    [House Hearing, 118 Congress]
    [From the U.S. Government Publishing Office]

                     HEARING ON HIDDEN COST: THE TRUE PRICE
                     OF FEDERAL DEBT TO AMERICAN TAXPAYERS

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

                                    HEARING

                                   BEFORE THE

                           SUBCOMMITTEE ON OVERSIGHT

                                     OF THE

                          COMMITTEE ON WAYS AND MEANS
                            HOUSE OF REPRESENTATIVES

                        ONE HUNDRED EIGHTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                DECEMBER 6, 2023

                                   __________

                              Serial No. 118-OS04

                                   __________

             Printed for the use of the Committee on Ways and Means

     [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                                  __________

                       U.S. GOVERNMENT PUBLISHING OFFICE
    55-784                  WASHINGTON : 2024

    -----------------------------------------------------------------------------------

                          COMMITTEE ON WAYS AND MEANS

                        JASON SMITH, Missouri, Chairman
    VERN BUCHANAN, Florida               RICHARD E. NEAL, Massachusetts
    ADRIAN SMITH, Nebraska               LLOYD DOGGETT, Texas
    MIKE KELLY, Pennsylvania             MIKE THOMPSON, California
    DAVID SCHWEIKERT, Arizona            JOHN B. LARSON, Connecticut
    DARIN LaHOOD, Illinois               EARL BLUMENAUER, Oregon
    BRAD WENSTRUP, Ohio                  BILL PASCRELL, JR., New Jersey
    JODEY ARRINGTON, Texas               DANNY DAVIS, Illinois
    DREW FERGUSON, Georgia               LINDA SANCHEZ, California
    RON ESTES, Kansas                    BRIAN HIGGINS, New York
    LLOYD SMUCKER, Pennsylvania          TERRI SEWELL, Alabama
    KEVIN HERN, Oklahoma                 SUZAN DelBENE, Washington
    CAROL MILLER, West Virginia          JUDY CHU, California
    GREG MURPHY, North Carolina          GWEN MOORE, Wisconsin
    DAVID KUSTOFF, Tennessee             DAN KILDEE, Michigan
    BRIAN FITZPATRICK, Pennsylvania      DON BEYER, Virginia
    GREG STEUBE, Florida                 DWIGHT EVANS, Pennsylvania
    CLAUDIA TENNEY, New York             BRAD SCHNEIDER, Illinois
    MICHELLE FISCHBACH, Minnesota        JIMMY PANETTA, California
    BLAKE MOORE, Utah
    MICHELLE STEEL, California
    BETH VAN DUYNE, Texas
    RANDY FEENSTRA, Iowa
    NICOLE MALLIOTAKIS, New York
    MIKE CAREY, Ohio
                           Mark Roman, Staff Director
                     Brandon Casey, Minority Chief Counsel
                                     ------

                           SUBCOMMITTEE ON OVERSIGHT

                      DAVID SCHWEIKERT, Arizona, Chairman
    BRIAN FITZPATRICK, Pennsylvania      BILL PASCRELL, New Jersey
    GREG STEUBE, Florida                 JUDY CHU, California
    CLAUDIA TENNEY, New York             BRAD SCHNEIDER, Illinois
    MICHELLE FISCHBACH, Minnesota        SUZAN DelBENE, Washington
    BETH VAN DUYNE, Texas                GWEN MOORE, Wisconsin
    RANDY FEENSTRA, Iowa
    NICOLE MALLIOTAKIS, New York

                             C  O  N  T  E  N  T  S

                                  ----------

                               OPENING STATEMENTS

                                                                       Page
    Hon. David Schweikert, Arizona, Chairman.........................     1
    Hon. Bill Pascrell, New Jersey, Ranking Member...................     1
    Advisory of December 6, 2023 announcing the hearing..............     V

                                   WITNESSES

    Grant Driessen, PhD., Specialist in Public Finance, Congressional
      Research Service...............................................     3
    Kent Smetters, PhD., Professor of Business Economics and Public
      Policy, University of Pennsylvania's Wharton School............    16
    Bobby Kogan, Senior Director, Federal Budget Policy, Center for
      American Progress..............................................    28
    Michael Faulkender, PhD. Dean's Professor of Finance, University
      of Maryland Robert H. Smith School of Business.................    40

                        MEMBER QUESTIONS FOR THE RECORD

    Member Questions for the Record and Responses from Grant
      Driessen, PhD., Specialist in Public Finance, Congressional
      Research Service...............................................    81
    Member Questions for the Record and Responses from Kent Smetters,
      PhD., Professor of Business Economics and Public Policy,
      University of Pennsylvania's Wharton School....................    87
    Member Questions for the Record and Responses from Bobby Kogan,
      Senior Director, Federal Budget Policy, Center for American
      Progress.......................................................    90
    Member Questions for the Record and Responses from Michael
      Faulkender, PhD. Dean's Professor of Finance, University of
      Maryland Robert H. Smith School of Business....................    92

                       PUBLIC SUBMISSIONS FOR THE RECORD

    Public Submissions...............................................    95
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

       HIDDEN COST: THE TRUE PRICE OF FEDERAL DEBT TO AMERICAN TAXPAYERS

                                  ----------

                          WEDNESDAY, DECEMBER 6, 2023

                      House of Representatives,
                             Subcommittee on Oversight,
                                   Committee on Ways and Means,
                                                        Washington, DC.
        The subcommittee met, pursuant to call, at 10:02 a.m., in
    Room 1100, Longworth House Office Building, Hon. David
    Schweikert [chairman of the subcommittee] presiding.
        Chairman SCHWEIKERT. Good morning. The subcommittee will
    come to order.
        I will let you, my good friend, ranking member, grab his
    seat.
        All set?
        Good morning. Today's oversight hearing is focused on the
    Treasury markets. Our jurisdiction in the Ways and Means
    Committee is the initial issuances from Treasury. As many of
    those have focused on the rapidly rising costs, so some of our
    economists in our office basically say we are moving just back
    to normal. But either way, gross interest this year will be a
    trillion dollars, making it the second highest cost in U.S.
    Government, you know, over Medicare and over defense.
        The other thing I am also going to ask us to focus on is,
    if we lay out history, those of us remember, was it 2014, we
    had certain stresses; 2020, the repo market stresses; even the
    bond auction we touched on a little while ago, 6 weeks ago. Are
    these stressors to be concerned about or should we be pleased
    that the markets actually worked themselves out?
        We have had the issue where the Federal Reserve, during two
    of those, actually sort of stepped in and participated. Is that
    something also we should be paying attention to?
        As we move forward, the seriousness of this market, the
    seriousness of U.S. sovereigns in the world, the place it plays
    in U.S. and the world economy I think is not completely
    understood by Members of Congress, that, in many ways, this is
    the lubricant that makes much of the world economy work.
        I am hoping, through this subcommittee hearing, we start to
    educate staff, members ourselves, and the seriousness--this is
    not a game, that the communication, the seriousness, the adult-
    like understanding that movements in this market can actually
    have cascade effects, and that is why we are hunting for
    stability.
        And with that, my ranking member, Mr. Pascrell.
        Mr. PASCRELL. Thank you, Mr. Chairman.
        A little bit of history. You don't mind history, do you?
        Chairman SCHWEIKERT. When it is accurate.
        Mr. PASCRELL. Oh, of course.
        President Clinton left office in 2001, running our last
    budget surplus.
        So far, so good?
        Chairman SCHWEIKERT. Republican Congress.
        Mr. PASCRELL. Then came two decades of tax cuts for the
    wealthy, which blew holes in our budget big enough for Godzilla
    to waltz through. Without the Bush tax cuts and the Trump tax
    cuts, revenues today would be on track to keep up with spending
    indefinitely, and the debt ratio would be declining. Even your
    charts would show that.
        Mr. SCHWEIKERT. No, they wouldn't.
        Mr. PASCRELL. You are saying that the debt ratio would not
    be declining----
        Chairman SCHWEIKERT. Yeah.
        Mr. PASCRELL [continuing]. If that was done?
        Chairman SCHWEIKERT. And this--Mr. Ranking Member, if you
    told me this was your opening, I would have brought the charts
    to show.
        Mr. PASCRELL. Oh, okay. Bring them back the next time.
        Chairman SCHWEIKERT. I will.
        Mr. PASCRELL. Let us be clear about the greatest danger to
    our Nation's economic health, because that is where we are
    heading.
        Where are the threats coming from to block America from
    paying its bills? Because we have got to pay our bills.
        And you would agree to that, I think.
        We have seen devastating consequences every time we have
    introduced default, threatened default--sorry--lowered credit
    ratings, skyrocketing borrowing costs, crippled job growth, and
    tumbling consumer confidence.
        Fitch downgraded America's credit rating to AA+ in August.
    Last month, Moody's moved America's ratings from stable to
    negative. Both changes are directly caused by default threats.
        Over and over, we have seen our economy held hostage over a
    budget shortfall the other side caused in the first place.
    During the last episode, the ransom demands included defunding
    the IRS to shield wealthy tax cheats. I thought we were over
    that. Obviously, we weren't, because we took that money--some
    of that money and used it to pay to help our allies in Israel.
        This is funding Democrats passed to close the tax gap and
    reduce the deficit. After we narrowly averted a catastrophic
    default, the House Republicans shamelessly returned to the
    single issue that unites your party, it seems to me: tax cuts
    for the wealthy.
        Fully extending tax scams would add another $3.5 trillion
    to the deficit. This is bigger than Mt. Everest. Rather than
    continuing to push extreme proposals, we need to come together
    to start governing. It will mean both sides, not just one. I
    know that. I know we stand ready, but I am not holding my
    breath.
        I yield back.
        Chairman SCHWEIKERT. Thank you, Mr. Pascrell.
        I can't express my level of disappointment in your opening
    statement. We should have brought our charts that, in the first
    30 months, there was $4.8 trillion voted out by the Democratic
    Congress, substantially--what is that, three times the cost of
    the tax reform.
        But, once again, the hearing was supposed to be focused on
    Treasury markets, liquidity, price stability. And where does it
    lead us?
        Grant--and is it Driessen?
        Mr. DRIESSEN. It is Driessen.
        Chairman SCHWEIKERT. Driessen.
        Mr. DRIESSEN. Yeah.
        Mr. Schweikert [continuing]. Driessen is a specialist in
    public finance at the Congressional Research Service. Thank you
    for coming.
        Kent Summers?
        Mr. SMETTERS. Smetters.
        Chairman SCHWEIKERT. Smetters is a professor of business
    economics and public policy at the University of Pennsylvania
    Wharton School. Outstanding.
        Bobby Kogan is senior director of Federal Budget Policy at
    the Center for American Progress. Thank you for joining us.
        Michael--and help me on the last name.
        Mr. FAULKENDER. Faulkender.
        Chairman SCHWEIKERT. Faulkender? Okay. I should have gotten
    it--is a dean professor of finance at the University of
    Maryland Robert H. Smith School of Business. Thank you for
    joining us today.
        And your written statements will be made part of the
    hearing record, and you each have 5 minutes to deliver your
    oral remarks.
        Doctor.

    STATEMENT OF GRANT DRIESSEN, PHD, SPECIALIST IN PUBLIC FINANCE,
                     CONGRESSIONAL RESEARCH SERVICE

        Mr. DRIESSEN. Chairman Schweikert, Ranking Member Pascrell,
    and members of the subcommittee, my name is Grant Driessen, and
    I am a specialist in public finance at the Congressional
    Research Service. Thank you for inviting me to testify----
        Chairman SCHWEIKERT. Can you pull the mic closer?
        Mr. DRIESSEN. Yeah. I never think it is----
        Chairman SCHWEIKERT. The room has poor acoustics.
        Mr. DRIESSEN. Yep. Yep. Every time, I will make that
    mistake.
        Thank you for inviting me today to testify on behalf of
    CRS. As requested, I will provide background on Federal debt
    management, briefly summarize current practices, and discuss
    developments and policy issues in light of recent budget and
    economic outcomes and projections.
        Congress now holds the authority to issue debt on behalf of
    the United States through the power granted in Article I,
    section 8 of the Constitution. While this power was delegated
    to the Treasury in 1789, Congress retains control over spending
    through the budget and appropriations process, revenue levels
    through tax legislation, and total borrowing through the
    statutory debt limit.
        If spending exceeds revenues, Treasury determines what type
    of debt instruments are used to finance the borrowing necessary
    to fulfill all obligations. Treasury aims to fulfill the
    government's borrowing needs at the lowest cost over time,
    while also acting predictably in maintaining sufficient
    liquidity for financial--or Federal financial operations.
        Beyond financing the government, Federal debt management
    also affects global markets due to the influential role of the
    United States in the world economy.
        Federal debt management has more influence on future budget
    and economic performance in the current high-debt, high-deficit
    environment. Persistently large deficits have led to
    significant increases in Federal debt in recent decades, with
    heightened increases during the Great Recession and pandemic,
    but also with steady or increasing real debt in other, more
    normal economic periods.
        Debt held by the public was $26.8 trillion at the end of
    November of 2023, or about 98 percent of gross domestic
    products, GDP. As the stock of real debt and average Federal
    interest rates rise, budget forecasts project that net interest
    payments will grow faster than both the general economy and
    other Federal spending and revenues.
        CBO's long-term baseline projects that, under current law
    and average economic conditions, net interest payments will
    grow from 2.5 percent of GDP in fiscal year 2023 to 6.7 percent
    of GDP in the fiscal year 2053. That 2053 figure is larger than
    projections of either total discretionary spending or Social
    Security spending.
        The Federal Government currently issues debt through
    several instruments, including Treasury bills, notes, and
    bonds, with maturities varying from several weeks to 30 years.
    These Federal securities are issued through an auction process.
    Auctions and their offering amounts are scheduled and announced
    in advance of the auction date.
        The Federal Reserve, or Fed, works with Treasury's Office
    of Debt Management, acting as their fiscal agent. Because they
    are also backed by the full faith and credit of the United
    States Government, Treasury securities are often seen as one of
    the safest investments available, which significantly lowers
    Federal net interest costs relative to other investment
    vehicles.
        Federal securities are owned by both individuals and
    institutions, domestic and foreign. In June of 2023, Federal
    Reserve banks were estimated to hold about 20 percent of
    Federal debt held by the public, other domestic entities were
    estimated to own another 50 percent, and the remaining 30
    percent or so was attributed to foreign entities.
        Longer term securities generally command higher interest
    rates compared to shorter term securities because investors
    demand greater compensation for incurring risk over a longer
    period of time.
        Generally, a strong economy or high inflation will be
    accompanied by high interest rates, which may make the
    prioritization of short-term issuances more attractive. This,
    however, could lead to more volatile and uncertain yearly
    interest payments as Treasury would have to enter the market
    more often. It involves a degree of uncertainty over future
    market behavior.
        During periods of economic downturn and low interest rates,
    Treasury may decide to prioritize instruments with longer
    maturities to take advantage of lower borrowing costs, though
    such periods may also present an elevated need for predictable
    behavior and higher levels of liquidity to respond to economic
    turbulence. Interest rates can shift suddenly throughout the
    business cycle, underscoring the value of a flexible portfolio.
        Developments in recent years presented new challenges for
    Federal debt management. Treasury responded to an
    uncharacteristically long period of low interest rates between
    the mid-2000s through the peak of the COVID pandemic by relying
    more heavily on debt instruments with a longer maturity period,
    locking in the low interest rates experienced at that time.
        Interest rates have subsequently increased in the past
    couple of years, and Treasury securities faced an inverted
    yield curve with shorter term debt instruments having higher
    rates of interest than longer term ones for much of 2022 and
    2023. These shifts further complicate the strategic choices for
    Federal debt moving forward.
        Thank you for the opportunity to testify today. I look
    forward to any questions that you may have.
        [The statement of Mr. Driessen follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Mr. SCHWEIKERT. Thank you.

