    [House Hearing, 116 Congress]
    [From the U.S. Government Publishing Office]

                     REEXAMINING THE ECONOMIC COSTS OF DEBT

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

                                    HEARING

                                   BEFORE THE

                            COMMITTEE ON THE BUDGET
                            HOUSE OF REPRESENTATIVES

                         ONE HUNDRED SIXTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

              HEARING HELD IN WASHINGTON, D.C., NOVEMBER 20, 2019

                                   __________

                               Serial No. 116-18

                                   __________

               Printed for the use of the Committee on the Budget

    [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                           Available on the Internet:
                                www.govinfo.gov

                                __________

                        U.S. GOVERNMENT PUBLISHING OFFICE
    40-261                       WASHINGTON : 2020

                            COMMITTEE ON THE BUDGET

                      JOHN A. YARMUTH, Kentucky, Chairman
    SETH MOULTON, Massachusetts,         STEVE WOMACK, Arkansas,
      Vice Chairman                        Ranking Member
    HAKEEM S. JEFFRIES, New York         ROB WOODALL, Georgia
    BRIAN HIGGINS, New York              BILL JOHNSON, Ohio,
    BRENDAN F. BOYLE, Pennsylvania         Vice Ranking Member
    RO KHANNA, California                JASON SMITH, Missouri
    ROSA L. DELAURO, Connecticut         BILL FLORES, Texas
    LLOYD DOGGETT, Texas                 GEORGE HOLDING, North Carolina
    DAVID E. PRICE, North Carolina       CHRIS STEWART, Utah
    JANICE D. SCHAKOWSKY, Illinois       RALPH NORMAN, South Carolina
    DANIEL T. KILDEE, Michigan           KEVIN HERN, Oklahoma
    JIMMY PANETTA, California            CHIP ROY, Texas
    JOSEPH D. MORELLE, New York          DANIEL MEUSER, Pennsylvania
    STEVEN HORSFORD, Nevada              DAN CRENSHAW, Texas
    ROBERT C. ``BOBBY'' SCOTT, Virginia  TIM BURCHETT, Tennessee
    SHEILA JACKSON LEE, Texas
    BARBARA LEE, California
    PRAMILA JAYAPAL, Washington
    ILHAN OMAR, Minnesota
    ALBIO SIRES, New Jersey
    SCOTT H. PETERS, California
    JIM COOPER, Tennessee

                               Professional Staff

                          Ellen Balis, Staff Director
                      Dan Keniry, Minority Staff Director

                                   CONTENTS

                                                                       Page
    Hearing held in Washington D.C., November 20, 2019...............     1

        Hon. John A. Yarmuth, Chairman, Committee on the Budget......     1
            Prepared statement of....................................     4
        Hon. Steve Womack, Ranking Member, Committee on the Budget...     6
            Prepared statement of....................................     8
        Olivier Blanchard, Ph.D., Senior Fellow, Peterson Institute
          For International Economics, and Professor of Economics
          Emeritus, Mit..............................................    10
            Prepared statement of....................................    12
        L. Randall Wray, Ph.D., Professor of Economics, Bard College,
          and Senior Scholar, Levy Economics Institute...............    16
            Prepared statement of....................................    21
        Jared Bernstein, Ph.D., Senior Fellow, Center on Budget and
          Policy Priorities..........................................    43
            Prepared statement of....................................    45
        John Taylor, Ph.D., Professor of Economics, Stanford
          University, and Senior Fellow, Hoover Institution..........    59
            Prepared statement of....................................    61
        Hon. Sheila Jackson Lee, Member, Committee on the Budget,
          statement submitted for the record.........................   112
        Hon. Seth Moulton, Member, Committee on the Budget, questions
          submitted for the record...................................   118
        Hon. Ilhan Omar, Member, Committee on the Budget, questions
          submitted for the record...................................   119
        Answers to questions submitted for the record................   120

                                REEXAMINING THE
                             ECONOMIC COSTS OF DEBT

                                  ----------

                          WEDNESDAY, NOVEMBER 20, 2019

                              House of Representatives,
                                       Committee on the Budget,
                                                       Washington, D.C.
        The Committee met, pursuant to notice, at 10:05 a.m., in
    Room 210, Cannon House Office Building, Hon. John A. Yarmuth
    [Chairman of the Committee] presiding.
        Present: Representatives Yarmuth, Moulton, Higgins, Khanna,
    Schakowsky, Panetta, Morelle, Horsford, Scott, Peters, Cooper;
    Womack, Woodall, Johnson, Smith, Norman, Roy, Meuser, Crenshaw,
    Hern, and Burchett.
        Chairman Yarmuth. This hearing will come to order. Good
    morning, and welcome to the Budget Committee's hearing on
    Reexamining the Economic Costs of Debt. I want to welcome our
    witnesses here with us today.
        This morning, we will be hearing from Dr. Olivier
    Blanchard, a senior fellow at the Peterson Institute for
    International Economics, and professor of economics emeritus at
    MIT; Dr. L. Randall Wray, professor of economics at Bard
    College, and senior scholar at Levy Economics Institute; Dr.
    Jared Bernstein, senior fellow at the Center on Budget and
    Policy Priorities; and Dr. John Taylor, professor of economics
    at Stanford University, and senior fellow at the Hoover
    Institution.
        Welcome to all of you. We look forward to your testimony. I
    will now yield myself five minutes for an opening statement.
        Once again, I would like to welcome our witnesses. We
    appreciate you coming here to help us discuss the changing
    economics of debt and its implications for fiscal policymaking.
    There is a wide array of views on this subject at the witness
    table, across the aisle, and even within our caucus, and within
    the Republican conference. So it is my hope that we can use
    this hearing as an opportunity to learn more about the
    different perspectives driving this important debate and hear
    from the experts on what Congress must evaluate when
    considering the real costs of debt in this new economic era.
        I say, ``new economic era,'' because today's economy defies
    many of the core principles of traditional economic theory. We
    have been operating under the long-held assumption that
    persistent budget deficits and rising government debt would
    increase interest rates and inflation, harming our economy over
    the long run.
        However, contrary to these predictions, we have seen
    interest rates and inflation fall to record lows, while debt
    has soared to its highest level since just after World War II.
    We are truly in a new era that has economists reassessing
    entire economic theories in light of these unexpected outcomes.
        If the Budget Committee is to promote effective and
    responsible fiscal policy, it is important that we learn more
    and participate in this growing debate.
        In our hearing last week, Federal Reserve Chair Powell made
    it clear that the fiscal challenge we face is a long-term one,
    not an immediate crisis. Our aging population and growing
    health care costs have put our debt on an unsustainable path.
    We will need to take steps to address this issue over the next
    several decades.
        But, in the meantime, persistently low interest rates have
    made reducing deficits in the near term less urgent, even
    counterproductive, given the risk to economic growth. It has
    also increased Congress's fiscal space, empowering lawmakers to
    make responsible investments now that will improve our future
    economic outlook.
        But that doesn't mean we should be spending like a drunken
    sailor, without thought or discretion. I apologize to any
    current or former sailors in the room. Deficits, and what they
    are used for, matter. Failing to tackle severe and persistent
    infrastructure, education, and health gaps is, arguably, more
    damaging to our economic and fiscal outlooks than the risk
    posed today by higher debt.
        Policies that support working Americans in an economic
    downturn, provide much-needed investments in our families,
    communities, and environment, and have a positive impact on our
    long-term fiscal health, are responsible uses of deficits.
        Every dollar invested in infrastructure increases near-term
    economic output by $1.50 and boosts our economy's productivity
    over time. A dollar for pre-disaster mitigation efforts saves
    $6 in future disaster costs. Investments in children's health
    care and preschool and college attainment pay for themselves
    over the long run. Housing programs that move children out of
    poverty can increase lifetime earnings by $300,000.
        Moreover, low interest rates will supercharge these
    investments. They will be cheaper to make today, and likely
    provide a bigger boost to the economy later.
        On the other hand, deficit-financed tax cuts for the
    wealthy and big corporations are clearly an irresponsible use
    of deficits. The Republicans' 2017 tax law is the poster child
    for wasteful deficit-financed policy. It has failed to provide
    any meaningful boost to the economy but increased our debt by
    at least 1.9 trillion and counting, worsening our already
    serious revenue problem. Skyrocketing the deficit for this
    purpose, while uninsured rates increase, air pollution worsens,
    and our children's reading scores decline is appalling.
        At the end of the day, carrying debt still carries risks.
    But by investing strategically in responsible policies that
    reflect our nation's values, and by having a more sober and
    evidenced-based understanding of the costs of debt, we can lay
    the groundwork for a productive and dynamic 21st century
    economy.
        I know we will hear different points of view as we examine
    this, which is the point of this hearing. But despite critical
    differences, both mainstream and alternative schools of thought
    increasingly agree that government debt appears to be less
    risky, less costly, and less urgent than traditional economic
    thought suggests. Today's hearing will provide a platform for
    experts and policymakers to share their ideas, whether
    practical, or aspirational, conventional, or controversial.
        Once again, I look forward to hearing from our witnesses
    about what they believe Congress can and should be doing in
    this new economic era, how we can invest responsibly in our
    future, and what fiscal policies best support American
    families.
        [The prepared statement of Chairman Yarmuth follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Yarmuth. With that I yield five minutes to the
    Ranking Member, Mr. Womack.
        Mr. Womack. I thank the Chairman for holding this hearing.
    I think it is an appropriate continuation of the conversation
    we began last week with the Federal Reserve Chairman.
        Last week I likened Chairman Powell's assessment of the
    economy to a checkup with your doctor. We received an
    encouraging bill of health. Our economy is strong. Forward
    momentum continues, thanks to the pro-growth policies enacted
    last Congress and under this Administration. Americans are
    confident, and rightly so.
        We should certainly celebrate this historic economic
    prosperity but cannot ignore the fact that we continue to face
    serious long-term fiscal challenges, particularly the ever-
    increasing federal debt. Simply put, the debt is on a
    completely unsustainable trajectory. The national debt is $23-
    plus trillion and is projected to grow more--to more than $34
    trillion within a decade. Soon thereafter, on our current path,
    the federal debt will reach the highest level in American
    history as a percentage of our economy.
        CBO also projects that by 2049 the federal debt will equal
    $248,000 per American, almost $1 million for each family of
    four. After that, it continues to grow. Interest payments will
    increasingly crowd out the other federal spending that is
    directed toward programs many Americans rely on. CBO projects
    interest payments on the debt will amount to $390 billion in
    fiscal 2020, an 11 percent amount of our federal tax revenue.
        Mr. Chairman, your hearing title provocatively asks us to
    reexamine the debt. And I suspect we will hear from some voices
    today that suggest we should not worry too much about it, or we
    will hear it is wrong--the wrong time to deal with it. Allow me
    to underscore just how irresponsible that thought process is.
        The way our government is operating is the same as an
    American family trying to make difficult financial decisions
    about mortgages, health insurance, and bills when they must
    first direct a significant portion of their family budget just
    toward paying the interest on a growing credit card balance. We
    call that the minimum payment due.
        Not only is this, the way we are doing business, fiscally
    irresponsible and unsustainable, CBO also found that a growing
    federal debt has a negative impact on business investment,
    productivity, and economic growth. It simply does not make
    sense to champion our present economic successes while ignoring
    the long-term challenge that is the debt.
        I hope we can have a realistic discussion today about the
    scenarios that are in front of us in the future. We could do
    nothing. We could try not to make things worse. We could spend
    even more and add new mandatory spending programs like we did
    yesterday on the CR, as many in this institution are proposing.
    Or we could work together and address the debt.
        What happens to the economy and the financial future of our
    children and grandchildren under each of these scenarios? I
    certainly don't want to--want my grandkids to see the crisis
    scenario, in which the interest rate on the debt will skyrocket
    abruptly because investors will no longer have confidence in
    our government's ability to pay its bills.
        That is why I am seriously concerned that it seems today as
    though many lawmakers have shifted from a willingness to
    address the debt with real bipartisan solutions, and instead
    are buying into this modern monetary theory, which tells us
    that the debt doesn't matter because we can, essentially, just
    print more money.
        This notion is absurd. We cannot simply wish our problems
    away. Last week, before this very Committee, Chairman Powell
    made the point himself that--when he said the idea that the
    debt doesn't matter is simply wrong. Yet our colleagues serving
    in the House used this theory to justify the costs of programs
    like the Green New Deal.
        So at this point I cannot help but wonder how many neutral
    outside experts Congress needs to hear from before we wake up
    and act. Congress must come together in a bipartisan, bicameral
    fashion to reduce the debt, deliver on our Article I
    responsibilities and make good on our responsibility to the
    American people who have to balance their own budgets each
    month.
        Finally, I would like to congratulate my friend, Mr.
    Burchett from Tennessee, the former mayor of Knox County,
    Tennessee, and Mr. Case from Hawaii, for working together to
    introduce a new bipartisan idea to address the national debt.
        I am often asked at home: when are you guys going to get
    together and do something, instead of fighting with each other?
    H.R. 5178 suggest creative approaches for how Congress could
    look at the debt in a bipartisan way, involving the House and
    the Senate. I am proud to support the bill authored by my
    friend, the mayor from Knox County, and his Democrat cosponsor,
    Mr. Case.
        Thank you, Mr. Chairman. I yield back the balance of my
    time, and I look forward to the Q&A.
        [The prepared statement of Steve Womack follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Yarmuth. I thank the Ranking Member for his
    opening statement.
        In the interest of time, if any other Member has an opening
    statement, you may submit those statements in writing for the
    record.
        Once again, I want to thank our witnesses for being here
    this morning. The Committee has received your written
    statements, and they will be made part of the formal hearing
    record.
        You each will have five minutes to give your oral remarks.
    Dr. Blanchard, you may begin when you are ready.
        You know that in Arkansas and Kentucky you would be
    Blanchard. And I don't know how many people on the Committee
    will butcher your name, so I apologize in advance for that.
        You are recognized for five minutes.

    STATEMENT OF OLIVIER BLANCHARD, PH.D., SENIOR FELLOW, PETERSON
        INSTITUTE FOR INTERNATIONAL ECONOMICS, AND PROFESSOR OF
     ECONOMICS EMERITUS, MIT; L. RANDALL WRAY, PH.D., PROFESSOR OF
      ECONOMICS, BARD COLLEGE, AND SENIOR SCHOLAR, LEVY ECONOMICS
      INSTITUTE; JARED BERNSTEIN, PH.D., SENIOR FELLOW, CENTER ON
    BUDGET AND POLICY PRIORITIES; AND JOHN TAYLOR, PH.D., PROFESSOR
     OF ECONOMICS, STANFORD UNIVERSITY, AND SENIOR FELLOW, HOOVER
                              INSTITUTION

                 STATEMENT OF OLIVIER BLANCHARD, PH.D.

        Dr. Blanchard. Thank you. I have accepted the fact that I
    am called Blanchard. The--Mr. Chairman, Members of the
    Committee, thank you very much for giving me the opportunity to
    testify on what I think is, really, indeed, a crucial topic.
        In my testimony today I would like to make five points. The
    first, nominal and real interest rates are likely to remain low
    for a long time to come. Indeed, nominal interest rates are
    forecast to be lower than the growth rate of nominal GDP for
    the next 20 years. Now, this being said, it is not an absolute
    certainty, and one should indeed be ready to act if the
    circumstances changed. That was the first point.
        The second point is that, as a matter of logic, low real
    rates have three implications for fiscal policy.
        Fiscal costs are lower. The cost of debt, inflation
    adjusted, is currently negative, slightly negative, more or
    less zero.
        Primary deficits, which are the deficits not including
    interest payments on the debt, must be offset by primary
    surpluses in the future, but smaller primary surpluses--in
    other words, lower taxes today require smaller increases in
    taxes in the future, just again, as a matter of arithmetic.
        Fiscal risks are also smaller. The probability that there
    is a market-induced debt crisis in the U.S. reflecting the
    inability of a government to pay its bills is smaller or, more
    or less non-existent, for the moment.
        So this is implications of lower rates for fiscal policy.
        My third point is about implications of low rates for
    monetary policy, and we are all familiar with what these
    implications are. The low nominal rates put sharp limits on the
    use of monetary policy, and the most that the Federal Reserve
    can do is--to stimulate the economy is to decrease nominal
    interest rates to zero, or very close to zero. Once at the
    lower bound, monetary policy cannot help. But fiscal policy
    can. That is, I think, a very central point.
        Fourth, as a result of my first three points, the
    implication is lower--on the one hand, lower fiscal cost and a
    higher potential benefits imply a larger role for fiscal policy
    as a macro stabilization tool. Put another way, the tradeoff
    between debt stabilization and output stabilization has shifted
    as a result of low rates in the direction of output
    stabilization, which would be relatively more concerned about
    output stabilization than debt stabilization.
        My fifth point is to try to translate these general
    principles into concrete conclusions about U.S. fiscal policy.
    And here I see two main implications.
        First, the deficits are running at a bit above 5 percent of
    GDP at this point, and they are very large. So, unless they are
    used to finance an ambitious and credible public investment
    plan, ambitious capital spending, they should be decreased.
    Decreasing them too fast, however, would be risky, because they
    might well reduce demand, and there is little room for the Fed
    to have set this decrease in demand for low interest rates.
        Therefore, the reduction in the deficit, which is highly
    desirable, should be contingent on the strength of private
    demand. This strategy might lead to further increases in the
    ratio of debt to GDP from the already fairly higher levels, but
    I believe that it is an acceptable risk, that maintaining
    output is very, very important.
        The second and final conclusion is that, if a recession
    materialized, monetary policy would be likely constrained.
    There is very little room for maneuver, making it essential to
    use fiscal policy. Automatic stabilizers, which is a fiscal
    instrument which has been used in the past, are too weak in the
    U.S. to do the job. Better ones focusing, for example, on
    larger payments to low income households should be designed
    soon. This is an urgent matter. Thank you.
        [The prepared statement of Olivier Blanchard follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Yarmuth. Thank you very much for your testimony.
    And now, Dr. Randall Wray, you have five minutes.

