[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]

THE BROKEN BUDGET PROCESS: LEGISLATIVE PROPOSALS

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

HEARING

before the

COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

SECOND SESSION

__________

HEARING HELD IN WASHINGTON, DC, MAY 31, 2012

__________

Serial No. 112-26

__________

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COMMITTEE ON THE BUDGET

PAUL RYAN, Wisconsin, Chairman
SCOTT GARRETT, New Jersey CHRIS VAN HOLLEN, Maryland,
MICHAEL K. SIMPSON, Idaho Ranking Minority Member
JOHN CAMPBELL, California ALLYSON Y. SCHWARTZ, Pennsylvania
KEN CALVERT, California MARCY KAPTUR, Ohio
W. TODD AKIN, Missouri LLOYD DOGGETT, Texas
TOM COLE, Oklahoma EARL BLUMENAUER, Oregon
TOM PRICE, Georgia BETTY McCOLLUM, Minnesota
TOM McCLINTOCK, California JOHN A. YARMUTH, Kentucky
JASON CHAFFETZ, Utah BILL PASCRELL, Jr., New Jersey
MARLIN A. STUTZMAN, Indiana MICHAEL M. HONDA, California
JAMES LANKFORD, Oklahoma TIM RYAN, Ohio
DIANE BLACK, Tennessee DEBBIE WASSERMAN SCHULTZ, Florida
REID J. RIBBLE, Wisconsin GWEN MOORE, Wisconsin
BILL FLORES, Texas KATHY CASTOR, Florida
MICK MULVANEY, South Carolina HEATH SHULER, North Carolina
TIM HUELSKAMP, Kansas KAREN BASS, California
TODD C. YOUNG, Indiana SUZANNE BONAMICI, Oregon
JUSTIN AMASH, Michigan
TODD ROKITA, Indiana
FRANK C. GUINTA, New Hampshire
ROB WOODALL, Georgia

Professional Staff

Austin Smythe, Staff Director
Thomas S. Kahn, Minority Staff Director

C O N T E N T S

Page
Hearing held in Washington, DC, May 31, 2012..................... 1

Hon. Paul Ryan, Chairman, Committee on the Budget............ 1
Prepared statement of.................................... 2
Submissions for the record:
Heritage Foundation and Brookings Institution
article, dated July 2008: ``Taking Back Our Fiscal
Future''........................................... 24
Washington Post article, dated May 16, 2012,
``Boehner's Debt Ceiling Speech''.................. 48
Hon. Chris Van Hollen, ranking minority member, Committee on
the Budget................................................. 4
Prepared statement of.................................... 5
Submissions for the record:
Bloomberg article, dated May 28, 2012, ``Debt-Ceiling
Deja Vu Could Sink Economy''....................... 44
Americans for Tax Reform's ``Taxpayer Protection
Pledge''........................................... 48
Transcript, Douglas Holtz-Eakin posting from YouTube. 64
Alison Acosta Fraser, director, Thomas A. Roe Institute for
Economic Policy Studies, the Heritage Foundation........... 7
Prepared statement of.................................... 8
Douglas Holtz-Eakin, president, American Action Forum........ 13
Prepared statement of.................................... 14
Henry J. Aaron, senior fellow, economic studies, the
Brookings Institution...................................... 18
Prepared statement of.................................... 20

THE BROKEN BUDGET PROCESS: LEGISLATIVE PROPOSALS

----------

THURSDAY, MAY 31, 2012

House of Representatives,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to call, at 10:05 a.m. in room
210, Cannon House Office Building, Hon. Paul Ryan [chairman of
the committee] presiding.
Present: Representatives Ryan of Wisconsin, Simpson,
Calvert, Cole, Price, McClintock, Stutzman, Ribble, Flores,
Mulvaney, Huelskamp, Young, Van Hollen, Bass, and Bonamici.
Chairman Ryan. The committee will come to order. So much
for--we are cutting back on gavels around here. Welcome to
House Budget Committee. The purpose of today's hearing is to
examine the need to restore responsibility and accountability
to how Washington spends its taxpayers' hard earned dollars.
The breakdown of responsible budgeting is clear, out of control
government spending. Four consecutive trillion dollar deficits
and a crushing burden of debt in the years ahead. Both
political parties share the blame for our fiscal mess.
I believe it will require both political parties to work
together ultimately to find common ground and to right this
fiscal ship. Unfortunately, current leaders in the Democratic-
controlled Senate and the White House have failed to step
forward with solutions to match the magnitude of our
challenges. The United States Senate has failed to pass a
budget in over 3 years. They didn't even propose a budget this
year or the last year. And the President has punted on the key
economic and fiscal challenges of our times with budgets
calling for even more spending, higher taxes and empty promises
that are quickly becoming broken promises if we don't fix these
problems soon.
This failure of leadership not only undermines America, it
undermines the America our children will inherit tomorrow. It
also stifles confidence in economic growth today. While budget
process reform alone cannot solve our budget problems, we can
strengthen this process and provide additional tools to help
address the enormous budget problems we face. This is a good
step in the right direction. Budget process reform alone is not
a substitute for the political courage and leadership required
to address our core of spending and the entitlement challenges.
I don't think there is any doubt about the failure of the
Federal budget process, but there are big differences in
opinion on how to tackle these challenges and how to address
these failures.
Despite these differences, the ranking member and I were
able to work out on a bipartisan basis to report out of this
committee and pass on the floor the Expedited Legislative Line
Item Veto and Rescissions Act. This committee has also advanced
baseline budget reform, Budget and Accounting and Transparency
Act, the Pro-Growth Budgeting Act, and today we continue the
committee's efforts to bring greater transparency to the budget
process.
Mandatory spending, or what we consider autopilot spending,
accounts for 60 percent of the Federal budget. Through the
Budget Control Act passed last summer, Congress has established
statutory limits on discretionary spending with enforceable
spending caps. Implementing similar statutory controls on
mandatory spending will help ensure the Federal Government can
deliver on its promises with sustainable entitlement programs
and a sustainable fiscal future.
To that end, committee member John Campbell of California
has introduced the Spending Control Act. Another criticism of
the budget process is the failure to account for future
consequences of today's decisions. As we develop the budget and
consider legislation, we currently focus solely on the 10-year
budget window, not taking into account the long-term impact of
current programs or proposed legislation. The sole focus of the
10-year window can also lead to accounting gimmicks that
perversely worsen our long-term budget problems. This is
something that was identified in the joint effort by the
Heritage Foundation and the Brookings Institution, two of whom
we have representatives from today.
We need to improve the way Congress budgets in the long
term and better assess the long-term implications of its
policies.
Mr. Mulvaney has introduced legislation to get that Federal
Government to the budget for the long term. And Mr. Chaffetz
has introduced a bill to bring greater scrutiny to Federal
spending. In addition to these bills, Mrs. Black has introduced
legislation to give the budget the force of law, Mr. Ribble
would reform the process to move to a biannual cycle, and Mr.
Lankford would remove the threat of government shutdowns.
So just the members of this committee have put forward a
robust set of proposal to reform and strengthen the budget
process. To help further advance this budget process reform
conversation, we welcome three terrific witnesses today. We
have Dr. Doug Holtz-Eakin former CBO director, no stranger to
this committee and the current President of the American Action
Forum and an expert on the budget, he is back with us today.
We have Alison Fraser, Director of the Thomas Roe Institute
for Economic Policy Studies at The Heritage Foundation. And
also no stranger to this committee, Henry Aaron, a senior
fellow of economic studies at the Brookings Institution. All
three bring expertise to this conversation, they have been
around these budget debates for a long time and we look forward
to your testimony.
[The prepared statement of Chairman Ryan follows:]

Prepared Statement of Hon. Paul Ryan, Chairman, Committee on the Budget

Welcome all to the House Budget Committee.
The purpose of today's hearing is to examine the need to restore
responsibility and accountability to how Washington spends taxpayers'
hard-earned dollars.
The breakdown of responsible budgeting is clear: out-of-control
government spending; four consecutive trillion-dollar deficits; and a
crushing burden of debt in the years ahead.
Both political parties share in the blame for our fiscal mess.
I believe it will require both political parties to work together
to find common ground and right this fiscal ship.
Unfortunately, the current leaders in the Democrat-controlled
Senate and at the White House have failed to step forward with
solutions that match the magnitude of our challenges.
The United States Senate has failed to pass a budget in over three
years. They didn't even propose a budget this year or last. And the
President has punted on the key economic and fiscal challenges of our
time--with budgets calling for even more spending, higher taxes, and
empty promises that are quickly becoming broken promises.
This failure of leadership not only undermines the America our
children will inherit tomorrow, but it also stifles confidence and
economic growth today.
While budget process reform alone cannot solve our budget problems,
we can strengthen this process and provide additional tools to help
address the enormous budget problems we face.
This is a good step in the right direction, but budget process
reform is not a substitute for the political courage and leadership
required to address our core spending and entitlement challenges.
I don't think there is any doubt about the failure of the federal
budget process, but there are big differences of opinion on how to
tackle these challenges.
Despite these differences, the ranking member and I were able to
work--on a bipartisan basis--to report out of this committee and pass
on the floor the Expedited Legislative Line-Item Veto and Rescissions
Act.
This Committee has also advanced the Baseline Reform Act, the
Budget and Accounting Transparency Act, and the Pro-Growth Budgeting
Act. Today, we continue the committee's efforts to bring greater
transparency to the budget process.
Mandatory spending--or autopilot spending--accounts for 60 percent
of the federal budget. Through the Budget Control Act passed last
summer, Congress has established statutory limits on discretionary
spending with enforceable spending caps.
Implementing similar statutory controls on mandatory spending will
help ensure the federal government can deliver on its promises--with
sustainable entitlement programs and a sustainable fiscal future. To
that end, Committee member John Campbell of California has introduced
the Spending Control Act.
Another criticism of the budget process is the failure to account
for the future consequences of today's decisions.
As we develop the budget and consider legislation, we currently
focus solely on the 10-year window, not taking into account the long-
term impact of current programs or proposed legislation.
This sole focus on the10-year window can also lead to accounting
gimmicks that perversely worsen our long-term budget problems.
We must improve the way Congress budgets in the long-term and
better assess the long-term implications of its policies.
Mr. Mulvaney has introduced legislation to get the federal
government to budget for the long-term and Mr. Chaffetz has introduced
a bill to bring greater scrutiny to federal spending.
In addition to these bills, Ms. Black has introduced legislation to
give the budget the force of law, Mr. Ribble would reform the process
to move to a biennial cycle, and Mr. Lankford would remove the threat
of government shutdowns.
So, just the members of this committee have put forward a robust
set of proposals to reform and strengthen the budget process.
To help further advance this budget process reform conversation, we
welcome three terrific witnesses to the committee today.
Doug Holtz-Eakin--a former CBO director, the current president of
the American Action Forum, and an expert on the budget--is back with us
today.
Alison Fraser is the Director of the Thomas A. Roe Institute for
Economic Policy Studies at the Heritage Foundation.
And Henry Aaron is a Senior Fellow of Economic Studies at the
Brooking Institution.
All three bring expertise to inform this conversation. Thanks all
of you for joining us today.
With that, I yield to the Ranking Member, Mr. Van Hollen.

Chairman Ryan. And with that, I would like to yield to the
ranking member, Mr. Van Hollen.
Mr. Van Hollen. Thank you very much, Mr. Chairman. I want
to join the chairman in welcoming all our witnesses today as we
explore ways to improve the budget process. I do hope that the
Senate will take up the bill we passed over here in a
bipartisan basis with respect to expedited rescission and
legislative line item veto.
We all agree that we have a budget challenge and a deficit
and debt challenge, especially over the long term, and we agree
that we need to fix it. But I think we also agree that the
fundamental problem is not the budget process rules. And no
bill that simply changes the budget process rules is going to
solve the underlying issue. There is no substitute for making
the tough policy issues to reduce the deficit in a balanced
credible way. And once the President and the Congress develop a
consensus on the policies on a budget agreement then the policy
process reforms can be an effective tool for enforcing its
implementation, at least at the margins. First you need to deal
with the fundamental policy questions.
Over the last 2 years, many serious bipartisan groups have
met to examine ways to put our budget back on a path towards
balance. Each of these groups has agreed that we need to take a
balanced approach toward deficit reduction that involves a
combination of spending cuts and cuts to--and revenues
generated by eliminating tax breaks that are unproductive in
many cases in the economy.
Unfortunately our Republican colleagues continue to oppose
the balanced approach. Again, 98 percent of our Republican
colleagues in the House have signed a pledge that says they
will not close a single corporate tax loophole for the purpose
of deficit reduction and won't ask people making more than a
million dollars a year to contribute one penny more for the
purpose of deficit reduction. That, of course, leaves only very
deep cuts in spending that help everybody else rather than a
balanced approach asks for shared responsibility. And in an era
of divided government, we need to be able to make the difficult
compromises necessary to get the job done. Unfortunately in
some parts of this House, compromise has become a dirty word.
Today's hearing is designed to examine a number of bills
put forth by our Republican colleagues. Two of them deal with
different forms of spending caps. Effectively what these bills
do is to try and enshrine in the law the House Republican
budget, the unbalanced approach to the budget with all the
requirements that it would make in terms of cuts ending the
Medicare guarantee and other very deep cuts and important
national investments.
Interestingly, if you actually passed the bills that have
been introduced with respect to the ceiling, they wouldn't even
pass muster--the current fiscal year 2013 budget put forward by
Republican colleagues wouldn't meet the test. It would require
an automatic sequester under the bills that have been
submitted.
Moreover, and I think it is an issue that every member
should focus on, the effect of these bills would be to take any
future economic downturn and risk turning it into a full-
fledged recession or depression. And we will get into a couple
of examples of how it would do exactly that and very interested
in our witnesses views on that, because you have to anticipate
these kind of events and the bills don't. They just take a very
rigid approach.
As Mr. Holtz-Eakin observed in testimony when he was the
head of the CBO speaking about an earlier Deficit Control Act,
and I quote, ``The target set under the Deficit Control Act,
both the original ones and the revised ones were unrealistic in
light of the prevailing economic conditions. For that reason
and others, actual deficits remained above the targets during
the years that the law was in effect.'' There is likely, if we
don't make the tough underlying policy decisions that is the
likely result here.
As Peter Orszag recently observed in a Bloomberg column,
all these things are a super version of SGR, right? We thought
we were going to solve rising health care costs by putting in
effect SGR cuts. Every year, this Congress on a bipartisan
basis has found a way around it. Doing a super-sized version of
SGR is not a way to resolve our issues.
And finally, Mr. Chairman, I just want to say a word about
sort of the Speaker's latest version of the mother of all
sequesters, his threat that the United States would not meet
its financial obligations. That, of course, would have the
effect of immediate deep across-the-board cuts, but it would do
so in a way that would devastate the economy. And even talking
about the United States for the first time in its history not
meeting its obligations is a reckless approach to economic
policy and jobs.
So that is kind of a sequester on steroids, these others
are different versions of that. None of them meets the test of
making the tough policy decisions. So I will end with this, Mr.
Chairman: These bills, in their current form, are either very
dangerous to our economy if they were actually to be put into
effect and followed because of the fact that they would make
much worse any economic downturn, or, at best, they are
misleading because they create a sense that the Congress has
done something, people go home and they say to their
constituents and say we passed a cap on spending, don't worry
about it, knowing full well that they won't be met.
I don't know which of those consequences are worse.
Although I would hate to see another full-fledged economy
downturn compounded by bad policies in these bills. Thank you,
Mr. Chairman.
[The prepared statement of Mr. Van Hollen follows:]

Prepared Statement of Hon. Chris Van Hollen, Ranking Minority Member,
Committee on the Budget

Thank you, Mr. Chairman. I welcome the opportunity to explore ways
that we might be able to improve the budget process. I do hope that the
Senate will take up the bill that we passed over here, on a bipartisan
basis, with respect to expedited rescission and the legislative line
item veto.
We all agree that we have a budget challenge, and a deficit and
debt challenge--especially over the long term. And we agree that we
need to fix it. But I think that we also agree that the fundamental
problem is not the existing budget process rules--and no bill that
simply changes the budget process rules is going to solve the
underlying issue. There is no substitute for making the tough policy
decisions to reduce the deficit in a balanced, credible way. And once
the President and the Congress develop a consensus on the policies of a
budget agreement, then the policy process reforms can be an effective
tool in enforcing its implementation--at least at the margins. But
first you need to deal with the fundamental policy questions.
Over the last two years, many serious bipartisan groups have met to
examine ways to put our budget back on the path towards balance. Each
one of these groups has agreed that we need to take a balanced approach
toward deficit reduction that involves a combination of spending cuts
and revenues generated by eliminating tax breaks that are unproductive,
in many cases, in the economy. Unfortunately, our Republican colleagues
continue to oppose that balanced approach. Again, 98 percent of our
Republican colleagues in the House have signed a pledge that says that
they will not close a single corporate tax loophole for the purpose of
deficit reduction, and they won't ask people making more than $1
million a year to contribute one penny more for the purpose of deficit
reduction. That of course leaves only very deep cuts in spending that
hits everybody else rather than a balanced approach that asks for
shared responsibility. In an era of divided government, we need to be
able to make the difficult compromises necessary to get the job done.
Unfortunately, in some parts of this House, compromise has become a
dirty word.
Today's hearing is designed to examine a number of bills put forth
by our Republican Committee colleagues. Two of them deal with different
forms of spending caps. Effectively, what these bills do is try to
enshrine into law the House Republican budget, the unbalanced approach
to the budget with all of the requirements that it would make in terms
of cuts--ending the Medicare guarantee, and other very deep cuts in
important national investments. Interestingly, if you actually passed
the bills that have been introduced, the current FY2013 budget put
forward by our Republican colleagues would fail to comply with the
spending caps. The bills would require automatic sequester cuts of over
$70 billion to the proposed FY2013 Republican budget.
Moreover, and I think this is an issue that every Member should
focus on, the effect of these bills would be to take any future
economic downturn and risk turning it into a full-fledge recession or
depression. We will get into a couple of examples of how it would do
exactly that, and I am very interested in our witnesses' views on that.
Because you have to anticipate these kinds of events, and the bills do
not--they take a very rigid approach.
As Mr. Holtz-Eakin observed in this testimony when he was head of
the CBO, speaking about an earlier Deficit Control Act, ``the targets
set under the Deficit Control Act, both the original ones and the
revised ones, were unrealistic in the light of the prevailing economic
conditions. For that reason and others, actual deficits remained above
the targets during the years that the law was in effect.'' And it is
likely that if we don't make the underlying policy decisions--then that
is the likely result here.
As Peter Orszag pointed out in his Bloomberg column, all these
things are a super version of SGR. We thought we were going to solve
rising health care costs by putting into effect SGR cuts. Every year
Congress, on a bipartisan basis, has found a way around it. Doing a
super-sized version of SGR is not a way to resolve our budget
challenges.
And finally, Mr. Chairman, I just want to say a word about the
Speaker's version of the mother of all sequesters--his threat that the
United States would not meet its financial obligations. That, of
course, would have the effect of immediate, deeper across-the-board
cuts--but it would do so in a way that would devastate the economy. And
even talking about the United States, for the first time in its
history, not meeting its obligations is a reckless approach to economic
policy and jobs.
So, that is a sequester on steroids, and these others are versions
of that, and none of them meets the test of making tough policy
decisions.
I will end with this, Mr. Chairman, these bills in their current
form are either very dangerous to our economy if they were actually to
be put into effect and followed because of the fact that they would
make worse any economic downturn. Or, at best, they're misleading
because they create a sense that the Congress has done something.
People go home and they say to their constituents, hey, we passed a cap
on spending, don't worry about it, knowing full well that the spending
targets won't be met. I don't know which of those consequences is
worse, although I would hate to see another full-fledged economic
downturn compounded by the mindless sequesters in these bills.