        STATEMENT OF KENT SMETTERS, PHD, PROFESSOR OF BUSINESS
       ECONOMICS AND PUBLIC POLICY, UNIVERSITY OF PENNSYLVANIA'S
                             WHARTON SCHOOL

        Mr. SMETTERS. Good morning, Chairman Schweikert, Ranking
    Member Pascrell, and other members of the----
        Chairman SCHWEIKERT. Once again, pull the mike very close.
        Mr. SMETTERS. Okay.
        Mr. SCHWEIKERT. The room has very difficult acoustics.
        Mr. SMETTERS. All right. I am a professor at the Wharton
    School, the faculty director of the Penn Wharton Budget Model,
    and research associate at the NBER. After receiving my Ph.D. in
    economics from Harvard in 1995, I worked at CBO for several
    years before heading to Wharton, and then later Stanford, and
    also was--served a brief appointment under Treasury Secretary
    O'Neill during the early days of the Bush administration. My
    remarks today are my own.
        I previously submitted written remarks, had a few typos. I
    apologize about those, hopefully corrected. In there, I discuss
    some more technical issues related to the Treasury auctions,
    international holdings, and related items there. I am happy to
    answer those types of questions a little bit later on.
        I want to use my brief remarks today to really talk three
    major points. The first one is, without major changes in the
    U.S. fiscal policy, we estimate at the Penn Wharton Budget
    Model that the U.S. Treasury debt will be unable to roll over
    its accumulated debt in about 20 years. Put differently, the
    U.S. Government will have to default, either explicitly or
    implicitly, through monetization as inflation of that debt. And
    that time span shortens if capital markets get spooked and
    believe that the U.S. policy will never create fiscal balance.
        Specifically, what we estimate is that the debt-GDP ratio
    will hit about 190 percent by 2050, now likely even earlier.
    And unlike Japan, we just don't have the national savings to
    support that high level of debt.
        So if we ask the question, what size of policy change would
    it be required to create fiscal balance, that is just enough
    money to be able to make spending promises as well as just
    interest payments. It would require either an immediate and
    permanent increase in all Federal tax revenue of 40 percent, an
    immediate or permanent decrease in all spending by 30 percent,
    or some combination of the two.
        The second point is that, even if Congress did stabilize
    the debt-GDP ratio but waited a couple decades to do it, it
    would have serious macroeconomic costs. GDP would be about 8
    percent lower than it otherwise would have been, wages would be
    about 4 percent lower, and borrowing rates would be about 150
    basis points higher.
        And so far, that is actually the good news, because these
    calculations assume that capital markets are patient, that they
    believe something will happen, Congress will take big action
    within a couple decades.
        We certainly have a range of options that we can consider
    at this point, and we have posted some of those at the Penn
    Wharton Budget Model, both on the more liberal and conservative
    side, a whole range. But the point is that simple options are
    not going to work. Simply saying we are going to limit tax
    increases on those making $400,000 and above, that is not going
    to come even close to covering the shortfall. Same thing with
    promises to cut spending otherwise unspecified. That is not
    going to do anything either.
        The third issue that I want to emphasize is that we can't
    really get distracted with side discussions here. Yes, one
    could always find some type of fiscal programs that pay for
    themselves, that they--even with higher deficits. But the truth
    be told, those are pretty uncommon. They don't scale very well.
        The more important issue here is that the blame game is
    just also irrelevant as well. We can argue until we are blue in
    the face whether it is because of tax cuts, spending increases.
    I could make an argument for both, just simply based on the
    baseline. Both baselines are--in terms of--we really wouldn't
    let the AMT increase the amount of tax collection over time.
    Same thing with real bracket created by debts--that is often
    baked into people's baseline, and that is just not realistic.
    Congress would never have had that happen.
        Same thing with Social Security. Technically speaking,
    Social Security is not ever insolvent, because cuts are going
    to happen automatically if Congress does nothing, but no one
    takes that seriously as a baseline either. And so baselines can
    certainly change people's views on things.
        But the more important thing is it--the blame game doesn't
    accomplish anything. It really doesn't tell us where to go from
    here forward. Even if I believed it was 100 percent due to tax
    cuts or 100 percent due to spending increases, the world today
    is completely different. It doesn't tell us the next best step.
    And so I think, instead, we need to really focus on what is the
    next best step going forward regardless of the blame game.
        And debt crises are the most serious of economic crises,
    because they lower the government's ability to pay while also
    increasing costs.
        Thank you.
        [The statement of Mr. Smetters follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman SCHWEIKERT. Thank you, Doctor.
        Mr. Kogan.

       STATEMENT OF BOBBY KOGAN, SENIOR DIRECTOR, FEDERAL BUDGET
                  POLICY, CENTER FOR AMERICAN PROGRESS

        Mr. KOGAN. Chairman Schweikert, Ranking Member Pascrell,
    members of the subcommittee, thank you for inviting me to
    testify.
        Today I intend to make two points. The first is that,
    without the Bush tax cuts, their bipartisan extensions, and the
    Trump tax cuts, the ratio of debt-to-GDP would be declining
    indefinitely. The second is that our current rising debt ratio
    is due entirely to these tax cuts and not to spending
    increases.
        But when I say spending, I mean primary or noninterest
    spending. And every mention of revenue, spending deficits,
    debt, I mean those amounts as a percent of GDP.
        Okay. So, recently, Fitch downgraded the United States
    credit rating, and Moody's put us on the negative watch. While
    each cited the long-term fiscal outlook in the last--the long-
    term fiscal outlook, in the last 3 years, each year, the long-
    term outlook was better than the year before. Importantly,
    however, they each cited recent Republican-led debt limit
    brinksmanship.
        A default is the only true worry on our Nation's ability to
    repay bondholders.
        This hearing is about debt service, and debt service is a
    product of debt and the interest rate, which is largely a
    function of primary deficits. I am going to tell you how we
    went from having primary surpluses to primary deficits.
        According to CBO, primary deficits are on track to shrink
    to roughly 3.3 percent of GDP over 30 years, high enough to
    cause the debt to rise indefinitely. The common refrain that
    you hear is that rising debt is due to rising spending.
    Revenues have been roughly flat for decades, and while spending
    was also roughly flat until recently, demographic changes and
    rising healthcare costs are now pushing it up. These facts are
    true.
        Our intuitions might reasonably tell us that if revenues
    are flat and spending is rising, then the one that is changing
    must be to blame, but I am going to tell you why our intuitions
    are wrong.
        In CBO's long-term projections earlier this century,
    spending was projected to continue rising. But despite this,
    CBO routinely projected long-term debt stability with revenues
    keeping up with rising spending, not due to tax increases but
    to our Tax Code bringing in more as Americans prospered. That
    prosperity results in both higher revenue collection and higher
    real after-tax income for the people whose incomes are growing.
    It is a win-win.
        In other words, we used to have a tax system that would
    fully keep pace with rising spending. And then the Bush tax
    cuts were enacted and expanded, and then, on a bipartisan
    basis, eventually made largely permanent in 2013.
        Under CBO and OMB's baseline construction, temporary
    changes in tax law are soon to end as scheduled. 2012 was,
    therefore, the last year in which CBO's projections reflected
    the Bush tax cuts expiring. Yes, these projections showed
    rising spending, but they also showed revenues exceeding
    spending indefinitely with debt declining indefinitely. But
    ever since the Bush tax cuts were made permanent, CBO has
    showed revenues lower than spending and has projected debt to
    rise indefinitely. And since then, the Trump tax cuts have
    further reduced revenue.
        Without the Bush tax cuts, their bipartisan extensions, and
    the Trump tax cuts, debt would be declining indefinitely
    regardless of your AMT assumptions.
        Now, two points explain this. The first employs a concept
    called the fiscal gap, which measures how much primary deficit
    reduction is required to stabilize the debt. The 30-year fiscal
    gap is currently 1.7 percent of GDP, which means that, on
    average, primary deficits over 30 years would need to be 1.7
    percent of GDP lower to stabilize the debt. The size of the
    Bush tax cuts, their extensions, and the Trump tax cuts under
    current law is larger than that. And, therefore, mathematically
    and unequivocally, without those tax cuts, debt would be
    declining, not rising.
        But the second is why spending is not to blame even though
    it is rising. And I have--I have behind me--I have a graph up
    that I am going to make reference to.
        So as I said, CBO's 2012 long-term debt project--long-term
    outlook was the last time that debt was projected to decline
    indefinitely. And relative to CBO's 2012 projection, current
    spending projections are down, not up.
        On the graph, the darker dashed line is lower than the
    lighter dashed line. In short, if you were trying to explain
    how we got from CBO's 2012 projection of declining debt to our
    current projections of rising debt, changes in spending have
    decreased the future path, not increased them. But changes in
    revenue have declined significantly more than spending.
        The darker solid line is far lower than the lighter solid
    line. Changes in revenue are, therefore, entirely responsible
    for going from declining debt to ever-growing debt. But
    importantly, a disproportionate share of the benefits of these
    tax cuts accrued to very rich Americans, highly profitable
    corporations, and wealthy heirs.
        Any discussion of how to address the deficits caused by
    these tax cuts should first look to the source. And,
    importantly, in any attempt to address the possibility that
    debt service could crowd out future investments, we must not
    cut our actual investments in the future.
        Thank you.
        [The statement of Mr. Kogan follows:]
       [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman SCHWEIKERT. Dr. Faulkender.

       STATEMENT OF MICHAEL FAULKENDER, PHD, DEAN'S PROFESSOR OF
       FINANCE, UNIVERSITY OF MARYLAND ROBERT H. SMITH SCHOOL OF
                                BUSINESS

