[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]








                             THE DEBT LIMIT

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

                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                            JANUARY 22, 2013

                               __________

                          Serial No. 113-FC01

                               __________

         Printed for the use of the Committee on Ways and Means






[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]





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                      COMMITTEE ON WAYS AND MEANS

                     DAVE CAMP, Michigan, Chairman

SAM JOHNSON, Texas                   SANDER M. LEVIN, Michigan
KEVIN BRADY, Texas                   CHARLES B. RANGEL, New York
PAUL RYAN, Wisconsin                 JIM MCDERMOTT, Washington
DEVIN NUNES, California              JOHN LEWIS, Georgia
PATRICK J. TIBERI, Ohio              RICHARD E. NEAL, Massachusetts
DAVID G. REICHERT, Washington        XAVIER BECERRA, California
CHARLES W. BOUSTANY, JR., Louisiana  LLOYD DOGGETT, Texas
PETER J. ROSKAM, Illinois            MIKE THOMPSON, California
JIM GERLACH, Pennsylvania            JOHN B. LARSON, Connecticut
TOM PRICE, Georgia                   EARL BLUMENAUER, Oregon
VERN BUCHANAN, Florida               RON KIND, Wisconsin
ADRIAN SMITH, Nebraska               BILL PASCRELL, JR., New Jersey
AARON SCHOCK, Illinois               JOSEPH CROWLEY, New York
LYNN JENKINS, Kansas                 ALLYSON SCHWARTZ, Pennsylvania
ERIK PAULSEN, Minnesota              DANNY DAVIS, Illinois
KENNY MARCHANT, Texas                LINDA SANCHEZ, California
DIANE BLACK, Tennessee
TOM REED, New York
TODD YOUNG, Indiana
MIKE KELLY, Pennsylvania
TIM GRIFFIN, Arkansas
JIM RENACCI, Ohio

        Jennifer M. Safavian, Staff Director and General Counsel

                  Janice Mays, Minority Chief Counsel


















                            C O N T E N T S

                               __________

                                                                   Page

Advisory of January 22, 2013 announcing the hearing..............     2

                               WITNESSES

Lee A. Casey, Partner, BakerHostetler, Washington, DC............     6
J.D. Foster, Ph.D., Norman B. Ture Senior Fellow in the Economics 
  of Fiscal Policy, The Heritage Foundation, Washington, DC......    26
G. William Hoagland, Senior Vice President, Bipartisan Policy 
  Center, Washington, DC.........................................    16
Simon Johnson, Ph.D., Ronald A. Kurtz Professor of 
  Entrepreneurship, Massachusetts Institute of Technology Sloan 
  School of Management, Boston, MA...............................    44

                       SUBMISSION FOR THE RECORD

Billy J. Spiva...................................................    91

 
                             THE DEBT LIMIT

                              ----------                              


                       TUESDAY, JANUARY 22, 2013

                     U.S. House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.

    The Committee met, pursuant to call, at 1:34 p.m., in 
Room 1100, Longworth House Office Building, Hon. Sam Johnson 
presiding.

    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                                                CONTACT: (202) 225-3625
FOR IMMEDIATE RELEASE
Tuesday, January 15, 2013
No. FC-01

                Camp Announces Hearing on the Debt Limit

    House Ways and Means Committee Chairman Dave Camp (R-MI) today 
announced that the Committee will hold a hearing on the statutory debt 
limit. The hearing will take place on Tuesday, January 22, 2013, in 
Room 1100 of the Longworth House Office Building, beginning at 1:30 
p.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    The U.S. Constitution grants Congress the authority to fund 
government, including the power to ``lay and collect taxes,'' and to 
``borrow [m]oney on the credit of the United States.'' Congress 
provided the President with a limited delegation of borrowing authority 
in 1917, and created the first statutory aggregate debt limit in 1939 
to pay obligations authorized by Congress.
      
    As of December 2012, the public debt is currently at the statutory 
limit of $16.4 trillion, and the U.S. Department of the Treasury 
(Treasury) is currently operating under ``extraordinary measures'' that 
give it additional, but limited, means to manage funds. According to 
Treasury, it is expected that the government's ability to meet its 
current obligations will be exhausted between mid-February and early 
March of this year.
      
    In announcing the hearing, Chairman Camp said, ``The Congress 
created the debt limit as a check on the delegated borrowing power of 
the President and it is critical that all parties understand the 
implications of increasing the debt limit. This hearing will examine 
the role and purpose of the debt limit, review past practices regarding 
its increase, and explore solutions that ensure responsible management 
of the government's finances.''
      

