartisan, that we are all invested
in those things, and so it is very difficult to talk about them
without it becoming a partisan issue. And I think it is too bad
that is the case. I want to try today to the best of my ability
to not inject partisanship into what I have to say. I would
like to talk about what happened in these years and then the
programs that gave rise to that performance and then look to
the future.
First of all, we have a lot of experience about America's
economic performance. This is an extraordinary country where
labor from somewhere else and capital from somewhere else met
here, fell in love, and with very few exceptions lived happily
ever after.
Even in postwar America, American exceptionalism has meant
that we have out-produced and grown faster than any developed
country in the history of the world. From 1948, the beginning
of the postwar era, until 2008, counting recessions, 10
recessions, 10 recoveries, we averaged an astonishing 3.4
percent real growth. In good years and bad, under Democrats,
under Republicans, we consistently grew. Until 2009, we had not
had a President in 135 years that did not have at least 1 year
during their term where we had 3 percent real economic growth.
And I picked 135 years ago because that is where the data
begins on an annual basis. I suspect it is true that never in
American history had that been the case.
In 10 of those recessions and recoveries, the American
economy behaved basically the same. We used to have a cliche in
teaching freshman economics when I was a college professor that
the bigger the bust, the bigger the subsequent boom, and that
pattern held throughout the postwar period until 2008.
And then in 2008, we had a recession, the subprime crisis,
and following that recession, we had far and away the slowest
economic expansion, the slowest recovery in American history.
The economy grew by an astoundingly low 1.47 percent.
Now, obviously, the question is why, and people can give
whatever interpretation of the facts they want to give, but let
me give you my interpretation. Our policies beginning in
January 2009 were distinctly different than the policies we had
followed in every recovery in postwar America.
There was a dramatic increase in marginal tax rates on
individuals. Because Congress and the President could not agree
on reforming corporate taxes, we ended up with the highest
corporate tax rate in the world. Eligibility standards for
Social Security disability and food stamps were dramatically
reduced, and enrollment exploded. We expanded Medicare and
Medicaid. Obamacare was adopted. The work requirements were
suspended under the welfare program, and through legislation,
through agency action, and through executive action, a layer of
regulation was applied like a wet blanket over the economy that
literally choked the economy. And as a result of the policies
being so different than the policies we had followed before
during other postwar recoveries, the net result was very low
economic growth.
In fact, I do not think it is an overstatement to say that
as our Government came to look more like a European government,
our economy performed more like a European economy.
Now, let me just give you a contrast to that. The two
policies in postwar America that are the most distinct are the
Obama policy, on one hand, and the Reagan policy, on the other.
And it is I do not think a coincidence that the performance of
the economy following those policy implementations represent
the high and low of America's postwar economic performance in
terms of economic growth and achievement.
When Reagan took office, we were coming off a slower period
of economic growth, 2.5 percent in the late 1970s. The
inflation rate was 13.5 percent. Prime interest rates had
peaked at 18.9 percent. And there was a general discussion in
America, serious discussion, about how economic and political
malaise and how the scarcity of resources meant that America's
future was going to be dramatically different.
Mr. Chairman, you may be old enough to remember the Time
magazine headline, ``The Joy Ride for America is Over.'' Well,
Ronald Reagan was elected and dramatically changed policy, and
what happened? The performance of the American economy changed
dramatically. Reagan cut marginal tax rates dramatically. I am
being dramatic, but these were dramatic times. He cut
nondefense spending and entitlement spending, and he lifted
regulatory burden. When that program was in effect, the economy
in the last 6 years of the Reagan Administration grew by 4.6
percent, and in 4 of those 6 years, Federal revenues grew on
average by over 10 percent per year.
Now, this comparison is important because the question we
are faced with now is, are we in a secular stagnation, or is
this a policy-induced stagnation? My belief is--and I think an
objective reading of the policies of the postwar period and the
performance of the economy in the postwar period--is that
policy makes a difference. American exceptionalism is based on
freedom and market efficiency, and when Government policy
reinforces those things, the economy grows and has no equal on
earth. When Government policy stifles those things, the growth
of the economy is stunted, and I believe that that is what
happened beginning in 2009.
Now, the question is, what can we expect when we move from
a policy that was implemented in the last 8 years to a policy
that is closer to the Reagan policy? What happens when we
dramatically reform the Tax Code, when we reduce rates, when we
strip out provisions of the Tax Code that misallocate
resources? What happens when we lift regulatory burden? What
happens when banks begin to hire people to make loans rather
than hiring compliance officers?
Well, what happens is I think we will begin to see the
economy move back to what we knew for 60 years was the economic
norm in postwar America. Through 10 recessions and 10
recoveries until this last recession and recovery, we averaged
3.4 percent real growth. If by changing policy, we could get
that growth back, as you showed in your chart, if we could get
back the normal growth America experienced for 60 years in
postwar America, revenues would rise by $4.6 trillion over 10
years. If we could just get half that difference back, if we
could just get halfway back to the norm by implementing
policies that have been the normal policies in postwar America,
we would get $2.3 trillion of new revenues in the American
economy.
Now, I want to digress real briefly to make the point that
growth is the key factor for Federal revenues, and I will just
give you two examples. And I give them because they show how
powerful growth is, and I picked two examples of tax increases.
In 1990, there was a Budget Summit Agreement, and part of
that agreement was to raise taxes. And a tax bill was adopted,
and that tax bill was projected over 5 years to raise revenues
by $159 billion. But because of subsequent poor economic
performance, because the growth rate fell as the economy
slipped into a recession, revenues actually declined by $206
billion because of a decline in economic performance.
Probably, the most dramatic one in American history
occurred in 2013. The Bush tax cut expired. A new tax bill was
adopted that was supposed to raise $650 billion over a decade.
After that tax bill was adopted, the CBO continually reduced
its projection of economic growth to the point that those
reductions in economic growth reduced revenues five times more
than the tax increase was supposed to increase revenues.
If you do not have economic growth, you cannot balance the
budget. If you do not have economic growth, you cannot fund the
policies that we are committed to fund. Right now, the
Congressional Budget Office estimates that the economy is going
to grow by 1.9 percent for a decade. At 1.9 percent, with a
growing population and with a population that expects to have
opportunity, that expects to have prosperity, and with a
disappointment that will come at that growth rate, there is no
possibility that we are going to be able to meet our
obligations in programs like Medicaid, Medicare, Social
Security. So we have got to get out of this rut.
Now, let me give you two examples of policies that have had
a pretty big impact economically, and let me start with the
1986 tax reform. This is not only the standard in America; this
is a standard in the world. When you talk to economists
anywhere in the world, they talk about tax reform. They talk
about 1986. When we adopted the 1986 tax reform, the
Congressional Budget Office said it would have no effect on
Federal revenues. That was their official projection. But they
actually, almost immediately lowered their projection of
economic growth to 2.9 percent. They did that in January 1987.
By the time the tax reform was fully in force, over that
ensuing 5 years, the economy grew by 3.8 percent, and revenues
grew by a commensurate amount.
The most dramatic underestimate by CBO occurred when it
scored the 1997 Balanced Budget Act. You will remember the
Congress and the President under President Clinton reached an
agreement to commit to a balanced budget and adopt budget
numbers to achieve the result. They also agreed to cut the
capital gains tax. The Congressional Budget Office projected
that that action would produce $33 billion of new revenues.
In 1 year alone in the year 2000, the economy generated
$303 billion more than the Congressional Budget Office
projected, and by the time the whole budget cycle had been
completed, revenues had grown by a whopping $1.34 trillion more
than the Congressional Budget Office had predicted.
Now, when you write your budget, it is clear that the
Congressional Budget Office is not going to be able to
differentiate because it has never really been able to
differentiate between policies that cause growth and policies
that impede growth, and so if you adopt a major tax reform
package, my guess is that the Congressional Budget Office is
not going to score it as generating much in the way of
revenues.
I believe that we have every right to assume that if we
change policies, especially if we adopt policies that have
worked in the past, that they are going to have an impact. If I
were writing the budget and I were going to dramatically change
policies with tax reform and with regulatory relief, I think
you certainly have the right to assume that we are going to get
halfway back to norm with this policy. I think that is a
conservative estimate.
Now, what this will mean is, when you write the tax reform
bill, part of it will be permanent, and part of it will go away
in 10 years if, in fact, we have not achieved what we set out
to do, which was to write one that was self-financing. If it
works and if revenues grow, you have got to assume that public
support would be sufficient to make it permanent.
But I want to say something about permanence. If there is
anything that you learn in being in Government, it is that
nothing is permanent. The great 1986 Tax Act was changed twice
in 10 years.
This idea that the economy will not respond to tax
provisions that are going to potentially expire in 10 years is
invalid. There are very few business people that I have ever
met anywhere that have confidence as to what Government policy
is going to be 10 years from now, because most of the people
that had such confidence have gone out of business long ago.
Finally, to conclude and then throw it open, I want to
mention two dangers, two things I worry about that I think we
ought to be paying attention to as we are trying to get the
economy going, as we are trying to get this lift-off, and there
are sort of two problems that are out there that do not show up
today. One of them is the debt servicing cost of the doubled
Federal debt that has occurred in the last 8 years. Fifty-five
percent of that debt was bought directly and indirectly by the
Fed, and then the interest payments were rebated to the
Treasury. And we have had historically low interest rates. So,
actually, in the last 8 years, we doubled borrowing, and the
cost of servicing the debt actually went down. But when we have
a full-blown recovery, every recovery in the postwar period has
been driven by exactly the same things and produced the same
results. It has been driven by strong private investment and by
home building, and in every recovery that has been a normal
robust recovery, interest rates have risen. If we get a full-
blown recovery and interest rates go up, debt servicing costs
are going to explode.
Now, you have seen the numbers where in 10 years, debt
servicing costs alone will exceed Medicare, but let me give you
an even more frightening number to me, and that is,
historically, in a recovery, Government borrowing has grown at
about 1.7 percent a year. In the recovery we hope to start,
within 5 years with a full-blown recovery and interest rates
returning to the normal levels, debt servicing costs will rise
to 6.6 percent of GDP.
Historically, the Federal Reserve Bank has offset some of
this by expanding the money supply to meet the needs of trade,
and they have created enough liquidity so that the net
Government borrowing has been 1.4 percent, but now they
quadrupled their balance sheet with all of the monetary easing
programs. So, when interest rates rise, banks are holding over
$12 of reserves for every $1 they are required by law to hold.
The Fed is paying them interest, so they really turn these
reserves into a Treasury note, a Treasury security. But if we
get a full-blown recovery, interest rates start to rise, banks
are going to start to lend, and when banks start to lend, the
money supply is going to start to grow.
And so despite all the Fed's reassurances about all the
things they can do--they can sell securities, they can pay
higher interest on deposits, they can let the securities they
hold mature on their balance sheets, they can borrow against
the securities with reverse repos--all of those things have the
same thing in common, and that is they are all competing with a
private sector for available capital.
When you look at where they are in their balance sheet, if
you assume that in a 5-year recovery that the Fed sold off the
balance sheet, which is what Bernanke has now predicted, they
would have to sell over $500 billion worth of securities a year
and absorb 3 percent of GDP in competing directly against
private investment for loanable funds.
So what is the message here? One, we need a strong
recovery. Two, once a recovery is in place, interest rates, I
believe, based on the debt problem and the Federal Reserve Bank
balance sheet problem--that interest rates are going to rise
faster than they have in the average recovery, and they are
going to be higher as the recovery reaches maturity. This is
going to force us to look at things like spending control and
entitlement control quicker than the Congress or the President
want to do. It is very important that this be done.
Final point. Mr. Chairman, thank you for your patience. If
we do not break out of this rut we are in, if we continue at a
1.9 percent growth rate, or if we break out and we cannot do
the things necessary to keep the recovery going, we could
easily end up in a secular stagnation. And America cannot be
the America we know if it is not growing and prosperous.
Everything our country stands for, all of the opportunities
that we believe should be there for every American depend on
growth, and so I think we need to be bold in getting the
economy growing, and then we need to be vigilant about what we
do to keep it growing.
Thank you, Mr. Chairman.
[The prepared statement of Senator Gramm follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Enzi. Thank you. I am always fascinated to hear
you. You put things very clearly.
I am going to defer to Senator Corker to ask the first
questions, but before I do that, I want to mention that once I
had an opportunity to talk to all of the head accountants for
the Securities and Exchange Commission (SEC). And when I was
asking questions, my people back in the office were noticing
the camera did a little wedge like that, and everybody behind
them was asleep.
[Laughter.]
Chairman Enzi. There are not many people that can talk
about numbers and keep people awake, so I was keeping track,
and everybody was awake. You do an outstanding job of
presenting.
Senator Gramm. Thank you.
Chairman Enzi. Senator Corker.
Senator Corker. Well, thank you, Mr. Chairman. I will be
very brief. I have folks waiting on me.
That was a very fulsome presentation, and, Senator Gramm,
all of us here like to listen to you.
I am just generally going to observe what I see here right
now, and that is a party-like atmosphere, where nothing is
going to be done to deal with spending. Certainly, it's hard
when you have a President that is not willing to deal with 70
percent of our budget, mandatory spending, which is where the
dollars are, and is where all the growth is too. It is growing
very rapidly.
And then at the same time, we hold numbers of discussions
about tax reform and tax cuts. Those are two very different
things, obviously. Sometimes they can take place in a combined
way.
I think you have always been, generally speaking, a fiscal
hawk. I agree with you 100 percent. There is no way to deal
with the issues that we have before us without growth rates
substantially increasing.
I do think that we will move ahead in a strong way on
regulatory reform. I think that is one thing the President is
committed to. He can do a lot of that himself. I am convinced
we will pass substantial Dodd-Frank reforms under the
leadership of Senator Crapo, and so some of the things you
alluded to are going to happen.
Let me just digress for a second. Under Reagan, no doubt,
the 1986 law is one we all look at and certainly admire the
economy that took place under Reagan. I will say, however, that
the national debt doubled, and we never got things under
control. The national debt doubled, and the mantra for
Republicans became, unfortunately, deficits do not matter
anymore. So somehow or another, with your leadership and
through caucus meetings and all that, we have to figure out a
way to not just do the sugar side of this, but to do the
spinach side. And I am just going to tell you right now, I see
no evidence whatsoever--no evidence--of us being willing to
deal with the spinach side of the equation.
So I think we are in a hell of a mess right now, hell of a
mess, and while I am someone who happens to believe we ought to
give some countenance to dynamic scoring, my sense is there is
going to be a push by supply siders to carry that to levels
that are beyond belief and beyond reality. And I would just
love to have any comments, and I will stop, but I am telling
you----
Senator Gramm. Well, let me----
Senator Corker [continuing]. We are in a hell of a mess
right now from the standpoint of where the Nation is and the
lack of ability here to deal with the spending side of the
equation.
Senator Gramm. Well, let me say that we are getting along
now because we do not have any recovery. We do not feel the
fever of this big debt, and we do not feel the impact of this
massive build-up in the Federal Reserve Bank's balance sheet
because there is so little pulse. But when the economy starts
to grow and interest rates start to rise, it is not me saying
that servicing the debt we have right now is going to cost as
much as we are spending on Medicare annually. Those numbers are
numbers that are out there that are easy for anybody to
calculate.
Senator Corker. No debate. No debate.
Senator Gramm. And if we can break out of this rut and get
the economy going, it gives us a chance to gain control, but
we--and I am not trying to be an alarmist, but I do not think
we will be able to keep the recovery going if we do not begin
to deal with spending. And I think at some point, we will be
forced to do it, and my guess is what will force us to do it is
rising interest rates.
Senator Corker. Well, if you want----
Senator Gramm. Now, if you do not ever get the economy
going, then this problem will get worse without warning signs,
but if we ever get the economy going and rates go up, these
bills come due.
Senator Corker. Yeah. Well, just as one Senator--and it is
going to take 50 Senators. It is going to take 50 of us. As one
Senator, I think we need to be really careful when we do this
tax reform to not over-project revenues.
I mean, the fact is you talked earlier about $4.6 trillion
in additional revenues over the next 10 years--I do not know
which particular plan you are looking at, but----
Senator Gramm. Well, no. That is if we could get back to
the average growth we had over the previous 60 years. That is
what the number would be.
Senator Corker. Yeah.
Senator Gramm. What I said was, even if you could get back
half that growth--so splitting the difference between the 1.9
that is projected now and the 3.4 percent we were able to get
through recessions and expansions for 60 years, if we could get
to that level, that would be $2.3 trillion over 10 years. That
to me would be a conservative number.
But, look, I do not fear having to give part of the tax
reform cut back if it does not work. In fact, it is somewhat of
a disciplining agent that part of it would be temporary.
Like I said earlier, this deal where people will not
respond if it is not forever until Jesus comes back, the 1986
tax bill was changed twice in 10 years, and it is still the
gold standard for tax reform.
Senator Corker. Thank you, Mr. Chairman, for deferring, and
thank you so much for your continued contributions to all of
us. Thank you.
Senator Gramm. Thank you for your contributions.
Senator Corker. Thank you, sir.
Chairman Enzi. And I cannot possibly let him leave without
asking this question: What overarching goals should Congress
focus on when debating tax reform for individuals, for
corporations, internationally? How do we ensure that these
marginal tax rates incentivize growth?
Senator Gramm. Well, the one thing I would emphasize, Mr.
Chairman, is that everybody focuses on the 1986 act and what it
did to marginal rates, but that was only part of its
productivity. It also eliminated all kinds of subsidies in the
Tax Code where people were incentivized to do all kinds of
things that made no sense economically.
So the first thing I would do is get rid of every provision
that you can possibly get adopted in the current Tax Code that
pays people to do things. All of the--and I know some of them
reach almost religious fervor in terms of support some have for
them, but to the extent that you can eliminate deductions and
credits and subsidies, do it, and use the money to lower rates.
That would be my first advice.
I think we will have to assume that we are going to have
some success. I do not think we can make this work assuming
that after we lift regulatory burden and after we reduce tax
rates and reform the system that we are going to have the same
economy we have got now. If CBO is anything close to form, that
is what they are going to assume.
I do not think we can or should assume that. I think that
will mean that the tax cut part of the reform will have to be
for 10 years, but like I said, the greatest tax reform in
American history was amended twice in 10 years. And, quite
frankly, if it does not work, having it snap back may not turn
out to be a bad idea.
Now, my belief is if we are conservative, if, for example,
we assumed that by implementing all these reforms, we could
just get back to half of where we were for 60 years prior to
January 20th of 2009, I think that is a conservative estimate.
I believe that is doable.
Now, we need to be relentless, and I just would throw in--
Senator Corker made the point about regulatory burden.
President Reagan used to say to those of us that were involved
in his program that we underestimated what they were doing in
lifting regulatory burden. I did not pay a lot of attention to
it, but looking back, he was right. Regulatory burden today is
at least as big a problem as the Tax Code, at least as big a
problem. And the arbitrariness of it in finance, there is no
rule of law. The law is whatever the regulator says it is, and
it is a terrible situation. And it wilts confidence, and it
wilts investment. And if we change it, America will change.
Chairman Enzi. Thank you. And the Democrats have invoked a
rule. It means that this hearing has to end at 11:30. So in
order of arrival, I have Senator Gardner, then Senator Crapo,
then Senator Boozman, so if we can keep it as brief as
possible.
Senator Gardner. Thank you, Mr. Chairman. I am only going
to use 14 of the 15 minutes left, so I will leave some time for
everybody else, if that is all right.
[Laughter.]
Senator Gardner. No, I will be quick.
Senator Gramm, thank you for your service. Thank you for
your expertise before the committee.
Just one question, and then I will make sure everybody else
has time as well. Senator Lee and I have been working on
legislation addressing the regulatory burden that you talked
about, also addressing the deficit situation, the debt
situation this country faces, by tying the issue of regulatory
burdens on our businesses, which slow the economy, with the
fact that we need a thriving economy in order to address our
debt crisis. And so the idea that we have come up with is this.
If we are faced--and we will be faced--with increasing the debt
limit of this country again, then in order to increase that
debt limit, shouldn't we then face and shouldn't we put in
place some kind of a mechanism to spur economic growth at the
same time? Because if you are just increasing debt without
economic growth, it is a spiral that results in more broken
credit.
So the idea would be this--say you increase the debt limit
by a trillion dollars. Then you would at the same time have a
regulatory reduction, reduce the regulatory burdens on
businesses by some percentage, so maybe you have a 15 percent
reduction in the cost of regulations for every X amount that
you increase the debt. So what do you think about that kind of
approach, to find the regulatory cost, to limit that and use
that?
Senator Gramm. I think anything you can do to reduce the
regulatory burden would be good. I think you might end up with
some problems with Senate rules in trying to do that.
Another idea that I have thought about is, what about
adopting a 10-year debt limit increase, where you set out in
law the debt limit for 10 years, where the debt limit falls to
the increase would be zero in the tenth year?
Senator Gardner. So it will snap back within the 10 years?
Senator Gramm. So that then that would have two big
advantages. One, you are voting for a balanced budget, which
makes the vote a lot easier. Second, you would--even if
Congress went over in a year, the number would not be so large
as to make debate irrelevant. Today, the debt ceiling, the debt
ceiling increase will be so large, there is no way you could go
back and make changes in policy to deal with it. But here, they
would be much, much smaller, and you might actually be able to
control them. You could also keep up with it and basically stop
bills saying this is going to take us over.
And if I were a Member of Congress and we did that policy,
I would just say, ``Look, I have increased the debt ceiling for
10 years in 10 equal amounts. I am not going to do it again.''
So that, I think, would be a good approach to it.
What happened on the debt ceiling, real quickly, because I
think it is important, in World War I, they changed the law
because they had to adjust the debt ceiling to be able to pay
for bills, and it was real cumbersome. And so they let it be
done over an extended period of time because they were spending
so much money on the war effort.
I wish we had gone back to the old system because what
better way to stop spending than to make people vote to raise
the debt ceiling to pay for it.
You might go back, Senator, and look at the pre-World War I
law and how it worked.
Another nice reform would be to raise the debt ceiling and
change the law, so beyond that point, any bill of any
significance beyond what is in the budget, you would have to
vote on a debt ceiling. And that would thin the ranks for
spending.
Senator Gardner. Thank you, Senator.
Chairman Enzi. Senator Crapo.
Senator Crapo. Thank you very much, Mr. Chairman, and I
thank you for inviting Senator Gramm to be with us. Senator
Gramm, it is welcome to see you. We miss you here. I am glad
that we are getting some of your advice today because we still
need your wisdom.
I just want to go quickly into two things. I really want to
get some numbers out, and I apologize. I was not here in the
beginning, so you may have already said this. But how many
years has it been since we have not achieved greater than a 2
percent growth? Do you know, in the economy? I think it is
approaching 10 years.
Senator Gramm. Let me put it this way. There is no
President in the last 135 years that has not achieved at least
1 year of 3 percent growth in their presidency, and I say 135
because annual data is not available before that. But I am
convinced that if we actually had the annual data, that the
Obama presidency was the first presidency in American history
that never had a 3 percent economic growth in any single year.
Senator Crapo. Well, I think you are headed where I am
trying to get at. I believe that it is correct to say that we
have not had an economic growth rate over 2 percent for at
least 8 years, probably closer to 10.
Senator Gramm. That is about right.
Senator Crapo. And you have indicated that the average for
the last, I think, 60 years was 3.4 percent?
Senator Gramm. For the 60 years, from 1948 through 2008.
That is counting the recession.
Senator Crapo. Counting part of the recession, yeah.
And I believe you have indicated that if there were--if we
were able to achieve just half of that difference, that it
would be over 2--how many----
Senator Gramm. $2.3 trillion of revenues.
Senator Crapo. Do you have the number of what it would be
if we could actually get back to just the average?
Senator Gramm. Yeah. 4.6.
Senator Crapo. So if we were able to get back to just the
average, we would have $4.6 trillion of additional revenue to
the Treasury?
Senator Gramm. Yeah. And the point I made in the testimony,
Mr. Chairman, is that our policies in the last 8 years have
been so dramatically different from our policies in the
previous 60 years that you got to believe if we change the
policies, that the problem is not America. The problem is its
Government.
Senator Crapo. Correct.
Senator Gramm. We are getting Europe's results because our
Government looks more and more European.
Senator Crapo. And that leads to my next question, which is
the regulatory burden, which you have already referenced. My
understanding is that some of the analysis shows that the
yearly cost of regulatory compliance in the United States is
approaching $2 trillion. It is $1.8 trillion-plus cost per
year. Now, that does not translate into its impact on the
budget, on our congressional budget, but my question to you is,
again--and I think you have discussed this--if we were to
address the excessive regulatory burden that we have put on our
economy in an effective way right now, that would also add to
the generation of economic growth and revenue to the Treasury
with which we could deal with our national debt. Correct?
Senator Gramm. If you gave me a choice of eliminating the
Obama-era regulatory burden or adopting the Trump tax reform, I
would take eliminating the regulatory burden.
Senator Crapo. I understand.
Senator Gramm. I cannot overemphasize the fact that people
cannot do business when they do not know what the rules are,
that financial institutions are being shaken down in this
country every day on trumped-up violations.
You have got a Government bureaucrat sitting in the board
room of every major financial company in America, like the old
commissar from the Soviet Union was in the factory and on the
submarine.
Senator Crapo. Well, that is right, and I would want to----
Senator Gramm. Government dominates everything in America.
Senator Crapo. I want to get back at least 20 seconds of my
time because we are running out for those who have not had a
chance yet, but that is a critical additional issue, and I
appreciate you bringing it----
Senator Gramm. You do them both; we are going to get
America back.
Senator Crapo. That is right.
Chairman Enzi. And people can ask, put questions in
writing, which I am sure Senator Gramm would be happy to
answer.
And we have 3 minutes left. Senator Boozman.
Senator Boozman. Let me just take a minute, Senator Gramm.
Thank you for being here. We really do appreciate your work on
this.
You mentioned historical averages and things. The
historical average of serving the debt is 5, 6 percent. So, if
we heat up the other things, then we are going to have that to
contend with. At what point do we have the balance of the debt?
And this is an actuarial thing. This is something that we
actually can figure out pretty easily. Where is the tipping
point there?
Senator Gramm. I do not know about a tipping point, but let
me tell you, if the economy started to grow and interest rates
rose, which they have in every recovery in the postwar period
except this one, debt service costs are going to rise very
rapidly. The Federal Reserve Bank is going to have to start
sopping up liquidity by selling assets, and interest rates are
going to rise.
And just to give you a number, in the average recovery in
postwar America, Government borrowed 1.7 percent a year in
competing with the private sector. At normal interest rates in
the fifth year of a full-blown recovery, Government would be
borrowing 6.6 percent of GDP.
We do not feel the problem because we do not have any
growth, but if we had real growth, you are going to get the
fever fast. And so what it is going to mean is, if we can get
the economy going, we are going to have to deal with spending
quicker than the political part of our country wants to deal
with it. It cannot--we cannot let it pass.
Senator Boozman. Thank you.
No, no, no. I will yield to Mr. Kennedy.
Chairman Enzi. I just got word from one of the attorneys
that, looking at the Senate standing rules, it appears that we
are exempt from the 2-hour rule. So, if you have another
question, go ahead.
Senator Boozman. Well, let me go ahead and take my time,
then.
The other thing is, again, looking at the historical
average of our labor force, 1.4 percent historical average, we
anticipate about a .5 percent. Arkansas now has very low
unemployment rates. How is that going to--what do you do about
that? How do you impact that with our ability to grow in the
future?
Senator Gramm. Let me give you a number. When the Reagan
program was adopted, the disability rolls under Social Security
plummeted.
I hate to sound like a name dropper, but I used to could
always get a smile from President Reagan by saying--when those
numbers came out, I would show them to him. I said, ``Mr.
President, people got up out of wheelchairs today and went to
work.'' And that is not that farfetched.
Our labor force participation is very low. It can go up and
will go up if there are really good jobs out there and if we
quit paying people not to work. Another thing we need to do
desperately is--President Obama waived the work requirements in
virtually every welfare program in every State in the Union. We
need to put those requirements back.
So I am not worried about Americans being willing to work
if we are willing to provide the incentives for them to go to
work.
Senator Boozman. I appreciate you mentioning the regulatory
burden and what it is doing to our community banks and the fact
that we are moving into this European style of doing things,
where you are really trying to take the risk out of capitalism
with our community banks, and the regulatory burden that they
are facing that is simply making it so difficult for small
business, people with good ideas to be able to get out and
actually make those come to fruition and create the jobs that
we need.
So thank you very much for being here.
Senator Gramm. When you take the risk out of capitalism,
you take the life out of it. That is the problem.
Senator Boozman. That is exactly right. Yeah.
Chairman Enzi. Senator Kennedy.
Senator Kennedy. Senator, I am sorry I am late. I am going
to take your testimony home and read it.
I wanted to test a thought out on you as to why we are
not--we are creating some jobs, but we are still about $6
million short of where we ought to be in recovering from a
normal recession, and the larger concern in my State in
addition to jobs not being created is wages are not going up.
I agree with you that part of that is the smothering of our
businesses by regulations and rules, but we are growing at less
than 2 percent. Pre-2008, for 30 years, we averaged about 3.1
percent growth.
The other problem, it seems to me, is productivity. We are
rocking along at about 1 percent increase in productivity every
year. It ought to be at least 2 percent.
I have noticed that a lot of our businesses are making
record profits, but they are not reinvesting. They are doing
stock buybacks. They are paying dividends. And at least part of
the problem, according to one economic theory, is that our
capital is not being reinvested in plants, in machinery, in
equipment, in technology, which means we are not creating jobs,
and we are not increasing productivity.
We have tried doing something about that on the monetary
side. I think we have done just about all we can do and maybe
even some harm. I do not see any choice but to address it on
the fiscal side.
Senator Gramm. Well, let me address the productivity thing.
I think just to bring together the regulatory burden and the
productivity, you have obviously seen the number that community
banks have hired more compliance officers since the adoption of
Dodd-Frank than they have hired loan officers.
My son has a little hedge fund. Hedge funds had nothing to
do with the financial crisis, but he now has a compliance
officer.
We have imposed all of these costs that in many cases do no
good and often do some harm, and when we lift this regulatory
burden, Americans have not run out of ideas. What has happened
is that we have made it hard to do business. We have created
tremendous uncertainties. We have got a regulatory apparatus
that is hostile to business.
There are people that want to milk the cow, and you can
have a successful economy and do that. But you cannot have a
successful economy if you are trying to do the cow harm, and I
think what has happened is that we now have an environment
where regulators are hostile to the very people they regulate.
And I can remember when I was working in a bank. There was
not an adversarial situation between us and the FDIC auditor.
They were doing their job. We were supposed to be doing our
job. They wanted us to be successful.
I think all of that has changed. Money, we have proven the
limits of monetary policy. Now we are going to prove the cost
of it, but I do believe that fiscal policy is important. But I
never thought 20 years ago, I would ever believe this:
Regulation is the No. 1 problem in this country. It is bigger
than the tax burden, and we need to deal with it. And thank
goodness, the bills that were adopted in the last 8 years are
all shells, where the regulator decides what the Volcker Rule
rules, what the stress test tests, and that can all be changed.
And we need to be relentless in changing it.
And I do believe tax reform will help us. It just cannot
make sense for us to have the highest corporate tax rate in the
world, when you bring in State rates, 39 percent, when you can
operate in Ireland for 13 percent. You are not serving your
investors by doing business here.
Senator Kennedy. I have received more complaints from my
business people, small and large in Louisiana, about regulation
than I have about the Tax Code.
Senator Gramm. Oh, yeah.
Senator Kennedy. Now, that does not mean they are happy
with the Tax Code.
In my opinion, some of these are fairly easy fixes. I have
introduced a bill that says if you are a financial
institution--bank or credit union--and you have less than $10
billion in assets, you no longer have to comply with Dodd-
Frank.
I asked Chairwoman Yellen in front of our Banking Committee
when it was my turn to ask her questions. I said, ``Explain to
me what the community banks, defined as less than $10 billion
in assets, did wrong in 2008,'' and she said they did nothing
to contribute to the meltdown.
Now, I do not know if that bill will pass, but even former
Congressman Frank has been quoted as saying, ``We went a little
too far on the small institutions.'' I am not saying all is
well with the larger banks, but I am saying that it has been my
experience, these community bankers are relationship bankers.
They do not do derivatives. They do not do mortgage-backed
securities. They loan to small business people, and they are
able to monitor their creditworthiness. And the average small
bank is less than 100 employees. We have lost 1,700 of them,
and the reason is they are having to sell or merge because of
the regulatory cost, which ironically is creating institutions
that have more assets which Dodd-Frank was supposed to help
with.
Senator Gramm. Yeah. Well, the big banks have gotten
bigger.
Senator Kennedy. Yeah.
Senator Gramm. And the small banks have gotten fewer. That
is true.
Look, anything we can do to reduce this burden will have a
big impact, and today, you cannot make a character loan.
Senator Kennedy. That is right.
Senator Gramm. Today, it is all formula-driven, and if your
loan violates that formula, you are going to get called in one
of the four or five audits you do a year. Imagine you are
running a little bank, and you get audited four different
times. So you have got to prepare for the audit for a week or
two, and then you are audited for a week. And then for a week
or two, you have got to respond to things they found that you
got to correct. When you multiply that times four, you are not
knowing your customer very well. You know your regulator real
well.
Senator Kennedy. You mean the commissar?
Senator Gramm. Yeah. So how did we get into this mess, and
how do we get out of it? Well, we got into it because there was
an agenda that was waiting to happen.
Senator Kennedy. Yeah.
Senator Gramm. Dodd-Frank had nothing to do with the
financial crisis. It was an agenda to have the Government
dominate the banking system. It has been an agenda of the
progressives for a hundred years, and they had the opportunity,
and they got it. Now we are paying for it in lower growth.
Now, they had the authority, and they did it, and people
voted for them. So did people vote to do this? I guess you can
say they did, but they did not know what it was going to cost.
That is a point I would argue.
And I think, again, on this regulatory thing, we need to be
absolutely relentless. I just cannot state it too strongly. It
is more important than anything else.
Now, these other things are important. If we cannot get out
of this 1.9 percent growth rate, we are never going to be able
to deal with the financial problems of the country. You cannot
balance a budget in America with the commitments we have made
with a 1.9 percent growth rate. This cannot be done. So we have
got to break out of this cycle.
Senator Kennedy. Thank you, Mr. Chairman.
Chairman Enzi. Senator Johnson has joined us. He is the
other accountant, and he is the chairman of the Homeland
Security and Government Accountability Committee. And they had
a hearing, but theirs had to end because they did not have the
same statutory capability that we do, so Senator Johnson.
Senator Johnson. We have rules.
[Laughter.]
Senator Johnson. Well, thank you, Mr. Chairman. Senator
Gramm, real great to see you here.
I am sorry I missed the whole first part of this, but I
think I can hop in. When we are talking about economic growth,
I know a little bit about what it takes to grow a company. And
I think you can kind of take that little micro example right up
to a macro example as well.
But from my standpoint, you certainly need security. You
need the rule of law. You need to make sure that your physical
location is safe and secure. It cannot be vandalized. You need
labor. You need people to work, and then you need capital.
Of course, I just came from a hearing on cybersecurity. So
from a national level, you need a safe and secure national
security and homeland security, but let us concentrate on labor
and on capital.
I come from the viewpoint, having come from a manufacturing
sector in Wisconsin, in the last 6 years, I have not visited
one manufacturing plant in Wisconsin that can hire enough
people, not one. We have a real problem in terms of Wisconsin
dairy, not having enough people to milk the cows, and they
really rely on immigrants to do that.
Can you just kind of address that situation
demographically, what your thoughts are in terms of our labor
pool, what is happening, why do we have such a low labor
participation rate?
Just an article in the Wall Street Journal today, even with
a very tight labor market, we are not seeing real wage growth,
not for years. What is causing that? I would throw a little
editorial opinion in there. We have this regulatory burden that
translates out to about $14,800 per year per household, might
be a drag on wages, but just talk about the whole labor
situation in America.
Senator Gramm. Well, first of all, the work requirement has
been waived in virtually every welfare program, every State in
the Union. My guess is it has been waived in your State. We
need to re-institute those work requirements.
The eligibility standards on food stamps have been reduced
dramatically, and the eligibility for disability under Social
Security has been reduced dramatically. You have got some
unions where 75 percent of their members get disability
designation when they retire. This program is clearly abused.
So we need to require people to work, able-bodied people,
to get welfare or to at least go to school, and we can do all
this stuff by computer. The labor force participation rate is
down. I said it earlier--you were not here--that back during
when the Reagan program first took hold, one of the most
astonishing numbers was the number of people on Social Security
disability declined. And I used to say, not totally joking,
``People are getting up out of wheelchairs and going to work.''
So I think that is part of the problem.
I think another part of the problem is we are wasting huge
amounts of labor. There are high schools in my State where more
people go to prison than go to college.
If we reformed our education system, gave people a choice
as to where they spent public money in educating their
children, we could revolutionize the labor force in America. I
wonder how many people in these schools, these failing schools,
have got real ability. My guess is a lot of them, and that is
something we could fix. These all require changes in policy.
Senator Johnson. Well, also changes in attitude. I have
always said we pay people not to work, which you have just
addressed. We also tell all our kids, ``You have to get a 4-
year degree,'' which implies, being a carpenter or a laborer or
somebody in the manufacturing sector, there is something wrong
with that. So we need to stop denigrating the trades.
But my final question is, just demographically, when you
look at head--there is a great piece written by Nick
Eberstadt--I think you are familiar with him--over at AEI. You
can take a look at America long term in terms of our fertility
rates. What do you think we need in terms of immigration and
policies that really do promote people coming to this country
to take advantage of the opportunity, but are here, that are
coming into this country to work, and provide that labor that
we are going to need? That is certainly what I believe we need.