Chairman Ryan. Sure. Obviously we see things differently.
Mr. Van Hollen. Talk about the math, the math.
Chairman Ryan. So as we mention in my opening statement, it
is not a substitute for getting the right policies, it is an
enforcement for making sure that the right policy changes
stick. But with that, I think we will start with Ms. Fraser and
then we will go to Dr. Holtz-Eakin and Dr. Aaron.

STATEMENTS OF ALISON ACOSTA FRASER, DIRECTOR, THOMAS A. ROE
INSTITUTE FOR ECONOMIC POLICY STUDIES, THE HERITAGE FOUNDATION;
DOUGLAS HOLTZ-EAKIN, PRESIDENT, AMERICAN ACTION FORUM; AND
HENRY J. AARON, SENIOR FELLOW, ECONOMIC STUDIES, THE BROOKINGS
INSTITUTION

STATEMENT OF ALISON ACOSTA FRASER

Ms. Fraser. Thank you very much. My name is Alison Fraser,
and I am the director of the Roe Institute for Economic Policy
Studies at The Heritage Foundation. And the views that I will
express today in my testimony are my own and shouldn't be
construed as representing any official position of The Heritage
Foundation. There is my disclaimer.
Thank you very much for having me here to testify before
you today at this hearing today. I will tell you what you
already know, which is that congressional and executive
oversight of the Federal budget are in turmoil. The political
aversions to toppling Federal overspending, I believe, is
enhanced an enabled by the inadequate processes that govern the
Federal budget. I think two things are needed to prevent a
European-style fiscal and debt crisis. One, our process changes
that would require some would say enforce the solution and
ensure fiscal results are achieved, and, of course, the robust
policies solutions themselves. Today's hearing on process
reform following the House's budget resolution which contains
these robust policy visions is in my view particularly welcome.
The sad fact is that U.S. Federal debt will soon reach
economically damaging levels and spending will be the driver of
that. The big elements of the spending growth stem from the Big
Three entitlements, Social Security, Medicare and Medicaid.
They compromise approximately 45 percent of the budget today,
but, as we know, they will experience very fast growth in the
future. A variety of projections show that it is highly
possible, even likely, that the U.S. could experience a U.S.--a
European style spending and debt crisis.
The problem is that changing courses seems elusive. The
process which governs the Federal budget has significant
weaknesses and must be addressed as both an impetus and tool to
driving the necessary changes to the budget. In my view, one
major gap in the budget process today is that mandatory
spending is in no way budgeted. Thus the Big Three entitlement
programs which essentially enjoy open-ended appropriations are
allowed to grow on budgetary autopilot. Or put another way, the
biggest drivers of the Federal budget are able to enjoy sort of
an automatic first call on tax revenues. The problem being then
that they squeeze out other priorities, whether they are low
taxes, strong defense, education funding or antipoverty
spending.
Another major gap is the seemingly arbitrary timeline of
budget window. One-year estimates, of course, are necessary and
longer term are as well, but from a budget perspective, there
is nothing crucial or magical about 5 or 10 years. Neither
adequately measures whether policies are affordable or as
sustainable over a longer term time horizon. And indeed, these
fixed, shorter-termed time frames even incentivize gaming the
timing of new policies so they seem to stick within their
budgetary targets and appear affordable.
Bringing entitlements in a sense on budget is an important
change in both the Spending Control Act and BOLT Act. Reviewing
the budget over the longer time as in the BOLT Act is equally
important.
To be sure, there are tremendous challenges with making
long-term budget projections. First of all, they all require a
variety of assumptions which, together or alone, over the long-
term, will all be wrong. But it is vital to know the direction
of the budget into the future and whether, based on today's
knowledge, policies are both sustainable and affordable.
Projections of this nature have been made regularly over the
years by a number of departments, including the Congressional
Budget Office. They are a good road markers of the direction
that we are in. So the transparency sections of the BOLT Act
featuring sustainability reports and regular review of long-
term spending to me are particularly important as is the long-
term reconciliation feature.
I do worry that enforcing spending caps through
sequestration against long-term projections could be
problematic. So a couple of possible solutions would be to
include some sort of margin of error for triggering
sequestration itself, and/or a slower phase in to bring
spending in line with the long-term caps. As for enforcement
itself, there are very understandable reasons for excluding
Social Security, but the program is, in fact, already running
permanent deficits. The only way for Congress to ensure
spending is sustainable is to put all programs in some way on
budget, even those that are the most sacrosanct, such as Social
Security.
So in conclusion, the nature of the political process
together has tremendous inertia to ignore our severe spending
and debt problems until forced to by outside events. The
objective of these bills are sound and sorely needed, I feel,
to fix the budget process in order to provide more
transparency, strong spending controls across the entire
Federal budget, not just a small share, that provides that
spending is sustainable over the long-term and to require steps
for reining in spending to meet controls.
In the end, only Congress will decide if and how it will
act. But I believe it is better to do so in an intentional
prudent way as these bills would provide rather than in a
crisis. Thank you, and I look forward to your questions.
Chairman Ryan. Thank you.
[The prepared statement of Ms. Fraser follows:]

Prepared Statement of Alison Acosta Fraser, Director, Thomas A. Roe
Institute for Economic Policy Studies, the Heritage Foundation

My name is Alison Acosta Fraser. I am the Director of the Thomas A.
Roe Institute for Economic Policy Studies at The Heritage Foundation.
The views I express in this testimony are my own, and should not be
construed as representing any official position of The Heritage
Foundation.
Congressional and executive oversight of the federal budget are in
turmoil. The political aversion to tackling federal overspending is
enhanced and enabled by the inadequate processes that govern the
budget. The last time a concurrent budget resolution was passed on time
was April 11, 2003. The Senate's record for failing to pass a budget
resolution is even more discouraging. The budget process is especially
inadequate for addressing and managing the long-term affordability and
sustainability of fiscal policy. Indeed, much about the process serves
to incentivize the avoidance of our long-term problems if not to
exacerbate them. The biggest drivers of long-term spending--
entitlements--are not subject to annual or even regular budget review
and they continue sharp growth under budgetary ``auto-pilot.'' And
there are other problems with the budget process: from the way the
budget window can be gamed to the exploitation of emergency spending.
Two things are needed to prevent a European-style fiscal and debt
crisis: process changes which require--some would say force--solutions
and ensure fiscal results are achieved, and the robust policy solutions
themselves. Today's hearing on process reform is particularly welcome.

NEED FOR ACTION

Today, federal spending is at about 23 percent of GDP and debt held
by the public is approximately 70 percent. When compared to the
historical, post--World War II average of approximately 20 percent of
GDP for federal spending and 44 percent for debt held by the public,
this growth alone would be cause for concern. But the sad fact is that
U.S. federal debt soon will explode to economically damaging levels and
spending will be the primary driver of that explosion.
Economic growth is materially slowed when debt approaches the size
of the economy. But in a world like today's, where the global economy
is increasingly interconnected and global capital markets in
particular, it is possible that even this can miss the true potential
magnitude of a debt and spending driven crisis. There is no better
evidence than to watch the European budget and debt crises continue to
unfold.
By the end of the decade, debt held by the public will reach 100
percent of GDP. After a generation it will reach nearly 200 percent\1\
and continue to skyrocket thereafter. The driver of this debt is
federal spending; in 10 years federal spending will be at 22.1 percent
of GDP, while revenues will reach 18.3 percent of GDP, essentially at
their historical average of 18.1 percent.\2\ Then the situation
deteriorates dramatically. By 2035, spending will reach 34 percent of
GDP, driven primarily by the three major entitlement programs: Social
Security, Medicare, and Medicaid. In 2012, they comprise approximately
45 percent of total federal spending, or 10 percent of GDP, and by 2035
they will reach approximately 16.5 percent of GDP. Left alone, they
will devour all tax revenues by 2045, assuming the historical level of
taxation.
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\1\ Congressional Budget Office, 2011 Long-Term Budget Outlook,
Alternative Fiscal Scenario, June 2011 at http://www.cbo.gov/sites/
default/files/cbofiles/attachments/06-21-Long-Term--Budget--
Outlook.pdf.
\2\ http://www.heritage.org/federalbudget/runaway-spending-tax-
revenue. There are different ways to calculate average historic levels
of revenue, spending, and debt. Such averages vary due to the time
periods covered. In the Heritage Foundation's Federal Budget in
Pictures publication, these averages span 50 years (1959--2008),
encompassing post--World War II and pre--Great Recession years.
www.heritage.org/federalbudget
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TAKING BACK OUR FISCAL FUTURE

Many budget experts on the right and left have been rightly
concerned about our grave situation and the lack of substantive
legislative progress. One such project, Taking Back our Fiscal Future,
stemmed from a joint project of the Brookings Institution and the
Heritage Foundation. Experts from those and five other organizations
across the ideological spectrum worked together for over a year to
``define the dimensions and consequences of the looming federal budget
problem, examine alternative solutions, and reach agreement on what
should be done. Despite our diverse philosophies and political
leanings, we have found solid common ground.'' \3\
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\3\ Joseph Antos, Robert Bixby, Stuart Butler, et al., ``Taking
Back our Fiscal Future,'' Brookings Institution and Heritage
Foundation, April 2008, http://www.brookings.edu/?/media/research/
files/papers/2008/4/fiscal%20future/04--fiscal--future.pdf (accessed
May 30, 2012).
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FIXING THE PROCESS

Process reform legislation should include tools to address the
major gaps that exist today, controlling the growth in spending--
including entitlement spending--over the both short term and the long
term.
My testimony will focus on the first two of the three bills under
discussion today:
Spending Control Act, H.R. 3576, which would put
enforceable limits on federal spending over the 10-year budget window,
which would be enforced through sequestration;
Balancing our Obligations for the Long Term (BOLT) Act,
H.R. 3580, which would focus on the long-term budget picture by putting
budget controls on total federal spending over a 30-year period,
increase disclosure of the true long-term budget picture to Members of
Congress and the public; and
Review Every Dollar (RED) Act, H.R. 3579, which would make
it more feasible to control spending by creating reserve accounts for
deficit reduction and placing new limits on administrative actions
which can drive up spending on mandatory programs.
The Spending Control Act starts by tightening the discretionary
caps in the Budget Control Act (BCA), and importantly gives more
discretion to Congress to set budget priorities between security and
non-security spending. Both of these are important; the BCA's total of
$2.1 trillion was only a first step toward slowing the growth in
spending, and more should be done. Indeed, the size of cuts taken in
isolation sounds impressive, yet over the 10-year period covered by the
BCA, these cuts represent merely 4.7 percent of total spending and just
over half of the new debt projected over the same period. As noted
earlier, reforms to the budget process must be accompanied by policy
changes. The new spending caps in the Act are taken from the House-
passed budget resolution, which included policy recommendations to
committees, which effectively links process to the policy goals and
strengthens the budget resolution. Congress should, however, have the
discretion to set priorities across the entire budget, so removing the
firewall between security and non-security spending is sound policy.
One major gap in the budget process today is that direct (or
mandatory) spending is not budgeted. Thus, the big three entitlement
programs--which enjoy essentially open-ended appropriations--are
allowed to grow on auto-pilot. Put another way, the biggest drivers of
the federal budget are able to enjoy an automatic ``first call'' on tax
revenues, squeezing other priorities--be they strong defense or
education. This is remarkable in the sense that affording such a budget
priority to any program--much less such a major one--effectively limits
congressional debate on setting national priorities. This is especially
problematic for solving our spending and debt crises as it places more
budget emphasis on the smallest portion of the budget and diverts
attention away from the biggest drivers. To address this imbalance,
this legislation would cap spending on the major entitlements in two
ways.
First, it places caps on three categories of direct spending:
Medicare, Medicaid and other health-related spending, and all other
direct spending (exempting Social Security and net interest). Here too,
the caps are set to the levels in the House-passed budget resolution--
further linking program modernization with the enforcement and process
side of budgeting. It is unfortunate that Social Security is exempt
from caps, as it is unsustainable over the decade and beyond.\4\ The
program is already in permanent deficits, which means it is placing a
strain on the rest of the federal budget by crowding out other spending
or--more likely--higher borrowing. Exempting Social Security from
spending restraint will mean more years of drawing on general revenues
to cover its deficits and will not require the program reforms that are
sorely needed to make it solvent and sustainable. Indeed, this seems at
odds with the intent of the legislation.
---------------------------------------------------------------------------
\4\ U.S. Social Security Administration, ``The 2012 Annual Report
of the Board of Trustees of the Federal Old-Age and Survivors Insurance
and Federal Disability Insurance Trust Funds,'' April 23, 2012, http://
www.socialsecurity.gov/OACT/TR/2012/index.html (accessed April 23,
2012).
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Even with these diverse ideological perspectives, the
recommendations in this report included taking entitlement spending off
budgetary auto-pilot and budgeting for the long term. This paper was
published over four years ago. One striking passage in the report notes
the ``huge problem the candidates are not talking about'' namely, ``how
to narrow significantly the enormous gap between projected federal
spending and revenues.'' Fast forward four years to the 2012 election
and an even worse fiscal picture. The same flaws in the budget process
still exist today, but the urgency for solving the fiscal picture is
even more imperative. Fixing the process is equally important.
Second, this legislation would also cap total spending, including
both discretionary and direct spending, and also requires enforcement
should the caps be exceeded. Putting the brakes on total spending is
essential, as noted earlier, and any limits must be enforceable.
Federal spending must be evaluated by the sum of its breadth;
comparisons of one part of the budget or another are simply inadequate
unless the budget in its entirety is measured and limited. The devil is
always in the details of just how to enforce such caps. Across-the-
board cuts, which are the Act's mechanism for enforcement, are the most
simple to implement, especially quickly. Moreover, there is the
semblance of shared sacrifice across all programs. However, they are
quite a crude tool for de facto policy-setting. This is especially true
for complex programs like Medicare where such a mechanism can have all
manner of unintended consequences, or in the Department of Defense
where it can jeopardize efficient and cost-effective management of
long-term contracts. Paraphrasing Churchill, other cuts have been tried
and across-the-board cuts are the worst form * * * except for all the
others.
Areas for Improvement: As noted above, Social Security is exempt
from the individual direct spending caps. To set policies which both
meet the needs of our citizens and are affordable and sustainable, all
programs across the entire federal budget should be on a level playing
field, open for debate and trade-offs. This should include even the
most popular or seemingly sacrosanct ones like Social Security. It too
should be subject to some form of spending restraint--whether part of
an individual spending cap or subject to some limit so that all federal
programs are brought under some form of budget discipline and
assessment. Leaving one out--no matter how integral it is in our
society--paves the way for additional exemptions. As for Social
Security itself, eliminating it from a cap simply delays the day of
reckoning when the trust fund is finally exhausted and solutions will
happen one way or another.
The policy results of budget enforcement should be as important as
the fiscal ones. So, one improvement for sequestration could be to link
the particular policy proposals included in the budget resolution into
sequestration rather than relying on sequestration. For example, the
phase-in period for moving Medicare to a premium support model could be
expedited, or income adjusting for affluent seniors could be enhanced.
In such a way, the policy changes to modernize these programs would be
an integral part of enforcement. Similar enforcement could be done for
Social Security such as phasing in a retirement age, or further income
adjusting for affluent retirees.
Another concern in the legislation is the sheer number of caps it
contains: discretionary spending, three individual program caps for
entitlements, and a cap on total spending. In addition to this, there
is a cap on deficits. This adds potentially unnecessary complexity and
makes it much harder for budget and program managers to anticipate and
prepare for sequestration, and conceivably could lead to more than one
set of sequestration cuts in a given year. These should be addressed in
future versions of the bill. Additionally, since deficits are the
result of spending and revenue levels, the deficit cap would be an
impractical one that--as the bill is written--would be difficult and
problematic to enforce. Since deficits are specified on budget
resolutions, this seems an unnecessary addition to this bill.
The Balancing Our Obligations for the Long Term (BOLT) Act has many
of the same strengths of the Spending Control Act, and some of the same
concerns. Its strengths lie in the steps it takes to ensure that the
entire budget--and federal spending in particular--is affordable over
the longer term beyond the rather arbitrary 10-year budget window.
There are several reasons this is of crucial importance.
First, lawmakers and the public must know whether existing policies
are affordable over both the near term and long term. In past years,
the 10-year budget window would show relatively modest increases in
spending and stable debt levels. However, over the longer term,
spending--especially on entitlements--explodes and the debt along with
it. This was the case, for example, in the last years of the George W.
Bush Administration where spending growth tapered off and revenues grew
with a stronger economy which lowered deficits and the debt ratio. But
it was well known that this was a false sense of security as shown by
the annual reports of the Medicare and Social Security Trustees and
long-term budget projections by the CBO and GAO. Lawmakers still did
nothing to tackle this huge problem. The lack of long-term budget
measures in the budget process allowed Congress and the Administration
to ignore the problem. Exclusive reliance in the budget process on
shorter-term projections even seemed to incentivize huge increases in
federal spending, as in the examples of the Medicare Drug Benefit or
universal health care subsidies in the Affordable Care Act, the Farm
Bill, or the budget busting SAFETEA-LU Transportation reauthorization.
Second, it is possible for individual programs to appear
affordable, but when examined in concert with all other spending a
different, troublesome picture can emerge. When the appalling condition
of Social Security and Medicare is added to the growing expanse of the
federal government, the true picture of federal finances is markedly
worse. Alternatively, especially important today, the longer-term
horizon shows the efficacy of spending reductions. Those that do not
tackle entitlement programs will do very little to bring the budget in
line to where it can be either affordable or sustainable. So the
objective of this legislation is sound and these kinds of changes are
sorely needed.
Lastly, it is possible to game legislation such that it appears to
be affordable within the 10-year budget window. The two biggest
examples of new programs--the Medicare drug benefit and the Affordable
Care Act--both employed this gimmick. They were affordable according to
the criteria established for the legislation within the 10-year window.
But since each of them back-loaded their new spending, they failed the
test of sustainable and affordable policy changes over longer-term
measures. For example, excess costs for the Medicare Drug Benefit were
estimated to approach $8 trillion over the 75-year time horizon, net
present value, more than twice the debt held by the public at the time
the bill was passed.
The BOLT Act addresses these flaw by first requiring reporting over
a long-term budget window--an additional 30 years after the end of the
10-year budget window. Both the legislative branch, through CBO and
GAO, and the executive branch through OMB and the President's own
budget submission must present an analysis of the long-term budget
picture and the sustainability of policy. To be sure, these kinds of
projections will not be accurate and are based on numerous assumptions
such as the growth in discretionary spending, needs of defense,
interest rates, the size and growth of the economy, etc. However, such
projections are made regularly by the departments named above which
present a reasonable picture of future spending and finances for
lawmakers and the public to gauge whether the budget and major policies
are sustainable. This first step, disclosure of long-term
sustainability in the budget process itself is important so it can be
used to guide policy in the budget resolution.
The legislation imposes spending caps over a 30-year period,
beginning after the 10-year budget window closes. Here, caps include
the same direct spending categories as the Spending Control Act, in
addition to a total spending cap. As noted earlier, budgeting only for
discretionary spending covers less than half of the budget and leaves
the biggest drivers of the budget out of annual budget debates. As
entitlement spending will automatically grow ever larger, these
programs must be brought under a formal review process, and thus
extending spending caps to them will be an important part of
constraining spending to affordable levels. These caps are set using
the same levels of spending as the House-passed FY-2013 budget
resolution, again linking policy objectives to fiscal targets.
Spending is kept under control by long-term reconciliation, a
regular review of sustainability every five years. Tens of millions of
Americans rely on entitlements for retirement security, so new changes
to these programs should be periodic, allowing seniors to plan and
react to changes. If reconciliation and regular review fail to keep
spending in check, there will be sequestration. These steps are welcome
improvements over today's glaring lack of long-term budgeting. The
downgrading of the nation's credit ratings last summer serves as
further warning that the debt is reaching unsustainable levels and must
be addressed. As the long-term budget gap is exclusively driven by
spending, this legislation is properly focused on spending.
As noted above, it is important to measure the costs of new
legislation over the short term, but this alone is an incomplete
measure as it allows gaming of the rules towards greater spending.
Measuring major legislation over the long term is an important step in
ensuring sustainable policy. Such formal measures would have markedly
changed the debate for the Medicare Drug Benefit and the Affordable
Care Act.
Improvements: While there are fewer caps than the Spending Control
Act, setting targets for Medicare, Medicaid and other health, and all
other excluding Social Security may set an unnecessary level of detail
for budget caps--especially over the long term. It is difficult enough
to forecast spending over the long run, and requiring enforcement
mechanisms at such detailed levels may prove troublesome. It is
valuable to assess sustainability of individual programs. So one
enhancement might be to provide additional flexibility to Congress to
move resources from one category to another.
The old saw that economists spend their careers explaining why
their predictions are wrong has some relevance here. Long-term
estimates are bound to be wrong. So giving some breathing room for the
caps and sequestration in particular through a small, acceptable margin
of error would still incentivize reforms and budget control if done
carefully. Ensuring that entitlement programs are not whipsawed by
frequent policy changes in response to the annual sustainability report
are also important. There should be a balance between the tension
needed for urgent steps to rein in spending and predictability for
those who rely heavily on such programs.
The Spending Control Act's shortcoming of excluding Social Security
also is present in the BOLT Act.