FOCUS OF THE HEARING:

      
    This hearing will examine the history of the debt limit, how past 
Congresses and Presidents have negotiated and raised the limit, and 
whether the Constitution provides options to the Executive Branch when 
the debt limit is reached.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
written comments for the hearing record must follow the appropriate 
link on the hearing page of the Committee website and complete the 
informational forms. From the Committee homepage, http://
waysandmeans.house.gov, select ``Hearings.'' Select the hearing for 
which you would like to submit, and click on the link entitled, ``Click 
here to provide a submission for the record.'' Once you have followed 
the online instructions, submit all requested information. ATTACH your 
submission as a Word document, in compliance with the formatting 
requirements listed below, by the close of business on Tuesday, 
February 12, 2013. Finally, please note that due to the change in House 
mail policy, the U.S. Capitol Police will refuse sealed-package 
deliveries to all House Office Buildings. For questions, or if you 
encounter technical problems, please call (202) 225-3625 or (202) 225-
2610.

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
official hearing record. As always, submissions will be included in the 
record according to the discretion of the Committee. The Committee will 
not alter the content of your submission, but we reserve the right to 
format it according to our guidelines. Any submission provided to the 
Committee by a witness, any supplementary materials submitted for the 
printed record, and any written comments in response to a request for 
written comments must conform to the guidelines listed below. Any 
submission or supplementary item not in compliance with these 
guidelines will not be printed, but will be maintained in the Committee 
files for review and use by the Committee.
      
    1. All submissions and supplementary materials must be provided in 
Word format and MUST NOT exceed a total of 10 pages, including 
attachments. Witnesses and submitters are advised that the Committee 
relies on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. All submissions must include a list of all clients, persons and/
or organizations on whose behalf the witness appears. A supplemental 
sheet must accompany each submission listing the name, company, 
address, telephone, and fax numbers of each witness.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TDD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://www.waysandmeans.house.gov/.

                                 