                  STATEMENT OF L. RANDALL WRAY, PH.D.

        Dr. Wray. Okay, thank you for the opportunity to speak
    here.
        In my statement I argue that federal deficits and debt are
    not so scary. Neither is on an unsustainable path. Rather,
    persistent deficits and rising debt are normal. They are not
    due to out-of-control spending now or in the future. They serve
    a useful public purpose. They are largely outside the control
    of Congress. And it is hard to imagine a scenario in which they
    create a financial crisis, lead to insolvency or high
    inflation, or trigger an attack by bond vigilantes.
        I want to focus on two graphs to back up these claims, and
    I don't know if these can be shown.
        Dr. Wray. Okay, there we go.
        Figure 7 shows sectoral balances. In the aggregate,
    spending equals income. One sector can run a surplus only if at
    least one other runs a deficit.
        [Slide].
        [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

        The government sector is in red in this graph. And, except
    for the Clinton years, it is always in deficit below the line.
        The private sector is blue, including firms and households.
    It is almost always in surplus, except for the decade after
    1996, when the private sector spent more than its income.
        The foreign sector is green, and in surplus since the
    Reagan years. That is because we run a current account deficit
    reflected in our trade deficit. So the usual case is the
    government's deficit equals the sum of the private-sector
    surplus and the foreign surplus against us.
        This is an identity. You can't change one without changing
    at least one other balance. Those wanting to eliminate deficits
    have to tell us which of the other two balances will change to
    allow that to happen.
        Will they put the private sector in deficit? That is what
    happened in the dot.com and housing bubbles, leading to the
    global financial crisis.
        Or we will get foreigners to run trade deficits. How? We
    have had a current account deficit for 40 years.
        Understanding sectoral balances shows why the federal
    balance is not under the control of Congress, as it depends on
    the other two sectors.
        Finally, let's address the bond vigilantes and projections
    of exploding interest payments on the debt.
        Dr. Wray. Figure 11 shows debt service is driven by
    interest rates, not by the debt ratio, and interest rates are
    determined by monetary policy, not by the debt ratio, nor by
    bond vigilantes.
        [Slide].
        [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

        So what do I recommend, going forward? I actually agree
    with a lot of the comments made.
        We don't need tax hikes or spending constraint now, when
    growth seems to be moderating, and there is no inflationary
    pressure. Indeed, doing that now might depress growth so that
    the deficit would actually increase, as it always does in
    recession. The time to rein in the deficit will be when growth
    booms and inflation threatens.
        I am not saying all deficits are good and created equal. I
    prefer well-targeted taxes and spending. The recent tax cuts
    were inefficient, because the main beneficiaries were high-
    income earners. This raised the deficit without boosting
    growth. It makes sense to shift taxes away from low to moderate
    incomes, and onto high income and wealth. That raises
    consumption and encourages investment. Spending should be
    targeted to job creation and productivity increases.
        I don't take long-term projections very seriously. I
    remember when President Clinton projected budget surpluses for
    15 years, retiring all the debt. The dot.com crash wiped out
    the surplus, and we have had deficits ever since. We at the
    Levy Institute warned in 1997 that that would happen.
        Current CBO projections have the debt ratio rising
    continuously. This is based on the twin erroneous assumptions
    that debt raises interest rates and lowers investment and
    growth through crowding out. That ignores positive impacts of
    deficits on the private-sector surpluses. This doesn't crowd
    out spending, but it increases net wealth and encourages
    growth.
        Instead of worrying about long-term projections that will
    be wrong, we should focus on formulating good policy today. So
    I suggest three recommendations.
        First, strengthen the automatic stabilizers. Spending
    should be more counter-cyclical, while taxes should be pro-
    cyclical. Policy changes weakened them over the past decades.
        Second, if discretionary policy is possible, raise taxes or
    cut spending only when the economy is overheating. There is no
    point adopting austerity today only because the deficit might
    be bigger in the distant future.
        And finally, increase efficiency of both spending and
    taxing. The goal should be sustainable growth, rising living
    standards, reduction of inequality, and not to achieve some
    arbitrary deficit or debt number. Thank you.
        [The prepared statement of L. Randall Wray follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Yarmuth. Thank you very much for your testimony. I
    now recognize Dr. Bernstein for five minutes.

                  STATEMENT OF JARED BERNSTEIN, PH.D.

        Dr. Bernstein. Chairman Yarmuth, Ranking Member Womack, I
    thank you for the chance to speak to this evolving area, where
    economics intersects public finance.
        My testimony starts by noting that current deficits are
    unusually high for this stage of the economic recovery. And yet
    these deficits are not pushing up interest rates or inflation.
    If the increased flow of deficits and the resulting higher
    stock of debt are not having obvious negative economic
    consequences, does that mean deficits don't matter, and
    policymakers should blithely put all of their preferences on
    the national credit card?
        My answer is no. The evidence does not relieve policymakers
    of budget constraints. It does not negate the revenue-robbing
    impact of the 2017 tax cuts that, in my framing, are exhibit A
    in wasteful, inequitable debt accumulation.
        But the evidence provides a more nuanced, far less cramped
    understanding of the economic costs of budget deficits and the
    potential benefits from investing in people and places who have
    long needed the help.
        The coexistence of high deficits and debt amid low interest
    rates belies the traditional crowd-out arguments where public
    and private borrowing compete over a fixed lump of capital. In
    fact, our economy is large and open with deep liquid global
    credit markets, and our debt is considered among the world's
    safest to invest excess savings.
        The central bank is also in the mix. The Fed has kept its
    benchmark interest rate below 1 percent for most of the past
    decade, and convinced investors that inflation would remain low
    and stable.
        Other evidence suggests that deficits are not leading to
    faster inflation and higher rates because the U.S. economy has
    not been operating at full capacity. For either public or
    private spending to generate overheating conditions, aggregate
    demand must exceed supply such that any extra demand, save for
    more deficit spending, would generate not more jobs and higher
    real incomes, but just more inflation.
        Priors in this area of economics also require updating,
    most notably regarding the lowest unemployment rate thought to
    be consistent with stable prices. Thus, it is a serious mistake
    to assume that deficits will pressure interest rates,
    especially when there is economic slack, strong capital flows,
    excess savings over investment, and well-anchored inflation.
        Moreover, with the economy's growth rate outpacing the
    relevant interest rate, the fiscal cost of debt stabilization
    is diminished. These facts should push strongly against knee-
    jerk, austere fiscal policy, but they should not obviate
    concerns about our persistent fiscal imbalances.
        First, interest rates could eventually rise that would be
    served--such that we would be servicing a much larger stock of
    debt, thus devoting a larger share of national income to debt
    payments. Prudent risk management does not assign a zero
    probability to higher future rates.
        Second, financing more of our public debt with foreign
    capital has led to an increasing share of our GDP leaking out
    through debt payments abroad. Back in 1970, public debt held by
    foreigners amounted to less than 2 percent of GDP. Most
    recently, that share was 30 percent.
        Third--and this is the concern that I find most worrisome--
    is the lack of perceived versus actual fiscal space. When the
    next recession hits, the Federal Reserve will reduce the cost
    of credit. But because interest rates have been so low, the Fed
    is likely to have reduced monetary space, less room to lower
    their benchmark interest rate. Counter-cyclical fiscal policy
    does not face an analogous limit. However, were Congress to
    take insufficient action to offset a downturn, it would be a
    fateful mistake, one that would disproportionately harm those
    who are already economically vulnerable and who are, at least--
    and who are least insulated from recessions.
        In closing, our evolving understanding of the role of
    fiscal debt provides us with both opportunities and risks. The
    former implies more leeway to use deficit spending to make
    necessary productive investments. The latter means avoiding
    adding to our already historically elevated debt for non-
    productive or wasteful spending and/or tax cuts.
        It is, thus, essential to define good debt from bad debt.
    Good debt invests in people and places that need the help. Bad
    debt does not. Considering the set of unmet needs we observe in
    communities across the country, along with the threat from
    climate change, there exists a deep, rich set of good debt
    investment opportunities. Tens of millions remain under-
    insured, in terms of health coverage. The impact of climate
    change is already being felt in volatile and costly weather
    patterns. The cost of colleges is a constraint to many families
    of moderate means. Much of our public infrastructure needs
    upgrading. Long-term wage stagnation has constrained the living
    standards of many working households, and there are significant
    swaths of people and places that have been left out of the
    current expansion.
        I am happy to elaborate on what I believe are good debt
    opportunities in those spaces during our future discussion.
    Thank you very much.
        [The prepared statement of Jared Bernstein follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Yarmuth. Thank you very much for your testimony.
        And now, finally, Dr. John Taylor, you have five minutes.

                    STATEMENT OF JOHN TAYLOR, PH.D.