GENERAL OBSERVATIONS

If it was only rules and procedures that were needed, our severe
budget challenges would likely be resolved today. Indeed, existing laws
have been ignored, whether intentionally as with the Senate, from
gridlock, or just plain lack of will to address these serious problems.
Since the last timely concurrent budget resolution was passed
(excluding FY 2013), there has only been a concurrent budget resolution
in four of out eight years. Reconciliation, the process originally
designed to help Congress change current law to conform revenue,
spending, and debt limit levels to the policies laid out in the budget
resolution, has only been used to minor effect for deficit reduction in
recent years.\5\
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\5\ See Alison Acosta Fraser and Brian M Riedl, ``The Deficit
Reduction Act: One Small Step for the House,'' Heritage Foundation
WebMemo No. 911, November 9, 2005, http://www.heritage.org/research/
reports/2005/11/the-deficit-reduction-act-one-small-step-for-the-house.
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The nature of the political process today has tremendous inertia to
ignore our severe spending and debt problems until forced to by outside
events. But this approach to governing is the worst way to set policy,
as crisis-driven decisions are often desperate choices which will fail.
The flawed concept of the Supercommittee and the equally flawed BCA
sequester are good examples. Moreover, crisis-driven decisions rarely
allow for public discourse, weighing the pros and cons of such changes
and building support so they are accepted. Congress and the President
must act with purpose and intent to solve the spending and debt
challenges, yet the system is sorely inadequate to ensure that all
spending over the short term and long term is both affordable and
sustainable. The objectives of these bills are sound and sorely needed:
to provide more transparency, strong spending controls across the
entire federal budget over the short term and the long term, and to
require steps for reining in spending to meet those limits. They are
important steps to fixing the budget process. In the end, Congress
itself will decide if it will act. Better if it does so in an
intentional, prudent way rather as these bills would provide, rather
than in a crisis.

Chairman Ryan. Dr. Holtz-Eakin.

STATEMENT OF DOUGLAS HOLTZ-EAKIN

Mr. Holtz-Eakin. Chairman Ryan, Ranking Member Van Hollen
and members of the committee.
Chairman Ryan. Pull your mic a little closer.
Mr. Holtz-Eakin. Thank you again for the privilege to
appear today, and I look forward to your questions. Let me
briefly make a couple points at the outset. First, to echo what
has already been said, the Federal budget process is
fundamentally broken. At best, when it works, the President
submits a budget and the House and Senate pass budget
resolutions and conference it to a single agreement, but there
is in fact no reason why is has to match what the President
submitted, there is no reason why the amount of spending in
mandatory programs has to have any relation to the
discretionary programs, and there is no reason why taxes have
to match spending in any fundamental way.
So when it works well, it doesn't produce a fiscal policy,
it produces a fiscal outcome, and it is usually bad. At the
moment, it is not working well at all. As the chairman noted,
the Senate is not passing budgets at all. The President's
budget submissions can't even get votes in either House of
Congress. And we have a demonstrable dangerous fiscal state. As
this committee is well aware, we already have gross Federal
debt that exceeds the size of the U.S. economy. We have all the
characteristics of countries that get into sovereign debt
crises, high levels of debt, heavy reliance of short-term
borrowing, a failure to understand fully the obligations that
the taxpayer faces and then they pop up and we have to pay for
them. All of this suggests the need for dramatic action in the
United States.
The history of countries that have gotten in this situation
has actually provided a road map for the right thing to do. In
circumstances of bad growth and large debt, the best set of
policies are to keep taxes low and reform them to be as pro-
growth as possible and to control spending. And the key in
controlling spending turns out to be government employment, not
a real big problem in the United States, and transfer programs.
And in the United States, those transfer programs are the large
mandatory spending programs, they are the entitlements,
Medicare, Medicaid, Social Security and the new Affordable Care
Act. So the policy playbook is actually apparent, the question
is can you design a budget process which will be a complement
and support that policy process. And as everyone here has
noted, process is no substitute for getting policies right.
The key features of the pieces of legislation under control
today, under consideration today, are that they actually put
mandatory spending on a budget, and that is a necessary
complement to getting policies control spending programs which
are at the heart of addressing the Nation's problems, so
putting mandatory spending on a budget is an enormously
important step, and having a long-term outlook with mechanisms
to force action to keep the policies on track is the second key
feature.
There are lots of other details, but there is no substitute
for doing that. These are examples of fiscal rules, imposing a
set of fiscal rules on a Congress is an important step for the
United States. It has been tried elsewhere around the globe, as
I noted in my written testimony, the Dutch adopted its spending
caps, the Swedes adopted spending caps and targets for surplus
averaged over the business cycle. These kinds of fiscal rules
have been shown to improve budgetary and economic performance
around the globe. I applaud the attempt to consider these here
and get the United States on a better track, both from a policy
and process point of view, thank you.
Chairman Ryan. Thank you.
[The prepared statement of Mr. Holtz-Eakin follows:]

Prepared Statement of Douglas Holtz-Eakin, President,
American Action Forum*

Chairman Ryan, Ranking Member Van Hollen and members of the
Committee, I am pleased to have the opportunity to appear today. In
this testimony, I wish to make a few basic points:
---------------------------------------------------------------------------
*The opinions expressed herein are mine alone and do not represent
the position of the American Action Forum. I thank Gordon Gray for his
assistance.
---------------------------------------------------------------------------
The U.S. faces a dramatic threat from the current and
projected levels of federal debt, driven by ever-increasing mandatory
spending;
The outlay reductions in the president's budget proposal
or the Budget Control Act are dwarfed by the scale and imminence of the
problem;
The current Congressional budget process is broken, and
does not facilitate addressing the threats to the Nation;
The legislation contemplated in this hearing have relative
strengths and weaknesses, but are clearly designed to introduce greater
discipline in the budgeting process;
In particular, to the extent they involve the adoption of
a ``fiscal rule'' these proposals would be a valuable step toward
budgetary practice that would address the debt threat and preclude its
recurrence; and
Budget process reforms are commendable, and to the extent
they can precipitate action, they should be pursued, but are no
substitute for necessary underlying policy changes.
Let me discuss each in turn.

THE THREAT FROM FEDERAL DEBT

The federal government faces enormous budgetary difficulties,
largely due to long-term pension, health, and other spending promises
coupled with recent programmatic expansions. The core, long-term issue
has been outlined in successive versions of the Congressional Budget
Office's (CBO's) Long-Term Budget Outlook.\1\ In broad terms, the
inexorable dynamics of current law will raise federal outlays from an
historic norm of about 20 percent of Gross Domestic Product (GDP) to
anywhere from 30 to 40 percent of GDP. Any attempt to keep taxes at
their post-war norm of 18 percent of GDP will generate an unmanageable
federal debt spiral.
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\1\ Congressional Budget Office. 2011. The Long-Term Budget
Outlook. Pub. No. 4277. http://www.cbo.gov/ftpdocs/122xx/doc12212/06-
21-Long-Term--Budget--Outlook.pdf
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This depiction of the federal budgetary future and its diagnosis
and prescription has all remained unchanged for at least a decade.
Despite this, lasting action (in the right direction) has yet to
achieve the force of law.
In the past several years, the outlook has worsened significantly.
Over the next ten years, according to the Congressional Budget
Office's (CBO's) analysis of the President's Budgetary Proposals for
Fiscal Year 2013,\2\ the deficit will average over $630 billion over
the next ten years. Ten years from now, in 2022, the deficit will be
3.0 percent of GDP, roughly $700 billion. As a result of the spending
binge, in 2022 debt held by the public will nearly have doubled from
its 2008 level to roughly 80 percent of GDP and will continue its
upward trajectory.
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\2\ Congressional Budget Office. 2012. An Analysis of the
President's 2013 Budget. http://www.cbo.gov/sites/default/files/
cbofiles/attachments/03-16-APB1.pdf
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The ``Bad News'' Future under Massive Debt Accumulation. A United
States fiscal crisis is now a threatening reality. It wasn't always so,
even though--as noted above--the Congressional Budget Office has long
published a pessimistic Long-Term Budget Outlook. Despite these gloomy
forecasts, nobody seemed to care. Bond markets were quiescent. Voters
were indifferent. And politicians were positively in denial that the
``spend now, worry later'' era would ever end.
Those days have passed. Now Greece, Italy, Portugal, Spain,
Ireland, and even Britain are under the scrutiny of skeptical financial
markets. And there are signs that the U.S. is next--as witnessed by the
decision of S&P to downgrade the federal credit rating. The federal
government ran a fiscal 2011 deficit of $1.3 trillion--nearly 9 percent
of GDP, as spending remained above 24 percent of GDP and receipts
remained below 16 percent of GDP.
How did this happen? First, the U.S. frittered away its time for
easier action. It was widely recognized that the crunch would only
arrive when the baby boomers began to retire. Guess what? The very
first official baby boomer already chose to retire early at age 62, and
the number of retirees will rise as the years progress. Crunch time has
arrived and nothing was done in the interim to solve the basic spending
problem--indeed the passage of the Medicare prescription drug bill in
2003 made it worse.
Second, the events of the financial crisis and recession used up
the federal government's cushion. In 2008, debt outstanding was only 40
percent of GDP. Already it is approaching 70 percent and rising
rapidly.
Third, active steps continue to make the problem worse. The
Affordable Care Act ``reform'' added two new entitlement programs for
insurance subsidies and long-term care insurance without fixing the
existing problems in Social Security, Medicare, and Medicaid.
Financial markets no longer can comfort themselves with the fact
that the United States has time and flexibility to get its fiscal act
together. Time passed, wiggle room vanished, and the only actions taken
thus far have made matters worse.
As noted above, in 2022 public debt will have nearly doubled from
its 2008 level to nearly 80 percent of GDP and will continue its upward
trajectory. Already, gross federal debt exceeds 100 percent of GDP.
Using this measure, research shows that a debt-to-GDP ratio of 90
percent or more is associated with the risk of a sovereign debt crisis.
Perhaps even more troubling, much of this borrowing comes from
international lending sources, including sovereign lenders like China
that do not share our core values. Rather than reducing this threat,
according to news reports the United States is facilitating increased
indebtedness to China by providing the People's Bank direct access to
Treasury markets.\3\
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\3\ Flitter, Emily. Reuters. http://www.reuters.com/article/2012/
05/21/us-usa-treasuries-china-idUSBRE84K11720120521
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For Main Street America, the ``bad news'' version of the fiscal
crisis occurs when international lenders revolt over the outlook for
debt and cut off U.S. access to international credit. In an eerie
reprise of the recent financial crisis, the credit freeze would drag
down business activity and household spending. The resulting deep
recession would be exacerbated by the inability of the federal
government's automatic stabilizers--unemployment insurance, lower
taxes, etc.--to operate freely.
Worse, the crisis would arrive without the U.S. having fixed the
fundamental problems. Getting spending under control in a crisis will
be much more painful than a thoughtful, pro-active approach. In a
crisis, there will be a greater pressure to resort to damaging tax
increases. The upshot will be a threat to the ability of the United
States to bequeath to future generations a standard of living greater
than experienced at the present.
Future generations will find their freedoms diminished as well. The
ability of the United States to project its values around the globe is
fundamentally dependent upon its large, robust economy. Its diminished
state will have security repercussions, as will the need to negotiate
with less-than-friendly international lenders.
The ``Good News'' Future under Massive Debt Accumulation. Some will
argue that it is unrealistic to anticipate a cataclysmic financial
market upheaval for the United States. Perhaps so. But an alternative
future that simply skirts the major crisis would likely entail
piecemeal revenue increases and spending cuts--just enough to keep an
explosion from occurring. Under this ``good news'' version, the debt
would continue to edge northward--perhaps at times slowed by modest and
ineffectual ``reforms''--and borrowing costs in the United States would
remain elevated and escalating.
Profitable innovation and investment will flow elsewhere in the
global economy. As U.S. productivity growth suffers, wage growth
stagnates, and standards of living stall. The combination of sluggish
income growth and a very large tax burden from the debt, assures that
the next generation will inherit a standard of living inferior to that
bequeathed to this one.

THE NEED FOR ACTION

The federal budget problem demands fundamental reforms to major
mandatory spending programs--Medicare, Medicaid, Social Security, the
Affordable Care Act--and would benefit from the improved growth derived
from fundamental tax reform. Despite this, successive budget proposals
by the president are devoid of reform proposals and characterized at
best by the type of piecemeal spending cuts and tax increases that
invite stagnation.
Recently, the passage of the Budget Control Act of 2011, its caps
on discretionary spending, and the formation of the Joint Select
Committee on Deficit Reduction represented a commitment to move the
nation's finances in a better direction.
However, the failure of the Committee to report recommendations to
address our fiscal challenges has left the United States in a perilous
position. It faces the expiration of tax polices most recently extended
in 2010 and a sequester that is widely judged to be bad policy. The
combined effect of these policies, in an unprecedented statement from
CBO, threatens recession.\4\
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\4\ Congressional Budget Office. 2012. Economic Effects of Reducing
the Fiscal Restraint That Is Scheduled to Occur in 2013. http://
www.cbo.gov/sites/default/files/cbofiles/attachments/FiscalRestraint--
0.pdf
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However, the structural budget challenges the nation faces are so
pressing and significant that they outweigh in terms of their
implications for economic output even a near-term recession. Clearly
something must be done to avoid a downturn, but any such undertaking
must be paired with reforms to address our fiscal imbalance.