        Mr. FAULKENDER. Chairman Schweikert, Ranking Member
    Pascrell, members of the subcommittee, thank you for the
    opportunity to testify today on the costs to the American
    people arising from increased Federal debt service. I have been
    a finance professor for more than 20 years and had the
    privilege of serving as the assistant secretary for Economic
    Policy at the Department of Treasury from 2019 to 2021.
        In fiscal year 2018, outstanding public debt was just under
    $16 trillion. Cost of servicing that debt totaled $351 billion.
    By the end of fiscal 2023, public debt had risen to more than
    $26 trillion. Debt service increased to $666 billion.
        So while the cost--while the debt outstanding has risen 67
    percent, the cost of servicing that debt has risen 90 percent,
    the result of the higher interest rates were seen recently.
        Even before COVID hit, our Nation was on an unsustainable
    fiscal path. While the CARES Act was necessary to mitigate the
    economic harm from the pandemic, that spending was entirely
    debt financed. Spending has not returned to its pre-COVID
    levels. According to CBO, as was just said, government spending
    will continue to rise, consuming 23 to 25 percent of national
    output each of the next 10 years compared to the last 50 years
    of just 21 percent. Revenue forecasts are at 18 percent of
    national output, which are above where revenues have been for
    the last 50 years at 17.4 percent.
        This permanent spending increase means debt as a percentage
    of GDP will rise unsustainably. A financial report of the U.S.
    Government forecasts that if this current policy were extended
    over the next 75 years, it would result in a debt-to-GDP ratio
    of 566 percent, compared to just 78 percent 5 years ago.
        Debt service costs are the result of both the amount of
    debt outstanding and the interest rate environment. One might
    think that minimizing interest costs is accomplished by simply
    issuing the maturity with the lowest yield. However, it depends
    upon the time horizon over which one is minimizing debt service
    costs.
        In 2020, interest rates on 1-year bonds were less than 10
    basis points, while coupon rates on the 10-year were at 0.625
    and, on the 30, were as low as 1.25 percent. If one were merely
    looking to minimize debt service costs in 2020, one might think
    Treasury should have only issued short-term debt. Instead, the
    Secretary increased the quantity of long-term debt in 2020 that
    was issued. While that marginally raised debt service costs,
    the American people today benefit from the fact that we issued,
    quote, higher-cost debt because, today, Treasury is still just
    paying 62 basis points on the 10 years that were issued at the
    time rather than the 4 to 5 percent that they would be rolled
    over at today.
        Significant academic work on the term structure of interest
    rates of debt issuances at different maturities find it to be
    upward sloping because, as was mentioned, investors bear
    greater risk on long-term bonds. One might, therefore, conclude
    that interest costs would be minimized by issuing just short-
    term debt. However, the bonds issued in 2020 demonstrate that
    there may be market conditions where Treasury will reduce long-
    term borrowing costs by issuing long-term bonds.
        As the chairman mentioned, recently, long-term bond
    auctions have shown less demand than normal, particularly from
    international buyers. The central banks of both Japan and China
    have been reducing their ownership of U.S. Treasuries, likely
    reflecting that investors are growing more concerned about our
    Nation's long-term fiscal stewardship.
        Whether we should pull back on issuing long-term Treasury
    bonds depends on whether government policy succeeds in reining
    in the recent 40-year high inflation. Reductions in budget
    deficits, deregulatory unleashing of the American economy would
    bring down inflation more effectively than the Federal Reserve
    merely raising interest rates.
        Issuing short-term debt that can be rolled over at lower
    bond yields would reduce long-term debt service costs. If,
    instead, we continue running unsustainable budget deficits and
    disincentivizing output, locking in today's interest rates
    might best mitigate the potential costs of having to roll over
    debt at even higher interest rates.
        I know that some have expressed concern that foreign
    holdings of U.S. Treasuries are problematic for Americans. I
    would differentiate Chinese holdings in technology firms who
    provide inputs into sensitive national security tools or the
    purchases of farmland near military facilities as different
    than holdings in U.S. Government debt.
        I believe we should welcome lower Treasury borrowing costs
    arising from foreign countries wanting to invest in our
    Nation's future, provided that those investments don't
    sacrifice defensive capabilities.
        I believe we net benefit from being the world's reserve
    currency. In addition to lowering borrowing costs, it
    facilitates implementation of our National Security Strategy to
    monitor arms dealing, drug trafficking, and other illicit
    activities. Further, it facilitates using sanctions as an
    economic tool to punish bad actors, enhancing potential
    military and diplomatic activities.
        The impact on the American people of higher debt service
    costs extends beyond future tax rates. Rising interest costs
    will likely crowd out funding for other government services.
    Additionally, mortgage rates paid by American home buyers
    directly result from the long-term borrowing rates for the U.S.
    Government.
        I believe the best way for us to improve access to home
    ownership for young people is to get interest rates back down,
    which means the fiscal and regulatory policy need to assist the
    Federal Reserve in bringing down inflation.
        I look forward to answering your questions.
        [The statement of Mr. Faulkender follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman SCHWEIKERT. Thank you, Doctor.
        As chairman's prerogative and an idiosyncrasy, I will go
    last in my questions. Think of it as batting cleanup.
        Mr. Fitzpatrick.
        Mr. FITZPATRICK. Thank you, Chairman Schweikert, for
    holding this hearing.
        There is no question that the greatest economic and
    national security threat we face is our long-term debt and
    deficit. We can point fingers and argue all day long about
    whether it is a revenue or a spending issue, but one thing is
    clear, there is only one thing that will fix the problem, and
    that is a bipartisan, bicameral solution where everybody comes
    to the table.
        Our national debt has increased more than $6 trillion just
    in the past few years alone. The United States is currently--
    our debt stands at $33.8 trillion in debt. And as we know, the
    primary objectives of the Treasury's debt management strategy
    is to issue debt in a regular and predictable manner, to
    provide transparency in the decision making process, and to
    seek continuous improvements to the auction process.
        So, Mr. Smetters, I will start with you. Do you believe the
    Treasury's current debt management strategy is meeting these
    objectives?
        Mr. SMETTERS. The auction design is, I think, fairly
    efficient. It is a very large market. The secondary market is
    very liquid. From an economist's perspective of we are going to
    start all over again, I actually would have the U.S. Treasury
    mostly focus on long-term debt issuance, even if it means a
    higher interest rate that is paid.
        And the reason why we currently have the situation that we
    have is that we have debt markets who are making bets against
    what they think Treasury will issue in the future, Treasury
    making bets against the debt market, and that is not
    competition; that is just an incredible source of uncertainty.
    Instead, Treasury should focus on what it actually does.
        So it is a big bias currently in the budget right now,
    where it rewards Treasury for lowering the expected costs,
    freeing up money for other things, but it doesn't penalize for
    anything like rollover risk that comes associated with that
    shorter term cost. I would remove that budget bias. I have an
    idea in my written remarks to do that.
        But the real value that Treasury brings is the thing that
    private markets cannot bring, and that is the long-term, risk-
    free asset.
        Mr. FITZPATRICK. Thank you.
        Mr. Faulkender, as I understand it, the Treasury's debt
    servicing strategy not only impacts private investment income
    growth and things like mortgage rates, but also impacts the
    Federal Government's ability to spend on other policies and
    programs. Is this correct, number one?
        To put it another way, how does the dramatic increase in
    debt servicing costs impact the Federal Government's ability to
    spend money on other policies and programs?
        Mr. FAULKENDER. So, yes, it is correct, in that the
    Treasury rate serves as the base rate for most, if not all,
    world--you know, global financial transactions. When we think
    about pricing out the interest rates, we would see on whether
    it is mortgage securities, whether it is on car loans, but even
    international bond issuances, the Treasury rate serves as a
    base reference rate that is used.
        And so while I would not--while I wouldn't argue we should
    push towards entirely long-term, I think it is beneficial that
    we have--that Treasury issues the whole spectrum of interest
    rates to provide those base rates for a variety of
    transactions, and I think that their work with the Treasury
    Borrowing Advisory Committee to get guidance on where there are
    clientele effects or gaps in the maturity structure is
    beneficial.
        Mr. FITZPATRICK. Thank you.
        I yield back, Mr. Chairman.
        Mr. SCHWEIKERT. Thank you, Mr. Fitzpatrick.
        Mr. Pascrell.
        Mr. PASCRELL. Thank you, Mr. Chairman.
        Mr. Kogan, we have had a front-row seat in the last couple
    years as America's credit has been endangered. We have only
    escaped fiscal calamity by the skin of our teeth, listening to
    all of our great speakers here today.
        So, over a decade ago, our committee heard testimony from
    the former IMF chief economist who said the impacts of default
    would be 10 times worse than the Great Recession. That is what
    he said 10 years ago.
        Can you detail what a default would mean for everyday
    Americans, as quickly as possible?
        Mr. KOGAN. Sure. So there are two points I want to make on
    that, Congressman. Appreciate the question.
        The first is on the credit side, and then the other is on
    the government side.
        Mr. PASCRELL. Right.
        Mr. KOGAN. So as my fellow panelist was saying, the entire
    financial system is capitalized through the U.S. Treasury
    market, and so any single transaction that involves credit
    would be more expensive. The whole point is that, if the
    government says it is going to pay you a certain amount in a
    certain time, you believe it. But if we are in default, that is
    no longer the case.
        And so home loans, auto loans, anything that involves
    credit is more expensive. But even if you are just buying from
    a business and you are not doing any credit, if the business is
    involved in the credit market and that is more expensive, then
    now the business costs are up. So any kind of purchase from an
    individual is more expensive. So that is on the credit side.
        And on the government side, the government is not allowed
    to issue new debt, which means it has to dramatically pull back
    its spending as we are no longer allowed to run deficits, and
    that means that any of the benefits that the American people
    rely on are no longer assured to come on time in the full
    amount--veterans benefits and disability compensation, child
    care, Medicaid payments to the States, you name it--those are
    all no longer guaranteed. So it would be cataclysmic for the
    country and for the world that also relies on the global
    financial market.
        Mr. PASCRELL. And I think you would agree with me that,
    when we look back historically, both parties are at fault in
    getting to the red line, some more appreciably at different
    times, obviously. But in 2011 and 2013, in 2015, in 2023, this
    was driven by the Congress.
        The debt extortion--I use that word strongly--has led to
    devastating consequences. Our Treasury debt has long been the
    world's safest asset, historically, but default extortion has
    lowered credit ratings and created higher borrowing costs. You
    guys have referred to that.
        Can you explain how even threatening a default on our debt
    impacts our Nation's economy and the ability of the Federal
    Government to maintain a stable market for Treasury securities?
        Do you understand my question? Am I clear?
        Mr. KOGAN. Yes, Congressman. So absolutely, as we said, the
    entire--the entire financial market is capitalized by these
    Treasuries. So if you are no longer certain--even if we don't
    default, if you now have in the back of your mind that we might
    default, then, especially for the longer term bonds, you are
    going to want to price in some uncertainty. And that is going
    to raise up--that is going to raise rates.
        Now, it is not going to be cataclysmic in the way that the
    actual default would be, but that raises the bar and cost in
    the margin of everything. So it is--if you want to talk about
    government waste, that is pure government waste. It is
    uncertainty out of nothing that raises borrowing costs both for
    the government and for everyday Americans.
        Mr. PASCRELL. Thank you.
        The deficit fell by a record $1.7 trillion during President
    Biden's first 2 years. The President has a plan to reduce
    deficits--have you seen that plan--by nearly $3 trillion over
    the next decade.
        We have been focused on looking and protecting Social
    Security, Medicare. Members on both sides have different views
    of that.
        Can you explain why spending programs like Social Security
    and Medicare are not primarily responsible for our deficit? Why
    is it necessary to increase revenue and close the tax gap to
    reduce the deficit?
        Mr. KOGAN. Thank you, Congressman. So taking the second
    part of your question first, the tax gap for anyone listening
    who is unfamiliar, it is the difference between the amount that
    is legally owed under law and the amount that we take in. So
    the tax gap is the mixture of people cheating on their taxes
    and then accidentally paying the wrong amount. It is estimated
    to be over $600 billion a year. Again, that is how much we
    don't take in that we are supposed to.
        That is bigger than the fiscal gap. So if tomorrow--
    obviously, you actually--it is impossible to recoup all of it,
    and then you actually have to spend money to get it. But if
    tomorrow everyone started voluntarily paying the correct amount
    and not making mistakes, that would be enough to change our
    fiscal trajectory to having debt decline indefinitely. So it is
    an incredibly important source.
        The fiscal gap is 1.7 percent of GDP, and it is bigger than
    1.7 percent of GDP. So, therefore, it is just a mathematical
    truth; that will be enough to have debt declining indefinitely.
    It is a great source of revenue to have people pay the taxes
    that they already owe.
        As to the first question for why it is spending--so why it
    is not spending, again----
        Mr. SCHWEIKERT. Yeah.
        Mr. PASCRELL. Let him finish his answer.
        Chairman SCHWEIKERT. No, no, no. Let you finish, and then
    we can get----
        Mr. KOGAN. Okay. Sorry. As to the first part of your
    question, it is just--as I said in my testimony, these two tax
    gaps are bigger than the fiscal gap, so regardless of whether--
    where you kind of want to place blame, like, we can--we
    mathematically know that they are enough to stabilize debt. And
    then the question about why we think that that is more fair
    than spending, it is just that spending is down and not up.
        Chairman SCHWEIKERT. And for management of the room, we are
    just going to start doing two to one just because the ratio
    is--Mr. Steube.
        Mr. STEUBE. Thank you, Mr. Chairman.
        When I was elected to Congress only 5 years ago, the debt
    was $21 trillion. Today, it is almost $33 trillion. So in 5
    years, we have put $13 trillion on the debt, and it is a
    staggering number that seems almost incomprehensible,
    especially to those in my district.
        When I try to explain that Washington has a spending
    problem and we are not addressing and balancing our budget, I
    come from the State of Florida, where we are required by
    constitution to balance our budget every single year. And so
    the legislature is very good about making sure that we are
    operating like you would operate your family or operate your
    business and not getting ourselves into the incomprehensible
    levels of debt that we have gotten our country into.
        Unless Congress gets serious about our spending problem,
    the consequences of Congress' failure to govern responsibly
    will have a disastrous impact on lives of several generations
    of Americans.
        It is true that deficit spending is nothing new. With only
    a few exceptions over the past several decades, the Federal
    Government spends more money than it receives every year. Since
    we do not actually have the money to pay for our spending, the
    government borrows money by issuing debt in the form of
    Treasury bills, notes, and bonds.
        In just the past few years, the amount we are forced to
    borrow has grown dramatically. The national debt increased by
    almost $2.5 trillion just in this past year alone. Despite
    Congress' best efforts to bury its collective head in the sand,
    the bill will ultimately come due.
        The interest payments on our existing debt are growing at
    an unsustainable rate. In fiscal year 2023, Federal net
    interest payments skyrocketed up to $659 billion, a 40 percent
    increase from just the prior year. Debt servicing costs will
    soon be the second largest line item for Federal spending,
    which will put it ahead of Medicare and defense spending.
        In recent months, both Fitch Ratings and Moody's downgraded
    their credit ratings on the government due to the large fiscal
    deficits and rising interest rates. We have been able to issue
    debt on favorable terms in the past because investors viewed
    them as a low-risk investment. Unfortunately, our bad decisions
    are catching up with us, and the market is starting to notice.
        We got away with spending like this for too long because
    interest rates were historically low. However, rates are on the
    rise, and our government does not appear to be ready for the