    Mr. JOHNSON OF TEXAS. We are expecting votes, so we are 
going to go ahead and get started. The Chairman is on his way. 
He will be landing in a couple of minutes. But we are going to 
get started.
    Good afternoon. Welcome to today's hearing on the debt 
limit. The Chairman has been delayed, but given the votes this 
afternoon, he asked we go ahead and start the hearing so 
Members may have as much time as possible with our 
distinguished witnesses.
    Before hearing from our witnesses, I will read Chairman 
Camp's prepared opening statement and then turn it over to Mr. 
Levin for his usual opening statement.
    Good afternoon. Thank you for joining us today, all of you.
    The topic of today's hearing is the debt limit, which has 
increased higher and faster under President Obama than any 
President in our Nation's history. Since the President first 
took office in 2009, there have been four increases in the 
statutory debt limit, totaling more than $5 trillion, a 55 
percent increase.
    As of December 31, 2012, our Nation reached the current 
debt limit of nearly $16.4 trillion, and the Treasury 
Department has been using extraordinary measures to avoid 
exceeding the debt limit. According to a letter from Secretary 
Geithner, those measures will be exhausted between mid-February 
and early March.
    In the simplest of terms, the debt limit helps hold 
Washington accountable to hardworking taxpayers, who ultimately 
foot the bill for Washington's spending habits. Without a 
limit, Washington would be free to borrow as much as it wanted 
without even a review of the bills we have racked up and those 
that are still coming due.
    Now, as I have said many times before, no one party is 
solely to blame. During 8 years of the previous Bush 
Presidency, deficits increased by $2.4 trillion. President 
Obama ran up twice that much during just his first term.
    The debt is not just some number; it has a direct impact on 
American families. During the President's fiscal commission, we 
heard nonpartisan testimony that stated when the debt is this 
large in comparison to the economy, it costs the country the 
equivalent of about 1 million jobs. Think about that. If 
Washington got its debt and spending under control, 1 million 
more Americans would be working today.
    As if that wasn't sobering enough, the staggering size of 
our debt and lack of a plan to deal with it also threaten to 
drive interest rates up. The Fitch Ratings agency recently 
warned that the failure to make progress on our structural debt 
would likely still result in a downgrade of the U.S. credit 
rating. A lower credit rating is sure to mean higher interest 
rates, which means families will face higher credit card 
payments, higher car payments, higher student loan payments, 
and certainly higher mortgage payments.
    In 2006, when speaking in opposition to increasing the debt 
limit, then-Senator Obama said, ``The fact that we are here 
today to debate raising America's debt limit is a sign of 
leadership failure.'' Those comments hold true today. That is 
why it is disappointing that the President has declined to 
engage in a meaningful dialogue to identify a responsible, 
balanced approach to reducing spending and, by extension, 
reducing the deficit, which the President promised to cut in 
half during his first term.
    Of course, it is tough to cut the deficit when the Senate, 
which is controlled by the President's own party, will not or 
cannot even produce a budget. It has been 4 years since the 
Democrat-controlled Senate has passed a budget. That is a 
disgrace.
    I fully expect Republicans and Democrats will disagree 
about what the budget should look like. Even when one party has 
a majority in both the Senate and the House, the two bodies 
often disagree. Disagreeing isn't the problem; the failure to 
resolve those differences is the problem. And how can we even 
start to find common ground if Senate Democrats won't tell us 
where they stand?
    In the first place, having the House and Senate pass a 
budget is the first step toward getting our finances back in 
shape.
    I want to thank the witnesses for agreeing to testify today 
and sharing your expertise on the debt, the debt limit, and 
what it means for the country. I thank you for your being here.
    And I would also like to welcome and thank our witnesses 
for appearing before us. Before we hear from them, I recognize 
now the Ranking Member, Mr. Levin, for his opening statement.
    Mr. LEVIN. Thank you.
    Welcome to all four of you.
    Today's hearing appears to have been originally designed to 
give the veneer of credibility to the notion that it might be 
appropriate, thinkable, or manageable to default on our debt. 
It is none of these. The debt ceiling is about paying the bills 
of the United States of America, for spending that this 
institution authorized. Manipulating it today, next week, or in 
3 or 4 months damages our economy and our credibility.
    In the summer of 2011--and I urge we all try to remember 
it--Republicans in this Congress pushed our Nation toward 
default. There were clear consequences--clear consequences. 
Today, they are prolonging another debt-ceiling showdown 
instead of a long-term extension. This continues and increases 
the economic uncertainty.
    Our Nation's economic wounds from 18 months ago are simply 
too fresh to ignore. August 2011 was the single worst month for 
job creation in the last 3 years. The Dow Jones plunged 2,000 
points in July and August of 2011, including one of its worst 
single-day drops in history, tumbling 635 points on August 8th. 
The Treasury was forced to spend $1.3 billion more in interest 
payments, according to GAO. The Bipartisan Policy Center 
estimates that the higher costs will be almost $19 billion over 
the next decade.
    And, of course, who could forget that the U.S. credit 
rating was downgraded for the first time in our history? One 
Standard & Poor's senior director said shortly after the credit 
agency downgraded the U.S. credit rating that the stability and 
effectiveness of American political institutions were 
undermined by the fact, and I quote, ``that people in the 
political arena were even talking about a potential default.''
    The Washington Post unequivocally stated in a story this 
week that, and I quote, ``In 2011, the debt-ceiling dispute 
traumatized the economy.'' A senior principal economist with 
IHS Global Insight was one of the many economists who have 
warned against a repeat. He wrote in a report last week, and 
again I quote, ``If the political bickering over the debt-
ceiling issue reaches a fever pitch, as it did in the summer of 
2011, then consumer confidence will nosedive further into 
recession territory.''
    We are hearing today that instead of quickly enacting a 
clean increase to the debt ceiling, there may be some other 
options. Some of the witnesses seem to suggest that it might be 
possible to instruct Treasury to pay bondholders while delaying 
payments to others. Whose bills should be delayed or cut? The 
Social Security checks of 56 million seniors and people with 
disabilities? The salaries of more than 2 million American 
personnel, many of whom are currently in harm's way?
    The idea is so troubling that it drew a strong rebuke from 
The Post Fact Checker last week. And he said, I quote, ``By 
available evidence, it appears all but impossible for the 
Treasury Department to pick and choose among payments.'' It is 
reported, as I read, that our Chairman, Chairman Camp, also 
cautioned his colleagues last week that such an approach is 
unworkable.
    I also urge--and I went back and checked it--that it 
embellishes history to imply that threatening to default has 
historically been used as leverage for deficit reduction, such 
as with Gramm-Rudman, which I voted for. In the House in both 
cases, the debt-ceiling bill was deemed passed, and the Senate 
then used it as a vehicle, not as a threat, for deficit-
reduction legislation.
    Over the past 2 years, we have achieved $2.5 trillion in 
deficit reduction--I repeat: $2.5 trillion in deficit 
reduction--and set an important precedent for future further 
balanced deficit reduction that includes both spending cuts and 
new revenue. And I close firmly urging we should proceed with 
this effort, focusing further on economic growth and jobs, not 
damaging this effort by attempting to use the debt ceiling for 
political leverage.
    Thank you, Mr. Chairman.
    Mr. JOHNSON OF TEXAS. Thank you, Mr. Levin.
    It is my pleasure to welcome the panel of witnesses before 
us today. We have four witnesses on today's panel.
    We will first hear from Lee Casey, a partner at the law 
firm of BakerHostetler. Mr. Casey is a former official in the 
Department of Justice Office of Legal Policy and Office of 
Legal Counsel.
    Second, we will welcome William Hoagland, Senior Vice 
President of the Bipartisan Policy Center. Mr. Hoagland is also 
the former Director of Budget and Appropriations for the Senate 
Majority Leader, Bill Frist, and former Staff Director of the 
Senate Budget Committee.
    Third on the panel is Dr. J.D. Foster, the Norman B. Ture 
Senior Fellow in the Economics of Fiscal Policy at The Heritage 
Foundation.
    Finally, we will hear from Dr. Simon Johnson, the Ronald A. 
Kurtz Professor of Entrepreneurship at the Massachusetts 
Institute of Technology's Sloan School of Management.
    I appreciate all of you being here with us today. The 
Committee has received your written statements. They will be 
made part of the formal hearing record. Each of you will be 
recognized for 5 minutes for your oral remarks.
    Mr. Casey, we will begin with you. You are recognized for 5 
minutes.