THE BROKEN BUDGET PROCESS

The Congressional budget process is broken and does not engender
regular evaluation of the fiscal health of the federal government.
Indeed, the prima facie evidence of its failure is that fact that the
president has regularly submitted budgets that clearly display a path
to a sovereign debt crisis, the U.S. Senate has not adopted a budget
resolution in three years, and the Congress as a whole regularly
operates without a binding budget resolution--all with no consequence.
The budget process is intended to facilitate a regular and
disciplined evaluation of the inflow of taxpayer resources and outflow
of federal spending. It should enhance the role of the Congress as a
good steward of the federal credit rating. It does neither because the
current process is insufficiently binding. As a result, it easily
degenerates to the mere adoption of current-year discretionary spending
levels, with no review of the real problem: the long-term commitments
in mandatory spending.

LEGISLATIVE PROPOSALS FOR PROCESS REFORM

To the extent that process reforms introduce added discipline to
governance, and contribute to good budgetary outcomes, they should be
commended. I believe there are elements of each of the three bills
considered today that meet that test.

BALANCING OUR OBLIGATIONS FOR THE LONG TERM ACT OF 2011

As noted above, the U.S. long-term budget challenge is daunting--
now more so because what was once a truly long-term challenge now
confronts in the medium term. Indeed, if credit markets observe a
continued failure to put in place a credible plan to address this
challenge, there would likely be near-term implications.
The BOLT Act should be viewed favorably for its focus beyond the
standard budget window. Any meaningful reform to major entitlements may
have only modest impact within the 10 year budget window, but are the
only sort of reforms that will address our looming, spending-driven
debt crisis. Some efforts on this issue have been made in the past,
such as the long-term budget point of order, the codification of which
is a particularly laudable aspect of this legislation. Strengthening of
the ``Medicare trigger'' enacted in 2003, but repeatedly ignored by the
current administration is also a worthy pursuit.
I must also note with caution the reliance inherent in this
legislation on long-term budget projections. Any budget process that is
contingent upon a long-term estimate of federal finances and a
subsequent long-term estimate on how legislation (the compulsory
``fast-track'' legislation) might alter those finances is fraught with
uncertainty. It is simply beyond the scientific capabilities of the
budget community to project these impacts with great certainty. The
need for Congress to consider the long-term outlook is undeniable.
Assuring that federal finances are sustainable and that the debt
trajectory is downward are far more important than hitting precise
projected numerical targets.

SPENDING CONTROL ACT OF 2011

Any serious approach to budget discipline must include mandatory
spending, which comprises over half of federal spending. The Budget
Control Act, and other efforts, principally stemming from this body
have put the brakes on discretionary spending growth. I would commend
any policymaker for rooting out additional savings in discretionary
programs, in domestic and defense appropriations, but much of the low-
hanging fruit has been culled, and undue effort to squeeze less
consequential savings from discretionary programs at the expense of a
much needed debate on entitlement reforms would likely be unproductive.
While praise-worthy for staunching the recent discretionary spending
binge, the Budget Control Act, in its post Super Committee-failure
guise, suffers from this flaw.
The Spending Control Act addresses this flaw by introducing
measures to restrain direct spending, overall spending, and deficits. I
believe the inclusion of mandatory spending into any budget process
reform regime is critical. While ultimately, we must reform the
underlying elements of mandatory programs, the desire to establish a
global budget for mandatory spending, which is essentially what such a
cap would do, is well intentioned, and would advance the goal of
imposing needed reforms to these programs.

REVIEW EVERY DOLLAR ACT OF 2011

Much like the previous two proposals, this legislation addresses
the critical driver of our budget woes--direct spending. A periodic
reassessment, as called for in the Review Every Dollar Act, of all
federal programs should serve as a catalyst for the necessary debate on
how to address our mandatory programs. That is the crucial first step
to reining in the largest and fastest growing federal programs.
The RED Act also seeks to address other specific flaws in current
budget practice that are worthwhile efforts. Making explicit the tens
of billions in federal transfers to the Highway Trust Fund is critical
to effectively prioritizing federal spending initiatives. In a time of
tight budgets, prioritization must determine funding allocations, and
if we are to do so with any fidelity, then the masking of the state of
the Trust Fund's finances is a practice that must come to an end.
Additional measures in the RED are also commendable for their
approaches to other such anomalies that impede proper budgetary
practice.

THE VALUE OF FISCAL RULES

One way to think of the reforms under consideration today is in the
context of a federal ``fiscal rule.'' At present, the federal
government does not have a fiscal ``policy.'' Instead, it has fiscal
``outcomes''. The House and Senate do not reliably agree on a budget
resolution. Annual appropriations reflect the contemporaneous politics
of conference committee compromise, and White House negotiation. Often,
the annual appropriations process is in whole or part replaced with a
continuing resolution. Annual discretionary spending is not coordinated
in any way with the outlays from mandatory spending programs operating
on autopilot. And nothing annually constrains overall spending to have
any relationship to the fees and tax receipts flowing into the U.S.
Treasury. The fiscal outcome is whatever it turns out to be--usually
bad--and certainly not a policy choice.
I believe that it would be tremendously valuable for the federal
government to adopt a fiscal rule. Such a rule could take the form of
an overall cap on federal spending (perhaps as a share of gross
domestic product (GDP)), a limit on the ratio of federal debt in the
hands of the public relative to GDP, a balanced budget requirement, or
many others. Committing to a fiscal rule would force the current,
disjointed appropriations, mandatory spending, and tax decisions to fit
coherently within the adopted fiscal rule. Accordingly, it would force
lawmakers to make tough tradeoffs, especially across categories of
spending.
Most importantly, it would give Congress a way to say ``no.''
Spending proposals would not simply have to be good ideas. They would
have to be good enough to merit cutting other spending programs or
using taxes to dragoon resources from the private sector. Congress
would more easily be able to say, ``not good enough, sorry.''
As documented by the Pew-Peterson Commission on Budget Reform\5\
other countries have benefitted from adopting fiscal rules. The Dutch
government established separate caps on expenditures for health care,
social security and the labor market. There are also sub-caps within
the core sectors.
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\5\ http://budgetreform.org/
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Sweden reacted to a recession and fiscal crisis by adopting an
expenditure ceiling and a target for the overall government surplus
(averaged over the business cycle). Later (in 2000) a balanced budget
requirement was introduced for local governments. Finally, in 2003 the
public supported a constitutional amendment to limit annual federal
government spending to avoid perennial deficits.
A lesson is that, no matter which rule is adopted, it will rise or
fall based on political will to institute it and the public's support
for its consequences.

NECESSARY POLITICAL WILL

All three of the measures being discussed today share the necessary
goal of controlling the largest drivers of our spending problem. To the
extent that the three bills before the Committee impel reforms to our
entitlement programs, then I support their passage. However, process
reform, no matter how well intentioned or considered is no substitute
for the actual reforms needed to address the looming debt crisis fueled
by federal spending. No statutory spending cap or scheduled sequester
can replace the needed debate on what a realistic or fair retirement
age should be, or what the proper federal role in seniors' health care
delivery is. So while I commend the authors of the legislation we are
discussing, I would also caution this Committee's membership, as many
know, the clock is ticking on the need for that broader discussion.
Thank you. I look forward to your questions.

Chairman Ryan. Dr. Aaron.

STATEMENT OF HENRY J. AARON

Mr. Aaron. Thank you very much, and I am very glad to be
here. I would like to begin with some areas of agreement.
Chairman Ryan. Pull your mic a little closer.
Mr. Aaron. Sure. I would like to begin with some areas of
agreement. There is not a hair's worth of difference among us
on the issue of the importance of dealing with the long-term
budget challenge that we face. There is not much difference
among us on the question of whether budget procedures could, in
fact, be improved. This hearing, however, isn't about those
issues; it is about whether these particular bills are the
right way to go about dealing with those problems.
The second area of agreement, I think among us, both Ms.
Fraser and Mr. Holtz-Eakin emphasized in their testimony the
problematic nature of any rule that is linked to very long-term
projections because they are wrong and exact, and if they force
actions, they are subject to random and capricious errors, and
they actually place in the hands of technocrats decisions that
properly belong in the hands of Congress.
A third area, one that Ms. Fraser emphasized, is that these
bills contain way too many caps and are unbalanced because they
omit from their ambit consideration of revenues as part of the
fiscal picture.
Mr. Holtz-Eakin just mentioned an aspect of his testimony
that I wanted to also emphasize, which is his reference to
budget caps in European countries. I would like to go on
record, maybe bragging a bit, I suggested precisely such a
budget cap for U.S. health care spending in total 20 years ago
in a Brookings volume, I still think it is a good idea but that
is not what these bills do. What these bills do is single out
those aspects of health care spending that benefit the aged,
the disabled and the poor. In that respect, they differ
fundamentally from the very European proposals to which Mr.
Holtz-Eakin called attention.
I would like to echo and repeat a point that Mr. Van Hollen
made in his opening remarks. I think it is important that none
of us, I believe, is opposed to procedural reforms in the
budget process. The current system is flawed it suffers from
many of the shortcomings from which Mr. Holtz-Eakin previously
referred. But there is also a very clear record of consistent
and complete failure of budgetary procedural rules to take the
place of substantive negotiations on the very policies that
comprise the budget and are projected to cause problems in the
future. They have never succeeded in the past in the United
States, there is no reason to think they will do so in the
future. They are no substitute for the specific substantive
negotiations.
When and as those negotiations yield an agreement on how to
deal with long-term budget challenges, changes in procedural
rules can help cement and sustain those agreements. But to
date, there is no evidence whatsoever that they can bring those
agreements about.
I would like in my concluding couple of minutes to focus on
what I think is perhaps the fundamental problem with the
procedural rules that are contained in this bill. They call for
spending cuts that, in my view, are simultaneously mistimed,
wrongly calibrated, and perversely targeted. They are mistimed
because they would be triggered just when additional spending
is needed to counter weakness in private demand. They are
wrongly calibrated because they would be largest during the
deepest recessions when those expenditures are most needed, and
they would be perversely targeted because they would fall most
heavily on the jobless and the sick precisely at the time when
assistance for those groups is most sorely needed.
I want to conclude by reiterating once again that I am not,
in any way, urging opposition to procedural reforms in budget
process. I think they are an important step for this committee
to take a leadership role in bringing about, but they are no
substitute and they cannot proceed substantive agreement on the
budgetary measures necessary to improve the long-term fiscal
picture of this country. Thank you.
Chairman Ryan. Thank you.
[The prepared statement of Mr. Aaron follows:]

Prepared Statement of Henry J. Aaron, Senior Fellow,
Economic Studies, the Brookings Institution\1\

Mr. Chairman and Mr. Ranking Member: Thank you very much for
inviting me to testify today.
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\1\ Bruce and Virginia MacLaury Senior Fellow, the Brookings
Institution. The views expressed here are my own and do not necessarily
reflect those of the trustees, officers, or other staff of the
Brookings Institution.
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These bills deal in complex ways with the rules that will govern
how Congress handles budgetary matters in the near and distant future.
In my testimony, I shall focus primarily on HR 3576 and 3580. I shall
emphasize the following points.
These bills would establish stringent spending limits.
Those limits would force spending to be cut far below levels set in
laws that Congress has duly enacted and the President has signed. These
cuts would span the federal budget, cutting spending in myriad programs
without debate or vote by members of Congress on the specific cuts
involved.
The limits on the size of government in HR 3576 and HR
3580 are lower than actual expenditures during the administrations of
the last five presidents, Republican and Democratic. A variety of
forces will tend to increase government spending in the future.
The bills would set limits on deficits without regard to
economic conditions. If adopted, they would likely deepen and lengthen
recessions. They would increase unemployment and lower earnings and
profits at times when the economy was already in distress.
Although ostensibly aimed a limiting the scope of
government, these bills would do nothing to curb tax provisions that
are the functional equivalent of expenditures and that, like direct
spending, alter the private allocation of resources.
Although ostensibly aimed at limiting deficits, these
bills would do nothing to inhibit deficit-increasing cuts in tax rates
or the creation of new deductions, credits, or exclusions.
These bills would end the established and benign
principle, present in budget deals and negotiations for more than two
decades and most recently embraced by the Bowles-Simpson commission,
that programs protecting low income Americans should be exempt from
sequestration.
The bills would limit the size of government and fiscal
policy not just for the next several years, but into a future no one
can foresee. To do so, they must depend on projections of economic and
political circumstances that are subject to vast uncertainty and
enormous discretion by those preparing projections. They thereby cede
to unelected technicians, who must use opaque assumptions and
procedures, power over policies that under the Constitution are the
responsibilities of members of Congress.
Government spending, revenues, and the deficit change because of
new legislation and evolving economic circumstances. Congress enacts
legislation. It does not control the economy.
Spending and revenues change automatically with economic activity.
Most taxes increase when the economy expands and shrink when the
economy contracts. Many expenditures vary with economic activity, as
well.
Spending under Old-Age, Survivors, and Disability
Insurance, Medicare, and Unemployment Insurance increases when the
economy slows. So does spending under income- or means-tested programs,
such as Medicaid, Temporary Assistance to Needy Families, Supplemental
Nutrition Assistance.
Personal and corporation income taxes, payroll taxes, and
many excise taxes rise and fall with economic activity.
These automatic variations in taxes and spending help keep the
economy on an even keel. When the economy is booming, rising revenues
and falling spending tend to prevent the economy from overheating. When
the economy is declining, falling revenues and rising government
spending directly support private demand or offset its fall. Without
automatic stabilizers, the economy would more easily 'overheat' during
economic booms. Without automatic stabilizers, the drop in income and
increase in unemployment during recession would be more severe than is
with them.
The faster such offsetting effects occur, the better. These
stabilizing effects would be delayed if anti-recession legislation were
enacted only after official statistics signaled economic shifts and
only after Congress reacted to such news and resolved the inevitable
political squabbling about just what to do. The fiscal relief measures
enacted in 2008 under President George W. Bush and 2009 under President
Barack Obama, for example, would have done even more good than they did
if political disagreements had not delayed them.
The bills that the Budget Committee is considering today would
weaken or reverse portion of the benign fiscal effect of automatic
stabilizers traceable to expenditures. They would not prevent tax
collections from falling during recession. But both the spending and
deficit caps would prevent spending from increasing. In fact, they
would force spending cuts. Those cuts would be mis-timed, wrongly
calibrated, and perversely targeted.
The spending cuts would be mis-timed because the caps
would cut spending just when it should be increased--during economic
slowdowns. That is when spending targeted on the unemployed and the
needy automatically increases. That spending has two beneficial
effects. It helps to maintain demand. And it relieves hardships
associated with unemployment and falling income. Together with
recession-induced drops in revenues, rising spending generates budget
deficits and boosts the ratio of spending to GDP. To cut spending when
the economy is weak would be no less wrong-headed than it would be to
raise tax rates to offset the automatic drop in revenues. To do either
because of an arbitrary formula would be folly.
The cuts would be wrongly calibrated because they would be
largest during the deepest recessions when spending is most needed. It
is during deep recessions when spending unemployment compensation,
pensions, and health and food benefits increases most. It is during
deep recessions when such assistance is needed most.
The cuts would be perversely targeted because they would
fall most heavily on the jobless and the sick. Meanwhile, of course,
the automatic stabilizer that would be left in place--tax flexibility--
would go disproportionately to those who had the highest incomes and
therefore faced the highest tax rates--those with high wealth or
income. Please understand, the automatic reduction in tax collections
that occurs when economic activity slows is a good thing. It also
attenuates economic losses. But so, too, do automatic increases in
government spending. To enact rules that reverse either of these
automatic responses to declining economic activity would be senseless.
Yet, that is just what these bills would do.
Please understand as well that this indictment of spending and
deficit triggers in these bills does not depend on the wisdom or lack
thereof of the particular stimulus legislation enacted at the end of
President George W. Bush's administration or the separate law enacted
early in President Obama's administration. I believe that this
legislation was beneficial, as does the report issued this week by the
Congressional Budget Office. I also think that the stimulus packages
were generally well, although not ideally, designed and were too small.
Some members of this Committee probably agree with those judgments.
Some probably do not. But whatever one may think about the 2008 and
2009 stimulus packages should have nothing to do with one's view of the
legislation on which you are holding hearings today. I speculate that
few members of this Committee personally believe that it would have
been a good idea to cut unemployment insurance, Medicaid, defense
procurement, agricultural supports, and highway construction just when
timed to take effect when the financial collapse of 2008 occurred and
massive unemployment ensued. I also speculate that fewer still would
have voted for such cuts. Yet, such cuts would have been forced had
legislation such as proposed in these bills been enacted by those who a
decade or two ago sat where you sit now.
To make matters even worse, the sequestration rule in this bill
reserves the largest cuts for those programs that increase when
economic activity falls or that were considered sufficiently important
for Congress to expand faster than inflation. Outlays that are not
expanding faster than the consumer price index would be exempt from
sequesters.
Programs that rise when unemployment goes up or incomes fall will
surely rise faster than consumer prices. They will be cut. Spending on
programs that Congress has deemed important enough to expand will
increase faster than the consumer price index. They will be cut.
What is left? Programs that don't directly help the unemployed or
those with falling incomes. Programs that Congress does not think worth
increasing. They will not be cut. It is hard to imagine a provision
more perversely designed to slow economic recovery, to harm those most
in need of help, and to shift resources from activities from high to
low priority uses.
Disagreement about the proper role and size of the federal
government is as old as our republic and was never deeper than it is
today. These bills attempt to settle that disagreement through
budgetary procedures. They create major, even insuperable, hurdles to
raising spending. Simultaneously, they lower current barriers to
cutting taxes.
Trying to settle the long-standing and deeply felt disagreements
about the proper role and size of government in this way is a bit like
trying to settle the outcome of a football game by telling one team
that it has to go twenty yards for a first down and the other team that
it has to go only ten. Such rules would be laughably unfair and one-
sided. The same may be said of the cut-go rules.
This harsh comment in no way contradicts the importance, once the
recovery is well established and well under way, of bringing the
deficit under control. It also does not deny that elected officials may
be tempted spend the taxpayer's money irresponsibly if they are not
forced to take account of the full costs of that spending. But there is
a parallel and equally serious danger that elected officials, unless
forced to take account of the deficit-increasing effects of their
actions, use tax cuts to pander to their constituents. You ignore
either risk at the nation's peril.
It is fair and sensible to require sponsors of new spending to show
how they will pay for what they want to spend. It is equally fair and
sensible to require sponsors of tax cuts to show how they intend to
offset the revenues they will surrender. It is neither fair nor
sensible to require one, but not the other.
Nor would it be fair nor sensible for current members of Congress
to presume that they are sufficiently informed or far-sighted to know
what the size or scope of government should be decades hence. The
fiscal records of the last five presidents have varied widely. In every
year Ronald Reagan and George Herbert Walker Bush were in office, as
well as three of the presidential years of Bill Clinton and of George
W. Bush, budget outcomes would have failed the spending tests set in HR
3576. In every budget year of the presidencies of Ronald Reagan and
George Herbert Walker Bush, in four of the budget years of Bill
Clinton, and in six of the budget years of George W. Bush, the deficit
tests set in that bill would have triggered sequesters.
Budgets for each president are assumed to begin with the
fiscal year after the year in which they are inaugurated and to run
through the fiscal year in which their successor is inaugurated.
Hard, objective forces drove government spending and deficits
during those presidencies. Similar forces will drive spending in the
future. Future presidents and Congresses may find it necessary to
deploy American military power abroad. They will encounter added
pension costs for the tens of millions of baby-boomers yet to retire.
If we are lucky, they will have to cope with added medical spending for
a growing menu of beneficial diagnostic and therapeutic interventions.
Unless we are both luckier and wiser than we have an reason to expect,
they will have to grapple with recessions, financial panics, and
natural disasters. No Congress can repeal such events. No Congress can
foresee when they will happen or how severe they will be. It would
therefore be profoundly unwise to legislate caps that hamstring what
can then be done.
For at least two decades, deficit reduction efforts have been
guided by the principle that the burden of closing the deficit should
be shouldered by those with adequate incomes--the middle class and the
well-to-do--not by the poor, people with disabilities, or the elderly,
and certainly not primarily by these vulnerable groups. This view has
been shared by Republicans and Democrats alike. Erskine Bowles and Alan
Simpson endorsed this principle in the introduction to their draft plan
for deficit reduction. While the overall plan did not secure the
requisite super majority laid out in its charter, there has been no
indication that committee members rejected this underlying principle.
Yet these bills would do just that. They would subject to sequester
programs that serve the poor, such as Medicaid and Supplementary
Nutrition Assistance. They would, in fact, target these programs for
the largest cuts. They would permit long-term pension commitments to be
rewritten without explicit debate, based on projections of spending or
deficits stretching decades into the future that historically have been
laughably inaccurate and are, inevitably, subject to manipulation
through the artful selection of assumptions.
It is just over a decade since budget analysts, a Federal Reserve
chairman, and at least a few economists worried--I am not making this
up!--that then-anticipated budget surpluses would sop up all
outstanding government debt and make impossible the management of
monetary policy. Those worries now seem risible, but serious people
believed them, just as many people now believe that projected deficits
will materialize. We now see that projections thirteen years ago were
unduly rosy. We should understand that it is just as easy for current
projections, which depend on assumptions about events we cannot
possibly anticipate, may be unduly bleak.
The Congressional Budget Office now issues long-term budget
projections under alternative assumptions. Informed observers
understand that these projections are highly sensitive to underlying
but seldom examined assumptions. For example, if health care spending
slowed to the rate of growth of income, most of currently projected
long-term budget deficits would largely vanish. Let me be clear * * * I
think such a slowdown in growth of health care spending is unlikely and
we shouldn't count on it. But how fast health care spending rises
depends sensitively on the fruits of future medical research. We can
guess, but we cannot know, what will be, but has not yet been,
discovered. Projections are also sensitive to assumed interest rates,
labor force participation, and productivity growth. CBO is crystal
clear that its long-term budget projections are not forecasts, but
extrapolations of certain trends about variables that no one can
forecast accurately. CBO's projections shape public debate, as they
should. But they do not, and should not, trigger specific legislative
action. HR 3580 would convert these guesses about the future course of
spending and revenues into action forcing events and goad Congress and
the President to act now on projections of spending and deficits as
much as forty years in the future.
During the 1980s, the nation faced large and troubling deficits.
Members of Congress repeatedly enacted rigid targets for deficit
reduction. None worked. Then, presidents of both parties and Congress
under both Republican and Democratic leadership dealt with the
substantive cause of deficits. They identified spending that
Congressional majorities agreed could be cut and taxes that could be
increased.
After those agreements had been struck, but only then, the pay-go
procedural rules helped members stick by the deal. But those rules
applied to both taxes and spending. They did not presume to know how
much government should spend or tax decades into the future. They did
not foster budget policy that would deepen recessions. They protected
vulnerable populations and did not force them to shoulder the burden of
deficit reduction. And, until they were repealed, they worked.