    consequences. Politicians from both sides of the aisle share
    blame for our addiction to spending money we do not have, and
    we are just now beginning to bear the consequences.
        Mr. Faulkender, I will start with you. Given the dramatic
    increase in debt servicing costs that we are experiencing,
    shouldn't this encourage Congress to tighten our belt instead
    of borrowing more money at a higher rate?
        Mr. FAULKENDER. Certainly, yes. We definitely need to
    tighten our belts.
        Mr. STEUBE. Your testimony points out that demand for
    Treasury securities at long-term bond auctions has declined.
    Why is that?
        Mr. FAULKENDER. That is correct. So if we look at the last
    couple--there was a 10-year auction and a 7-year auction
    recently where there was less demand, particularly from
    international buyers, and so the prime dealers who participate,
    they had to soak up more of the issuances than they normally
    would have to.
        Mr. STEUBE. Well, and you said two. What--like, what are
    the implications for that on the taxpayer?
        Mr. FAULKENDER. So the implications are that yields,
    therefore, are going to be higher. The auction outcome at which
    the issuance actually goes through results in a higher yield,
    which means that interest payments are higher than what they
    were expected to be.
        Mr. STEUBE. So, in the last exchange with Mr. Pascrell, Mr.
    Kogan was talking about, if we were able to magically get $600
    billion of people to pay what they are supposed to pay, do you
    guys have any response to that or do you have a difference of
    opinion on that issue?
        Mr. FAULKENDER. Well, I think there are two parts, right.
    There is the tax gap, and then there is also had we not engaged
    in some of the tax cuts. If that were the case--remember that
    the Tax Cuts and Jobs Act, for instance, made the Tax Code more
    progressive, not less. And so, you are talking about a time of
    an affordability crisis for many American households, and the
    argument seems to be if only middle-class taxpayers were paying
    more taxes.
        Mr. STEUBE. Mr. Smetters.
        Mr. SMETTERS. So even if we collected all the uncollected
    tax revenue, it is not going to come close to----
        Chairman SCHWEIKERT. Can you move closer to your
    microphone?
        Mr. SMETTERS [continuing]. It is still not going to balance
    the budget. It is simply the numbers aren't there. That is a
    big hypothetical if we can even get a lot of that money.
        I mean, the bottom line here is, you know, taxes have
    come--revenues come down, spending has gone up. And both sides
    are really to blame. In particular, if you just look at
    spending for fiscal year 2023, it is about $600 billion, $700
    billion more than you would have guessed just by trending the
    line pre-COVID. So, both are happening.
        Mr. STEUBE. Do you have anything to add to that in the
    remaining time I have?
        Mr. DRIESSEN. Yeah. So, you know, I think $600 billion
    would be helpful if we could kind of improve that on that side
    of the ledger. And I think, while I think some of the numbers
    that we have been throwing out are quite pessimistic, one thing
    I would want to communicate is, the sooner we act, even if it
    is only partially acting, the better, whether it is on the
    revenue reside or on the spending side.
        I think, you know, it would not get rid of the deficit
    entirely. Collecting $600 billion more in revenue every year
    would probably go some way to improving our debt trajectory,
    though how much is kind of uncertain.
        Mr. STEUBE. Thank you.
        I yield back.
        Chairman SCHWEIKERT. Thank you, Mr. Steube.
        Ms. Tenney.
        Ms. TENNEY. Thank you, Mr. Chairman, and thank you to the
    witnesses for your expertise. We greatly appreciate it.
        I just want to first say, one of the reasons we are here
    today is Ways and Means has sole House jurisdiction over the
    Federal debt and to fulfill this committee's duty to ensure
    that existing Federal debt is being managed at the lowest cost
    to the American taxpayer. Part of this means ensuring that the
    American people have more transparency surrounding the
    Treasury's debt management practices.
        So, with that being said, Mr. Driessen, it is my
    understanding that the Treasury has discretion over the debt
    management process. Is this correct? And, if so, where does
    this discretion derive from?
        Mr. DRIESSEN. Yeah. Treasury does have a relatively broad
    discretion within--to manage Federal debt. So, there is a lot
    of places in statute where that is provided. One of the big
    places is 31 U.S.C. in the 3100s. And so, you know, Congress
    can certainly make changes to what sort of powers they delegate
    to Treasury, but there is a lot of power with the Treasury
    Secretary and more generally----
        Ms. TENNEY. So, rulemaking also under the Code of Federal
    Regulations, I see, has happened over the years as well?
        Mr. DRIESSEN. Yes. Yes.
        Ms. TENNEY. So do you know, since that time of that
    statute, like, when is the most recent modification that this
    statute--well, to the statute that was made that is impacting
    the ability of the Treasury, either----
        Mr. DRIESSEN. Yeah.
        Ms. TENNEY [continuing]. For better or worse, to manage our
    debt?
        Mr. DRIESSEN. Sure. So I think the most observers would say
    it is kind of the last significant changes made to those
    portions of the Code were several decades ago. I think there
    were large changes in the 1970s and 1980s, largely to make the
    process a little bit more predictable and transparent.
        There have been some small changes since then, 2010 and
    others, but I think significant, you are talking several
    decades.
        Ms. TENNEY. Still significant ability to manage the debt?
        Mr. DRIESSEN. Right. Exactly.
        Ms. TENNEY. Thank you so much.
        As many know, the United States has benefited from
    historically favorable credit ratings, allowing the Federal
    Government to issue Treasuries on relatively favorable terms.
    However, as funding deficits and projected debt-to-GDP ratios
    have grown over time, the country's credit rating has not.
        For example, on August 1, 2023, Fitch Ratings downgraded
    the country's long-term foreign currency issuer default rating
    from AAA to AA+, which was the first time a ratings firm
    lowered its assessment of the U.S. Government's ability to pay
    its debt on time since 2011.
        Mr. Faulkender, can you please describe the relationship
    between Treasury's debt issuance strategy and credit ratings?
        Mr. FAULKENDER. Sure. So all bond issuances have to be
    rated in order for many mutual funds and different fund
    families to hold them, and so Treasury--there is--the rating
    agencies differently model out governments, corporates,
    utilities, and financials, and then they set a rating on the
    likelihood of being repaid.
        Treasury meets with the three major rating agencies each
    year to discuss the fiscal outlook and to give--and from that
    information they obtain, the rating agencies then provide a
    rating that is, as has been said by my panelists, the
    foundational interest rates that are provided in global
    financial markets.
        Ms. TENNEY. Well, let's bring this home. How does this
    affect American families, the bottom line there?
        Mr. FAULKENDER. So, the higher the borrowing costs for the
    U.S. Government, the higher the borrowing costs for nearly
    every other form of credit for the American people. So, it is
    not just that they are going to pay higher taxes in the future
    to support higher interest costs, but any borrowing they are
    doing in their own household is going to be higher if U.S.
    Treasury rates are higher because their bond rating is lower.
        Ms. TENNEY. Thank you.
        So, quickly, since--I will stick with you, Mr. Faulkender.
    You may recall a slide that Mr. Kogan shared earlier today
    during his testimony which argued that revenue and spending are
    both lower than earlier projections, suggesting that low
    revenues are responsible for the persistent primary deficits.
        So, what are your thoughts on this, and do you agree with
    Mr. Kogan's proposal?
        Mr. FAULKENDER. Well, again, the revenue forecast relied
    upon current law extending in ways that it is not clear
    Congress actually would have. So, we suffered, for instance,
    from what is known as bracket creep, which is that, as people
    made more money, a higher portion of their income was then
    thrown into a higher tax bracket.
        In order to have those CBO projections continue, you would
    have had to assume that Congress would not have fixed that.
    Likewise, as we know, the alternative minimum tax, for
    instance, was implemented to capture a couple of millionaires
    that weren't paying very much in Federal income taxes, and yet
    by the--into the 2000s, you had, you know, a few million
    taxpayers being hit by the AMT, and so Congress came in and
    modified it because it extended beyond what its original
    objective was.
        One has to presume that Congress would not have made those
    fixes that American households would be paying about 25 percent
    higher taxes today.
        Ms. TENNEY. Well, let me ask you this: Aren't a lot of
    these things static numbers? Isn't there a lot of growth that
    happened because of the Tax Cuts and Jobs Act?
        Mr. FAULKENDER. So that is the other piece, is that you
    have to presume that we would have continued to have the growth
    output we had. We saw higher growth rates following the Tax
    Cuts and Jobs Act. There is some recent academic work that
    shows that. It is hard to argue that we would have had the same
    economic output and the same spending levels had tax rates been
    significant--substantial.
        Ms. TENNEY. So, historically, where are we with revenues
    today?
        Mr. FAULKENDER. Revenues is a percent of GDP, which is, I
    think, the best way to look at it. In 2022, for instance, we
    are about fourth highest on record.
        Ms. TENNEY. Thank you.
        My time has expired. Thank you, Mr. Chairman.
        Chairman SCHWEIKERT. Thank you, Ms. Tenney.
        Ms. Chu.
        Ms. CHU. Mr. Kogan, I want to address an accusation leveled
    against Treasury Secretary Janet Yellen alleging that she
    committed the biggest blunder in the Department's history by
    not refinancing the public debt when interest rates were
    historically low. This accusation assumes that the Treasury
    could have easily auctioned trillions of dollars in long-term
    securities at a very low interest rate on the bond market.
        Of course, the Secretary cannot compel investors to
    purchase the securities at Treasury auctions. And, in fact,
    former Treasury Secretary Mnuchin explored the idea of
    refinancing the debt this way under the Trump administration
    and found that there was no viable market for these bonds.
        So, we already know that there is no quick fix to reduce
    debt servicing costs. The reality remains that Republicans'
    commitment to cutting taxes for the wealthy and corporations is
    the reason for the country's rising debt ratio.
        So, Mr. Kogan, can you talk more about the issues with this
    proposed simple fix for reducing debt servicing? Why did
    Secretary Mnuchin find that this option was not viable when he
    studied it in 2019?
        Mr. KOGAN. Thank you for the question, Congresswoman. Yeah.
    Precisely as you said, you cannot induce demand--you cannot
    force people to buy stuff. But even if you--it is even deeper
    than that, because even if you could compel people to buy at
    the rate you want, the Treasury deliberately tries to
    diversify, you know, how it is doing the bond market. It
    deliberately wants to make sure that there is not too much
    demand for certain kind of Treasuries, too little demand. It
    has a vested interest in making sure that the entire market is
    stable, and that is far more important than kind of winning a
    little bit in the margin. Maybe you could do a little bit in
    the margin, but the stability is the most important thing.
        And then I would be remiss if I didn't point out, even if
    you then did do this and you were able to--you were able to
    lock in really low rates for a lot of the debt, that has
    nothing--that has very little to do with kind of the long-term
    trajectory. Eventually that debt rolls over, and then you are
    right back where you started. Yes, you kind of gained a little
    bit by getting the benefit from lower stuff, but the long-term
    issue is driven by the fact that revenues are lower than
    primary spending, not that, you know, we locked in interest a
    little bit higher or a little bit lower. And that is kind of
    the big issue. And as I said, that is caused by these tax cuts.
        Ms. CHU. Mr. Kogan, unfortunately there are far too many
    tax loopholes that benefit the wealthy in our Tax Code, and I
    am working with Senator Sheldon Whitehouse, chair of the Senate
    Budget Committee, on legislation to close one of those harmful
    loopholes in the Tax Code.
        Normally, the wealthy are subject to capital gains taxes
    when they sell appreciated assets like stock. But if those
    assets are instead donated to a 501(c)(4), the donor pays no
    capital gains taxes at all, even if the organization sells the
    assets immediately after receiving the donation.
        This loophole effectively gives a public subsidy to the
    wealthy for engaging in political activity like lobbying and
    seriously reduces tax revenue. For example, earlier this year,
    billionaire Barre Seid donated $1.6 billion in stock to a
    rightwing nonprofit organization that engages in political
    activity, avoiding a tax bill of up to $400 million.
        So, Mr. Kogan, can you talk about the impact of closing tax
    loopholes like this one? Can Congress improve our fiscal
    condition by ensuring that the wealthy pay their fair share?
        Mr. KOGAN. Thank you, Congresswoman. Yeah, making sure that
    the--kind of these forms of capital are not getting
    preferential treatment is an important way of--both of kind of
    increasing equity in society and also in terms of helping the
    Federal Government.
        I think the estimate is that more than half of capital
    gains have never been taxed and will never be taxed. You get
    the full buildup, and then the example you give, they get to
    pass it over, and then the basis is reset. And so, then, if
    they sell it immediately, there is no gains, right. It is
    another way in which--yeah, in the case of Mr. Seid, most of
    the gains from his business will never be taxed, and that is a
    major problem that has huge effects on our Federal outlook.
        The one thing I want to say, so the President proposed a
    tax plan that would be only above 4--only bring in revenue
    above folks making 400K in profitable businesses. That itself
    is--his proposal is almost enough by itself just to stabilize
    our long-term outlook. It is slightly below the fiscal gap. If
    you did a little bit more, that will be enough. This is a
    major, major, major source of revenue.
        Ms. CHU. And, in fact, earlier, somebody on the other side
    of the aisle said that despite our $688 billion in the tax gap,
    that how could we magically pay for this? But is there a way to
    pay for it?
        And let's talk about IRS funding.
        Mr. KOGAN. Sure. So the tax gap, as I say, it is bigger
    than the fiscal gap. So you cannot get it all. You have to
    spend money to get it. That ends up, you know, netting down the
    costs and, regardless, you won't be able to get it all. But it
    is a major source of lost revenue of people simply cheating on
    their taxes or kind of mispaying.
        As I said, if we could get it all--we can't, but if we
    could get it all, that would be enough not to balance the
    budget but to stabilize our debt ratio.
        Ms. CHU. Thank you. I yield back.
        Chairman SCHWEIKERT. Thank you, Ms. Chu.
        Mrs. Fischbach?
        Mrs. FISCHBACH. Sorry. Had to find my button.
        Thank you, Mr. Chair.
        Dr. Faulkender, I----
        Chairman SCHWEIKERT. Mrs. Fischbach, can you get close to
    your mic?
        Mrs. FISCHBACH. I can't, actually. The chair is too big. I
    will lean in.
        Chairman SCHWEIKERT. Just scream.
        Mrs. FISCHBACH. Okay. I will lean in.
        And thank you very much.
        But I know that Congresswoman Tenney kind of was--led up to
    some of this, but maybe you could describe the impact that the
    higher Treasury yields have on the American family in layman's
    terms. So, what is it really doing to the American family
    budget?
        Mr. FAULKENDER. Sure. So, let's think about--the mortgage
    rate that the American person--that the American household pays
    on their 30-year mortgage is going to be priced off of a 10-
    year Treasury bond. So, think about where 10-year Treasury bond
    yields were back in the 2020, 2021 timeframe. They were around
    1 percent. And so, therefore, you were able to get households
    to get 30-year mortgages at around 3 percent. There is going to
    be a gap because there is, of course--the Federal Government is
    going to be a higher quality credit than an individual
    household, and so there is a spread that households pay.
        Today, the 10-year bond is closer to 4, 4.5 percent, and so
    you have got mortgage rates closer to 7 percent. Again, as the
    10-year Treasury yield went up, so did the borrowing rate for
    households.
        Now, this has enormous problems because, for instance, a
    $250,000 mortgage on a house back in early 2021 would have
    about a thousand dollars a month in a principal and interest
    payment. At today's interest rates, that would be closer to
    $1,700 per month.
        That doesn't just make home ownership less affordable for
    people newly looking to purchase a home, but it also means that
    people are somewhat trapped in their existing homes. So,
    imagine for a moment that, you know, you got married and your
    spouse and you bought a house, but you were looking to maybe
    move to a different school district or get a larger home when
    it was--when the kids were of school age.
        Right now, if you move, you don't get to take your mortgage
    rate with you. And so that means that, if you move, you lose
    the 3 percent mortgage rate that you had when you refinanced
    back in 2020, and now you are possibly going into a 7, 7.5. And
    that makes it nearly unaffordable for many not just to start
    home ownership, but then continue on the path that we normally
    think about families engaging in.
        Mrs. FISCHBACH. Thank you very much.
        And, you know, can you maybe talk about some of that in
    comparison to what is going to happen with the economic growth?
        Mr. FAULKENDER. Sure. Oh, my. Okay.
        Mrs. FISCHBACH. See, you get up close and it scares you.