                  STATEMENT OF LEE A. CASEY, 
            PARTNER, BAKERHOSTETLER, WASHINGTON, DC

    Mr. CASEY. Thank you, Mr. Chairman and Members of the 
Committee. It is an honor and a privilege to appear here today 
to discuss the critical issue of the Federal debt ceiling.
    Although there are many important policy questions raised 
by the current debate over the debt ceiling, I would like to 
address the more fundamental constitutional questions of 
whether there must be a congressionally mandated limit to 
Federal borrowing and the extent to which the President may 
ignore these restraints or simply raise that limit and borrow 
money on his own authority.
    I believe that the answer is clear: Under the Constitution, 
Congress alone has the power to decide how, when, and why 
Federal spending should take place, and the extent to which 
that spending may be supported by taxation and/or borrowing.
    The debt limit is, of course, a statutory device that dates 
to the First World War. Although the debt limit in its current 
form is not constitutionally mandated, some type of 
congressionally controlled limit on executive branch borrowing 
is required and, whatever precise form that limitation takes, 
it is constitutionally protected. The President can neither 
ignore nor alter the debt limit without fundamentally 
subverting the Constitution's separation of powers and 
violating his oath of office.
    There are two principal mechanisms by which the Federal 
Government may obtain resources in order to operate: through 
taxation and through borrowing. The Constitution makes both of 
these mechanisms the peculiar province of the legislative 
branch. Congress alone is granted the authority to lay and 
collect taxes, to pay Federal debts, and to borrow money on the 
credit of the United States. The executive branch then carries 
out these functions; that is, its role is to execute what 
Congress has enacted in these areas. The President has no 
independent authority to raise taxes or to borrow on the 
Nation's credit.
    This was, of course, the purpose and intent of the 
Constitution's Framers. In a basic division of governmental 
power, they gave Congress the power of the purse, a grant they 
viewed as especially empowering the House of Representatives, 
where all revenue bills must originate.
    Moreover, as James Madison explained in the Federalist No. 
58, the Framers fully anticipated and intended that 
congressional power over Federal taxation, borrowing, and 
spending would be used as a political weapon. I quote, ``This 
power over the purse may, in fact, be regarded as the most 
complete and effectual weapon with which any constitution can 
arm the immediate representatives of the people, for obtaining 
a redress of every grievance, and for carrying into effect 
every just and salutary measure.''
    It follows, of course, that the President cannot raise the 
debt ceiling on his own authority and is bound to respect this 
limitation on Federal spending, even if this requires him to 
make difficult decisions and take actions he would not 
otherwise support. Claims that section 4 of the 14th Amendment 
grants the President such power are mistaken. Section 4 forbids 
repudiation of Federal debts lawfully incurred. Permitting the 
President to raise the debt ceiling on his own authority under 
section 4 would upset the Constitution's basic separation of 
powers. And it is also plainly inconsistent with the 14th 
Amendment's language that, I quote, ``The Congress shall have 
power to enforce, by appropriate legislation, the provisions of 
this article.''
    It is also important to understand that the public debt 
guaranteed by section 4 does not include ordinary Federal 
spending programs but extends only to debt instruments issued 
in exchange for money on the credit of the United States.
    Thus, as a constitutional matter, Congress has the 
authority and obligation to regulate Federal borrowing. It can 
exercise this power in a number of different ways, including by 
voting on individual debt issues as was the case before the 
First World War, or by establishing an overall limit on the 
amount of debt the Federal Government may incur without further 
congressional action.
    The President is bound by such limits. He can neither 
ignore the debt ceiling, nor can he raise it on his own 
authority.
    And I would be pleased to answer any questions the 
Committee may have. And thank you.
    [The prepared statement of Mr. Casey follows:]
    
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    
    

    Mr. JOHNSON OF TEXAS. Thank you, Mr. Casey. I appreciate 
your comments.
    Mr. Hoagland, you are recognized for 5 minutes.