What are your thoughts on that?
Senator Gramm. Well, let me just say one thing about the
previous problem, and then I want to answer this question.
There are a lot of things we could do to get Americans to
work longer. I do not understand. That does not affect me one
way or another, but why should we make somebody over 70 pay
Social Security and Medicare taxes if they are still working?
Why wouldn't we want them to keep working and get the benefit
they have qualified for? So there are a lot of ways that we
could get people to work longer by just making it easier.
Look, America cannot be America without immigrants. This is
an issue I am hard over on. I do not think people ought to come
here illegally. Illegal immigration has a big problem: It is
illegal. And I think we ought to gain control of our border.
I am willing to build a wall. I got fences around my ranch.
But we need people to come to America, and I think we ought to
let people come that can bring things that help us, people that
can bring the education they have, can bring the skills they
have, can bring the capital they have. I want a vigorous legal
immigration program, and I do not buy it. I am sorry. I just do
not buy it that some brilliant engineer coming here from
wherever is taking a job away from somebody.
Senator Johnson. No, we need the best and the brightest,
and by the way, I did introduce a piece of legislation that
makes that legal immigration system governed by the States. I
think States would be a better judge of what sectors they want
them working in, what wage rates, to make sure we do not
depress American labor, so I am on the same page with that.
Mr. Chairman, you have been very indulgent. I appreciate
it. Great hearing.
Thank you, Senator Gramm.
Senator Gramm. Thank you, Senator.
Chairman Enzi. Thank you for coming, and thank you for all
the complementary things that get done in your committee to
what we are trying to do here, and we will have to work
together on more of those.
Senator Gramm, I cannot thank you enough for being here
today, for your outstanding comments, and then your answers to
questions.
Incidentally, anybody on the committee that wants to submit
questions can until close of business today, and we would hope
that you would answer those for us too. Some of them would be
more specific. I have some that will deal with a lot more
numbers that I would appreciate someone putting together for me
because it would be a help.
But I love the ability you have to phrase things. You make
it simple. You make it understandable. You even make the
numbers seem exciting. Not many people have that talent. So I
appreciate you making the case for doing something, doing a lot
of things that would keep this country from imploding, and you
have made some excellent suggestions, so thank you.
Senator Gramm. Well, Mr. Chairman, I appreciated coming
today. I am sorry that we got this dispute going on and we do
not have our Democratic colleagues here.
But let me say that just in conclusion that anybody that is
writing off America is making a big mistake. We have stagnation
because we have had bad policy. If we change these policies, we
are going to change America, and anybody who does not believe
that policy matters, all they got to do is look at the history
of our country. America had better government, less of it, more
efficient markets, and we took the huddled masses yearning to
breathe free that nobody else in the world wanted and produced
more empirical evidence of what you can do with a good system
than any nation in history has ever done.
So I do not understand how people can look you in the face
and say, ``Well, our poor economy has nothing to do with the
policies we followed for the last 8 years,'' or ``The good
economy for the previous 60 years on average had nothing to do
with the policies we followed there.'' I guess the Soviet Union
did not collapse because of bad policies. Well, what did they
collapse from? We have grown faster than Europe for our whole
history. Is that just an accident? I do not think so.
So I think these are the points we need to get back to, and
you have been very flattering to me, because we are old
friends, and I appreciate it. Thank you very much.
Chairman Enzi. Thank you. I have got pages of notes here
that I will have to go through some more, and I will be sending
some more questions. Thank you very much.
Senator Gramm. Thank you.
Chairman Enzi. The hearing is adjourned.
[Whereupon, at 11:52 a.m., the committee was adjourned.]
ADDITIONAL COMMITTEE QUESTIONS
[The following submitted questions were not asked at the
hearing but were answered by the witness subsequent to the
hearing:]
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RUNNING THE GOVERNMENT FOR LESS
----------
WEDNESDAY, MAY 17, 2017
U.S. Senate,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to notice, at 10:33 a.m., in
room SD-608, Dirksen Senate Office Building, Hon. Michael B.
Enzi, chairman of the committee, presiding.
Present: Senators Enzi, Grassley, Crapo, Toomey, Johnson,
Perdue, Gardner, Kennedy, Boozman, Sanders, Warner, Kaine,
King, Van Hollen, and Harris.
Staff present: Eric Ueland, Republican staff director; and
Warren Gunnels, minority staff director.
OPENING STATEMENT OF CHAIRMAN MICHAEL B. ENZI
Chairman Enzi. I will call this hearing to order. Good
morning, and welcome to all here. A packed house today. I
apologize for being 4 minutes late. We had to get a bunch of
bills out of Homeland Security today, and we did, I think about
15 bills. That is a lot of roll calls.
We are here today to discuss ways to reduce the operating
costs of the Federal Government and make it more efficient and
effective for hardworking taxpayers. Budgeteers and the entire
Nation eagerly await next week's release of the President's
full budget proposal. I expect it will kick off a new round of
debates about whether various Federal Government programs
should be increased, decreased, or eliminated.
What is sure to get less attention are the numbers in the
budget reflecting the overhead costs of running our Government,
the hundreds of billions of dollars we spend each year as the
cost of doing business. I am talking about the personnel, the
procurements, the information systems, the payment processing,
and the innumerable other low-profile expenditures that consume
a surprisingly big portion of the budget, particularly of the
discretionary spending totals that are hotly debated each year.
These are costs that we tend to view as fixed and immutable
while we debate the relative merits of more visible grant or
transfer programs.
But Congress' own support agencies have raised important
questions about these operating costs. For instance, as the
Nation's largest employer, the Federal Government paid $215
billion last year to compensate a work force of more than 2
million employees, and that is on the non-defense side alone.
As the pie chart on the screen indicates, one-fifth of all
discretionary spending is in that category.
[Slide 1 follows:]
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We will hear today about a new Congressional Budget Office
(CBO) report that finds a significant disconnect between the
compensation paid to Federal workers and that received by
private sector counterparts with similar training and
experience.
The Federal Government is also the world's biggest
customer, purchasing more than half a trillion dollars of goods
and services annually. This includes, for instance, more than
$80 billion spent on information technology systems that
warehouse and process data. In light of the size and scope of
Government purchasing, we should be alarmed by the host of
inefficiencies the Government Accountability Office (GAO) has
chronicled in Federal procurement practices. The GAO also
informs us that in the normal course of business, the U.S.
Treasury now issues more than $100 billion in improper payments
each year. That is 93 percent of the $144 billion in improper
payments issued last year that were overpayments in which we
sent money to individuals or entities who either were not
supposed to get it or got more than they were supposed to.
As you can see from the chart up on the screen, more than
three-quarters of these improper payments governmentwide are
issued by just three programs: Medicare, Medicaid, and the
Earned Income Tax Credit (EITC). It is important for Congress
to ask if we are using taxpayer dollars wisely and operating
the Government as efficiently and effectively as the managers
of a private sector company would.
[Slide 2 follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Are the more than $1 trillion in improper payments reported
since 2003 just a necessary cost of doing business? Or could we
be saving tens of billions annually by reducing the error rate?
Is it possible to better align Federal employees' compensation
with counterparts in the private sector such that we are
neither underpaying nor overpaying different types of Federal
employees but, rather, compensating individuals appropriately
and in accord with their skills, their training, their
experience, and their work product?
How much could we save if the Government effectively
leveraged its economies of scale to purchase information
systems and various other goods and services?
We are fortunate to have before us today the heads of two
major congressional support agencies that have both produced
substantial bodies of work identifying ways the Government can
operate in a more efficient and cost-effective manner. I hope
that we can have a substantial conversation today about the
budgetary implications of their findings.
But before we hear from the witnesses, I will turn the
floor over to the ranking member for his opening remarks.
Senator Sanders.
OPENING STATEMENT OF SENATOR BERNARD SANDERS
Senator Sanders. Thank you very much, Mr. Chairman. And let
me welcome Dr. Hall and Mr. Dodaro. We thank you very much for
being with us.
Mr. Chairman, we very much look forward to the hearings
that will be held on the President's budget, and, obviously, at
this point we do not know exactly what will be in that budget.
But based on some of the information that we have seen from his
so-called skinny budget and other proposals, including tax
ideas, I believe that what we are going to be looking at are
proposals way, way, way out of touch with where the American
people are and where they want to go.
These proposals will include hundreds and hundreds of
billions of dollars in tax breaks for the top 1 percent at a
time when we already have a massive level of income and wealth
inequality. And while the President's budget will propose tax
breaks for billionaires, the budget will also talk about
massive cuts to Pell grants, to Head Start, to after-school
programs, for the Meals on Wheels program, to the WIC program,
which provides nutrition for low-income pregnant women and
their babies.
To my mind, the American people do not believe that the
wealthiest families in this country deserve incredible tax
breaks while we cut programs that the working people of this
country desperately need. So I look forward to those hearings.
Mr. Chairman, I wanted to say a few words this morning on
some of the work that Dr. Hall and the folks at CBO have done.
And as you know, they did an analysis of the original Trump-
Ryan health care bill, which was signed into law, and this is
what the CBO estimated would happen. I think it is important
that all Americans understand this. This is not from Bernie
Sanders. It is not from Tim Kaine. This is from the CBO, and I
would hope that if I am making a mistake, Dr. Hall, please jump
in and tell me if I am incorrect.
What the CBO reported was that an additional 14 million
people would be uninsured in 2018. We are the only major
country on Earth not to guarantee health care to all of our
people. This legislation will result in an additional 14
million people being uninsured. In other words, we are moving
in the wrong direction. Instead of insuring more people, we are
throwing people off of health insurance. An additional 24
million people would be uninsured by the year 2026.
Medicaid provides health insurance not just to lower-income
Americans but about 60 percent of Medicaid funding goes to
nursing homes, so when middle-class people are forced to see
their parents enter a nursing home, Medicaid in many cases is
paying that bill. Medicaid would see cuts of more than $800
billion over the next decade, denying health insurance to 14
million Americans.
In 2026, as a result of that legislation, the original
legislation that was proposed, a 64-year-old with an income of
$26,500, an older worker, would see his or her premiums
increase from $1,700 under current law to $14,600. This is
somebody with an income of $26,000. Preposterous. More than
half their annual income.
According to CBO, if Planned Parenthood is defunded, which
was in the legislation that was passed, ``The people most
likely to experience reduced access to care would probably
reside in areas without other health care clinics or medical
practitioners who serve low-income populations.''
So we should also be very clear that the so-called
Republican health care plan that the House recently passed
really in all honesty is not a health care bill at all. It
continues the obsession of our Republican colleagues for tax
breaks for the wealthiest people in this country. So we are
throwing millions of people off of health insurance, raising
premiums for older workers in a significant way.
But here is the good news: If you are in the top 2 percent,
the top 2 percent would receive a $299 billion tax break, and
hundreds of billions more in tax breaks will go to large
insurance companies, drug companies, and other corporate
interests. That is what that bill is about.
In my view, that bill--not my view. Poll after poll after
poll shows this is exactly what the American people do not
want.
So, Mr. Chairman, I look forward very much to holding
hearings here on that legislation, to holding hearings on the
proposed President's budget, hearings on his tax proposals. And
I thank you very much for holding this hearing.
Chairman Enzi. Thank you for your comments, and we will be
doing lots of hearings, and doing those, that will be a more
proper time to debate some of those things. And it will be
after the Senate input on it, too, which is always important.
On today's hearing, we all agree that we need to strive for
the most effective, efficient Government possible, and I think
we are going to hear evidence from our witnesses in a moment
that there is plenty of room for improvement and plenty of
potential for budgetary savings. Both of our witnesses this
morning have testified before this panel before, so I will make
their introduction brief.
Our first witness is the head of the Government
Accountability Office, Comptroller General Gene Dodaro, and Mr.
Dodaro was confirmed by the Senate back in 2010, and he has
worked at GAO in a variety of capacities for more than 40
years. He has probably lost track of how many times he has
testified before Congress. But committees keep inviting him
back because he is a great witness who always has a lot to
teach us.
Our other witness is Dr. Keith Hall, who is the Director of
the Congressional Budget Office. Dr. Hall became the ninth
Director of CBO a little more than 2 years ago. Before that, he
was the Commissioner of the Bureau of Labor Statistics and,
before that, the Chief Economist for the White House Council of
Economic Advisers.
We look forward to receiving the panel's testimony. Thank
you both for joining us and being willing to share your
expertise and, of course, any questions that might be submitted
later by those who are not here or those who are here.
So welcome, Comptroller General and Director of the CBO.
General Dodaro, you can go ahead and present.
STATEMENT OF THE HONORABLE GENE L. DODARO, COMPTROLLER GENERAL
OF THE UNITED STATES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Dodaro. Thank you very much, Mr. Chairman. Good morning
to you, Ranking Member Senator Sanders, members of the
committee. It is a pleasure to be here today to talk about how
the machinery of Government could operate more efficiently and
effectively.
I will focus my opening remarks on two pervasive
governmentwide issues that I think should be the subject of
this committee's oversight.
First is the area of improper payments in the Federal
Government. These are payments that should not have been made
or were made in the wrong amounts. Since the Congress has
required the executive departments and agencies to estimate the
amount of improper payments every year since 2003, the
cumulative number of improper payments that has been reported
was in excess of $1.2 trillion. So it is a significant amount
of money. The annual figures that have been reported have grown
over the last 3 years from $125 billion to $137 billion to the
most recent estimate in 2016 of $144 billion. This includes
estimates for 112 programs at 22 Federal agencies, so it is a
pervasive problem.
As you pointed out, Mr. Chairman, in your opening remarks,
three large Federal programs constitute the majority of
estimated improper payments: Medicare, Medicaid, and the Earned
Income Tax Credit. But there are a number of programs across
Government where this problem is an issue. There are 14 Federal
programs where there is over $1 billion reported in improper
payments; 11 programs report estimates of over 10 percent error
rates across the Federal Government.
Now, as significant as these numbers are, they are
understated. There are 18 risk-susceptible programs--large
programs like Temporary Assistance for Needy Families (TANF),
and for 2016, the SNAP program, Supplemental Nutrition
Assistance Program, that did not report estimates at all. And
there are some Federal agencies that do not report that they
are susceptible to improper payments.
So for a number of years now, we have identified a material
weakness in our audits of the Federal Government's financial
statements. This is because the Federal Government really is
not able to determine the extent of this improper payment
problem across the Government or have a reasonable prospect
that it is managing it properly in order to reduce these
improper payments.
Now, we have many recommendations to Federal agencies, and
some matters for Congress to consider in terms of legislative
changes that I would be happy to talk about in the question-
and-answer period. So we think this is an area where there
could be considerable savings and proper stewardship is needed
over these programs.
What I am very concerned about are the high rates in
Medicare and Medicaid, which are two of the fastest-growing
programs in the Federal Government. So these are areas that I
believe require additional and more aggressive congressional
oversight.
The second area I wanted to mention is the Federal
Government's investment in information technology, which has
averaged over the years over $80 billion. In 2015, we
designated it one of the high-risk areas across the entire
Federal Government, for several reasons.
One, there are continual cost overruns and schedule delays,
and often the investments did not produce a material return and
added little to mission outcomes of the agencies that have been
investing in those IT programs.
Now, the Congress passed the Federal Information Technology
Acquisition Reform Act to give additional authorities to Chief
Information Officers. It also required more transparency and
risk management associated with the Federal Government's
investment in information technology, and to reap more savings
in consolidating agencies' data centers, and to eliminate
duplicative investments in information technology. And so there
is a lot that could be done.
A troubling trend is of the $80 billion or so that is
invested every year, a significant proportion of it goes into
supporting existing legacy systems. Almost three-quarters of
the $80 billion goes to support these old systems, some of
which are 30, and in some cases almost 50 years old. And these
older systems also introduce security risk.
We also have designated cybersecurity across the Government
as a high-risk area since 1997 and protecting critical
infrastructure protections since 2003. So we identified the
information technology area both in investments, not getting a
good return on investment, as well as security. Both are
disturbing issues that require attention.
So I thank you very much for inviting me, and I look
forward to answering questions at the appropriate time.
[The prepared statement of Mr. Dodaro follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Enzi. Thank you.
Dr. Hall.
STATEMENT OF KEITH HALL, PH.D., DIRECTOR, CONGRESSIONAL BUDGET
OFFICE
Dr. Hall. Senator Enzi, Ranking Member Sanders, and members
of the committee, thank you for your invitation to testify at
today's hearing.
My written testimony is devoted to CBO's recent report on
the compensation of Federal employees. The Government's
personnel costs reflect the number of workers and average cost
to employ them. For the past 30 years, the number of civilians
employed by the Federal Government has not changed much but has
been a declining share of the growing U.S. labor force. Federal
civilian employees now account for just 1.5 percent of total
employment.
Our report compared Federal and private sector compensation
from 2011 to 2015. We concluded that total compensation was, on
average, 17 percent higher for Federal workers than for private
sector counterparts, after accounting for geographic location
and some other characteristics that affect compensation.
However, the comparison varied by education level. For
example, average Federal compensation for workers with a high
school diploma or less was 53 percent higher than for similar
private sector workers. But for workers with a professional
degree or doctorate, compensation was 18 percent lower for
Federal workers than in the private sector.
In my remarks this morning, I would like to put personnel
costs in a broader context to clarify their impact on the
Federal budget. I will focus on potential efficiency gains in
the executive branch agencies other than the Postal Service and
Defense Department since funding for the Defense Department
affects combat power in complex ways that warrant a separate
discussion.
To understand the potential for such gains, it is useful to
distinguish administrative from programmatic costs. In some
cases, efficiency gains might allow for reductions in
programmatic costs. For example, new technologies that allow
medical services to be delivered more efficiently could lower
the cost of health care programs.
More typically, efficiency gains involve reductions in
administrative costs. For example, efficiency may be gained by
combining the management structures of programs with similar
goals. However, efficiency gains cannot eliminate
administrative costs entirely. Certain levels of management
staffing, for example, are needed to provide oversight and
prevent fraud, waste, and abuse.
Administrative costs are a relatively small part of the
overall budget. In 2015, 87 percent of direct obligations by
executive agencies--that is, spending that is not reimbursed by
another entity--were in categories that were mainly
programmatic. These categories include benefit payments, grants
to States and local governments, and interest on the public
debt. The remaining 13 percent of Federal spending fell into
three categories, each of which represented a mix of
administrative and programmatic costs.
The first category, contractual services and supplies, was
just 6 percent of spending. Most of that spending cannot be
easily characterized as administrative or programmatic.
However, payments for travel, transportation, rent,
communications, and utilities were more likely to represent
administrative costs.
By comparison, contracts for research and development, the
operation and maintenance of equipment, and the operation and
maintenance of facilities, notably the Energy's Department
National Labs, were more likely to represent programmatic
costs.
Members of Congress often ask CBO about the number and cost
of people working under Federal contracts; however, the
Congress has not required the executive branch to collect that
information.
The second category was personnel, which was 5 percent of
2015 spending. Much of that spending for personnel was
programmatic rather than administrative. For example, outside
defense, the Department of Veterans Affairs (VA) employed the
largest share of the Federal civilian work force. About 60
percent of its employees worked in various medical professions,
the most common of which was nursing. The Department of
Homeland Security employed the next largest share, with the
most common job being an inspector for the Transportation
Security Agency.
The third category, acquisition of assets and certain trust
fund transactions, was 3 percent of spending. Non-defense
assets are generally required for use in programmatic
activities. The largest acquisitions in 2015 were in the area
of international assistance, primarily capital contributions
and loans to the International Monetary Fund. Assets can also
be acquired for administrative support, such as in the case of
software systems for payroll management.
Improving the efficiency of Government is an important
objective, but being CBO, I have to mention that given an aging
population and rising health care costs, making a significant
dent in Federal deficits would require broader changes in
Federal tax or spending policies. To make such changes,
lawmakers would have to increase revenues above amounts
projected under current law, reduce spending for large benefit
programs such as Social Security and Medicare, or combine these
approaches.
I would be happy to answer any questions you may have about
our work on compensation. Thank you.
[The prepared statement of Dr. Hall follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Enzi. Thank you.
We will now go to the questions for the witnesses, and we
do this in a particular order, who were here at the time of the
gavel, and then order of arrival after that.
I am going to defer my opportunity to ask questions,
though, to Senator Grassley, who has some other things to get
to.
Senator Grassley. Thank you for that courtesy, Mr.
Chairman.
I am going to start with GAO. I always try to thank you
publicly for all the hard work you do for the investigations I
ask you to do because you give a great deal of credence to the
things that we are trying to get information on, and
particularly to fight the rest of the Federal bureaucracy.
I have a question that you have already referred to in your
comments. It is about some of these programs like SNAP or TANF
not reporting. So I will not give the background because you
know what it is.
So a very simple question. Why is it that some programs are
unable to even estimate improper payments? Is it a structural
deficiency or a willful defiance?
Mr. Dodaro. In the case of the Temporary Assistance for
Needy Families Program, the Department of Health and Human
Services (HHS) believes it does not have the statutory
authority to ask the States for information to estimate
improper payments. Now, the HHS Inspector General has
recommended that Congress clarify that and make it clear in
statute that they should do an estimate of improper payments,
and I agree with that. I think Congress should act statutorily
to require the TANF Program to develop an improper payment
estimate.
Now, the Supplemental Nutrition Assistance Program had
reported improper payment estimates up through 2015, and then
the program identified a problem with the quality of the
information for State quality assurance programs in 42 of the
53 States, including the territories. So program officials are
trying to sort through what those quality assurance problems
are right now, Senator Grassley, and I expect that once they
do, they will be able to resume making estimates.
Senator Grassley. Well, I think you gave me a job as a
member of the Agriculture Committee when we have the next farm
bill, which includes a lot with nutrition, to bring up that
reporting requirement on the part of the States.
A follow-up. How much improper payments are due to people
defrauding the Government as compared to simple mistakes?
Mr. Dodaro. It is hard to estimate the amount of fraud. All
improper payments are not fraud. But all fraud is an improper
payment by definition. And so it is hard to estimate the
quantity that is fraud and that that results from errors. But
we know there are instances of fraud, particularly in the
health care area, and it is very important that the agencies
have appropriate controls over payments. In some cases they
identify the cause of the improper payments is insufficient
documentation. It may be a paperwork problem, but it might be
something disguising fraud. Just under 24 percent of improper
payments are made because the agency has not been able to
authenticate eligibility properly. That is a problem. And I
think that agencies need to make more of an effort to ensure
the payment is right in the first instance.
Senator Grassley. And one question for you, sir. I
appreciate the work that CBO does and has done to study the
compensation of Federal employees compared to the private
sector. This is what I find troubling, not about your work but
about the report, the results. According to your analysis, the
Federal Government is actually overpaying for low-skilled labor
and underpaying for professional or high-skilled workers
compared to the private sector. Much of the difference in total
compensation is due to the cost of benefits, specifically
defined benefit pension.
Do you have any thoughts on how to undo this divergence? Do
you have any suggestions to reverse the trend going forward?
Dr. Hall. Sure, I appreciate the question. But, you know,
CBO is very careful not to make recommendations, so we could
talk about some possible proposals. If we had some proposals to
work through, we could tell you how it would affect
compensation, whether it would get you to where compensation
was closer in the Federal Government to what is in the private
sector. As far as recommending something, like I say, we would
shy away from that because of our role.
Senator Grassley. OK.
Dr. Hall. Let me just say one thing, though, from what we
have got as well. There have already been some changes in the
defined benefit program that are going to have effect in the
future going forward that are likely to reduce this
discrepancy. It is the contributions by new employees on
defined benefit. That contribution is now going up, and that is
not having much of an effect yet. But once those people get
into a decade or two decades to retirement, it is going to have
an effect then, and that will by itself close the gap a little
bit.
Senator Grassley. OK. Thank you, Mr. Chairman.
Chairman Enzi. Thank you.
Senator Sanders.
Senator Sanders. Thanks, Mr. Chairman. And, gentlemen,
thank you both for your very informative presentations. I think
we can say whether we are progressives or conservatives, we do
not want to see Government wasting money. We want programs run
efficiently.
Mr. Dodaro, let me begin with you. I did find it
interesting that you did not say much about the largest
discretionary program in the country, the Department of Defense
(DOD). The Pentagon currently has a $1.4 trillion acquisition
portfolio, which currently suffers from more than $469 billion
in contractor cost overruns. A cost overrun is a contractor
promises a product at a certain price, ends up costing two or
three times more.
Furthermore, as I understand it, virtually every major
defense contractor in the United States has reached a
settlement with the U.S. Government because of allegations of
fraud or have been outright convicted of fraud.
So you have got huge cost overruns, and we are dealing with
mega billion-dollar defense contractors who in many cases have
been charged with fraud and reached settlements or been
convicted of fraud.
This is what the GAO said last May about the Pentagon's
inability to manage its finances. It has ``adversely affected
DOD's ability to control costs, ensure basic accountability,
anticipate future costs, measure performance, prevent and
detect fraud, waste, and abuse, address pressing management
issues, and prepare auditable financial statements.''
Tell me about the audit of the Department of Defense. Do we
have one?
Mr. Dodaro. No.
Senator Sanders. Isn't that a little bit of a problem when
you are dealing with a $600 billion-plus agency?
Mr. Dodaro. It is a very significant issue. It is one of
the main reasons we cannot give an opinion on the consolidated
financial statements of the Federal Government. Senator, I
would say that the business practices of the Defense Department
need to be improved, and there is a lot of room for efficiency,
not only in financial management; but also in weapons systems
acquisition, inventory management, supply chain management, and
business system modernization. All these areas are on the High-
Risk List that GAO keeps of programs across the Federal
Government.
Now, with regard to improper payments, we have found that
DOD is not properly sampling and making good estimates of
improper payments at the Department. We have made some
recommendations to DOD. I think DOD needs to do a better job in
that area.
One of the biggest problems DOD has is they cannot identify
all of its transactions.
Senator Sanders. I understand that. But what I am hearing
you say--and correct me if I am wrong--is this is a very, very
significant issue that Congress needs to take a hard look at.
We are talking about many billions of taxpayer dollars.
Mr. Dodaro. Definitely. And I have been urging that for a
number of years.
Senator Sanders. Thank you very much.
Dr. Hall, let me pick up maybe from a different perspective
what Senator Grassley was talking about. As I understand it,
your study indicates that lower-income workers are better
compensated at the Federal level, but people with more
education are not as well compensated as the private sector.
Dr. Hall. That is correct.
Senator Sanders. OK. Let me just make what is an obvious
point. In this country today, we have a $7.25 Federal minimum
wage. To my mind, and I think to most people's minds, that is a
starvation wage. So we have got millions of workers flipping
hamburgers, we have millions of workers all over this country
earning 8 or 9 bucks an hour, and you know what? You cannot
survive on 8 or 9 bucks an hour.
So the Federal Government, for a number of reasons, says
that we are going to hire lower-income workers, people at the
bottom of the work chain, so to speak; we are going to try to
pay them a little bit more so maybe they can pay rent and take
care of their food.
So I do not think this is all that shocking. The answer is
not to lower, in my mind, wages for Federal workers. It is to
raise the wages of lower-income workers all over this country,
which is why I have proposed, with a lot of support, a $15-an-
hour minimum wage.
And in terms of pensions, the goal, again, should not be to
cut pensions for Federal workers. It should be to raise
pensions and create a system where workers in this country,
when they reach retirement age, know they have something in the
bank. Today almost half of workers in America, Mr. Chairman,
when they reach retirement, have no money in the bank when they
retire, and this is a national crisis. We should not be talking
about cutting pensions. We should be talking about a program to
guarantee that when people retire they can live in dignity.
Thank you.
Chairman Enzi. Senator Kennedy.
Senator Kennedy. Gentlemen, what do we do about it?
Mr. Dodaro. Well, there are a number of recommendations
that we have, and some of them require legislative solutions.
For example, there is a Do Not Pay working system at the
Treasury Department that a number of agencies can use. But they
currently do not have access to the full death file that Social
Security has. Social Security says it does not have the
authority to give the Treasury Department the file that
includes all State-reported data, so there are opportunities
for matching that are lost.
In the Medicare area----
Senator Kennedy. Excuse me. You mean they do not have the
legal authority?
Mr. Dodaro. Yes, that is what the Social Security
Administration (SSA) asserts. SSA does not have the legal
authority to give the full death file to the Treasury
Department because Treasury is not ``a benefit-paying agency.''
But we believe Treasury should have it and----
Senator Kennedy. What would happen to them if they did?
They would get put on double secret probation or something?
[Laughter.]
Mr. Dodaro. Well, some----
Senator Kennedy. Why don't they just give it to them?
Mr. Dodaro. SSA believes it does not have the legal
authority. I recommend that Congress clarify that authority
question.
I have had running battles with a lot of agencies about
them not feeling they have the legal authority to give GAO
information. Fortunately, the Congress' act just clarified that
in a bill that was signed into law this year to give us access
to the National Directory of New Hires at the HHS Department
that has the most current wage information so that we can
compare it to programs that require eligibility based on
income, to make sure people are self-reporting the right
information.
On Medicare and Medicaid----
Senator Kennedy. May I interrupt you? I do not mean to. I
just want to understand.
Mr. Dodaro. Sure.
Senator Kennedy. What are they afraid of? Since nobody ever
gets fired around here, what are they afraid of?
Mr. Dodaro. Well, you would have to ask Social Security
directly about it. Social Security officials just will not
share the data because they do not believe they have the
authority to do it.
Senator Kennedy. Excuse me for interrupting.
Mr. Dodaro. That is OK. I am perplexed as well by the whole
situation, and I empathize with your view. But I cannot compel
Social Security to give the information. Only Congress can
compel Social Security to give the information, and I have
urged Congress to act in that regard.
There are many things that could still be done. The
Medicaid program in particular--there are a lot of
recommendations that we have. The data that the Centers for
Medicare and Medicaid Services (CMS) has to oversee that
program is usually 2 or 3 years out of date. CMS needs better
data. CMS could provide more information to the States from
databases they use for Medicare matching that the States could
also use for Medicaid matching. Also the managed care providers
on Medicaid have not been under a regular system of audit. We
have recommended that. CMS is supposed to start it this summer.
With regard to the Earned Income Tax Credit, which is about
a 24 percent error rate, we have recommended that----
Senator Kennedy. That means--excuse me for interrupting.
Mr. Dodaro. Sure.
Senator Kennedy. That means that 24 percent of the people
receiving checks should not receive them?
Mr. Dodaro. That is the improper payment rate. Either they
should not receive them at all, or they are not in the right
amount, one of the two things. That is one of the higher error
rates in the Federal Government.
There are several things that could be done in this regard.
One, Congress could lower the requirement for electronic filing
of W-2 data. This past year, based on our recommendation,
Congress required employers to provide W-2 information earlier
to the Internal Revenue Service (IRS), in January. Previously,
they were not getting it until March or April, which was too
late to use for verifying tax returns. Congress also extended
the deadline and instructed IRS not to pay refunds until
February.
Senator Kennedy. Let me stop you one more time. I am going
to run out of time.
Mr. Dodaro. OK.
Senator Kennedy. And I do not want to go over.
Mr. Dodaro. Well, I can give you a list for the record of
all our recommendations.
Senator Kennedy. Would you mind if I came to see you 1 day
at your convenience and we could talk about this further?
Mr. Dodaro. Sure. You can come see me; I will come see you.
I would be happy to talk about it.
Senator Kennedy. In the 40 seconds I have, I want to be
sure I understand. I want to follow up on Senator Sanders'
point. On defense spending, we do not have any idea about any
improper payments because they are not providing it, the
information?
Mr. Dodaro. DOD has made some estimates. The estimates, in
our view, are not accurate estimates. And in other cases, DOD
is not making improper payment estimates. We have made
recommendations along those lines. But, also----
Senator Kennedy. That is extraordinary.
Mr. Dodaro. Also, DOD is the only major department or
agency that cannot pass a financial audit, and so that is
something else that needs to be attended to. That is one of the
reasons why DOD is having problems making improper payment
estimates. They cannot document the full universe of
transactions or provide documentation to support a lot of the
transactions.
One clarification, Senator Kennedy, on the Earned Income
Tax Credit. The 24 percent is the amount of money, not 24
percent of the people.
Senator Kennedy. So it is even worse.
Mr. Dodaro. That is one way to look at it.
Senator Kennedy. Thank you, Mr. Chairman.
Chairman Enzi. Senator Kaine.
Senator Kaine. Thank you, Mr. Chair, and thanks to the
witnesses. There is a lot of meat in the written testimony that
we will use. A couple of things.
First, I wanted to say to the chair I appreciated your
comments, Mr. Chair. The ranking member, Senator Sanders, was
addressing comments to you, Dr. Hall, about the CBO report on
the American Health Care Act (AHCA), and the chair in
response--and I appreciate this--said we will be doing lots of
hearings after the Senate input, which is important. And I just
wanted to underline that because a huge concern on this side of
the aisle about the health care effort right now is that we not
repeat what was done in the House. The bill that was put up
before the House, there were not meaningful hearings on the
bill where experts could testify, where patients, doctors,
hospitals, small businesses could testify. Democrats did not
get an opportunity to amend the bill.
Contrast that with the Affordable Care Act in 2010, the
extensive hearings, extensive opportunities for testimony. The
Senate version of it had 145 Republican amendments that were
accepted. And so I think a fear that we have had on our side is
that in the Senate it would be done the same way, that there
would be a small process, there would be a bill pushed to the
floor, hopefully for a 51 vote, without hearing from patients,
doctors, hospitals, insurance companies, small businesses,
without letting the public see the debate, without allowing
opportunities for amendments. This is the most important
expenditure that anybody ever makes in their life, and it is
also the largest segment of the American economy.
So we recognize we are in the minority. We just want to, on
behalf of our constituents and the American public, have an
opportunity to see a CBO report, for gosh sakes, and hear from
people and try to make sure we get this right. And so the
comments of the chair that we are going to be having hearings--
and I think ``we'' meant generally in the Senate--hopefully the
Health, Education, Labor, and Pensions (HELP) Committee on
which I serve, hopefully the Finance Committee, possibly this
committee, too, and we would do those after Senate input so
that we do not make mistakes. I was very heartened by that,
number one.
A second question for each of you. When the 2017 budget
deal was reached recently, the President said we might need a
good shutdown of the Government in September. He said that via
a tweet.
Could either of you tell me whether you think a shutdown of
the Government of the United States of America is a good thing?
Mr. Dodaro. I would not endorse that at all. We looked at
the shutdown that occurred in 2013, here are a couple
observations that we made.
One, the Bureau of Economic Analysis issued a report later
saying it reduced the fourth quarter gross domestic product
(GDP) by about 0.3 percent, so it had a short-term impact. A
longer-term economic impact was not able to be determined
because it just lasted, a 16-day period.
We also looked at a number of agencies. The National
Institutes of Health (NIH) had to close down clinical trials
right away so people could not sign up for them. NIH eventually
rectified that. A number of grant applications were put on
hold. The Department of Energy had to lay off some contractor
employees at their environment management facilities because
the Department stopped work orders. So there were disruptions
that occurred during that period of time.
So I think it is better to keep the Government open,
operating, and serving the American people.
Senator Kaine. Dr. Hall.
Dr. Hall. First, I would not want to offer an opinion even
on something like that because of our role. But we have not
done anything, exactly calculated the cost of a shutdown. We
could do that at some point, but I would echo actually a lot of
what Gene said. It did seem to have some small effect in the
short run, economic effect that kind of faded over time. But it
all depends, of course, on how long it lasts.
Senator Kaine. Right. Thank you. Well, I would hope that we
would all, having taken an oath to be part of this enterprise,
we would all embrace the wisdom of the first Republican
President, Abraham Lincoln, at Gettysburg, who said government
by, of, and for the people shall not perish from the Earth, and
I do not think that means perish for a minute or a day, much
less 16 days or longer. So the notion of a good shutdown I find
offensive.
Let me ask you, Dr. Hall, could I have your written
testimony here, but your verbal testimony, can you read me the
last two sentences of it again? There was a point I wanted to
ask you about, and I want to make sure I heard it correctly.
Dr. Hall. I am guessing it was the part before, ``I would
be happy to answer questions.''
Senator Kaine. Yeah, you can skip that.
[Laughter.]
Senator Kaine. We do not view that as a sincere statement.
[Laughter.]
Dr. Hall. We will skip over that.
Well, I will read you the last paragraph: ``Improving the
efficiency of Government is an important objective, but given
an aging population and rising health care costs, making a
significant dent in Federal deficits would require broader
changes in Federal tax or spending policies. To make such
changes, lawmakers would have to increase revenues above
amounts projected under current law, reduce spending for large
benefit programs such as Social Security and Medicare, or
combine these approaches.''
Senator Kaine. And I thought that is what you said, and I
think that is just an important point to underline. If we are
going to deal meaningfully with budgetary issues, especially
debt and deficit, there are a lot of good ideas in both this
testimony about the way we can be more efficient, but these are
big policy decisions, the taxes, the revenues, the programs,
big policy decisions. And if we are going to deal with the debt
and deficit, that is the way we are really going to deal with
it.
And with that, I do not have any other questions, Mr.
Chair.
Chairman Enzi. Thank you.
Senator Perdue, followed by Senator Van Hollen.
Senator Perdue. Thank you, Mr. Chairman, and thank you both
for being here again. You are right in the vortex of probably
the most critical crisis in American history, in my opinion,
and that is this $20 trillion debt. Our Federal Government has
grown from $2.4 trillion in 2000, the last year under President
Clinton, to $3.9 trillion last year. As a percentage, it is
21.6 percent of our GDP, outlays. We are only collecting about
18.5 percent in revenue, which although is an all-time high
relative in aggregate dollars.
My questions, I have two things. I want to go to the HR
personnel issues, but first, General, your report for years has
been outlining excess spending, wasting spending, and all that.