        Dr. Taylor. Chairman Yarmuth, Ranking Member Womack,
    Members of the Committee, thank you for inviting me to testify
    on this important topic, reexamining the economic costs of
    debt. At previous hearings of this Committee at which I
    testified, including the 19--including a 2015 meeting that was
    titled ``Why Congress Must Balance the Budget,'' in that
    hearing I showed that basic economic theory grounded in real-
    world data implies that high federal government debt has a
    cost. It reduces real GDP and real income per household
    compared to what these would be with lower debt levels.
        A reexamination of the economic costs conducted for this
    hearing yields the same results. In work with John Cogan,
    Volker Wieland, and myself, we used modern economic models to
    estimate the effect of a decline in federal expenditures as a
    share of GDP. This fiscal consolidation plan led to an
    immediate and permanent increase in real GDP, according to the
    model calculations. Similar fiscal consolidation strategies
    were simulated in later years.
        Recently the Congressional Budget Office reported similar
    results. They compared their extended baseline in which--that
    goes to 144 percent of GDP--with an extended alternative fiscal
    scenario in which the federal debt goes up to 219 percent of
    GDP. This alternative scenario has the total deficit rising to
    15.5 percent, compared with 8.7 percent in their extended
    baseline.
        The CBO also finds that real GDP is 3.6 percent lower when
    the debt is higher. So clearly, according to these analyses,
    the higher debt has real economic costs.
        CBO also analyzed scenarios in which the debt is lower as a
    share of GDP, 42 percent and 78 percent. In the 42 percent
    scenario, real GDP would be 5.8 percent higher; in the 78
    percent scenario real GDP would be 3.7 percent higher.
        With the Congressional Budget Office's currently projected
    increase in the deficit and the federal debt in the United
    States, this reexamination implies the need for a credible
    fiscal consolidation strategy. Under such a strategy, spending
    still grows, but at a slower rate than GDP, at least for a
    while, thereby reducing both spending as a share of GDP and the
    debt as a share of GDP, compared with current projections.
        Such a fiscal strategy would greatly benefit the American
    economy. It would also reduce the risk of the debt spiraling up
    much faster than is currently projected by the CBO. I believe
    these conclusions are robust to different ways of thinking
    about the world.
        Professor Blanchard has emphasized that if the growth rate
    of the economy is greater than the relevant interest rate and
    the public debt, then there will be a tendency for the debt-to-
    GDP ratio to decline over time. In many of the simulations
    reported by Professor Blanchard, the primary deficit is held to
    zero. However, any projection at this point has a primary
    deficit far, far above zero. And according to Congressional
    Budget Office, it is growing over time.
        Moreover, the economic costs reported here do not
    distinguish between the primary and the total deficit. It is
    the increase in the debt via the total deficit that creates
    economic costs. Of course, different views of the relative size
    of the growth rate and the interest rate are important, but
    they do not diminish the estimated costs of high debt.
        Another view of the economic costs of debt is related to
    what is sometimes called modern monetary theory. It is
    difficult to determine how this approach would work in the
    future, and it is frequently associated with large spending
    programs, and even wage and price controls. Model simulations
    would be useful, to be sure, but history can also be a valuable
    guide.
        In the 1970s the United States imposed wage and price
    controls, and the Federal Reserve helped finance the deficit by
    creating money. The result was a terrible economy, with
    unemployment and inflation both rising. This ended when money
    growth was reduced in the late 1970s and early 1980s. As
    explained in a new book by George Shultz and myself, it is an
    example where poor economic reasoning led to poor economic
    policy, which led to poor economic performance. It was only
    reversed when good economics again prevailed and policy
    changed. Thank you.
        [The prepared statement of John Taylor follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Yarmuth. Thank you for your testimony and, once
    again, thanks to all the witnesses. We will now begin our
    question-and-answer session.
        As a reminder, Members can submit written questions to be
    answered later in writing. Those questions, and the answers
    from our witnesses, will be made part of the formal hearing
    record. Any Members who wish to submit questions for the record
    may do so within seven days.
        The Ranking Member and I will defer our questions until the
    end. So I now yield five minutes to the gentleman from New
    York, Mr. Morelle.
        Mr. Morelle. Thank you very much, Mr. Chairman, for holding
    such an important hearing. I feel a little bit like being at a
    panel where I have just listened to the four leading
    cosmologists in the world talk about string theory,
    multiverses, blackholes, the origin of universe, and my first
    question is, like, how does gravity work? So I apologize,
    because this was a lot to process.
        But I did want to--just to go back to--and I think perhaps,
    Dr. Bernstein, you touched on this, as maybe--you all did, to
    some degree, but textbook economic theory, as I understand it,
    predicts that persistent budget deficits and rising government
    debt essentially raises interest rates, fuels inflation, crowds
    out, as you talked about, or depresses private investment, and
    triggers financial and fiscal difficulties.
        We are, obviously, not seeing that. The publicly held debt,
    I think, in the United States is roughly 80 percent of GDP. It
    has actually grown, which I think is unusual to grow as a
    percentage of GDP during an economic expansion, which we have
    seen over the last 10 or 11 years. The 10-year note is at lower
    interest rates than it was 20 years ago.
        So, since that was the sort of expectations, and it hasn't
    played out, is it that the assumptions that we made are
    incorrect? Or are we in sort of a unique period, or the
    circumstances have changed, where no longer those expected
    results are present? And what is the lesson that we, as
    policymakers, should take from that?
        Dr. Bernstein. I think it is more accurate to say that the
    assumptions were right at one point in time and they no longer
    are.
        So in my testimony I show a scatterplot between budget
    deficits and interest rates. And actually, if you go back a few
    decades, that lines up pretty negatively, much like the theory
    would predict.
        And, by the way, you comprehended everything that we were
    talking about perfectly well. So just being clear that you--we
    are on the same page here.
        But, as I stressed in my testimony, dynamics, global
    credit, the role of the Federal Reserve, anchored inflationary
    expectations, excess savings over global investment, all of
    those have contributed to fundamentally change the relationship
    such that the crowd-out hypothesis simply doesn't bind in the
    data.
        Now, I try to be very clear in my testimony that that
    doesn't mean that interest rates won't go up and create a
    serious problem for us. I think the way I put it was that, you
    know, it is not good risk management to assume, you know, a
    zero threat from that possibility. But it is really that the
    old assumptions no longer hold.
        Mr. Morelle. I would like to just shift. Last week we had
    the Fed Chair--Chairman Powell was here, talked about debt
    level sustainability. And I just want to read what he said. ``I
    would define sustainable as the debt is not growing faster than
    the economy. Our debt is growing faster than our economy now by
    a margin. And so, by definition, it makes it unsustainable. You
    have to have an economy that is growing faster than your debt,
    and you have to do that for 10 to 20 years. That is how you
    successfully handle this. If you don't do it, over time you
    will be crowding out private investment.''
        I am just curious, Dr. Bernstein, as a follow-up, would you
    agree with that, or do you think--would you dissent from that
    view?
        Dr. Bernstein. I would broadly dissent in the spirit that I
    just showed you. I think it is really an empirical question.
        However, John Taylor makes a fair point when he says that,
    you know, yes, it is true that growth rates surpass interest
    rates, but because the primary deficit, or the deficit net of
    interest payments has been large and growing, that is putting
    upward pressure on the debt. I don't think that means that
    crowd-out is around the corner, or at least in any perspective
    that I can see.
        I think what it does mean is that, to the extent that we do
    engage in deficit spending, it should be on the kinds of
    productive--I put it under the rubric of good debt.
        Mr. Morelle. Yes, and I did--I wanted to ask a question on
    the--something else, but--the automatic stabilizers, and
    perhaps someone else will ask about that.
        But while you are on the subject, could you just define
    perhaps a couple of examples of bad debt? You have mentioned
    some of good.
        Dr. Bernstein. I think the most--I think exhibit A is
    really in a debt that comes from tax cuts, and particularly tax
    cuts that are regressive. That is, that return far more
    benefits to those at the top of the wealth scale. To me, that
    is a classic example of both inequitable, revenue-robbing, bad
    debt.
        Mr. Morelle. Very good. Thank you, Mr. Chairman, I will
    yield back.
        Chairman Yarmuth. The gentleman yields back. I now
    recognize the gentleman from Missouri, Mr. Smith, for five
    minutes.
        Mr. Smith. Thank you, Mr. Chairman. As of today it has been
    219 days since the deadline has passed for us to propose a
    budget in this Committee.
        While this Committee might not realize it, there is several
    reasons why we go through the budget process. One, it gives
    guidelines to the appropriators; two, in a budget resolution,
    we also set the 302(a) number allocations, which establishes
    the overall spending numbers. Yesterday on the floor we saw a
    continuing resolution passed again, yet we still don't have the
    302(a) numbers.
        I am glad that this Committee hearing at least is moving
    more towards a hearing that a Budget Committee would have when
    you are talking about the national debt. So I think that at
    least that is a step in the right direction, even though we are
    219 days behind.
        Earlier this--I just want to make a comment in regards to
    what some of the witnesses had said earlier about good debt
    investing in people. Mr. Bernstein made that statement. I think
    a lot of times folks up here in the swamp get confused, and
    they think of government-funded, government spending, but it is
    not government-funded, it is not government spending, it is not
    government debt. It is taxpayer-spending, taxpayer funded, and
    taxpayer debt.
        So when we talk about debt, it is not government debt, it
    is taxpayer debt. It is every one of the 320-plus million
    Americans that have the debt. And let's not get blinded by a
    different entity, by saying ``government,'' because it all has
    to be paid for someday. And it is all the citizens of this
    country. It is the taxpayers. So remember the difference
    between government debt and taxpayer debt. It is taxpayer debt.
        I know the Tax Cut and Jobs Act was brought up a couple of
    times. I represent a congressional district that is one of the
    poorest in the nation. And I can tell you, under the Tax Cut
    and Jobs Act, where our median household income of a family of
    four is just right at $40,000 a year, the people of my district
    benefited greatly from the Tax Cut and Jobs Act. And a family
    of four with a median income household of 40,000 is not a lot.
    It is in the lowest bracket of median household incomes in the
    nation of 435 congressional districts.
        And I can tell you, by traveling the 30 counties of
    southeast and south central Missouri, how people have benefited
    from the Tax Cut and Jobs Act by the doubling of the standard
    deduction, by the doubling of the child tax credit. These were
    real numbers that helped drive the economy in a very rural,
    impoverished economy.
        So I do know that there was huge benefits, and there wasn't
    any robbing of the poor people in southeast Missouri. In fact,
    they benefited from the Tax Cut and Jobs Act, at least the
    people that I represent and the 30 counties that call 20,000
    square miles home in southeast Missouri.
        You know, the bootheel of Missouri used to be a swamp, by
    the way. And we drained it. And now it is some of the most
    fertile land in the country. And I think that is what President
    Trump is trying to do up here in Washington, D.C. And let's
    hope that it is working.
        Mr. Taylor, I have a question for you. CBO reports that an
    increasing public debt harms per-capita gross national product,
    whereas reducing the debt improves per-capita gross national
    product. Given the negative consequences of our nation's
    current fiscal path, if we were to actually legislate and put
    the federal budget on a sustainable course, what would be the
    positive economic effects?
        Dr. Taylor. I believe if the plan, if you like, the
    credible consolidation plan, budget deficit reduction plan, was
    somehow passed or agreed to--as multi-year would be best, to be
    sure, so it is credible--I think it would have a beneficial
    effect on the economy.
        So often the models that people use emphasize any reduction
    in government spending of any kind as contraction, and I don't
    believe that is the case. If it is credible, if it is
    understood, if it is planned, it has been beneficial. And that
    is what our models show. That is what our simulations show.
        I think it would be a benefit--and people have talked about
    this in the past--a strategy to reduce the debt-to-GDP over
    time. And it would be beneficial, according to models that I
    use, and I think other people have used. So I would very much
    hope that that would be the direction. I know it is not what
    you are focused on right now, but I wish there was more focus
    on that multi-year discussion, and what is going to happen.
        If you look at the expenditure growth, it is astounding,
    what is being projected. So I think that needs to be fixed.
        Mr. Smith. I see my time expired, Mr. Chairman.
        Chairman Yarmuth. Yes. Thank--the gentleman's time has
    expired. I now recognize the gentleman from Nevada, Mr.
    Horsford, for five minutes.
        Mr. Horsford. Thank you very much, Chairman Yarmuth, and to
    the Ranking Member.
        I know we are here today to reexamine how we view debt and
    deficits with respect to our economy. And my good friend, Mr.
    Smith from Missouri, he and I serve on the Ways and Means
    Committee, as well, we have had some good, lively debate in
    both this Committee and our other Committee.
        But what I find interesting sometimes is that the other
    side will view tax cuts for the very wealthy as investments.
    But when we talk about investing in resources and programs that
    we know will benefit our children and their future, somehow
    that is not something that is worth investing in.
        So I want to go directly to the numbers that impact my
    constituents. Mr. Smith talked about his.
        During the 2017-2018 school year, Nevada, which has 355
    Title I schools, over 200 thousand children in those schools--
    Clark County is the fifth largest school district in the
    country, nearly half of the students are Latino students,
    limited English proficient students. Had we received the full
    allocation of funding, we would have been budgeted $379 million
    in Title I funding from the federal government.
        However, our schools received only $130 million. That is
    $250 million funding deficit for our students that need it the
    most. And I have been to these schools. I have seen what these
    teachers are dealing with, with overcrowded classrooms, with
    inadequate textbooks, with not having the after-school
    resources, early childhood investments that we know will
    improve the educational outcomes of young people and improve
    their quality of life.
        Mr. Horsford. Let me give you another example to turn to
    the chart. We have seen cuts to various skills training
    programs such as the Workforce Innovation Opportunity Act and
    the Perkins Career and Technical Education Act, as well as
    adult education. As you can see from this chart, WIOA was
    funded at $4.6 billion in fiscal year 2001. These are programs
    to train people for the 21st--skills of the future, but it only
    received $2.8 billion in funding for fiscal year 2019.
        [Chart].
        [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