   STATEMENT OF G. WILLIAM HOAGLAND, SENIOR VICE PRESIDENT, 
            BIPARTISAN POLICY CENTER, WASHINGTON, DC

    Mr. HOAGLAND. Thank you, Mr. Chairman, Mr. Levin, and 
Members of the Committee. It is a privilege for me to be here 
this afternoon.
    Fundamentally, the debt-ceiling discussion emerges from the 
most basic tenet of our legislative sovereignty, and that, of 
course, is the power of the purse.
    I began my career here on Capitol Hill with the 
Congressional Budget Office in 1975. Later, as staff on the 
Senate Budget Committee and in the Senate Majority Leader's 
office, I witnessed and participated in many budget standoffs. 
But one of the first and most memorable was the one that the 
Ranking Member mentioned, the 1985 Gramm-Rudman-Hollings Act. I 
believe Mr. Levin and Mr. Rangel were the only two who were 
here at that time in 1985. That legislation came about because 
of the need to raise the statutory debt limit over $2 trillion 
for the first time in the country's history.
    The debt-limit bill has always been politically sensitive, 
but as the country's debt has continued to increase, the need 
to legislate an increase has become more frequent--78 times 
since 1940--and more difficult. Further, based on the actions 
that the 112th Congress took at the end of the 112th, I 
estimate that the debt held by the public will continue to 
rise, reaching 77 percent of GDP by 2022, and the debt subject 
to limit will exceed $27 trillion.
    My statement addresses two issues: First, what we call the 
X date, the date at which extraordinary measures will run out 
and there will be insufficient cash to pay our Nation's bills; 
and, second, one of the foci of this hearing, what options are 
available to the Executive when that X date is reached.
    On the first question, the cash flows of the past week have 
largely been, as we have anticipated, with no large 
fluctuations. And we at the BPC base our estimates of those 
cash flows on known cash flows and scheduled payments during 
this time period and on previous years' patterns of payments. 
And at this point, we are projecting the windows of the X date 
between February 15th and March 1st, the same as Treasury.
    On the second issue, what actions might the Treasury take 
post-X date, the President and Treasury officials will face two 
potential scenarios: First, the Treasury could prioritize 
payments, choosing to pay some and not others. In 1985, the 
Comptroller General issued a letter to the then-Chairman of the 
Senate Finance Committee, Bob Packwood, concluding that the 
Secretary of the Treasury does have the authority to choose the 
order in which to pay obligations of the United States. I asked 
the GAO general counsel last week if this opinion has changed 
and have been told that GAO has not issued an opinion on this 
question since 1985. It stands.
    Now, while prioritization may be legal, the actual 
implementation of it may not be practical. Treasury must make 
over 5 million payments on each business day. Treasury's 
computer systems are set up to confirm and process all payments 
as they come due. Implementing prioritization would be a 
dramatic overhaul and extremely difficult. Further, should 
Congress take to itself the responsibility of setting payment 
dates, possibly having to overturn the Prompt Payment Act or 
Title X of the Budget Act dealing with impoundment and other 
existing laws, one must be realistic as to how long such a 
legislative debate would last.
    The second scenario, should the Treasury deem 
prioritization to be implausible, the Secretary could instead 
announce that the government will make payments on daily 
obligations but in the order in which they come due on a 
delayed schedule. Assuming, as we do, that the X date is 
February 15th, the Treasury enters that date with precisely 
enough cash to fund the $30 billion interest payment due that 
day, and all other interest payments are prioritized and paid 
on time.
    In this situation, there would be $22 billion of 
noninterest payments owed on February 15th, which include 
military pay and unemployment benefits. They would be delayed 
until February 20th. Similarly, over $30 billion of payments 
due on February 20th, which include Social Security benefits, 
would have to be delayed until February 25th. These delays 
would continue to cascade. Payments due March 1st, which 
include Social Security benefits, military salaries, and 
veterans benefits, among others, would be delayed until March 
15th, half a month late. The government could face legal 
challenges under the Prompt Payment Act, not to mention the 
real impact on individuals and businesses across the country.
    Finally, under normal conditions, Treasury issues new debt 
to the public in order to raise cash to pay off outstanding 
securities as they mature. However, in a situation where 
Treasury has begun to delay payments on noninterest 
obligations, there is a possibility that such auctions would be 
disrupted. Investors might demand a significant premium on 
their debt purchases or, in the worst-case scenario, Treasury 
could find itself with insufficient buyers for an auction.
    Were this to occur, it would force Treasury to step in with 
enough cash to pay off the redeeming bondholders or face a 
default on the U.S. debt, and it would further delay 
noninterest obligations--a vicious circle. We expect that there 
will be over $500 billion of debt that will need to be rolled 
over from February 15th to March 15th.
    In conclusion, Mr. Chairman, the Bipartisan Policy Center 
strongly believes that the imbalance in our Federal budget 
ledger does need to be addressed. Risks are risks, and while no 
one can know for sure what ramifications the largely 
unprecedented scenario of passing the X date would have, those 
risks clearly grow day by day and eventually could become 
catastrophic. These are considerations I know the Members of 
this Committee will keep in mind as you deliberate this 
important issue.
    Thank you.
    [The prepared statement of Mr. Hoagland follows:]
    