Government has proven that it is not very efficient. If you
look at the VA, the Postal Service, Fannie Mae, Freddie Mac,
the lack of an audit in DOD, the poverty rate today is about
the same as it was in the mid-1960s. So some of these big,
sweeping programs just have not worked, and part of it is the
inefficiency inside the control that we are spending.
You have identified somewhere between $200 and $400 billion
over time relative to excess spending out of that $4 trillion.
Is that a fair statement directionally?
Mr. Dodaro. Yes. I would say----
Senator Perdue. Can you give some granularity on that?
Mr. Dodaro. Sure, sure.
Senator Perdue. And here is my specific question. How much
of that is mandatory, which is the $3 trillion we spend, and
how much is discretionary, the $1 trillion? Can you break it
out that way?
Mr. Dodaro. First, in the reports you are referring to on
overlap, duplication, fragmentation, cost savings, we have made
in the first 6 years 645 recommendations; 51 percent of those
have been implemented, and so far that has saved or will save
$136 billion. So Congress has acted on a number of our
recommendations. I am very pleased. There are, including new
ones we added this year, about 300 or 400 open recommendations,
and 61 specific recommendations to the Congress. Fully
addressing the remaining recommendations could save an
additional tens of billions of dollars. Some of that is in the
entitlement programs, in Medicare and Medicaid. Some is in
discretionary spending. I would have to go back and sort that
through.
Senator Perdue. What is the current outstanding potential
reduction?
Mr. Dodaro. Senator, I cannot give you a fixed number. It
depends on what Congress and the agencies do in implementing
the recommendations. All I could say is there are tens of
billions of dollars in potential savings for sure. So far there
has been $136 billion in savings. That gives you some order of
magnitude of what could be achieved in the future, but I cannot
put a number on it.
But I also endorse what Keith has said. The real crux of
dealing with our debt and deficit issue is dealing with the
mandatory spending.
Senator Perdue. Which is very interesting. Inside our
budget process, which this committee sits over, that is not
within our purview.
Mr. Dodaro. I know.
Senator Perdue. Our purview is the $1.1 trillion
discretionary, and that is the reason for the question.
Mr. Dodaro. Right.
Senator Perdue. The potential is in the tens, maybe
hundreds of billions of dollars of not waste but all the errors
that we have in how we run the Government.
Mr. Dodaro. Right.
Senator Perdue. And the question is: How much is in the
purview of the Budget Committee and how much is outside? I
would love to come sit with you, and we will do that.
Mr. Dodaro. Right.
Senator Perdue. I will get on your calendar to follow up on
this.
Dr. Hall, it is interesting. The ranking member made a
comment that the overpayments seemed to be--his implication was
that it was mostly on high school and below, but let me ask you
a question: Half the people that work for the Federal
Government are GS-11, -12, and -13. Is that pretty much
correct?
Dr. Hall. Yeah, that sounds about right.
Senator Perdue. That is exactly correct. It is your number.
[Laughter.]
Senator Perdue. So the question is: GS-11, -12, and -13,
are they at minimum wage?
Dr. Hall. No.
Senator Perdue. They are not, are they? These are
bachelor's, master's, generally people with some training. Is
that correct?
Dr. Hall. That is right.
Senator Perdue. So their difference between the public
sector and the private sector is about 21 percent in your
study, if I remember correctly, with a bachelor's degree, just
a bachelor's degree. And most of that difference was in non-
salary. It was in benefits.
Dr. Hall. Right.
Senator Perdue. Mostly the defined benefit plan. Most of
corporate America has converted to a defined contribution plan.
Dr. Hall. Right.
Senator Perdue. And the Government is still in a defined
benefit environment. That is one of the big differences between
the two. My question is: What can be done relative to that
potential, some $37 billion estimated? But I do not look at it
that way. That is hard to get at. You have to have turnover,
and when you replace people, they are coming into the same
system.
So my question is this: Are we able to compete for quality
talent, A? B, do we have the wherewithal to continue to have
the best and brightest? And what I mean is in corporate America
if you do not perform, you do not stick around long. Do we have
the ability in the Federal Government to continue to weed out
nonperformers and adapt to this level of pay?
Dr. Hall. I think those are exactly the right questions.
You know, this study gives you some idea of where we are in
comparison.
Senator Perdue. Yes, sir. And it is very good, by the way;
I have to say.
Dr. Hall. But the bigger issue is are we able to recruit
effectively and retain people who are high quality and that
sort of thing. And I think this is a piece of that----
Senator Perdue. Sorry to interrupt. Subtly different.
Dr. Hall. Right.
Senator Perdue. Not only those two things, but the third is
are we able to--does the system always have the best and
brightest move to the top? And are we able to remove people who
are not productive?
Dr. Hall. Right. That is probably an issue. We have not--I
do not want to speak too much because we have not looked
specifically about what if we changed some things, what would
be the likely effect? But that is an important part of having
an efficient Government, right? That people who are top
performers get rewarded for that, and they stick around. You
know, that is the issue of retention, I think.
Senator Perdue. Are we able to incent outside of salary and
benefits for people in specific situations for specific
outcomes?
Dr. Hall. Yeah, it is hard----
Senator Perdue. I am thinking about an audit in the DOD,
for one, by the way.
Dr. Hall. Right. Yeah, I mean, it is hard to generalize,
and this was just sort of one look. But I certainly think there
are instances like that where it is difficult. I think
particularly if you start looking at some occupations where it
is already hard to hire people, it can be hard to keep people.
And part of what I am saying is my personal experience. You
know, I have had a lot of years in the Federal Government, and
it is sometimes hard to keep really good people. That is
probably true everywhere.
Senator Perdue. It is. Well, thank you both. I am over my
time. Thank you, Mr. Chairman. Thank you both for what you do.
Chairman Enzi. Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. I thank both
of you for your testimony.
Dr. Hall, I want to drill down a little bit on some of the
comments you made about Federal employee compensation. You made
the point that those with professional degrees were actually
undercompensated relative to their peers. And Senator Sanders
made the point with respect to pensions. And you indicated
yourself that part of the difference in compensation--in fact,
the largest component--is with respect to pensions.
You also noted that this Congress has reduced the Federal
contribution to pensions for new employees. If you are a
Federal employee joining the work force just 2 years ago, you
are at a much lower Federal contribution rate.
So all the figures you have provided here are for the
current work force in aggregate. Is that right?
Dr. Hall. That is right.
Senator Van Hollen. OK. It would be very helpful, I think,
at least for me, if you could provide what those numbers would
be in comparison, once this worked through the entire work
force. Because if we are talking about long-term deficits and
debt, as more people get hired at the lower pension rates, you
are going to have a much lower differential. Isn't that right?
Dr. Hall. That is right. And I think that is why it would
be useful probably for us to look through----
Senator Van Hollen. Right, I mean, the alternative would
be, based on what you said, that we were cutting the pensions
for current Federal employees, and this Congress made a very
clear decision not to do that but to apply it on a forward-
looking basis, which is what we did, right?
Dr. Hall. Right. That is right.
Senator Van Hollen. OK. Let me ask you about contractors,
because I noted you made a comment that we are not collecting
information on the compensation that we are paying to
contractors. Is that correct?
Dr. Hall. That is right, although, for our purposes,
contractors are recruited in the private sector and paid by the
private sector. So it is not relevant for our particular study.
Senator Van Hollen. Sure. But these are people doing the
work of the Federal Government. They are being contracted--
their work is being contracted for by the Federal Government.
And we have no idea, you are saying, what their compensation
levels are, do we?
Dr. Hall. That is correct. We do not.
Senator Van Hollen. Because there is lots of evidence that
the folks doing the work for the Federal Government in the
private sector are getting much higher compensation than
Federal employees. Have you seen any of that work?
Dr. Hall. I have not. We have not looked at that.
Senator Van Hollen. Let me ask you about the deficits and
debt. CBO's March Long-Term Budget Outlook said, and I quote:
``Large and growing Federal debt over the coming decades would
hurt the economy and constrain future budget policy.'' You go
on to cite a number of other problems that would create.
So my question to you is very simple, which is: Do you
agree it would be best for the economy if Congress' budget and
tax decisions do not increase the Federal debt relative to the
current baseline?
Dr. Hall. The answer is without providing a recommendation,
but yes, the sooner you start to work on this problem, the less
dramatic a solution you are going to have somewhere down the
line.
Senator Van Hollen. Right, and I know a lot of my
colleagues mentioned things like Medicare and Social Security.
But isn't it the case that one of the largest categories of
mandatory expenditures, according to CBO, is in the category of
tax expenditures?
Dr. Hall. That is correct.
Senator Van Hollen. That is right. And, in fact, Mr.
Chairman, on an annual basis we pay more in tax expenditures
than we do on Social Security. Isn't that the case?
Dr. Hall. That is correct.
Senator Van Hollen. All right. My last question, Mr.
Chairman, goes to something Senator Sanders raised with respect
to analyzing the discretionary budget. It is a fact that the
Defense Department budget is more than half of our
discretionary budget. Isn't that the case?
Dr. Hall. Yes.
Senator Van Hollen. And you pointed out, Dr. Hall, that
when you look at the compensation levels, $215 billion of that
Federal civilian employee compensation is going to the Defense
Department, and the next largest categories are in national
security-related areas--veterans and homeland security. Isn't
that right?
Dr. Hall. That is right. Those combine for about 60
percent.
Senator Van Hollen. Right. So when you actually look at
what we call ``the national security budget,'' it is even
higher, right?
Dr. Hall. Yes.
Senator Van Hollen. Now, Mr. Dodaro, we have not seen the
Pentagon pass an audit in recent memory, if ever. Isn't that
the case?
Mr. Dodaro. The Department or none of the major services,
that is correct. Ever.
Senator Van Hollen. Right. Well, they have been on GAO's
High-Risk List since 1995. Isn't that the case?
Mr. Dodaro. That is correct, the financial management
aspects of DOD.
Senator Van Hollen. And you are aware of a 2015 report by
the Defense Business Board that found, and I quote, ``We can
see a clear path to saving over $125 billion in the next 5
years.'' Are you familiar with that?
Mr. Dodaro. I am familiar with that report, yes.
Senator Van Hollen. So I think all of us would like to see
us spend what we need on our national defense and national
security. We also all, I would hope, do not want to see money
wasted there more than anywhere else.
Can you talk about your assessment of how much taxpayer
money is wasted at the Pentagon?
Mr. Dodaro. I think there are a lot of opportunities for
savings. For example, in strategic sourcing, we looked at
private sector companies. They put about 90 percent of their
spending on their strategic sourcing. That is where you look at
spending patterns and you use leveraged buying power. The last
time we looked at the Defense Department, less than 10 percent,
maybe 6 percent was under that approach.
Headquarters functions have grown for the functional
commands over 50 percent over the few years. There are a lot of
opportunities. Congress has already mandated reductions of $10
billion in headquarters staffing functions over time.
So there are a lot of opportunity for savings in DOD
functions. I talked earlier about trying to get DOD to evaluate
its payment processes for contractor pay and other areas. I
think DOD needs to be able to come up with estimates on the
amount of improper payments in areas of known risk.
The compensation area needs to be looked at too. It is a
big driver of cost.
Health care expenditures are a big problem for DOD as well.
In the TRICARE program, for example, DOD is not making improper
payment estimates in the same way Medicare is doing it. DOD is
not looking at whether TRICARE is paying only for services that
are medically necessary. We have recommended that TRICARE
improve its estimating methods.
So there are a lot of opportunities for savings at the
Defense Department.
Senator Van Hollen. Thank you.
Thank you, Mr. Chairman.
Chairman Enzi. Yes, and now it is Senator Johnson's turn.
He should have been much earlier because he was chairing a
committee meeting that is the one that made me late, but
probably the most----
Senator Johnson. Sorry about that.
Chairman Enzi. Probably the most efficient markup that I
have ever seen, did about 15 bills in 30 minutes.
Senator Johnson. That is what accountants bring to the
table here. We bring efficiency, right?
Chairman Enzi. Senator Johnson.
Senator Johnson. Thank you, Mr. Chairman.
Our committee is embarking on a new oversight project. We
are looking at--I think this is based on an Office of
Management and Budget (OMB) report--unexpended funds at the end
of fiscal years, both obligated and unobligated. And I think
where we have hard data was for fiscal year 2015 we had $1.4
trillion of obligated funds, $896 billion of unobligated funds
at the end of the fiscal year.
When they presented this to me, I was pretty well shocked.
I am trying to--as long as I have got you both here, I just
want to ask: Is there some explanation to this before we get
too far into the weeds on this in terms of committee work? I
will start with you, Dr. Hall.
Dr. Hall. I do not know of any obvious explanation for it.
I mean, certainly it makes sense to look at this sort of thing.
But we have not looked hard enough----
Senator Johnson. So you are not really aware of what all
this is compromised of?
Dr. Hall. No.
Senator Johnson. General Dodaro, do you know what I am
talking about here?
Mr. Dodaro. Definitely. Every year once a President submits
a budget, we review what certain agencies have in unobligated
funds or carryover funds. Now, some of the time there is multi-
year money that is available for obligation and expenditure
over multiple years.
Senator Johnson. Again, that would be obligated, right? I
mean, I can understand that. That would be we have approved a
weapons program, and it is obligated over the next 10 years,
correct? That would be the obligated portion, right?
Mr. Dodaro. Well, sometimes there is multi-year money where
the agencies have 2 or 3 years to expend the money; unobligated
and obligated funds can be carried over into the next year.
That is particularly true in the Defense Department and other
areas.
Senator Johnson. That would be obligated, right?
Mr. Dodaro. No, not necessarily. The budget authority would
still be available, but they have up to 2 or 3 years to
actually obligate the money. So some of the carryover might be
those sorts of authorities and funds.
But we look and scrub certain agency budgets every year. In
fact, one of the recommendations, when I testified before your
committee last month, was about the Advanced Technology
Vehicles Manufacturing Loan Program. We are suggesting there is
about $4.2 billion, I believe, in that program that is still
unobligated and that Congress could rescind that money.
So in some cases where we identify the fact that the money
is no longer going to be used, and Congress can rescind that
money. And then sometimes if agencies have carryover money but
are also asking for the same money for the next year, Congress
can reduce the next year's spending on that program.
Senator Johnson. Of the $896 billion of unobligated at the
end of 2015, do you have any sense of how much that would be
considered just sort of like a slush fund?
Mr. Dodaro. Well, no, off the top of my head, I do not.
Senator Johnson. We will be doing that oversight, and we
will be----
Mr. Dodaro. Well, we are very aware of the issue. We look
at it systematically, and we would be happy to work with you in
this area. I think it is a potential area that needs attention.
Senator Johnson. So, Dr. Hall, I kind of want to get into
one of my favorite topics, 30-year deficit, and I appreciate
the work CBO does in doing projections. You always present it
as a percent of GDP, which I think is a very relevant and
important figure. But we do not buy hamburgers with a
percentage sign. So, my staff has always worked, tried to work
pretty closely with you to try and turn that into dollars.
Dr. Hall. Right.
Senator Johnson. Now, you do not do this every year, so I
have been operating for the last couple of years saying the 30-
year projected deficit in dollars was about $103 trillion. Your
most recent long-term projection we have converted into
dollars, about $129 billion. And I do a one-page income
statement on this, pretty well three components: about $18.5
trillion of Social Security deficit in terms of what we pay out
in benefits versus what we bring in in the payroll tax; $39
trillion of deficit in Medicare; $64.5 trillion of interest on
the debt.
Just kind of comment. Is that roughly accurate in terms of
dollars?
Dr. Hall. That sounds right. I do not have the numbers in
my head, but that sounds right.
Senator Johnson. That is quite shocking, isn't it? And I
would just point out that if you need more revenue, rather than
looking to increase taxes, we need to grow the economy. I do
not think it is widely known that, even with the meager
economic growth we have had since 2009, revenue to the Federal
Government has increased by about $1.1 trillion per year with
meager economic growth. Correct?
Dr. Hall. That is right.
Senator Johnson. So, Mr. Chairman, from my standpoint we
have to look at what can we do--and, of course, we had an
excellent hearing here with former Senator Phil Gramm. You
know, what is impeding that economic growth in our market? We
talked about regulatory reform. It would be nice if we could
get a bipartisan commitment to actually reduce that massive
regulatory burden. We have to rationalize our tax system
simplify it, make it pro-growth. And I would like to use our
energy resources as well.
But, again, I appreciate you for your good work. And,
General Dodaro, we will definitely be working with you to
figure out these unobligated balances which are, to my mind,
pretty shocking.
Thank you, Mr. Chairman.
Chairman Enzi. Thank you.
Senator Warner.
Senator Warner. Thank you, Mr. Chairman. And, Dr. Hall, it
is great to see you. Gene, it is great to see you. I also want
to recognize that we have got a number of students from Woodson
High School in Northern Virginia here. Maybe they can see some
of the cooperation and ideas that we wrestle with.
I would simply point out, before my friend Senator Johnson
leaves the room, that we have had this debate a number of
times, and I do believe we need to deal with our entitlements.
But I would simply again point of the 34 industrial nations in
the world, America ranks 31st in terms of total revenues as a
percent of GDP. So I actually believe we have a combination of
the worst: we have the worst, most complicated Tax Code with
highest nominal rates, yet we on a relative basis, compared to
all of our competitors, many of which have at least lower
corporate rates, are way behind them in terms of revenues
collected.
But I want to try to drill down from the global to a little
bit more of the mundane, and one of the areas that I get very,
very frustrated with, Dr. Hall--and this is a CBO scoring
change that took place I think around 2012, 2013, and it deals
with the Veterans Administration leasing of facilities. Up
until that time, the way those were scored was whatever the
least cost happened to be that year, that would be what would
be budgeted. That would be charged against the Government. Now
CBO has changed the scoring mechanism where you have to, in
effect, aggregate at least the budget authority for the whole
10- or 20-year lease. I do not know any business around that
would say you have to collect all of your 10- or 20-year lease
payments before you enter into an agreement to provide in this
case veterans' health care in areas that are desperately
needed. There are 15-odd different VA facilities that have
fallen into this category in a whole series of States--Maine
being one. I know in Virginia we have got the fastest-growing
veterans population down in Hampton Roads. This is down
Virginia Beach and Hampton. Our VA facility is one side of the
water. The growth is mostly on the other side, called the
``South Side.'' We have been anxiously awaiting this new
facility, 155,000-square-foot facility, for years.
It is hard for me to explain to students, or anybody else
for that matter, why rationally we cannot get those facilities,
provide that health care, short of aggregating together 10
years' worth of lease payments on the front end. No rational
business would do that.
So, Dr. Hall, I guess my biggest question is: Hopefully you
are aware of this, and if you are not aware of this, will you
commit to working with us so that we do not have to go through
a whole legislative process to change your scoring framework, a
scoring framework that did not exist prior to 2012, in a way
that makes some rational approach to this?
Dr. Hall. Yeah, we would be happy to follow up and talk
with you.
Senator Warner. Well, I want more than a follow-up
commitment. I want a commitment that we are going to work this
out and we are going to work through this issue, because we
increased the spending on the VA, yet if we do not translate
that into service for in this case veterans' health care, there
is no way I can go back straight-faced and say we have got this
facility, we have got to aggregate literally tens and tens of
millions of dollars on the front end, when the actual lease
payments on an annual basis do not affect the budgetary
obligations of the Government in any bigger way.
So I will take that as a commitment that we are going to
work through this.
Dr. Hall. Sure.
Senator Warner. And the next time we visit, the legislation
that Senator King and I and others, bipartisan, are working on,
we will not need this because CBO will come to a rational
conclusion.
Dr. Hall. OK. We are happy to work with you.
Senator Warner. I am going to take that as a yes.
Gene, let me move to you for a minute. I really appreciate
the fact that you raised the issue on IT modernization and
legacy systems, and I think your testimony pointed out that
this is, again, one of the things that people scratch their
heads. This is almost the reverse of the VA issue. We spend $88
billion a year on IT at the Federal Government level, I think
your numbers, of which $75 billion of that are basically
patching old legacy systems. Senator King and I sit on the
Intel Committee. We had a brief yesterday on vulnerabilities in
cyber. Every time you patch, beyond the fact that you have an
old legacy system that is out of date, but every time you patch
you create more cyber vulnerability.
So, you know, Gene, I would love to hear from you. What do
you think ought to be the ratio in terms of actually investment
in new systems in IT versus simply patching? And we have got,
again, some bipartisan legislation that would allow us to kind
of--again, the reverse, aggregate the dollars so you can go
ahead and buy those new legacy systems rather than simply
patch--junk some of those legacy systems and buy new IT systems
rather than patching.
Mr. Dodaro. Well, in some cases some of those systems are
not even supported by the vendors anymore, so I am not sure
they are even being patched, which is an additional problem. I
think you ought to have at least about a third in new systems
and investments to get the best use out of technology. I will
go back and look at it and give you a better number based on
private sector practice. But these legacy systems are a
millstone around the agencies' necks, and are creating a lot of
cyber problems.
I mentioned in my statement that we identified
cybersecurity as a high-risk issue in 1997. This is the 20-year
anniversary. I have been trying to get agencies to focus----
Senator Warner. That is when you were still young.
[Laughter.]
Mr. Dodaro. That is right.
Senator Warner. You were only a lieutenant general at that
point.
Mr. Dodaro. We have over 1,000 open recommendations that we
have made to agencies to fix their cybersecurity issues, and
they have not yet attended to those issues. And this is in the
face of all these known breaches and other cybersecurity
problems. We need a cultural change in dealing with these
activities, and I am very concerned about them because I think
we remain highly, highly vulnerable. But we have got to get out
of the legacy systems mode.
In my statement there is a table of the oldest systems in
the Government. Some are over 50 years old. You talked about
VA. The system used for scheduling of VA patients for
appointments right now is over 30 years old. And we have got to
go to commercial solutions for a lot of these areas, which I
think will result in new technologies coming in faster. And the
Government cannot build them anymore. They ought to buy more in
that area.
Senator Warner. Thank you Mr. Chairman.
Chairman Enzi. In regard to your leasing problem, you and I
need to get together on capital budgeting.
Senator Warner. I support that.
Chairman Enzi. Senator Boozman.
Senator Boozman. Thank you, Mr. Chairman, and thank you all
for being here. We appreciate your hard work.
Mr. Dodaro, I was really pleased in your testimony in
regards to improper payments. As you said, in fiscal year 2016
those added up to more than $144 billion with around 93 percent
of those being overpayments. When you look at the deficit for
that same fiscal year, it was $587 billion. Would it be
accurate to say that this means that closer to a quarter of our
deficit in fiscal year 2016 could be attributed to improper
payments?
Mr. Dodaro. The numbers work out that way. I am not sure
you could save all $144 billion at once. I do not think we can
solve our deficit by reducing improper payments alone.
Senator Boozman. No, no, no. But I guess my point and your
point--and I think it is a point that we need to emphasize--is
that, you know, that is something that being more aggressive in
that area, that is something that would save a lot of money.
Mr. Dodaro. Oh, definitely. I think you would save a lot of
money. It would make it easier to deal with our long-term
problems. It will not solve it.
But on the other side, we have a tax gap of over $400
billion on an annual basis of revenue that should be coming in
that is not. So we have money going out the door that should
not and revenue not coming in that should. Both of those things
would help.
Senator Boozman. Let me ask you a follow-up on cyber, which
is so important. One of the things in dealing with Homeland, I
hear reports that perhaps we make a contract, and then with the
procurement process that goes on, we are getting this up-to-
date version of whatever we need to do, OK? But with the
procurement process the way it is, it might be 4 or 5 years
until that works out, and then what we wanted, which was up to
date at that point, is no longer up to date. Is that a fair
statement?
Mr. Dodaro. There is a lag time in that area that I think
is important, and I think----
Senator Boozman. Any lag time--and, again, I do not mean to
interrupt, but any lag time in that area, with the technology,
we simply have to figure out with things like that how to have
a more efficient process, or we waste a tremendous amount.
Mr. Dodaro. Right. What we have suggested--and this is the
policy of the administration now for a while--is incremental
development where an IT project is delivering functionality
every 6 months. If agencies use that approach, they can stay
more up to date rather than have these multi-year procurement
efforts to try to purchase a system that by the time they get
it, it is out of date. So if agencies use more incremental
development, they can stay more up to date.
Senator Boozman. Now, I am hearing even with software
updates that it might take 2 years to get a software update on
a piece of equipment in the sense of----
Mr. Dodaro. That seems awful long to me. I would have to go
back----
Senator Boozman. It seems awful long to me.
Mr. Dodaro. I am not sure that that is always an accurate
statement. Agency officials might say that. But they could
purchase a lot of this software and updates off the General
Services Administration (GSA) list. So, I would have questions
about the procurement strategy first. But if that is the case,
it is too long.
Senator Boozman. OK. Very good.
One of the charts in your report points out a 76 percent
error rate within the VA Community Care Program. As a member of
the Senate Veterans' Affairs Committee, that is bothersome. As
we focus on the future of these programs and undertake the
consolidation of community care, are there specific reforms you
believe could be helpful in getting these improper payments
under control?
Mr. Dodaro. Yes.
Senator Boozman. What do we need to do about it?
Mr. Dodaro. Well, VA needs to follow the Federal
Acquisition Regulations. That is really the reason why many
payments in that program are improper payments judged by the
Inspector General at the VA. So VA has to follow the rules like
we require everybody else to.
Senator Boozman. Very good. Well, that is simple enough.
[Laughter.]
Senator Boozman. Thank you, Mr. Chairman.
Chairman Enzi. The ever patient Senator King.
Senator King. Thank you, Mr. Chairman.
First, I want to say you two gentlemen are unsung heroes.
You do your job professionally, straightforward. In a sea of
partisan politics, you manage to go through it with grace and
aplomb, and I appreciate that--except, Dr. Hall, your hero
designation has an asterisk. We have got to fix this lease
problem with the VA that Senator Warner talked about. If we can
get that straightened out--because we have got veterans in
Maine that want and need care, and we have got a program ready
to go, and I think this is an accounting issue, and we ought to
be able to resolve that. So if you want to get your full hero
status, work with us to get that taken care of.
[Laughter.]
Senator King. Mr. Dodaro, you and I talked about this
sometime before. It is not in your report today, but as I
recall, there is also a figure for undercollection of taxes.
Mr. Dodaro. Yes.
Senator King. What is that number?
Mr. Dodaro. That number, the net tax gap is $406 billion.
That is an----
Senator King. A year?
Mr. Dodaro [continuing]. Annual estimate. A year.
Senator King. So $406 billion a year of undercollections,
about $145 billion of improper payments, add those together,
interestingly enough, it is almost--well, it is slightly above
this year's projected deficit.
Mr. Dodaro. Yeah, both are significant issues, and we have
many recommendations to address both.
Senator King. And I appreciate that, and I have seen your
recommendations. Let me skip to what was going to be my last
question. You have got all these recommendations. How do we
systematically be sure that they are implemented? You mentioned
slight frustration that you have made the recommendations; you
have got all these agencies. Don't we need somebody in the
Government whose job it is to wake up every morning and be sure
that these things are done, somebody in OMB or the White House
or someplace?
Mr. Dodaro. I have met with Director Mulvaney. I have sent
him a letter of open recommendations. I am meeting with all the
new heads of departments and agencies. I am sending them a
letter with open GAO recommendations that required priority
attention of their agencies.
Senator King. My experience is that unless someone has the
responsibility for making these things happen----
Mr. Dodaro. Right.
Senator King. If it is only eighth on their list of
everything else they have got to do, it is not going to happen.
Mr. Dodaro. I agree with that. And you could charge OMB
with doing it within the executive branch. With all due respect
and at risk of losing my hero status, a lot of this has to be
done by the Congress.
Senator King. Well, I would like your recommendation as to
how we might further--not in detailed implementation, but is
there some structural way that we can get at the problem of
lack of implementation of your very good suggestions?
Does the $144 billion of improper payments, or what we call
them, does that include any estimate of the same thing in the
Defense Department?
Mr. Dodaro. Only to a limited extent.
Senator King. It does not. So I assume there is another
fairly large number there.
Mr. Dodaro. There could be. And you could have a small
error rate with the size of DOD's payments and have a very
significant number.
Senator King. Yeah, their total budget is about equal to
the rest of the Federal Government budget.
Mr. Dodaro. For discretionary spending.
Senator King. Right, right. Roughly, yeah.
Mr. Dodaro. Right.
Senator King. I am interested to note that your estimate on
improper payments, 75 percent are in three areas: Medicare,
Medicaid, and the EITC. So that suggests that that is where we
should be concentrating our attention to get 75 percent of the
savings.
Mr. Dodaro. Right. And we have recommendations for the
EITC, for example, and Congress can act on this. Number one
would be to give Treasury authority to require more electronic
filing of W-2s. In mid-February, there were still 17 million
paper W-2s sitting at SSA that had not gotten to the IRS yet,
and they could have used such information to review EITC
claims.
Second would be to give IRS correctable error authority.
This would allow IRS to correct tax returns that do not match a
database that is already in the Government.
And third is to give the IRS the authority to regulate
unenrolled tax preparers. For tax returns prepared by an
unenrolled tax preparer, the error rate for refundable tax
credits----
Senator King. I noticed that was one of the big----
Mr. Dodaro [continuing]. Is higher than people who file
their own returns themselves. And it is a big part of the
issue.
Senator King. Well, not to mention the fact that processing
an electronic return is about a tenth as expensive as a paper
return.
Mr. Dodaro. Right.
Senator King. I remember when we switched in Maine to
electronic, and it made a huge difference just in the overhead
of the department.
Procurement. I am on the Armed Services Committee, and
procurement is one of our biggest issues, particularly in Armed
Services, but throughout the Government. You mentioned it. I
would say that the Federal procurement system is Byzantine,
except I would not want to insult the Byzantium Empire.
[Laughter.]
Senator King. We have really got to have some kind of
systematic review of how we do procurement, because my sense is
it has built up over the years in a kind of accretion way, all
the rules, regulations, safeguards, prohibitions, to the point
where--well, for example, we have learned in Armed Services
that Silicon Valley will not deal with the Pentagon. The small
and innovative companies just do not want to be bothered
because it is such a hassle, even though they could be
contributing significantly to our national security.
My time is up, but better IT investments, that gets to the
procurement piece, I think. And as I say, I think in the end we
have got to have some systematic way--there has got to be
somebody whose job it is, the saving czar or something--I do
not know what you want to call them--whose job it is to chase
these things on a consistent basis. Otherwise, it will just
fall down into the nether world of various agencies.
Oh, I had one more question. Do you have a number for
return on investment in the IRS in terms of undercollection? In
other words, for $1 invested in the IRS in enforcement, what is
the return to the Treasury?
Mr. Dodaro. The Commissioner of IRS says 1:4. You know, for
every $1 invested, $4 are returned. The caveat I would give on
that is that IRS does not have enough return on investment
(ROI) information for specific types of enforcement strategies.
Senator King. Right.
Mr. Dodaro. Providing IRS with additional money will
eventually produce more revenue. But is IRS really maximizing
the investment that the Congress is making in them to maximize
that return on the investment? We have said they could do
better in that regard.
Also, on enforcement of our recommendations, there is a
bill that Senator Johnson and Senator McCaskill are working on
with a lot of our open recommendations for cost savings, and so
I would just mention that to you as well. They have committed
to follow up on those recommendations that are addressed to
Congress.
Senator King. Thank you very much. Thank you for your
testimony.
Mr. Dodaro. Sure.
Senator King. Mr. Chairman, thank you, and I am looking
forward to working with you on capital budgeting.
Chairman Enzi. Thank you. Thank you for your variety and
excellent questions.
As an accountant, I am always interested in that number of
how many dollars are collected versus how much is spent. And it
does not do any good if you spend just as much as you collect.
Senator King. I would like to see it go toward Federal
deficit reduction.
Chairman Enzi. The accounting firms usually have a much
better return, but as the Comptroller said, it is because they
are more selective in who they are auditing. And we have more
general rules on how they have to do this audit, which means we
are not going after the worst first, which I think could
increase it.
I will not always be leaving my time until last, even
though I always have to stay for the end of the hearing.
[Laughter.]
Chairman Enzi. But I am always pleased with the variety of
questions that we get and the variety of information that you
folks have at your fingertips.
On the Federal IT, we did pass in 2014 the Federal
Information Technology Acquisition Reform Act, which we were
hoping would take care of some of the problems. What is the
status of that implementation? Has it resulted in cost
reductions yet for the Federal Government? Any estimates on how
much?
Mr. Dodaro. There are not any estimates yet on how much has
been saved, but it is being implemented. If effectively
implemented, I think it would lead to a lot of improvements.
One thing I am concerned about, Senator, in this regard is
that that legislation was to give the Chief Information
Officers more authority to make sure that they approved the IT
budgets, and they had a role in the procurements, and that is a
little bit of a mixed record so far. We are looking at that. I
think that requires some more oversight by the Congress.
Also, data center consolidations were supposed to improve
and lead to cost savings. So far it has saved a couple billion
dollars. There are more savings to be had there, but the
agencies are not setting aggressive numbers. We think there
could be more savings in data center consolidations.
Also, on portfolio management, there has been a little bit
of a retrenchment of what agencies think they could save. So we
are looking at that issue, and it is a very important part of
what GAO is doing.
So we will provide you regular status reports, but so far
it is off to sort of a mixed start, and it is to be determined
how much will be saved.
Chairman Enzi. Well, sometimes those things just need a
little bit of emphasis. Maybe we need to add the emphasis.
Mr. Dodaro. That would help.
Chairman Enzi. Thank you. I am going to switch over to the
pension system now because some people have recommended that
the pension system be changed to a defined-contribution-only
plan. Very few private sector companies continue to offer
defined benefit plans for new employees. How might such a
conversion score in a budget window? This is for Dr. Hall, of
course. I assume that the current scoring rules would be a
problem because any savings would appear outside the budget
window.
Dr. Hall. Right, sure. In this case, of course, details
matter, sort of how it is phased out and how defined
contributions are set and that sort of thing. But you are
right, in defined benefit, the savings would take place once
people retire, so it would be often outside the 10-year budget
window, while the drop in revenues would occur now. So on the
10-year budget window, phasing out a defined benefit plan would
look like a loser over 10 years when, in fact, some of the
benefits would occur outside the 10-year window, and over a
long time period it would not look that way.
Chairman Enzi. One of the reasons we are looking at
pensions in general is that we require private firms to invest
money and we have requirements on how much so that there is
relative assurance that when their employees retire, they will
get what they were owed. And we discovered that in the Federal
Government, very little money is contributed by the employees,
and none of it is invested. So as we run out of money in the
Federal Government, our pensions, our employees' pensions, the
administrative branch's pensions, your pensions are not really
guaranteed. So we need to be taking a look at the entire
pension system for the Federal Government, and I guess that
would include the military as well, because we really do not
budget anything in a mandatory way. We do it out of
discretionary. And that could create a few problems.
Again, for the Comptroller General, in the improper
payments, they could get worse before they get better. Are
there lessons that we can learn from the private sector, such
as using some enhanced data analytics to prevent the improper
ones? Are agencies making the best use of the Do Not Pay
initiative that was designed for this purpose?
Mr. Dodaro. First, there are definite lessons that the
Federal Government can learn from the private sector. Over the
past several years, I have convened forums that involve various
people from the Federal, State, and local level as well as
private sector to get ideas about doing this.
There is a Health Care Fraud Prevention Partnership that
involves private sector insurance firms along with HHS and
others. They have identified hundreds of potential fraud
schemes and also have led to savings in the Federal Government.
So I think the private sector definitely has a lot to
offer, and it is very good to have partnerships. For example,
the American Council on Technology and Industry Advisory
Council is a nonprofit educational organization that includes
private sector entities. We are going to be working with them
to focus on health care fraud and ideas that the private sector
has to resolve that. OMB is participating and Treasury as well.
Now, with regard to the Do Not Pay working system, we have
found that it was only used in limited circumstances. It could
be used more. We made recommendations to OMB to have a strategy
to get agencies more involved in using the Do Not Pay working
system. And we also made a recommendation to the Congress in
order to amend the Social Security Act so Social Security could
give all the death records to Treasury's Do Not Pay program to
match against.
Chairman Enzi. Thank you. Thank you, both of you, for all
of your answers today. Comptroller General, on those open
recommendations that you have, if you could supply us with a
copy of that as well.
Mr. Dodaro. I would be happy to, Mr. Chairman.
[The referenced information follows:]
Use of the Do Not Pay Working System
(1) To help ensure that agencies use the Do Not Pay (DNP) working
system--a centralized data-matching service--to help reduce improper
payments, we recommended that OMB:
--develop guidance that clarifies whether the use of DNP's payment
integration functionality is required and--if required--the
circumstances and process in which agencies may obtain an exemption
from this requirement.
--develop a strategy--and communicate its strategy through
guidance--for how agencies should use the DNP working system to
complement existing data matching processes and whether and how
agencies should consider using the DNP working system to streamline
existing data matching. Such guidance may cover how agencies should
demonstrate that their data matching processes meet the requirements in
the Improper Payments Elimination and Recovery Improvement Act of 2012,
whether agencies can decide on their own which specific databases to
use, and how agencies should use the functionalities available through
the DNP working system.
--provide additional guidance that outlines when and how agencies
should verify DNP matches against a secondary source and provide
individuals an opportunity to contest before taking adverse actions as
a result of DNP matches.
--develop and implement monitoring mechanisms--such as goals,
benchmarks, and performance measures--to evaluate agency use of the DNP
working system.
(2) We also suggested that Congress should consider amending the
Social Security Act to explicitly allow SSA to share its full death
file with Treasury for use through the DNP working system, which could
strengthen agencies' efforts to prevent improper payments to deceased
individuals.
Chairman Enzi. Thank you.