        So Mr. Bernstein and Dr. Blanchard, do you think the long-
    term economic and fiscal consequences of neglecting investments
    in critical areas such as education and skills training could
    be more damaging than the consequences of increasing our debt?
        Dr. Bernstein. I will start. I do worry about precisely
    that, and this is a good example of what I am talking about
    when I say good investment, in terms of deficit spending versus
    wasteful inequitable spending.
        And it is important to just broaden out your comments
    slightly, and I will get out of the way so Olivier can jump in.
    One force that is clearly not driving the debt ratio forecast
    that we have all been talking about is precisely this kind of
    spending. So this is non-defense, discretionary spending. It is
    expected to fall to historical lows as a share of GDP. It is--
    precisely the area where we should be investing is where we are
    doing the least.
        Mr. Horsford. Dr. Blanchard?
        Dr. Blanchard. I very much agree. I think the deficits, as
    they are now, are not used for the right purposes. There is a
    number of programs, measures which could increase growth,
    decrease inequality. It would be a much better use of these
    deficits than is currently the case.
        Mr. Horsford. Thank you. So I just want to note, Mr.
    Chairman, that the President and my Republican colleagues again
    passed a $1.9 trillion tax cut, and they did so in 51 days
    without one hearing. They rammed through that job tax cut bill.
    That $1.9 trillion my Republican colleagues in the Trump
    Administration passed, that benefited only the top 1 percent.
    That could have been used to fully fund Title I in my state. It
    could have been to invest in some of these programs that we
    know people need in order to compete for American jobs.
        We are talking about getting ready to work on USMCA. Trade
    is important, but guess what? We also have to invest in our
    workers in order to have the skills to compete.
        So when we talk about competition in a global economy, it
    is trade, it is skills in our workforce, and it is having a
    competitive tax rate. My colleagues focused on only one of
    those areas. They did it in 51 days, and they did it without
    regard to the majority of the American people who would benefit
    the most. I yield back.
        Chairman Yarmuth. The gentleman's time has expired. And I,
    unfortunately, neglected to, while Mr. Smith was still in the
    room, to correct one thing he said for the record--and he may
    have misspoken.
        But there--we do have 302(a) numbers for next year. We
    don't have 302(b) yet. We are working on that. But anyway, I
    just wanted to correct that for the record.
        I now recognize the gentleman from South Carolina, Mr.
    Norman, for five minutes.
        Mr. Norman. Thank you so much. Thanks to each of you for
    being here.
        Let me just re-emphasize what Mr.--Congressman Smith said.
    You know, when you say government debt, that is taxpayers'
    debt. This thing we call government is made up of taxpayers.
    They are the ones who put the money in the coffers to make
    government work. So that is not some term that is--I think it
    is misunderstood or misused by the left.
        Secondly, I have heard several talk about tax cuts for the
    rich, tax cut for those at the top. Where did the bonuses come
    that President Trump--that we passed that President Trump has
    put into practice, where did the bonuses go? They went to
    people, people that make up the corporations.
        So it is interesting that, you know, we talk about this, we
    think of government in terms--as if it is not people. We talk
    about corporations, the rich. I think the people who have
    benefited the most are those that have a job now. I think the
    growth rates under the President Trump are real, as opposed to
    the obvious low growth rates under the previous Administration,
    which hovered over 1.2, 1.5 percent. There is a reason people
    have jobs. There is a reason the growth has occurred in this
    economy like never before.
        Mr. Wray, let me ask you, have you ever run a private
    business?
        Dr. Wray. No.
        Mr. Norman. Okay. So you have never had to hire--make a
    payroll, balance up--I guess, other than your household budget,
    you never had to balance, make a product, or use--make sure
    things--you are making a profit so that you can pay the police,
    you can pay our schools, you can pay our first responders. You
    have never done that.
        Dr. Wray. That is correct.
        Mr. Norman. Okay. Let me ask you about the modern monetary
    theory, which I think you buy into. And I think the basis of
    that--tell me if I am wrong--budget deficits can be financed by
    nations who control the currency.
        Dr. Wray. Yes.
        Mr. Norman. Okay. Are you familiar with the monetary policy
    of some Latin American economies, Chile?
        Dr. Wray. Some Latin American countries, yes.
        Mr. Norman. Okay. What about Peru?
        Dr. Wray. Not Peru, no.
        Mr. Norman. Okay. Are you familiar with some of the
    inflation rates? And I mentioned Chile. You--do you remember
    what that is, the inflation rate in Chile?
        Dr. Wray. No, I don't----
        Mr. Norman. It is 500 percent. Do you remember the
    inflation rate in Peru by just printing money? Seven thousand
    percent.
        What about Venezuela? How has that worked out? That was
    10,398 percent.
        So hyperinflation hurts the little man that you are talking
    about you protect.
        You know, in Venezuela today we are witnessing the effects
    of Socialism, a socialistic economy that doesn't work for the
    people that you say you protect. Those are the consequences of
    the very monetary policy that you say you promote.
        And I guess--let me ask each one of you. I have got a
    minute, 31. As you look at priorities in this country that we
    spend on, is--does the Green New Deal add up as the top
    priority?
        And I would start with--well, Mr. Wray, let me start with
    you.
        Dr. Wray. I do think that we face a very serious challenge
    that will require federal government involvement and federal
    government spending.
        Mr. Norman. What would it cost?
        Dr. Wray. It depends on what you include in the Green New
    Deal. Say----
        Mr. Norman. Pick a number.
        Dr. Wray. Well, say the complete package of greening
    programs could be as much as 5 percent of GDP for the next 10
    years.
        Mr. Norman. Which is? Give me a number. Just pick a number,
    because I have heard----
        Dr. Wray. Okay.
        Mr. Norman.----73 trillion, I have heard----
        Dr. Wray. No.
        Mr. Norman. Not that?
        Dr. Wray. No.
        Mr. Norman. But it is top of the list over national
    defense, over education----
        Dr. Wray. I don't think that we have to make a choice like
    that.
        Mr. Norman. Okay.
        Dr. Wray. If we are talking about adding 5 percent of GDP
    to total spending, we don't have to eliminate defense. That
    would bring government spending up to about 25 percent of GDP.
        Mr. Norman. Okay. Mr. Taylor?
        Dr. Taylor. I think the highest priority is to have a
    faster-growing economy which benefits large parts of this
    economy. And--as you have emphasized.
        Mr. Norman. Which is what the tax cuts have done. That is--
    --
        Dr. Taylor. They have been effective.
        Mr. Norman. Right. That is--I am out of time. Thank you,
    Mr. Chairman.
        Chairman Yarmuth. Do either of the other two witnesses want
    to respond to the question? Dr. Blanchard?
        Dr. Blanchard. The Green New Deal is, indeed, a priority.
    Is it the top priority? There are many other things which need
    to be repaired in this country, from bridges to other
    infrastructure. Should it be financed by debt or by taxes? I
    think the answer is by a mix of the two.
        Dr. Bernstein. The only thing I will add is when you are
    contemplating the cost of the Green New Deal, or any other
    action against climate change, it is very important to factor
    in the costs of not doing anything about climate change. Those
    costs are becoming increasingly significant, and they must be
    netted out of whatever numbers we are throwing around.
        Chairman Yarmuth. Thank you. The gentleman's time has
    expired. I now recognize the gentleman from Tennessee, Mr.
    Cooper, for five minutes.
        Mr. Cooper. Thank you, Mr. Chairman. And I welcome such a
    distinguished panel of economists. I appreciate your patience,
    because you must know when you come there will be a lot of
    partisan sparring.
        I must admit, I actually watched the YouTube video of Mr.
    Blanchard's address, because when I saw the headline that he
    apparently said, according to the press, that deficits don't
    matter, I had to see for myself what, in fact, you had said.
    And I regret the distortions that were made of your, what, AEA
    speech that prompted some journalists to mischaracterize it.
        I worry, in general, that the nuance that is in all of your
    testimony largely escapes Members, so I worry that you end up
    looking like pinatas, hit by whatever is the opposing side.
    Because, as we well know, when the other side is in the
    majority, there will be three John Taylors on the panel,
    instead of the only one we have today. I am not suggesting you
    be cloned.
        But the real issue is whether we can get at the truth. And
    perhaps no hearing this year is going to be more important in
    helping us ferret out the truth, because, as we deal with
    short-term, medium-term, long-term tradeoffs, I worry that
    there is a certain learned behavior here, when we refuse to
    acknowledge nuance, when we refuse to try to get things right
    and look beyond the horizon, that we could be committing grave
    errors today.
        And literally, none of us really has skin in the game,
    because the average congressional tenure is six to eight years.
    We will be gone. Some of you have tenure. Even with that, you
    will be gone.
        So our real obligation is to our children and
    grandchildren, great-grandchildren. And it really matters, even
    though some of these issues are measured in small percentage
    points, whether we get it right. Because the difference between
    1 percent growth, 3 percent growth, 5 percent growth is
    monumental.
        I worry that, on behalf of your profession, there is not
    sufficient humility, because my guess is that none of you
    correctly predicted the 2008 recession, because hardly anyone
    did, and those who claim they did sometimes exaggerate their
    foresight.
        But I think John Maynard Keynes said that all economists
    should be humble, like dentists. And I am not saying, you know,
    from the profession, a dentist type humility or ability--
    because at least dentists have to talk to their patients and
    try to make sure the patient understands brush your teeth every
    day, otherwise you will have cavities.
        So, if you could help me understand, because, to me, there
    is more commonality in the testimony than would appear on the
    surface, and yet you are being separated three to one, as if,
    you know, one side is good, one side is bad. Dr. Bernstein even
    characterizes good debt, bad debt. That is a pretty Manichean
    view of the world.
        You know, it all depends on what your favorite programs
    are. And both parties end up having similar sins. We both love
    spending if it is our sort of spending. We both decry debt if
    it is not our sort of debt. So I am worried we are really
    talking past each other here.
        So would any of you admit that there is really more
    commonality than first appears?
        Dr. Bernstein. I mean, I--first of all, let me just say
    that embedded in my testimony is more humility than perhaps I
    showed. And I totally agree with your point on that. And the
    idea is that we should be humble about our ability to predict
    the future, say the correlation between deficits, debt, and
    interest rates. And so I really emphasize the empirical
    relationship. And I think that is the important one.
        In terms of good debt and bad debt, I was just--that is
    sort of trying to be somewhat of a cute framing to suggest the
    debt that is incurred in the interest of productive investment
    is very different than debt that is incurred for what I would
    consider wasteful tax cuts.
        Now, we can have a good argument about that, but I just
    wanted to be clear about that point.
        Mr. Cooper. Dr. Blanchard?
        Dr. Blanchard. Thank you. I thought, listening to the three
    others, that there was, indeed, a lot of commonality, in the
    sense that I think we would all say that debt, per se, is not
    good in the long run, that it has--we can disagree about how
    bad it is, but nobody argued that it was good.
        There was some difference about the short run. I think a
    few of us believe that, if there was a sharp fiscal
    consolidation, this would lead to a decrease in demand and
    potentially a recession.
        John, I think, was more optimistic about the fact that
    animal spirits triggered by fiscal consolidation could undo the
    direct effects. I am very skeptical of this. But beyond this, I
    think there was agreement.
        The last point is I think there was agreement that if that
    is used for good stuff, public investment, R&D, growth-
    enhancing measures, then there is some justification for using
    debt in that case, the same as would be true for a private
    firm.
        Mr. Cooper. I see that my time has expired, Mr. Chairman.
        Chairman Yarmuth. The gentleman yields back. I now
    recognize the other gentleman from Tennessee, Mr. Burchett, for
    five minutes.
        Mr. Burchett. Thank you, Mr. Chairman and Ranking Member. I
    want to thank you for your kind words. I think about my folks
    when somebody says something nice about me, and I hope, where
    they are, they can see that. I think they would be very
    pleased. And I thank you, brother, for that.
        My question today is for the entire panel. And I am always
    concerned about China. I guess it is almost genetic. My father,
    actually, after the Second World War, was in the Marine Corps
    actually went to China and fought the Communists for a short
    while, and was, I think, amazed at their abilities that they
    had, and just their view of totalitarianism, and very little
    regard for human lives. And I think that scared him.
        And with that, I would like to know--China, of course,
    holds the most of our debt, with $1.1 trillion. What are the
    economic impacts if these foreign countries decide to collect
    on that debt?
        I hear that a lot. Put it down on my level. I took first
    quarter economics for a good reason. I was asked to. So I--the
    second time around I was told to. So if you all could--I would
    appreciate every one of you all giving your response.
        Dr. Blanchard. I think we have to worry about China. As I
    mentioned, that particular one worries me less than some of the
    others, in the sense that, if they were to want to sell the
    large amount of treasury bills and bonds that they have, they
    would make a very large capital loss on their holdings. I think
    that is sufficient reason not to want to do it, from their own
    point of view. So I would not worry very much about the fact
    that China holds quite a large quantity of government, U.S.
    Government, bonds.
        Dr. Wray. Can I add? If you look at who are the holders of
    U.S. Government bonds abroad--and that is almost half of the
    debt we have been talking about--they are the exporters to the
    United States, plus offshore banking centers. The way that they
    get the bonds is by selling output to us. We use dollars to buy
    it. They accumulate dollar reserves at the Fed, and then they
    convert those into U.S. treasuries.
        So, as long as China and other exporting nations want to
    sell their goods to us, they are going to accumulate dollars,
    and they are going to very rationally convert those to U.S.
    treasuries. I think that any transition out of U.S. Government
    bonds is going to be very slow. China will eventually run a
    trade deficit. It is going to become too wealthy; its incomes
    are going to become too high to be the low-cost exporter in the
    world. Their population will buy more imports, and so that will
    reverse. But it is going to be very, very gradual.
        So I agree with Professor Blanchard, this is really not a
    worry.
        Dr. Bernstein. Since I agree with Blanchard, let me just
    briefly say that if you owe the bank $100, they own you. If you
    owe the bank $1 million, you own them. That is kind of what
    Olivier was saying, and I share that view.
        Dr. Taylor. Yes, I think we should be concerned because our
    debt is growing very rapidly. And many people are buying it.
    They won't always buy it. There is a risk. And that is not
    built into the usual forecast, but you can't ignore that. It
    could be a spiral up, and some people would say no, that is
    enough. So I think it is a risk.
        I think that China is much more than that. I think there--
    they seem to be going back, away from some of the market
    principles that made debt economies so successful with Deng
    Xiaoping, originally.
        I think the U.S. needs to be concerned about its own
    economy, its growth, its tax system, et cetera, and continue to
    stress that philosophy that we have had for many years and has
    worked. China seems to be going in the wrong direction. That is
    bad for them, bad for the world, as well.
        Mr. Burchett. Thank you, Mr. Chairman. Thank you all very
    much for being here.
        Chairman Yarmuth. The gentleman yields back. I now
    recognize the gentleman from New York, Mr. Higgins, for five
    minutes.
        Mr. Higgins. And thank you, Mr. Chairman, and thank you,
    panelists, for being here. Let's just be clear about a couple
    of things.
        First of all, the job creators in the strongest economy in
    the history of the world, a $21 trillion economy which is 70
    percent consumption, are the American people. And with higher
    wages, you have higher demand. With higher demand you have
    higher growth. So fiscal policy and tax policy has a major,
    major impact.
        Some talk about bad debt, and, you know, debt does matter.
    What is absurd is the hypocrisy of Republican actions that
    created lots of bad debt that served the interests only of the
    hyper-rich, and not the general good.
        Two questions: Did the $1.5 trillion over 10 years
    corporate tax cut produce economic growth beyond that which was
    projected before the tax cut? It did not. And I would defy
    anybody to argue the contrary.
        Did every American household receive $4 to $9,000 increase
    in household income that the White House Council of Economic
    Advisors explicitly said would occur, and on a recurring basis,
    because of the tax cut? Absolutely, it did not.
        Here is who it benefitted, and this is why it is bad debt.
    In fiscal year 2017, FedEx owed more than $1.5 billion in
    taxes. The next year, after the full year that the tax cut went
    into effect, it owed nothing. FedEx's effective tax rate went
    from 34 percent in 2017 to less than zero, meaning that the
    federal government owes FedEx a rebate. FedEx spent $2 billion
    on stock buybacks and dividend increases in 2019, more than
    double the amount that FedEx paid for buy-backs and dividends
    in 2017, before the tax cut. The FedEx chief executive officer
    received $16 million in compensation in 2019, and the five top
    executives below him received compensation averaging $6.2
    million in compensation.
        So it seems to me that it is very, very clear after a very
    short period of time that this tax cut was bad debt. We spent
    $1.5 trillion and didn't get any measurable return accruing to
    the public good.
        Under President Trump, he has accumulated almost $4
    trillion in new debt. That will be by the end of the fiscal
    year 2020, the final year of his first term. The U.S. budget
    deficit grew to almost $1 trillion this year, and we project $1
    trillion deficits for the next several years, moving forward.
        Now, it would seem to me a company like FedEx would be
    promoting good debt for the general purpose. I mean that is a
    company, as I understand it, that is a logistics company. They
    move product by ship, by plane, but a lot by trucks. And my
    sense is that the better use of debt would have been $1.5
    trillion in infrastructure bill that would have produced
    economic growth and helped this economy, our $21 trillion
    economy, function much more efficiently.
        Dr. Bernstein, your thoughts?
        Dr. Bernstein. Yes, if you look from the first quarter of
    2018, which is when the tax law took effect--this is broadening
    out from the FedEx point, just to the broader business
    community--companies have spent almost three times as much on
    dividends and stock buy-backs than they have on increased
    investment. If you actually look at the investment record, it
    is exhibit A against the argument that the tax cut was going to
    have these trickle-down effects that would generate faster
    investment, faster productivity, and then faster income growth.
        In fact, in the prior two quarters business investment has
    been a negative on GDP, and it is widely agreed-upon that this
    is one of the most conspicuous failures.
        And that is what I mean when I talk about debt that I view
    as both wasteful, inequitable, and robbing the treasury of
    revenues it needs to make the kinds of investments that we have
    been talking about earlier.
        Mr. Higgins. Dr. Blanchard?
        Dr. Blanchard. Whatever the case for corporate tax rate
    reduction as boosting investment, I think the evidence so far
    is that it has not. And therefore, indeed, I think the money
    could have been spent much better, along the lines that you
    suggested.
        Chairman Yarmuth. The gentleman's time has expired. I now
    recognize the gentleman from Georgia, Mr. Woodall, for five
    minutes.
        Mr. Woodall. Thank you, Mr. Chairman, and thank you for
    holding the hearing. If I have learned anything with you over
    these 11 months now, it is that we should stop passing bills
    that are only supported by one party or the other.
        When Mr. Womack was chairman, we spent much of our time
    debating the merits of the Affordable Care Act and the unmet
    promises that were there, and now we are debating the merits of
    the Tax Cut and Jobs Act. We are not debating the 1983 Social
    Security amendments that raised taxes and cut benefits and
    solved the system for a generation. We are not debating the
    1996 welfare bill, we are not debating the 1997 Medicare
    amendments, we are not debating the 2005 Medicare Part D, all
    of those things that we did in partnership.
        And against that backdrop I ask, here we are, with a three-
    to-one ratio--and yes, if Mr. Womack was chairman, we would
    have a three-to-one ratio going the other way--I want to find
    what those things are we agree on, because the three of us had
    an opportunity to serve on a bipartisan, bicameral budget
    process reform committee last cycle, and I think we have heard
    that broad agreement, that we can't keep doing things the way
    we are doing them, that we can do better. Even if we can keep
    doing things the way we are doing them, we can do better.
        In your testimony, Dr. Bernstein, you point out that non-
    defense discretionary spending isn't the problem. It
    absolutely, positively is not the problem. Now, we will spend
    more time in Congress this year debating those issues than we
    will any of the problem issues. But it is not the problem.
        Dr. Blanchard, you said unless they are used to finance
    ambitious, incredible public investment plans, deficits should
    be decreased. I serve on the Transportation and Infrastructure
    Committee. I promise you we were supposed to debate ambitious,
    incredible infrastructure development plans this year, and we