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    Mr. JOHNSON OF TEXAS. Thank you, sir. I appreciate that.
    Dr. Foster, you are recognized for 5 minutes.

 STATEMENT OF J.D. FOSTER, PH.D., NORMAN B. TURE SENIOR FELLOW 
  IN THE ECONOMICS OF FISCAL POLICY, THE HERITAGE FOUNDATION, 
                         WASHINGTON, DC

    Mr. FOSTER. Thank you, Mr. Chairman, Mr. Levin, Members of 
the Committee. Good afternoon. It is nice to be back.
    My name is J.D. Foster. I am the Norman B. Ture Senior 
Fellow at The Heritage Foundation. The views I express today 
are my own and should not be construed as the position of The 
Heritage Foundation.
    Mr. Chairman, once again we find ourselves in dire straits. 
The President's position on the debt ceiling I believe could be 
summed up simply as: Kick the can, and then we will have a 
conversation; we will engage in a dialogue. The Senate's 
position can be summed up simply as: Hoping not to be noticed. 
And so it falls, as it so often does, on the House to lead.
    On the debt ceiling, I believe we face basically three 
options--two drastic, and one, which is sound. The first 
drastic one: Congress could simply leave the debt ceiling in 
place. While perhaps tempting to some, and understandably so, I 
think we all know this would be unwise and irresponsible, with 
consequences we can only begin to imagine--consequences that do 
not include, however, defaulting on the Nation's debt, a 
suggestion the President frequently makes in awesome 
irresponsibility.
    Second, Congress could raise the debt ceiling by some large 
amount or repeal it altogether, as the President has suggested, 
and do nothing else. Raising it substantially and doing nothing 
else would continue a pattern of reckless, irresponsible fiscal 
policy with no end in sight and, for this reason, would with 
certainty also bring terrible consequences. To be sure, the 
date of onset of these consequences is uncertain, which makes 
this course so appealing in a political environment often 
favoring perfect myopia.
    The Federal Government's debt trajectory is dangerous--
dangerous to our economy, dangerous to our future as a Nation. 
And surely that, at least, we can all agree on. Fiscally, the 
rise in the debt means more of the government's resources will 
be crowded out in the future into paying interest expense, 
making less resources available for other priorities. Americans 
generally are willing to pay taxes, but they expect services in 
return. Servicing the government's debt is not what they have 
in mind.
    Economically, it also means that savings that would 
otherwise be available for productive investment in the private 
sector have been captured by the government. Less private 
saving means a smaller economy and lower wages. Soaring public 
debt also means that when interest rates begin to rise--and 
rise they most assuredly will--they are now set to rise much 
farther and much faster. The consequences of these higher 
interest rates will be the most terrible of all, for families, 
for businesses, for the economy. And there will be nothing then 
that Congress can do to stop them.
    What Congress should do is raise the debt ceiling while 
enacting concrete programmatic spending reforms, especially to 
entitlements, to reduce the deficit in the short run and 
especially the long run. There are sound, bipartisan, 
commonsense, options for restraining entitlement spending while 
ensuring these programs preserve economic security for the 
elderly and the poor. Indeed, it is possible through reform to 
remedy key failings, such as the woefully inadequate minimum 
benefit in Social Security and the lack of a catastrophic 
benefit in Medicare, while doing these reforms. Our mantra 
should be ``reform and improve'' while slowing the growth of 
spending.
    If the President led on these issues, he could help shape 
these vital programs to ensure their sustainability and 
effectiveness and, in the process, transform himself from the 
most fiscally irresponsible President to arguably the most 
fiscally responsible President in our history.
    Which brings us back to the debt limit. Modern history 
provides fertile ground for doubt when process solutions 
substitute for concrete decisions, such as the House is 
considering. Thus, I have my qualms over the course the House 
leadership has set. But I understand the difficulties the House 
faces, and I accept as sincere assurances that there is a 
firmer strategy. I accept this.
    I agree entirely that if we are to make sustained progress 
in restraining spending and deficits, Congress must return to 
the regular order in a budget process, however much the other 
body would like to do otherwise. The House is correct to press 
for a regular, disciplined budget process.
    I don't know whether the House can compel a change in 
course. I acknowledge the difficulties. For all our sakes and 
the sake of my children and yours, I fervently hope you 
succeed.
    I do know the House can take a stand to present the 
American people a clear alternative to soaring debt and a 
dimmer future: To choose to stand with deficits and debt and 
decline, or to stand with the economic security and prosperity 
of future generations of Americans. The American people deserve 
at least to know this much from the U.S. House of 
Representatives: Where the Nation is heading and what the House 
would do differently.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Foster follows:]
    