        Mr. FAULKENDER. I barely moved.
        Mrs. FISCHBACH. That is what is going on with me.
        Mr. FAULKENDER. So the other thing, though, it does is
    there is something called labor mobility, which also, because
    we have locked people into their houses, it makes it more
    difficult for people then to move if--so let's say that a new
    work opportunity arose in another town, again, it is now
    significantly more expensive for somebody to move and take that
    alternative job because, again, you don't get to take your
    mortgage rate with you.
        Also, purchases of automobiles, any kind of purchase that
    consumers are making on credit is now that much larger. Small
    business loans are now higher interest rates. So that is going
    to curtail the type of investment we see. And that is why we
    have seen, for instance, that the number of pending home sales
    is at 20-year lows. So there is reductions in a variety of
    economic--of industries as a result of this higher interest
    rate environment.
        Mrs. FISCHBACH. Thank you very much. I appreciate it. And
    it really is important, I think, that the American people
    understand, you know, how this really is affecting and their
    inability to purchase a home and to purchase the cars.
        And I appreciate the effect that you mentioned, the labor
    mobility issue too, because there are lots of other job offers
    going around and it makes it difficult. So thank you, and thank
    you all for being here. I appreciate it.
        And with that, I yield back, Mr. Chairman.
        Chairman SCHWEIKERT. Thank you, Mrs. Fischbach.
        Ms. Van Duyne.
        Ms. VAN DUYNE. Thank you very much.
        The reality is Biden inflation is driving our national debt
    to unprecedented levels, not only burdening future generations
    but also actively punishing working families and forcing people
    across the country to choose between putting food on the table
    and paying for things like rent. The American people are
    suffering and tightening their budget right now. The Federal
    Government should be doing the same thing. The last few years
    of spending levels weren't just unsustainable, they were
    reckless and unfair to future generations who will be forced to
    foot the bill.
        To borrow from my friend, the Budget Committee chairman, we
    didn't get into this massive amount of debt overnight and we
    won't get out of it overnight, but we cannot get ourselves out
    of this mess just by cutting spending. But through sound tax
    policy, we can and need to grow our way out of this.
        I am looking forward to the Tax Subcommittee hearing later
    today, which we will look at the successes of TCJA, which
    brought in record revenues and created unprecedented growth.
    And this is our Tax Cut and Jobs Act, as all of you are
    familiar.
        I have got a question for Mr. Smetters. Since 2021, we have
    seen the Federal debt balloon by more than $6 trillion all the
    way up to an unprecedented $33.8 trillion. This debt not only
    strains the Federal Government's ability to service the debt,
    but also costs American families and taxpayers tremendously
    through increased mortgage rates, car loan rates, and every
    other day necessities.
        Mr. Smetters, what can Congress do to help mitigate the
    cost of servicing this extremely high debt for American
    taxpayers?
        Mr. SMETTERS. The main thing it can do is simply reduce the
    deficits over time, and that is either through more revenue,
    less spending, or a combination of both, and that would lower
    interest payments that are required to be paid on that debt.
        And, you know, there is a lot focused on these ratings, but
    keep in mind, ratings really focus on technical default or the
    failure of the government to pay. Markets are much more
    concerned about potential for monetization of future debt and
    through higher inflation, and that is not going to be captured
    in ratings at all. So there is much more scare out there than
    is captured by ratings alone.
        Ms. VAN DUYNE. I appreciate that.
        Mr. Faulkender, in fiscal year 2023 alone, debt increase
    soared to $659 billion, a nearly 40 percent increase from
    fiscal year 2022. And on top of that, within a few years, debt
    service costs alone are expected to become the second largest
    Federal Government outlay only behind Social Security.
        So is there anything the Treasury can or should be
    implementing in this debt servicing and management strategy to
    help mitigate costs for the American people?
        Mr. FAULKENDER. I think the most important thing Treasury
    can do, as Kent just mentioned, is work to reduce the budget
    deficit. So, for instance, we saw Treasury issue rules
    regarding the electric vehicle tax credits that were much more
    generous than they needed to have been. We have seen, for
    instance, just earlier this week, there was an article in The
    Wall Street Journal about Treasury opening up COVID money for
    States that, instead, could be reprogrammed towards other
    activities.
        Anything we can do to bring down the budget deficit would
    lower our future debt service costs.
        Ms. VAN DUYNE. I appreciate that.
        And, Mr. Kogan, in your testimony, you said that our
    current rising debt ratio is due entirely to both Bush and
    Trump tax cuts, not spending increases. Can you honestly sit
    here and justify the current spending levels that we have seen
    over the last few years?
        Mr. KOGAN. Thank you for the question, Congresswoman. Yes,
    I can. I think, you know, the important thing for us to figure
    out as a society is what we want our government to look like,
    and then we should figure out how to make sure we have----
        Ms. VAN DUYNE. Well, we know what our government looks
    like. I am asking you not what the government looks like. I am
    asking you, can you sit here, look me in the eye, and justify
    the spending levels that we have seen since the Biden
    administration took over, when you are complaining that it is
    all the Bush and tax cuts--Bush and Trump tax cuts that caused
    it, even though we have seen record amounts of increased
    revenue as a direct result of things like the TCJA?
        Mr. KOGAN. Thank you for the question. So I would make
    three points on this. The first is that we had the strongest
    recovery in the world among G7 countries. That is a really,
    really important thing. I am glad that we are serious about the
    COVID response.
        Ms. VAN DUYNE. So you are glad that we are at $33.8
    trillion debt. It is a good thing.
        Mr. KOGAN. I am glad that we did not have an economic
    calamity. I am glad that we responded correctly.
        Ms. VAN DUYNE. But do you not think that it is short term
    and that we will potentially have that when you are looking at
    $33.8 trillion in debt?
        Mr. KOGAN. The stock of debt is different from the long-
    term trajectory. So what the recession spending did was we
    pushed up the stock of debt, but that has little effect on the
    long-term trajectory of our debt ratio. We are starting from a
    higher level.
        Ms. VAN DUYNE. We are going to be at a point where the
    second largest Federal Government outline is going to be
    servicing that debt. That is long term.
        Mr. KOGAN. Right. But the long-term debt ratio is driven by
    the flows in the future, rather than----
        Ms. VAN DUYNE. Thank you. I yield back.
        Chairman SCHWEIKERT. Thank you, Ms. Van Duyne.
        I want to get to Mr. Schneider, because he has another
    place he belongs right now.
        Mr. SCHNEIDER. Thank you very much. And I thank the
    witnesses. A lot of good things here.
        Let me start with just a question for Mr. Kogan. In the
    opening remarks, it was noted that we had a balanced budget in
    1999 with a Democratic President, Republican House. What was
    the--do any of you know the spending or the revenue--I am
    sorry, the revenue side as a percentage of GDP in 1999?
        Mr. KOGAN. I don't have 1999, but the highest that we got
    was 20 percent of GDP. Yeah.
        Mr. SCHNEIDER. Right. It was actually 19.6, to be precise.
    And by the way, I will agree with my Republican colleagues, we
    all rightly should be concerned about our level of debt. I
    think we are talking about it. $33 trillion is a massive number
    and, as you said, Mr. Kogan, it is not sustainable if we stay
    on the current trajectory. We have to take specific action.
        Dr. Smetters, you made a comment just a moment ago. It is
    not just the drop of our ratings with the credit agencies; it
    is if there is a loss of confidence. One of the things I
    believe the credit agencies noted in the ratings cut is that it
    is the failure of Congress to take the necessary steps to show
    that we are serious about that.
        Do you think that was a fair assessment of Fitch and
    others?
        Mr. SMETTERS. Sir, do keep in mind Fitch is really focused
    on the narrow question of whether payments will be made.
        Mr. SCHNEIDER. But S&P took that position when they did it
    a number of years ago. Do you think others are looking at us
    and saying, if Congress can't act, there are reasons to be
    concerned about United States' future fiscal trajectory?
        Mr. SMETTERS. Absolutely. Once capital markets believe that
    fiscal balance will not happen, you will see a big unraveling.
        Mr. SCHNEIDER. And, Mr. Kogan, maybe you know this. Our
    discretionary spending, is it significantly higher than it was
    in 1999, when the two lines crossed at 19.6 and 20 percent?
        Mr. KOGAN. No. Our recent kind of post-Budget Control Act
    levels are significantly below average in the post-1986 kind of
    world. And, in fact, nondefense discretionary minus the VA
    shrank this year from the previous year, which itself shrank
    from the previous year. We have kind of a semistable, somewhat
    shrinking trend for NDD.
        Mr. SCHNEIDER. So, if I follow your logic, going back to
    when we had things in balance at roughly, let's call it, 20
    percent for sake of argument, revenues and spending both end at
    20 percent of GDP. Our revenues today are what percent?
        Mr. KOGAN. We are down to 16.5, not among the highest ever
    but, instead, the lowest ever in good economic times.
        Mr. SCHNEIDER. Wait. I thought we were at record. Is 16.5
    less than 20 percent?
        Mr. KOGAN. Significantly less, Congressman.
        Mr. SCHNEIDER. Okay. So let me stick on this for a moment.
    Because if the revenues are lower, there are a number of
    reasons that might be. One is, as you have noted, the tax cuts
    in previous administrations. The other one also noted is this
    tax gap, and that is something I have been very much focused
    on.
        You said we can't get all of it. I think one of the reasons
    you expressed that was because there is going to have to spend
    money to get it. Compliance is a key piece of this.
        What would happen if we cut the investment that the
    administration has asked for and Congress approved in
    increasing our compliance? What is likely to happen to the tax
    gap?
        Mr. KOGAN. It absolutely will increase. It will send a
    signal to would-be tax cheats that, not only is the United
    States not serious about going after tax cheats, but that even
    if we--in the one time where it looked like we were going to
    get serious, that there was massive mobility against doing it.
    So I believe it would increase lack of compliance.
        Mr. SCHNEIDER. Okay. So, if there is a greater tax gap and
    there is a greater need to try to get to a place where we are
    bending the curve and reducing our deficits, who is the burden
    going to fall upon?
        Mr. KOGAN. I am sorry. Could you please repeat the
    question?
        Mr. SCHNEIDER. I guess it is a leading question. I will ask
    it even more leading. If we signal to the tax cheats that it is
    open season, if we let the tax gap expand because the IRS
    doesn't have the ability to enforce the laws on the books,
    doesn't that put a greater burden on law-abiding taxpayers?
        Mr. KOGAN. That is right. Thank you, Congressman. Yeah, it
    is a deeply unfair thing for the super majority of us who pay
    our taxes. Democrats, Republicans, Independents, nonvoters,
    most of us pay our taxes. To give special preference to tax
    cheats is bad for fairness, and it is bad for America, and it
    is bad for our Federal coffers.
        Mr. SCHNEIDER. Maybe not just calling them tax cheats, but
    freeloaders and free riders, people who are taking advantage of
    those who obey the law, because there are too many people in
    this body, in Congress, who are trying to eliminate the ability
    to go after those tax cheats and make sure that we are doing
    what we can to serve those who are honoring the law.
        With that, I yield back.
        Chairman SCHWEIKERT. Thank you, Mr. Schneider. And I
    appreciate your patience. I know you needed to run on us.
        Mr. Feenstra.
        Mr. FEENSTRA. Thank you, Mr. Chair. Thank you for holding
    this hearing.
        I want to thank each of our witnesses for your testimonies
    today. I think each of you made it very clear that we are in
    some very serious times with our debt, and it is on the backs
    of our children and grandchildren. And if we don't act, there
    are going to be severe ramifications. We have also just heard
    about the 10-year yield, how that affects families and
    businesses. And when it comes to loans on houses, cars,
    operational loans for businesses, this is real.
        But I want to talk about more macroeconomics and the risks
    that are out there. And one thing that is not talked about is,
    when you start having all this spending, when you are having
    all these treasuries being sold, you are flooding the market
    with treasuries, in effect, it affects private investment,
    literally affects private investment. And that is what I want
    to talk about.
        Dr. Faulkender or Mr. Faulkender, can you expand on this,
    that how would the private enterprise and the private sector,
    private investment be affected by all this flooding of paper on
    the market?
        Mr. FAULKENDER. Sure. So the reason that firms are going to
    engage in the private investments is because spending money
    today is going to generate better outcomes in the future. But
    because it is now going to be more expensive to move that money
    from the future back to today in terms of the higher interest
    rate environment, that is going to make incremental investments
    less valuable. They are not going to look as strong. And so you
    are going to see companies----
        Mr. FEENSTRA. Less competitive.
        Mr. FAULKENDER. Less competitive, less beneficial to engage
    in that investment. And that means companies are going to pull
    back on the kind of infrastructure investment and facilities
    and equipment investments and intellectual property.
        Ultimately, real wage growth comes from matching capital
    with labor. And if we reduce the incentives on businesses to
    allocate capital to match with that labor, you are reducing
    real wage growth, and that reduces income for future Americans.
        Mr. FEENSTRA. Exactly right. And that is my greatest fear.
    I mean, we can talk about the interest rates and all this
    stuff, but there is this big macro effect that is going to
    affect so many other things, especially when it comes to GDP.
    And I want to talk to Mr. Smetters about that.
        Staying on the topic of macroeconomics, you stated in your
    testimony that if Federal debt is allowed to increase to 180
    percent of GDP over the next 30 years, the economic
    consequences would be severe. GDP would fall to around 8
    percent. Wages would fall by 4 percent. Interest rates would go
    up by 1.5 percent.
        I want you just to discuss the scenario further, and what
    timeframe do you see? I mean, this is big stuff. This is really
    serious stuff. I want your thoughts, Doctor.
        Mr. SMETTERS. Yes. In fact, this is the good news, because
    that is the most optimistic that we could actually project our
    framework. And in particular, because of this crowding out
    effect that was just described of the reduction in investment,
    it is going to shrink the capital that is available, and it is
    going to reduce GDP relative to where it otherwise would have
    been at about 8 percent.
        Literally, we cannot solve the model after that point.
    There is just not enough national saving. A lot of times people
    make a comparison against Japan. It is just not right for many
    reasons.
        And so this is the most optimistic that we can even get
    with the model. If capital markets really believe that Congress
    is not going to take action, everything unravels even faster.
        Mr. FEENSTRA. Yeah. So, Dr. Faulkender, I want to go back
    to you then. On that same front, right, if you look at the
    global world and where we stand with the European Union and all
    this stuff, if we continue to slide down this path of lowering
    our GDP and continue with, you know, flooding the bond market
    with paper, what does this do to the rest of the world? What
    does this do to our dollar?
        Mr. FAULKENDER. So traditionally, the strength of our
    economy and the strength of our ability to engage in foreign
    policy, engage in our national security is a result of the
    strength of our underlying economy. So if we reduce our growth
    rate, that reduces our ability to, for instance, maintain our
    status as the world's reserve currency.
        Mr. FEENSTRA. That is right.
        Mr. FAULKENDER. The world's reserved currency, as I
    mentioned in my opening remarks, facilitates our ability to
    engage in sanctions, on the national security. It allows us to
    monitor illicit financing, drug dealing, arms dealing around
    the world.
        All of those activities are endangered if we don't get our
    fiscal house in order. And if we continue down this path, it
    would jeopardize our status as the world's reserve currency.
        Mr. FEENSTRA. I want to thank you for those comments. I
    mean, this is catastrophic not only to our Nation but around
    the world and what it does to our U.S. dollar. And that is why
    we have got to get our arms around this.
        And I thank the chairman for putting this together, as it
    is so critical. So I look forward to figuring out a fix. I hope
    you guys are all involved in trying to understand what a fix
    looks like.
        With that, I yield back.
        Chairman SCHWEIKERT. Thank you, Mr. Feenstra.
        Ms. Malliotakis.
        Ms. MALLIOTAKIS. Thank you very much, Mr. Chairman.
        The national debt has skyrocketed by more than $6 trillion
    over the last 2 years and is now nearing $34 trillion, and that
    represents over $100,000 in debt for every American man, woman,
    and child.
        The current fiscal trajectory is unsustainable, and
    American families are already feeling the financial hit through