Chairman Ryan. Ms. Fraser, let me start with you, I have
got this piece from Brookings and Heritage, Taking Back Our
Fiscal Future I will include in the record without objection.
[The article follows:]

Chairman Ryan. Joe Antos, Bob Bixby, Stuart Butler, Paul
Cullinan, Allison Fraser, Bill Galston, Ron Haskins, Julia
Isaacs, Maya MacGuineas, Will Marshall, Pietro Nivola, Rudy
Penner, Bob Reischauer, Alice Rivlin, Bell Sawhill, Gene
Steuerle, a pretty good list, people from both sides of the
aisle with specific recommendations on how to improve the
budget process, which are encapsulated in these bills we are
talking about here.
I want to look at a certain section which I think had you a
lot to do with, specifically, there are three recommendations I
want your take on. First you recommend, and I will read it from
the document here, ``Congress and President should enact
explicit long-term budgets for Social Security, Medicare and
Medicaid that are sustainable, set limits on automatic spending
growth and have required review every 5 years.'' Can you tell
us about the rationale for this recommendation and whether this
rationale was shared by the bipartisan group of experts that
signed this document?
Second, is this issue, ``the rules for the 5-year window
trigger for action forcing device that requires explicit
decisions when projected spending exceeds budgeted amounts.''
That is basically what Mr. Mulvaney's bill does. Can you
discuss how these triggers might work in your judgment?
Ms. Fraser. Yes, thank you very much.
Chairman Ryan. And then third, third, you can go back if
you want to, but I just want to in the interest of time pack my
question pretty quickly here. You recommend, ``The long-run
cost of these three programs should be visible in the budget at
all times and considered when decisions are made. The benefits
should not be increased either at the 5-year review or in
between without insuring that they are fully financed, that is
the other idea that is in Mr. Mulvaney's bill. Can you talk a
bit about a rationale for this recommendation and whether this
idea was supported by the bipartisan group of experts?
Ms. Fraser. Yes, thank you very much. We published this in
2008 after nearly a year of working together, going over what
our big concerns are over fiscal policy. And let me just read
the two bullets where we came to agreement: ``We have
unsustainable deficits in the Federal budget which threaten the
health and vigor of the American economy. The first step
towards establishing budget responsibility is to reform the
budget decision process so that the major drivers of the
escalating deficits, Social Security, Medicare and Medicaid,
are no longer on budgetary autopilot.'' We thought this was
very important, both from the short-term perspective and the
traditional 10-year budget window, but also, and more
importantly, over the longer term.
So that is where we came up with the three basic
recommendations that we went through. And we spent a lot of
time doing this, because as you can tell by the individuals
associated with this, there are a lot of diverse, very diverse
ideological opinions and core beliefs. But it was a bipartisan
view that we have to change course and that the biggest threat
really is the fact that entitlement spending, especially on the
Big Three is on budgetary autopilot.
So with that, we thought it was fundamentally important
that we change the dynamics, that Congress change the dynamics
that trade-offs are made in the budgetary process by bringing
these three entitlement programs on. We do believe that all
three of them are very important in our society and our
culture, but we believe that they have to be transformed and
modernized so that they are both sustainable and affordable.
Since they are, in essence, especially Social Security and
Medicare, longer term, people rely on--millions of people rely
on them exclusively in retirement, that there should not be a
number of sort of whipsawing changes that occur in the same way
that could occur in discretionary spending. Hence, we thought a
regular review of say every 5 years that was the suggestion
would allow for more sustainable or planning kinds of policies
that people could rely on, policy changes.
So we didn't want to see changes that would happen every
year as in discretionary spending. That is why we recommended
sort of 5-year, 7-year kind of period.
Again, this is was a bipartisan view. I would say that one
of the differences is though we all believed that spending is
the problem, we also believe that we should have a full and
very formal overhaul of our Tax Code. And we should have a
debate about how big we want government to be, and we should
have a debate about how high revenue should be, and there are
provisions in there to do that. And I would be happy to talk
about my views on how big government should be, and we could
have a robust discussion about that, but that was outside of
your three questions.
So what we thought is by setting a course that everybody
could agree with about how big government should be, that
should involve both the Congress and to the President that we
should set sort of the track that we should be on, and then
have some sort of way to keep us on track, hence the regular
review. If Congress and the President did not come together to
ensure that fiscal policy, especially over these biggest
drivers was in adherence with those benchmarks, then there
would be some sort of forcing action through a trigger to make
sure that that happened.
Now one of the things that we actually recommended as
opposed the across-the-board sequestration was having actual
policy triggers and there are a number of ways to do that. For
example, you could increase premiums in Medicare, we could
increase income adjusting in Social Security, lots of policy
ways to include in the triggers themselves.
And then lastly, again, I forget your third question.
Chairman Ryan. Third question, let me get it, it is in the
document here, ``the long-run cost of the programs should be
visible at all times without insuring they are fully
financed.'' Basically, how do you think the trigger ought to be
worked, that is basically what you just got into?
Ms. Fraser. But if I could add----
Chairman Ryan. So it was the policy trigger, I think that
the sequester was what Mr. Van Hollen said, what do you think
is the best trigger? I think you more or less answered that.
You are saying the backup ought to be a policy, a predesigned
policy trigger is what you are basically saying is what the
trigger ought to be versus, say, a sequester? That was the
question.
Ms. Fraser. That was my recommendation to consider a
policy. Because a sequester--you all are dealing with what the
sequester is or is not going to be at the end of the year. And
our thoughts were, well, let's have something that we can all
agree on in advance that could be ratcheted up.
Chairman Ryan. Is the thinking that that is a trigger that
is more likely to stick or that that is a trigger that is more
focused on these programs, and therefore, it will more likely
require actual policy prescriptions from Congress before that
occurs. So, for instance, we passed our reconciliation package
to prevent the sequester in the first year, nothing is
happening in the Senate, we have the lame duck issue we are
going to be dealing with. People can speculate as to whether
the sequester will or will not occur if it will be replaced or
not. Is the thinking that a policy trigger is better because it
is more specific, less across the board, and more directed
towards the very programs of the drivers of our debt, is that
the basic rationale?
Ms. Fraser. Yes. And if I could just elaborate on a point
of making sure that there is more transparency in what our long
term path is. We thought that was especially important, so
there is a debt limit that is set, but there is never any sort
of measure or metric as to how high we want the future, our
excess obligations stemming from some of these programs to be
and we thought that was especially important.
Chairman Ryan. That is what where we thought was most
intriguing about this. What Mr. Mulvaney, and I will let him
speak for himself and his bill, a bill that all of us here on
the committee on this side are behind, is it is all about
confident and trajectory. Are we getting our trajectory of debt
under control, and are we confident that we are going to meet
that trajectory. And therefore, to the point that some say,
well, arbitrary caps on spending in and of themselves don't
really give you confidence that you are going to meet this
trajectory of the debt because that means a future Congress at
some other time will actually do the right thing, then to meet
this benchmark. But if we actually are forcing ourselves to
deal with the drivers of the debt, changing the laws themselves
that are the cause for this run up in debt, and then putting
enforcement mechanisms to make sure that those change in laws
actually do continue and persist, then we have confidence that
this trajectory of debt is under control.
And by measuring the outcomes in the outyears of this debt,
we can better send signals to the credit markets, we can better
keep the integrity of our currency, we can better give seniors,
or soon-to-be seniors or would-be seniors in their 40s and 50s
more confidence that the Federal Government will be able to
make its commitment that it is making to people which today has
no means of making.
So what we believe this does is this gives us the
confidence that we will get the debt under control, and it
gives us the tools to make sure that the changes we need to
make are made and continue so that government can keep its
promises to people, and we can avoid a debt crisis from our
debt getting out of control, and as a result of that, we can
have better, fast economic growth, because we are removing so
much uncertainty from the marketplace.
Now we limit ourselves to 10, maybe on the second round I
will ask Dr. Holtz-Eakin I had a question I wanted to as you,
but I want to be sensitive to members' time. Mr. Van Hollen.
Mr. Van Hollen. Thank you, Mr. Chairman. Let me, again,
thank all the witnesses for their testimony. Let me begin with
the point that Mr. Aaron made which is that there is agreement
that we have got to deal with our budget challenges, especially
our growing long-term budget challenges, and much of the
testimony was focused on that area of common agreement. As Mr.
Aaron also pointed out, the purpose of this hearing is to look
at three specific bills. And when you are looking at bills, I
hope everybody would agree that details matter because very
shortly, this committee will be asked to vote up or down on
those and then the full House will as well.
I would just point out, Mr. Chairman, this Brookings
Heritage document, Taking Back Our Fiscal Future, makes a
number of points in it. I would also just comment on the fact
that it says ``Myth: Cutting taxes will increase revenues,''
that is on page 5. It also discusses other alternative to a
trigger that in addition to cutting spending would include
revenue increases. I dare say that you would be hard pressed to
get the individuals--all of the individuals who put their names
on this to endorse these three bills. In fact, I am sure many
of them would not endorse the bills that are before us because
as I said, bills require details, details are important. Let's
just talk about some of those details.
Under this bill, under the bill, the first spending cap
bill that was put in that would go into effect immediately, I
want to make the point that it would require immediate
sequester in 2013, even if we passed the House Republican
budget for 2013, the one that has already passed the House that
goes into effect. You pass the first sequester bill that is on
the agenda, it would require a $70 billion outlay cut. So I
would like all our witnesses just to very briefly say whether
they think that is a good idea going into the beginning of next
year.
Chairman Ryan. If the gentleman would yield. These bills
are in December on a different baseline.
Mr. Van Hollen. Right.
Chairman Ryan. So new versions of these bills will be
changed to reflect the latest numbers from the CBO to conform.
It will be a technical thing.
Mr. Van Hollen. In fact, you are making my point, Mr.
Chairman, which is those numbers change every year. They change
every year, we have seen them change just in the last year, and
yet, you are putting in the bill for 10 years a list of
assumptions and making cuts based off assumptions. As you have
just pointed out, those assumptions change within 9 months,
they change more in a year, they change even more in 2 years,
and yet you are codifying policies for 10 years. So you are
going have that problem every single year.
Now I would like to ask the witnesses to walk through this
following scenario, because we have done the math and we are
happy to share these with others. If you put these bills into
effect, the House passes it next week, let's just say the
Senate goes off its rocker and passes it and the President
signs it and then you were to have an economic downturn next
year, let's say, of the magnitude we just had. We had double
dip recession, this would require cuts in fiscal year 2013 by
over $700 billion. And the way this is designed, I hope all my
colleagues will take a closer look at it, it limits the cuts to
some of the mandatory programs, but you still have to hit the
overall spending limit cut and the cut of the deficit as a
percent of GDP.
So you have an economic downturn, two things we all know
happen, number 1, more people become eligible for some of the
programs that are safety net programs, a lot of those are cut
under the bill, but even with those cuts, some people will get
somewhat higher benefits.
Second, you have a big drop in revenue and yet the bill
requires that you hit the deficit through GDP target. And what
gets wiped out is discretionary spending. You think the cuts to
defense in the sequester that we are talking about happening in
January are big? They would be huge under this bill if you have
another economic downturn next year.
So I just want to ask, our witnesses are distinguished
economists, I want to ask each of you whether you think that is
a good public policy.
Ms. Fraser. Well, in my view, one of the most damaging
things to the economy is maintaining our current course. And I
think one the things that can be addressed in this bill is, as
you say, when we do have a downturn, but I am not projecting
that we do have a downturn next year. So I think that what we
need is policies such as are contained in this bill to
immediately begin to rein in spending because I believe it is
the most damaging thing to our future.
Mr. Van Hollen. Let me just ask you, did you project in
2008 and 2009 an economic downturn?
Ms. Fraser. No, sir.
Mr. Van Hollen. Okay. We can't project things that are
somewhat beyond our control. What we are seeing in Europe is an
austerity-only approach taken by some countries that has led to
double dip recessions.
Mr. Holtz-Eakin, do you think that is a good policy result?
Mr. Holtz-Eakin. A wise man once told me, you should budget
for your problem. No budget will be perfect, but you should
have a process that solves your biggest problem. Our biggest
problem is mandatory spending, even if we don't project
downturns, we have enormous fiscal problems. That wise man was
Henry Aaron.
Mr. Van Hollen. Go ahead.
Mr. Holtz-Eakin. And that is why I believe these bills are
the right thing to do. If, in fact, we revisit something that
looks like 2008 and 2009, I find it unimaginable that a
Congress would sit and pretend that its hands were cuffed and
not respond to the general needs of the American people.
Mr. Van Hollen. As it turns out we have seen changes
between the 2011 Republican budget and the 2013 Republican
budget that would require 70 billion. So I don't think that
changes in the economy are things that we don't expect. We all
know that the economy will change in certain ways, and
pretending we can freeze in place these particular levels
obviously have negative consequences.
Let me ask you, Mr. Holtz-Eakin, a question because you
have been on the record about this, with respect to something
that is been talked about very much, another budget issue,
which is the Speaker's proposal to once again threaten that the
United States would not pay its obligations when we hit the
debt ceiling. Do you think that is productive?
Mr. Holtz-Eakin. I can't speak for the Speaker, but you did
read his remarks very carefully and I did not see that. There
was a commitment to meet the obligations of the Federal
Government and not to, in any way, default on its borrowing.
And there was a principle that increasing the Federal debt
limit should be accompanied by comparable dollar amounts of
spending cuts or reforms. And I believe the central word in
that is ``reforms,'' because that goes straight to the
mandatory spending programs are at the heart of our problems.
And once again, that takes the form of a fiscal rule that
forces the Congress to address the policies which are
generating bad outcomes, and I endorse that.
Mr. Van Hollen. Do you think it is productive to threaten
that we not raise our debt limit?
Mr. Holtz-Eakin. I do not believe he said that. And I don't
think its productive to announce you are going to default on
your borrowing and no one has.
Mr. Van Hollen. Well, I think the record will speak for
itself. If that is the case and the Speaker has proposed to
vote to increase the debt limit that would be news, we will
have to find out if that is the case.
Would you agree that the--all the discussion surrounding
the August Budget Control Act that that had some--created
uncertainty in the economy and creates some negative effects in
the economy.
Mr. Holtz-Eakin. Yes, I do believe there was a real
negative impact because for the first time, the American people
were close to as aware of how dysfunctional the budget process
is as this committee is. And that is one of the reasons why I
hope similar reforms are made.
Mr. Van Hollen. All right. I would just ask to put in the
record some documents from Bloomberg that noted the negative
economic consequences to the economy as a result of that sort
of standoff last year.
[The information follows:]

[From Bloomberg, May 28, 2012]

Debt-Ceiling Deja Vu Could Sink Economy

By Betsey Stevenson and Justin Wolfers

Europe is crumbling. China is slowing. The Federal Reserve is
dithering. Yet the biggest threat to the emerging U.S. economic
recovery may be Congress.
John Boehner, the leader of the House Republicans, has promised yet
another fight with the White House over the debt ceiling--the limit
Congress has placed on the amount the federal government can borrow.
If this sounds familiar, it's because we suffered through an
identical performance last summer. Our analysis of that episode leads
to a troubling conclusion: It almost derailed the recovery, and this
time could be a lot worse.
Sometime around the end of this year, the federal government will
bump up against its $16.4 trillion borrowing limit, as a direct result
of spending and tax laws enacted by Congress. To raise the limit,
legislators must pass a separate law. In principle, the extra level of
approval can serve as a useful mechanism, forcing Congress to debate
its priorities. But refusing to raise the limit wouldn't free the
government of its existing spending obligations. Rather, it would leave
the government with no choice but to default on its debts.
In other words, congressional Republicans are taking the
government's creditworthiness hostage when they threaten not to
increase the debt ceiling. Politically advantageous as this may be, it
is terrible economics. To understand why, let us consider the economic
effects of last year's debt-ceiling debate. If we know our history,
perhaps we will not be doomed to repeat it.