    
    
    
    
    
    
    
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    Mr. JOHNSON OF TEXAS. Thank you, Dr. Foster.
    Professor Johnson, you are recognized for 5 minutes. Please 
proceed.

STATEMENT OF SIMON JOHNSON, PH.D., RONALD A. KURTZ PROFESSOR OF 
 ENTREPRENEURSHIP, MASSACHUSETTS INSTITUTE OF TECHNOLOGY SLOAN 
                SCHOOL OF MANAGEMENT, BOSTON, MA

    Mr. JOHNSON. Thank you very much, Mr. Chairman.
    I find it frightening and also hard to believe that we are 
having this conversation in general and that you are having a 
hearing on this matter.
    Among other things, I am the former Chief Economist of the 
International Monetary Fund, and I would remind you that the 
United States is not just the center of the world's economy; 
our financial assets, our government debt serves as a linchpin 
of the world's financial system.
    From 1948 to 1968, foreigners held as reserves U.S. 
Government debt worth about 2 percent of our GDP. Their 
reserves now, their rainy-day funds, the basis of their 
financial calculations, are now at least 15 percent of our GDP. 
These are assets they hold willingly. They hold them because 
this has in the past been regarded as the world's safest asset. 
You are calling this into question when you raise the issue of 
not increasing the debt ceiling. This, to the world, to the 
world's investors, is just unbelievable, that you would even 
have this conversation.
    Could I show, please, the first slide?
    I testified before this Committee and I made these exact 
same points in the summer of 2011. And the point I tried to 
communicate to you then was that if you continued to have a 
confrontation around the debt ceiling, you would create an 
unprecedented level of uncertainty regarding economic policy in 
the United States.
    This chart is taken from the work of Professors Baker, 
Bloom, and Davis. The full reference is in my written 
testimony. And they have measured policy uncertainty since 
1985--not, I would say, at my behest or particularly focusing 
on the debt ceiling. But what do they find? What do you see in 
this chart?
    Matching exactly with what Mr. Levin said at the beginning, 
August 2011 stands out as the moment since 1985 when we had the 
greatest uncertainty, the most lack of clarity for everyone--
not just for the government, everyone in the private sector. 
Consumers, businesses cannot make decisions if they don't know 
what is going to happen to the government debt.
    And listening to the testimony just now, I was further 
frightened by the extent to which leading experts disagree or 
vary in opinion with regard to exactly what may happen if we 
are to breach or come up against or somehow play with this debt 
ceiling.
    The United States has never threatened to default, not 
since the 1780s. That has been the key element of U.S. fiscal 
policy since the Constitutional Convention in Philadelphia. 
That is actually a lesson that President Madison learned the 
hard way in and after the War of 1812, the importance of being 
very careful with your public debt and very careful with all 
communications around your public debt management.
    If you don't raise the debt ceiling now or if you postpone 
this conversation, if you say, every 60, 90, or 100 days we are 
going to again have the same kind of conversation about the 
debt ceiling, you will continue to have this sort of spike in 
policy uncertainty, you will continue to undermine the private 
sector, you will continue to delay investment and to reduce 
employment relative to what it would be otherwise.
    I urge you--I understand you have many difficult fiscal 
conversations to come. I appreciate that. I realize there is a 
range of reasonable opinion here. But I urge you, as I urged 
you in the summer of 2011: Take the debt ceiling off the table. 
Do it for our sakes. Do it for the world economy. Do it for the 
global financial system, which has still not recovered from the 
problems of 2007-2008.
    If you want to destabilize the European economy, if you 
want to put pressure on all those sovereigns in Europe who are 
right now struggling fiscally, then you should have exactly 
this confrontation, pushing up the yield on risky assets around 
the world. But you don't want to do that. You don't want to 
destabilize Europe. You don't want another downgrade of U.S. 
debt. You don't want another spike in policy uncertainty.
    Please, take the debt ceiling, once and for all, completely 
off the table.
    Thank you.
    [The prepared statement of Mr. Johnson follows:]
    