And I would remind members of the committee, even the ones
that are not here--I do not know how they hear it, but if they
have questions or if anybody has additional questions, if they
submit them by close of business today, we will pass those on
to you for additional information or clarification.
Thank you very much for your participation. This hearing is
adjourned.
[Whereupon, at 12:01 p.m., the committee was adjourned.]
ADDITIONAL COMMITTEE QUESTIONS
[The following submitted questions were not asked at the
hearing but were answered by the witness subsequent to the
hearing:]
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THE PRESIDENT'S FISCAL YEAR 2018 BUDGET PROPOSAL
----------
THURSDAY, MAY 25, 2017
U.S. Senate,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to notice, at 9:47 a.m., in
room SD-608, Dirksen Senate Office Building, Hon. Michael B.
Enzi, chairman of the committee, presiding.
Present: Senators Enzi, Grassley, Crapo, Graham, Toomey,
Johnson, Corker, Perdue, Gardner, Kennedy, Boozman, Sanders,
Murray, Stabenow, Whitehouse, Warner, Merkley, Kaine, King, Van
Hollen, and Harris.
Staff present: Matthew Giroux, Republican deputy staff
director; and Warren Gunnels, minority staff director.
OPENING STATEMENT OF CHAIRMAN MICHAEL B. ENZI
Chairman Enzi. Good morning, and welcome to all. I will
call this hearing to order.
We are here today to discuss the President's budget request
for fiscal year 2018. I know my colleagues and I have been
anxiously awaiting the arrival of President Trump's first real
budget submission. We are pleased to welcome Director Mulvaney
to hear in detail from him the fiscal aspirations of the
President and answer questions. We are interested to learn how
the President proposes to grow our economy and help put our
fiscal house in order.
Of course, this is merely the first step in the 2018 budget
process. While the President has his plan, the United States
Constitution instills Members of Congress with key tax and
spending functions and with the responsibility to ultimately
decide what our Nation's fiscal priorities will be.
Budgets are an incredibly important part of governing
because they are the fiscal blueprints for the Nation. It is
crucial that Congress and the President work together to
confront rapidly growing deficits born from our Government's
habitual overspending which plagues America and its taxpayers.
Over the past 8 years, even as Government took in record
revenues and taxes, our Nation was still unable to live within
its means. Since 2009, our Nation's gross Federal debt doubled
to almost $20 trillion today. To put that in perspective, this
is larger than the entire U.S. economy and cost taxpayers, even
with today's historically low interest rates, $241 billion in
interest payments last year.
The Congressional Budget Office (CBO) says these interest
costs will continue to grow and reach $768 billion in 2027
alone. That is in 1 year. This chart shows the growth of the
interest rate, and I think they are using some pretty
conservative interest rates. This amount is based on a
conservative assumption of future interest rates. CBO tells us
that a 1 percentage point increase in interest rates any year
would drive up Federal deficits by a further $1.6 trillion.
Soon, paying interest on America's debt will become one of the
largest functions of Government and is poised to represent more
than we spend on important national priorities like defense,
education, infrastructure, and our social safety net.
[Slide 1 follows:]
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In other words, these billions upon billions in interest
payments for the money we have already borrowed will soon crowd
out our ability to execute our core responsibilities as a
Government.
To make matters worse, our automatic spending on mandatory
programs continues to grow unchecked. In 1967, it represented
just 32 percent of the budget. But in 2017, it represents more
than 69 percent. By 2027, it will represent more than 77
percent of total spending and will consume nearly every single
penny of revenue that the Government collects. On that chart,
the gray is the mandatory, the red is the interest, and you can
see on the revenue that is projected that we will be borrowing
absolutely everything that we have for defense and nondefense
by 2027. That means our entire discretionary budget which
Congress actually debates each year will be completely deficit
financed.
[Slide 2 follows:]
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Ceding this level of congressional budgetary responsibility
is not an outcome that Jefferson and Madison could have
possibly envisioned for our country at its inception. We all
know that our current debt burden is unsustainable. We are in
the worst fiscal shape since World War II, and if things do not
change, we will add another $10 trillion to our debt within 10
years.
Even this budget getting to balance adds $5 trillion to the
debt. We must do better. Congress can help Washington become
more accountable to hardworking Americans by spending taxpayer
resources efficiently in order to improve or eliminate
Government programs that have received little oversight or are
simply not delivering results. That chart shows some of the
unauthorized spending that we are doing at the moment. In 2016
alone, we spent more than $310 billion on unauthorized
programs.
[Slide 3 follows:]
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Just last week, this committee held a hearing with the
Comptroller General of the Government Accountability Office,
which is the Government's top watchdog. He outlined hundreds of
billions of dollars in savings that can be achieved by reducing
improper payments or by consolidating duplicative programs. I
have a little example on that chart of some of the duplicative
programs. For instance, in housing, there are 160 programs
administered by 20 different agencies. Nobody is in charge. No
goals are set. No oversight is done. It is hard to tell if
anything is really happening with the money, and probably those
could be condensed down.
[Slide 4 follows:]
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But I understand the daunting task of slashing $6 trillion
to get to balance. But I appreciate the effort that has been
put into this President's budget, realizing the daunting task
of how you get there.
I look forward to hearing more from Director Mulvaney about
how the President's budget will help improve accountability of
the Federal Government and will strongly support efforts to
improve and eliminate Government programs that are not
delivering results. It is also crucial to allocate taxpayers'
resources effectively so that programs with the best
performance receive more funding and poorly performing programs
receive less or none at all.
I applaud the aggressive approach contained in the
President's budget to reorganize and reform both programs and
Federal agencies to ensure that they are both effective and
efficient. I would also like to commend the President and
Director Mulvaney on proposing a budget that balances. It has
been years since the White House has even attempted a balanced
budget. But here in this very first budget proposal, President
Trump has provided a plan to get to balance. You may not like
how he had Director Mulvaney get there, but I am looking for
suggestions. Please, instead of complaining, share some ways to
make a difference or at least something that you like.
This year, we have taken the important first step forward
in helping to change the way we do business here in Washington
by focusing on the importance of a balanced budget. The reason
this work is so important is because we must restore the trust
of the American people in their Government.
I will yield the floor to Ranking Member Sanders.
OPENING STATEMENT OF SENATOR BERNARD SANDERS
Senator Sanders. Mr. Chairman, thank you very much, and,
Director Mulvaney, thanks very much for being with us this
morning. And I would agree with the Chairman on one point. We
must restore faith with the American people and their
Government. Sadly, this budget does exactly the opposite.
The Trump budget that was introduced this week constitutes
a massive transfer of wealth from working families, the
elderly, the children, the sick, the poor, the most vulnerable
people in our country, to the top 1 percent. It follows in the
footsteps of the Trump-Ryan health care bill which gives
massive tax breaks to the people on top while throwing 23
million people off of the health insurance they currently have
and dramatically raising premiums for older workers.
This is a budget which says that if you are the wealthiest
family in America--the Walton family of Walmart--you can get up
to a $52 billion tax break through the repeal of the estate
tax.
Let me repeat that. The wealthiest family in America could
get up to a $52 billion tax break.
But at the same time, this budget says that if you are a
lower income senior citizen, you will not be able to get one
hot nutritious meal a day that is currently provided to you by
the Meals on Wheels program.
This is a budget that says that if you are the second
wealthiest family in America, the Koch brothers--a family, by
the way, that has contributed hundreds and hundreds of millions
of dollars into the Republican Party--your family can get up to
a $38 billion tax break. But at the same time, if you are a
working-class young person trying to figure out how you can
possibly go to college, your dream of a college education will
disappear because of $143 billion in cuts to student financial
assistance programs.
This is a budget which says that if you are a member of the
Trump family, you may receive a tax break of up to $4 billion.
But if you are a child of a low-income family, you could well
lose the health insurance you currently have through the
Children's Health Insurance Program and massive cuts to
Medicaid.
When Donald Trump campaigned for President, he told the
American people that he would be a different type of
Republican, that he would take on the political and economic
establishment, that he would stand up for working people, that
he understood the pain that families all across this country
were feeling. Well, sadly, this budget exposes all of that
verbiage for what it really was: just cheap campaign rhetoric
that was meant to get votes, nothing more than that.
At a time when the very rich are already getting much
richer while the middle class continues to shrink, this is a
budget of the billionaire class, by the billionaire class, and
for the billionaire class. This is a budget which will make it
harder for our kids to get a decent education, harder for
working families to get the health care they desperately need,
harder to protect our environment, and harder for the elderly
to live out their retirement years in dignity.
This is not a budget that takes on the political
establishment. This is a budget of the political establishment.
This is the Robin Hood principle in reverse: You take from the
poor, and you give to the very rich. The reality is that the
budget that President Trump has proposed would break virtually
every promise he made to working people of this country.
Among many other promises that it breaks is not only
massive cuts to Medicaid, but cuts to Social Security. This
budget would make massive cuts to Social Security for people
who have severe disabilities, children who have lost their
parents, and the poor. And, Director Mulvaney, please do not
tell me that the Social Security Disability Insurance Program
is not part of Social Security. Let us be clear. Social
Security is not just a retirement program. It is an insurance
program that protects millions of Americans who become disabled
or lose their parents at a young age.
The chairman said we have got to restore faith with the
American people. He is exactly right. The way to do that is to
totally reject this budget and create a budget that works for
working families in this country, not just the billionaire
class.
Thank you, Mr. Chairman.
Chairman Enzi. Thank you, Senator Sanders.
Our witness this morning is Mick Mulvaney, the Director of
the Office of Management and Budget. Having only been confirmed
by the Senate on February 16, 2017, it is safe to say that
Director Mulvaney has had a busy few months. Prior to his time
as the Director of OMB, he served the people of the 5th
District of South Carolina as their Congressman, where he was
first elected in 2010. During his time in Congress, he served
on both the Budget Committee and the Joint Economic Committee.
We look forward to receiving your testimony, Director
Mulvaney. Please begin.
STATEMENT OF THE HONORABLE MICK MULVANEY, DIRECTOR, OFFICE OF
MANAGEMENT AND BUDGET
Mr. Mulvaney. Chairman Enzi, Ranking Member Sanders,
members of the committee, thank you so much. It is wonderful to
be back here in this wonderful room to present to you the
President's fiscal year 2018 budget. The title on the cover is,
``A New Foundation for American Greatness.'' As you can
imagine, I spent a lot of time in this document over the course
of the last couple days and weeks. I wish now that I had
changed the title on the cover. I wish that the title was ``A
Taxpayer-First Budget.''
As I went through it, I said, OK, we have got this title,
we have got this name. It is the ``New Foundation for American
Greatness.'' What is new about it? And one of the things that
is new about it is that we actually did look at the
expenditures through the eyes of the people who pay for it. I
think for too long we have probably just looked at the impact
on the folks receiving taxpayer dollars and not nearly enough
time focusing on the folks who pay taxpayer dollars. And that
is new in this budget this year.
What else is new? It balances within 10 years, something
the previous administration was incapable or unwilling to do
for their 8 years in office. It is an opportunity for us to
have a conversation about borrowing money. We do borrow money
in this budget, as President Obama did before us and President
Bush did before him. We do something unusual when we compare it
to the previous administration. We actually have a plan to pay
it back, because if you borrow money, if you take money from
people and have no intention and no plan of ever giving it back
to them, that is not debt. That is theft. And that is what the
previous eight budgets offered by an administration did--took
money with no prospect ever of giving it back to the people
from whom you borrowed it. And we changed that because we have
a plan for how to borrow money in the short term and then start
to pay it back to the people. Every single man, woman, and
child in this room owes the Federal Government $60,000. My 17-
year-old triplets, $60,000. Every single one of your
constituents, $60,000.
You might be able to look them in the eye and say, ``That
is OK.'' The President decided to look them in the eye and say,
``You know what? That is not right. It cannot go on forever.''
We have to have a plan for figuring out how to start paying
back the money that we have borrowed from people for all of
these years.
The next word in the budget was ``foundation,'' and I tried
to come up with what was the foundation, what we were trying to
get to when we picked that word. What was the foundation for
American greatness? And the foundation for American greatness
is 3 percent growth. Every single time I am in the Oval Office
talking to the President, whether it is on budgets, tax policy,
trade policy, energy policy, regulatory policy, those
discussions are driven by one goal and one goal only: How do we
get America back on track in the economy?
There are some folks who believe--and many of those folks
happen to work in the Congressional Budget Office--that 1.9
percent growth is the best we can do forever. We refuse to
accept in this administration that pessimistic view of the
future. We refuse to accept that the new normal is 1.9 percent,
especially when the history of this Nation is above 3 percent.
And that goes back to the founding. You can go back to World
War II, if you want to. For some reason, some of us want to
accept the fact that we will only ever grow at below 2 percent
growth again. If you are in this room today or watching this
and you are 30 years old, you have never had a job as an adult
in a healthy, a truly healthy American economy. And an economy
at 3 percent is so much different than an economy at 2 percent,
it is hard to described except like this: In the 1990s, when I
was a younger man, we had excellent growth in this country. We
had it under a Democrat administration and a Republican-
controlled Congress. If you got fired back then during a
healthy American economy, you could find another job easily. If
you did not like your job, you could quit and start your own
business. That type of optimism dies in a 1.9 percent economic
growth world, and we need it back. And everything we do in this
administration, including the principles in this budget, are
designed to get us back to 3 percent growth.
We do all that, by the way--it is still from the
President's priorities. We have talked about them before:
national security, border security, law enforcement, veterans,
school choice, paid parental leave--I hope we get a chance to
talk about that today--infrastructure, money in here for that,
we can talk about that.
We do not touch Social Security retirement or Medicare. I
look forward to having that discussion. We also focus, Chairman
Enzi, on unauthorized programs, $310 billion. One of the
questions I ask, if you think it is so important, why don't you
vote to reauthorize it? I think that is a fair question when
you look at this through the perspective of the people who are
paying for it.
I have enjoyed watching all the politicians on TV this week
saying, ``Oh, we wish we spent more money on this program,''
and the program is unauthorized. And I cannot go back to the
taxpayers and say, ``Yes, I want to spend more money on a
program that Congress does not care enough about to even vote
on anymore.'' That is no longer defensible.
So we do all that, and we balance the budget within 10
years because we look at the Government differently. We are no
longer going to measure compassion by the number of programs or
the number of people on those programs. We are going to measure
compassion by the number of people we get off of those programs
and back in charge of their own lives. We no longer measure
success by how much money we spend but by the number of people
we actually help. And that is the last part of the budget,
which is American greatness.
So, anyway, with that, Mr. Chairman, I look forward to the
hearing today. I look forward to answering your questions. I
hope I do a decent job with it. And I appreciate the
opportunity to be here to present the President's budget.
[The prepared statement of Mr. Mulvaney follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Enzi. Thank you. You are one of the few people
that ever finished up a minute ahead of time.
[Laughter.]
Mr. Mulvaney. I am from the House. We only get 5 minutes
over there, Mr. Enzi. Seven minutes is very generous.
Chairman Enzi. Now we do turn to questions, and I will
explain the process to committee members. Each member will have
5 minutes for questions, beginning with myself and then Senator
Sanders. Following the two of us, I will alternate questions
between Republicans and the minority. All members who were in
attendance when the hearing began will be recognized in the
order of seniority. For those who arrived after the hearing
began, you are on the list in order of arrival. If your turn is
on the list to be recognized and you are not available, you
will be moved to the bottom of the list, and the next Senator
on that side will ask questions. So we will start the
questions.
Director Mulvaney, the President's budget reduces deficits
for OMB's pre-policy baseline by $5.6 trillion. While $3.6
trillion of this deficit reduction is directly scored to
policies in the budget, the rest is estimated to come from
economic feedback. Specifically, the budget projects more than
$2 trillion in increased revenue from increased economic
growth.
What initiatives in your budget do you expect will lead to
that growth?
Mr. Mulvaney. Thank you, Mr. Chairman. When Secretary
Mnuchin, Director Cohn, and I, as members of the so-called
troika, sat down shortly after I was sworn in, we had a chance
to look at the CBO numbers that proposed or projected that 1.9
percent growth. And then we asked ourselves, OK, what are we
going to do to get that number to 3 percent? That $2 trillion
worth of additional revenue you mentioned comes from the 3
percent economic growth throughout the 10-year budget window.
And so we said, OK, we are going to have tax reform. That
should increase gross domestic product (GDP). We are going to
have regulatory reform, which we actually thought had a larger
increase on GDP than tax reform. We are going to have new trade
policies. We are going to undo Obamacare, and according to the
Congressional Budget Office, repealing Obamacare actually added
to the GDP growth in this country because even the
Congressional Budget Office recognized that the passage of
Obamacare created a disincentive for people to work.
So that is what we did. We went through our policies line
by line, and depending upon the values that we assigned to
them, we actually came up with some numbers that were higher
than 3 percent. The President did mention numbers higher than 3
percent on the campaign. But we settled on the 3 percent
growth. We thought it was a conservatively defensible number.
Chairman Enzi. Thank you. In one of the supporting volumes
of the budget, I found a truly startling figure. According to
your documents, in the 10 years ending in 2016, non-independent
agencies added about $78 to $115 billion in estimated annual
costs through the finalization of new regulations. And this
does not capture the entire regulatory burden as regulations
such as those stemming from the Dodd-Frank Act are imposed by
independent agencies.
How does this budget propose to review those rules to
lessen their impact on the economy and prevent such buildup of
regulations in the future?
Mr. Mulvaney. We have actually already taken steps in that
direction, Chairman Enzi. Shortly after I arrived, OMB reviewed
and approved an Executive order to address the regulatory
climate in a couple of different ways.
Number one, we instituted a one-in, two-out rule, that
before agencies introduce a new piece of regulation, they have
to go back and look at two that get off of the books.
By the way, it has been extraordinarily difficult to do
that. As we have been through the process, what we have learned
is it is not that hard to slow down an agency on creating new
regs. But when you ask an agency, a bureaucratic agency that is
designed to created regs to start to deregulate themselves, it
is really, really--it is a muscle that they have not used for a
long time, if ever. So we have been a little bit surprised by
the challenges in looking for those two out. So we think we
have done a pretty good job so far of slowing down the new
regulations into the pipeline, but we are going to work very
hard to make sure we spend as much energy on getting old regs
off of the books.
We also instituted a net zero dollar policy, that if you
are going to introduce a new reg that creates $100 worth of
burden on the American population, you are going to have to
find some to get rid of that same $100 so that there is a zero
net regulatory burden on the economy.
Chairman Enzi. That is what I have been hearing in Wyoming.
Last November, the GAO issued the results of a study that I
had requested that found that the cost estimates for the
Education Department's various income-dependent student loan
repayment plans have been reestimated upwards by tens of
billions of dollars. The reason was that enrollment far
exceeded the prior administration's original estimates. This
budget includes another huge upward revision of student loan
program costs with the anticipated cost to the outstanding
portfolio rising by an additional $39 billion. While the budget
says $8 billion of this is due to still greater enrollment,
another $18 billion is due to updated collection rate
assumptions concerning the roughly $100 billion in defaulted
student loans the Department currently manages.
It seems we keep finding that the student loan programs are
more expensive than the Government expects. How does the
President's budget proposal attempt to contain student loan
costs going forward?
Mr. Mulvaney. I have not reviewed the Federal Student Aid
(FSA) report, but I think we all know that there was a lot of
pressure, I think, during the Affordable Care Act debate to
look to the student loans to be generating money. You can ask
yourself whether or not there was pressure to show unreasonably
rosy numbers at the time as part of the Obamacare discussion.
As we look forward, though, and talk about what the
President proposed when he was campaigning, the President made
specific promises regarding taking the variety of repayment
programs that are out there today to repay student loans and
condense them into one. And that is exactly what we have done
in the budget. We take a single income-based program and tie
your repayments of your student debt to the amount of money
that you are making after you graduate, and that leads to a
circumstance where, if you are making less money, you will pay
back less of your loan; if you are making more, you will pay
back more.
When President Obama I think introduced something similar,
he suggested that we forgive the debt after 20 years. We
actually move that to 15 years. But by doing it in a single
plan that is actually easier for folks to use and we expect
them to use it and buy--making the variables depending on
income, we actually save a considerable amount of money.
Chairman Enzi. Thank you. My time has expired.
Senator Sanders.
Senator Sanders. Thanks very much, Mr. Chairman.
Before we go further, I find it a little bit unfair that
Mr. Mulvaney and many people in the Trump administration
disparage the Director of the CBO when it was Tom Price, the
former Republican chairman of the Budget Committee, who
appointed Dr. Hall in the first place. So let us get that
clear.
Mr. Mulvaney, as you know, the United States today has more
income and wealth inequality than any major country on Earth.
The top one-tenth of 1 percent now owns almost as much wealth
as the bottom 90 percent; 52 percent of all new income today is
going to the top 1 percent.
But your budget thinks that it is good public policy to
provide $52 billion in tax breaks for the wealthiest family in
this country, a family already worth $128 billion. You think
that a family like the Walton family where one guy owns four
Ferraris and one Maserati that are worth more than $65 million
are just in desperate need of massive, massive tax breaks. You
think that Sheldon Adelson, who, among other things,
contributed $5 million for the Trump Inaugural, is in need of a
massive tax break, as well as the Koch brothers.
So my question is pretty simple, and I want you to tell the
American people why you think it is a good idea to give $3
trillion in tax breaks to the top 1 percent at a time when the
rich are becoming much richer while at the same time you are
going to throw 17 million children in this country off of
health insurance because of the unconscionable cut that you are
making to Medicaid, why you are going to throw seniors in the
State of Wyoming or the State of Vermont off the Meals on
Wheels program, maybe the one nutritious program that they get
a day, why you are going to throw women and low-income babies
off of the Women, Infants, and Children (WIC) program at a time
when infant mortality rates in this country are already high.
Do you really think it is a great idea to tell a low-income
pregnant woman that you are going to take away the WIC program,
take away nutrition programs for children, in order to give a
massive tax break of $52 billion to the Walton family? Please
explain your logic to the American people.
Mr. Mulvaney. I will see if I can handle each of those in
reverse. Actually, let me deal with the CBO first. I cannot
disparage who I do not know, and I do not think I have ever
disparaged the Director----
Senator Sanders. You made a dismissive remark about him.
``Even the CBO.'' You guys appointed the Director.
Mr. Mulvaney. And, again, all I am telling you is that the
results are awful.
Senator Sanders. But you appointed him, so let us go with
that.
Mr. Mulvaney. I measure performance by results, Mr.
Sanders, and if you continuously put out bad numbers----
Senator Sanders. Your opinion is that the results are
terrible. I am suggesting that it was a member of the Trump
administration who appointed this gentleman, not some kind of
radical Democrat.
Mr. Mulvaney. So we can agree that the CBO puts out bad
data, OK.
Senator Sanders. No, we cannot. We can agree that you guys
are beating up on a man that you appointed because you do not
like his results. But, anyhow, get back to the question, why
tax breaks----
Mr. Mulvaney. I do not like the results----
Senator Sanders [continuing]. For billionaires and cuts for
working-class----
Mr. Mulvaney [continuing]. Because they are not right.
Senator Sanders [continuing]. Kids.
Mr. Mulvaney. WIC serves all the projected participants.
There is no change there. Meals on Wheels is not reduced at
all. The change that we make is through----
Senator Sanders. The Community Development Block Grant
(CDBG) program, which you eliminate.
Mr. Mulvaney. Block grant----
Senator Sanders. So you eliminate the block grant, and you
are telling me that funds the program, and you are telling me
that does not have an impact----
Mr. Mulvaney. The program is funded, Senator, through the
Old Age or Senior Nutrition Program, I think through the
Department of Health and Human Services (HHS), which we do not
change.
Senator Sanders. No, that is not true.
Mr. Mulvaney. That is true, actually. The CDBG program is a
block grant to the States, and some States do choose--choose--
to use some of that money----
Senator Sanders. And you eliminate that program.
Mr. Mulvaney [continuing]. On Meals on Wheels, and that----
Senator Sanders. The bottom line is----
Mr. Mulvaney. Senator, I mean, if----
Senator Sanders. Go ahead. Answer the question.
Mr. Mulvaney. The total money for Meals on Wheels that
comes from CDBG is 3 percent. That is it. And I do not know how
you can possibly contend that we are----
Senator Sanders. But you are eliminating the program that
funds not only Meals on Wheels but many other programs at the
discretion of Governors and mayors.
Mr. Mulvaney. I would be more than happy to have a long
discussion about CDBGs. You asked about Medicaid as well. The
slashing of Medicaid, the dramatic cuts to Medicaid, is a
slower growth rate in Medicaid. There is a 1-year exception
during the Affordable Care Act where--excuse me, the Affordable
Health--the American Health Care Act (AHCA) where the bill
calls for the end to expansion, and there is a small reduction
that year. But, generally speaking, over the 10-year budget,
Medicaid spending goes up every----
Senator Sanders. Yes, but so does health care inflation. We
go through these games every single year. Inflation is going up
a lot faster than the money that you are putting in.
The bottom line is, tell me--let me get back to one
question.
Mr. Mulvaney. Sure.
Senator Sanders. Why do you think the Walton family needs a
$52 billion tax break?
Mr. Mulvaney. My guess is that you are basing that
assertion on the only tax detail that we have in the budget,
which is----
Senator Sanders. The repeal of the estate tax, exactly.
Mr. Mulvaney. Right. And if we want to have a talk about
why we are repealing that, I would be more than happy to do
that.
Senator Sanders. Good. Tell me.
Mr. Mulvaney. Because ordinary people are paying more.
Senator Sanders. No. Ordinary people do not have a wealth
of $128 billion. That is not an ordinary person.
Mr. Mulvaney. The average increase across this Nation since
the inception of Obamacare----
Senator Sanders. You are not answering the question. The
question is----
Mr. Mulvaney [continuing]. Is 105 percent.
Senator Sanders. Answer the question. The wealthiest family
in America gets a $52 billion tax break as a result of the
repeal of the estate tax.
Mr. Mulvaney. That is correct.
Senator Sanders. Tell the American people why you think
that is good when you cut Medicaid and you cut programs for
kids.
Mr. Mulvaney. We do not cut Medicaid. We are talking about
repealing Obamacare. The results that you mentioned----
Senator Sanders. Throwing 23 million people off of health
insurance. That is right?
Mr. Mulvaney. It is a CBO number that I think you just
agreed could be wrong if----
Senator Sanders. I did not agree to that at all.
Mr. Mulvaney. OK. That we repeal Obamacare----
Senator Sanders. Why does a billionaire family get a $52
billion tax break? Please tell the American people.
Mr. Mulvaney. Because we think it is wrong that ordinary
folks lose coverage, and we want to get rid of the plan----
Senator Sanders. Ordinary people.
Mr. Mulvaney. Yes.
Senator Sanders. Is the Walton an ordinary family?
Mr. Mulvaney. No, they are not. They are extraordinary. But
ordinary people are losing coverage today under Obamacare----
Senator Sanders. I asked you why----
Mr. Mulvaney [continuing]. And we repeal----
Senator Sanders [continuing]. The wealthiest family in
America is getting a $52 billion tax break.
Mr. Mulvaney. And I am answering the question by saying
because we repeal Obamacare.
Senator Sanders. No. You end the estate tax, which applies
to the top two-tenths of 1 percent.
Mr. Mulvaney. Senator--well, OK. I am sorry. I thought the
assumption was we were looking at the tax that--the tax
reductions that are contained in Obamacare----
Senator Sanders. No, that is not what we are talking about.
Mr. Mulvaney. You mentioned the estate tax----
Senator Sanders. No, no, no.
Mr. Mulvaney. OK.
Senator Sanders. We are talking about the repeal of the
estate tax, which you just mentioned.
Mr. Mulvaney. The budget assumes a deficit-neutral tax
plan, because when we wrote the budget, we did not have nearly
enough specifics to assume what you are assuming, which is the
specific reductions. Yes, the proposals that the White House
published about 3 or 4 weeks ago, the principles that set
forth, does include a reduction of the estate tax----
Senator Sanders. Repeal of the estate tax, sir.
Mr. Mulvaney. You are absolutely right. It is a repeal of
the estate tax. But I think it is mathematically impossible to
take those general principles and assume a direct impact on a
particular family. You cannot do it.
Senator Sanders. No, that is not----
Mr. Mulvaney. Nobody can do it. I have seen estimates from
groups that say, oh, it is going to add to the----
Senator Sanders. No, that is not--that is----
Mr. Mulvaney [continuing]. Deficit by $2 trillion to $10
trillion. People were just making up numbers.
Senator Sanders. That is really not true. I mean, we do not
know when people are going to be dying, that is for sure. But
you can make those estimates.
Mr. Mulvaney. We do not know that people----
Senator Sanders. No, you do not know when somebody is going
to be dying. But the truth is that if the family is worth----
Mr. Mulvaney. They are pretty sure they are going to die
eventually.
Senator Sanders. That we can be pretty sure of.
Mr. Mulvaney. At least we agree on something.
[Laughter.]
Senator Sanders. Thank you.
Mr. Mulvaney. Thank you.
Chairman Enzi. Senator Graham.
Senator Graham. That was borderline fascinating.
[Laughter.]
Senator Graham. For 8 years, President Obama presented a
budget, which was a proposal, and got zero votes in the United
States or the U.S. House. It is fair to say we are going to
continue that trend.
Mr. Mulvaney. I might get one or two, Senator.
Senator Graham. You might get one, but it will not be mine,
and let me tell you why. I really appreciate you trying to
balance the budget in 10 years. You got the Budget Control Act
numbers to deal with. That is correct, right? That is the
constraint we imposed on you. And if you are going to balance
the budget in 10 years, there are really no good ways to do it.
Obama increased taxes by $3.1 trillion in 2017. I think
that would devastate the economy. That is probably why it got
no votes.
Some of the cuts you have made I think will have an effect
that the country probably does not wish for. But you are in a
spot of having to balance the budget, increase military
spending because we need it, and that makes you, with the BC
Act numbers, make very tough choices. So I appreciate you
trying.
Mr. Mulvaney. And we did not touch Social Security
retirement or Medicare.
Senator Graham. OK, and so that is my question. Let us not
fool people. You did a really good job. Meals on Wheels is not
being gutted. The block grant portion is being eliminated, and
that is 3 percent of funding, is what you said?
Mr. Mulvaney. Maximum 3 percent.
Senator Graham. So please quit saying things that are not
true. There is enough we can say about this budget that is
true.
So the bottom line is I would like to eliminate the death
tax because I just do not like the concept of taxing people's
estate when they die because every time they made a move while
they lived, you tax it. I would rather have the Walton family
take the money and give it away rather than the Government
grabbing it after they die, because I think the chief
philanthropists in this country are a lot of the wealthy people
you talked about, and they are doing a lot of good things. They
may have a Ferrari in the garage, but I can tell you, when it
comes to conservation and other things, the Walton family are
contributing. So it is just a philosophical difference. If it
were up to me, we would have no death tax because we tax you
every time you move while you live. So the bottom line, these
are just philosophical debates. It is not meanness. We just
disagree.
But the one thing I do not want the public to be misled by
is that you do nothing in terms of Medicare and Social Security
insolvency, which is coming. Is that correct?
Mr. Mulvaney. That is correct. We do not make any proposed
changes to Social Security retirement or Medicare.
Senator Graham. If you were able to, if you were unleashed
by the President, would you not want to get a grand bargain
where we cleanup the Tax Code, take away some deductions for
the few at the expense of the many, and save Medicare,
Medicaid, and Social Security--Medicare and Social Security
from insolvency, which is coming?
Mr. Mulvaney. Senator, let me answer it this way. When I
sat here 3 months ago and you all asked me what I was going to
do, because sometimes I would disagree with the President,
which I thought was one of the reasons he hired me was that I
would lay out options for him, and I did that. And I went into
the office. I think we had 4 hour-long meetings on mandatory
programs, and I gave him a list of proposed mandatory changes.
And at the end of the last meeting, he went, ``Yes, yes, yes,
no, no, no.'' And the answers for ``no, no, no'' were Social
Security retirement and Medicare, because he said, ``Look, I
looked people in the eye when I ran for office. I promised I
would not change them. I am keeping that promise.''
Senator Graham. But here is what the President needs to do.
He needs to look people in the eye and tell them that that is
an impossible promise if you are serious about getting out of
debt.
Now, Mr. President, quit playing the game everybody else
plays up here. By 2042, Medicare and Social Security alone will
consume all the revenue sent to Washington. That is the
projection. Is that correct?
Mr. Mulvaney. I have seen similar numbers, yes, sir.
Senator Graham. Because the Baby Boomers retire en masse,
of which I am one. So you cannot skip over Medicare. You cannot
skip over Social Security if you are serious about preventing
us from becoming Greece, and to skip over these programs is to
allow them to die over time. So the one thing I would say to my
Republican colleagues who believe you do not need entitlement
reform, including the President, to keep us from becoming
Greece, you are wrong. And, Mr. Mulvaney, you know the right
solution.
Mr. Mulvaney. And I will deliver that message to the
President.
Senator Graham. Well, thank you. And you have been the
solution, in my view. Thank you for what you did with the
ports, a very innovative solution to funding ports. We will
have a disagreement about MOX, but let me tell you one thing
about the budget that does bother me: soft power. Do you agree
with me that we are never going to win the war on terror just
through dropping bombs on terrorists?
Mr. Mulvaney. Senator, I agree it is one of the greatest
military challenges we face. You know why we did what we did.
Again, it was the President keeping his promise to spend less
money on foreign aid.
Senator Graham. All I can tell you is that I do not know
what it cost the country to ignore Afghanistan before 9/11 to
the taxpayer. But when you shoot women in soccer stadiums for
sport, when you blow up statutes of anybody's religion, to
expect nothing to come your way is a huge mistake. To the
American taxpayer, the King of Jordan is the best ally we could
hope to have. We reduce his funding by $279 million. I got a
call from the Ambassador of Jordan saying, ``What did we do
wrong?'' ``Nothing, ma'am.''
Georgia, a front-line State in the crosshairs of Putin, a
66 percent reduction in their assistance.
These people are not owed a dime by the American taxpayer.
Foreign aid is 1 percent of the budget. But I will tell you
this, Mr. Mulvaney. From my humble point of view, if we do not
help the King of Jordan more at a time of critical need, his
kingdom could fall. If we do not push back from Russia and help
those in the crosshairs of having their democracy destroyed, I
do not know what that cost to the taxpayer is, but to me it is
an unacceptable cost. So the reason I would vote no is because
soft power is destroyed in this budget.
Mr. Mulvaney. Thank you, Senator.
Chairman Enzi. Senator Whitehouse.
Senator Whitehouse. Thank you very much, Chairman.
Mr. Mulvaney, can we talk about the tax cuts, tax reform
proposal? You just said that you assume that the tax reform
plan is going to be deficit neutral. Is that correct?
Mr. Mulvaney. Yes, Senator.
Senator Whitehouse. And your presentation to this committee
states that it is deficit neutral, correct?
Mr. Mulvaney. Yes, basically, Senator, we had three
choices, which is we could assume the tax plan, which is still
in its very early stages--it is not really a plan----
Senator Whitehouse. So there is no scoring on it yet. That
is an assumption at this point.
Mr. Mulvaney. Either add to the deficit, subtract from the
deficit, or be deficit neutral, and we picked the third up the
middle way.
Senator Whitehouse. And the way that you get to that
conclusion is that you recognize that there will be immediate
revenue reductions from lower tax rates and calculate that they
will be offset by increased revenues from enhanced economic
activity and that they offset each other to deficit neutrality.
Mr. Mulvaney. With respect, sir, no, that is not the
calculation we went through.
Senator Whitehouse. OK. What was the calculation?
Mr. Mulvaney. That we went through the list of exclusions
that are reduced, loopholes that are closed, deductions that
are removed. I cannot remember what the number that we assigned
to ending the--the proposal includes to remove the deduction
for State and local taxes, which is a huge number. We get rid
of a wide variety of personal deductions, including, I think,
everything except--I think the proposal has some mortgage----
Senator Whitehouse. So your testimony here is that you are
not assuming any growth from tax revenues as a result of
increased economic activity in reaching the deficit neutrality.
That is all going to be tax dollars in, tax dollars out, no
added growth as the basis for deficit neutrality.
Mr. Mulvaney. I do not know if I am agreeing or disagreeing
with you, but let me tell you what we did. We assumed economic
growth. Certainly, it is part of, as I mentioned in my opening
statement, the assumptions how we got to 3 percent growth. Tax
policies were part of it. And certainly when we do go to 3
percent growth, we assume that Government revenues go up. So we
assume that there is growth, but we did not use those numbers
to say that the tax policy was deficit neutral.
Senator Whitehouse. So the tax policy, as you foresee it,
will be one that is deficit neutral without regard to growth--
without regard to the increased growth that you assign to the
tax policy itself. There is a circularity where people say we
are going to change the Tax Code, and that is going to increase
revenues, and then we are going to bake those revenues back
into the Tax Code. That is not going to be a manner in which
you achieve deficit neutrality when you get your Tax Code
proposal together.
Mr. Mulvaney. Again, I think we are agreeing, but just to
use my own words, I am aware of the accusations of double
counting. I do not believe that we engaged in that.
Senator Whitehouse. But the only way that that becomes true
is if, in fact, the tax reform proposal is deficit neutral----
Mr. Mulvaney. Deficit neutral on its own----
Senator Whitehouse [continuing]. Without regard to growth
from the tax proposal.
Mr. Mulvaney. Exactly. So we are agreeing on that point.