CONFIDENCE DROP

High-frequency data on consumer confidence from the research
company Gallup, based on surveys of 500 Americans daily, provide a good
picture of the debt-ceiling debate's impact (see chart). Confidence
began falling right around May 11, when Boehner first announced he
would not support increasing the debt limit. It went into freefall as
the political stalemate worsened through July. Over the entire episode,
confidence declined more than it did following the collapse of Lehman
Brothers Holdings Inc. in 2008. After July 31, when the deal to break
the impasse was announced, consumer confidence stabilized and began a
long, slow climb that brought it back to its starting point almost a
year later. (Disclosure: We have a consulting relationship with
Gallup.)
Businesses were also hurt by uncertainty, which rose to record
levels as measured by the number of newspaper articles mentioning the
subject. This proved far more damaging than the regulatory uncertainty
on which Republican criticisms of Barack Obama's administration have
focused (more on that subject in a Bloomberg View editorial today).
Employers held back on hiring, sapping momentum from a recovery that
remains far too fragile.
Growth in nonfarm payrolls decelerated to an average 88,000 a month
during the three months of the debt-ceiling impasse, compared with an
average of 176,000 in the first five months of 2011 (see chart).
Payroll growth subsequently recovered and has averaged 187,000 jobs a
month since. Despite the rebound in job growth, employment is likely
still below where it would otherwise have been.
There are also more visible permanent scars. The sense that the
U.S. political system could no longer credibly commit to paying its
debts led the credit-rating company Standard & Poor's to remove the
U.S. government from its list of risk-free borrowers with gold-standard
AAA ratings. Just as a poor credit score raises the interest rate you
pay in the long run, so a worse credit rating will probably raise the
interest rate on our national debt.

ECONOMIC SABOTAGE

All told, the data tell us that a debt-ceiling standoff is an act
of economic sabotage. The only way to avoid this conclusion is to argue
that consumers and employers were reacting to some other economic
factors. But the debt ceiling was the dominant economic story at the
time. No other news fits the data as well. Although the European debt
crisis was a rising concern throughout 2011, the real trouble in Europe
arose in the period when consumer confidence and employment were
recovering.
The next debt-ceiling battle could be worse, because the stakes are
even higher. In addition to the threat of default, the U.S. is facing
the so-called fiscal cliff: a raft of spending cuts and tax increases
that will happen at the end of this year unless Congress acts to
postpone them. Another stalemate would almost certainly plunge the
economy into a deep recession. Our best alternative--in fact, our only
hope--is for Congress to set aside partisan politics and work together
with a common goal of helping our country out of the Great Recession.

(Betsey Stevenson and Justin Wolfers, both professors at the
University of Pennsylvania's Wharton School, are Bloomberg View
columnists. The opinions expressed are their own.)

Mr. Van Hollen. Mr. Aaron, could you just comment on,
again, the issue of compounding the negative effects of an
economic downturn by locking in some of these bills?
Chairman Ryan. And Henry, try to do it in 39 seconds if you
can. You will get other time later.
Mr. Aaron. I don't remember making the statement that Doug
Holtz-Eakin attributed to me, but I think it makes sense. And
it underscores the importance of answering a question that
posed which he did not do. The question that you posed to him
was what should be done in the face of a serious financial
panic and downturn in Europe that threatens to have an effect
on the U.S. economy. In that situation, a policy in the United
States of cutting spending as would be required under this bill
because of the likelihood that the ratio of debt to GDP would
exceed the ceilings, because the ratio of spending to GDP would
exceed the ceilings, would, in my view, be utter folly. It
would be worse than folly, it would be extremely damaging to
the economy. The implication I think is that members of both
parties would understand that, and this law would be overridden
and wouldn't have any effect.
Mr. Van Hollen. Thank you.
Chairman Ryan. Dr. Price.
Mr. Price. Thank you, Mr. Chairman. And I want to thank the
witnesses as well for your work in the past and for your
testimony today, and I think there is some significant
agreement, as Dr. Aaron mentioned, and hopefully, we can get to
that from a policy standpoint. I do want to, however, correct
the record on the ranking member's, one of the comments he made
in his opening statement, and our friends on the other side
continue to do this talking about our opposition to closing
corporate loopholes for deficit reduction. And the fact of the
matter is our budget actually does close significant corporate
loopholes. What we----
Mr. Van Hollen. Mr. Price, if I may, that is not--that is
not for the purpose of deficit reduction. That is a
misstatement.
Mr. Price. I will reclaim my time.
Mr. Van Hollen. And you are under clarifying my statement,
you are making a misstatement.
Mr. Price. It is an interesting process, you just embarked
upon.
Mr. Van Hollen. We don't have the chairman here.
Mr. Simpson. I am in charge.
Mr. Ryan. Well, we will have Mr. Simpson be in charge.
Mr. Price. I think the response to that is curious and
points out the fallacy of the statement. We strongly support
closing corporate loopholes in the Tax Code, strongly. The fact
of the matter is, what the ranking member does has always added
that final clause to it, phrase to it for deficit reduction
which is something we would gladly do. What we are not in favor
is of is increasing revenue, is increasing taxes on either
business or hard-working taxpayers across this land to chase
ever increasing spending, that is what we are opposed to. And
my friend from Maryland----
Mr. Van Hollen. Would the gentleman yield?
Mr. Price. No, no, no. You had your 10 minutes.
Mr. Van Hollen. But it is a totally accurate statement, you
just confirmed it.
Mr. Price. With my remaining 3 minutes after correcting the
record from my friend from Maryland.
Mr. Holtz-Eakin, I want to address an issue that we dealt
with on this committee in the past, but I know that you have an
interest in, and that is the issue of fair value accounting. In
an article less than a year ago you stated, ``Budget law
requires the CBO, Congressional Budget Office, to assume that
loans made directly by the government earned huge profits with
virtually no risk that such assessments could be wrong.''
I think this is one of the areas where the budget process
is remarkably flawed and gets us to the wrong answer. So I
wonder if you might elaborate on why the current system is
structured in this manner and what perverse spending policies
does this structure bring about.
Mr. Holtz-Eakin. I actually wrote a letter to Chairman Ryan
on this topic which has sort of my full views on it. The short
version is that what you want the process to do is reflect the
timing and scale of obligations that the taxpayers will have to
finance. And in its origins, the Federal Credit Reform Act did
something quite desirable, which took loans, loan guarantees
and put them on a level budgetary playing field in terms of the
timing. At the moment the obligations was incurred, these
economically equivalent transactions were recorded in the
budget.
What it didn't do was get the scale right, because it did
not reflect fully the risks to which the taxpayers exposed, it
took a narrow view of risk, the credit risk of the borrower,
not the larger market risks for changes and interest rates and
economic conditions. It is entirely desirable to do that. If it
is done that way, they will be fully on a level playing field
and you wouldn't have any budgetary gain moving from one to the
other. We saw, for example, in the passage of the Affordable
Care Act the use of taking equivalent student loans from the
private sector into the public sector at an apparent profit as
a way to pay for it, and that is an economic mirage that you
shouldn't permit.
Mr. Price. And the folks at risk in this process are the
taxpayers.
Mr. Holtz-Eakin. Taxpayers, absolutely
Mr. Price. Our friends are talking about the student loan
issue that you just raised. I wonder if you would elaborate a
little bit in just a few remaining seconds about how that issue
has been pushed, or the risk has been pushed to the taxpayer in
that program.
Mr. Holtz-Eakin. Well, the all new student loans are out of
a direct loan program where the portfolio was held by the
Department of Education.
Mr. Price. All by the government?
Mr. Holtz-Eakin. All by the government. And we have
mispriced the risk systematically and we don't fully understand
the exposure of the taxpayer to future liabilities out of that
portfolio. I am deeply concerned about the quality of that
portfolio and the taxpayer risk embedded in it.
Mr. Price. As we are as well. Thank you, very much. Thank
you, Mr. Chairman, I yield back.
Chairman Ryan. Thank you, Ms. Bass.
Ms. Bass. Thank you. I would like to yield a minute to the
ranking member.
Mr. Van Hollen. I thank you, Ms. Bass, I don't need a
minute, I just want to put in the record the so-called taxpayer
pledge from Grover Norquist, point two that people signed in
the supposed any net reduction eliminating deductions and
credits unless matched dollar for dollar by reducing--by
further reducing tax rates. You don't--the Republican position,
anyone who signs this is taking a pledge not to close one tax
loophole for the purpose of deficit reduction, just go ask
Grover Norquist that is what he said and that is what it says
on this sheet.
[The information follows:]

Chairman Ryan. Since we are throwing time around----
Ms. Bass. Hey, wait a minute. I did not yield----
Chairman Ryan. Not to rob her time, I just want to ask
unanimous consent to include the Speaker's speech in the record
which corroborates what Dr. Holtz-Eakin was saying. And I will
without objections include in the record.
[The Speaker's speech follows:]

[From the Washington Post, May 16, 2012]

Boehner's Debt Ceiling Speech

By Ezra Klein

On Tuesday, Speaker John Boehner took the stage at the Peter G.
Peterson's 2012 Fiscal Summit and outlined his intentions to again
threaten the Obama administration with default in order to extract
concessions on spending. I wrote a bit about why Boehner is adopting
this strategy in Wednesday's Wonkbook. But here's his full speech:

It's truly an honor to be with you in the historic Mellon
Auditorium. It was here in the spring of 1949 that the United States
and our closest allies gathered to sign the North Atlantic Treaty,
giving birth to NATO.
On that occasion, President Truman declared that people `with
courage and vision can still determine their own destiny. They can
choose freedom or slavery.'
In our time, all of these great nations face a grave threat to
freedom, one from within, and that is debt. It is shackling our
economies and smothering the opportunities that have blessed us with so
much.
Once again the world looks to the United States for what it always
has: an example. It is the example of a free people whose hard work and
sacrifice make up the sum total of thriving towns and a vibrant
economy. It's a humble government that lives within its means and
unleashes the potential of first-rate ideas and world-class products.
It's a nation never content with the status quo and always on the make.
I got a glimpse of this example growing up working at my dad's
tavern just outside Cincinnati, and then lived a piece of it running my
own small business.
Instead of this shining example, what does the world now see?
A president on whose watch the United States lost its gold-plated
triple-A rating for the first time in our history;
A Senate, controlled by the president's party, that has not passed
a budget in more than three years;
And, earlier this month, another unemployment report showing that
the world's greatest economy remains unable to generate enough jobs to
spur strong and lasting growth. If you should know one thing about me,
it's that I'm an optimist. Yes, times are tough, but our future doesn't
need to be dark. We don't have to accept a new normal where the
workplace looks more like a battlefield and families have to endure
flat incomes, weak job prospects, and higher prices in their daily
lives.
We have every reason to believe we can come out of this freer and
more prosperous than ever. And we will, if we confront our challenges
now while we still have the ability to do so.
For the solution to what ails our economy is not government--it's
the American people.
The failure of `stimulus'--a word people in Washington won't even
use anymore--has sparked a rebellion against overspending,
overtaxation, and overregulation.
Nationwide, we're seeing a groundswell of support for bold ideas
that reject small politics, cast off big government, and return us to
common sense and first principles--the kind of ideas that will restore
prosperity and substantially improve the trajectory of our economy.
In March, as part of our Plan for America's Job Creators, the House
passed an honest budget with real spending cuts, pro-growth tax reform,
and serious entitlement reform. It's a far-reaching effort to control
government's worst habits and capitalize on the American people's best.
This budget gets our fiscal house in order AND promotes long-term
growth. Far from settling for stability, it offers a true path to
prosperity.
Various bipartisan commissions and coalitions have devised
ambitious plans as well. The math and the mix are different, but the
goals are mainly the same.
And of course, there are summits like these that bring together
people who just get it. Of course, while I'm happy to be here and I'm
sure we all enjoy each other's company, we can also agree that we've
talked this problem to death.
It's about time we roll up our sleeves and get to work.
For all the focus on Election Day, another date looms large for
every household and every business, and that's January 1, 2013.
On that day, without action by Congress, a sudden and massive tax
increase will be imposed on every American--by an average of $3,000 per
household. Rates go up, the child tax credit is cut in half, the AMT
patches end, the estate tax returns to 2001 levels, and so on.
Now, it gets a little more complicated than that. What will expire
on January 1 is cause for concern--as is what will take effect. That
includes:
Indiscriminate spending cuts of $1.2 trillion--half of which would
devastate our men and women in uniform and send a signal of weakness;
Several tax increases from the health care law that is making it
harder to hire new workers; As well as a slate of energy and banking
rules and regulations that will also increase the strain on the private
sector. But * * * it gets even more complicated than that. Sometime
after the election, the federal government will near the statutory debt
limit. This end-of-the-year pileup, commonly called the `fiscal cliff,'
is a chance for us to bid farewell--permanently--to the era of so-
called `timely, temporary, and targeted' short-term government
intervention.
For years, Washington has force-fed our economy with a constant
diet of meddling, micromanagement, and manipulation. None of it has
been a substitute for long-term economic investment, private
initiative, and freedom Previous Congresses have encountered lesser
precipices with lower stakes, and made a beeline for the closest lame-
duck escape hatch.
Let me put your mind at ease. This Congress will not follow that
path, not if I have anything to do with it.
Having run a business, I know that failing to plan is planning to
fail. The real pain comes from doing nothing * * * `austerity' is what
will become necessary if we do nothing now. We'll wake up one day
without a choice in the matter. There's also no salvation to be found
in doing anything just to get by, just to get through this year.
`Nothing' is not an option, and `anything' is not a plan. To get on the
path to prosperity, we have to avoid the fiscal cliff, but we need to
start today. To show my intentions are sincere, I'll start with the
stickiest issue, and that of course is the debt limit. On several
occasions in the past, the debt limit has been the catalyst for budget
agreements. Last year, however, the president requested a quote-unquote
`clean' debt limit increase--business as usual.
So last year around this time, I accepted an invitation to address
the Economic Club of New York. I went up there and said that in my
view, the debt limit exists in statute precisely so that government is
forced to address its fiscal issues.
Yes, allowing America to default would be irresponsible. But it
would be more irresponsible to raise the debt ceiling without taking
dramatic steps to reduce spending and reform the budget process.
We shouldn't dread the debt limit. We should welcome it. It's an
action-forcing event in a town that has become infamous for inaction.
That night in New York City, I put forth the principle that we
should not raise the debt ceiling without real spending cuts and
reforms that exceed the amount of the debt limit increase.
From all the way up in Midtown Manhattan, I could hear a great
wailing and gnashing of teeth. Over the next couple of months, I was
asked again and again if I would yield on my `position,' what it would
take, if I would budge * * *
Each and every time, I said `no' * * * because it isn't a
`position'--it's a principle. Not just that--it's the right thing to
do. When the time comes, I will again insist on my simple principle of
cuts and reforms greater than the debt limit increase. This is the only
avenue I see right now to force the elected leadership of this country
to solve our structural fiscal imbalance.
If that means we have to do a series of stop-gap measures, so be
it--but that's not the ideal. Let's start solving the problem. We can
make the bold cuts and reforms necessary to meet this principle, and we
must. Just so we're clear, I'm talking about REAL cuts and reforms--not
these tricks and gimmicks that have given Washington a pass on
grappling with its spending problem.
Last year, in our negotiations with the White House, the president
and his team put a number of gimmicks on the table. Plenty of thought
and creativity went into them--things like counting money that was
never going to be spent as savings. Maybe in another time, with another
Speaker, gimmicks like these would be acceptable.
But, as a matter of simple arithmetic, they won't work.
They won't work, and as I told the president, we're not doing
things that way anymore.
What also doesn't count as `cuts and reforms' are tax increases.
Tax hikes destroy jobs--especially an increase on the magnitude set for
January 1st. Small businesses need to plan. We shouldn't wait until New
Year's Eve to give American job creators the confidence that they
aren't going to get hit with a tax hike on New Year's Day.
Any sudden tax hike would hurt our economy, so this fall--before
the election--the House of Representatives will vote to stop the
largest tax increase in American history.
This will give Congress time to work on broad-based tax reform that
lowers rates for individuals and businesses while closing deductions,
credits, and special carveouts.
Eyebrows go up all over town whenever I talk about this, but when I
say `broad-based' tax reform, I mean it. We need to do it all * * *
deal with the whole code, personal and corporate it's fairer and more
productive for everyone.
That's why our bill to stop the New Year's Day tax increase will
also establish an expedited process by which Congress would enact real
tax reform in 2013. This process would look something like how we
handle Trade Promotion Authority, where you put in place a timeline for
both houses to act.
The Ways Means Committee will work out the details, but the bottom
line is: if we do this right, we will never again have to deal with the
uncertainty of expiring tax rates.
We'll have replaced the broken status quo with a tax code that
maintains progressivity, taxes income once, and creates a fairer,
simpler code.
And if we do THAT right, we will see increased revenue from more
economic growth.
Last fall, when I addressed the Economic Club of Washington, I said
that making relatively small changes now can lead to huge dividends
down the road in terms of debt reduction. As we approach the issue of
the debt limit again, we need to continue to bear this in mind.
As you know, we could eliminate all of the unfunded liabilities in
Social Security, Medicare and Medicaid tomorrow, and the effect within
the Congressional Budget Office 10-year window could be minimal.
That's because changes to these programs take time and are phased-
in slowly.
For example, when Congress last increased the retirement age for
Social Security, the increase--a mere two years--was scheduled to fully
take effect 40 years after the law was enacted. Another example: take
the House Budget Resolution and its assumptions for Medicare reform.
Those would not even begin until after 2022.
Smart and modest changes today mean huge dividends down the line.
Now, I can already hear the grumbles * * * partisans getting all worked
up or people saying, eh, let's wait until after the election. We can't
wait. Employers large and small are already bracing for the coming tax
hikes and regulations, which freeze their plans.
The markets aren't going to wait forever; eventually they're going
to start reacting. We now know that we ignore these warnings at our own
peril.
That's why the House will do its part to ease the uncertainty
surrounding the fiscal cliff. And I hope the president will step up,
bring his party's Senate leaders along, and work with us.
Because if there's one action-forcing event that trumps all the
rest--even the debt limit--it's presidential leadership. Ladies and
gentlemen, I believe President Obama cares about this country and knows
what the right thing to do is. But knowing what's right and doing
what's right are different things.
The difference between knowing what's right and doing what's right
is courage, and the president, I'm sorry to say, lost his.
He was willing to talk about the tough choices needed to preserve
and strengthen our entitlement programs, but he wasn't ready to take
action.
As it turned out, he wouldn't agree to even the most basic
entitlement reform unless it was accompanied by tax increases on small
business job creators.
We were on the verge of an agreement that would have reduced the
deficit by trillions, by strengthening entitlement programs and
reforming the tax code with permanently lower rates for all, laying the
foundation for lasting growth.
But when the president saw his former colleagues in the Senate
getting ready to press for tax hikes, he lost his nerve. The political
temptation was too great. He moved the goalposts, changed his stance,
and demanded tax hikes. We ended up enacting a package with cuts and
reforms larger than the hike. But it could have been so much more. The
letdown was considerable. And, in turn, our nation's credit rating was
downgraded for the first time.
Well it should also be the last time that happens, which is why I
came here today. If the president continues to put politics before
principle--or party before country, as he often accuses others of
doing--our economy will suffer and we may well miss our last chance to
solve this crisis on our own terms.
But if we have leaders who will lead * * * if we have leaders with
the courage to make tough choices and the vision to pursue a future
paved with growth, then we can heal our economy and again be the
example for all to follow. I'm ready, and I've been ready. I'm not
angling for higher office. This is the last position in government I
will hold. I haven't come this far to walk away.
Well, NOW is the time to do the right thing.
Let's do it for the right reasons--we don't need to be dragged
kicking and screaming. That's not the American way. Let's summon the
courage and vision to choose freedom, to choose prosperity, and to
determine our destiny.
Then we'll not only have succeeded in solving this crisis--we'll be
worthy of that success. Thank you all.