    haven't. We have been focused on other, smaller issues.
        So what is the big picture item that, across this panel, we
    can agree on?
        And the plug I would put in would be a debt-to-GDP target
    that had enforceable mechanisms. It has to be revenue; it has
    to be dealing with mandatory spending growth. But that--to
    bring people together, I have got to have a common set of rules
    and goals. If we all agree we can do better, tell me what that
    proposal is you would make. Dr. Bernstein?
        Dr. Bernstein. Well, I think you said it. I am not going to
    give you a number or a debt rule. What I am going to say is
    that I think both sides agree that our infrastructure, our
    public infrastructure, is really in trouble. And I must say I
    don't understand, especially given how low interest rates are,
    why we are not doing more investment in that. Maybe you can
    help me understand that. But that would seem to be an area of
    bipartisan agreement.
        Mr. Woodall. Now, given that everyone testified that they
    thought interest rates would remain low for some time to come,
    I thought we had a sense of urgency to get to work on taking
    advantage of low interest rates. I feel less of that sense of
    urgency, listening to you all. I sometimes think we need that
    sense of urgency. If interest rates were 5, 6, 7 percent on
    federal debt, I promise you we wouldn't be having the debt
    conversation we are having now. We have made it too easy.
        Dr. Wray, you have been the target of a lot of conservative
    attention. But that also makes you someone who could help me
    bring my colleagues with me to the center. What is your
    counsel?
        Dr. Wray. Well, we have to remember that the debt ratio is
    a compound term. And if we increase GDP, and if we get growth
    going, the debt ratio will come down in two ways. High growth
    increases tax revenue tremendously. It reduces some kinds of
    transfer payments. So total spending goes down. And second--so
    the debt is smaller. And second, we are increasing the
    denominator. GDP is higher. And that is the best way to reduce
    the debt ratio.
        And that is typically what has happened in the past. Our
    debt ratio was 100 percent in World War II. And then it
    declined over the whole post-war period until relatively
    recently, when it started going back up again to 80 percent.
        Mr. Woodall. I was looking through each of your written
    testimonies, looking for that dramatic change in productivity,
    women entering the workforce, all of those dramatic factors
    that led to economic growth over the past 50 years. I didn't
    see any of those transformative things, which had me worried
    about repeating that.
        Even at these high consumption--our debt is not fueling the
    investment we have talked about. It is fueling consumption. It
    is fueling transfer payments. Even at these levels that--you
    believe that we can only deal with one side of the equation,
    which is growing GDP? I love to grow GDP; I just don't think it
    is--I don't think--I am a growth guy. I can't do it by growth
    alone, I have got to have revenue, I have got to have
    reductions in spending.
        Do you disagree with that, fundamentally?
        Dr. Wray. I don't think we need reductions of spending, no.
        Mr. Woodall. Thank you, Mr. Chairman.
        Chairman Yarmuth. The gentleman's time has expired. I now
    recognize the gentleman from Virginia, Mr. Scott, for five
    minutes.
        Mr. Scott. Thank you, Mr. Chairman.
        Dr. Bernstein, you mentioned the offsetting costs of
    climate change. What did you mean by that?
        Dr. Bernstein. I could cite various studies that project
    the costs of climate change, in terms of destruction of
    property, destruction of businesses, destruction of homes. But
    I don't have to cite studies. You can just open the newspaper.
    We see much more volatile weather that scientists tell you is
    related to climate change; droughts; fires. That is what I was
    referring to.
        If we are going to contemplate the cost of doing something
    about that on the budget side, we must net out the cost of not
    doing something about it, which are in the hundreds of
    billions, according to estimates I have seen.
        Mr. Scott. Thank you. In terms of fiscal responsibility,
    they say we should run the budget--run the federal budget like
    families run their budgets. Isn't it true that a fiscally
    responsible family will routinely go into debt buying a house,
    buying a car, and sending children to college? What are
    comparable good debt on the government's behalf?
        Dr. Bernstein. I think the analogy that the government is
    like a family is extremely misguided in this regard. In fact,
    it goes the other way. When families are tightening their
    belts, say in a downturn, the federal government, which has the
    ability to borrow--and, again, at particularly low rates--
    should be loosening their belts.
        So the idea that the federal government would contract when
    the private sector is contracting is a recipe for austerity,
    more specifically, for--more pain for the people least
    insulated from the pain, the most economically vulnerable
    families.
        Mr. Scott. But families do go into debt for houses. That is
    not considered fiscally irresponsible.
        Dr. Bernstein. No. I mean I think that is a good example of
    the kinds of debt distinctions that I am making.
        I mean people will go into debt for a college education,
    for a housing--it--you know, it really gets back to this idea
    that growth rate versus the interest rate--and that applies to
    families, too.
        Why does a college education often make sense to people?
    Because--a college loan often make sense to people? Because you
    are becoming indebted in the interest of improving your earning
    power. And so that is the kind of calculation that I think
    families make, and governments ought to, as well.
        Mr. Scott. Now, it has been pointed out that there is no
    noticeable difference in trajectory in unemployment rate and
    jobs created after the $1.5 trillion tax cut, an economic plan
    about twice as expensive as the Obama stimulus package, which
    had a profound change in trajectory in terms of jobs and
    unemployment rate.
        Why did the Trump--why was the Trump initiative so
    ineffective?
        Dr. Bernstein. Well, first of all, I have noticed many
    Members citing $1.5 trillion cost of the--the CBO says $1.9,
    and that, I think, is more accurate.
        Mr. Scott. I think it is a question of whether you add the
    interest in, I think, is the question.
        Dr. Bernstein. The answer--my answer to your question
    actually comes to predictions that not just myself, but were
    widely made before the Trump tax cuts, that it would not have
    anything like the investment effects that were projected. And
    the reason why many of us thought that was because the cost of
    capital was already so low, and that firms were sitting on
    large piles of retained earnings.
        So there was no reason to think that, as an economist would
    say, there was a large elasticity to tap there. That is, firms
    had access to all the investment capital they needed, we made
    it a bunch cheaper by cutting taxes, and, guess what, they
    didn't respond on the investment side. Once again, supply side,
    trickle-down fairy dust didn't work.
        Mr. Scott. You mentioned debt held--foreign-held debt went
    from 2 percent to 30 percent of GDP. What is the problem with
    that?
        Dr. Bernstein. Well, the problem with that is that more of
    our national income leaks out to lenders from abroad. So if you
    are concerned about one of the costs of increasing debt,
    meaning that income that we produce in this country ends up in
    the pockets of lenders from other countries, you know, that is
    a germane concern at 30 percent, not so much at 2 percent.
        Mr. Scott. And interest rates are set on--we talk about
    crowd-out, and we used to be concerned about the federal
    deficit. Is our interest rate set on a domestic basis or an
    international basis?
        Dr. Bernstein. I would say very much on an international
    basis. But I would also stress that the Federal Reserve, or the
    central bank--and not just our Central Bank--are very much in
    the mix. And, as I point out in my testimony, if you average
    out over the last decade, the central bank's interest rate has
    been .6 percent, on average. So they are in the mix, as well.
        Mr. Scott. And if the international rate went up, an
    international rate over which we have very little control, what
    would happen?
        Dr. Bernstein. Well, that is one of the reasons why I argue
    deficits matter, because we are exposed with a larger stock of
    debt to that kind of problem.
        Chairman Yarmuth. The gentleman's time has expired. I now
    recognize the gentleman from Oklahoma, Mr. Hern, for five
    minutes.
        Mr. Hern. Thank you, Mr. Chairman. I am thankful today in
    the House Budget Committee that we are actually talking about
    taxpayer debt for the first time. I have been here a little--
    one year, and it is the first time we have talked about it. It
    is encouraging.
        But I am also discouraged to hear that, you know, that we
    don't think deficits and debts matter when we talk about the
    monetary theory, and that countries that can print their own
    money can just take care of their issues, and we don't really
    have a responsibility.
        Last week we had the opportunity to talk to the Fed
    Chairman, Jerome Powell, sitting in your seat. And I asked him
    specifically about the modern monetary theory. And his--he
    stated, ``The idea that countries that borrow in their own
    currency can't get into trouble is just wrong. And the idea
    that debt does not matter is also wrong.''
        Additionally, we have--more than 40 leading economists were
    asked whether they agree with the underlying tenets of modern
    monetary theory by the University of Chicago's Booth School of
    Business. One hundred percent of the respondents disagreed or
    strongly disagreed with the economic principle.
        I don't believe that Members of Congress are naive enough
    to believe in MMT as a way of servicing our debt. I believe
    that this is just a way to justify their multi-trillion-dollar
    wish list. They simply cannot face up to the reality that their
    free proposals like the Green New Deal, Medicare for All, the
    Green Housing Deal are not at all free.
        When asked about how to pay for these programs, they can't
    get a straight answer. Some just argue that ``We will.'' Some
    settle on the convenient MMT. This is not realistic. The Green
    New Deal, Medicare for All, and the Green Housing Deal are not
    realistic, and our kids and grandkids will pay the price tag.
    By pretending that we can afford these outrageous proposals, we
    are indebting our future generations to pay for them all.
        We have all talked about the 2017 Tax Cut and Jobs Act of
    being just so destroying of our economy. Would you all agree
    that we are--this year we will have the highest revenues in the
    history of this country?
        Dr. Bernstein. Not nearly as a share of GDP, which, in my
    view, is the right way to----
        Mr. Hern. But we will--from a pure dollar standpoint, we
    will have the highest revenues ever in the history of this
    country. Is that correct?
        It is yes or no. I mean it is not hard. You guys are
    economists, all doctorates, the last time I checked.
        Dr. Bernstein. That statement is probably true every
    quarter in our history, except when we are in recession.
        The relevant measure is as a share of GDP. I mean this is
    a--this is not a partisan statement. This is a CBO view. And as
    a share of GDP, we are collecting 16.3 percent of revenues in
    fiscal year 2019. That is a historical low point.
        Mr. Hern. So, you know what? I have been here one year. I
    will tell you that, no matter what the revenue is, that we will
    figure out how to spend it. I mean would you agree with that,
    as well?
        Dr. Bernstein. Yes.
        Mr. Hern. Okay, good. We got a yes-or-no on that one, for
    sure. Yes, we will figure out how to spend it. There is no
    sense of fiscal accountability in this House.
        And so, to say that it is wrong to put a little bit of
    money back in the people's pocket--because I will tell you,
    back in the hinterland, when you get out of the beltway, they
    don't believe we can control any kind of spending. And to put
    money back in their pocket is not wrong, because they don't
    just go bury it in their backyard, contrary to what you would
    like to make everybody believe. They go spend it in their
    economies, their local economies, which pay taxes to fund their
    schools, to fund their roads, to fund everything else in their
    area not dependent upon the federal government.
        Those are just facts. You can agree or disagree, but those
    are facts.
        You know, as we go forward here, I like what you said, Mr.
    Bernstein, about we have good debt and bad debt. In fact, I
    introduced a pro-growth budgeting act two weeks ago. It will
    never see the light of day, because, contrary to popular
    belief, most people here don't believe that you actually invest
    using debt.
        And when we talk to the ordinary people in the world, the
    people that are not in this room--except for our guests, I
    appreciate our guests being here--but those of us that are here
    talking at each other, when you talk about debt you have some
    reasonable expectation of paying it back. That does not occur
    in Congress. You borrow money and you never pay it back. It has
    only been paid back four times in--four years in a row, 1997,
    1998, 1999, and 2000--and 2001, a little bit. But since then we
    have been running deficits every year, which means we are not
    paying down any debt.
        So we have a different definition of debt in this world up
    here. So I would encourage you to look at that and give me your
    thoughts because it says if we spend $1 or borrow $1, it is
    being borrowed and spent to actually grow the economy. I would
    encourage you to look at it. It has got a lot of reviews, a lot
    of people signed onto it. Not Members of Congress, but a lot of
    people signed onto it. So, anyway, I would like you to take a
    look at that.
        You know, as we go forward here, I would like to talk about
    the Green New Deal, Mr. Wray. If it is not $93 trillion or $83
    trillion, what is the number that we are talking about? Because
    it is getting used a lot around here. I know you guys, you see
    this, and you hear about it, and it is in the press. But in our
    hearings, every hearing, every committee, 22 committees, has
    some component of a conversation of Green New Deal. Can you
    give me just your best guesstimate of what that is going to
    cost?
        Net, net. I get it, you know, you are going to save money
    and all that stuff, Mr. Taylor and others. But what is that
    number?
        Dr. Wray. As I said, it depends on what you include in the
    Green New Deal, and it could be about 5 percent of GDP.
        Mr. Hern. So only $100 billion a year? Is that what you are
    saying? Is that roughly--wow. Trillion? Trillion dollars a
    year. So a trillion versus $9 trillion?
        Dr. Wray. Yes.
        Mr. Hern. That is a big difference, I mean----
        Dr. Wray. Sure.
        Mr. Hern.--because up until now I have not really heard
    many people argue the $9.3 trillion a year number that----
        Dr. Wray. Yes.
        Mr. Hern. So----
        Dr. Wray. I have looked at the $93 trillion number, which
    is an outlier. And they don't count reduction of spending on,
    say, the destructive activities.
        Mr. Hern. So you are saying the $8.3 trillion is what we
    would save, versus spending on net trillion. That is--man, I
    don't know. That is a pretty good return.
        Dr. Wray. Well, as I said, that was an outlier.
        Mr. Hern. Yes.
        Dr. Wray. Other estimates are nowhere near that number.
        Mr. Hern. Obviously, we don't have 20 minutes to ask
    questions. But Chairman, I thank you for your indulgence.
        Chairman Yarmuth. I always enjoy giving you more time.
        Mr. Hern. No, thank you, Mr. Chairman. I really appreciate
    it. I thank the witnesses for being here.
        Chairman Yarmuth. The gentleman's time has expired. I now
    recognize the gentleman from California, Mr. Khanna, for five
    minutes.
        Mr. Khanna. Thank you, Mr. Chairman. Thank you to the
    distinguished panel. I want to welcome Professor Taylor, who is
    from the Bay Area. I taught as a lecturer in economics at
    Stanford for four years. And while I am more with Professor
    Krugman than I am with you, Professor Taylor, I will say that I
    had students in my class who wore a tee shirt with your face on
    it, and the Taylor Rule. So you certainly were a popular
    professor.
        I want to ask the panel about our strategy that allowed us
    to win the Cold War. I think we forget that, post-Sputnik, our
    government did great things. We created satellites. We remain
    the only country that has ever sent someone to the moon. We
    invented the Internet. We invented navigation systems.
        And I would argue that there were two comparative
    advantages to American policy: one, we had a policy of talent
    acquisition from around the world. If you were creative, smart,
    entrepreneurial, we wanted you here; and two, we had almost 3
    percent of our GDP in fundamental science and technology
    investment.
        And so I would like to ask the panel, putting aside
    partisanship, if we want to lead the 21st century against
    China, would you recommend, as a growth strategy, that we
    invest in smart infrastructure, smart broadband, smart new
    technologies, quantum computing, artificial intelligence, new
    fields of biology? And would you recommend that we have a
    policy of talent acquisition? Dr. Bernstein or Dr. Taylor,
    either.
        Dr. Taylor. So, thank you, fellow professor.
        Mr. Khanna. Lecturer. I never would be tenured at Stanford.
        Dr. Taylor. So I think you are correct, that what we did
    is--in technology is amazing. The Apollo 11 movie, it is a
    fantastic thing to watch. I encourage everybody to do that. It
    is the private-sector, public sector working together, and I
    think that is admirable.
        I think we need to find out more ways to do that. I think
    it is partly working with the private sector. It has encouraged
    them. You know the private sector very well, and it is not
    bashing them, it is encouraging them, because it is very much
    part of our society and why we are successful.
        I do think the question of crowding out of discretionary
    spending, what you are talking about, is other kinds of
    spending. I could see these projections of spending as a shared
    GDP, they are just going through the roof. And that means that
    other things, which haven't even come up yet in this hearing,
    are growing very rapidly, because we know that funding for the
    things you are talking about are not going.
        So I think the focus should be what are you going to do to
    control the growth of those items, because they are crowding
    out the things that you want and we want. That is what is
    happening. And it is not really benefitting people very much.
        So that is where I would look. What is--why is that
    spending path exploding? It is exploding. What can you do about
    that, and what can this Budget Committee do about it?
        It is probably the targets that Mr. Woodall suggested. What
    should the--maybe 42 percent of GDP, like we had averaged over
    50 years is okay. What is wrong with that? And have a
    deliberative process of how do you get to that.
        So I would suggest having an overall view would be very
    important.
        Mr. Khanna. Dr. Bernstein, do you want to----
        Dr. Bernstein. Very quickly, I would say that I wouldn't
    characterize our spending in the areas that John did as
    exploding. I would characterize them as completely predictable,
    given pressures from demographics and health care costs. And I
    do think there are savings to be had there in health care
    reform.
        To answer your--let me just give you one granular answer to
    your question. And I know, Congressman, this is--I think this
    will appeal to you, because I know that you think about this in
    a granular way.
        So green technology wasn't on your list, but I am sure it
    was implicit. And think about battery storage. Now, I happen to
    know that--I pay attention to this--countries are now trying to
    figure out--kind of competing, fighting for who is going to
    dominate the global market when it comes to storing energy in
    battery technology. And that is a fight that we are not even
    in, and I think it is extremely consistent with your view.
        Mr. Khanna. If I could ask one more quick question to the
    panel, putting aside your view on the wealth tax, I ran
    around--across a statistic that 87 percent of American wealth
    is in the United States, 87 percent. Only 2 percent is in the
    Cayman Islands, 1.5 percent in Britain, 13 percent overseas.
        And so people who say, okay, if you have a tax on wealth
    people are going to leave, remind me of my friends who said if
    Donald Trump was going to win the presidency, they would leave
    America. They didn't, because this is the best place to live in
    the world. And don't you think this is the best place, still,
    to invest in the world?
        Dr. Bernstein. That is a rhetorical question. Yes.
        [Laughter.]
        Yes, I do, and I think you make an interesting point that
    hasn't really been brought to bear on the wealth--I mean I
    think it is true that, given the mobility of wealth, and
    proclivities for avoidance and evasion, we do need a structure
    that holds hands with other countries to monitor that. But your
    point is well taken.
        Chairman Yarmuth. The gentleman yields back. I now
    recognize the gentleman from Pennsylvania, Mr. Meuser, for five
    minutes.
        Mr. Meuser. Thank you, Mr. Chairman. Thank you all for
    being here with us.
        So the federal government does have a serious spending
    problem, as do state governments, truly trying to be all things
    to all people. Even just hearing today, it sounds like he wants
    the government to get into the battery business.
        We don't so much have a revenue problem. According to CBO
    projections, the federal government's revenue will total $46
    trillion over the next 10 years. Revenues will grow by 63
    percent, about a 6 percent range. Very healthy. That is--and
    last year our revenues grew about 7 percent, and that is after
    the Tax Act, which had extraordinary results.
        So--but, however, mandatory spending over the next 10 years
    is projected to increase by $3.1 trillion to $5.3 trillion, a
    total of $36.5 trillion over a 10-year period, almost as much
    as it will be--total as much as revenues. So without even
    discretionary, which will grow by $14 trillion, we have already
    used up, just in mandatory spending, all the revenue growth.
        So clearly, we have a spending problem. And that would put
    us in the neighborhood of a $10 trillion--you know, 36 plus
    14--deficit, or debt, in addition to where we currently are.
    So--and this would lead to 79 percent of GDP today to 144
    percent in--within a 10-year period.
        So the way I look at it is we have two budgets, we have
    discretionary and we have mandatory budgets. Discretionary
    spending is up $70 billion in 2018. Revenues, however, are also
    up $70 billion. So just looking at that one budget, we have a
    balanced budget. Our problem is, as stated, with mandatory
    spending.
        So what we have, though, is many proposals to add to our
    mandatory spending, such as Medicare for All, which has a $32
    trillion estimate cost over the next 10 years.
        So, Dr. Taylor, I will ask you, I will start with you. In
    your opinion, how do you think the government would have to
    finance this program? And how high would taxes have to be