And keep in mind, when we have to make these assumptions for
the budget, in fact, we are very early on in the discussion on
what a tax policy would look like. We have to make certain
assumptions, and the three options that I mentioned to you were
the three options we took. I guess we probably could have made
the assumption that the tax policy by itself would reduce the
deficit. We chose not to do that. My guess is there are some of
you who would make the contention that the tax policy by itself
should add to the deficit. We chose the middle way to say,
look, we do not know enough about the tax policy. We know some
of the basic principles of it. We are going to lower rates, we
are going to simplify, but we are going to get rid of this
whole host of deductions, some of which are massive, and said,
look, the most defensible, conservative--with a small ``c''--
way to look at this is to say on its own policies those will be
deficit neutral.
Now, whether or not what you all find passing and when we
negotiate with you on a final tax bill, what it looks like, I
cannot say. But we have to make certain assumptions early in
the process to do the budget.
Senator Whitehouse. So when we look at your tax proposal,
when it gets to a level of specificity that we can actually
look at, we will be looking at growth numbers that are a
constant with and without the Tax Code and the deficit
neutrality will be the function of changes within the Tax Code
itself, not projections of growth.
Mr. Mulvaney. Let me look at it a different way and, again,
see if we are agreeing by using different words. When we
offered next year's budget, we will not be able to make those
assumptions, I hope, regarding what the tax policy would look
like, because we hope that it is either in law or very close to
being in law. So we will not be forced with that choice of
looking at some piece of paper with basic principles and trying
to do the math on that, but we will have a specific thing that
we might be able to score and make more detailed assumptions
regarding.
Senator Whitehouse. Because you do recognize that if you
count the growth here in the budget and then you count it again
in your tax proposal, that is a double count. And you are
saying it is not a double count because you are not going to
use it twice in that way.
Mr. Mulvaney. And I would not want to come now and have to
answer questions from my good friend Senator Van Hollen if I
was actually double counting.
Senator Whitehouse. Thank you. My time has expired.
Chairman Enzi. Senator Johnson.
Senator Johnson. Thank you, Mr. Chairman.
Let us talk about why you want to grow the economy. If you
go from 2 percent to 3 percent growth, that is about $14
trillion over 10 years of added economic activity. If you
assume revenue to the Federal Government is about 18 percent of
GDP, that is about $2.5 trillion of additional revenue flowing
to the Federal Government without raising anybody's taxes,
correct?
Mr. Mulvaney. We scored it, I think, at $2.1 trillion, but,
yes, you are in the same ball park.
Senator Johnson. So that is why you want to grow the
economy. And I think the whole purpose of tax reform would be
to rationalize our tax system so it incentivizes growth. So
from my standpoint, when we are trying to score a tax proposal,
you actually want to see a static revenue loss made up by
economic growth so we have a dynamic score that comes as close
to revenue neutral as possible. I mean, just having a revenue-
neutral tax reform does not do much. It just redistributes
income. Isn't that what you are trying to do, is you are
training to rationalize the tax system so we gain the type of
economic growth that does put more revenue into the Federal
Government?
Mr. Mulvaney. Again, I think my answer to you, Senator,
would be the same as I just gave to Senator Whitehouse.
Senator Johnson. Well, I do not care about the double--you
know, that was beyond me.
Mr. Mulvaney. OK.
Senator Johnson. I am talking about just basic stuff. $14
trillion of economic growth yields more than $2 trillion of
revenue. So you want to have a tax policy that makes America
more competitive so we can grow our economy.
Mr. Mulvaney. Looking at it another way, Senator, in a
world of 1.9 percent growth, we will never balance the budget
again.
Senator Johnson. I have got a chart here, my 30-year
deficit chart. Here are the stark facts, the latest CBO
projection put into dollars. Over the next 30 years, we have a
projected deficit of $129 trillion. That would be added on to
our $20 trillion worth of debt. The net value of all private
assets, $128 trillion, clearly unsustainable.
[The referenced chart follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
But let us go to the next sheet. This is what I call my
``one-page income statement'' over 30 years. Three things are
yellow--actually, four things, but three things I want to
highlight. The deficit in Social Security over the next 30
years is about $18.5 trillion. In other words, we will pay out
$18.5 trillion more in benefits than we bring in the payroll
tax over the next 30 years, Social Security $18.5 trillion.
Medicare is a $39 trillion deficit. The remainder of that $129
trillion basically is $65 trillion interest on the debt.
[The referenced chart follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
So, in other words, if we do not want to pay $65 trillion
in interest to our creditors, we better address Social Security
and Medicare, and I want to focus on Medicare. I want to talk a
little bit about how do you restrain the growth in health care
costs. Isn't that what ought to be the primary goal of any
health care proposal coming out of Congress? How do we bring
competitive, consumer-driven competition to restrain the growth
of costs, actually improve quality and access through
competition? Can you tell me in the American Health Choice Act,
the A-H whatever, the House bill, what in that bill is going to
drive consumer-driven competition to restrain the growth in
health care costs? Because that is the number one thing we have
got to do if we want to not pay $64 trillion to our creditors.
Mr. Mulvaney. It is a bunch of different things. I will
pick one for the sake of the discussion, which is I think
Medicaid is one of the--Medicaid is one of the larger drivers
up here as well. You can see it behind us. Medicaid is a State-
administered program. States also pay for it. I remember being
in the State legislature looking at that line item, which I
think at that time was the second largest line item in our
State budget after K-12 education, and thinking, oh, my
goodness, look at this number, where do we spend it on, finding
out, and then saying, well, why are we spending it that way
when we could spend it another way better, more efficiently?
And they said, well, if you want to do it your own way, you
cannot get the Federal match. If you want to actually take care
of the people in South Carolina the way you think you should,
in a manner that is effective and efficient and delivers that
care, because we all want to take care of our most needy, we
could not do that because the Federal Government did not allow
us to do that.
The AHCA changes that. It is one of the fundamental sort of
structural changes that you get with the House version of the
bill, which is what we would do, is we put the States in much
more control over how the administer health care at the local
level. And that changes one of the long-term drivers of cost.
You get to the very heart of the matter. How do we make health
care more affordable? Just about everything that we buy is more
affordable and of higher quality than it was 10 years ago
except health care. How do we----
Senator Johnson. In the 1940s, 68 cents of every health
care dollar was actually paid for by the patient. Today it is
about 11 cents. We have driven free market competition out of
it. And let me just use health savings accounts (HSAs), because
I know that is something else in the House bill. In my own
businesses, health care costs were escalating. Congress did
pass the HSA law, and so we went from probably about--I cannot
remember exactly, about a $1,000 deductible plan to I think at
the time it was a $2,500 HSA qualified plan. The premium
savings that we realized, just by making that small little
change--and let us fact it, Obamacare policies have a far
higher deductible than that. Just that switch allowed me to
take that premium savings, divvy it up by the employees, and
invest $3,000 per year per employee in their HSA accounts. Ten
years later, they have probably got about $30,000 per employee
in an HSA. Now they have got that money. That is their money,
and they are driving consumer choice in things like walk-in
clinics, Walmart, CVS, Walgreens. It actually does work.
So you are investing how much in HSAs in the House bill?
Mr. Mulvaney. I cannot remember what the number is, but I
know it is a dramatic expansion of the HSA program. I am sorry
I do not have the numbers.
Senator Johnson. But, again, isn't that the direction we
need to go? If we want to solve this long-term deficit--so much
of Government spending is involved in health care--we have got
to really focus on restraining the growth in health care costs.
Mr. Mulvaney. Agreed.
Senator Johnson. Thank you, Mr. Chairman.
Chairman Enzi. Senator Warner.
Senator Warner. Good morning, Mr. Mulvaney.
Mr. Mulvaney. Good morning, Senator.
Senator Warner. So much to talk about. I have got a follow-
up on a couple of these.
Mr. Mulvaney. Sure.
Senator Warner. I have seen lots of tricky budgets before,
but this may take the cake. You assume abolishment of the so-
called death tax, estate tax. But when you go to Table S3,
baseline by category, you still count the revenues from the
estate and death tax, which is kind of a tricky thing. I would
call that double counting.
Your outside experts have assumed that your tax plan would
cost $5 trillion. As somebody who spent a couple years, as you
know, trying to wrestle with these numbers and took on
entitlement reform, took on additional revenues, I do not see--
I do not think there is any way you can get there with
elimination of tax expenditures, particularly when you take
charitable, home mortgage, and retirement accounts off the
table. There are not enough tax deductions to get to those
numbers, unless you are going to--I imagine you are now saying
you are going to go ahead and dramatically cut back on the
deductibility of employer-provided health care plans. That is a
large number.
Mr. Mulvaney. I am sorry, sir. A specific question? I was
making notes.
Senator Warner. The specific question is: You would have $5
trillion in costs in your tax plan.
Mr. Mulvaney. Right.
Senator Warner. Unpaid for. You cannot pay for it in any
revenue-neutral basis without double or triple counting or
dynamic scoring on steroids if you take charitable, home
mortgage, and retirement accounts off the table as not being
cut.
Mr. Mulvaney. Right.
Senator Warner. You cannot get there. The numbers do not
add up. And, by the way, I do not think you have told the
American public yet that to even get close, you are going to
have to then take off the deductibility of employer-provided
health care plans. So that is on the table?
Mr. Mulvaney. Here is what is on the table, which is, I
think, the one-page set of principles that we sent to the
Hill----
Senator Warner. Sir, I have gone through these----
Mr. Mulvaney [continuing]. A Couple weeks ago.
Senator Warner. I know you have as well.
Mr. Mulvaney. Right.
Senator Warner. I have spent years going through these
numbers to try to get them to balance. You have got to go where
the money is if you are talking about any kind of a rational
revenue-neutral plan. And I do not think you can get there. And
I do not think your numbers add up. I think they do not pass
the smell test. And I think, frankly, what Senator Whitehouse
was pushing at, that you are not double counting, I just do not
believe that as well because you have put dynamic scoring in
place. Dynamic scoring assumes the tax cuts, because you cannot
say dynamic scoring alone is going to come about without the
tax cuts in place. So if you are counting those on the dynamic
scoring process, you have got to bake that in. And so it is not
truly a revenue-neutral tax plan. To get $5 trillion in
savings, when you take charitable, home mortgage, and
retirement accounts off the table, the numbers just do not add
up.
Let me move to another item because my time is about up.
You take nondefense discretionary spending down to 3.1 percent
of GDP. I have still got another year or two before I can say I
have spent longer in business than I have in Government. I was
a venture capitalist. I invested in a lot of businesses. I
would invest in businesses based on their investments in their
workforce, plant and equipment, and staying ahead of the
competition.
For an American tax plan and business plan, that would
equate to investment in people, which is education; plant and
equipment equals infrastructure; staying ahead of the
competition in a global economy means research and development
(R&D). How can you cut those so draconianly, cutting
discretionary spending by $1.4 trillion over the next 10 years,
cut those three areas, and assume that we are going to have all
this growth you project? I would never invest in a business
that spent less than 3 percent of its revenue line on
workforce, plant and equipment, and staying ahead of the
competition. And that is what you are saying the American
business plan ought to be.
Mr. Mulvaney. No, I am not, sir, and I would suggest that
you would also never invest in a business whose revenues were
growing dramatically--excuse me, their expenses were growing
dramatically faster than their revenues, which is what we have
seen here----
Senator Warner. Amen to that, so let us deal with both
sides, both the spending and----
Mr. Mulvaney. Your capital investment, I think you are
looking at only one part of the equation. When you look at the
American business plan--because we agree with you the capital
investment is absolutely critical. In fact, you cannot get 3
percent growth without having dramatic increases in capital
investment. We just simply think that private capital
investment is a more efficient and effective way to get there--
in fact, history proves that--than Government capital
investment. So what we do is in our tax plan try to promote the
type of capital investment that you are looking for. We are
moving it out of Government capital investment, which we think
is woefully inefficient, and into the private market capital
investment, which gets us to----
Senator Warner. All I would say, Mr. Mulvaney, is that, for
the most part in our country, education, infrastructure, and
core basic research and development still remain a Government
function.
Thank you, Mr. Chairman.
Mr. Mulvaney. Thank you, sir.
Chairman Enzi. Senator Perdue.
Senator Perdue. Wow, I wish we had 2 hours. Thank you for
being here----
Mr. Mulvaney. I am sort of glad we do not, Senator.
[Laughter.]
Senator Perdue. I can understand that. I just want to
highlight a couple things.
First of all, thank you guys for addressing the debt. It is
the dirtiest four-letter word in our English language today,
and it threatens our Republic. And you and I have had private
conversations about that. In the last 16 years, under one
Republican President and one Democratic President, this Federal
Government has grown in constant dollars from $2.4 trillion to
$3.9 trillion. And I know it is a philosophical debate up here
between parties about big government, but let us just look at
results. You talked about results earlier, so I made some notes
here.
Big government has failed. It has failed in poverty. In
1964-65, the Great Society put the War on Poverty. We were all
for that. We wanted poverty reduced in America. But the irony
is that the poverty rate today is basically the same as it was
in the 1960s when that great program was put into place.
If you think the Government does a great job running
businesses, how about the U.S. Postal Service, the VA, Fannie
Mae, Freddie Mac.
And then we get to Social Security and Medicare. I want to
come back to that in a minute. They both go to zero--their
trust funds go to zero in 15 short years or less, and we are
sitting in the weakest recovery in 70 years.
I want to get to the point of this exercise that we are
doing today and call out what a travesty it is relative to the
bigger issue. In the last 8 years, as a Federal Government, we
borrowed about 35 percent of what we spend, and right now in
the 2016 budget that goes through 2027, it was projected--CBO
projected that we would borrow another 30 percent per year on
average over that period of time.
Well, by definition, if discretionary spending is
directionally $1 trillion on a $4 trillion budget, we are
spending less than 30 percent on discretionary; the rest of it
is mandatory. That means by definition if every dollar of
revenue--and, by the way, we collected more tax dollars last
year and the year before that, too, than we ever have in our
history. And yet we still have this growing debt problem.
So, by definition, every dollar we spend, every dollar we
are debating here today is borrowed money, by definition. So I
want America to understand what this travesty is all about up
here. The travesty is that we are not talking about $4 trillion
of expenditures to the Federal Government. That is what we are
going to spend next year. And it will grow from there.
So what I want to get at here is the fact that the budget
process itself is absolutely broken. It has only worked four
times since 1974 in 43 years. And as a matter of fact, we have
to appropriate this budget. You talk about authorizing. We have
not authorized things up here. We have $310 billion, some 250
programs, that are not authorized today, to your earlier point,
and that is not even being considered today.
As a matter of fact, over the last 43 years, we have
averaged two-and-a-half appropriation bills being passed on
average during that period of time. We have to pass 12 to fund
the Federal Government. That means that we are headed for a
train wreck again this year. We will go to September 30th. We
will not have the Government funded. We will either do a
continuing resolution, or we will have to do an omnibus where
six people get in a room, and the rest of us get an up-or-down
vote about how we spend $1 trillion. And even that does not
address the $3 trillion of mandatory expenditures.
Now, I am not arguing programs. I am not arguing cuts. We
will do that at a later point in time. But I have to say this:
I applaud the administration for at least addressing the issue
that we have got to address over the next 5 years or so, and,
that is, the long-term implication of the debt.
The specific question I have is: Would you support a budget
process eventually that would include all expenditures of the
Federal Government?
Mr. Mulvaney. Senator, yes. In fact, I had part of that
discussion with Senator Enzi, believe it or not, in the
antechamber, before we came into this room. I think it is
something that we should start discussing.
Senator Perdue. Well, as we know, to get at debt, we are
not going to do it by working under $1 trillion.
Mr. Mulvaney. No, you cannot. You cannot balance the budget
within the nondefense discretionary portion of the budget at
all. You simply cannot do it.
Senator Perdue. Now, let us talk about growth for a second,
and thank you for telling the American people that 1.9 is not
acceptable. Let us dial into the 1.9. In the last 8 years, true
growth here is 0.6 percent. That is without population growth.
That is productivity. That is the way business guys look at it,
because I can manipulate population. I cannot manipulate
productivity growth. Productivity growth, 0.6 percent. You want
to grow 3 percent, there are two things that we have really got
to do, in my opinion, just as a business guy. But you have got
to work on the workforce. There are plenty of people right now
on the margins of our workforce that are not included in this
workforce. I understand the low unemployment number, Director,
but I am concerned about the people that are underemployed, and
I am concerned about the people that dropped out of the
workforce. I am concerned about having matching skills with
jobs that are available. That is number one. That is the first
constraint on getting to 3 percent growth.
Second is capital. You mentioned it earlier, but we have
got $6 trillion of capital, and this is a mistake that
politicians make. I am sorry, Mr. Chairman, but this is
important. Politicians think that you want to stimulate 3
percent growth, we need more capital investment from the
Federal Government. That is the last thing we need, frankly. I
believe that right now we need to do whatever we can to free up
the $6 trillion that are not at work in this economy--$2
trillion on the Russell 1000 balance sheet because of
Government policy, not just in the last 8 years, possibly over
the last 20 years. The second is our small banks and regional
banks have about $2 trillion on their balance sheets because we
have taken that capital reserve from 3 percent to 6 percent to
7.5 percent, unilaterally, by the way, in the Basel III
agreement, where none of the other countries are really doing
the same thing. And, last, the repatriation tax has $2 trillion
or more stuffed overseas.
So my question, finally, to you quickly is: Are those
things that you are going to focus on not just in this budget
but over the next few years to try to continue to develop a
consistent 3 percent growth in this economy?
Mr. Mulvaney. Senator, I think you heard that in part of my
exchange with Mr. Warner, that you must have more capital
investment to get the productivity up.
Senator Perdue. But is that capital from the Federal
Government more productive or from the private sector?
Mr. Mulvaney. That is the point, and what this budget does
is try to focus on private capital investment and not public.
Senator Perdue. Thank you.
Chairman Enzi. Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. It is great to
see you, Mr. Director.
Mr. Mulvaney. Thank you, Senator. Good to be here.
Senator Van Hollen. And you can call this a taxpayer-first
budget, but this is only really great for taxpayers who are in
the top 1 percent. They are the only folks that, looking at the
numbers in this budget, actually get a tax cut, because you
have incorporated the House health care/Trumpcare health care
bill into this, which, as we all know, provides millionaires
with, on average, a $50,000-a-year tax cut. So it is great for
folks at the very top.
I should also point out, if we are talking about facts,
that that revenue in the Affordable Care Act came from applying
an investment income tax to households over $250,000 and
dedicated to the Medicare Trust Fund. So your proposal also
takes 3 years off the solvency of the Medicare Trust Fund.
You talked a lot about reducing the debt, and I could not
agree with you more. We have had this conversation for years.
We have got to reduce the debt. And you talked a lot about tax
breaks. But isn't it a fact that you do not close a single tax
break in this budget for the purpose of reducing the debt?
Mr. Mulvaney. I think I am going to agree with you on that,
Senator. I think what we do is we close the loopholes--we
assume--we have to make a bunch of assumptions, as you know,
because you have written budgets as well. And so the
assumptions are that those deductions, the loopholes, the
exemptions go away in order to keep the tax program deficit
neutral. Then we take the benefits of the tax program in the
growth.
Senator Van Hollen. So my point is that we can all talk and
we should talk about the danger of the debt, but you do not
take away one special tax break for anybody, hedge fund
managers, for the purpose of reducing that debt. And that is a
fact, and we have had a lot of conversations over the years
pointing out that the largest annual expenditure is the
category of tax expenditures, tax breaks, even larger than
Social Security on an annual basis. Isn't that right?
Mr. Mulvaney. I believe that is close, yes.
Senator Van Hollen. And yet you talk about going after all
those other categories to reduce the deficit, but you do not go
after the category of tax expenditures.
Now, you know, we have disagreed on a lot of things, but--
--
Mr. Mulvaney. In fairness, Senator----
Senator Van Hollen. If I could just--we disagree on a lot
of things----
Mr. Mulvaney. I do not think that is entirely true, but OK.
Senator Van Hollen. But you have had a reputation as a
straight shooter, OK? You have had that.
Mr. Mulvaney. I hope to keep it, Senator Van Hollen.
Senator Van Hollen. Well, now you are working for a
President who--anyway, I am not going to get into that at this
moment. But Senator Graham pointed out that when you testified
here at your confirmation hearing, you said just what you did
now. You do not want to close one tax break for the purpose of
reducing the deficit. We have big disagreements on that. The
reality is that revenue as a percent of GDP is about 18 percent
today. The last time we balanced our budget it was about 19, 20
percent, in the early 2000s. But you do not want to go there.
And what you have done instead of--you do cut the Social
Security disability. I think that is a bad choice. Those are
hardworking people. In order to qualify, you have to work a
long time. You get disabled, the whole point is to have a
insurance policy there. You go after that. But you do not do
what Senator Graham mentioned, going further into Medicare and
Social Security.
Now, here is the thing. I think we should go after tax
expenditures. But at least you have got to be honest, and
instead what you have done is you have made up a number here
based on no policies. You guys have assumed 3 percent growth.
It is easy for all of us to say, oh, we wish we had higher
growth. I do, too. Why don't we wish for 4 percent growth? It
is not just the CBO. Mr. Director, I am looking at something
that was just put out that shows all the forecasts that have
been put out there recently. You have got the Professional
Forecasters Survey, 2.1 percent long-term growth. You have got
the Reserve Bank of Philadelphia, about 1.9 percent, around
where CBO is. You have got the Economist Intelligence Unit,
around 2 percent long-term economic growth.
You have a one-page so-called tax plan that has been put
out by this administration. You have got no backup in this
budget to tell anybody how you expect to get from 1.9, 2
percent growth to 3 percent growth. And the only way you
balance this budget is on that, what is fraudulent accounting
in the absence of a plan that shows you how to get there. It
would be $2 trillion short in 10 years if you had not made that
assumption. Isn't that true? If you had not made your
assumption about 3 percent growth, you would be $2 trillion
short after 10 years of a balanced budget?
Mr. Mulvaney. Well, I will agree with you, Senator, that
the dynamic impact of the 3 percent growth is $2.1 trillion in
additional revenues.
Senator Van Hollen. OK, the dynamic impact.
Mr. Mulvaney. Yes, sir.
Senator Van Hollen. So you just had this long
conversation--I think you and Senator Whitehouse were on very
different pages. You are talking about what--again, it is a
one-pager, $6 trillion tax cut, which under most----
Mr. Mulvaney. It was $5 trillion----
Senator Van Hollen. That is $5 trillion. That puts you in
the whole, and somehow you are going to have huge growth that
is going to sort of recapture that, and you are going to get 3
percent growth as a result of that, even though you are going
to also capture that for the purpose of deficit reduction.
Look, it is flimflam. I understand you are now representing
President Trump who put the parameters that you described on
you. But please, as someone who has a reputation as a straight
shooter, do not come before this committee and pretend this is
in balance. This is not close to balance. The harm in the near
term is real. The balance in the 10 years is fantasy, flimflam.
Mr. Mulvaney. Senator, I will deny that I know that, and
what I will say to you is that, as I have mentioned--I do not
remember who it was earlier--that we sat down and came up with
impacts of our policies, and that is how we got from 1.9 to 3
percent growth. Keep in mind, President Obama in his first
budget was assuming 4.5, 4.6 percent growth. We did not do
that. By the way, he never even balanced while he was still
doing that. We think this is extraordinary defensible.
Senator Van Hollen. We know that two major factors in
economic growth--and, actually, you mentioned it--is population
and----
Mr. Mulvaney. Productivity.
Senator Van Hollen. And your immigration plan--your whole
administration's position on immigration is to dramatically
reduce immigration in this country. So you have sort of taken
off the table one of the major factors, and in place of that
you have got like a one-pager tax plan. Anyway, I----
Mr. Mulvaney. Thank you, Senator. I look forward to talking
to you.
Chairman Enzi. Senator Kennedy.
Senator Kennedy. Thank you, Mr. Chairman.
Mr. Director, I do not know you well, but I have watched
your effort here and that of your staff, and I have to tell
you, I find it refreshing. I want to offer you just a couple of
points of view, and I want you to interrupt me if you disagree.
I want to talk to you just for a second about how your
budget impacts the people in America who get up every day and
go to work and obey the law and pay their taxes and try to do
the right thing by their kids and maybe save a little money for
retirement. I guess we could call them the middle class or the
working class. We have a lot of them in Louisiana. And for the
past, I do not know, 20, 25 years or so, what many of those
people--in fact, most of those people would tell me about
Washington is that--they would say our country--I am
paraphrasing. They would say our country was founded by
geniuses, but it is being run by a bunch of idiots. How can our
leadership on both sides of the aisle expect to borrow $4
billion a day to operate, run up an almost $20 trillion debt,
run deficits? When we try that in our family, it does not work.
And this is what they also tell me. They tell me that they
look around and they see too many undeserving people at the top
getting bailouts and special treatment. And they see too many
undeserving people at the bottom getting handouts. And they are
stuck in the middle, and they are getting the bill. And they
cannot pay it anymore because their health insurance has gone
up thanks to the Affordable Care Act and their kids' tuition
has gone up and their taxes have gone up. But I will tell you
what has not gone up, is their income.
And I think that is why this country is so divided. We have
two groups of people. We have those Americans who believe in
more freedom, and we have those Americans who believe in more
free stuff.
I would like you to tell me how your budget impacts the
working class of this country that is being hollowed out and is
not sharing in the great wealth of this country, economically,
socially, culturally, because the people, the undeserving
people--not everybody but the undeserving people at the top and
the bottom who have all four feet and their snout in the
trough.
Mr. Mulvaney. Senator, I am going to answer that in a way
you probably do not expect, because the easy answer would be to
say that 3 percent growth helps those folks more than they can
possibly imagine, and if they are above the age of 30, they
might remember what it was like to work in a healthy American
economy, when wages were ahead of inflation, people were
getting better economic opportunities, you could save for your
kids' education, you could save for your own retirement.
But I am going to answer it a different way, because you
asked me a specific question, how does this budget help those
people. I think, Senator, part of the disconnect that we see in
the Nation right now is that those folks that you have just
described, many of whom also live in South Carolina, pay their
taxes and then hear the stories about how that money is wasted,
and they wonder why they are paying taxes. And it undermines
their faith in the system when they hear that there are 11,000
dead people getting their money to help pay their dead people
bills, when there are people in prison getting benefits, when
there are folks who are not in this country legally getting
benefits. It saddens them and angers them. Some of them react
in different ways. But they all react negatively toward the
institution of America, and it helps contribute to that ``us
and them'' mentality, and I think that is unhealthy. And what
this budget does is looks them in the eye and says, You know
what? We are not going to allow that anymore. And if we are
wasting your money, we are going to stop. If it is going to
somebody who should not get it, we are going to stop. And we
are going to respect your money as much as you do. And,
hopefully, that will help cure some of the ills that you just
mentioned.
Senator Kennedy. I want to thank. And thank you, Mr.
Chairman. I do not agree with everything in your budget, but I
sure do thank you and your staff for your approach.
Mr. Mulvaney. Thank you, Senator.
Chairman Enzi. Senator Murray.
Senator Murray. Thank you, Chairman Enzi.
Thank you, Director Mulvaney, for joining us. I would say
you have got a tough job today. I do not envy you. You have
been asked to come before this committee to explain the
unexplainable and defend the indefensible, as I think my
colleagues on this side have pointed out, especially Senator
Warner and Senator Van Hollen.
You know, President Trump spent his campaign promising
workers he would stand with them. He promised seniors he would
protect their care. He promised the middle class he would make
the economy work for them. What we have in front of us today
with this budget is a perfect summary of all the ways those
promises have been broken. His promise not to cut Medicaid,
broken. Promise not to cut Social Security program, broken.
Promise to help workers get training, broken in this budget.
Promise to focus tax cuts on the middle class, not the rich,
broken. And his promise to provide ``insurance for everybody
that was better and lower cost,'' that has not just been
broken, it has pretty much been shattered. So a lot of promises
broken, and we are all looking forward to see how you explain
this.
But I do want to say I am very glad to see it is not just
Democrats but Republicans who are already coming out and
rejecting this budget. Fortunately, we here were able to reach
a deal on the fiscal year 2017 spending bill for one and one
reason alone, and that is that Democrats and Republicans joined
together, they ignored President Trump's absurd and extreme
budget proposal. We rejected the ill-conceived and expensive
border wall paid for on America's taxpayers' dime. We rejected
the attempts to cut Planned Parenthood. We rejected the $18
billion in cuts that were sent to us the last time. And we got
a budget done and moved our country forward.
So having said all that, I do want to focus today on this.
I want to start by asking a question on President Trump's
broken promise on health care that you built into this budget.
Now, families in my State and across the country are frankly
scared about the health care chaos that President Trump is
causing.
On Monday this week, the Trump administration requested
another 3-month delay in the House's frivolous lawsuit to take
away payments that help to lower the cost of care for working
families. Now, experts all agree and have told us continuously
that this administration's threats to end the payments are
driving premiums up today. And I want to just ask you about
this because the L.A. Times recently reported that the Centers
for Medicare and Medicaid Services (CMS) Administrator Seema
Verma attempted to use those payments to try to pressure our
insurers to support the Trumpcare bill.
Director Mulvaney, do you believe it would be wrong to use
families' health care as a political bargaining chip?
Mr. Mulvaney. Senator, under the theory that I try and find
things to agree with with folks more than things I disagree
with, you mentioned that people are scared about the chaos. You
attribute that to the chaos of the Trumpcare program.
Senator Murray. That is what insurers have been telling us.
Mr. Mulvaney. And what I am telling you is that people
where I am from are scared about the status quo. People in Iowa
are scared about losing their coverage under Obamacare. People
are scared in South Carolina about----
Senator Murray. Look, what I am asking you is specifically
about Seema Verma. Have you been part of any of those
discussions about cost-sharing subsidies with Administrator
Verma or in any way influenced her conversations?
Mr. Mulvaney. I have been included in various conversations
over the course of the last 4 months about the cost-sharing
reduction payments, yes, ma'am.
Senator Murray. Have you talked with her about specifically
talking to insurers and threatening them not to support it?
Mr. Mulvaney. No. What I do know is that we made the
payments in May, like we said that we would. We have made no
commitments to the payments that are due in June, and that we
are considering all the options on whether or not we will make
those payments.
Senator Murray. OK. Well, let me ask you about your
comments about the CBO score of the House bill.
Mr. Mulvaney. OK.
Senator Murray. Given what we just learned from CBO just
last night, do you think the Trumpcare bill keeps President
Trump's promise to provide ``better insurance'' to
``everyone''?
Mr. Mulvaney. Absolutely, because so many people do not
have any coverage now at all. Any coverage would be better if
you live in a county that does not have any providers.
Senator Murray. Well----
Mr. Mulvaney. And more and more counties are facing zero
providers. I live in a State where we are down to one, Senator.
Senator Murray. OK.
Mr. Mulvaney. One.
Senator Murray. I am just going to say that is not what the
CBO report says, and people are not going to find that credible
when they lose their care. They know what is causing this.
I only have a few seconds left. I do want to make a couple
points. I do want you to know I was really disappointed to see
that you attempted to block the Office of Government Ethics
request for information on which former lobbyists are receiving
secret waivers now from President Trump. I think that is really
wrong, and I urge you to reverse course and cooperate with the
Ethics Office. And I assure you that we are going to keep
pushing on that. I wanted to let you know that, number one.
Mr. Mulvaney. I am happy to respond to that, Senator, if
you give me the time.
Senator Murray. OK. Well, since my time is out, let me just
make this point, and I want to make it very clearly, and I want
everyone to hear this. OMB has indicated that it is reviewing a
rule related to the birth control mandate. Should this yet be
another step by the administration to roll back women's health
and rights, you better expect a very strong opposition from
this Senator, Democrats, and women across the country. And I
just want you to know that.
Mr. Mulvaney. I am not aware of that specific detail, but I
hear what you are saying.
Senator Murray. Thank you.
Chairman Enzi. Senator Toomey.
Senator Toomey. Thank you, Mr. Chairman. And thank you,
Director Mulvaney, for being with us and for really, I think,
an outstanding job that you are doing.
I want to particularly commend your emphasis on economic
growth. It is so important in every single challenge that we
face. Every problem in America is easier to solve if we have
strong economic growth than if we do not. And some are
impossible to solve without strong economic growth.
The fact is stronger growth means more job creation, means
higher wages, means a better standard of living for the very
people that Senator Kennedy was referring to. But it also
naturally follows that if you have stronger economic growth,
you are going to have reductions in various welfare payments
because fewer people will need those welfare payments. That
should be the purpose. That should be the whole idea, that,
yes, diminishing numbers of people on Medicaid and food stamps
and Section 8 housing and you name it because they are able to
get work that pays enough for them to be able to support
themselves and their families. So that should be our focus.
Let me zero in a little bit on how we get there. I think an
essential part of getting the economy growing at its potential,
which I think it is easily capable of 3 percent growth,
requires really pro-growth tax reform. I would point out we are
still laboring under an $800 billion tax increase from the
Obama era that had nothing to do with Obamacare. So if we
repeal all of Obamacare, as I hope we will, we will still have
this big tax increase that we are still laboring under. I see
no need to lock that in permanently.
Second, I think it is just mathematically wrong not to take
account of the dynamic effect of more growth on Federal
revenue. As Senator Johnson pointed out, if the economy is
larger, there is that much more to tax; therefore, more
revenue.
Have said that, we all know that we might not get a very
aggressive dynamic score from our friends at CBO and Joint Tax,
great men and women who do great work, often do not get the
credit they deserve. But they might view the economic effect of
tax reform differently than I would. And so my view is we ought
to be willing to do tax reform that may not be revenue neutral.
The goal should be to maximize growth.
Now, if we cannot persuade our Democratic colleagues to
work with us on this, then, as you know, we would need to use
the reconciliation device under the Budget Act to pass such tax
reform with a simple majority. If we go down that road, one of
the constraints we have is that if Joint Tax and CBO determine
that there would be a revenue shortfall outside of the budget
window, then that is subject to a point of order which
invalidates the 51-vote threshold.
So you get two choices in that scenario, it seems to me.
One is you have the pro-growth tax provisions expire at the end
of the budget window, and then you have a temporary--you have
this great Tax Code that is temporary, which is a bad idea. But
another option is to extend the budget window. We have
historically often used 10 years, but the Budget Act says it
must be at least 5, and it does not specify an outer limit.
So I would like for you to consider seriously a 20- or a
30-year budget window, something that would allow us to have a
great growth maximizing Tax Code that lasts a long time. If we
had a 20-year budget window for this purpose, it would probably
be about as close to permanent as you get around here because
within 20 years you will revisit the Tax Code anyway.
I wonder if you would just comment on your thoughts about a
budget window that extends longer than 10 years.
Mr. Mulvaney. Sure. And I actually think so highly of the
idea, we toyed with possibly adding some consideration for a
20-year window and simply did not have time to do it. We are
exploring how difficult it would be to do a 10-year and a 20-
year next year. So you are absolutely right, and you talked
about several of the benefits of looking at a longer term.
There are a couple other ones you have not mentioned, which is
that if you want to make changes that phase in over time,
especially on age-tested programs, a lot of times you take the
heat but do not see the benefit because all of the benefit
falls outside of the 10-year window. So there are many
attributes to looking at multiple budget windows, and I think
it is something that we should continue to explore.
I guess if there was one argument against doing the
balancing test, I would hate to think we would go to a 20-year
budget window just so we could tell people, oh, by the way, we
will balance the budget in 19 years, because I think people do
not believe us at that point. I think we should continue to
focus on balancing the budget as quickly as we possibly can,
regardless of the budget window that we look at. But on the
whole, I like the program a lot, and we are going to explore
what options are available to us at OMB going forward.
Senator Toomey. Well, I look forward to working with you on
that, because as I say, we have got an opportunity--in fact, we
have got an obligation to really have a Tax Code that allows
the American people to be as prosperous as they possibly can
be. President Trump campaigned among other things on
significant tax reform. I think his message was clear that it
would not necessarily end up being revenue neutral. His goal, I
think, was to maximize growth. That is the right goal, and if
it takes a longer budget window to do it, then I think that is
something we should seriously consider. Thank you very much for
your testimony.
Mr. Mulvaney. Thank you, Senator.
Chairman Enzi. In order of arrival, Senator Stabenow is
next.
Senator Stabenow. Thank you, Mr. Chairman. And welcome,
Director Mulvaney.
I have tremendous concerns about a wide variety of issues
in this budget and how they do not match up with priorities of
Michigan families. But I want to talk about one that has caused
terrific concern in Michigan and all around the Great Lakes,
and that is the question of completely eliminating the Great
Lakes Restoration Initiative, which funds the cleanup of our
beaches, protecting our fish and wildlife. We have challenges
with Asian carp right now getting into our waters. That is
funded through this initiative, which was a bipartisan effort
we started back in 2010. And we have about 40 million people
that get their drinking water from the Great Lakes. I could go
through all of it, boating, fishing, hunting, jobs connected
with the economy.
So you eliminate all the funding to protect the Great Lakes
and then on top of that have gone into the farm bill to
eliminate a voluntary conservation effort to protect watersheds
that we are now having great success with, partnering with
farmers and conservation groups like Ducks Unlimited and other
groups to address runoff and water quality issues in the Great
Lakes. So on behalf of Michigan families, I would like to know
why you think it is not important to protect our water.
Mr. Mulvaney. Thank you, Senator. I will begin by saying we
absolutely agree. In fact, I had a chance yesterday in the
House to point out that it might be news to people, but there
are Democrats who care about national defense and Republicans
who care about clean air and water. So I think starting from a
premise that we do not care about clean air and clean water is
a difficult premise to accept and start the conversation.
Senator Stabenow. Well, then explain why----
Mr. Mulvaney. I would be happy----
Senator Stabenow [continuing]. Your budget zeroes out
dollars that allow us to protect our Great Lakes.