Chairman Ryan. Ms. Bass.
Ms. Bass. I get 2 extra seconds. Thank you for coming
today. I actually wasn't going to ask these questions but I did
want to follow up on the student loan issue because you
mentioned the fact when the student loans were pulled away from
the private sector back to the public sector, that that creates
problems. Do you think it is better? Should it go back to the
private sector?
Mr. Holtz-Eakin. I personally believe that it would be
highly desirable to get more private capital involved in the
financing of student loans, that is an observation number one.
The second observation is really the origination process and
the monitoring of borrowers under the current program troubles
me. We have recreated some of the worst aspects of the subprime
disaster by having those who originate student loans have no
stake in their future liability. And so that loan portfolio has
terrible incentives embedded in it, and my reading of the
evidence, and I have done some papers on this, is that private
lenders do it a better job of keeping those who get arrears
getting them back current and keeping them out of default, that
is important part of----
Ms. Bass. Let me interrupt you, because I would agree on
one hand because I think the private sector kind of acted a
little bit like a loan shark, but let me just say that isn't it
the case that if a student defaulted when it was in the private
sector, that it was Federally guaranteed so that the government
would wind up paying if the student defaulted?
Mr. Holtz-Eakin. Absolutely. The whole goal was to
subsidize lending to those who were going to institutions of
higher education.
Ms. Bass. So it is not just a question that the liability
is taken away from the taxpayers if we guarantee it. But let me
change subjects since my time is limited. You were saying there
was no liability. I am not going to yield because I am running
out of time.
So another question that I would like to ask when there is
an economic downturn, I think about--and especially coming from
State government, I think about programs such as unemployment
compensation, supplemental nutrition assistance program, how
the they automatically expand to protect the vulnerable. So how
would statutory limitations in the Spending Control Act, how
would that affect the ability, especially of a State government
to meet the folks' needs because of unemployment? Coming from
California, I have actually asked each of you if you could
briefly, because I am steadily watching this clock.
Mr. Holtz-Eakin. My view is that the virtue of these kinds
of budget processes, these caps, is they force the Congress to
look at the policies regularly. In fact, the best evidence of
that is the SGR, where much to the chagrin of the Congress,
every year they have to actually look at the Medicare program.
Looking at the Medicare program every year is a good idea, and
thus the policies can be adjusted for economic conditions and
any other policy objectives. The caps putting it on autopilot
is exactly the problem.
Ms. Bass. So essentially, we would have a cap that would
just be flexible, and it really wouldn't be a cap, a cap
spending but if we needed to increase it, you could do that
under the Spending Control Act?
Mr. Holtz-Eakin. You could always change the policies to
target those in need and still hit the cap or if Congress saw--
--
Ms. Bass. What if the policies didn't change? So let's just
say unemployment is capped in the State of California, which is
where I come from, and had to deal with this crisis between
2008 and 2010. If unemployment is capped, and we couldn't issue
anymore, what happens to those folks? What happens to the women
and the children who run out of--they have no more supplemental
nutrition assistance, what would they do?
Ms. Fraser. Well, I think that these are overall caps. And
You have discretionary spending caps. You have various
categories of caps. I think one of the things that concerns me
is that there are almost too many caps. When you are talking
solely about SNAP and talking about unemployment, there is not
individual caps for these, as I understand it, under any of
these bills.
Ms. Bass. Okay.
Ms. Fraser. It gives Congress the flexibility to move
resources from one program to another.
Ms. Bass. Thank you.
In my last few seconds, could Mr. Aaron or Dr. Aaron speak?
Mr. Aaron. The effect is catastrophic, and the scenario
that Mr. Holtz-Eakin and Ms. Fraser have described is
unrealistic. What would happen would be that need would rise
abruptly. Whether action might be taken would depend on where
in the legislative cycle Congress happened to be. Congress
would debate these issues. They would hold hearings. There
would possibly be filibusters in the Senate. There would be
delay.
Ms. Bass. Okay.
Mr. Aaron. The result would be that the needs of people who
are extremely vulnerable would not be met for extended periods
of time, and perhaps indefinitely, depending on what action
might eventually be taken.
Ms. Bass. Okay.
Mr. Aaron. We have to have a realistic understanding of how
things would actually play out in moments of crisis.
Ms. Bass. Thank you.
I am sorry I was cutting both of you off. I was just real
cognizant of that big clock. So sorry about that.
Chairman Ryan. We let it go over because we took some of
your time.
Ms. Bass. I appreciate that.
Chairman Ryan. Mr. McClintock.
Mr. McClintock. Thank you, Mr. Chairman.
First, I would like to remind the ranking member that the
top 1 percent of income earners earn 17 percent of the income
and pay 37 percent of the income taxes. So if the gentleman
were really serious about the rich paying their fair share, he
would be arguing for a 50 percent cut. Nobody is suggesting
that, but we do think that as we eliminate loopholes, we should
not be raising the overall amount that is being paid.
To my colleague from California, who has just left, I would
remind her that at the peak of California's revenues in early
2008, when the State was taking in more money than it had ever
taken in in its history, it was already running on nearly a $10
billion deficit. That is the problem; a simple inability to say
no to reckless, irresponsible spending at both the State and
Federal level. We run deficits in good times as well bad.
What I would like to do is pose two observations now to the
panelists for comment. My observation is that the single
biggest problem we have is very simply that we are allowed to
spend more than we take in, so we do. It is much easier to
borrow money from the future generation and spend it now than
it is to go through the difficult process of saying no to
spending or imposing higher and higher taxes. It seems to me
the most important single reform that we could adopt to bring
our spending back into line is a simple balanced budget
amendment. That is the first observation.
The second observation, the second biggest problem that we
have, is that mandatory spending is not subject to budget
appropriations, and I--what happens is we end up arguing over
discretionary--whether discretionary spending should be 1.048
trillion or 1.027 trillion, and completely ignore the $2.7
trillion in mandatory spending that is growing like Topsy, and
is sinking our country. So I certainly applaud the Heritage
proposal on that.
Final point: It seems to me that except for those two
problems, those two flaws, we have got a pretty good process. I
mean, we set overall budget parameters, the authorizing
committees review these programs regularly to determine whether
or not they are worthy of expenditure, and then the
Appropriations Committee decides if we can afford them in the
budget. The problem is that process is not being followed. It
is being ignored.
The Senate has not passed a budget in years. Authorizations
have routinely expired, and we keep shoveling money at them,
and the appropriators are acting independently of the
authorizers. That seems to me to be the problem.
Those are the observations I have drawn for the 3 years
that I have been here, and I would appreciate your comments on
them.
Ms. Fraser. Yeah. Thank you very much.
I think that you are absolutely right. One of the biggest
problems that we have is that we are spending too much. There
are a lot of pros and cons of the balanced budget amendment
that I don't know if we have time to discuss today, but like
the bills under consideration today, a balanced budget
amendment would force the Congress to begin to address both our
resources as well as the amount that we are spending.
And you know, like any process, it needs to be accompanied
by strong policy changes. So what we are looking at are
mechanisms that are going to drive policy changes so that we
have affordable spending and levels of taxation to cover that,
whether that is balancing, or whether, as Chairman Ryan
indicated, what we are doing is to drive down the debt to
sustainable levels, especially when we consider our global
capital markets and so forth.
I absolutely agree that one of the fundamental problems
here is that as Congress sets the budget, it is fighting over a
smaller and smaller share in discretionary spending as
entitlement programs continue to grow. I think that bringing
them in some form so they continue to deliver predictable,
reliable benefits, bringing them on budget in some way is very
important.
Mr. McClintock. Since my time is short, may I go to Mr.
Holtz-Eakin for his thoughts on those observations?
Mr. Holtz-Eakin. Well, I have testified on the balanced
budget amendment. I applaud the notion of putting mandatory
spending on a budget, because, in fact, these kinds of fiscal
rules give the Congress a way to say no. I think that is one of
the most succinct advantages of this.
It is important that these things be in law, because the
problems we have, there is no shortage of information. The CBO
puts out----
Mr. McClintock. Let me just cut right to the chase. With
those two exceptions, the balanced budget amendment and the
mandatory spending being brought within the budget process, is
there really anything wrong with our process except that it is
not being used?
Mr. Holtz-Eakin. I believe the other additional
improvements in this are to force the President to agree with
the Congress and have the Congress agree between the House and
Senate on a budget. We do not do that at the moment, and that
is a huge flaw.
Chairman Ryan. Thank you.
Mr. Mulvaney.
Mr. Mulvaney. Thank you, Mr. Chairman.
I am glad to hear that at least there is a starting point
at some agreement here across the aisle, and that, as Mr. Aaron
put it, at least we agree that something has to be done, and
that is encouraging. I think that is an advance over where we
were probably 2 years ago when one side was saying, let's do
something about the deficit, and the other side was saying,
let's not worry about the deficit. So at least we have made
that progress.
But I think at the end of the day, that is probably not
nearly enough. We can't just agree that we are going to have to
do something and then not actually do something.
So I do want to talk a little bit about the BOLT Act, and I
want to go to Mr. Aaron for a second, who was critical of it at
a couple of different places.
Mr. Aaron, I encourage you to consider the fact that the
act does not completely exclude considerations for revenues or
new taxes. It doesn't set caps, and we will talk about caps for
a second. I understand you don't agree with those necessarily,
but would you agree with me, sir, that there is nothing in the
BOLT Act itself that automatically excludes the consideration
of additional revenues, closing of loopholes, or new taxes?
Mr. Aaron. There is nothing that any law could do to
prohibit Congress from considering new taxes. Obviously, that
is always within their prerogatives. The question is whether
the procedural imperatives in the bill symmetrically and
equally deal with the revenue and expenditure sides of the
budget, and it doesn't.
Mr. Mulvaney. And I can see that perspective. I thought you
were taking the point that it was sort of like the most
conservative version of the balanced budget amendment, which
would have a supermajority necessarily raising taxes.
Mr. Aaron. No.
Mr. Mulvaney. Okay. So I see that you disagree with the
philosophy of it embraced in, for example, the caps. Let's talk
about that.
And one of the sets of caps in the bill sets total spending
at 20 percent of GDP, which I take it is something you would
object to. Let me ask you a philosophical question as I sit
here and try and build bipartisan support for this bill. Would
you take it if it was 25 percent?
Mr. Aaron. No.
Mr. Mulvaney. How about 30?
Mr. Aaron. I don't believe that any current Member of
Congress is sufficiently wise to set a limit on what the size
of the Federal Government should be regardless of
circumstances. I think that is a prerogative of Members of
Congress to decide that they should face the substantive issues
involved and not rely on formulas.
Mr. Mulvaney. That is fine. Let's exclude war, because I
think that is something we would all agree on would be an
emergency situation, or we might have to blow it through a cap.
And I will just ask you a very simple question. Excluding war,
is there any size of the Federal Government that would
objectionable to you in terms of percentage----
Mr. Aaron. Oh, sure. Lots of sizes of the Federal
Government that would be objectionable to me.
Mr. Mulvaney. Give me a number.
Mr. Aaron. No, I won't give you a number. If you want to
give me substantive policies, I will deal and respond to them,
but I think dealing with numbers is an avoidance mechanism.
Mr. Mulvaney. Well, dealing with numbers----
Mr. Aaron. Let's deal with the specific policies involved.
Is Social Security larger than it should be? Is Medicare larger
than it should be? Is national defense larger than it should
be? Let's talk about policy, and then we can have an informed
debate. If we are talking about numbers, we are talking about
what I regard as a kind of mindless abstraction.
Mr. Mulvaney. Well, unfortunately on the Budget Committee
oftentimes what we have to do deal with is numbers.
Talk about the long-term projections. I understand the
objection generally, understanding a little bit about how
numbers work and about basic economics, that it is difficult to
anticipate 5 or 10 or 20 years out. It was difficult to predict
at the end of 2007 that we would have a recession just a couple
of months later. But we do it at a certain level every day,
don't we? I mean, we do 75 years, for example, with Social
Security. It is not accurate, it is not perfect, but would you
agree with me that it is better than doing nothing at all and
just flying blind on a day-to-day basis?
Mr. Aaron. I believe it is very important and valuable to
do long-term projections. Exactly how far out one should look
into the future, I think, varies depending on the program and
the circumstances.
With respect to Social Security, it seems to me 75-year
projections are valuable. With respect to Medicare, I don't
think they make a whole lot of sense because we have no idea
what is going to be forthcoming in the way of medical
technology down the road. But still, multiyear, 25, 30-year
projections, it seems to me, are extremely valuable.
What is not valuable is tying or requiring current actions
to be taken to change the system in response to those
projections, because we do know for a fact that historically
they have been wrong by vast amounts. So as long as Congress is
aware of those numbers, is doing those projections, is
incorporating them into its debate about what current policy
should be, I think you have gone exactly the right distance. If
you introduce requirements that legislative actions be taken
now in response to those projections of the distant future, I
think you have gone a step too far.
Mr. Mulvaney. Thank you.
Thank you, Mr. Chairman.
Chairman Ryan. Mr. Huelskamp.
Mr. Huelskamp. Thank you, Mr. Chairman. I appreciate the
opportunity to ask a few questions here in between committee
meetings in another room here.
First I want to start with--follow up with Mr. Aaron and
your response to some questions from my colleague here. And you
talked about numbers avoidance and mindless--what was that word
you used, mindless----
Mr. Aaron. I don't remember exactly what it was. It is in
the record.
Mr. Huelskamp. I am just trying to follow it. I am just
trying to follow the numbers. I do have a numbers question for
you.
Mr. Aaron. Yes.
Mr. Huelskamp. And given the current projections on
growth--and I know you indicate that they are usually
horrifically wrong. They are usually horrifically wrong in the
same direction.
Mr. Aaron. That is not true. It can be wrong in either
direction. We----
Mr. Huelskamp. It certainly could, but if you look at the
projections of our entitlements, they have been horrifically
underguessing the cost since the beginning, particularly on
Medicare.
Mr. Aaron. On Medicare there was a long period in which
there were severe underestimates. In the case of Social
Security, the estimated cost has been more or less on target
for about the last 15 or 20 years. It has varied very little.
It has gone up and down.
Mr. Huelskamp. Sure. Sure.
Mr. Aaron. It has moved in both directions, but we are back
at about where the projections were 20 years ago.
Mr. Huelskamp. Yeah, and I appreciate that. But the issue
of numbers is pretty important. In your estimation how much
longer can our Federal Government continue to run $3- to $4
billion deficits every day? How long can that continue to
occur, in your opinion?
Mr. Aaron. I think it is, under current economic
circumstances, on balance beneficial, a serious effort to
reduce----
Mr. Huelskamp. You think it can go on forever then? And the
question was how long do you think it can go? You think it can
go on forever then?
Mr. Aaron. I was in process of trying to answer your
question.
The question of whether a deficit is helpful or harmful
depends on the economic circumstances. Once the economy--the
economic recovery is well established and well under way, I
believe it is of urgent importance for Congress to take
aggressive measures to reduce Federal budget deficits. An
indefinite expansion of the national debt can do enormous harm
to this country, could precipitate serious economic crisis, and
I believe in the end Members of this body and the Senate will
jointly prevent that from happening. Currently----
Mr. Huelskamp. Okay.
Mr. Aaron. Currently, in the midst of a recession, an
attempt to balance the budget, it seems to me, would do
considerable harm.
Mr. Huelskamp. Okay. And I agree. I agree. And under the
President's budget proposal, it didn't balance for 75 years.
How much harm does that do if the President never proposed to
ever balance the budget in the 75-year window?
Mr. Aaron. I think that if one looks at the projection of
the Congressional Budget Office, under current law, under
current law, you will discover that the budget deficit comes
down sharply and reaches a very sustainable level. Current law,
as opposed to current policy, would entail significant tax
increases and spending cuts. Current law would not permit
Social Security to spend more than they have collected.
Mr. Huelskamp. May I interrupt? The President's budget
never balances. It never gets to a surplus in 75 years; never,
ever.
Mr. Aaron. But the debt-to-GDP ratio comes down.
Mr. Huelskamp. The question as I ask and as you answered
was, can you run deficits without economic harm? And you said,
when you have an economic recovery, you should not run
deficits. I agree with that statement. That was the statement
that you gave, Mr. Aaron. I am just trying to figure out----
Mr. Aaron. But I still think we should take aggressive