    raised to meet such a large level of additional mandatory
    spending?
        Dr. Taylor. I think, if it is just in addition, it is not
    going to work. You have to go the other direction.
        The simulations, the calculations, as you say, there is--
    mandatory spending is going very rapidly. It has got to be
    controlled. You don't have to reduce it, you have to slow the
    growth, compared to growth of GDP. There is proposals out to do
    that.
        I think there would be--more discussion of those proposals
    would be very worthwhile. Much of the discussion is going to
    the opposite direction, the Green New Deal, et cetera, Medicare
    for All. I haven't seen those where they are really saving
    money. I know there are some people that argue that it would
    be.
        But there really has to be some attention given to this--I
    would--because the projections, at least, are explosions of
    spending, and it is largely because of the so-called
    entitlement problem.
        Mr. Meuser. All right. Has there ever been a country that
    you can think of in history that has spent its way into
    prosperity, and increased taxes in order to pay for more
    government-run programs?
        Dr. Taylor. I think the history is quite clear, that a
    solid fiscal policy, where you are balancing the budget as
    close as possible over the cycle, you have deficits and
    recessions and slumps, you have even surpluses sometimes and
    sometimes it works pretty well. It has worked well for the
    United States. When we got off of that, it has not worked very
    well.
        So that should be the goal. We are a long way from that
    now. But some of the reforms that would go in that direction--I
    would actually encourage you to use CBO. Why doesn't CBO have a
    model that answers the questions about the short run and the
    long run?
        Much of the debates and the focus is, oh, you can't even
    reduce the growth of spending, because it is going to be a hit
    to the economy. I don't believe that is the case. I think you
    can. And reasonable calculations, the models show that it is a
    benefit.
        So I would encourage that part. Maybe it deals with some of
    the partisanship that we are seeing already.
        Mr. Meuser. Yes, agreed. I want to ask you this, then. The
    tax cuts that took place, they are being debated, they are
    saying they were not helpful. And clearly, we have an
    unbelievably booming economy. And they are being compared to
    the shovel-ready stimulus program from 10 years ago, which
    was--the data shows was relatively useless, and waste.
        Can you just comment on the historical results that come
    from tax cuts, putting money in people's pockets, and gaining
    the multiplier effect, versus the federal government thinks it
    knows best what people's money--and on projects that are so-
    called shovel-ready and are presented based upon, very often,
    who knows who, and--which is also a symptom of a Socialist
    government?
        Dr. Taylor. Thank you very much. I have written a lot on
    the stimulus packages, both in 2008 and later, the stimulus
    packages of President Obama. I don't think they had the impact
    that some people do. I think it actually was negative, in many
    respects. The states didn't spend the money as they thought
    they would, they pocketed the money. A lot of it was transfers.
    It really didn't work very well, and I have lots of studies
    that show that is the case.
        I also am on the record for showing and arguing that the
    2017 tax reduction reform was beneficial, and is not just the
    35 to 21 percent, it is a lower rate on small businesses, it is
    expensing of investment. It is the kind of things that we know,
    at least in our theories--and I think it is true in reality--
    that more investment, more tools, better tools, better things
    that workers have to work with, they are going to be more
    productive, and their wages will go--that is the idea, and that
    is what is built into the CBO long-term calculations that I
    referred to before.
        So I don't think economics has changed. I think it is
    basically working quite well. We can see anomalies, like the
    low interest rates that we have seen. But--negative interest
    rates around the world. But basic economic forces are still
    working very well, and I think we need to emphasize those more.
        Mr. Meuser. I apologize for going over my time, Mr.
    Chairman. I yield.
        Chairman Yarmuth. The gentleman's time has expired. I now
    recognize the gentleman from California, Mr. Peters, for five
    minutes.
        Mr. Peters. Thank you very much, Mr. Chairman, and thank
    you to the witnesses for being here.
        I want to--I keep hearing about the Green New Deal. It is a
    straw man. Fewer than half the Democrats have sponsored it. It
    has already been killed in the Senate. So I don't think we
    should spend a lot of time talking about it. I mean there are
    component parts of it that have to deal with climate that I
    certainly think would be worth talking about, but it has become
    just this straw man, and it seems to end the discussion and not
    lead to much nuance.
        The--with respect to nuance, I get the sense that there is
    kind of a consensus that it might be appropriate to debt-
    finance the kinds of things that would generate a return. So
    that might be infrastructure, a training investment in
    education for people who could add to their earning potential,
    basic research.
        Of course, we did not develop GPS through the government,
    we did not develop the Internet, but we led the research that
    allowed the private sector to invest in those things, and I
    think, you know, it certainly was good for the country and good
    for the United States to be the locus of that, I think, as
    well, as I think your other statement implied.
        But I do want to talk a little bit about bad debt. And I
    suspect that bad debt--and maybe, Mr. Bernstein, you could
    answer this--might be financing or borrowing money to pay your
    ongoing expenses, whether it is--particularly the ones that are
    non-cyclical.
        So, if you think about the social benefit programs, I mean,
    is this something that we should be concerned about? Is it
    appropriate? Is that what you mean by bad debt?
        Dr. Bernstein. You know, it isn't. And the reason----
        Mr. Peters. What is an example of bad debt, then?
        Dr. Bernstein. Well, I think that--so I keep raising the
    tax cuts from my perspective. We don't have to rehearse that.
        There is another one, though, that I haven't had a chance
    to talk about, and it gets to something you were just raising,
    which is, you know, the fact that other countries ensure their
    full populations for about 10 or 12 percent of their GDP, and
    we do so for 18 percent of our GDP. So call that 6 to 8 percent
    of GDP that is, you know, basically waste in the delivery
    system of the way we provide health care. So I think we could
    slow the cost of health care growth.
        Getting back to your first question, though, I would want
    to do so in a way that protects vulnerable people.
        Mr. Peters. Okay, but--so you really--so would you think it
    is appropriate for us to debt-finance the cost of health care?
        Dr. Bernstein. Oh, well, we very much do so, of course, and
    yes, I think these are--I mean, whether it is health care or
    retirement security through Social Security, I mean, these are
    clearly essential public goods. And we are not raising enough
    revenue to pay for them. So yes, I consider that to be
    reasonable debt in this climate.
        Mr. Peters. Okay. I haven't found an answer yet, I don't
    think, but I will ask Mr. Taylor.
        You advocate for the 2017 tax cut. Should we be cutting
    taxes more?
        Dr. Taylor. I think we should be looking for tax reform
    that promotes more economic growth.
        Mr. Peters. So the----
        Dr. Taylor. It also deals with other problems, but I think
    it is still an important issue for the United States.
        Mr. Peters. The knock on that bill was that--not that it
    didn't help some people, but that it helped a lot of people who
    didn't need help, and that by--if you give money back to people
    who already have swollen bank accounts and have a lot of
    savings, that is not going to generate the kind of economic
    activity.
        And, in fact, all the economists surveyed by the University
    of Chicago--I think 38 of them--agreed that it wouldn't pay for
    itself. And I think even Mr. McConnell said--admitted we had to
    generate 4 percent growth in the economy to pay for those tax
    cuts.
        So my question--and I guess it is rhetorical--is where does
    this end? And if our revenues are at a low point compared to
    GDP, isn't it really time to think about how to get more
    revenue in? And maybe should wealthy people pay more, the ones
    who have plenty of earnings to part with?
        Dr. Taylor. I think it is time to--if there is something--
    --
        Mr. Peters. More directly, what would you do, as--for
    American tax policy? What would be your next step to make
    sure----
        Dr. Taylor. I would consider more ways to reform. There was
    very little done on the personal side. There could be done more
    on that [sic]. There is--the tax cuts are not permanent,
    anyway. They are going to disappear.
        They--again, based on the basic economic theory, you want
    to have more encouragement of investment, because that is where
    more productivity comes from.
        Mr. Peters. Right.
        Dr. Taylor. More productivity leads to higher wages and
    higher incomes. It is just sort of the most basic thing in
    economics. You don't want to discourage businesses from
    investing. You don't--you want to encourage them, because that
    will make their workers more productive in the system, as it
    has for many, many years. Another----
        Mr. Peters. We should tax people at some level. How would
    I----
        Dr. Taylor. Yes, of course.
        Mr. Peters.----as a policymaker, determine what that level
    should be?
        Dr. Taylor. I think the first thing is what do you want
    your spending level to be. And there is not a discussion about
    that. And then you have a way to finance that. I think there is
    reasons that sometimes you have a deficit----
        Mr. Peters. Assume I wanted my spending level to be what it
    is today, which is $1 trillion more than we are taking in. What
    would I do to raise that----
        Dr. Taylor. I think the projections of spending are that it
    is--I don't know, 28 percent of GDP is the projections.
        Mr. Peters. Well, I----
        Dr. Taylor. So that is not going to work. So you have to--
    --
        Mr. Peters. Assume it is 20 percent, and right now I am
    taking in 16 percent. What should I do to tax policy to raise
    that money?
        Dr. Taylor. I think the tax cut that is in place will raise
    more. This notion that it is not paying for itself is not
    really true, if you look over the long term. It is true over
    maybe a couple years, or three years, but it is not true over
    the longer term. Growth increases. You don't have to be----
        Mr. Peters. I am out of time. But maybe I would ask you in
    writing.
        Like, if I say 20 percent is a historical level at which we
    spend, invest, and we are taxing at 16 percent----
        Dr. Taylor. Well, you--I think the Budget Committee of the
    Congress has to decide what is the right level. There is----
        Mr. Peters. I am not a professor at Stanford. That is why I
    ask you a question about how I would answer that question.
        I mean we all would--we are all people of good faith who
    want to figure out what the right answer is. But, you know,
    all--I never hear from people, you know, what the appropriate
    way to set that number is. And it strikes me that some people
    are being under-taxed, and they are not the people who are
    paying payroll taxes.
        So I guess we will have to continue this discussion later.
    But I would really like to know the answer to that question.
        Dr. Bernstein. Can I submit a memo on that to you?
        Chairman Yarmuth. Absolutely, you may.
        The gentleman's time has expired. I now recognize the
    gentleman from Texas, Mr. Crenshaw, for five minutes. Oh,
    sorry, no, the gentleman from Ohio, Mr. Johnson, for five
    minutes.
        Mr. Johnson. Thank you, Mr. Chairman. And I am really
    enjoying these--thanks to the witnesses, by the way, for being
    here. I am enjoying these conversations today. You know, we are
    talking about the un-sustainability of the federal debt. And
    yet this Committee, that is responsible for producing a budget
    to address our spending, has not done one.
        So, Mr. Chairman, I am going to submit to you that we got
    to get back on track on this Committee and produce a budget.
    That is our primary responsibility.
        You know, the federal debt is an unsustainable trajectory.
    We all know that. The current debt burden on every American is
    $70,000. Within three decades CBO says that it is going to be
    around $248,000 per American, or almost $1 million for a family
    of four.
        So mandatory spending, including interest payments on the
    debt, is projected to increase from $3.1 trillion in fiscal
    year 2019, to $5.3 trillion in fiscal year 2029. This is a $2.2
    trillion--or 71 percent--increase.
        So, Mr. Taylor, do you believe we should be focused on
    stabilizing current important programs, such as Social Security
    and Medicare, which--we know those are part of the mandatory
    spending that is driving the debt, right--so that we can make
    sure that they are preserved and strengthened? Or should we
    focus on expanding these programs and creating a bunch of new
    programs on top of them?
        Dr. Taylor. I think the most important thing is to
    stabilize, in the sense of have them not growing faster than
    GDP. And that requires reform. And that requires projections.
    And I think they will work better in that case.
        I think there could be more focus on this Committee, the
    other Committees of Congress, on finding ways to reform those
    programs. That is what I would focus on. They are crowding out
    other things that have been mentioned already in this room.
        And then, once that is determined--that is the job of our
    society, our democracy, to determine that--then figure out
    about the financing.
        And there are reasons why sometimes you have deficits and
    sometimes you have surpluses. Economists wrote about that all
    the time.
        But I think the main thing is what should be the spending
    priorities, and I believe, now that it is--the so-called
    entitlements are growing too rapidly, many people have thought
    that--the same, so figure out a way to reform that. There are
    proposals out there. And that is the way I would go about it.
        Mr. Johnson. Yes, and you used that ugly word,
    ``entitlements,'' because I can tell you the people where I
    live, where I represent, my 80-something-year-old mother,
    before she passed away, they hate that word, ``entitlements,''
    because they invested in those programs. They view those
    programs as responsibilities of the federal government.
        Dr. Taylor. Absolutely.
        Mr. Johnson. And we have let them down by not doing
    budgets, by not managing the spending so that we protect those
    programs.
        You know, interest payments on the debt are already high,
    and are projected to grow. This year interest on the debt is
    projected to be $390 billion. By 2029 it will more than double
    to $807 billion. Under CBO's longer-range forecast, interest on
    the debt will rise to 29 percent of federal revenue by 2049.
        So, again, Mr. Taylor, are you concerned that an ever-
    rising federal debt and its associated interest payments will
    crowd out other important federal spending priorities such as
    defense, research, health care, and meeting our obligations
    that American people have paid into?
        Dr. Taylor. Absolutely. I am concerned. That is why I
    focused in my testimony on the cost of doing that. I think it
    is the cost of the economy. It is--CBO agrees it is a long-term
    cost. I think it is also a short-term cost and would encourage
    CBO to adjust their analysis to capture that, as well.
        But it is fundamental. It is really the most important
    thing that--I look at the budget. I don't know why it is going
    in the direction it is going. We need to change it, need to
    make it more--more sense, from an economic perspective.
        Mr. Johnson. Okay. In my last 30 seconds, you know, some
    would say that modern monetary theory simply says that
    Americans shouldn't worry about how much we spend, because the
    dollar is the currency of the world, and because America owns
    the dollar, we just print it when we want it.
        So my question to you is do you worry that implementing
    this kind of philosophy, the MMT, could cause a loss of
    confidence in U.S. financial markets?
        Dr. Taylor. Yes, I have have worried about it for a number
    of reasons. It is really going back to policies that we know
    hasn't--haven't worked in the U.S. I gave my example of the
    1970s, but it is going back to countries which have not been
    successful. It is high inflation.
        I would like to see, at least, somebody run through
    particular proposals that are along these lines with some
    models, with the CBO model, so there can be some, at least,
    discussion about it. But right now it seems to me it is going
    back to policies which we know in history have not worked.
        Mr. Johnson. Okay. Thank you, Mr. Chairman. I yield back.
        Chairman Yarmuth. The gentleman's time has expired. I now
    recognize the gentlewoman from Illinois, Ms. Schakowsky, for
    five minutes.
        Ms. Schakowsky. Thank you so much. I wanted to go back to
    climate for a minute. I think it is, perhaps, the greatest
    challenge facing the 21st century.
        We have just estimated 11 years to cut emissions by 45
    percent. We have to achieve carbon neutrality by 2050 to stop
    temperatures from rising above 1.5 degrees centigrade. But
    creating a clean--but I see--but creating a clean economy will
    require sustained government investment. We have heard you talk
    about that.
        In a Roosevelt Institute report economists Jay W. Mason and
    Mark Parke argue that the government can afford to finance de-
    carbonization plans of at least 5 percent of GDP, as you
    mentioned, Dr. Wray, without causing substantial economic
    disruption.
        So Mr. Bernstein and whoever else wants to comment on this,
    given our current economic conditions of persistently low
    interest rates, as you had mentioned before, and low inflation
    rates, would you agree that it is sound fiscal policy for the
    government to invest in a clean economy?
        And let me also ask would you also agree that the economic
    and social cost of not addressing climate change is--climate
    change are far greater than any risk to incurring additional
    debt?
        Dr. Bernstein. I will be brief. I would like to hear my
    other panelists comment on this.
        Ms. Schakowsky. Sure, thank you.
        Dr. Bernstein. Yes. As I have stated throughout the hearing
    today, we can't make this a one-sided equation. As you
    correctly pointed out, Congresswoman, we have to factor in the
    cost of the environmental damage from doing nothing. And if you
    simply look at your front page, those costs seem to be growing
    by the month.
        And I guess my argument would be we can't afford not to do
    this. And to talk about this purely as an expense on businesses
    or something like that is to miss both the opportunity for
    game-changing investments, where, I believe, our country should
    play a role, and again, the costs of not doing enough.
        Ms. Schakowsky. Yes, Dr. Blanchard?
        Dr. Blanchard. There is a marvelous cartoon. It takes place
    in 2050. The world has become uninhabitable. But there is an
    old man who talks to a young man and he says, ``Yes, it is
    uninhabitable, but look, we have reduced the debt.''
        I think that is a very deep cartoon. It is clear that we
    need to do something about global warming, that the cost will
    be high. The question, I think, is not whether it should be
    done. It should be done. The question is how much should be
    financed with taxation, additional taxation, and how much
    should be financed by debt.
        I don't think there is a simple answer to that. Some of it
    can be financed by debt, but to a large extent what we do to
    fight global warming has very large social returns and very low
    financial returns to a state. And, therefore, if it is all
    financed by debt, it will complicate life later. So I think it
    is a mix.
        There is no question that we should be doing it, and partly
    finance it by tax and partly financing by debt. The part which
    would be financed by debt would be called, I think by Jared,
    good debt. This is debt to improve the future.
        Ms. Schakowsky. Dr. Wray?
        Dr. Wray. Yes. Can I add? Look, according to the
    scientists--and I am not one of those--we have the technical
    know-how, okay?
        So the question is can we release the resources from
    current uses, plus put unemployed resources to work to tackle
    climate change? And I think the answer is, clearly, yes.
        If it is 5 percent of GDP and use that as a measure of the
    resources we need, this is absolutely doable. Think about what
    we did in World War II. We had to move 50 percent of the
    nation's production to fight the war. We did it. The debt ratio
    went to 100 percent. The deficit reached as high as 25 percent.
    We managed to keep inflation below 10 percent at the peak. And
    most of the years much below that.
        We can, if necessary--I completely agree with Professor
    Blanchard--we may find we are going to need a tax increase. Or
    we may find that we need to postpone some consumption, to ask
    the workers to make a sacrifice for 10 years in order to enact
    what we need to do to turn around this trajectory of
    annihilation. And we will reward you later.
        That is what we did in World War II. We gave benefits,
    Social Security, retirement, health care. All those things were
    promised at the end of the war. Workers got them. How did we
    come out of that experience with 100 debt ratio? The golden age
    of U.S. capitalism. That is what we got from that.
        Ms. Schakowsky. Thank you. I yield back.
        Chairman Yarmuth. The gentlewoman's time is expired. I now
    recognize the gentleman from Texas, Mr. Crenshaw, for five
    minutes.
        Mr. Crenshaw. Thank you, Mr. Chairman. Thank you, everyone,
    for being here. I want to clarify some things, because there
    has been some creative use of semantics about the debt.
        So, over and over again we hear that we aren't taking
    enough money from the American people, and the businesses that
    they create. If we let them keep their money, it is apparently
    classified as bad debt for the government, which is quite the
    take.
        Dr. Bernstein, as you stated, apparently Americans spending
    more of their money because of the tax cuts is not useful
    investment, never mind that GDP growth rates have increased
    since the tax cuts and, according to the Fed and CBO, it has
    been largely due to consumer spending and some business
    investment. But I guess that isn't useful, because there is
    this belief--and it is a belief--that only the government can
    possibly make smart investments.
        This is an odd thought, this notion that our debt is a
    result of not taking enough of our constituents' money, as
    opposed to us spending it on unsustainable entitlement
    programs, which, by the way, as a share of GDP, is the only
    category that is changing radically.
        So federal revenue, in absolute terms, has continued to
    increase, increase by 4 percent last year. And as a share of
    GDP, it dropped, as Dr. Bernstein has noted, only slightly
    recently. But it is on track, as this graph notes.
        [Graph].
        [GRAPHIC] [TIFF OMITTED] T0261.063