Mr. Mulvaney. Consistent with many other things that we did
across the budget, Senator, we look at programs that should be
local, programs that are more appropriately local in nature as
opposed to national in nature. Again, go back to the original
premise. I am looking at this through the eyes of somebody in
Arkansas. Can I really look them in the eye and say, look, I
need to take some of your tax money to go do something in
Michigan or Wisconsin----
Senator Stabenow. Yes, that is called having a country,
with all due respect. Twenty percent of the world's fresh water
surrounds Michigan and eight other Great Lakes States, and this
is something that we not only do in the State and by the
community, but it is a major national resource. And the idea
that we would not recognize that in this budget is just
stunning to me.
Mr. Mulvaney. Well, I would agree that there are certainly
things that deal with the environment that are national in
scope, and there are other things that are in national in
scope. For example, I can look that taxpayer in the eye on
something like national defense. That helps make us a country.
On this particular program, we just chose to go another way.
Senator Stabenow. Let me ask, on another thing that I also
think is a responsibility for all of us together as Americans,
and that goes to the question of health care and Medicaid. In
your budget, you assume that the Affordable Care Act will be
repealed and that there will be, I would assume, $880 billion
in cuts or something like that from the House. You add to that,
and the number gets to $1.5 trillion. And in the tenth year,
that is about a 50 percent cut in health care for people on
Medicaid. Three out of five seniors in nursing homes in
Michigan are there because they have Medicaid health care. So
what do you say to a family in Michigan whose Mom has
Alzheimer's and she is in a nursing home and she is not going
to be able to get the health care she needs under your budget?
Mr. Mulvaney. That that is entirely false and that this
Government will continue to take care of that particular
person.
Senator Stabenow. Just 50 percent less.
Mr. Mulvaney. Ma'am, I hate to push back on this, but that
is not a cut. We have not proposed a cut. With the one
exception that I mentioned on a year where there is a small
actual reduction because of the timing of the end of Medicaid
expansion, all that we do in this budget is slow the rate of
growth. We spend more money year on year on Medicaid.
Now, in Washington, many people consider that a cut, but
that family back home that you have talked about does not
consider that a cut. They consider that----
Senator Stabenow. Do you believe, though----
Mr. Mulvaney [continuing]. To be an increase.
Senator Stabenow. With all due respect, do you believe,
though, that as health care costs go up, then the family should
absorb that, number one? And then, number two, are you also
saying that the repeal-and-replace effort and the $880 billion
in cuts in Medicaid is not a cut?
Mr. Mulvaney. I would suggest to you that it is up to the
Government to try and right the wrongs that we have committed
that have contributed to the dramatic rise in the cost of
health care, not just insurance but health care. And the reason
that family is worried is because they see the price of health
care going up year over year. And one of the things I am very
proud of that the House bill does is try to finally try to deal
with the actual cost of health care, not just health insurance.
The Affordable Care Act may--may--have made insurance more
affordable for some people, but it made health care more
expensive for everyone, and that is what we are trying to
remedy.
Senator Stabenow. I would just conclude by saying the
reality of what has been done in the House and what is now in
the Senate is a massive cut to health care in Medicaid and a
great big additional tax cut for the wealthiest Americans that
does not reflect the values I know of in Michigan.
Thank you, Mr. Chairman.
Mr. Mulvaney. Thank you.
Chairman Enzi. Senator Crapo, followed by Senator Harris.
Senator Crapo. Thank you very much. And, Director Mulvaney,
I appreciate the fact that you have not only today but
consistently made yourself available to us in Congress and have
worked with us to try to achieve the significant reforms that
we are hoping to put into place.
I want to use the few minutes that I have to talk with you
about the assumptions in the budget. I know there has been a
lot of criticism about the rate of growth of the economy that
the budget assumes.
First of all, could you tell me what those assumptions are
for the first year and then for the 10-year cycle?
Mr. Mulvaney. Yes, sir: 2.3 percent growth in year 1, 2.5
in year 2, 2.8 in year 3, and then 3 percent growth out through
the end of the budget window.
Senator Crapo. And the average for the budget window is
2.9?
Mr. Mulvaney. 2.9.
Senator Crapo. I assume you would know this, but it is my
understanding that in President Obama's first budget, his
projected growth rate was 4 percent and was over 4 percent for
the first 4 years.
Mr. Mulvaney. It was 3.5, then 4.4, then 4.6, then 3.8.
Senator Crapo. OK. And the average for the 10 years under--
--
Mr. Mulvaney. Was 2.9.
Senator Crapo. Was 2.9. So it is the exact same average
that President Trump is proposing.
Mr. Mulvaney. Yes, sir. And dramatically less than the
second Obama budget, 3.3 over the budget window. The third
Obama budget was 3.2 percent over the entire budget window. The
fourth was 3.2. So we are actually lower than the Obama
administration first four budgets.
Senator Crapo. All right. I find that very interesting, and
I also would like to have you compare this not to the Obama
budget proposals and the Obama economic assumptions, but would
you compare this to the actuality? What is the average rate of
growth in the United States for, say, the last 50 years?
Mr. Mulvaney. Just slightly above 3 percent.
Senator Crapo. So the proposal that you are talking about
is slightly below the historic average for----
Mr. Mulvaney. Which is one of the reasons, Senator, there
was actually some discussion about raising these to get us to
the historical norm.
Senator Crapo. And what is the historical norm?
Mr. Mulvaney. I think if you look from post-World War II,
it is 3.3, 3.4, 3.5--someplace in the mid 3s.
Senator Crapo. And one of the reasons that you are willing
to make these projections, if I understand it, is that you are
also proposing significant reforms, like the tax reform, the
health care reform, a number of other significant reforms that
would help us to stimulate economic growth in the United
States. Is that correct?
Mr. Mulvaney. And do not discount the impact of regulatory
reform.
Senator Crapo. I should have mentioned regulatory reform.
Mr. Mulvaney. When we talk to businesses--we do believe
that there is pent-up growth in this country, that businesses
have simply decided not to do thing because the regulatory
environment has discouraged them from doing so, and that simply
by telegraphing that the environment is going to change has
already helped some of the leading economic indicators. We know
that the GDP numbers for the first quarter were lower than
everybody wanted to see them, but some of the leading
indicators are very, very strong, and that the opportunity for
us moving forward on driving growth through regulation reform
is dramatic.
Senator Crapo. I very much agree with and appreciate that.
As you may know, I am a Bowles-Simpson guy and have been a part
of the Gang of Six in the Senate fighting for these kinds of
reforms. And I have talked about the national debt and the drag
that it is on our economy for years and years and years. But I
am starting to think that the regulatory burden is beginning to
approach the national debt in terms of it seriousness for its
impact on our economy. So I appreciate your focus on that.
One last aspect of this. We have talked about the roughly 3
percent projected growth targets that we would like to achieve.
Is there any reason why we could not hit higher than 3 percent?
I do not know why we should--let me ask the question this way:
I understand that a lot of people are saying that the
projections should be somewhere around 1.9 and we should just
say we will have a 1.9 percent growth rate for the next 10
years. That is being argued, isn't it?
Mr. Mulvaney. Not only is it being argued, it is the
official position of the Congressional Budget Office.
Senator Crapo. OK. So why would we set a target one-third
below the historic average and equal to what we have been
seeing during the economic crisis that we have been living
through? Why should we set that as the target that we should
maintain?
Mr. Mulvaney. You have to wonder about anyone who would
argue that 1.9 is where we should be, their view about the
American spirit, their view about the American worker, their
view about the American economy, and whether or not there is a
pessimism that is hard-wired into that number that should
discourage all of us.
Senator Crapo. Well, again, my time is out, but I want to
thank you for setting the target, setting the goal high--and
``high'' is probably the wrong word--a little bit below the
historic average, and saying to America that we can get there,
that we can build this economy in this country back. So thank
you. I appreciate your efforts.
Mr. Mulvaney. Thank you, Senator.
Chairman Enzi. Senator Harris, followed by Senator King.
Senator Harris. Director Mulvaney, you mentioned in your
comments that in creating this budget you have considered the
impacts of your policies. My concern is that you have
overlooked the impacts as it relates to certain Americans who I
believe are particularly--they need us to see them and to think
of them when we create such a budget. So I would like to talk
in particular about a few.
The American worker. There has been a lot of talk about the
American worker, and I think we all know we need to prioritize
the American worker. Your budget cuts the Department of Labor
by $2.5 billion and workforce training by $1.3 billion. As you
probably know, there are a number of major disruptions in our
labor force, and over the next 20 years there will be more,
mostly driven by automation and technology, which puts millions
of jobs at risk, developments like online shopping, automation,
and fast-food delivery, driverless cars and so on.
People who are currently between the age of about 30 and 50
in our country right now who are unemployed, who want to work,
who had a job, need to be seen. They will have a life
expectancy of probably another 30 to 50 years, and I believe
they need the support that your budget does not give them when
you have proposed a 21 percent cut to the Department of Labor,
including a 40 percent cut to the Employment and Training
Administration. So I would encourage you to review the impacts
of your budget to that population, the population being the
American worker.
As it relates to another subset of our population who need
to be seen and the impact to them needs to be thought about and
prioritized, it is that population of people that are impacted
by the opioid epidemic in our country. According to the
American Psychiatry Association, a survey that came out
yesterday indicates that more than a quarter of Americans and
more than a third of millennials report knowing someone who has
been addicted to opioids or prescription painkillers. Most
responses believe that treatment is a better option than law
enforcement to tackle the problem. Seventy-three percent of the
responses believe people can recover from opioid addiction.
The Congressional Budget Office, however, estimated that
repeal of the Affordable Care Act translates to one in six
Americans losing access to opioid treatment because they live
in a State that would waive the requirement on covering
substance abuse and treatment. Your budget would also cut the
Medicaid program by 40 percent, which is currently the largest
payer for opioid treatment.
In considering the impacts of your policies, I would also
urge you to consider older Americans. As you know, the CBO has
projected that under the repeal of the Affordable Care Act, a
number of seniors would see a cost increase or lose their
coverage. According to the AARP Public Policy Institute in
California, for example, a 55-year-old of today with a $25,000
income would pay on average as much as $8,598 more a year than
today. In Louisiana, that would be $5,920 more; in Iowa, $6,670
more; Colorado, $6,975 more; in Maine, $7,602; and Alaskans,
$18,533 more a year.
So I would like to know how you are interpreting the impact
of your budget as it relates to these populations when there is
objective feedback that we are receiving from folks like the
AARP, the American Psychiatry Association, and the CBO that
indicates that they will be harmed, perhaps irreparably,
because of the cuts in your budget.
Mr. Mulvaney. Thank you, Senator. I will handle as may of
those as I can in the time.
The American worker is at the top of the list. When you
stop to consider what this administration has already done in
terms of helping the American worker, the emphasis we put on
trying to bring manufacturing back, the proposals that we have
in our deregulatory efforts, our tax proposals, our trade
policies, those are all focused on helping the American worker,
as does----
Senator Harris. Director Mulvaney, I think you know that
the American worker will tell you, those in particular who are
between the age of 30 and 50 today, who are unemployed, who had
a job and want to work, that they do not necessarily have the
skills that industry requires for them to actually be able to
get a job and keep a job, and that they are in need of training
and resources to allow them to transition into these new
economies. The Department of Labor has as its focus and
responsibility to assist the American worker in acquiring those
skills so they can get and keep a job. How do you justify
cutting funding for the American worker to be able to
transition into these new economies?
Mr. Mulvaney. We actually increase spending on the
workforce training programs that work.
Senator Harris. But cutting the budget by 40 percent?
Mr. Mulvaney. No, ma'am. We actually--we asked a reasonable
question, which is we went to the workforce programs and said,
look, are you successful as measured by the number of people
that you train that actually get jobs after they go through the
program. And if a program proved to us that they were
successful, they got more money. if they proved to us that they
were not, they got less. That seems to be a fairly reasonable
approach.
Senator Harris. I think you need to tell that to the
American worker.
Mr. Mulvaney. I would be happy to.
Senator Harris. Good. Thank you.
Chairman Enzi. Senator King.
Senator King. Thank you, Mr. Chairman.
First, just to clarify a bit, the administration supported
the AHCA. Is that correct?
Mr. Mulvaney. That is correct. Yes, sir.
Senator King. So, really, the AHCA and this budget need to
be looked at as a unit in terms of dollars and allocation.
Mr. Mulvaney. I think that is fair. Yes, sir, keeping in
mind that I think we included--because there were some last-
minute amendments--the Upton amendment I do not think made it
into our assumptions just because of the timing allowed.
Senator King. I understand. So that means that we are
talking not about $800 billion Medicaid cuts just in the CA--I
mean in the AHCA, but also the cuts that are proposed in the
budget. My understanding is that those are not identical, that
there is--in fact, it is about $1.3 trillion combined. Is that
your----
Mr. Mulvaney. The number I have heard is 1.4, and that is
drawn from the 800 from the AHCA and 600 from some of the other
reforms that we propose--if I may?
Senator King. Yes.
Mr. Mulvaney. However, you cannot add those two numbers
together because there are components of those that overlap. So
the total would be less than 1.4. It depends on what the final
version of the bill looks like before you can say what the
number is.
Senator King. Well, is it somewhere in that range, 1.3 to
1.4?
Mr. Mulvaney. It is someplace between 800 and 1.4. So if
you wanted to round the difference off, what is that, 1.1?
Senator King. OK. So it is your position, as you were
answering questions a minute ago, that you are not cutting
Medicaid, you are simply cutting the rate of growth?
Mr. Mulvaney. Yes, sir.
Senator King. The problem is Medicaid, as you know, now
pays the cost of a nursing home bed, for example, for an
elderly person. So if the cost of the nursing home bed goes up
6 percent and under your proposal Medicaid reimbursement goes
up 2 percent, there is a differential. Isn't that so?
Mr. Mulvaney. Under that set of circumstances, I guess
there would be a differential, but keeping in mind that----
Senator King. Well, what assumption of growth of Medicaid
were you using in the budget to create these numbers?
Mr. Mulvaney. The assumption of the growth rate in
Medicaid, we dialed it down a little bit, Senator, from what
was in the AHCA because the research that we had done during
the preparation for that bill was that the actual growth rates
in Medicaid were below what they have in the AHCA, and I cannot
remember----
Senator King. So are you saying that your Medicaid, even
with all of these cuts, or whatever you want to call them, is
going to meet the need of the elderly person in the nursing
home?
Mr. Mulvaney. Yes, sir, we do believe that.
Senator King. So you are essentially saying there are no
cuts.
Mr. Mulvaney. We are saying that we are slowing the rate of
growth that is assumed in the Congressional Budget Office, but
that the money that we provide for will still be enough to meet
the population that Medicaid serves.
Senator King. And so there are going to be no real
reductions even if--what I am trying to get at is does the
assumption of your growth rate that is in your projections
equal also the assumptions of the increase in costs of health
care? Because as you know, health care has escalated at
significantly above ordinary inflation.
Mr. Mulvaney. It has, but Medicaid has not grown at that
level. And, by the way, before, I say that we only slow the
rate of growth. As I think I have tried to make clear in the
couple times we have talked about it, there is 1 year where
there is an exception, and that is an element of the AHCA where
you end--the grandfathering of the expansion of Medicaid in the
various States ends, and that leads to a very small actual real
drop.
Senator King. Well, what you are testifying here is that
you are really not cutting Medicaid and that all this about
$1.4 trillion is just much ado about nothing? Is that your
testimony?
Mr. Mulvaney. Well, we have to measure it against the
Congressional Budget--the baseline, and the baseline--everybody
else wants to do it that way. If we measure it against the
baseline, it is someplace around a $1.1--give or take--trillion
reduction against the baseline. We think the baseline is too
high.
Senator King. So that is the assumption? There will be no
negative impacts on disabled people, children, elderly, that is
your testimony?
Mr. Mulvaney. We care about----
Senator King. I just want to be clear that is your
testimony.
Mr. Mulvaney. We care about the disabled and the children
and the elderly just as much as----
Senator King. So is it your testimony that these changes in
the rate of reimbursement for Medicaid will have no effect on
elderly, children, disabled people who are now beneficiaries?
Mr. Mulvaney. We believe that to be the case, yes, sir.
Senator King. All right. Thank you for that testimony.
A question on growth, and everybody wants growth. And we
can talk about whether it is going to be 3 percent or 4 percent
or 1.8, and, clearly, whatever the assumption is affects
whether you are balanced in 10 years or 20 years or whatever. I
understand that. None of us know what it is going to be. We all
want it to grow.
My problem is that when you think about it, and Senator
Perdue talked about productivity, you think about productivity,
one of the--that is the engine of growth in the end.
Mr. Mulvaney. Correct.
Senator King. And one of the ways you--two of the principal
ways you grow productivity are workforce training and research.
My concern is that you are significantly cutting workforce
training and research, both in the National Institutes of
Health (NIH) but also particularly in the Department of Energy.
There are elimination--Advanced Research Projects Agency
eliminated in the Department of Energy, Advanced Technology
Vehicle Manufacturer eliminates, Fossil Energy Research and
Development Program cut by 58 percent, nuclear energy cut by 31
percent, energy efficiency and renewable energy cut by 70
percent. I do not know how you increase productivity by cutting
research--and I am not even talking about NIH--by cutting
research and by cutting job training programs. You cannot--that
is what you need to grow the economy.
Mr. Mulvaney. I would love to have time to--it is an
excellent question, and I think I have at least a reasonable
answer to it, which is if you look at total R&D spending, it is
up. If you look at the NIH spending with the reforms that we
propose--and if I can very quickly--if you get a grant from a
private foundation, you are only allowed to use 10 percent of
it toward overhead. The average in the Federal Government is
about 27, 28 percent. If you take the Federal level to the same
as the private level, you actually spend as much on NIH
research this year as you did the year before.
Senator King. So it is your testimony that actual is just
like before. What looks like cuts in the budget are not really
cuts; the end result will be the same.
Mr. Mulvaney. We are trying to be more efficient with the
use of taxpayer money. We think we can do it without negatively
impacting the things that you have mentioned.
Senator King. I do not have time for another question, but
I will quote General Mattis with regard to the drastic cuts to
the State Department: ``If you cut the State Department budget,
you are going to have to buy me more ammunition.'' I think that
is a huge policy mistake.
Thank you.
Mr. Mulvaney. Thank you, Senator.
Chairman Enzi. Senator Kaine.
Senator Kaine. Thank you, Mr. Chair, and thank you,
Director Mulvaney. This is a hearing about the President's
budget, so you are here getting the questions. But we
understand these are the President's decisions, and you are
here to explain them.
Mr. Mulvaney. This is the job I asked for and the one you
all saw fit to give me, and I do enjoy doing it.
Senator Kaine. I am just making the point that these are
questions directed really about the President's budget. We know
that you are here as the Director----
Mr. Mulvaney. Are you getting ready to say something really
nasty about it, Mr. Kaine? Is that the----
Senator Kaine. It is not about you. It is about the
President's budget. But I do appreciate the candor in your
written testimony, so I am looking at the first page: ``It also
keeps the President's promise to balance the budget within the
next decade and reduce our debt without affecting beneficiaries
of Social Security and Medicare retirement programs, and
without raising taxes.''
You do not include in that paragraph the President's
promise not to cut Medicaid.
Mr. Mulvaney. Correct.
Senator Kaine. Because the budget does not keep that
promise. The President said, ``I will not cut Social Security,
Medicare, or Medicaid,'' and I think you were smart not to put
the Medicaid line in this because I do not think it keeps the
President's promise to not cut Medicaid. And in Virginia, about
a million people on Medicaid: 600,000 are kids, 112,000 are
seniors in nursing homes, 186,000 are people with disabilities.
So I am going to be out talking to a lot of people, and they
are going to ask me, wait, the President said he was not going
to cut Medicaid. I am a kid. I am a senior in a nursing home.
Or my parents or grandparents are in a nursing home. I am
disabled.
What do I say to them when they tell me, ``The President
promised he was not going to cut Medicaid''?
Mr. Mulvaney. That their quality is actually going to
improve. I do not know if you were here earlier when I was
telling my history of being in the State legislature, and I
cannot remember if you were in the State legislature in
Virginia or not. But I do remember begging the Federal
Government for more control over our Medicaid dollars, how we
served people in South Carolina, because we thought the one-
size-fits-all Federal programs did not serve the rural poor
that we had in South Carolina.
And so what I would tell those folks is what the American
Health Care Act does is, yes, it changes Medicaid, and, yes, it
spends less. But by giving local control, Governors and State
legislatures will actually be able to----
Senator Kaine. But you get my point. They are saying to me,
``The President said he would not cut Medicaid.''
Mr. Mulvaney. And if you----
Senator Kaine. And then I am going to say to them, ``Yes,
but and there is a cut between $800 trillion and $1.3
trillion,'' but I am supposed to tell them, ``Your quality is
going to improve''?
Mr. Mulvaney. And if you go back to my verbal statement--
you have got the written statement, and they are both fine. I
stand by both of them. I would tell those folks, look, are you
really going to measure your Medicaid by the amount of money we
spent on it or the quality of the care that you got?
Senator Kaine. Well, how about if they say this to me, they
say, well, dollars are some of it, and I see that there is a
Medicaid cut that is somewhere between $800 billion and $1.4
trillion, and I see that there is a tax cut that is $992
billion. So why am I getting my health care cut if I am a
child, my Medicaid cut if I am a child, if I am elderly, if I
am disabled, and the same budget, the AHCA plus the budget, has
a $992 billion tax cut? What do I say to them?
Mr. Mulvaney. Senator, let me put it this way, because I
represented some of the same sorts of people that you did. I
represented a relatively rural part of South Carolina. And when
I had folks on Medicaid, what they cared about was their health
care. And if they were getting good health care, they were not
the jealous, envious type that wanted to have what everybody
else----
Senator Kaine. Whoa, whoa, whoa. I am not talking about
jealous, envious people either. I am just saying if folks are
seeing the headlines saying, ``Medicaid cut by $1.3 trillion,
tax cut $992 billion,'' that is going to make them scared.
Mr. Mulvaney. Wouldn't it be great if instead of that, the
headline said, ``Government providing better Medicaid at lower
cost''? How do you think they would respond to that one?
Senator Kaine. How are they going to believe that?
Let us go to another promise of this President: ``Nobody is
going to lose coverage. Nobody.''
Mr. Mulvaney. I believe it is a promise that is already
being broken by the current status of Obamacare.
Senator Kaine. Hold on a second. This was a promise that
this President made. Under Donald Trump, nobody is going to
lose coverage. The CBO yesterday said 23 million people are
going to lose coverage. So I have got to go out to them, and I
have got to say Medicaid is going to be cut by $1.3 trillion,
$992 billion of tax cuts, a lot of them at the top end, and 23
million people are going to lose coverage. And when they say to
me, ``The President promised nobody was going to lose coverage,
but 23 million are,'' what do I say to them?
Mr. Mulvaney. And I guess you are right in this case,
Senator, in the sense is that the President cannot keep that
promise unless the law changes, because unless the law changes,
those people will lose coverage.
Senator Kaine. But if the law changes and 23 million--are
you telling me that 23 million people losing coverage keeps
President Trump's promise that nobody loses coverage?
Mr. Mulvaney. I would love to have a conversation about the
methodology behind the 23 million people lost coverage. It
assumes, for example, that----
Senator Kaine. Should this body try to keep President
Trump's promises, a health care system where nobody loses
coverage, nobody pays more, and nobody with a preexisting
condition has to revert back to a position where they are going
to get kicked around?
Mr. Mulvaney. I think you should pass something that
replaces Obamacare and meets the needs that you have just laid
out.
Senator Kaine. We can call it a replacement or repeal,
whatever. What we should pass is something that should meet
those three promises that the President made: nobody loses
coverage, nobody pays more, and nobody gets kicked around
because they have a preexisting condition?
Mr. Mulvaney. All I know, Senator, is you cannot keep that
promise under the current law.
Senator Kaine. So but any change should be a change that
would meet President Trump's promises?
Mr. Mulvaney. I think any change would be a change for the
better, that is for sure.
Senator Kaine. I am going to leave it right there. Thanks,
Mr. Chair.
Chairman Enzi. Senator Corker.
Senator Corker. Well, thank you, Mr. Chairman. I was in a
great meeting with Senator Kaine just a few minutes ago, and
Senator Merkley, actually, and I am glad to be here finally. I
am sorry to be here late.
I want to thank you for your service, and I hope you still
feel this is the job that you have lived for in life.
Mr. Mulvaney. In all fairness, it is. So thank you for
that.
Senator Corker. I am glad you are in it, and thank you for
being here.
Somebody in the administration either yesterday or the day
before said that the President's tax reform plan will be offset
on a static basis every year of the budget window. That was a
statement coming out of the White House yesterday, and I just
wondered if you would affirm that.
Mr. Mulvaney. I think that is consistent at least,
Senator--I am not familiar with that exact statement, but I
think it is consistent with some of the discussions we have had
here earlier today about the assumptions that we made in this
budget. We get accused, as you probably heard about, double
counting. The assumptions we made with this was that the
changes in things like the deductions and the examinations and
the loopholes would result in a tax plan that was revenue
neutral. We had to make some assumptions early on, right? There
is only three. I assume increase the deficit, decrease the
deficit, or kept it the same. We assumed it was right down the
middle and kept it the same. So that is how we pay for the tax
proposals that we had to assume, and then we do take the
benefits of dynamic growth through the 3 percent in order to
generate new revenues to the Treasury.
Senator Corker. But the actual policy that will be put in
place, I mean the way you put the budget together, indicated
that the tax reform package would be deficit neutral on a
static----
Mr. Mulvaney. Correct.
Senator Corker [continuing]. On a static scoring basis.
Mr. Mulvaney. Would be deficit neutral.
Senator Corker. Would be deficit neutral on a static
scoring.
Mr. Mulvaney. Yes, sir.
Senator Corker. And that seems to be consistent with a
White House official yesterday--I do not know who it was that
said that. It sounds like the tax policy that the White House
is planning to put in place would be revenue neutral in every
year over the next 10 years, which is consistent with what you
have in the budget. Is that correct?
Mr. Mulvaney. Keeping in mind, Senator, we have to make--we
start--in fact, I did not even realize this until I started
looking at the job. We will start the 2019 budget now. That is
how much lead time you have to do when you are writing a
budget. The agencies are already starting--so there is a great
amount of lead time. So you have to make certain assumptions,
and when we started to make assumptions about the tax policy,
all we had to go off was this single piece of paper that laid
out our principles.
Senator Corker. Right.
Mr. Mulvaney. So the ultimate bill probably can and will
look different than that, but the assumptions we made were
along the lines of what you just laid out.
Senator Corker. Well, it sounds like--I mean, I am just
repeating again. It sounds like the budget proposal, which you
started working on as soon as you came into office, is
consistent with what White House officials are saying, and that
is, it is going to be revenue neutral on a static basis.
Mr. Mulvaney. That I am not aware of, although the
discussions are going--I know that Secretary Mnuchin has taken
the lead on the discussions in the House. He may have met with
various Senators--well, in fact, I assume that he probably has.
So I have no idea where we are in that process. I know that
when we had to lock in our numbers, we made that assumption. I
do not think that is any indication as to what the final bill
will actually look like.
Senator Corker. So I just----
Mr. Mulvaney. As I mentioned--I do not mean to cut you
off--we cannot make those assumptions again next year. If I am
sitting here next year, we will have more details on what their
budget looks like.
Senator Corker. Of course. And I listened to the exchange
you had with Senator Kaine, and I know that the word ``cuts''
was used for Medicaid. And I would like to use the word
``reform'' instead. We need to make sure that people who
actually benefit from Government services are entitled to, and
do so in a more efficient way so that these programs are around
in the future. I would just like to make an editorial comment
and say that I hope in the 2019 budget you are able to convince
the administration to look at Social Security and Medicare,
because if you leave that much entitlement spending off the
table, it is very difficult, as you know, to solve our Nation's
fiscal issues. And you and I both know we can deal with those
issues appropriately, and not do anything in any way to damage
or harm the people that are currently on those programs.
So I look forward to working with you, and I hope that you
are able to alter opinions between now and next year's budget,
and that is why I am so glad you are in this position.
I would like just to ask one final question. Yesterday both
you and Secretary Mnuchin, who I also appreciate working with,
said Congress will need to raise the debt limit sooner than
expected. I know that administrations typically play this game
with us to increase pressure. The default date is always X and
then you move it up to Y so that there is a little leeway in
the event we do not raise the debt ceiling. That may not be the
case here. I am just telling you what has happened in the past.
You have experienced that. Knowing this, what has changed that
would require Congress to address the debt limit sooner?
Mr. Mulvaney. I think in talking with Secretary Mnuchin, he
and I had about an hour-long meeting Monday, Tuesday--the whole
week starts to run together--but the receipts were coming in a
little bit more slowly than he anticipated when he gave his
last letter to Congress. I think the last letter he sent--and I
hate to butcher this, but I think it said he expected the debt
ceiling to be reached about sometime in early September. And I
think now it has moved a couple weeks in advance, and he may be
giving additional guides on that out of Treasury shortly, and I
think that is consistent with his testimony yesterday.
Senator Corker. Thank you.
Thank you, Mr. Chairman.
Chairman Enzi. Senator Merkley.
Senator Merkley. Thank you, Mr. Chairman.
Under the H.R. 1628 Trumpcare 2.0, Medicaid expansion is
essentially wiped out. In Oregon, that means about 400,000
people lose their health care coverage. Why do you not consider
that to be a breaking of the promise for coverage?
Mr. Mulvaney. No, sir, my understanding is that, generally
speaking, most folks do not stay on Medicaid very long. It is a
bridge to something else, and that the AHCA allows a
grandfather period necessary for the States to allow those
folks to rotate off of the Medicaid program. So we do not
anticipate that anybody would be kicked off. Certainly future
folks who might have qualified under an expanded Medicaid would
not have access to that program, but that does not mean that
somebody would be kicked off.
Senator Merkley. Well, using the churn as a strategy to
simply eliminate Medicaid expansion means roughly 400,000 fewer
Oregonians will be covered by Medicaid, by just the expansion.
That is before you start cutting the heart out of basic
Medicaid. But let me turn--I think everyone, every analyst,
every expert, every health care group considers this to be a
massive reduction for States that have Medicaid expansion and a
significant reduction for those who have basic Medicaid. And
you can sit here and spin it all day long, and that is your
privilege. You are here to testify. But nobody in the world
buys that story.
Let me turn to the attack on rural America. This budget
cuts rural business loans, rural development, rural
transportation, rural water, essential service to rural
airports, as well as contract tower support, rural clinics,
rural hospitals, rural rental housing, rural agriculture,
which, by definition, is rural, and veterans' vouchers.
So why does the President have it in for rural America?
Mr. Mulvaney. We create a new economic infrastructure grant
account providing $161 million, of which 80 is targeted for
Appalachia. We increase farm loans by $552 million over the
enacted level of already $7 billion. We increase community
facility loans by $400 million to support a loan level of $3
billion. We provide $6.2 billion in loans to rural electric----
Senator Merkley. Excuse me. Are you saying that none of the
reductions that I just mentioned are things that are in the
President's budget?
Mr. Mulvaney. No. I am saying there----
Senator Merkley. I would like you to read the President's
budget if you are going to sit here and testify and----
Mr. Mulvaney. No.
Senator Merkley. Do you acknowledge all these cuts to rural
America?
Mr. Mulvaney. No, your question is: What are we doing to
and for rural America? You would say ``to,'' I would say
``for.'' And my point to you would be the same points I made to
other folks here today. I give the Appalachian Regional
Commission, Mr. Merkley, as a prime example. OK? We were not
convinced that it worked. We were not convinced that it was
showing a return on investment for the taxpayers. So----
Senator Merkley. Are you contending rural America will get
the same amount of resources it has after you savage all these
programs?
Mr. Mulvaney. So what we did with the Appalachian Regional
Commission, which I think was $144 or $146 million----
Senator Merkley. I am not interested in the Appalachian
Commission. That does not affect Oregon. I am asking you about
all the cuts you are doing to rural Oregon.
Mr. Mulvaney. I am telling you that we think that we are
taking care of the rural--the rural--not rural poor, rural
folks generally. Keep in mind, you are only looking at one side
of the equation. You are not looking at the policy----
Senator Merkley. So to the five airports that have contract
tower support to keep rural air service, which is essential,
you are saying that they will still have that support in the
budget?
Mr. Mulvaney. No. We are saying that----
Senator Merkley. Thank you.
Mr. Mulvaney [continuing]. There are absolutely going to be
changes in the specific program.
Senator Merkley. OK. So we do not have time to go through
all these pieces. I have listed them out, the essential damage
that this budget does to rural America. You can contend
otherwise, as you spin everything else. But let us turn to the
direct impact on those who are hungry in Oregon: 370,000
children at risk of going hungry every day. Have you ever in
your life gone to bed hungry?
Mr. Mulvaney. No, sir. And I am thankful that I have not.
Senator Merkley. Then you feel very comfortable cutting the
basic program that ensures our children have food in Oregon?
Because you have never gone hungry, so you cannot place
yourself into the----
Mr. Mulvaney. No, sir, because we do not do that. The SNAP
reductions and the other programs you are looking at deal with
us trying to involve the States in managing the programs. Keep
in mind the way SNAP works right now is that we provide 50
percent of the administrative costs and the State matches that.
But we provide 100 percent of the actual benefit. And what we
have found is that is a formula for waste and growth rates in
costs that are simply unsustainable. So what we do is ask the
States to pick up some of the costs in order to drive
efficiencies that we know exist when the people who are
administering the program have at least just a little bit of
skin in the game. So the total spending should not go down, or
if it does, it goes down because of efficiencies and not
because of reductions.
Senator Merkley. It is so easy to sit in your chair and
talk about efficiencies when you have never worked with low-
income incentives who are going hungry.
Mr. Mulvaney. Senator, that--with respect, sir, you asked
me if I had ever gone to bed hungry. You never asked me if I
had worked with folks who had.
Senator Merkley. Well, clearly what you are doing in this
budget is going to do a lot of damage to those individuals,
whether or not you have worked----
Mr. Mulvaney. I respectfully disagree, but I thank you.
Senator Merkley. Let us turn to housing. We have 4,000
housing vouchers eliminated. In Oregon, the housing vouchers
play an incredibly important role in a state of emergency, to
help address a state of emergency in housing. Why make it
worse? Why make a housing emergency worse?
Mr. Mulvaney. Senator, to be honest with you, I have
handled a lot of questions over the last 2 days, and I do not
have the information about the housing voucher program at my
fingertips, and I apologize.
Senator Merkley. Thank you. I will follow up with you,
because I do have it at my fingertips, and it makes a housing
crisis in Oregon, which has one of the worst crises in America
because a lot of people have heard what a wonderful place
Oregon is, and it is, and people are moving to----
Mr. Mulvaney. I would suggest to you that your housing
crisis in Oregon is driven mostly by your land-lease policies
and not by anything dealing with Federal regulations.
Senator Merkley. I would suggest you know very little about
housing in Oregon.
Mr. Mulvaney. Thank you, sir.
Chairman Enzi. I want to thank everybody that participated
today. I want to particularly thank Director Mulvaney for his
answers and for the effort that he has had to put together in a
very short period of time to come up with something as
complicated as $4 trillion worth of spending.
We are going to get to grapple with these same things as a
committee because, as I have told people as they have come by
me here, this is a list of suggestions from the President, but
we are the ones that actually do the budget. And so I am going
to be relying on all of these folks who have criticism--and I
think everybody has some criticism--how they are going to solve
the problems that we have and do it in a responsible way. I
really appreciate that that is the first balanced budget, even
though it is over 10 years, that I have seen from a President
in a long time. And, in fact, for the last 8 years, we have
voted on a President's budget, and the first 7 years the
President got zero votes. He did not get a vote from the
Democrats, and he did not get a vote from the Republicans.
Now, in the eighth year, he did better. He got one vote. I
suspect that your budget will do a little better than that, but
when you are dealing with that much volume, there is something
in this budget for every single person to hate. And if they are
going to pick out the thing that they do not like in there and
vote against the whole thing, we do not stand much of a chance
of even doing the congressional budget that we are obligated to
do.
You were asked a lot of questions about tax reform. I think
tax reform is up to us, too.
Mr. Mulvaney. The last time I checked, most legislation is
up to you, Senator.
Chairman Enzi. Yes. Thanks again for your suggestions and
being willing to do that, and I do recognize the difficulty of
cutting and the fact that around here, in all my time, I have
watched that it is considered a cut if you do not get as much
as you ask for, even though it is more than you had before, and
that makes it very difficult.
And I appreciate your work on the debt ceiling. We are
going to have to do that. And, of course, I am hoping that we
can get some budget reform to get a little better process that
puts us on a better track. We had testimony from former Senator
Phil Gramm, who did one of the budget acts earlier, and who is
an economist, and he actually suggested that your number for
the rate of growth is a little low. He thought that 3.4 was a
better answer than that based on both historical and what he
saw as possibilities for solving some of our problems.
So thank you for your efforts on this. Thank you for your
patience and your willingness to answer questions and the
volume of answers you were able to do on such a diverse set of
questions.
So thank you very much. We will work with you to see how
much of that we can accomplish and what will come out in our
budget.
Mr. Mulvaney. Senator, thank you very much for having me.
Chairman Enzi. The hearing is adjourned.
[Whereupon, at 12 p.m., the committee was adjourned.]
ADDITIONAL COMMITTEE QUESTIONS
[The following submitted questions were not asked at the
hearing but were answered by the witness subsequent to the
hearing:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
THE PRESIDENT'S FISCAL YEAR 2018 BUDGET AND REVENUE PROPOSALS
----------
TUESDAY, JUNE 13, 2017
U.S. Senate,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to notice, at 10 a.m., in room
SD-608, Dirksen Senate Office Building, Hon. Michael B. Enzi,
chairman of the committee, presiding.
Present: Senators Enzi, Grassley, Crapo, Toomey, Johnson,
Perdue, Gardner, Kennedy, Sanders, Wyden, Whitehouse, Merkley,
Kaine, Van Hollen, and Harris.