measures to reduce the deficit.
Mr. Huelskamp. Okay. I am just trying to get answers.
Mr. Aaron. I am trying to answer.
Mr. Huelskamp. Okay. Well, let me ask it again, if I might.
Do you think we should ever run a surplus----
Mr. Aaron. Oh, yes.
Mr. Huelskamp [continuing]. In the next 75 years? How about
in the next 75 years? Any time do you see an----
Mr. Aaron. I don't have a specific date, but there are many
circumstances under which a budget surplus would be highly
desirable.
Mr. Huelskamp. Okay. I agree with that. And again, the
President's budget proposes to never run a surplus in 75 years,
in 75 years, and the tremendous damage that could do to our
economy if we don't look at entitlement spending--a year ago,
by the way, was the anniversary of a vote in the House on the
President's demand that we have a clean debt limit increase;
clean, with no cuts, no proposals, and no idea what we are
going to do for the next--I don't know what his budget was,
still 75 years of null on balance as well--but an anniversary,
and the House wisely said no including--it was a bipartisan no,
that we should do something.
Do you think that we should do a clean debt limit increase
in December again, assuming that is when we hit the debt
ceiling again?
Mr. Aaron. I believe the debt ceiling should be completely
separate from consideration of spending and revenue decisions.
The debt ceiling is breached because of decisions that Congress
has made in the past. If it wishes to change those policies, it
should do so, but the idea that we are going to not raise the
debt ceiling in the face of decisions that a majority of
Congress has voted on and the President has signed seems to me
to be to link policies that should not be linked.
Mr. Huelskamp. I appreciate that opinion.
Thank you, Mr. Chairman.
Chairman Ryan. We have another Member Mr. Campbell, who is
an author of one of these bills coming, so I will just start
round two, if that is okay with the panel, if you have the
time, in order to buy some time for him to come.
Let me start. I have got a question for--I wanted to ask
Dr. Holtz-Eakin a question about some CBO baseline issues, but
before I get into that, I am kind of puzzled at the premise of
the arguments used against these reforms, which were derived
from this bipartisan working group document. And it kind of
goes like this: We have a spending-driven debt crisis coming in
this country. We all know that. It will threaten our economy
and put us into an economic meltdown, or a recession, or a
slowdown, whatever you want to say. And so in order to prepare
for that eventuality, we don't want any spending caps so that
we can spend more money to fight the fire at that time, which,
you know, I know a lot of people believe in the demand side
argument that is there.
What we are trying to do here is prevent that from
happening. What we are trying to do here is address the drivers
of this spending-driven debt crisis so that we don't have a
debt crisis, so that we don't have a recession stemming from a
debt crisis. That is the whole purpose of this.
And so if you want to look at where we are headed, it is
Europe, because we are on the same path. That is what austerity
is. Austerity is once the crisis has hit, once your yield curve
starts going nuts, the bond markets have turned on you, massive
surgery right away, indiscriminate across the board, pull the
rug out from current seniors, raise taxes, slow down the
economy, youth unemployment rate 21 percent, on, and on, and
on. And that is because governments have overspent. Governments
had made promises that they can't keep, and now they are broken
promises to lots of people.
But we are trying to preempt that from happening, prevent
that from happening, by getting at the source of this problem:
a spending-driven debt crisis. And what we have learned around
here is that this process not only is not broken, it is not
even working, it is not even being used. There is no budget
process. There is no budget. Haven't had one for 3 years. And
that means we are sticking with the status quo, which means we
will have a debt crisis, which then, yeah, I suppose if you
believe in the Keynesian, you know, demand-side stimulus
argument, you want to be ready with the buckets of spending to
throw at the fire.
But what we want to do is put together a budget process
that actually works to actually deliver on the fiscal targets
to actually get Congress to put these reforms in place to
prevent that crisis from ever occurring in the first place.
That is what this is all about.
And so when we see a working group of people with
impressive credentials from both sides of the aisle coming to a
consensus on some natural ideas on how to attack this problem,
knowing that it is not a substitute for actually passing the
laws that fix the problem, but are good backups, good
enforcement mechanisms, good measurement sticks to make sure
that Congress gets on task to actually fix the problem, we see
that as productive. We see that as a constructive step in the
right direction.
And as I mentioned at the beginning, no one party is going
to fix this thing on its own. There will have to be, you know,
bipartisan agreements at the end of the day here to fix this
mess. And what we see in front of us is a narrowing window of
opportunity to do that in before we have a European-like crisis
on our doorstep. That is the whole point here.
It is the baseline issue I wanted to get to you, Doug. When
you were Director of CBO, when you are running the baseline,
there are times that administrative decisions increase CBO's
estimate of spending even though the underlying statute did not
change. The administration will take actions that they believe
they have the authority under the law to do. How does CBO score
that action?
We had a VA issue, or I think they had an actuarial misfire
which resulted in a change administratively that resulted in
$13 billion in more direct spending. This year we have got
Medicare Advantage cuts that are coming, which I think, likely
for political reasons, a new demonstration project was formed,
which has something like $8.35 billion in spending to delay
those cuts, which will clearly accrue to adverse benefits for
people currently on Medicare Advantage before the end of the
year. How does CBO deal with this?
Mr. Holtz-Eakin. Very straightforwardly. So a concrete
example, Medicare Modernization Act passed, the prescription
drug bill. CBO had a score under my tenure on that bill as it
was passed. When HHS implemented the bill, they actually
implemented a tighter formulary than we had anticipated that
would come out of the bill. As a result, access to high-cost
drugs was more limited than we expected, and the bill actually
turned out to be cheaper, and we had to mark down in the
baseline the expected Medicare outlays to reflect that. And it
goes on all the time, in every program. What stands out are
ones of large magnitude like the VA. Those are relatively
unusual.
Chairman Ryan. Time is up. Let's go to you, and then we
will see if Mr. Campbell gets here.
Mr. Van Hollen. Mr. Chairman, let me again thank the
witnesses. Thank you, Mr. Chairman.
Just to go back to the overall point that the chairman
raised where there is consensus is that we need to reduce our
deficits, especially as they are projected to rise over the
long term. That is where there is consensus.
Yes, there is a spending component. We recognize that.
There is also a revenue component. Apparently our Republican
colleagues do not recognize that component, at least not as
part of the solution, despite the fact that every bipartisan
group that has looked at that challenge recently has concluded
that the way to tackle this problem is through a combination of
policies that lead to spending reductions and policies that
will increase the revenue component. And putting process bills
forward in the absence of an agreement on the underlying policy
issues is putting the cart before the horse, and I think that
is what the testimony has been about.
Mr. Holtz-Eakin, I mean, I would assume--I have some
statements you made when you were the Director of the
Congressional Budget Office, and I think from your testimony
today you would agree with your earlier statements.
Let me just read: ``The statutory''--this was 2004. Quote:
``The statutory budget disciplines that expired in 2002, the
limits on discretionary spending, and the pay-as-you-go
requirement for new legislation affecting entitlements and
revenue prove to be an effective enhancement of the budget
process.''
Do you agree with that?
Mr. Holtz-Eakin. Yes.
Mr. Van Hollen. Okay. Do you know that this bill, the first
one, Mr. Campbell's bill, eliminates the statutory pay-as-you-
go requirement? Are you aware of that?
Mr. Holtz-Eakin. I am aware of that, but it is a completely
different approach. I mean, there are many ways to support the
budget----
Mr. Van Hollen. I am just saying that, as I understand, you
agree that it was an effective enhancement to the budget
process in the past. I am not saying there aren't others, but
you would agree then that this legislation eliminates one
effective budget-control enhancement. Would you agree with
that?
Mr. Holtz-Eakin. But I would stipulate it adds others. So,
I mean, that is----
Mr. Van Hollen. I know, but they are taking one tool out of
the toolbox, right?
Mr. Holtz-Eakin. And again, you have to budget for the
circumstances in which you find yourself. PAYGO rules and
discretionary caps--I mean, the PAYGO rules in particular stop
you from making it worse, but there is nothing there that
forces the Congress to make it better.
Mr. Van Hollen. Mr. Holtz-Eakin, I agree with you. Stopping
us from making it worse is a good thing. I mean, it doesn't
solve the problem, but it is a good thing.
I assume you also continue to agree that these kind of
process reforms are most effective when there is an agreement
on the underlying policies.
Mr. Holtz-Eakin. I think everyone has said from the outset
this is not a substitute for better policy.
Mr. Van Hollen. Mr. Aaron, if you could just elaborate on--
well, let me just make this point, because, Mr. Chairman, you
referred to this document a couple of times. Again, I think--I
mean, I have looked at this document. I think it is a long way
from this particular document to the three particular bills,
especially the two bills that we are talking on, and I would
just say----
Chairman Ryan. They are not meant to be a complete--all of
the points of the document. Some of the other bills we passed
before----
Mr. Van Hollen. Right.
Chairman Ryan [continuing]. Out of here in that document,
these are three of the ideas being recommended in the document.
Mr. Van Hollen. Well, I would--just to be clear, I mean, it
would be useful, I think, to ask every individual who is on
this bipartisan group whether they agree with the three
specific bills, because I daresay you would find a lot of
Members whose names are on here who do not agree with the
details, as Mr. Aaron has pointed out, of these bills. But----
Mr. Aaron. May I say something at this point?
Mr. Van Hollen. Sure.
Mr. Aaron. As it happens, yesterday afternoon, as I was
completing my testimony for this, Isabel Sawhill, who was a
colleague at Brookings, and who is a signer of that particular
document, walked by, and we had a brief conversation. I think
you will find she is not sympathetic with this particular
approach.
In addition, I would like to mention and make available,
should you wish it, a document that I was a party to that
responded to the Taking Back Our Fiscal Future document that
the chairman has mentioned. It, too, was signed by a lengthy
roster of very distinguished economists, including one Nobel
Prize winner, a former director of--a former CEA chairman, and
a number of others in many ways, I think, as distinguished as
the list that signed Taking Back Our Fiscal Future. This
document indicated why we thought the approach taken in this
document was flawed, and I would like to make it available to
the committee, if you wish.
Chairman Ryan. I would love to see what your board meetings
at Brookings Institution are like.
Mr. Aaron. Well, I think----
Chairman Ryan. That is a big think tank you have got there.
Mr. Aaron. It is worth noting that the Brookings
Institution is, I think, the only think tank around where you
can have senior members of staff debate each other, holding
different positions, as, for example, Alice Rivlin and I do on
the issue of the----
Chairman Ryan. We enjoyed--I am digressing here.
Mr. Campbell, I guess, is not going to show up. But we had
a nice hearing at Ways and Means where Dr. Rivlin and Dr. Aaron
debated each other on the issue of premium support. So you have
got all sides of representation over there at Brookings.
We will just close it out with Mr. Mulvaney.
Mr. Mulvaney. Thank you, Mr. Chairman. I appreciate the
second opportunity to ask just a couple of questions and move
away from the bills, because one of the other things we get a
chance to do on this committee is talk generally about ideas
and policies, in addition to the specifics of bills. And you
have heard a couple of things mentioned here during the course
of today's discussion that I want to touch on very briefly
before we go, which is the situation in Europe, and then also
the debt ceiling.
Ms. Fraser, I know it is very difficult to sort of sum up
the causes behind the current situation in Greece, and Ireland,
and Portugal, and Spain, but is it fair to say that
overborrowing by those sovereigns, by those governments, is a
major contributor to what is happening and the difficulties
they are experiencing in those countries today?
Ms. Fraser. Yeah. In my view, it is a part of
overborrowing. They are spending too much. They are borrowing
to do it. I think they also have large government. But they
also don't have growing economies. And that is one of the
biggest problems that they face right now is how do you rein in
spending to stabilize your debt when you have a recessionary
kind of economy that is not robust.
And I think that is one of the advantages that we have in
this Nation when it comes to solving our own problems is that
we do have the underpinnings of a robust economy even though we
are not growing at our capacity today.
Mr. Mulvaney. And I think several of you mentioned the fact
that if we don't do something differently--I will paraphrase. I
don't want to misquote anybody. Unless we do something
differently, we may well be facing a similar type of future as
to what they are facing in Europe today.
Dr. Holtz-Eakin, what would it look like in this country
when we start to go through what Europe is going through today?
Tell me what that would look like for the folks in this
country.
Mr. Holtz-Eakin. What it would look like is something that
would make 2008, 2009 pale in comparison. You would have credit
markets freeze up, inability of private borrowers to get even
ordinary financing for their inventories and things like that.
Main Street America would crumble. And in those moments
international lenders would demand of the U.S. changes to the
Federal budget that would be unpalatable to every American, but
about which we would have no choice. There would be sharply
higher taxes and slashes in spending that have nothing to do
with thoughtful policy.
Mr. Mulvaney. Thank you for mentioning that, because that
is the point I am getting at that I don't think folks grasp
back home, which is that we are going to get to the point where
people don't want to lend us money under the same terms they
have been lending us money. We can print it, but that is
another debate for another day. But we could get to the point
where folks don't want to lend us money at half a percent, or 1
percent, or 25 basis points. They are going to ask for much
larger spreads, which is exactly what is happening in Greece.
So it comes to one of the overall discussion, Dr. Aaron, of
when you are faced with that, when you are faced with interest
rates of 6 or 8 or 10 percent, which are numbers that we have
incurred as a government during my lifetime for our debt, how
do you borrow your way out of that difficulty?
Mr. Aaron. You don't.
Mr. Mulvaney. But one of your criticisms of my BOLT Act was
it didn't give you the flexibility that you needed to borrow
money and to grow the size of the government when you go into a
recession.
Mr. Aaron. The United States currently is so far from the
situation that I think Doug has correctly described could occur
if debt piled up for an extended period of time that we are in
a completely different world. The world we are in right now is
one in which the United States remains the most secure and
reliable borrower in the world, in which we are operating well
below our economic capacity, and in which, in my view, the
first and overwhelmingly the most important task facing our
Nation is to get U.S. workers back on the job, to increase
employment, to reduce unemployment, to avoid the human tragedy
that is resulting for millions of people coming out of school
and not being able to find work. And for that reason the first
and most important problem is to increase the demand for the
services of American workers. That should include tax policy
that encourages private spending. It should include government
expenditure that supports demand and provides essential
services.
We are going to return to full employment, and when we do,
we have got to reverse that engine and begin to get our Federal
budget under control.
Mr. Mulvaney. Thank you.
Mr. Aaron. I think it is a key to understand which problem
comes first and the vital need to solve it.
Mr. Mulvaney. I appreciate that.
Finally, Mr. Chairman, I do want to touch very briefly on
the debt ceiling issue that the ranking member raised. And I
always enjoy dealing with folks who do pay attention to
language and do pay attention to details is one of the things
that I appreciate about the ranking member. And I couldn't help
but notice the details of the language that you are using now
in the discussions about the debt ceiling, which is no longer
that this side is threatening to default on our debts, default
on our obligations. The language is now ``meeting our
obligations.'' I think this is sort of taking the veil off of
the accusations last year that we are going to default on our
debt. We heard it. We heard that if we didn't raise the debt
ceiling, we would default on the debt. And I think we have put
the lie to that. We are never going to default on our debt,
because we have plenty of money to pay the debt--to pay our
interest obligations. Similarly, we are always going to pay our
Social Security obligations. We are going to continue to do
those things.
I think it is interesting to hear the language from the
opposition now who has changed from ``defaulting on our debt''
to ``meeting our obligations.'' I am interested to hear that
language as we go through the discussions between now and the
end of the year.
Mr. Van Hollen. Mr. Chairman, if I might, since the
gentleman referred to a comment I had made. I would like to put
in a record a transcript of a YouTube posting by Mr. Holtz-
Eakin on what would happen in the event that we had a--we hit
the debt limit, including not making full payments of Social
Security and zeroing out, I might add, defense spending and all
other discretionary spending, among other things.
[The information follows:]

Chairman Ryan. I am sure that the hits will spike now.
Mr. Holtz-Eakin. Thank you for the advertisement.
Mr. Van Hollen. Absolutely. I actually hope a lot of people
will turn to it. It was a well-done tape.
Chairman Ryan. Thank you for your indulgence. We will
conclude it here. The hearing is adjourned.
[Whereupon, at 11:38 a.m., the committee was adjourned.]