        Mr. Crenshaw. It is on track to be back at historical
    levels within just a couple of years.
        So if we don't cherry-pick the data, we see that we aren't
    that far from average federal revenue.
        What has happened in the last couple of years? The fastest-
    growing wages have been in the bottom quintile of earners. And
    it is not even close--child tax credits have doubled, which
    matters to low-income earners. Businesses are hiring, which
    matters to all people, not just the 1 percent. Eighty percent
    of taxpayers are paying less this year, and we all know that it
    is the wealthy earners in high-tax states who ended up paying
    more. Let's stop pretending otherwise.
        And this notion that we are regressive is interesting.
        Dr. Bernstein, how does our country compare to others as it
    pertains--others in the OECD--as it pertains to progressivity
    of the tax code? Where does America stand?
        Dr. Bernstein. Pretty low, not only in terms of
    progressivity, but also in terms of the amount of tax
    collection of the federal government.
        Mr. Crenshaw. Yes, well, the OECD data completely
    disagrees. In fact, they have us at number one.
        Dr. Bernstein. Okay. So that is including state and local.
    You can't do anything about----
        Mr. Crenshaw. It includes all taxes?
        Dr. Bernstein. Yes. You can't do anything about state and
    local----
        Mr. Crenshaw. So number one. I mean----
        Dr. Bernstein. Federal taxes were made far more regressive
    by the tax cut. I mean that is not a debatable----
        Mr. Crenshaw. But, as a country, we are number one. And it
    is not even close. Ireland is second, and it is not even
    close----
        Dr. Bernstein. Number one in what?
        Mr. Crenshaw. Progressivity of the tax code. Okay.
        Dr. Taylor, you said the tax cuts have been effective.
        And I will give you this data, Dr. Bernstein, if you would
    like, to add context to the discussion.
        Dr. Taylor, you said the tax cuts have been effective. A
    lot of others disagree with you. But how so? How have they been
    effective?
        Dr. Taylor. Well, first of all, they have had increase in
    growth since they were passed. Growth has been higher in 2017
    and 2018. Towards the end of 2017 it was passed. It was passed
    relatively quickly. Nobody think it would happen [sic]. But I
    think it has been a beneficial thing.
        I think, long run, you will see more effects. There is a
    slow-down now in the economy. It could be due to other things;
    it could be due to this growing debt. But I think, ultimately,
    it is beneficial, and that is what theories show, the models
    show, the data show.
        Mr. Crenshaw. Thank you. And look, it doesn't actually seem
    like any of you are advocating for unlimited spending. That is
    not the--that is not what I am taking here.
        And I do believe, Dr. Bernstein, you said in your statement
    that we would be better off, actually, decreasing our deficit
    somewhat, not zeroing them out--that would be radical,
    according to you--but you want to get them on a more
    sustainable path. That is what I remember reading from your
    statement.
        And so, Dr. Bernstein, what--here is what I want to ask
    you. What is the main driver of debt, okay? You, obviously--you
    do not want to touch discretionary spending, perhaps even
    increase it. But even if you had your way and you eliminated
    the recent tax cuts, it still wouldn't pay for the vast growth
    in entitlement programs.
        So I want to know. Can we agree on this? Do we agree that
    Social Security and Medicare programs need to be addressed?
        And do we have solutions for that that don't involve over-
    taxing my generation in order to increase benefits for your
    generation?
        Dr. Bernstein. Yes, I think we probably get----
        Mr. Crenshaw. And, Dr. Taylor, if you could also answer
    this after Dr. Bernstein.
        Dr. Bernstein. No, I think there is some agreement there.
        I think the--where we disagree is on the revenue side. So
    you and your colleagues keep citing the--you know, these
    highest revenue collections ever, because you are talking
    billions and trillions. As I point out in my testimony----
        Mr. Crenshaw. Okay, I understand we disagree on that. But I
    really----
        Dr. Bernstein. Yes.
        Mr. Crenshaw. The main driver of debt, we do agree, is
    entitlements, right? We do agree on that.
        Dr. Bernstein. Yes, yes.
        Mr. Crenshaw. So I want to get a solution for that. I
    want----
        Dr. Bernstein. So the----
        Mr. Crenshaw. Drive the discussion towards that.
        Dr. Bernstein. So the--I have tried--so there is two
    solutions to that. One is we need to collect more revenues and
    do some more progressively. And two, we need to slow the growth
    of health care spending.
        Mr. Crenshaw. Okay. And, Doctor, if the chairman would
    allow it, if Dr. Taylor would like to answer that, as well?
        Dr. Taylor. No, I think it is clear that the driver is
    the--you used the word ``entitlement spending,'' that is okay
    with me--is this growth, which is quite rapid, and a reform of
    those programs, a reform, I think, which will make them work
    better is what we need. And it is going to slow their growth,
    and that is what is key.
        Mr. Crenshaw. I would love to talk about that for hours,
    but only if the chairman would indulge me.
        Thank you, Mr. Chairman.
        Chairman Yarmuth. We would all love to do that. The
    gentleman's time has expired. I now recognize the gentleman
    from California, Mr. Panetta, for five minutes.
        Mr. Panetta. Thank you, Mr. Chairman.
        Gentlemen, thank you very much for being here today, as
    well as your expertise on this very, very important crucial
    subject I believe that you have testified to. I apologize for
    not being here earlier, and so I probably will ask some
    questions that have already been asked. So let me just make
    that clear. But thank you very much for being here.
        You know, we are here, as you know, to reexamine the
    economic costs of our debt. And obviously, we won't--before we
    do that, though, we want to take the stock level of debt we
    have and the trajectory of our deficits and our debt. As you
    know, we got $16 trillion in publicly held debt and $6 trillion
    in inter-governmental debt, basically close to--we just
    passed--the debt surpassed $23 trillion. And it is growing
    faster than our GDP.
        And Dr. Blanchard, you testified that deficits running at 5
    percent of GDP are a cause for concern.
        Debt, as a share of GDP, is projected to rise from 79
    percent in fiscal year 2019 to 95 percent by fiscal year 2029.
    And if we keep on going at this rate, it is going to be 144
    percent by 2049.
        Now, last week, in the very same--at the very same table
    that you gentlemen are sitting at, Federal Reserve Chairman--
    the Federal Reserve Chairman said that the level of debt that
    we currently are going at is just completely unsustainable. And
    I believe he is right.
        But regardless of that level, and which level is healthy,
    there are clear dangers, I think we understand, of allowing our
    debt to continue to grow at this rate. And so, clearly, your
    testimony today is very important, not just to examine those
    risks, but to also look forward to some sort of solutions to
    responsible and smart budgeting.
        If I may, Dr. Blanchard--you are closest to me--do you have
    an opinion as to what a healthy debt-to-GDP ratio is, and does
    100 percent concern you? If not what about that 144 percent
    number I threw out there?
        Dr. Blanchard. I believe that there is no magic number that
    could increase to a much higher level before starting or
    triggering a crisis in the markets.
        This being said, there is no particular reason to want to
    do it because it can be done. And therefore, all things equal,
    I think that lower levels of debt than the ones we have are
    desirable, and that if we can get there without creating
    problems with the economy itself by slowing down public demand,
    I think we should try to get there.
        Mr. Panetta. Understood. Understood. Now, I wasn't here for
    your testimony, but I read your testimony. And you said that
    the deficit shouldn't keep us from making smart investments,
    clearly. But if we run deficits without considering the debt at
    all, we clearly run some risk, correct?
        Dr. Blanchard. Yes, when you--you want to issue debt only
    for good reasons. One may be to sustain, basically, the demand
    and maintain output at full employment. Or for public
    investment, which makes sense. If you don't do this, neither of
    the two, then you should definitely worry about that. If you do
    this, I worry less about that increase in debt if I can justify
    it on the basis of your macro considerations or public
    investment.
        Mr. Panetta. Understood, okay. Thank you. Thank you.
        And Dr. Bernstein, you were--in your testimony that I read
    you talked about the 2017 tax bill, obviously, and the drain
    that it had on revenue. Is there anywhere else that you would
    suggest we look to to increase revenue?
        Dr. Bernstein. Yes. I think it is an important question.
    Because so much of market income and market wealth has
    accumulated at the top of the scale, I think that some of the
    current debates about taxing wealth are relevant and worth
    thinking more about.
        Now, whether we are actually talking about a wealth tax is
    a different question. So closing the step-up basis loophole
    would make a lot of sense to me.
        Mr. Panetta. Could you explain that, briefly?
        Dr. Bernstein. Sure. So when a wealthy person transfers a
    capital gain to an heir, the value or the basis of that capital
    is stepped up, meaning it is raised to the current market rate.
    And that gain is completely untaxed. So this is a way in which
    asset accumulation is--goes untaxed. And the more you put
    wealth or income or any sort of accumulation in a tax category
    that goes untaxed, the more people are going to figure out that
    is precisely the kind of income they have a lot of.
        So I am not necessarily endorsing some of the more far-out
    ideas about new wealth taxes. I am saying we should tighten up
    what we have. We should bring capital gains rate closer to
    income rates. We should give the estate tax some bite. And we
    should definitely fund the IRS to close some of the tax
    avoidance gap that has cost us, literally, hundreds of billions
    per year.
        Mr. Panetta. Great, thank you. I yield back my time. Thanks
    again, gentlemen.
        Chairman Yarmuth. The gentleman's time has expired. I now
    recognize the Ranking Member for 10 minutes.
        Mr. Womack. And we are into the lunch hour, which is never
    a good thing for the two of us, who have a few minutes of
    questions.
        First of all, thanks to the witnesses here today. I am
    going to come full circle and just ask each of you--we kind of
    started this way. I want to go back, because there has been a
    lot said. Does debt matter?
        From the perspective of the United States taxpayer who may
    be watching this hearing, or hearing about it, to each of my
    panelists today, does the federal debt matter? Dr. Blanchard?
        Dr. Blanchard. Debt absolutely matters----
        Mr. Womack. Dr. Wray?
        Dr. Blanchard. That was a ``but,'' but I didn't--you didn't
    give me time.
        Mr. Womack. We may come back to the ``but,'' but----
        Dr. Wray. Yes, but probably not in the way you are
    implying.
        Mr. Womack. You said ``but'' and kept going, and I wouldn't
    let Dr. Blanchard do it.
        Dr. Bernstein. Yes.
        Dr. Taylor. Yes.
        Mr. Womack. Okay. Well, I am glad to hear that. My dad
    always said, ``Don't go into debt''--he is a very successful
    businessman--``Don't go into debt for things that are not an
    appreciating asset.'' Pretty sage advice, don't you think?
        Dr. Bernstein. Yes.
        Mr. Womack. Do I get any pushback from the----
        Dr. Blanchard. No, you said my ``but.''
        [Laughter.]
        Mr. Womack. Okay. And I think he is right. By the way, he
    operates a business today and has no debt, and has an extremely
    healthy business.
        There have been some discussions here today about whether
    the family household budget that most of our constituents have
    a context on versus the federal budget, and whether they should
    operate similarly when it regards debt.
        Now, the household budget does not have to provide for the
    national defense. It is not in their constitution; it is in
    our--it is in the Constitution that we are responsible for up
    here.
        But in terms of going into debt for purposes of investment,
    growth in the economy, those kinds of things, the principles,
    though, between the household and the federal budget are still
    similar in nature. Would you not agree?
        Dr. Blanchard. I would not agree. The public debt, the
    government debt, plays a macro stabilization role that
    individual debt does not. So when the government decreases its
    debt or has a large surplus, this has an adverse effect on the
    economy, which it has to take into account. This is irrelevant
    to you or me or any household.
        Mr. Womack. Dr. Wray, I saw a negative response from you.
        Dr. Wray. Right, because when you are looking at it from
    the point of view of the individual in the private sector,
    whether household or firm, at some point, yes, they need to
    repay their debt. The private sector, taken as a whole, never
    repays all of the debt. It grows over time, in the same way
    that the federal government's debt grows over time. It has been
    growing since 1791. It has been growing as--relative to GDP
    since 1791. It will continue to grow. So will the private
    sector's total debt.
        So you can't look at it from the point of view of the
    individual in the private sector. Look at the private sector as
    a whole; their debt grows over time, too.
        Mr. Womack. All right. Dr. Bernstein?
        Dr. Bernstein. Just as I said earlier, I think this idea
    that when the household is tightening their belt, the
    government actually needs to go in the other direction. So I am
    afraid I disagree, as well.
        Mr. Womack. Dr. Taylor?
        Dr. Taylor. I think the so-called automatic stabilizers are
    good when the economy is in a boom, revenues increase and
    spending increases. And I think, in a slump, it goes the other
    way.
        Mr. Womack. Well, I guess here is where I am going with it,
    and that is that, unlike the federal government, for the
    American household there are consequences for going into too
    much debt, to the extent where you do not have the capacity to
    repay. And there are many examples of that. Student loan debt,
    I think, is a real good poster child for it, because there is a
    lot of people that went into student loan debt with a purpose
    of improving their earnings potential when, in fact, they
    didn't improve their earnings potential.
        In fact, a quarter of that student loan debt is not even--
    did not even lead to a college degree. So I think it was
    purpose-defeating in that regard.
        But there are consequences for my constituents for going
    into too much debt and not having the capacity to repay, as
    opposed to the U.S. Government, which leads me to this
    question.
        If we agree that debt does matter, and it is just a
    discussion about the type of debt--bad debt versus good debt--
    and if the premise that the government should have the capacity
    to repay--and I am not talking about just minimum payment due,
    just the net interest on the debt, but, I mean, start whacking
    away at the long-term structural challenges--if that is true,
    then this--the lack of the congressional process that this guy
    and I worked on, in addition to Mr. Woodall, to develop a
    budget of the United States Government, and to be able to put
    before the American people what our fiscal condition is, and to
    begin to make those prioritized decisions, discretionary versus
    non-discretionary, and--or the mandatory side--and remember,
    those mandatory programs are on auto-pilot, so unless the
    Congress acts, they continue to go completely unchecked, and it
    becomes a demographic challenge for the country, that our
    moving those costs higher, higher, in addition to health care
    spending that, Dr. Bernstein, you talked about.
        So do you--would you agree with me that part of the problem
    that Congress has is it is not honoring the process that is
    designed to be able to put the spotlight on the fiscal
    condition of our country in such a way that we can begin to
    make those established priorities?
        And again, not to--at the risk of using the word ``poster
    child'' again, let me remind you yesterday we passed a
    continuing resolution. We are seven, almost eight weeks into
    the fiscal year, we don't have a budget, and we pushed the
    spending of the country again to the 20th of December, to
    Christmas, and we will probably do it again, and maybe two or
    three more times.
        Is the lack of the execution of our process, or a better
    process, contributing to the problems that we are facing today,
    Dr. Blanchard?
        Dr. Blanchard. I would not think of myself as an expert on
    these issues. But yes, from where I stand, at the distance, it
    looks like the congressional budget process it not ideal and
    could be substantially improved.
        Mr. Womack. Dr. Wray? Or does the process matter?
        Dr. Wray. Look, capacity to repay, I am not sure what that
    would mean for a federal government that is an ongoing concern
    that has only repaid its debt one time, 1837, followed by our
    first depression.
        We do not have to repay the debt. What we have to do is
    make the interest payments. That is what we need to do.
        Mr. Womack. Okay. All right. Well--all right. So let me hit
    pause here a minute, and just focus on interest payments for
    just a moment.
        Today, as evidenced by one of the--a couple of our Members
    have indicated that the net interest on the debt this year,
    with very low interest rates, is going to be somewhere in the
    neighborhood of $400 billion, which is more than half of what
    we spend on our constitutional challenge to provide for the
    common defense of the country.
        And there has been the term ``crowding out'' used many
    times here today. We are crowding out the investments that you
    gentlemen are suggesting that we continue to make to grow our
    economy, help vulnerable Americans, the things that we would
    normally spend that money on we are spending on the net
    interest on the debt. That is money that could be spent
    elsewhere, which I think makes my point that deficits and debt
    do matter, because it is crowding out the available money that
    we have to be able to effectively fund the discretionary budget
    of the U.S. Government.
        Dr. Wray. Well, I mean, you put that constraint on
    yourselves. And I understand your political dilemma here.
    Interest payments, I think all three of us agree, are a very
    inefficient kind of spending. The first half of it is going
    abroad, and the other half is going into the United States. But
    it doesn't tend to go where you want it to go. It doesn't tend
    to lead to economic growth.
        So I am not advocating trying to ramp up interest payments.
    Crowding out theory, there are two approaches, one loanable
    funds, the other is IS-LM. The evidence just does not show that
    there is crowding out. Now, it may crowd out your spending
    because you put constraints on the budgeting process. It
    doesn't crowd out in the real world by raising interest rates
    and reducing investment. All that government spending goes
    somewhere into the economy, and it creates net income for the