    higher interest rates on mortgages, cars, and other goods and
    services financed in the economy. Servicing this debt has
    crowded out other government spending and forced the government
    to prioritize interest payments at the expense of American
    families.
        As early as next year, paying off the interest on the debt
    alone could become the second largest Federal outlay after
    Social Security, more than Medicare and defense outlays at a
    time when Medicare part A is predicted to be insolvent by 2031.
        There has been a lot of discussion today about what happens
    if we continue on this current trajectory, but I want to shift
    to the circumstances around who holds our debt, specifically
    foreign and international holdings, which now accounts for $7.3
    trillion. And this includes foreign adversaries like Communist
    China, which holds roughly $800 billion in America's debt.
        I will turn to you, Mr. Smetters, first. Many believe that
    the risk could be mitigated by addressing foreign countries'
    role in bidding for and ultimately owning our national debt.
    Can you please speak more about the role that foreign
    adversaries and other nations play in our debt servicing
    process, and is it beneficial, and what are the challenges?
        Mr. SMETTERS. Sure. So as testimony given earlier pointed
    out, there is a really big difference between China buying our
    debt versus them investing in our critical infrastructure and
    things like that. Right now, if anything, they are giving us a
    subsidy so we can build up our critical infrastructure. The
    international component of that is, if anything, right now a
    good thing for us, and it is not really a major risk.
        Ms. MALLIOTAKIS. Okay. Does anybody else want to comment on
    that point? You guys all look tired.
        Mr. FAULKENDER. I would just say I agree.
        Ms. MALLIOTAKIS. Okay. You agree. Great.
        I would like to turn--I would like you guys to expand a
    little more. I mean, you have brought up some really important
    points as it relates to keeping America's dollar as the reserve
    currency. And I want to just give an opportunity for you to
    expand on some of the other benefits that it is for the
    American taxpayer.
        Mr. DRIESSEN. I think it actively lowers our net interest
    costs. I think estimates range on exactly how much that is
    worth, but I have seen things around, you know, 25 basis points
    in terms of the interest rates that Treasury is phasing. That
    is quite large when you kind of map it out in terms of Federal
    cost per year if we were to cede the reserve currency to
    someone else.
        Mr. FAULKENDER. I would just add that being the world's
    reserve currency facilitates our sanctions activity. It
    facilitates capital flows not just to the Federal Government
    but to American businesses and companies as well as households.
    And then it also enables us to monitor illicit transactions, so
    everything from sex trafficking to arms dealing to drug
    trafficking.
        The fact that dollar denominated securities pervade the
    global financial system means that financial institutions
    around the world willingly participate in our oversight of
    these transactions, and that is enabled by the fact that we
    have the world's reserve currency.
        Ms. MALLIOTAKIS. And how threatened do you think this is
    right now, the U.S. debt and the impact it could have on us
    being the reserve currency?
        Mr. FAULKENDER. I had the privilege of testifying to the
    Financial Services Committee about this a couple of months ago,
    and I think our view is there are kind of three factors at
    play. You want to maintain a regulatory environment such that
    we have the most liquid, transparent markets in the world;
    second, you want to be a strong financial steward such that
    reserve banks want to hold your assets denominated in your
    currency; and then, third, you want to make sure that you don't
    abuse your position as the reserve currency when it comes to
    engaging in unilateral sanctions or unilateral punishments that
    abuse that position. And so maintaining those three things, I
    think, are essential to maintaining status as a reserve
    currency.
        Ms. MALLIOTAKIS. Thirty seconds left if anyone else wants
    to add.
        Mr. SMETTERS. The biggest threat for the U.S. economy is
    still the longer term. So certainly we could maintain a reserve
    currency, but if financial markets get nervous about our
    willingness to monetize that debt, which is the last channel,
    that is what has to happen mathematically if we don't close
    this imbalance, then that is when the financial markets are
    going to demand a much higher return, and this whole thing
    could literally unravel.
        Ms. MALLIOTAKIS. Well, thank you very much.
        And thank you, Mr. Chairman, for your commitment in getting
    our fiscal house in order.
        Chairman SCHWEIKERT. Thank you, Ms. Malliotakis.
        Ms. DelBene.
        Ms. DelBENE. Thank you, Mr. Chairman, and thanks to all our
    witnesses for being with us today.
        Mr. Kogan, I wanted to give you an opportunity to respond
    to an earlier question about the impact the Bush and Trump tax
    cuts had on the Federal debt, and I would love to hear your
    view on what that is and--well, let's start there.
        Mr. KOGAN. Thank you for the question, Congresswoman. I
    think the right way to look at kind of the long term is this
    concept called the fiscal gap. It measures how much primary or
    noninterest deficit reduction you need to go from having debt
    beyond its upward trajectory as a percent of GDP to being
    stable as a percent of GDP, not balanced budgets, not flat
    debt, but debt as a percent of GDP stable. And the most recent
    estimate using CBO numbers is 1.7 percent of GDP.
        The size of the Bush and Trump tax cuts under current law
    is bigger than that. So that means, even if you want to say,
    well, you could blame other things as well, regardless of where
    you want to place the blame, that just means that they are big
    enough that if you hadn't done them or if you undid them today,
    that debt would be stable as a percent of GDP. And that is kind
    of the starting point.
        I then think that it is right to focus on them because our
    spending trajectories--our long-term spending trajectories are
    down, not up. So we used to have a system where revenues and
    spending would keep pace, regardless of your assumptions about
    AMT. Now we don't. Since then, both revenue and spending are
    down. So it doesn't make sense to me to blame spending if our
    long-term trajectories are actually down instead of up.
        Ms. DelBENE. And sometimes the investments we make, make a
    big difference on the long term. Child poverty costs our
    country a trillion dollars a year in lost productivity, crime,
    health disparities.
        And so how can programs like the enhanced Child Tax Credit
    that increase children's opportunities for success and help
    rebuild the middle class, how can those benefit long-term
    economic growth?
        Mr. KOGAN. Thank you for the question, Congresswoman. So I
    think there is broad agreement investing in children is a very
    wise thing to do. You see higher birth rates. You see higher
    graduation rates. You see higher wages. You see, therefore,
    more money into the Federal Government. You see lower crime
    rates. You see lower recidivism rates.
        And then at the same time, you see the moral benefit of
    millions of children lifted out of poverty. There is strong
    agreement. In fact, CBO just released a working paper a couple
    weeks ago that showed that their estimate was that, even if you
    didn't offset it, enrolling children in Medicaid on a net
    present value basis paid for half of itself, and that if you
    did then offset it, then it was a two-to-one return. So there
    is strong, strong agreement that investing in children is a
    very wise thing to do, even aside from the moral imperative.
        Ms. DelBENE. And not investing has a cost. As I said
    earlier, child poverty costs us a trillion dollars a year.
    Sometimes if we don't invest, it actually costs us more money
    over the long run, which I think has been left out of this
    conversation a little bit.
        In your testimony, you discuss how earlier in the 21st
    century CBO forecasted long-term debt stability despite its
    initial outlook projecting primary spending to rise as a
    percentage of GDP.
        I wondered if you can speak to the role our tax system
    played in CBO's calculation of long-term debt stability and
    what has changed since then.
        Mr. KOGAN. Thank you, Congresswoman. Yeah. So in the CBO
    baseline, they assume bracket creep. I think some of my fellow
    panelists are against that concept. I don't think it is a bad
    thing that needs to be fixed. If I get a raise that outpaces
    inflation, then more of my income is taxed at a higher rate.
    That is the natural part of a progressive tax system. That is
    not a bad thing.
        And so regardless of whether you then went in and changed
    your AMT assumptions, we used to have a tax system where our
    revenue was going to grow to match our spending. And that is
    kind of the most important part. Since then, we have done these
    tax cuts. They not only lowered the level, they not only did a
    level increase, but they also flattened the Tax Code. The jump
    from one tax bracket to the next tax bracket is smaller than it
    used to be and kind of the income bands in some places have
    changed. That leads to less bracket creep than there used to be
    and, therefore, less kind of natural--natural income gains from
    the real wage gains when Americans get them.
        So those two components led to our revenue no longer
    keeping pace with our spending and, in fact, no longer growing
    quite as much when we have a good economy. We used to see, when
    the economy was great, revenues shot way up. Now they shoot up
    some. The fact that we have this economy and have revenues down
    at 16.5 percent of GDP, that shouldn't happen.
        Ms. DelBENE. Thank you.
        I yield back, Mr. Chairman.
        Chairman SCHWEIKERT. Thank you, Ms. DelBene.
        Ms. Moore.
        Ms. MOORE. Thank you, Mr. Chairman.
        I want to thank all of the witnesses for appearing. This is
    certainly a master class, and one of the great privileges of
    being a member is to have such expertise here.
        I just want to clear some things up. I think, Mr. Kogan,
    you just shared with the committee an explanation of what
    constitutes a fiscal gap, and you said that the 1.7 percent
    fiscal gap of GDP, that the tax cuts from Bush and Trump exceed
    that.
        One of the things that I really want to clear up is whether
    or not we regard tax cuts as spending. We seem to not think
    that providing trillions of dollars of tax cuts to the
    wealthiest 1 percent of Americans, that somehow that is not
    spending.
        Can you help me understand why that distinction is made?
    Maybe I understand why it is made, but is that not calculated
    as a part of spending?
        Mr. KOGAN. Thank you, Congresswoman. In terms of how the
    NIPA tables might show it, you know, they are going to classify
    it for the reason that you want. But to the point of your
    question, it is a cost regardless of how you are classifying
    it. It is the deficit or the primary deficit. It is just the
    difference between how much you are taking in and how much you
    are putting out.
        And so one way to change that is to change how much you are
    putting in or taking out, and another way is how much you are
    taking in. And so these are true costs that are borne by the
    American taxpayer.
        Ms. MOORE. So, when we reduced the tax bill down to 21
    percent, that was a loss of revenue and it was spending. Am I
    correct?
        Mr. KOGAN. I would say the way that it shows up in spending
    is with the future interest payments. We have to pay the--we
    have to bear the interest payments that then come from these
    tax cuts.
        Ms. MOORE. Okay. So you assert in your testimony that both
    revenues and spending are lower than earlier projections,
    meaning low revenues are responsible for persistent primary
    deficits. So we hear all the time that spending is going up,
    up, up, up, up. And we have many worthy things that we need to
    spend on, you know, healthcare costs and, you know, defense.
        So, your statement really contradicts people's notion of
    what is causing these deficits. Can you explain that statement?
        So, actually, we are not spending as much as we used to.
    Those projections are lower, but the revenues are lower. Can
    you explain that?
        Mr. KOGAN. Thank you, Congresswoman. So spending is going
    up, but it is going up at a slower pace than we used to project
    it to be. And so I think people focus that this year was higher
    than the previous year which, you know, aside from blips, is
    that is roughly the trend is the upward trajectory.
        But the reason that I don't think that that is the right--I
    mean, that is basically driven by demographic changes and
    excess cost growth. And so mostly what is going on is it costs
    more to do the same. It is not like profligate spending. It is
    that it costs more to take care of our seniors than it did
    before. And that is okay, because we used to have a tax system
    that would keep pace with that. The problem is we now no longer
    have a tax system that would keep pace with it.
        Ms. MOORE. Just very quickly, you know, I wrote down here,
    D equals S minus R, deficits equals spending minus revenues.
    Can you just sort of explain that for the record?
        Mr. KOGAN. Yes, Congresswoman. So the annual deficit is the
    difference between how much we spend in total. You take all of
    our program spending--Medicare, Medicaid, Social Security,
    SNAP--and then also the interest. You take all of that spending
    and then you look at how much we bring in in Federal tax
    revenue, and the difference between those is the deficit.
        Ms. MOORE. So when we talk about having high deficits, we
    are talking about having a lot lower revenue?
        Mr. KOGAN. That is right, Congresswoman.
        Ms. MOORE. Okay. So in my remaining time, I just want to
    associate myself with the comments, particularly of Ms.
    DelBene, with regard to the Child Tax Credit and the
    investments that we make in children.
        Would you agree that that should not just be regarded as
    spending but should be regarded as investments, you know, just
    as, similarly, Republicans like to associate tax cuts as
    investments?
        Mr. KOGAN. I think we can all agree that putting money for
    our children in the future is a wise investment. It is moral
    and, as I say, some of the benefits then redound to the Federal
    taxpayer.
        Ms. MOORE. Thank you so much.
        And thank you for your indulgence, Mr. Chair. I would yield
    back.
        Chairman SCHWEIKERT. Thank you, Ms. Moore.
        Dr. Murphy.
        Mr. MURPHY. Thank you, Mr. Chairman. And thank you for
    having this conference.
        And thank you all. I appreciate the expertise you all
    bring.
        I am just a dumb surgeon, so I am just going to have to
    approach this in a little bit different regard. I think if you
    look at what our biggest challenge is in the future, really, it
    will be healthcare spending. And let me say why I feel that
    way.
        1965 began with the Great Society programs with Medicare.
    At that age, you thought life expectancy was 70. You were going
    to live 5 years. Now we pushed it to 80, 2 or 3 percent live to
    90. But there was never any type of calculation ever put in
    that system at that time to account for what would be growth in
    longevity. Nothing.
        And so now we are chasing the fact that we are adding
    10,000 Americans a day to the Medicare rolls, but there was
    never any chase about that. And now the fact we are living to
    80, not 70, there was never any planning done with that. And so
    we are hitting the cliff because of that.
        And as for what we are doing with child tax credits, also
    with the Great Society programs we began rewarding, actually
    punishing the nuclear family. So if you look in the State of
    North Carolina now, 52 percent of the births in North Carolina
    are on Medicaid. I see these patients, okay? I see them face-
    to-face. And I see the 16-year-old mothers. I see the 22-year-
    old mothers having children. They are Medicaid.
        And all of a sudden, these poor children--and they are poor
    children because they are being raised by children themselves--
    are now the government's problem. These are, again, problems
    that have been caused by policies put into effect with the
    Great Society programs.
        So now we have this huge massive occurrence. Mr. Kogan,
    this is fact. We now have this massive occurrence, more and
    more people on Medicare because, hey, great, technological
    advances that have occurred that are allowing us to live
    longer, which are more expensive. So now we are paying more and
    more for people on healthcare, which is great, but we never
    thought of changing the formula as we are going along.
        And anybody now who wants to reform the formula, oh, we all
    want to cut Medicare. We want to do this. We don't want to do
    that. No, the numbers, just like you guys are pointing out with
    our deficit, the numbers just don't work. And so as we move
    along this curve, we have to do something with mandatory
    spending.
        And we talk about this great recovery during the Biden
    administration. The great recovery was because you absolutely
    extinguished America. And instead of 100 widgets a day, we were
    only allowed to produce 40 widgets a day. And the framework was
    put in during the Trump era for this great continued recovery
    to occur.
        I will agree with my Democratic colleagues, everybody who
    should pay taxes should pay taxes, period point-blank. I have
    no issue with that whatsoever. But our revenues are at record
    levels now. So it can't be just blamed on one side of this.
    This is a blend. This is an absolute blend.
        One question that I love to ask, some of my social media,
    let's just say, favorite people are all espousing the modern
    monetary theory that none of this really matters, we can just
    keep printing money, and all the debt doesn't even matter at
    all.
        I just wondered if each of you could just spend 2 seconds,
    really. Does debt matter? Is modern monetary theory actually a
    thing or is it just a stupid pie in the sky idea? How does that
    fit in relation to what is happening with our debt?
        Mr. SMETTERS. I don't think anybody here would endorse
    modern monetary theory.
        Mr. MURPHY. I am so glad to hear that. Debt does matter,
    correct?
        Mr. SMETTERS. Yes.
        Mr. MURPHY. It does. It is critical. And modern monetary