Staff present: Eric Ueland, Republican staff director, and
Warren Gunnels, minority staff director.
OPENING STATEMENT OF CHAIRMAN MICHAEL B. ENZI
Chairman Enzi. I will call to order this hearing for budget
and revenue proposals.
Good morning, and welcome to our hearing on the President's
fiscal year 2018 budget and revenue proposals. I want to thank
you, Mr. Secretary, for agreeing to testify today on the
budget. Your agency, the Department of Treasury, has
responsibility for fostering our Nation's economic growth and
ensuring fiscal stability across our financial system.
Our country's growing debt and underperforming economy
should be front and center in these conversations. America is
faced with a mammoth national debt that totals almost $20
trillion and the sluggish economy that is holding back more
robust growth. Economic forecasts for the future expand at a
modest 2 percent rate. Over the next 30 years, the debt is
projected to nearly double as a percentage of gross domestic
product (GDP) from 77 percent in 2017 to 150 percent in 2047.
In order for Congress to tackle this enormous fiscal
challenge, it must reduce spending and ensure outlay growth
does not outpace our economy. But we also must focus on the
other critical part of the equation: growing our gross domestic
product. I have suggested including long-term debt-to-GDP
targets in the Federal budget process, which would provide key
goals and benchmarks for the budgets of both Congress and the
President. If baseline projections do not comply with these
targets, the administration would need to submit a plan to
bring the current law projections back into compliance.
Congress will be asked to raise the debt ceiling again this
year to cover spending that is already obligated or essentially
already spent. We must also prioritize changing the trajectory
of our overspending. The administration has proposed a budget
that balances, and it has been years since the White House has
even attempted to accomplish that goal. But Congress must
implement these reductions and deficit spending and economic
growth policies to put our Nation on a better fiscal path.
One way to promote economic growth is through tax reform
that does not increase the debt. Both parties and many
administrations have recognized the inefficiencies in our Tax
Code and the negative impact it has on economic growth. If we
can broaden the base while lowering tax rates and simplify our
tax laws, it will help limit Government distortion of market-
based decisions, increase investment and growth of businesses.
I appreciate that President Trump and the Treasury have
identified guiding tax reform principles and want to engage
Congress about navigating a path forward. We do need a simpler,
fairer, and more transparent tax system. We all agree that tax
reform is long overdue, and we need to take the steps to reform
our tax system while promoting economic and job growth.
I am confident that having an administration that set tax
reform and stronger economic growth as priorities and that has
committed to working with Congress will allow us to get a bill
across the finish line. How the Budget Committee scores a
comprehensive overhaul of our tax code is one question we will
continue to work on with the administration. Past scoring
practices do not include the reaction of the general economy to
major policy changes. That means lawmakers are only getting a
partial picture of how an important policy might actually
affect the economy. Dynamic scoring can add missing economic
information that static scores do not provide, making the score
more complete.
The Joint Committee on Taxation has multiple dynamic models
which they combine with different assumptions about Federal
Reserve policy and labor supply elasticity that produce a range
of results. They have been running and refining these models
for decades in order to provide legislators with critical
information on major policies that can promote growth. And they
have consistently recognized the link between taxes and output
in the economy. Having the Joint Tax Committee select a single
best point estimate for Congress to weigh against the current
law baseline is how we enforce the budget. This committee
continues to discuss how dynamic feedback can be used for
enforcement, and we welcome input from the administration and
the Treasury on this matter.
Treasury also plays a key role in many of the other growth
policies proposed by President Trump: regulatory relief,
international trade, incentivizing private investment in the
infrastructure, to name a few. The administration has proposed
a financial deregulation plan to rid the banking system of red
tape caused by the Dodd-Frank Act and announced a withdrawal
from the Paris climate agreement. Each step gets us closer to 3
percent economic growth, which returns our economy to its
historic average rate. The Budget Committee sets Congress'
preferred legislative path for growth. I look forward to
considering a fiscal year 2018 budget that promotes the
economy, creates jobs, and tackles our mammoth national debt.
Thank you for being willing to serve, and I thank you for
the great people that you have gotten to help you out.
Senator Sanders.
OPENING STATEMENT OF SENATOR BERNARD SANDERS
Senator Sanders. Thank you, Mr. Chairman, for holding this
important hearing. Mr. Mnuchin, welcome.
Mr. Chairman, during his campaign for President, Donald
Trump told us--at a time of massive income and wealth
inequality, the very, very rich are getting richer, almost
everybody else is getting poorer--that he, Donald Trump, was
going to stand up for the working families of this country, he
was going to take on the establishment, and he was especially
harsh in his words about Wall Street greed. He said he was
going to ``drain the swamp.'' He said, and I quote, ``We cannot
fix a rigged system by relying on the people who rigged it in
the first place.''
He said, ``I am not going to let Wall Street get away with
murder. Wall Street has caused tremendous problems for us.''
That is an exact quote from Donald Trump.
He included language, pushed language into the Republican
platform, which I happen to agree with, stating, ``We support
reinstating the Glass-Steagall Act of 1933 which prohibits
commercial banks from engaging in high-risk investment.''
He said that he was the only person in America, the only
one, who could take on the corrupt political and economic
establishment. He said, ``We are going to send the special
interests packing, and we are going to once again have a
Government of the people, by the people, and for the people.''
Wow, those are really dramatic statements. Here we have a
President who ran, he was going to take on Wall Street. He was
going to stand up for the working families of this country. And
those words no doubt must have gotten the billionaire class
really, really nervous because he was saying all these things
during the campaign.
Unfortunately, as I think most Americans understand, all of
those words of Donald Trump were never meant to be taken
seriously. It was just campaign rhetoric--good rhetoric, I must
say--to get votes but nothing that he ever had any intention of
actually implementing.
Donald Trump talked about draining the swamp, talked about
taking on Wall Street, but he now has more billionaires in his
administration than any President in American history. Funny
way to take on the establishment by having more billionaires in
your administration than any President in American history.
His administration--this is the guy who was going to take
on Wall Street--is filled with executive after executive from
Goldman Sachs, one of the largest and most powerful financial
institutions on Wall Street. His chief economic adviser is Gary
Cohn--chief economic adviser, Gary Cohn--who was the president
of Goldman Sachs and the man who received a $285 million
severance package. His Treasury Secretary--and we are delighted
that you are with us today, Secretary Mnuchin--worked at
Goldman Sachs for 17 years.
Mr. Chairman, one of the great scandals of our time, which
is still impacting millions of Americans today, is that
virtually every major Wall Street institution was involved in
reckless, irresponsible, and illegal behavior which led to the
great crash of 2008, which caused massive unemployment in this
country, people lost their homes, people lost their savings.
We had financial institutions who sold mortgage-backed
securities that were worthless while they ripped off low-income
and working families throughout the country. In fact, among
virtually every other major financial institution, as a result
of their illegal activities, Goldman Sachs alone paid a fine of
more than $5 billion to the Federal Government.
But instead of reforming Wall Street, which is what the
President said he would do, instead of reinstating Glass-
Steagall, as he promised he would do during the campaign,
President Trump endorsed a bill that passed the House last week
that would deregulate Wall Street, increasing the odds of yet
another taxpayer bailout even bigger than 2008. Campaigned for
Glass-Steagall. Now he is deregulating Wall Street.
In my view, if financial institutions are too big to fail,
they are too big to exist. It is time to break them up.
Now, Mr. Chairman, with a Cabinet of billionaires, it
should come as no surprise that the budget that President Trump
has proposed has been written by the billionaire class and for
the billionaire class. Frankly, this budget that we have
recently received is the most anti-working-class budget, the
most destructive budget in the modern history of America. This
budget follows in the footsteps of the Trump-Ryan health care
bill, which gives massive tax breaks to the people on top and
throws 23 million Americans off of health insurance, cuts
Medicaid by over $800 billion, defunds Planned Parenthood.
The Trump budget--and I hope to be questioning Mr. Mnuchin
about this--would cause devastating pain to tens of millions of
families in our country by cutting nutrition programs, by
slashing Head Start, by making massive cuts to affordable
housing, by doing away with programs, life-and-death programs,
for working families. But guess what? Guess what? As part of a
budget, we are looking at $3 trillion in tax breaks over a 10-
year period to the top 1 percent. So the very rich get richer;
the working class in this country is shrinking. The Trump
budget gives unbelievable tax breaks to the wealthiest family
in this country.
It is an immoral budget. It is a budget that must be
defeated by the U.S. Congress.
So, Mr. Chairman, thank you for holding this hearing. There
is a lot to discuss, and I look forward to chatting with Mr.
Mnuchin on some of these issues.
Chairman Enzi. Thank you, Senator Sanders.
I will now introduce our witness. Our witness today is the
Honorable Steve Mnuchin, the Secretary of the United States
Treasury. The Secretary has a remarkable career, including
being a partner and chief information officer at the Goldman
Sachs Group, founder and CEO of the OneWest Bank Group, and
founder, chairman, and CEO of Dune Capital Management. Prior to
being sworn in as Secretary of the Treasury, he was a senior
economic adviser to then-President-elect Trump and finance
chairman for his campaign.
Apart from his professional roles, Secretary Mnuchin has
been committed to various philanthropic and charitable causes.
Those causes include the UCLA Health System Board, the L.A.
Police Foundation, and the Hirshhorn Museum and Sculpture
Garden right here in DC, just to name a few.
Thank you for taking your time to be with us today and for
being willing to serve. We look forward to receiving your
testimony. Please begin.
STATEMENT OF THE HONORABLE STEVEN T. MNUCHIN, SECRETARY, U.S.
DEPARTMENT OF THE TREASURY
Secretary Mnuchin. Thank you very much. Chairman Enzi,
Ranking Member Sanders, and members of the committee, it is an
honor to be here with you today. I am looking forward to
working with Members of Congress and this committee on passing
important legislation for the American people.
My No. 1 priority as Treasury Secretary is creating
sustainable economic growth for all Americans. The best way to
achieve this is through a combination of tax reform, regulatory
relief, and protecting taxpayers; this also includes making
some difficult decisions with respect to our budget. We are
currently bearing the costs of excessive Government commitments
of previous years, and this has forced us into hard choices.
But the remarkable thing about economic growth is that it
builds on itself. If we develop the right policies today, our
children and grandchildren will reap the benefits of an ever-
growing economy. Indeed, in the next 10 years, if we return to
the modern historic average of above 3 percent annual GDP, our
economy would grow by trillions of dollars. This will be
meaningful to every man, woman, and child in this country and
future generations.
Tax reform will play a major role in our campaign for
growth. It has been more than 30 years since we have had
comprehensive tax reform in this country. This administration
is committed to changing that. We have over 100 people working
at Treasury on this issue.
We are working diligently to bring tax relief to lower and
middle-income Americans as well as make American businesses
competitive again. All of this comes as we simplify the Tax
Code and make it easier for hardworking Americans to file their
returns.
Finally, I would like to speak about the importance of free
and fair international trade. Few doubt that trade is a crucial
component of economic growth. But trade deals that disadvantage
American workers and business can hardly be considered either
free or fair.
In meetings with my international counterparts, I have
stressed this dual importance. Just 2 weeks ago, I had
productive meetings with the finance ministers of the G-7, and
earlier, I met with members of the International Monetary Fund
(IMF) and World Bank. They understand our concerns, and we have
approached our international dialog with a renewed spirit of
mutual understanding.
In the President's Joint Session to Congress, he spoke
about the marvels that this country is capable of when its
citizens are set free to pursue their visions. Fundamental to
that freedom is removing imprudent regulation and uncompetitive
taxes from blocking their way.
This has been a significant few months at Treasury. We have
been studying, developing, and implementing policies that will
put this country on the path toward sustained economic growth.
In the current months, we will work with this committee and
Congress in what we will look back on as an important time for
this Nation's economy and our history.
Thank you and I look forward to answering your questions
today.
[The prepared statement of Secretary Mnuchin follows:]
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Chairman Enzi. Thank you, Mr. Secretary.
As we turn to questions, let me take a minute to explain
the process for the committee members. Each member will have 5
minutes for questions, beginning with myself and then Senator
Sanders. Following the two of us, we will alternate questions
between Republicans and the minority. All members who were in
attendance when the hearing began will be recognized in order
of seniority; those who arrived after it began, in order of
arrival. I will begin with my questions.
Mr. Secretary, the original estimate for exhaustion of
extraordinary measures was for the fall for the debt limit, but
there has been an interest in raising or suspending the debt
ceiling prior to the August recess. Can you give us an update
on when the debt limit needs to be addressed?
Secretary Mnuchin. Sure. Thank you very much, Mr. Chairman.
First, let me say, as I notified Congress earlier in March
when we had an issue with the debt limit, my strong preference
is for the House and the Senate to address this as soon as
possible, and my preference is for you to do this before you
leave for the August recess. I think that the U.S. dollar is
the reserve currency in the world. We have the strongest
credit, and we need to maintain that. So I would urge you and
the House to do this.
In regards to the specific timing, we do have plans, if you
do not do it beforehand, that we can fund the Government
through September when you get back. But, again, I urge, given
the importance of this, that we send a message to the rest of
the world and to the markets that we take our credit very
seriously.
Chairman Enzi. Thank you. The President's budget assumes
deficit-neutral tax reform and provides core principles for
discussions with Congress. It assumes a more efficient Tax Code
can get our economy growing again. Can you expand on the
administration's view on tax reform and economic growth?
Secretary Mnuchin. Sure. Let me first say that
fundamentally we believe that we can get back to 3 percent
sustained economic growth. That is not this year and that is
not next year, but we can get there. And that is going to be a
combination through tax reform, regulatory relief, and trade.
On the tax side, our fundamental principles are we need to
simplify personal taxes, cut down the number of brackets, cut
down special interest deductions, and make it so that most
Americans can fill out their tax returns on a large postcard.
On the business side, we have a very uncompetitive system.
Our taxes are some of the highest in the world. We tax our
companies on worldwide income. We have a system of deferral
which leads our companies to leave trillions of dollars
offshore.
We want to correct that. We want to make our companies
competitive, and we want to bring back trillions of dollars so
it can be invested here in America to create American jobs.
Chairman Enzi. Thank you, which is a good lead into my next
question. In 2012, I introduced the United States Job Creation
and International Tax Reform Act that would help fix our Tax
Code and promote U.S. economic and job growth. The bill would
modernize our international tax rules for 21st century commerce
and make them more certain so that U.S. companies are not at a
competitive disadvantage with foreign companies. It would give
American companies incentives to create jobs in the United
States and undertake activities here at home so they can win
globally. It would encourage U.S. companies to develop and keep
rights to their ideas and inventions in the United States
rather than shift them offshore.
Do you agree that our current international tax system is
outdated and places U.S. companies at a competitive
disadvantage, that our system should move forward toward a
territorial system?
Secretary Mnuchin. Yes, Mr. Chairman. First of all, let me
applaud you on the work that you have done, and we have studied
this as we look forward to tax reform. I completely agree that
the system is outdated. We have not had tax reform for 30
years. That is way too long. And, yes, I also agree that we
should be moving to a territorial system. Our worldwide system
encourages companies to leave their money abroad as opposed to
bringing it home.
Chairman Enzi. Thank you. I also am hoping that as we do
the corporate tax reform, we keep in mind those thousands and
thousands of small businesses that are pass-through businesses
so that we can keep it fair for both. But I know that you will
have some questions about estate tax, and I have a lot of
ranchers, farmers, small and medium-sized businesses in my home
State of Wyoming. And I believe that family owned businesses
should not face the threat of financial ruin caused by a tax on
a tax. I mean, when they earned it, they paid for it. When they
die, they have to pay again. We should free Americans from that
burden of the death tax, allowing them to preserve the
livelihoods for their families and future generations.
Does the administration share this concern? And if so, how
does it plan to address that tax reform?
Secretary Mnuchin. Yes, Mr. Chairman, we do share your
concern. We think that Americans should be taxed once and not
twice, that the death tax is unfair, and especially for those
family businesses that want to continue on and have been a
large engine of driving growth in this country.
Chairman Enzi. Thank you. I appreciate the brevity of your
answers as well.
Senator Sanders.
Senator Sanders. Chairman, thank you. Thank you for leading
me right into the question that I wanted to begin with. We have
a little bit different take on it.
Mr. Mnuchin, as you know, the estate tax applies only to
the top two-tenths of 1 percent; 99.8 percent of Americans will
not gain a nickel if the estate tax were repealed. So my first
question is: Why do you think at a time when the middle class
is shrinking and millions of our families are struggling to put
bread on the table, they are working 50, 60, 70 hours a week--
not uncommon in my State of Vermont that people would be
working three jobs. Why do you think it is a good idea to throw
23 million people off of health insurance, to cut nutrition
programs for low-income pregnant women and their babies, why do
you think it is a good idea to make massive cuts in the Low
Income Home Energy Assistance Program (LIHEAP) so that older
people in Vermont can stay warm in the wintertime, why do you
think it is a good idea when all over this country people are
paying 50, 60 percent of their limited incomes for housing, why
do you think it is a good idea to make massive cuts in those
programs and yet, with regard to repealing the estate tax, give
the wealthiest family in this country, the Walton family, up to
a $52 billion tax break? Do you think most Americans who are
struggling think it is a great idea to cut programs that impact
working families and give unbelievable tax breaks to the
wealthiest families in America?
Secretary Mnuchin. Well, thank you for your question. Let
me first assure you that as part of tax reform, the President
very much wants us to have a middle-income tax cut that is
focused on spurring the economy.
Now, as it relates to the estate tax, the super rich have
plenty of gimmicks so that they do not need to pay the estate
tax. This is about eliminating the estate tax so that Americans
who have built businesses and created jobs and want to pass
those companies on and continue their farms and continue their
industry do not have to sell those businesses to pay the death
tax.
Senator Sanders. No, actually, that is not what it is
about. In fact, my good friend Chairman Enzi mentioned ranchers
and farmers, and we are all concerned about it. The last study
I saw thought that maybe 50--5-0--ranchers and farmers may be
impacted.
What this is really about--and we should be honest about
it--is that people like the Koch brothers, second wealthiest
family in America, have spent hundreds and hundreds of millions
of dollars to get benefits like this. So do you really think,
when you talk about families like the Koch brothers and the
Walton family--and, by the way, the Trump family, who would get
something like a $4 billion tax break. Do you really think that
it makes sense, again, to cut programs that people desperately
need, need to stay alive, and give massive tax breaks to the
children of the wealthiest family in this country?
Secretary Mnuchin. Well, I am not going to comment on the
specifics of the Waltons or the Kochs. I am sure they have done
plenty of estate planning, and they have both been very
philanthropic in their charitable contributions.
What this budget is about--and our tax reform is about
creating 3 percent growth, and what this budget is about is
sending a message that, one, the Trump administration believes
we should have a balanced budget; and, two, we have made very
difficult decisions, and I understand some of those programs I
agree with are quite worthy, but we have made very difficult
decisions to fund the military, to protect Americans. We have--
--
Senator Sanders. I apologize for interrupting. We just do
not have a lot of time, so please accept my apology here. You
made difficult decisions to give tax breaks to
multibillionaires and to cut programs for working families. I
do not think those are difficult decisions. I think those are
immoral decisions.
Let me ask you another question. President Trump campaigned
on the fact that he was going to take on Wall Street. He
supported a 21st century Glass-Steagall Act. That is what he
said during the campaign. You just recently introduced a report
on Wall Street reform. Can you tell me where I could find the
establishment of a 21st century Glass-Steagall Act, which would
separate commercial banking from risky investment banking,
something the President campaigned on? On what page might I
find that?
Secretary Mnuchin. OK. First of all, let me just comment
that I think, as you know, I had the pleasure of traveling the
country with the President during the campaign. I met with
hundreds and hundreds of small and medium-sized businesses.
During the campaign we specifically said that we believed in a
21st century Glass-Steagall. That was differentiated from what
was the Republican Party view of Glass-Steagall, and----
Senator Sanders. Whoa, whoa. Let me get this straight. I do
not mean to interrupt you, Mr. Secretary, but you are telling
me----
Secretary Mnuchin. But you are interrupting me. You are not
letting me finish my comment.
Senator Sanders. But I have very limited time, and what you
are saying is that the language that Trump put into the
Republican platform is not really the language that he believed
in.
Secretary Mnuchin. Again, let me be clear: The President
did not put everything into the Republican platform. There was
the Republican platform, and there was the Trump position,
which I was very involved in, and I had the pleasure of
speaking to Senator Warren about this when I testified several
weeks ago, and I followed up with her office and had a personal
meeting with her, and I explained to her the difference between
what we had thought of as a 21st century Glass-Steagall and
Glass-Steagall, and made it very clear in my last testimony in
front of the Senate that the President did not support breaking
up big banks. We think that that would hurt the economy, that
would ruin liquidity in the market.
What we are focused on is safe and prudent regulation for
the large banks so we do not have taxpayer risk.
Senator Sanders. In other words, the campaign, the Trump
campaign, campaigned on reinstating Glass-Steagall----
Secretary Mnuchin. No, it did not. It never campaigned on
that, Senator, and with all due respect----
Senator Sanders. But just put it into the Republican
platform. I stand corrected.
Secretary Mnuchin. Again, we differentiated, and we were
very clear, and as I had said to Senator Warren, if we believed
in it, we would have not labeled it a ``21st century Glass-
Steagall''----
Senator Sanders. That is the name of legislation right now,
as you know.
Secretary Mnuchin. I understand that is hers, and that is
an unfortunate coincidence.
Senator Sanders. Right.
Chairman Enzi. Senator Crapo.
Senator Crapo. Thank you, Mr. Chairman, and, Secretary
Mnuchin, I appreciate you being here. I do not know that I have
ever seen a Secretary of the Treasury who has been more willing
to engage with Congress, whether it is in testimony at hearings
or coming out, as you just indicated, and meeting individually
with Senators or with committees and working with us to achieve
the objectives that we agree need to be achieved. So thank you
for that.
Secretary Mnuchin. Thank you.
Senator Crapo. With regard to your opening statement, it
basically covered what I was going to go through in my
questions. I appreciate the approach you have taken. I just
want to quickly highlight something. You have indicated that
the budget that you are working on assumes about 2.9 percent
growth over 10 years. Is that correct?
Secretary Mnuchin. That is correct, and that is
significantly lower than what President Obama used in his
original budget of above 4 percent growth, I might just point
out.
Senator Crapo. Well, you beat me to my question again. That
was going to be my question. Just by way of comparison,
President Obama had assumed almost a percent of growth higher
for the first 4 years of his budget. And something you already
said, but just for context, I would like to get this out as
well. A 3 percent growth rate, to see a 3 percent growth rate
for our country is not an unusual thing, is it? What is the
historic average of growth in the United States economy?
Secretary Mnuchin. It is higher than that.
Senator Crapo. That is what I thought.
Let me move for the remaining time that I have to the
Treasury report that was issued just last night, the one that
was just referenced by Senator Sanders. I was very pleased to
see this report come out. You have been tasked by the President
and the Financial Stability Oversight Council (FSOC) and others
have been working to analyze our regulatory system, which I
believe is becoming one of the biggest drains on our ability to
achieve economic growth. The regulatory burden in this country
is estimated by some groups to be as much as $1.8 trillion of
costs to our economy on a yearly basis. That is not a 10-year
summary. That is a yearly estimate. And so I appreciate the
report that you issued.
This report is an important step in the effort to evaluate
the effectiveness of post-crisis regulatory regimes, and I
commend the excellent work you have done. It includes a
plethora of helpful recommendations on a wide range of topics,
including regulatory structure, capital and liquidity rules,
stress testing, living wills, mortgage rules, and the Volcker
rule.
While I am still going through the report, I am encouraged
by the report's recognition that rules need to be better
tailored to reflect the size and complexity of the business
models of the businesses that are regulated.
Can you talk a little bit about the need to tailor and to
give examples maybe to us of rules that can be more effectively
tailored to reduce the overwhelming compliance burdens that
institutions in America are facing?
Secretary Mnuchin. Sure. Thank you very much, Senator. So,
first, let me comment. I think that it has been a significant
amount of time since Dodd-Frank was passed, and there are
lessons learned, and the good news is that our banking system
is now sufficiently capitalized.
Our overarching theme is that we want to make sure that
community banks, credit unions, and regional banks can grow
properly. The top eight G-SIBs account for 50 percent of the
assets in the U.S. banking system while over 12,000 regional
banks and community banks and credit unions make up the rest.
Those are not the banks that are putting our system at risk, so
we want to make sure that the regulations are tailored, that
small community banks do not have undue burdens of regulation,
that they can afford to lend to small and medium-sized
businesses. They understand how to make credit decisions. They
understand community banking. And the primary focus of the
report is around that sector of banking.
Senator Crapo. Well, thank you very much for that.
Last Congress, there was some bipartisan support for
changing the Systemically Important Financial Institution
(SIFI) threshold and the application of the enhanced prudential
standards and the Comprehensive Capital Analysis and Review
(CCAR). If Congress exempted some non-complex regional banks
and streamlined the requirements for other banks, how would
that impact broader economic growth?
Secretary Mnuchin. We think that is critical to economic
growth, and we think that is also critical to not having the
large banks entirely fund the U.S. economy and have a situation
where we do not put taxpayers at risk.
So as I had said earlier, part of our mission in getting to
3 percent growth, tax reform, regulatory reform, and trade. And
our part of the regulatory reform is around financial services,
so thank you.
Senator Crapo. Thank you. And one last question. The report
makes a number of recommendations to simplify and clarify the
requirements of the Volcker rule and ensure the rule is applied
in a more targeted fashion. Can you discuss broadly the costs
and difficulties institutions have had trying to comply with
the rule in its current form and how simplifying it can help
spur economic growth?
Secretary Mnuchin. Yes, so let me just say, you know, I do
not think the Volcker rule is what created the financial
crisis, and I know that Chairman Hensarling and others in the
CHOICE Act called for a repeal of it, which we look forward to
you working with him on additional legislation.
Our main focus is what can we get done to fix it right now,
and I have already been working with FSOC members, and our
biggest concern is that we want to make sure that market makers
can provide liquidity in market making, and we are going to
work with the different regulators around the definition of the
rule, not to allow proprietary trading within these banks but
to make sure that proper market-making functions do occur.
I was really at the G-7, and one of the economists spoke on
this, and they said that banks' trading desks needed a lawyer
and a psychiatrist to sit there and interpret what a trader was
doing to be in compliance.
Senator Crapo. Thank you.
Chairman Enzi. Senator Wyden, you get to question the
witness at the Finance Committee and here.
Senator Wyden. Thank you. Yes, thank you, Mr. Chairman.
Mr. Secretary, I thought it was very unfortunate yesterday,
and I listened to what amounts to a multi-Pinocchio performance
with respect to the Mnuchin rule, and I want to walk this
through carefully.
Ten days ago, you repeated in an interview the comment that
you had made earlier on CNBC. That was your statement there
would be no absolute tax cut for the wealthy. And as you know,
in the Finance Committee, when I heard that, I said, ``That
sounds good. We are going to call it the `Mnuchin rule.' '' You
picked up on that in that recent interview when you said, ``I
felt I was in great company with the Buffett rule and the
Volcker rule. Now there is a Mnuchin rule.'' You had a real
sense of pride that there was something called the ``Mnuchin
rule,'' which said there would be no absolute tax cut for the
wealthy.
Yesterday you walked that back in the House Appropriations
Committee. You said, and I quote, that now the Mnuchin rule is
``an objective.'' Maybe it will happen, maybe it will not, but
it was no longer a pledge, no longer a commitment. And then,
regrettably, you went on to say that the President would not
veto a massive tax break for the wealthy. So it seems to me
there was a very substantial retreat yesterday from what, A,
you said; B, in the Finance Committee you said you took pride
in that there would be a Mnuchin rule with no absolute tax cut
for the wealthy.
So my question to you is: Will you reverse course again and
return to your original commitment that, as part of tax reform,
there will be no absolute tax cut for the wealthy?
Secretary Mnuchin. So, first, it is a pleasure to see you,
and I look forward----
Senator Wyden. As well.
Secretary Mnuchin [continuing]. To working on tax reform
with you. And I am honored that you named a rule for me. As I
have said before in several of these testimonies, I did not
make this as a rule. You made it as a rule. Yes, in my first
CNBC interview--and I have been through this now several
times--I did comment that that was what we were trying to do,
and that was the objective of the President. We are working
closely with the House and the Senate on trying to get tax
reform done because it has been too long. And as I have said in
the past, that our objective is to create a middle-income tax
cut and----
Senator Wyden. No. Mr. Secretary, you made a commitment
that there would be no absolute tax cut for the wealthy. And
yesterday you changed that. You said, ``We have an objective to
do that,'' so maybe it will happen, maybe it will not. Tell me
why you changed from something, A, you said; and, B, you took
great pride in when that is the way we developed it in the
Finance Committee. It was based on your words. That is why I
thought it was promising, and now it looks to me like it has
basically been set aside.
Secretary Mnuchin. First of all, we have had several
conversations on this, so I have testified on this now at least
three or four times, and I have clarified this three or four
times. Yesterday was nothing new.
So let me first say, again, I am quite honored that I am in
good company with other people who have rules.
So the second thing I would say is our focus is on getting
tax reform done. To get tax reform done, it is my job to figure
out what meets the President's objective, what meets the House
and the Senate so that we can get something signed into law.
And there will be compromises along the way on this.
So, yes, you made it a rule. I did not make it a rule. I
was honored that you named it----
Senator Wyden. No. No, Mr. Secretary. You took great----
Secretary Mnuchin. I said----
Senator Wyden. You took great pride as we repeated what you
said, and you again 10 days ago referenced the original comment
by saying it on CNBC. You are the one who has walked it back.
Nobody else has walked it back. You are the one who walked it
back.
Secretary Mnuchin. Well, I have walked it back from my CNBC
interview, which I think was in January. But we have had the
opportunity to talk about this several times, and, again, I
look forward to coming to your office and talking about tax
reform. And, again, tax reform, at the end of the day the
President will evaluate what is on his desk, and he will make a
decision whether he wants to sign it or not. My objective is to
deliver tax reforms that we can get the economy back going. And
as I have said before, our focus is on reducing and creating
taxes for the middle class.
Now, I just want to comment one thing----
Senator Wyden. My time----
Secretary Mnuchin. You may not think there is----
Senator Wyden. My time is up, and I just want to close with
one point. I think my colleagues especially on the Finance
Committee know that I have a special commitment to bipartisan
tax reform. I have written what are the only two complete
bipartisan tax reforms since 1986. We will not get bipartisan
tax reform when the Secretary of Treasury walks back a pledge
to have no absolute tax cut for the wealthy. We need tax
reform, which is what our colleagues, including Dan Coats most
recently, now the Director of National Intelligence, agreed to,
is we had tax reform that gave everybody in America the chance
to get ahead. That is why got bipartisan proposals. We did not
get them because the Secretary of Treasury walked back pledges.
Thank you, Mr. Chairman.
Secretary Mnuchin. Well, when we have the final plan that
is more than the one page, as you have outlined, which we are
working on developing, we look forward to coming and talking to
you about it, and we hope there is many aspects--and I will say
I continue to get hammered by the New York and California
contingency who assures me there will be tax increases under
the proposed plan.
Chairman Enzi. I will look forward to going back through
your two proposals again, too, to make sure there are not any
breaks for the rich in those.
Senator Toomey.
Senator Toomey. Thank you, Mr. Chairman. And I would just
like to echo Senator Crapo's opening comment about your
accessibility and interaction with Members of the Senate in a
variety of settings and ways. We appreciate that and recognize
that, Secretary Mnuchin, so welcome back.
I would like to stress your emphasis on economic growth. I
think that is exactly right and absolutely essential. Misguided
policies of the last 8 years have given us the weakest recovery
since the Great Depression, and the U.S. economy is capable of
much, much more than this meager barely 2 percent growth, and
it makes a huge difference. Every single problem in America is
easier to solve if the economy is booming. Some problems cannot
be solved unless the economy is booming, and when the economy
is booming--and I think this is an important point, and it is
unfortunate that our ranking member has left, because I think
some of our friends on the other side of the aisle have a cause
and effect exactly backward. They would like to suggest that
your mission is to reduce spending on various welfare programs
in order to give a tax cut to wealthy people--that is what they
like to say--when, in fact, if we get tax reform right, we are
going to have so much more growth that far fewer people will
need these welfare programs because they will have jobs and
they will have higher wages and they will not need these
programs to the same degree. And I think that should be the
goal.
And so if you would just take a moment, do you agree that
the fundamental dynamic here is stronger economic growth
diminishes the extent to which people have to depend on these
programs?
Secretary Mnuchin. I agree with you completely, Senator.
Not only does it diminish their need, but it creates
opportunities for people who have left the work force because
they cannot find jobs. Although the unemployment rate is one of
the lowest it has been in very long periods of time, there is a
lot of people who have left the work force. And if you take
into account other numbers, we are actually closer to an 8.5 or
9 percent unemployment rate.
So we are committed to creating good-paying jobs, and we
are also to making sure that people who have jobs that have not
had income, wage increases in the last 10 years can see that.
And many, many economic studies show that more than 70 percent
of the burden of corporate taxes are passed on to the workers.
Senator Toomey. Right.
Secretary Mnuchin. So our objective to fix the corporate
tax system is about helping American workers.
Senator Toomey. Absolutely. So let us talk a little bit
about how we get there. Part of getting there is to have a
really pro-growth Tax Code instead of this terrible Tax Code
that we have now. I would also suggest that the $800 billion in
tax increases that President Obama gave us that had nothing to
do with Obamacare, they are still with us. That is still a drag
on our economy. And as you know, Federal tax revenue as a
percentage of our total economy is above its historical
average. It is my view that we do not need to permanently lock
in those tax increases and we should not do so.
It is also my view--and I know you share this view--that it
would be just mathematically wrong not to take into account the
tax revenue surge that comes from a bigger economy. That
growth, that extra economic output, is all taxed. And so we
need to dynamically score this.
One of my concerns is that our friends at the Congressional
Budget Office (CBO) and Joint Tax, good people who do good
work, may not take into account, as much as many of us do, this
dynamic feedback. If they do not, then I hope we will
acknowledge that the goal should be to maximize growth and get
the right Tax Code, not to be held captive by this score that
may not take into account that full growth.
So as you know, if our Democratic colleagues do not want to
work with us on this, we need to use the reconciliation tool
that a budget resolution gives us. As you know, any increase in
the deficit, according to our scorekeepers, outside that budget
window is not permitted. And so you are in this bind where you
are stuck with a temporary Tax Code, one that has to expire at
the end of the budget window.
So I would just like to suggest that you seriously consider
a longer budget window than the traditional 10 years. As you
know, the statute simply says the budget window must be at
least 5 years. A permanent tax reform is the best, but it takes
bipartisan support, and you just heard we are not going to get
that.
So the next best thing is a temporary great Tax Code, but
making it long enough that we can actually enjoy the benefit.
So I would just ask you to comment on and think about a longer
budget window so that we can have the real tremendous benefits
from a pro-growth Tax Code.
Secretary Mnuchin. Well, first, let me just say I am
hopeful that we can still get some bipartisan support because
the issues we are focused on are about creating opportunities
for the middle class, about simplifying the Tax Code, about
making business competitive so that more Americans can have
good-paying jobs.
But as you said, if we cannot, reconciliation is an
alternative, and I look forward to working with you and the
Senate on ideas such as a 20-year window as opposed to a 10-
year window to explore that. And, yes, we fundamentally agree
with you on dynamic scoring.
Senator Toomey. Thank you very much, and thank you, Mr.
Chairman.
Chairman Enzi. Senator Whitehouse.
Senator Whitehouse. Thank you, Chairman. Secretary Mnuchin,
welcome.
We heard your testimony before the Finance Committee that
the President's tax reform plan would be paid for, I quote you
here, ``with economic growth and base broadening.'' On the same
day, Office of Management and Budget (OMB) Director Mulvaney
said that the President's tax reform plan would be deficit
neutral without regard to growth. Which one of you is accurate?
Which will be the plan?
Secretary Mnuchin. So, first, let me say that we are hard
working on tax reform, although we did put out a very short
overview. The devil is in the details, and we hope that that is
something that we can release soon. When the budget----
Senator Whitehouse. Yes, but that is not responsive to my
question.
Secretary Mnuchin. I understand that. When the budget was
done, we did not have tax reform done, so Mulvaney did not have
tax reform to put into the budget. OK? Now, there are lots of
different issues----
Senator Whitehouse. But you will agree with me that,
whether dynamic scoring is a figment of the Republican
imagination or whether it is real, you cannot count it twice.
Secretary Mnuchin. We have no intention of counting it
twice.
Senator Whitehouse. OK, good.
Secretary Mnuchin. So as I have said before, I can assure
you that when we come out with tax reform----
Senator Whitehouse. We agree on that. It cannot be counted
twice----
Secretary Mnuchin. Absolutely.
Senator Whitehouse. Not once in tax reform and another
time----
Secretary Mnuchin. The budget will be updated with updated
projections, and there is no intent--and, obviously, we
understand math. There will be no double counting.
I did not think that dynamic scoring was something that was
completely along a Republican and Democrat line. There is
plenty of----
Senator Whitehouse. Pretty close.
Secretary Mnuchin. There is plenty of Democrat economists
that support it.
Senator Whitehouse. Pretty close, particularly in this
unconstrained version.
With respect to concern about the deficit, most of the
witnesses, if not all of the witnesses, that have come before
this committee have recognized that spending through the Tax
Code that reduces revenues and gives benefits to either
individuals or corporations has just as direct an effect on the
deficit as appropriated spending, and that tax spending and
appropriated spending are from a deficit point of view the same
thing. Do you agree with that?