    private sector, which should encourage investment, rather than
    discouraging investment.
        Mr. Womack. So the constraints that you suggest that we put
    on ourselves, they are only there for one reason, and that is
    not to explode this deficit and debt situation, even further
    exacerbate the situation as we currently have, which most
    people would agree is already beyond any capacity for us to be
    able to repay, and it is just going to lead to further
    complications in taxes for future generations.
        Dr. Bernstein, real quickly, a thought from you, and then--
    --
        Dr. Bernstein. Well, just on the process point, because I--
    what you said resonates with me. I am going to be straight with
    you about that, about the broken process.
        But the--I immediately went back to--I believe it was 2011,
    and the balanced budget agreement that, you know, created this
    so-called super-committee, I view that as being, you know, just
    a huge process failure. So I----
        Mr. Womack. That was 2011.
        Dr. Bernstein. Yes, 2011.
        Mr. Womack. It was not our Joint Select Committee----
        Dr. Bernstein. No, no, no. I am just saying----
        [Laughter.]
        I said that I think the problems go deeper than process. I
    agree with you the process is broken, but I think there are
    fundamental differences about the kinds of investments that we
    are arguing about today, good versus bad, about the amount of
    revenues that we need to collect. And I feel like, before we
    can have a reasonable process, we probably have to talk more
    about those differences.
        Mr. Womack. Dr. Taylor?
        Dr. Taylor. So I think going back to regular order would be
    a tremendous--budgets come from the President, the Budget
    Committees go through it, the appropriations, and you got a
    budget by October 1st. It would just be so clear to people,
    compared to what is happening now. No one--this is a democracy;
    people are supposed to be somewhat informed. It would improve
    the process greatly. I would encourage you to try to do that.
        Mr. Womack. Okay. And I have just got one final question,
    and it is related to our process, because our Committee--which
    I think did extraordinary work, we came up a little bit short,
    but not because we didn't really work hard at it, because we
    spent a year doing it.
        But the one thing that I think we kind of rallied behind
    was, regarding debt, is some kind of a target. We have talked
    about it already today, debt-to-GDP, which I believe--I have
    given up hope that we are going to balance the books of the
    federal government. It is certainly not in the timeframe I am
    going to be here. But at some point in time should this country
    not have a reasonable target of debt-to-GDP? Pick the number.
        I don't know if it is 42, the historical average, or if it
    is 65, or you--whatever that number is. But some kind of a
    target, so that we can at least begin to somewhat conduct
    ourselves as people who can constrain the absolutely growth of
    federal government, which can go out of sight if you don't.
        Real quickly, from left to right.
        Dr. Blanchard. I think that the issue is that we really do
    not have a good sense of what the debt target is. And choosing
    a number comes with dangers of trying to do something which may
    not be quite the right thing. So I am with you in spirit. I
    would have a very hard time deciding what the number should be.
        Mr. Womack. Dr. Wray?
        Dr. Wray. I absolutely agree. I can't see any--I think you
    should focus on the things that are important: employment,
    rising income, economic growth, rising productivity, meeting
    the challenges that face us in the future.
        Mr. Womack. Dr. Bernstein?
        Dr. Blanchard. Yes, I would urge you to think about that
    much more dynamically. Imagine we had a debt target in World
    War II, and we didn't gear up to fight that existential battle.
    I am sure you would be opposed to that. So I don't think
    targets are a good idea.
        Mr. Womack. Okay. Dr. Taylor?
        Dr. Taylor. I think targets are a good idea with emergency
    clauses to deal with this.
        Mr. Womack. Amen. I yield back my time. Thanks for allowing
    me to go over.
        Chairman Yarmuth. Absolutely.
        Mr. Womack. And congratulations on Louisville--number two,
    by the way.
        Chairman Yarmuth. Thank you. We are loaded. People need to
    look out for us.
        Well, I yield myself 10 minutes. Thanks again to all the
    witnesses for being here, and I think it has been a valuable
    discussion. I didn't have much economics education on my way
    through school, so I am using my chairmanship to become
    educated, and this hearing helped.
        When Mr. Cooper earlier talked about nuances in some of
    these issues--and I fully agree--most everything we do up here
    has significant nuance. And we don't recognize that.
        So I am interested--and we talked about the 2017 tax cut.
    When people say it is a $1.9 trillion tax cut, it actually
    wasn't. It was a $5 trillion tax cut, just that we are
    offsetting revenues that made it a $1.9 trillion net tax cut.
        So--and one of the biggest factors on the revenue side was
    the SALT taxes, eliminating the state and local tax deduction.
    There were many others.
        And so, in terms of thinking about if we were to review the
    tax cut with an aim of keeping the parts that did benefit
    people and doing away with the part that had no societal
    benefit, I think that is an important thing, distinction, to
    make.
        When Mr. Smith talks about his residents, yes, if you get a
    $100 tax cut and you are making $40,000 a year, or something
    less than that, that is a significant amount. When you are my
    classmate in college, Stephen Schwarzman, and you talk about
    cutting his tax rate by 2.6 percent at the top, that doesn't
    seem to serve any great societal benefit. So I think we often
    have to think about taxes like that.
        And I also think about, when we talk about cutting
    mandatory spending, whatever we spend on Social Security,
    whatever--every Social Security benefit check that goes out
    every month, how much of that do you estimate goes back into
    the economy?
        Dr. Bernstein. The vast majority.
        Chairman Yarmuth. Virtually all of it, right? And whatever
    you spend on Medicare and Medicaid goes back into the economy.
    So our $4.--whatever it is, $4.5 trillion spending at the
    federal level, with the exception of probably some of the
    defense budget and the interest on the debt, all of it is part
    of GDP.
        So when we are talking about cutting federal spending, we
    are cutting GDP at the same time. And I think we lose sight of
    that sometimes, like all of a sudden, we just cut this, and the
    economy keeps roaring on. That is not necessarily the case.
        Humana is based in my district. Humana is about a--right
    now, about a $60 billion-a-year company. Eighty percent of
    their revenue is managing government health care programs. So
    you cut health care there, you are cutting a huge part of my
    economy in my district. And so, again, these things are all
    very nuanced.
        Is there any difference, in your opinion--anybody can
    answer this--a tax cut that goes to a middle-income individual
    versus their Social Security check, in terms of macro-economic
    impact? Is there any difference?
        Dr. Bernstein. No, I think the likelihood is that they will
    both be spent.
        Chairman Yarmuth. Right. So in one case you are dropping
    federal revenues, the other one you are writing a check. But
    they have the same impact on the economy.
        And one of the things that I love about your statement, and
    it came up when Dr. Taylor talked about looking at models from
    CBO, and I saw a little smirk on your face. I may have misread
    it. But when you talk about empirical economics--and that is
    where I have--since I have been on this Committee, which is
    now--this is my 11th year--something that I have always been
    very interested in.
        I remember several years ago when Tim Geithner was
    Secretary of the Treasury and came before the Committee, and at
    the time Paul Ryan was Chairman of the Committee. And he put up
    these charts showing spending on--mandatory spending, and so
    forth, and the debt going out 50 years. So I asked Secretary
    Geithner, ``How realistic do you think projections going over
    50 years are?''
        And he said, ``I don't think going--anything longer than
    five years is reliable.'' And that is one of the things that I
    have been obsessed with, is that we live in a world that is
    changing more rapidly than anyone can possibly have forecast.
        And making projections as to what is going to happen in the
    economy--I saw this morning there was a release of a story that
    some--a company that Bill Gates funded has come up with a
    process using artificial intelligence and solar panels that
    will increase--allows you to create heat at levels sufficient
    to do concrete and so forth, which is responsible for about 7
    percent of global carbon emissions.
        So it seems to me that the possibilities of technology and
    innovation change--radically changing some of our future needs,
    and maybe changing either--maybe increasing some of our needs
    is something that--it is going to be hard for us to project.
        We say Congress's optimum efficiency moves at 10 miles an
    hour. This year it is two miles an hour. But the world is
    moving at 100, and I don't know how we make policy to
    accommodate that.
        But one of the things, Dr. Blanchard, that I have been
    obsessed with is artificial intelligence. And we know
    artificial intelligence is going to have its productive uses,
    as it apparently has with this company, but it is also going to
    have disruptive uses in the economy. For instance, eliminating
    an awful lot of jobs. I heard one estimate that--this came from
    one of the top people at IBM, who said that, within the next
    three years alone, artificial intelligence would either
    eliminate or significantly change 120 million jobs around the
    world, and that is going to increase.
        So given that, we know--we don't know the extent of
    disruption that is going to happen, but we know there is going
    to be a lot of disruption happening. What would you say that
    means for our priorities of spending in order to try to
    accommodate the changes we know will come, but we don't know to
    what extent?
        Dr. Blanchard. I think, you know, AI has all kinds of
    implications. One of them is that the low productivity growth
    that we have might increase over time because we are
    rediscovering ways of doing things differently, in which case
    it would be good news for the economy. It would probably
    increase interest rates. But that is fine.
        The--I think the other dimension, which is worrying people
    very much, is that there might not be enough jobs. And, as you
    know, this is an issue which has come with technological
    progress for at least two centuries. In the past it has always
    worked out okay in the sense that new jobs are being created. I
    think this time we are less sure. It may not, in which case we
    really have to think about everything we can do to help the
    people who may lose their jobs and not find one, which leads to
    issues of universal basic income--basically, money given to
    people who really cannot find jobs.
        It means thinking again about the earned income tax credit
    and making it much more generous than it is.
        I think we have to be ready for these contingencies. They
    may cost money.
        Chairman Yarmuth. I am going to not ask any more questions.
    But you all have sat here a long time and listened to a lot, so
    I would like to give each of you a minute to respond to
    anything you heard, if you--if there is something you would
    like to comment on that you heard that you would like to either
    defend yourself or to make another point.
        Dr. Taylor, do you want to start?
        Dr. Taylor. So I think three things. Tax reform, if
    possible, should be revenue-neutral. So that is the idea of
    this SALT changes. You add restrictions on the state and local
    tax, and you had a reduction in the rate. So maybe that went
    too far for California and some states, but that is the
    concept, as useful.
        I think it is not correct to say that every reduction in
    government purchases reduces GDP. If it is planned, if it is
    understood, if it is--the context is there, if there is a
    social safety net which is reasonable, I think it can benefit.
    And that is what my simulations tried to show. You can actually
    have a higher GDP growth.
        And finally, the impact of artificial intelligence on jobs,
    I think the main lesson is let the private economy work. It is
    amazing, what it can do, and that is why the history that
    Olivier Blanchard referred to is so promising.
        And the worst thing we can do is get in the way of what the
    market will do. Of course, you need to have a social safety
    net, which is working, but don't really make a mess of what
    otherwise could be a tremendous boon to productivity, not only
    in the United States, but globally.
        Chairman Yarmuth. Thank you. Dr. Bernstein?
        Dr. Bernstein. I guess two points. One is--or maybe a point
    and a question. One is that we really do have a revenue
    problem. And I am--I guess the one thing I would argue is that
    it really doesn't make sense to cite revenue collections in the
    billions and hundreds of billions and argue that we are in some
    uniquely favorable space.
        As a percentage of GDP--and I go through this in my
    testimony, if you can bear reading through it, I tried to do a
    careful job--the 2017 tax cut really broke down connective
    tissue between a growing economy and ample revenues. And I
    believe that it is essential that we fix that if we are going
    to address this problem.
        I guess the question I have is, often when I come up here
    and talk about these issues, I hear much more reasonable
    conversation, much more agreement, much more fundamental
    understanding of the importance of key investments in public
    goods, and yet, at the other end of the process, we just don't
    see it.
        And I have been a creature of the swamp here for decades,
    and I am still scratching my head as to why well-intentioned
    people--not everybody is well-intentioned, but a lot of people
    I heard from today on both sides are--can't get together,
    especially given the favorable rates that we have all been
    stressing, and make some of these investments.
        Chairman Yarmuth. Well----
        Mr. Womack. I want to respond to that, because if you just
    let Yarmuth and me fix all this, give us 30 minutes and a
    sandwich----
        Dr. Bernstein. Are you announcing that you are running
    for----
        [Laughter.]
        Mr. Womack. No, no, but we have had this conversation a
    lot.
        Chairman Yarmuth. Right.
        Dr. Wray. I just want to say--so there were several
    references to MMT, and they all seemed to equate it to printing
    money. That is not MMT. We described the way the government
    actually spends.
        I think what they have in mind is something much closer to
    quantitative easing, in which the Fed spent $3 or $4 trillion
    buying assets, essentially, by crediting bank accounts with the
    reserves. That is nothing like what MMT is recommending.
        We are asking you to look at government debt, deficits in a
    different way, to take account of sectoral balances. If you are
    going to reduce the budget deficit, we need to know which one
    of those other two sectoral balances is going to change.
        Are we going to be reducing the private sector's surplus?
    Are we going to make the private sector run deficits? Are we
    going to somehow get the trading partners to decide not to sell
    stuff to the United States? Something has to happen. You can't
    just raise the tax rate and think that you are going to balance
    the budget or reduce government spending and think you are
    going to balance the budget, because one of those other two
    sectors, or both of them, has to change what they are doing.
        Let me just--and cutting health costs is cutting GDP.
    Cutting government spending is reducing the injection of
    government spending into the economy. Reducing the amount of
    debt that is issued is also reducing the net financial assets
    that are being accumulated by the private sector. That is going
    to have some kind of consequences for the private sector.
        So we need to look at both sides of the equation of
    government spending, but also of government debt, which is held
    as an asset, the safest asset in the world. The world wants
    more of it, you know. So why are we so worried about giving the
    world what they want.
        The last thing on the robots taking away all our jobs, as
    Professor Blanchard said. That has been going on for 200 years.
    It is usually a good thing. I think it probably will continue
    to be a good thing.
        But what should the government do about this? We do need
    training. We do need education, because robots are pretty good
    at taking away the jobs of the lower skilled and lower-educated
    workers. They are some way off from taking away our jobs. Maybe
    someday that will happen, but we need to worry about the people
    at the bottom end that will be replaced probably pretty
    quickly. We need to educate them.
        I don't like the idea of basic income guarantee, or just
    telling people, ``Look, sorry. In the modern economy there is
    nothing you can do.'' No, we have to find jobs for these
    people, and we need to train them for jobs.
        Chairman Yarmuth. I thank you for that. And I--well, I was
    going to Dr. Blanchard, first.
        Dr. Blanchard. I was looking at my notes. I have two
    points.
        The first one is a nerdy one, which is that if you look at
    the interest rates and debt, it is true that interest rates
    have decreased while debt was increasing. To conclude from this
    that, therefore, there is no effect of debt on interest rates
    would be wrong. This would be mixing correlation and causality.
        I think what has happened is many other factors have led to
    a decrease in interest rates, which have nothing to do with
    debt. It may well be that debt has a positive effect on rates,
    it just is hard to see because of all the other things which
    have happened.
        So I think we have to continue to assume that debt, in the
    long run, has some effect on interest rates. I think it would
    be dangerous to do something else.
        The other is more general and related to a number of
    discussions which took place, which is I do not think that
    mandatory spending can be decreased substantially. I think
    there are some savings to be made, but there are also more
    demands, because of aging and dimensions have changed.
        I suspect--I very strongly suspect that the way to take
    care of deficits and reduce them over time is for increasing
    taxes. I have no doubt that this is the case.
        Chairman Yarmuth. Thank you. Just one comment. Watson
    apparently--IBM's Watson can now apparently do 70 percent of
    what lawyers do with greater reliability, and they can read CAT
    scans and MRIs more accurately than radiologists.
        And when I was talking to my accountant, my Kentucky CPAs,
    when they were in town not too long ago, they said that is the
    number-one thing they talk about, the existential threat that
    artificial intelligence is to CPAs. So it is not just truck
    drivers.
        Anyway, thank you all very much. Once again, it has been a
    stimulating discussion. And we appreciate your contributions
    very much.
        With no further business, this hearing is adjourned.
        [Whereupon, at 12:36 p.m., the Committee was adjourned.]
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