    theory was a great thing with unicorns and rainbows and pie in
    the sky and we could just keep printing money. It is not the
    case. It is not the case. Our national debt does matter, and it
    is actually truly a matter of national security.
        So, you know, what would I ask--I heard one person say one
    time, just because of this debt, what happened if we just
    devalued our currency? What would that look like?
        Mr. FAULKENDER. You would lose world reserve currency
    status, and then we would have all of the national security
    problems that we discussed previously of not being able to
    monitor illicit financial activity, nor be able to use
    sanctions.
        Mr. MURPHY. Right. It would just absolutely undermine our
    economy and our national stature, correct?
        Mr. FAULKENDER. Yes. And in addition to the national
    security issues, you would raise borrowing rates for every
    household.
        Mr. MURPHY. And you know what, this may be heresy, but a
    Republican said that. And I just put my head in my hands.
        This committee usually is fairly bipartisan. Math doesn't
    take any politics with this. And so we see how critically
    important this issue is. Yes, we need to collect our revenues,
    but yes, we need to cut our spending, and yes, we actually need
    to stop paying people not to work.
        Thank you. With that, I will yield back, Mr. Chairman.
        Chairman SCHWEIKERT. Thank you, Dr. Murphy.
        Before I recognize Mr. Beyer, will you explain to us how AI
    is going to help us stabilize spending?
        Mr. BEYER. I couldn't do that in my 5 minutes, but we are
    working on it.
        Chairman SCHWEIKERT. But I know you are working on it.
        Mr. BEYER. Mr. Chairman, Ranking Member, thank you for
    doing this.
        Dr. MURPHY, I would suggest there are no dumb surgeons. And
    thank you for shouting out----
        Mr. MURPHY. I must disagree.
        Mr. BEYER [continuing]. MMT. I think Herb Stein said years
    ago, if something is too good to be true, it is not true. That
    is exactly where we are. And also, thank you for going through
    the increase in our social services over the years--Social
    Security, Medicare, Medicaid--and how that has completely
    changed what we spend money on in the Federal Government. It is
    very different from when I was a child.
        The challenge is that it seems like the American people
    love most of those things, which is why it has been so
    difficult to cut back on them. Even President Trump has said,
    don't you guys go touching Social Security, because he knows
    that this is--so then the question is, how do we pay for it?
    How do we begin to balance what the American public has come to
    expect from government?
        By the way, Mr. Chairman, I do completely share your
    concerns that our budget deficit at $33 trillion must be a very
    high priority. But we look at it--and thank you, Mr. Kogan, for
    all of your purposing.
        One of the things that is missing as we look at this budget
    and cutting spending in a lot of different ways is, what is the
    fiscal effect of the disinvestment in our people? I mean, how
    much growth comes from the fact that we are putting money into
    our children, into education, into social services, and what
    happens when we slash that back?
        Mr. KOGAN. Thank you for the question, Congressman. So five
    things that I mentioned in my written testimony that I didn't
    have room for in my spoken testimony. I wanted to highlight
    some of the cuts that were proposed by this body in this
    Chamber, right?
        So the idea was, oh, well, we need to reduce our spending,
    and that is the great way to help the future. And in going
    about trying to write the appropriations bills that would find
    the spending cuts, this Chamber called for an 80 percent cut to
    Title I education grants, which helps poor public schools in
    every State. Called for a 59 percent cut to the Federal program
    that helps make sure our drinking water is safe across the
    country. It called to cut our NIH cancer and stroke research.
    You know, across the board, these were kind of cuts to the
    future.
        And I would just say, as you are saying, these sorts of
    cuts are fundamentally shortsighted. You might lower a Federal
    dollar here or there, but then you wouldn't have the redounding
    effects in the future that are critical to us kind of being
    competitive in the future.
        Mr. BEYER. Thank you.
        You know, again, historically, I remember I used to prepare
    a little family's businesses taxes in the seventies and
    eighties, and the first $50,000 is a relatively low rate, and
    then it jumped up to 78 percent. So, I think both our personal
    and our corporate tax rates were much more progressive in the
    fifties, sixties, seventies.
        How did that affect our GDP growth?
        Mr. KOGAN. We had strong and robust GDP growth in the
    fifties and sixties.
        Mr. BEYER. Thanks very much.
        Dr. Faulkender, is there any plausible method of closing
    the fiscal gap that doesn't involve generating new revenues?
        Mr. FAULKENDER. Certainly. We could bring spending down
    significantly, and that would also close the fiscal gap.
        Mr. BEYER. Let me put it back to--in the real world, is
    there any way, given the political realities of the American
    public and the American public's expectations, is there any way
    to do this without generating new revenue?
        Mr. FAULKENDER. Yes. In the real world, we could bring
    spending down to the 2021 percent that it has been historically
    of GDP.
        Mr. BEYER. But our revenues are at 16 percent right now.
    Doesn't that leave us a gap of----
        Mr. FAULKENDER. Last year's revenues were much lower. If
    you look at 2022's revenues, they were at 19.5 percent of GDP.
    So I don't think we want to cherry-pick a single number.
        Mr. BEYER. Well, that is a cherry-picked number, though, if
    you look back over the many years. And that is a number driven
    by all the investments we have made, the money we doled out as
    part of the pandemic, the CARES Act, et cetera, which is why it
    surged in that 1 year. That is certainly not where it was in
    the years right after the TCJA.
        In any case, I have a couple seconds left, which I would
    love to yield to my friend Ms. Moore.
        Ms. MOORE. Thank you so much, Mr. Chairman.
        I just want to say that I just basically resent us bringing
    up the old tropes about paying people not to work. We are not
    paying people not to work.
        I guess I would like to ask you, Mr. Kogan. I mean, would
    it be fair to say that our social services programs, like
    Medicare and Medicaid, are taking care of old people, disabled
    people, kids? Most of the people who are on food stamps work.
    And that is an old welfare queen trope that these moneys are
    going to people of bad character. Is that correct?
        Mr. KOGAN. I completely agree with your assertion,
    Congresswoman. The idea that this money is immoral--is wrong,
    is poorly spent, is really disgusting.
        Ms. MOORE. Thank you so much for that.
        And I yield back. I yield back to Mr. Beyer.
        Mr. BEYER. And I yield back.
        Chairman SCHWEIKERT. Thank you for yielding back.
        All right. Now for the lightning round. Oh, how could I
    possibly forget Lloyd, you know? So you don't want to take your
    time so I can just go?
        Mr. SMUCKER. Mr. Chairman, you can do whatever you want.
        Chairman SCHWEIKERT. No, go ahead, Lloyd. And I apologize.
        Mr. SMUCKER. Well, I do appreciate, Mr. Chairman, the
    opportunity to participate in this hearing.
        I think this is a really important topic. I know this is a
    topic you have been interested in for a long time, but I think
    it is difficult for the American public or even Members of
    Congress to understand the weight of what we are dealing with
    here.
        And I think particularly, Mr. Smetters, what you have
    described, what could occur here, what will occur here,
    according to your testimony, over the next 20 years if we don't
    change course, is really--it is a five-alarm fire. It is
    cataclysmic.
        History has plenty of examples of countries and empires
    that have risen, have maintained their dominance in the world
    for a long period of time, and then essentially have
    overextended themselves. And we, I would say, are potentially
    at the brink of that occurring here. And it could be a slow
    decline, where rising interest rates are affecting the economic
    conditions, or it could be catastrophic, which I think, Mr.
    Smetters, you have alluded to.
        A sovereign debt crisis will occur when the capital
    markets--when investors no longer are willing to hold the U.S.
    dollar because they believe the government has the inability to
    pay or doesn't have the will to put ourselves on the right path
    to be able to pay.
        And, Mr. Faulkender, you have talked about the softening. I
    don't know if I am misstating what you are saying, but
    certainly a few weeks ago we saw a softening of purchases and
    the demand, which potentially is probably driving up interest
    rates now. But, you know, if that trend continues, whether it
    is individuals or institutions or foreign countries that are no
    longer willing to hold our debt, we are in real trouble, are we
    not? I mean, am I overstating the condition that we are in now?
        I see. Go ahead.
        Mr. SMETTERS. So debt crises historically are the worst of
    all crises. If you look back at COVID, look back at 2008, how
    did we deal with those crises? We issued more debt. We were
    able to use debt to cover those crises.
        But when the crisis is caused by debt itself, there is not
    much you can do at that point. And we have seen many societies
    completely reordered as a result of debt crises. Those
    societies cannot handle economic hits.
        Not to be dramatic about it, but think about the Nazi
    Party, 1928. They only got 2.6 percent of the vote. Then 1929
    happens. A complete reordering of society in the face of
    large----
        Mr. SMUCKER. And we have seen the failure of nations. You
    know, and it is why I appreciate Mr. Pascrell's earlier
    comments that, I think, we have to come together as Members,
    regardless of party, and understand the situation that we are
    in. We have to accept responsibility. I think both parties, as
    Mr. Pascrell said, have led to the situation that we are in
    now.
        Mr. KOGAN, I know that you have in your testimony been--you
    have been intent on blaming Republicans. Could you agree with
    me that both parties have brought us to where we are today?
        Mr. KOGAN. My testimony was clear it was a bipartisan
    extension of the Bush tax cuts was an instrumental part of it.
        Mr. SMUCKER. Do you feel like both parties contributed to
    the situation that we are in today?
        Mr. KOGAN. I mean, it was a bipartisan bill. So yeah, both
    parties were involved.
        Mr. SMUCKER. Besides the bill, would you say?
        Mr. KOGAN. I think--I mean, I think----
        Mr. SMUCKER. I will stop there. And the reason I put you on
    the spot is because I think it is really important that we have
    to get beyond blaming one another for where we are. And it is
    why I support a debt commission, which I think is critical to
    us to change the trajectory going forward.
        We really need to come together and understand that this is
    far beyond blaming one another. It is far beyond politics. This
    is something, we are talking about the future of the country
    for future generations. And so it is critical that we act on
    this now.
        So I hope, Mr. Kogan, that we can get past just blaming a
    particular party. And that is why I appreciated Mr. Pascrell's
    comments.
        But one of the things I want to say as well, I don't think
    the American public really understands the situation that we
    are in now. And I have been looking, particularly if we do a
    debt commission, I think the role of the commission is going to
    be to help the public understand where we are and knowing that
    we are going to have to make tough decisions and everything
    should be on the table.
        But in a very brief amount of time, I haven't seen a lot of
    work done out there in regards to past examples in history of
    what has happened and sort of looking at our current situation
    relative to that. And I would be very interested in hearing
    from any of you on where we could go to help to explain to the
    American people what happens if we don't address this.
        Maybe, Mr. Smetters, I will start with you on that.
        Mr. SMETTERS. Sure. I mean, the impact on the economy, the
    American people, the wages, the borrowing rates are all going
    to be very negatively affected. And there are lots of examples
    in Asia, in Latin America, in Europe where this has happened.
        And there has been bipartisanship certainly in the past.
    That is what 1986 was all about. You know, the joke before 1986
    was paying. One reason why these high rates didn't really
    matter is because paying your taxes was a civil obligation,
    just not a legal one before 1986. There were so many different
    ways to dodge those taxes.
        But in 1986, incredible bipartisanship to--and most
    economists agreed with that approach. And so I think there are
    examples that you can point to.
        Mr. SMUCKER. Thank you. I am out of time. Thank you, Mr.
    Chairman.
        Chairman SCHWEIKERT. Thank you, Lloyd.
        Chairman Arrington.
        Mr. ARRINGTON. Thank you, Mr. Chairman, for your passion
    and concern about what I believe is the most significant threat
    to the United States and one that, if left unaddressed, in
    probably nearer term than we think will cause not only
    significant but irreparable harm that will impact interest
    across the political spectrum, by the way.
        For those who care about climate and want more climate
    spending programs, safety nets, entitlements, or for those of
    us who think that the job of the Federal Government is mainly
    to keep us safe and free and most everything else is delegated
    to the States and the people, we still have to put a military
    on the battlefield such that protects our freedom and security
    interests. All of that is in jeopardy, as well as America's
    leadership in the world, if we slip into a sovereign debt
    crisis.
        So I want to focus on how things are being managed at this
    point with respect to Treasury bonds and the issuance of debt
    and especially the rise in interest expensing, which some
    people think is the key measure of when we start to trip the
    wire and we start seeing a chilling effect, if not worse, in
    the Treasury bond market.
        I just talked to an economist literally before coming to
    this hearing who said the 14 percent interest per revenue,
    Treasury revenue, tax revenue, is a tipping point where you
    start to see the effects in the Treasury bond market. And that
    hasn't been hit in over 30 years, but we are now over that.
        And then this gentleman mentioned the two significant--he
    said the most significant events in his 27-year career as an
    economist and a policy adviser, which is the August and
    November Treasury Debt Issuance Advisory Committee saying, wait
    a minute, we are $250 billion short of the money we need to
    service the debt--that is significant--and we need a whopping
    $1.6 trillion in debt in the fourth quarter of this year and
    first quarter of next year.
        The bottom line is, we are entering into this vicious
    cycle, and the interest and debt are going from unsustainable
    to completely running away from us.
        Now, the Treasury Advisory Group and the Treasury
    Department has started issuing shorter term debt rather than
    longer term, like 80 percent more. That hasn't happened in
    recent history if not modern history. And that means the yield,
    they call it an inverted yield, where we are getting higher
    interest rates. And the tradeoff is keeping the economy propped
    up versus the cost to the taxpayer, and I would suggest future
    taxpayers, and the cost to generations of Americans who will
    pay a higher price for our widening deficits and mounting debt.
        Help me understand that dynamic, the shift to short-term
    Treasury issuance versus long term with higher yields, lower
    cost. What are the implications of that?
        Maybe, Dr. Smetters, you can start, but I welcome any
    input. And for the remainder of the 1 minute, I will yield to
    our witnesses.
        Mr. SMETTERS. Sure. And I will try to be then brief. The
    cycle that you mentioned is exactly the right word. In
    particular, you could issue enough debt that interest rates
    become high enough that you actually now have to issue even
    more debt and interest rates would go up even more. There is no
    market clearing that happens anymore. You can literally have an
    economic collapse that way.
        And what you mention about moving to shorter term, it looks
    in the short term like, hey, that is a win. We are taking
    advantage of lower rates. The problem is that you now take on
    more rollover risk. And that is not being costed and priced
    into the budget, and that is really a budget bias right now. We
    reward you for the lower expected interest rates. There is no
    pricing on the credit reform or anything like that for the
    rollover risk.
        Mr. ARRINGTON. But the rates for the 10-year Treasury are
    now five and a quarter.
        Mr. SMETTERS. Right.
        Mr. ARRINGTON. So we are actually paying more----
        Mr. SMETTERS. Even then, yeah.
        Mr. ARRINGTON [continuing]. For the 10-year Treasury. Why
    the shift, this extreme shift to the shorter term Treasury to
    issue debt? Anybody else have any thoughts about that?
        Mr. FAULKENDER. What the TBAC has told Treasury is that
    there are not sufficient buyers out there for the longer
    duration stuff. You can go ahead and find additional buyers for
    the shorter term stuff.
        To add to what you said earlier, one of the issues that the
    economic literature has shown is, once you get above 90 percent
    debt to GDP--so you were talking about debt service to revenue.
    Another one is aggregate debt to the size of your--once you get
    above 90 percent, that is where fiscal crises, debt crises
    start to occur.
        We are above that. The belief in the literature is that we
    can go above that because we are the world's reserve currency,
    but there is no test--nobody out there can model where it is.
    And so as Kent just said, you know, 20 years from now, at best,
    we get into that permanent spiral that you can't recover from.
        Now, in terms of the maturity mix, we currently have an
    inverted curve. So 1 years are higher than 10 years. We would
    be cheaper issuing tens in the short run. Normally, tens are
    going to cost you more than one. The reason is that most people