Secretary Mnuchin. Well, let me just first say we are very
concerned about the deficit. We are concerned about the debt
having gone from $10 trillion to $20 trillion. And, yes, we
need to make sure that if we have tax reform, which is not just
tax cuts but tax reform, that it is paid for and accounted for.
Senator Whitehouse. And if we are looking at trying to
bring the deficit down, it would be important to close--let us
say it would be valuable with regard to deficit reduction to
close loopholes and, indeed, it would be just as valuable on a
dollar basis as the same dollar value of appropriated spending
cuts.
Secretary Mnuchin. Well, again, it depends on what the
impact is. The Tax Code and the changes we are trying to make
to the Tax Code are all about creating economic growth that
will create more revenues and will cut Government spending on
various entitlement programs.
Senator Whitehouse. One of the issues that we are going to
face, I hope sooner or later, in this committee is the issue of
savings in the health care system. As you probably know, the
American health care system is more expensive than virtually
all of our Organisation for Economic Co-operation and
Development (OECD) competitors by a lot, like twice what the
average is. And we do not do particularly well on some of the
basic measures of health that you would think that much
spending would pay for. So I look forward to working with you
on that.
One of the things we have seen is CBO reduced the out-year
projections for Federal health care spending downwards by $3.3
trillion since the Affordable Care Act. So I would urge you to
keep an eye on that and not let those savings go to waste in
the pursuit of the Affordable Care Act.
And in the matter of that, it appears that the Affordable
Care Act is being repealed through a secret process in which
there will be no opportunity for Democratic amendments, Mr.
Chairman. And there was so much criticism from the Republican
side about the one moment when we used reconciliation for a
last piece of the bill, but the bulk of the bill was done
through our Health, Education, Labor and Pensions (HELP)
Committee, as you will remember. And you yourself, Mr.
Chairman, got more than 50--I think 50 amendments in that
process, or at least had your name on 50 amendments. We put 160
through that--160 Republican amendments passed in the HELP
Committee, as I recall. We had days of hearings. We had
amendment after amendment after amendment after amendment. The
one that created the imaginary death panel thing was actually
an amendment by Johnny Isakson, which I think was number 157 of
the amendments that we took up in that committee.
So I think we are turning the Senate into something very
unfortunate if zero amendments are going to be allowed other
than through the vote-a-rama process, and for those of you on
the Republican side who actually had amendments during that
process, I think it is really double dealing, and I hope we do
not go that path.
Thank you, Mr. Chairman.
Chairman Enzi. Senator Johnson.
Senator Johnson. Thank you, Mr. Chairman.
Mr. Secretary, I want to also confirm what Senator Crapo
and Senator Toomey were saying in terms of your engagement and
your willingness to work with us. I appreciate it. I think you
are well--because of that engagement, I have got my own ideas
on particularly corporate tax return that would treat C
corporations like other pass-through entities and tax corporate
income at the ownership level. There are many benefits to that,
and I want to talk about one of them: the elimination of the
harm caused by the double taxation of dividends. Senator
Sanders was talking about, you know, the death tax only applies
to the top. I come from what started out as a small
manufacturing company that eventually became a medium-sized
manufacturing company, the exact businesses I think you are
talking to, that you engaged in the campaign, that are forced
to sell to larger competitors. They pull them out of the free
market competition of a free market economy, and that is
exactly what the death tax does. It is also what double
taxation of dividends does.
In my own business, we probably had maybe a few hundred
potential customers over 30 years consolidated because of
double taxation of dividends, the hoarding of cash by large
corporations, consolidated down to a few dozen. I think that is
bad for a free market economy.
I just kind of want you to speak to that aspect of tax
reform because, from my standpoint, the more small and medium-
sized manufacturing companies, the more innovation, the more
competition, the more restraint in prices, the higher quality
because of innovation. And that is pro-growth. It is depressing
to hear our colleagues on the other side dismiss the benefits
of dynamic scoring. What is the point in tax reform if it is
not going to be pro-growth? That if on a static basis it maybe
shows you lose revenue, but because of economic growth you gain
it back on a dynamic basis?
So right now just talk about your own experience talking to
small and medium-sized manufacturers about what they are
complaining about, why they are not growing.
Secretary Mnuchin. Well, first of all, let me say we look
forward to continuing to work with you on tax reform, and we
absolutely believe that small businesses that operate as pass-
throughs, that they should have the benefit of the business
tax, that it just should not be about lowering corporate taxes.
And we want to make sure that we do that and also in a way that
we protect wages are properly taxed as well.
So we look forward to working with you on that, and, again,
as it relates to dynamic scoring, obviously the only reason we
are trying to change the Tax Code is to create more growth,
which the difference between 2 percent and 3 percent GDP is
over $2 trillion of additional revenue to the Government. So we
are all trying to do the same thing, which is more growth, more
revenues, more good-paying jobs for American workers.
Senator Johnson. By the way, I am making some pretty good
progress. I have been tenaciously talking to CEOs, CFOs; they
are very intrigued by the idea--and I know you are, too. You
think it might be a little bit, you know, too much we are
biting off, but I am actually quietly gaining some pretty good
support for this concept, so I definitely want to keep working
with you.
Secretary Mnuchin. Thank you.
Senator Johnson. The other point, I think the biggest
impediment is--as uncompetitive as our tax system is, the
biggest impediment to growth, particularly for small and
medium-sized businesses, is overregulation. The big companies
can deal with it. They can hire the compliance officers. Quite
honestly, they can hire the lobbyists to come in here and make
sure the rules, you know, work for them, do not work so good
for their smaller competitors. The Competitive Enterprise
Institute just updated their last study, $2 trillion, $15,000
per year per household, the cost of complying with regulations.
I applaud this administration for focusing on that. Speak a
little bit about, you know, why that is so important.
Secretary Mnuchin. We heard the same thing. The No. 1 thing
we heard from business was regulation. The No. 2 thing we heard
was tax. So we agree with you completely, and I would just also
say that, as we develop this tax reform plan, we have literally
met with hundreds and hundreds of businesspeople. We have had
listening sessions both for business, for think tanks, a
meeting with Members of the House and Senate. So we want to
take a lot of input into this process.
Senator Johnson. I think the President--and we actually had
a joint hearing on this, the one-in/two-out rule. That is a
really good start. But everything in Washington is additive.
Here is finally a process within the administration with
something that is subtractive. We have got to do so much more.
So, again, you are certainly--with OMB and the Office of
Information and Regulatory Affairs (OIRA), it is going to be
incredibly important that we really focus on overriding
regulation to eliminate old and outdated regulation that really
is hampering our economy.
Secretary Mnuchin. Thank you.
Senator Johnson. Thank you.
Thank you, Mr. Chairman.
Chairman Enzi. Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. Good morning,
Mr. Secretary. How are you?
Secretary Mnuchin. Good. Nice to see you.
Senator Van Hollen. Good to see you. I have a question on
infrastructure, and it is the Budget Committee. Normally, we
would not be asking the Secretary of Treasury that many
questions about infrastructure, but since at least what I
understand the plan shaping up may look like, it would involve
a lot of Tax Code provisions.
So a lot of us had hoped that we might get off to a start
in this Congress on a bipartisan basis, focusing on modernizing
our infrastructure. Senate Democrats put forward a $1 trillion
plan. The President talked during the campaign about a $1
trillion plan. But here we are in the Budget Committee, and if
you look at the President's budget, while it has some plus-ups
in the area of infrastructure, it also has some cuts in the
area of infrastructure. And the University of Pennsylvania
Wharton School--of course, the President's alma mater--looked
at it and concluded that, on net, this budget would cut our
national investment in infrastructure by $55 billion.
Have you had a chance to look at that Wharton School study?
Secretary Mnuchin. I have not, but I would look forward to.
I will reach out to your staff, and we will get a copy of it,
and I look forward to working with you. I can assure that the
President is very focused on infrastructure. This is a big
investment we need to make, and I hope this is an area where we
can definitely have bipartisan support, because it is a huge
issue in this country. We need to build out our infrastructure
and rebuild our aged infrastructure.
Senator Van Hollen. There is no doubt about that, and as I
said, I had hoped that maybe we would begin with something like
that. All the talk I hear out of the administration says maybe
we will get to it in 2018. We have not seen any plan beyond the
one-pager for infrastructure, just like we have a one-pager on
the tax policy. And what we do have that is real, in some sense
anyway, is the budget proposal, which, as I said, the Wharton
School study cuts it by $55 billion, which was a surprise to
many people.
Let me talk briefly about the tax issues. When you appeared
before the Banking Committee, you and I had a little discussion
about the tax provisions in what is called the ``health care
reform bill'' here, which, as you know, has significant tax
cuts, and those tax cuts do go disproportionately to wealthy
people. But let us just set that aside for a moment. We are
going to be debating that. At least I hope we have some
amendment process. As Senator Whitehouse said, no amendment
opportunities yet.
But let me ask you this about the proposals that you are
thinking about, and I know there has been some conversation
already this morning.
The first question is: Will it adhere to the statement that
you made last November about no absolute net tax cuts for the
``upper class''?
Secretary Mnuchin. So I already had the pleasure of talking
about this this morning, I think before you got here. And let
me just say I have now testified on this at least five or six
or seven times. Again, I think the best thing we should do is
we hopefully will soon have a more detailed plan that we can
release. And when we have the detailed plan, obviously it is
going to be scored. We are going through distributions, and we
are happy to go through it at the time.
So I have heard all different types of feedback. As I said,
we have eliminated almost all deductions other than charitable
and mortgage interest. I have heard from many States who do not
like us getting rid of the tax break for high taxes in their
States and worry about taxes going up. But when we have the tax
plan come out, I am more than happy to get grilled on the
details of it.
Senator Van Hollen. OK. And just to followup on what
Senator Johnson was asking you about in terms of dynamic
scoring, we have had a long debate. Here the reality is the
Joint Tax Committee will be doing dynamic scoring of whatever
plan comes down, and my question to you is: Will you agree that
it would be a bad idea to pass a tax plan that the Joint Tax
Committee, using their dynamic scoring analysis, concludes will
increase the deficit and the national debt?
Secretary Mnuchin. Again, what I would say is our intent
when we come out with the full tax plan is to have complete
transparency----
Senator Van Hollen. No, my question is not transparency. My
question is on the deficit.
Secretary Mnuchin. I am answering the question. So we
believe in complete transparency, and I have been very clear in
saying that there is a static score, which we do not agree
with. There will be a Joint Tax, and when we see the Joint Tax
scored, we have over 100 people that run models. If we agree
with the Joint Tax score, I will tell you that. If we do not
agree with it, I will explain why.
So, again, we have said this tax plan will be paid for, and
we will go through the details when it comes out.
Senator Van Hollen. All right, Mr. Secretary. I hope at
that time you will also explain how your growth projections of
over 3 percent, which we would all like to see, without having
provided us a plan, why they are so out of whack with every
other forecaster, which I assume you depended on during your
time in the private sector. So I look forward to that answer as
well.
Secretary Mnuchin. Thank you.
Senator Grassley [presiding]. Senator Kennedy.
Senator Kennedy. Thank you, Mr. Chairman. Welcome, Mr.
Secretary.
Secretary Mnuchin. Thank you.
Senator Kennedy. Like our chairman, I appreciate your brief
answers.
The United States taxes our companies on income they earn
in foreign countries, but only if they bring that money home.
Is that correct?
Secretary Mnuchin. That is correct.
Senator Kennedy. We know that there are billions, perhaps
trillions of dollars offshore, staying there because they do
not want to pay those taxes. Is that correct?
Secretary Mnuchin. That is correct. Why would they?
Senator Kennedy. Why don't we make a deal with them, reach
an agreement on how much taxes they would have to pay, get
bipartisan support from both Democrats and Republicans in the
U.S. Congress, bring that money home and use it for
infrastructure?
Secretary Mnuchin. Well, first, let me say my primary
objective is to fix the Tax Code, and I think as you have
outlined, a major fix has to be we need to move to a
territorial system, because otherwise that money is not going
to come back, even if we had a one-time issue. We have got to
fix it permanently. Now----
Senator Kennedy. I get that part. But why don't we fix it,
work a deal? We can get bipartisan support and use it for
infrastructure. You are matching non-recurring revenue with a
non-recurring expense, so it is not going to add to the deficit
in any way.
Secretary Mnuchin. Again, I look forward to working with
you and others on any idea that has bipartisan support. At the
end of the day, the cash is fungible. We want to spend money on
infrastructure. We want to bring that money back. Whether we
link them or we do not link them, I look forward to working
with you and the rest of the Senate on that.
Senator Kennedy. What do you think about that idea?
Secretary Mnuchin. I think it is an interesting idea, and
we have talked about that. My job for the moment is to figure
out what the right tax plan is for the American people and for
the American public and something that can get passed. And as
we look for ways to package that to get it through the House
and the Senate, we look forward to working with you. So we
appreciate your ideas.
Senator Kennedy. That is not a yes, is it?
Secretary Mnuchin. I think it is a yes, but what I am
saying is, again, you know, there is the form and the
substance. I am focusing on how we fix the Tax Code, and we
will work with you and others on how we get it through the
Senate.
Senator Kennedy. I am just looking--look, we have
infrastructure needs. We know our Tax Code generates money that
is sitting offshore, so that is within your playing field. I
think we could get bipartisan support on it. You would be
matching non-recurring revenue with a non-recurring expense. It
would not add to the deficit. We would not have to borrow
money. Just think about it. OK? Just think about it. You talk
to the President a lot. Talk to the President about it. I think
we could get bipartisan support.
Let us talk about the Tax Code. If you add up all the
exemptions, exclusions, deductions, and credits, refundable and
otherwise, in the United States Tax Code, how much money are we
talking about?
Secretary Mnuchin. It is a staggering number. I do not have
it off the top of my head, but it is a monstrously staggering
number.
Senator Kennedy. OK. The more you tax something, the less
you get of it.
Secretary Mnuchin. That is correct.
Senator Kennedy. The less you tax something, the more you
get of it. So, presumably, when we choose not to tax something,
we are supposed to get it, get something in return--generally
jobs. Do you have people going through all the exemptions,
exclusions, deductions, and tax credits in the Tax Code and
asking, OK, why did we create this? What was the cost and what
is the benefit? Presumably, economic development, jobs. Is the
benefit greater than the cost?
Secretary Mnuchin. We have said everything is on the table,
and we are looking at all of them, as you have suggested.
Senator Kennedy. I think some people call those tax
expenditures, right?
Secretary Mnuchin. Yes.
Senator Kennedy. OK. Tell me what your tax reform proposal
will do for the middle class, the working class. I am not
talking about the folks at the top. I am not talking about the
folks at the bottom that we take care of through our social
programs. I am talking about the men and women that get up
every day and they go to work and they pay their taxes and they
obey the law. I am talking about a mom and dad each making
$45,000 a year, 90,000 bucks. They have got two kids. They are
not getting any breaks, and they are getting further and
further behind. What are we doing for them?
Secretary Mnuchin. Our objective is: one, for them to have
a tax cut; two, for them to have simpler taxes so that they can
do it simply; and, three, by making the business Tax Code more
competitive, as I have suggested, over 70 percent of corporate
taxes are borne by the worker, that they will have better,
higher-paying jobs by us fixing the business tax system.
Senator Kennedy. Thank you, Mr. Secretary.
Secretary Mnuchin. Thank you.
Senator Kennedy. Roads, infrastructure. It is something we
can get bipartisan agreement on.
Secretary Mnuchin. We look forward to working with you.
Thank you.
Senator Grassley. Senator Kaine.
Senator Kaine. Thank you, Mr. Chair. Thank you, Mr.
Secretary. Nice to see you.
Secretary Mnuchin. Thank you.
Senator Kaine. Mr. Secretary, after we, Congress, reached a
budget deal at the beginning of May, working together,
compromises made by both Houses, both parties, the President
tweeted out a few days later that he thought it might be time
for a ``good shutdown'' of the Government in September. That
was the tweet, ``a good shutdown in September.'' Do you think
there is any such thing as a good shutdown of the United States
Government?
Secretary Mnuchin. It is an unfortunate outcome. At times
there could be a good shutdown, and at times there may not be a
good shutdown.
Senator Kaine. I represent a State that has got a lot of
Federal employees. I have got a lot of people on Medicaid,
Social Security disability, Medicare, and the thought of a
shutdown just scares them to death. The 16-day shutdown in
October 2013 was deeply unsettling to them. It was an injection
of uncertainty into a State, a national economy that I think
does better in terms of growth when there is certainty.
Tell me what a good shutdown would look like.
Secretary Mnuchin. Well, first, let me say I was not here
in 2013, so I cannot comment on it.
Second, it is not our primary objective to have a shutdown.
Senator Kaine. Good. So you do not want to hypothesize what
a good shutdown would look like. I actually think that is
pretty wise not to, but, I mean----
Secretary Mnuchin. I am happy to talk about the budget or
questions you have on the budget. I am not here to kind of
define what good shutdowns are, or bad shutdowns.
Senator Kaine. But you are the Secretary of the Treasury,
and so I think----
Secretary Mnuchin. Yes, I am.
Senator Kaine [continuing]. You are somebody who should
have an opinion about whether shutting the Government of the
United States down is ever a good thing.
Secretary Mnuchin. There could be times. I do not--you
know, again, we could go through a lot of hypothetical things
today. There could be reasons at various times why that is the
right outcome. But, again----
Senator Kaine. But in your role as Secretary, can you see
anything good about shutting the Government of the United
States down?
Secretary Mnuchin. I would never be in a position to want
to shut down any of the critical infrastructure of the U.S.
Government. If we were spending too much money on things and we
could not come to agreements on things that were not critical,
but I can assure you, just as I have said with the debt limit,
our No. 1 objective is to raise the debt limit, and I can also
assure you that we would never shut down critical functions of
the Government.
Senator Kaine. Great. Would you agree with me--in your
testimony, you talk about things that you think are important
to sustainable economic growth. ``The best way to achieve this
is through a combination of tax reform, regulatory relief,
protecting taxpayers.'' Would you also agree that providing
some certainty is more helpful to growing the economy than
continuing uncertainty about budgetary or other major policy
matters?
Secretary Mnuchin. Again, we are getting into hypothetical
questions, which I cannot answer without knowing all the
details. If the certainty is bad--I would rather have
uncertainty that could lead to good outcomes than certain that
assures bad outcomes. But these are very hypothetical
situations. So if you want to describe a specific one.
Senator Kaine. Defaulting on the debt ceiling or defaulting
on debt, is that--that would----
Secretary Mnuchin. I could not be clearer in my comments
that, as it relates to the debt ceiling, I would like to have
certainty. I would like Congress to act before they leave.
Senator Kaine. How about having a budget versus not having
a budget?
Secretary Mnuchin. I would obviously prefer to have a
budget than not have a budget.
Senator Kaine. Doing an appropriations bill rather than
doing a continuing resolution (CR)?
Secretary Mnuchin. Again, I leave that--these are issues
for the Senate to figure out, but, obviously, dealing with
appropriations, the sooner we can get through appropriations
and spend money, that is better for the U.S. economy.
Senator Kaine. The way I described to my constituents the
difference between an appropriations bill and a continuing
resolution is I say one is like driving looking through the
windshield looking forward, an appropriations bill, projecting
forward; and a continuing resolution, where you are kind of,
you know, doing what you did for the past--is like looking
through the rearview mirror. As a general matter, it would be
better to budget looking forward based on plans and priorities
that you have committed going forward than just doing it based
on looking at what you did in the last few months.
Secretary Mnuchin. Well, I would say as a general matter,
maybe at some point it makes sense to review the entire
budgeting process and link the debt ceiling to budgets and look
at capital budgeting and others. There is obviously a whole
bunch of arcane parts of Government budgeting that I am
learning.
Senator Kaine. And not so arcane. I mean, I actually think
there are some really profitable areas of working together
between Democrats and Republicans, between Congress and the
White House on budget reform issues. And I know the chairman,
Chairman Enzi, is a big fan of this, and I am, too.
Secretary Mnuchin. We would look forward to working with
you on that.
Senator Kaine. And just to use one example, back on the
certainty thing--I am kind of a certainty freak because I was a
mayor and Governor, and I always felt like if I could be
certain everybody would at least know what to adjust to, it is
hard to adjust to an asterisk or a question mark. One of the
areas that we talk about a lot in this committee deals with
debt, how much debt is too much. We have hearings on things
like dangerous debt, but I can never get a witness to tell me
what a debt policy should be. Do you have an opinion as
Secretary of the Treasury about, for example, what our debt-to-
GDP ratio should be or what percentage of our annual budgetary
outlays should go into debt service versus current programming?
Secretary Mnuchin. Well, I mean, first, I would say I have
a general concern about the size of the national debt and how
it has grown from $10 trillion to $20 trillion. And we want to
make sure that it goes back in the other direction at some
point. I think, as you know, that the last time we had a
surplus, it was when we had economic growth. So the issue here
is we need to create economic growth. That is the No. 1 way of
dealing with the debt problem in my mind.
Senator Grassley. Senator Gardner.
Senator Kaine. Thank you.
Senator Gardner. Thank you, Mr. Chairman, and thank you,
Secretary, for your service and your time today.
This question on debt, debt policy, and other issues, a $10
trillion debt to now a $20 trillion debt and growing, one of
the things I am most concerned about is how we drive Federal
spending. In my time at the State legislature, I watched as the
State would look for ways to shift funding out of State
spending and off of State revenues and onto Federal dollars.
And I think most recent reports of various census data show
that on average I think a third of States' general fund
revenues come from the Federal Government today. Obviously, in
education it can vary greatly. In welfare programs, it can vary
greatly what the State is depending on the Federal Government
for their share. Transportation, another one.
In your conversations across the country, do you speak with
Governors about how States are driving Federal spending and
what can be done as that becomes part of a focus of our debt
policy?
Secretary Mnuchin. I think it is a very important issue and
something that I look forward to working with you on. It has
not been my focus for the moment, but I think it is a very
important point.
Senator Gardner. Thank you. And, Mr. Secretary, I was at a
hearing with Secretary Tillerson just before I came into this
hearing, and it was brought up by Chairman Cardin that rarely
are committees on budget about the budget, and they are about
other things. And so I am going to vary from the script of the
Budget Committee hearing, if you do not mind.
I want to draw your attention and colleagues on the
committee attention to two reports that came out this past week
regarding North Korea, and the first report released yesterday
by an independent organization known as C4ADS. They identified
over 5,000 Chinese companies that are doing business with North
Korea. These Chinese businesses are responsible for about $7
billion worth of trade with North Korea. That is about 90
percent of North Korea's total global trade.
Moreover, the report from C4ADS said that only 10 of these
companies, only 10 of those 5,000 companies, control 30 percent
of Chinese exports to North Korea. That was just in 2016. And
one company alone out of those 10 out of the 5,000 controlled
nearly 10 percent of total imports from North Korea. Some of
these companies even had satellite offices and businesses in
the United States.
The second report that I would highlight released by the
Royal United Services Institute in the United Kingdom last week
concluded, ``The report finds that not a single component of
the United Nations sanctions regime against North Korea
currently enjoys robust international implementation.''
In February of this year, the United Nations (U.N.) Panel
of Experts on North Korea similarly addressed that Pyongyang's
illicit networks overseas were ``increasing in scale, scope,
and sophistication.''
So with these reports in mind, and what we are seeing from
reports of the U.N., what efforts can we undertake to
strengthen global enforcement of North Korean sanctions, what
efforts are you taking, and what efforts has the administration
taken to date as it relates to these sanctions and our efforts
to peacefully de-nuclearize the North Korean regime?
Secretary Mnuchin. Well, first, let me just comment, I do
take my responsibility overseeing our terrorist financing and
intelligence function of the Treasury very seriously. I am
probably spending 50 percent of my time on these issues right
now. And let me first say that the President and we believe in
sanctions. We think they work. We think in the case of Iran it
is the only reason why they came to the table. And we think we
could have had a better deal. So they work best when there is
international cooperation. I think as you know, the President
is concerned about the recent activity in North Korea and the
missile tests.
During our meeting with the Chinese, President Trump and
President Xi specifically discussed North Korea. I am having
discussions with my counterparts there. Also, every single
meeting I have with my foreign counterparts of the G-7 or the
G-20, I talk about sanctions, whether it is North Korea, Iran
on their ballistic missile program, their terrorist financing,
Syria. So I assure you we are doing everything we can.
As it relates to the report you just referenced that came
out yesterday, I did just get briefed on it this morning. I
have not had a chance to go through the entire findings, but I
can assure you I am focused on that with my staff.
Senator Gardner. Well, yesterday, I think you are aware,
Secretary Mattis declared that North Korea is the most urgent
national security threat facing the United States. I know
President Trump and President Xi have had conversations about
North Korea. There have been some reports that China is doing
more today than they had in the past when it comes to North
Korea.
However, if you look at the first quarter trade between
China and North Korea, that trade activity increased by roughly
40 percent between China and North Korea just in the first part
of this year alone.
So do you believe that China is meeting its agreements that
it has said it would carry out with the Trump administration?
Secretary Mnuchin. Again, I want to be careful about
talking about confidential or classified issues in this
setting. I would be more than happy to followup with you in a
different setting. But I can assure you we take these issues
very seriously. I agree with General Mattis in his comments,
and we are going to do everything we can with sanctions and
other ways of dealing with this.
Senator Gardner. Thank you. We will followup on some
timeline matters on sanction disagreements.
Thank you, Mr. Chairman.
Senator Grassley. Senator Merkley.
Senator Merkley. Thank you, Mr. Chairman. And good to have
you with us, Mr. Secretary.
Secretary Mnuchin. Thank you.
Senator Merkley. I wanted to share with you part of a
letter I received from John Rose, of Ashland, Oregonian. He
said, ``The President's tax plan contains less detail than some
supermarket receipts. Moreover, it would explode the deficit
while stealing from everyday Americans to give even more to the
rich, including the President and his family.''
Now, his commentary could not be truer when it comes to the
tax cuts included in the GOP health care proposal, the American
Health Care Act (AHCA) plan. I have a chart which demonstrates
the winners and losers of the tax cuts included in the
Republican health care plan. The winners are clear. That health
care plan, which is estimated to strip health care from 23
million Americans, delivers to Americans making more than $1
million an average $50,000 tax cut. Hardworking Americans
making less than $200,000 are the losers, and this seems like
just bizarre that slashing health care, the peace of mind that
goes with knowing that your loved one will get the care they
need and that you will not go bankrupt in the process, but
using that bill to actually do a giveaway of the Treasury to
the richest Americans.
[The referenced chart follows:]
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Senator Merkley. And then there is the so-called Mnuchin
rule, an assurance that you made that the President's tax plan
would benefit middle-class taxpayers, not the highest earners.
Doesn't the health care bill itself violate this Mnuchin
rule?
Secretary Mnuchin. Well, again, I have commented a few
times earlier today on what was not my naming of the rule, but
Senator Wyden's naming of the rule. But let me just comment on
the health care and the chart that you just put up. The health
care is just reversing $1 trillion of taxes that were put on
this economy, and most of those taxes are on capital. And the
problem with taxing capital is that capital can move freely,
can move freely between countries, it can move freely between
opportunities. And capital is what creates investment, it
creates productivity, and creates jobs.
Senator Merkley. So just to be very clear, you are very
comfortable with the notion of giving $50,000 on average to the
richest Americans while slashing health care from 23 million
Americans.
Secretary Mnuchin. Again, I am not going to comment on the
specifics of the health care bill, which I am less involved in.
What I will comment on is that it is reversing $1 trillion of
taxes, which is a drag on the economy. So, yes, that part is
just a pure drag on the economy.
Senator Merkley. Well, if we turn to the fiscal year 2018
budget proposal, it also lays out a strategy of including $3.6
trillion in tax cuts with three-quarters of that going to the
top 1 percent of Americans, and wow. So here we are, already in
America the top 1 percent control 40 percent of the wealth and
the top 10 percent control three-quarters of the wealth. The
top 10 percent receive 50 percent of the income. So we have the
very few at the top doing very well indeed.
So why would there be a tax proposal completely contrary to
the principle you asserted that this administration was not
going to be about enriching the rich but helping the middle
class? Why would there be a proposal completely dedicating even
more to the richest Americans while taking away basic programs
that support struggling and working families?
Secretary Mnuchin. Well, again--and I would like to
separate the discussion on what is health care and what is tax
reform. When we come out with the full tax reform, we will go
through an outline of what the distribution effects are and how
we think it impacts the middle class and the economy.
Senator Merkley. Well, can you pledge today that you will
make sure that that tax reform proposal, in fact, does not give
away the Treasury to the richest but strengthens the foundation
for struggling and working families?
Secretary Mnuchin. What I can say is that the President's
objective is to create economic growth, simplify taxes, and
create a middle-income tax cut. And we are working closely with
the House and Senate on this.
Senator Merkley. So you are completely abandoning the
principle that you asserted before?
Secretary Mnuchin. Again, I am not abandoning anything. We
have said all along our objective is not about creating tax
cuts for the rich. Our objective, OK, is to simplify the Tax
Code. And in the case of the wealthy, we have taken away every
single deduction other than charitable contributions and
mortgage interest. And when we come out with the full tax plan,
I am more than happy to talk about it. And, again, I would be
happy to focus on budget things today.
Senator Merkley. Mr. Chairman, my allocated time is done,
but I see I am the last person here. Do you want to continue
this committee a bit longer, or are you anxious to wrap it up?
Senator Perdue [presiding]. Well, I am anxious to wrap it
up, but I have not gone yet myself.
Senator Merkley. OK.
Senator Perdue. But if you have another question, I will
allow that. Thank you.
Senator Merkley. Yes, I want to--OK. Thank you. I will just
ask one of the many I have here. But we had a real crisis that
was driven by predatory mortgages, both mortgages that were
undocumented and mortgages that had exploding interest rates,
that included kickbacks to the mortgage originators to move
people into subprime mortgages who qualified for prime
mortgages. We also had big bets being made by Wall Street in
situations where they were banks that are insured by the
Federal Government. And so those two things, the Volcker rule
and the controls to make sure a mortgage is a fair, square,
wealth-building American dream rather than an American
nightmare, those two things we have improved on greatly. Do you
support dismantling either or both of those foundations for
success?
Secretary Mnuchin. Well, again, I think--let me first
comment on the mortgages, which I have firsthand experience,
and let me clarify. I have not been in investment banking for
over 15 years. I have been focused on regional banking. I know
the mortgage business very well. I took over some of the worst
mortgages that were ever made when we bought IndyMac. So we are
100 percent committed--and I can assure you in my job, having
the Office of the Comptroller of the Currency (OCC) as part of
Treasury, we are 100 percent committed to make sure that
Americans have access to mortgage capital, but that they can
afford those mortgages.
And as it relates to the Volcker rule, people do not do
proprietary trading within the bank. They do it outside the
bank, but within holding companies. Our objective is to fix the
Volcker rule, and that is what we are working on.
Senator Merkley. Well, I hope you will also be 100 percent
committed to the principle of not allowing predatory mortgages
back into the marketplace.
Secretary Mnuchin. Thank you.
Senator Merkley. Thank you.
Senator Perdue. Mr. Chairman, thank you for being here.
Secretary Mnuchin. Thank you.
Senator Perdue. I think I may be the only thing between you
and lunch, so I will be direct.
I want to go back to your earlier comments today talking
about growth, because I know the administration has talked
about that. And the purpose of the growth--and let us just put
this in supervision--in my mind is we have a $20 trillion debt.
You referred to that earlier.
Secretary Mnuchin. Yes.
Senator Perdue. What we are not talking about is that
unless we do something now to this baseline budget that we have
today, that exists today, we will add another $10 trillion to
that debt over the next 10 years. I have got several questions.
To get the growth to deal with this insurmountable debt, in
my mind, there are some $200 trillion of debt in the world
totally; 60 of that is basically sovereign debt. We have a
third of that sovereign debt today. I just do not know how much
longer the bond markets are going to allow us to continue to
eat up more and more debt capital that way, and my question to
you today specifically on the debt--you mentioned that the size
of the debt bothers you, but I think you might have said
peripherally. So the question then is: If interest rates were
to move to their more historic norm of somewhere around 5
percent, we would be paying about $1 trillion of interest on
this debt as it exists today. And, also, the duration of our
debt is very, very short. Some 60 percent or over half of our
debt is 3 years or less; whereas, Britain has moved their
position to about 48 percent of theirs is 20 years or longer.
So the question I have, first of all, is: On the position
of the debt, what is the Treasury's position relative to the
budget, how it is dysfunctional, how it impacts the debt, and
then how it is draining the ability to grow because of sucking
more capital, more debt capital to the needs of the Federal
Government?
Secretary Mnuchin. Well, let me first comment on the
duration, which you commented on, and I have talked about this
publicly, that we are exploring what we call ``ultra-long
bonds,'' 50-year bonds or 100-year bonds, to explore
lengthening the duration. And we have reached out to the
Treasury Borrowing Committee as well as institutional investors
to explore whether it makes sense to do that.
Senator Perdue. But even the--I am sorry to interrupt, but
even moving more to 30-year Treasurys would help.
Secretary Mnuchin. It would.
Senator Perdue. It would just take longer to get----
Secretary Mnuchin. It would, and we explore what the
capacity is at different parts of the market and what the most
efficient way is to extend the maturity. So that is something
we are looking at.
Senator Perdue. So let us continue on with this debt. There
is about $6 trillion--some estimates are greater than that--
that are not at work in the economy today--roughly about $2
trillion on the Russell 1000 balance sheets, about $2 trillion
on small community banks and regional banks, and then somewhere
around $2 to $3 trillion overseas in unrepatriated profits. I
know in your one-page tax proposal you eliminate the
repatriation tax. What else can you summarize for the committee
that this tax bill will do relative to growth and dealing with
unleashing that capital? Because it seems to me that the
economic miracle over the last 70 years, Secretary, happened
because of innovation, capital formation, and the rule of law.
And we have messed around with capital formation here in the
last 8 years, and I would like to know what the
administration's position is relative to growth, what we are
doing regarding capital formation.
Secretary Mnuchin. Well, I agree with you completely, and
on the business side, we need to simplify and make the business
tax system more competitive, and that starts with we have a
business rate that is way too high. It is one of the highest
rates in the world. As you have suggested, we tax on worldwide
income. That encourages with deferral. That encourages our
companies to leave trillions of dollars offshore. We want to
bring that money back to put it to work for the American
workers. And we want to make the system work so that, going
forward, companies bring back their foreign earnings and
reinvest it here.
And we are also committed, not just on multinationals, but
we are also committed that small and medium-sized businesses
should have tax relief as well. That is the engine of growth in
our economy.
Senator Perdue. Would you repeal Dodd-Frank if you were
king for a day?
Secretary Mnuchin. If I were king for the day, I would. I
would start all over, and I think most of it is unnecessary.
But since I am not king for the day, we went through what we
thought the critical portions were, and we delivered to the
President yesterday on our Executive order, and we think about
70 or 80 percent of what is critical to get done we can get
done through Executive orders and working with the regulators,
and we look forward to working with the House and the Senate on
other things.
Senator Perdue. When will we see that?
Secretary Mnuchin. It came out last night.
Senator Perdue. OK.
Secretary Mnuchin. So we will make sure it is delivered to
your office.
Senator Perdue. All right. Thank you.
One last question. The budget process is broken. It has
only worked four times in the last 43 years. This year--well,
like over the last 43 years, we have used 178 continuing
resolutions. I just walked out of an Armed Services Committee
hearing where we heard the dire straits of if we have another
CR this year. It is almost guaranteed that we will not have a
budget process that will be effected normally this year, and
that we are headed for either a CR in the end of September--I
think we have 43 days left, Senate working days left before the
end of this fiscal year. So the best we could hope for would be
an omnibus before that time.
When the Director of OMB was before the committee a couple
weeks ago, we talked about this. You are involved in this from
the Treasury. What is your perspective on the budget process
that has not worked since 1974? And what do you think we need
to do to make this relevant so we can fund the Government,
which is the No. 1 priority of the Congress, according to
Article I, which we are not doing, and since 1921, when the
OMB--or when the budget capability of the administration was
created, it seems like the legislative responsibility has
become less and less and less every year.
So how would you as part of the administration advise us to
move on this budget process that is not working?
Secretary Mnuchin. Well, if I got to be king for a day, I
would probably choose to fix the budget process even over Dodd-
Frank.
Senator Perdue. Would you really?
Secretary Mnuchin. I would. I mean, it is completely
broken. And I think there is the process of the budget, there
is the process of spending, and there is the process of
appropriation. And, you know, it is not going to be resolved
this year, but this is something that, you know, I would look
forward to working with you on.
Senator Perdue. Well, it is dire. We are supposed to
appropriate 12 bills a year to fund the Federal Government.
Over the last 43 years, we have averaged two and a half. It is
just----
Secretary Mnuchin. That is not a good record.
Senator Perdue. There is no way in any other environment
that----
Secretary Mnuchin. No sports team would be doing very well
with that.
Senator Perdue. No. The coach would be gone. The
quarterback would be gone. The wide--everybody would be gone.
Secretary Mnuchin. That is the reason to drain the swamp.
Senator Perdue. Exactly.
Mr. Chairman, I think we are out of questions. I want to
thank you for appearing before the committee today. Your full
statement will be included in the record.
As information to all Senators, questions for the record
are due by 6 p.m. today with a signed hard copy delivered to
the committee clerk in Dirksen 624. Under our rules, Secretary
Mnuchin will have 7 days from receipt of our questions to
respond with his answers.
With no further business, this hearing is adjourned. Thank
you, Mr. Secretary.
Secretary Mnuchin. Thank you.
[Whereupon, at 11:36 a.m., the committee was adjourned.]
ADDITIONAL COMMITTEE QUESTIONS
[The following submitted questions were not asked at the
hearing but were answered by the witness subsequent to the
hearing:]
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