    think interest rates are going to come down.
        So it is okay to issue short. If, indeed, interest rates do
    come down, we may actually end up with lower debt service
    costs. But those debt service costs will not be lower if rates
    don't come down because we don't get the budget under control.
        Mr. ARRINGTON. Listen, I think--thank you for that. Not
    sufficient buyers of U.S. Treasury treasuries. That is a very
    explosive statement when you are thinking about slipping into a
    sovereign debt crisis.
        Again, I think there is this false sense of security that,
    as the world's reserve currency, we will just forever be able
    to act like we are all modern monetary theorists and spend and
    borrow and print with no significant consequence. It doesn't
    sound like that is the case.
        Thank you, Mr. Chairman.
        Chairman SCHWEIKERT. Thank you, Jodey.
        All right. And I saved myself partially because I want to
    spend a little time doing sort of technical, so I am going to--
    and listen up, because you have actually come close to this.
        Dr. Faulkender, what does a failed bond auction look like?
    A failed bond, an undersubscribed bond auction, what does it
    end up to ultimately look like.
        Mr. FAULKENDER. Well, ultimately what happens is that the
    primary dealers who are part of the Treasury Borrowing Advisory
    Committee have to step in and take on the portion that was not
    subscribed, and it ends up being at higher yields. And
    ultimately what could happen is that those participants choose
    not to be in future auctions.
        So because they are obligated to take on the portion that
    is not subscribed, they may very well withdraw from future
    auctions, and that creates additional problems in the future
    when we have got to re--when we have got to issue more debt.
        Chairman SCHWEIKERT. So what is the ultimate definition of
    undersubscribed? I mean, we had a 10-year recently that 24
    percent was taken by the primary dealers, which, you know, that
    is double what we would have seen traditionally.
        Mr. FAULKENDER. Right. So I don't know that there is a
    formal--it is going to be a historical reference that it is--
    you are asking the primary dealers to come in and take a much
    larger portion than they are normally taking, and they may not
    themselves have set aside sufficient capital in order to fill
    all of that need.
        Chairman SCHWEIKERT. That was actually what I was looking
    for, is, at what point does the piping, let's call it the
    plumbing, our primary dealer network not have enough cash on
    the books? If they had to take 50 percent of an issuance, is
    that more cash than they have? And at that point, have we hit a
    black swan where interest rates pop to bring in new capital? I
    am trying to understand our fragility, to use a sort of pop
    culture economic term.
        Mr. FAULKENDER. I don't know that I would say there is a
    specific number, because I don't want to ever give the
    impression that we can march right up to that number, right.
    And so it does depend upon how much capital is available, what
    are the other things that they are funding, what does their
    reserve status look like. And that is going to change over time
    as to how much just excess capital the primary dealers have
    available in reserve to step in for these kind of
    contingencies. That is not something that, for instance, there
    is N dollars necessarily set aside that I can give you a
    specific number such that you think that they can march up to
    just below that and be okay.
        Chairman SCHWEIKERT. Dr. Smetters, you have been bouncing
    your head up and down on this one.
        Mr. SMETTERS. Yeah. I completely agree with that. There is
    no magic number. To take that example, even at the current
    values right now, if all of a sudden the primary dealers really
    believe that Congress is either going to spend it wildly or tax
    very little going forward, if they just lose confidence even at
    current values, things could unwind.
        And so it is really about their expectations of the future
    rather than a given auction. If they are confident in Congress
    going forward, they are able to raise the capital. If they are
    not confident in Congress going forward, the capital markets
    are not going to give them the capital.
        Chairman SCHWEIKERT. Okay. I was going to go this way, but
    could we spend 30 seconds, does anyone have an expertise on,
    you are a broker-dealer. You actually are in contract
    functionally with Treasury to be a market maker in the first
    takedown. How do you raise your own capital?
        Mr. SMETTERS. Well, that is really costly capital, because
    that is equity capital that you would have to raise in order to
    meet your obligations. And so that could cause great dilution
    of the primary dealer. It would not be the case that they can
    just go out and engage and leverage themselves, because this is
    a very much more challenging market to do that. And that is why
    it is--once they get spooked, that is going to be a serious
    problem.
        Chairman SCHWEIKERT. You see, and that is something I don't
    believe Members of Congress and even many who actually write
    about this area understand is they have to actually raise the
    capital. They often have certain relationships. I promised we
    weren't going to talk too much about repo, so we will stay away
    from, you know, some of the swaps and the pledges.
        Do any of you see any potential stressors--I am agnostic on
    these because I haven't read enough--on the SEC wanting to go--
    and this is sort of for the secondary market--to sort of a
    single trading platform, or I will also ask you to speak to
    Treasury's plan to basically look at some of older issuances
    that are thin and repurchase them and add that to current
    capacity.
        Do any of those make differences in the breadth of markets
    on capital or are those just grounding errors in the plumbing?
    Anyone that feels they have an expertise on either of these
    weird issues.
        Mr. SMETTERS. Sure. I mean, I view Treasury as a current
    idea of, I call it operation twist with a twist. I mean, they
    have done some----
        Chairman SCHWEIKERT. Yeah, but you don't game it, I mean.
        Mr. SMETTERS. That is right. That is right. And so I don't
    think it is going to be a first order event. I think but it
    does point to a much broader problem, and that is markets are
    making bets against Treasury, Treasury are making bets against
    the market. It is that two-sided betting that is actually
    inefficient.
        Treasury could over time create more consistency in supply
    and really focus and eventually reduce risk premiums if they
    made the maturity structure much more predictable and really
    focusing on what they can actually provide that capital markets
    cannot, and that is long-term risk-free assets.
        Chairman SCHWEIKERT. But hasn't one of the problems been on
    Treasury's long-term funding outlooks is some of the spending
    bills, discussions of tax extenders, where they are suddenly,
    like we had in, you know, fourth quarter and even first quarter
    of this fiscal year, we were way off?
        Mr. SMETTERS. Right. I mean, the projections were
    incredibly off. And this is a problem why I say the blame game
    is not that useful, because it doesn't tell us the best path
    forward.
        You know, if we even think about the Bush era, remember
    their Medicare part D, the long-term effect of that was even
    bigger than the tax cuts there. I mean, it all comes down to
    your baseline and what you incorporate as your baseline.
        I don't think looking back is the way to go. I think it is
    really about our best decisions going forward, whether it is
    investing in children or other things is independent of all
    that.
        Chairman SCHWEIKERT. All right. And it is not heresy,
    because the math is the math. CBO, OMB, even a couple of your
    groups, if you actually look at the numbers, basically say from
    today through the next 30 years, 100 percent of the future
    borrowing is basically demographics and interest. Okay?
        So we can spend--which broke my heart, and I have already
    shared with my friend here. Our staff sometimes live in a
    partisan bubble, but that is what they know. This hearing
    wasn't about--because I have plenty of charts, and so when you
    do the dynamic effects, some of the things you said drove me
    nuts, but that is the game we do here.
        What I want to know is, from today forward, what do we do
    policy wise, or should we just stay the hell away from it?
    Stability, price efficiency. Price efficiency, stability, and
    if you have suggestions there.
        And then my weird question--they get weirder--have any of
    you ever seen--Professor Shiller 10 years ago wrote an article
    about something he called a Trill, which was almost selling an
    equity interest that actually would be sympathetic to receipts
    going up, you got a little bit more. It is sympathetic if
    receipts went down, you got a little bit less. And that way you
    had an instrument that was a sympathetic bond where often what
    we have here is sometimes those bonds, you know, are
    countercyclical.
        Should Congress dive into, what do we do for stability,
    what do we do for liquidity? And should we also be looking at
    some alternative debt management instruments?
        Let's start at one end. What would you do?
        Mr. DRIESSEN. Yeah, I mean, I think the biggest thing I
    would say is that I think there are different management
    approaches that could be considered, and I think Treasury is
    looking at those. Some of my colleagues have presented, you
    know, encouraging to kind of look at longer term instruments,
    which I think has some value.
        Chairman SCHWEIKERT. And I know I am interrupting. Going
    back to Treasury Secretary Lew, because he and I had a
    wonderful argument years ago about wanting to sell super bonds,
    and it was basically to get beyond our demographic bubble.
        Mr. DRIESSEN. Yeah.
        Chairman SCHWEIKERT. He fussed back to me that there wasn't
    an appetite. And I said, you haven't really looked. When you
    talk about longer term bonds, are you talking 40s, 60s?
        Mr. DRIESSEN. Yeah. I mean, I think both Secretary Mnuchin
    and Secretary Yellen at least expressed a desire to look at 50-
    year bonds and 100-year bonds. They do have the discretion to
    do that, as we talked about earlier. There was some feedback
    that there wasn't sufficient demand at that point.
        I do think that, you know, it is going to be kind of a
    circular loop there where, you know, if you are looking at
    longer term, providing longer term supply, there is also going
    to be a demand issue. And all of that is going to kind of feed
    back to what the market views as the long-term debt trajectory.
        So it really is going to go back to how do we bring down
    the deficits and how do we stabilize debt. That would probably
    help in terms of stoking demand for some of those longer-term
    vehicles that might help in the way that my colleague
    suggested.
        Chairman SCHWEIKERT. Okay. Because there is the powerful
    argument that type of bond actually has a certain credit
    enhancement because of U.S. demographics. You know, you get
    beyond some of the cost structure, but that is----
        Mr. DRIESSEN. Sure, sure.
        Chairman SCHWEIKERT. Doctor?
        Mr. SMETTERS. Yes. No, I agree with this. I mean, one of
    the problems that I have when people look at the current market
    and they talk about demand, that demand is all based on what
    they think Treasury is going to do in the future. They are
    trying to make forecasts. If Treasury created a much more
    predictable environment, then the private market could actually
    create this shorter term duration asset.
        So, for example, in theory, economists would say, what
    textbook says, is that the government really just has to
    produce something similar to the asset you just talked about
    that is called a console. It just is an infinitely lived bond
    that pays interest rate forever. The U.K. has had some of these
    things.
        Chairman SCHWEIKERT. So a perpetual.
        Mr. SMETTERS. That is right, or perpetuals. And the private
    market, if they knew there was a constant supply of that, they
    can create all the intermediate durations--the repackaging is
    actually very simple--without counterparty risk. That is
    something that easy custodial relationships can deal with.
        But the problem is that we--sometimes people call the
    supply and demand side of the Treasury market competition. That
    is just wrong. We can actually have no equilibrium when
    Treasury is trying to optimize against the bond buyers and bond
    buyers are trying to optimize against the Treasury.
        I think the goal is that the Treasury, at least over time--
    because current contracts are written around what was issued in
    the last few years--over time Treasury should get to a longer
    term maturity, ideally quite a bit longer, and let the private
    market be the one who dices up and creates the more
    intermediate securities. Right now, the budget scoring process,
    though, really favors much shorter term issuance, because the
    rollover risk is simply not priced in.
        Chairman SCHWEIKERT. That is helpful. That is helpful.
        Mr. Kogan, what would you do in that sort of--would you
    offer alternative instruments? What would you do?
        Mr. KOGAN. I think--I mean, I--I agree with what has been
    said previous, that I think there--I think you can look into
    trying to do stuff in the margin. I know in the Clinton
    administration they did a little bit at the margin. But I think
    you run the risk, if you kind of are messing with the bond
    market too much, of having unintended consequences.
        I think the long run, interest is a product of debt, and so
    the right thing to do is to look at the long-run trajectory of
    our primary deficit.
        Chairman SCHWEIKERT. Okay. Dr. Faulkender?
        Mr. FAULKENDER. I was at Treasury when Secretary Mnuchin
    asked the TBAC to look at 50s. I was surprised that they came
    back and said that there wouldn't be sufficient demand for
    them, simply because, as people are living longer, both pension
    plans and insurance companies, it seems to me, would have even
    more need for locking in interest rates over 50-year time
    periods. And yet TBAC did come back and say there wouldn't be
    sufficient demand for them. I do worry that if we can't even
    issue 10s and 7s, as to whether or not there would be demand
    for 50s, particularly from our international potential
    purchasers.
        In terms of other structures, I like TIPS, if for no other
    reason--the Treasury inflation protected securities--if for no
    other reason they get the right incentives, so interest costs
    to the U.S. Government are lower in low-inflation environments,
    higher in higher inflation environments.
        One worries about whether the market would actually take
    the wrong signal if we start saying we are going to pay you
    more when the economy is doing well and pay you less when the
    economy is doing poorly. Is that going to be a signal that we
    think the economy is going to do badly?
        So I think there is some perverse signaling that maybe we
    are----
        Chairman SCHWEIKERT. But there is possibly alignment of
    incentives?
        Mr. FAULKENDER. It is--yeah. So I like the idea of
    encouraging, you know, and having the American people have--I
    mean, there are already plenty of instruments, though, where
    people can share in an improving economy. You know, generally
    the stock market, more broadly. Usually, Treasury securities
    have served as a hedge.
        I think what you are saying--and I would have to give it
    more thought and go look at Professor Shiller's paper--as to
    whether or not there really is need for yet another security
    that already provides upside in good economies.
        Chairman SCHWEIKERT. Okay. But how do you feel, though,
    about the discussion in a perpetual?
        Mr. FAULKENDER. Again, we would need to establish--I like
    longer term ones. There have been some corporate bonds issued
    with 100-year----
        Chairman SCHWEIKERT. Oh, yeah.
        Mr. FAULKENDER [continuing]. Maturities on them.
        Chairman SCHWEIKERT. Apple did 60s last year.
        Mr. FAULKENDER. Yeah. Yeah. So that was why I was a little
    surprised by the conclusion of the TBAC, because if AA and AAA
    companies can issue at 100 years, why can't Treasury find a
    sustainable market for 50s? I thought that market should have
    been there because, as I mentioned before, it seems like there
    is natural hedging demand from life insurance companies and
    pension plans.
        Chairman SCHWEIKERT. All right. Gentlemen, thank you. I am
    probably going to send you all a note asking for a little bit
    more of your thoughts, and I know you have been incredibly
    generous to do this.
        And part of the argument in sort of my place here in
    Congress is trying to make the argument that, you know,
    demographics is our destiny. Demographics is debt. Work through
    it. It is why, as we were here talking, we were talking about
    what could we do to disrupt the price of delivering health
    services, because Medicare is the primary unfunded liability in
    our society. And we are very uncomfortable talking about that,
    because most of what we talk about is financing of Medicare,
    not the actual cost of keeping someone healthy.
        But with that, I have a powerful interest on are there some
    things we should do in our debt markets that show that we are
    going to try to reach beyond the demographic bubble?
        You know, as I pointed out, I have a 17-month-old little
    boy we have adopted sitting in the back, and the math says,
    when he is functionally just become an adult, U.S. tax rates
    almost have to double just to maintain baseline services.
        It is no longer, though, about the next generation. I will
    argue it is about all of our retirements now if the stressors
    continue, and I am terrified of a black swan. So I want to
    communicate to markets that stability, liquidity, and that we
    are paying attention.
        So with that, I am going to bring this hearing to a close.
    I will--oh, you wanted to give me the script.
        Please be advised that members have 2 weeks to submit
    written questions to be answered later in writing. Those
    questions and your answers will be made part of the formal
    hearing record.
        And with that, I really, really appreciate your time.
        And to Mr. Pascrell, thank you for letting me chat on your
    ear and try to be really annoying.
        And with that, the hearing is over.
        [Whereupon, at 12:13 p.m., the subcommittee was adjourned.]

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