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    Mr. JOHNSON OF TEXAS. Thank you, sir.
    We have a vote going on right now, and it appears to me 
that we are not going to be able to continue as we are. So I 
think we will recess until the vote is over, which will be 
about half an hour, they say, and return. So the meeting stands 
in recess----
    Mr. LEVIN. Mr. Chairman, let me just mention, there is 
going to be a Rules Committee meeting on the bill, so I may not 
be here for the questioning. I think my colleagues will be 
pressing the issue of a 3-month delay and the potential harm it 
can do.
    We went through this once, Dr. Johnson. I remember your 
testimony so well. And to think of going through it again, my 
hope is that there will be questions that can elicit your view 
as to why we should not be playing with fire once again.
    Thank you.
    Mr. JOHNSON OF TEXAS. The Committee stands in recess.
    [Recess.]
    Chairman CAMP [presiding]. The Committee will come back to 
order.
    I want to thank our witnesses for being here today.
    And I think we will move into the question and answer 
period. I am going to reserve my question time for a minute, 
and I will go to Mr. Brady.
    You are recognized for 5 minutes.
    Mr. BRADY. Thank you, Mr. Chairman.
    And thank you to all those who were here for the testimony 
today. It was very helpful.
    First, clearly, America will pay its debts. That has been 
made clear by Republicans and Democrats in Congress. We always 
have. And I hope that those who choose to be melodramatic about 
it these days to gain political advantage, if you could please 
stop, that would be helpful.
    Second, there is absolutely no chance that the President's 
request to have a permanent unlimited debt ceiling will occur. 
This is the constitutional prerogative of the House and the 
Senate. As we have seen in the past, it has also been a helpful 
tool, not only on checks and balances, but to enact spending 
reforms and restraints that can be helpful, although, in my 
view, have not been as helpful as they have in the past.
    And a third point is that the claim we heard earlier today, 
that a short-term extension of the debt limit may raise our 
U.S. Government debt service cost, that is highly speculative. 
The 2011 GAO study showed mixed results, with no significant 
impacts in 40 percent of the extensions. So three out of every 
five had no impact. The 2012 report was based on only one 
event, so it is statistically inconclusive. The Bipartisan 
Policy Center estimates are based upon both of these 
questionable GAO studies, and they miss the point.
    The fact of the matter is, unsustained spending over time, 
without doubt, will raise the cost of our borrowing in America. 
That is why we are all here today to deal with this issue or 
attempt to give our best insight.
    I would like to ask Dr. Foster a question because it 
relates to the debt ceiling. Many of us see the other side of 
that coin as a credit downgrade, a second one, which has 
serious consequences not just for our borrowing but for 
borrowing of small businesses and consumers at home.
    My question to you--and I know there are different 
opinions, but what do you think Congress has to do? What steps 
should we take to create not just medium-term fiscal 
consolidation addressing that issue, but long term, dealing 
with our long-term drivers of debt and spending? What do we 
need to do to avoid a second downgrade, or a downgrade by a 
second credit rating, to be accurate?
    Mr. FOSTER. To avoid another downgrade, which on our 
current path is almost assured, we really need to do two 
things. And they are pointed out in the letter expressing the 
first downgrade.
    One, don't raise any question about not raising the debt 
ceiling; ultimately, we have to do that. And the second is we 
have to get our long-term fiscal house in order. That means we 
have to get the entitlement programs under control, achieving 
two goals: One, the reforms necessary to make sure they achieve 
the result intended, which is protecting at-risk populations, 
while spending moneys that we can afford to spend and no more.
    There are simple entitlement reforms--
straightforward, and well- vetted--that this Congress could 
adopt, I believe, fairly quickly. They are not even 
legislatively complex. And these are the kinds of reforms that 
have received bipartisan support in the past. They are sort of 
commonsense changes.
    It is frustrating, in fact, that we don't take these 
reforms more seriously and move on them because they would have 
profound impacts in the long run, where the fiscal problem 
really lies. Yes, we have a serious problem with a trillion-
dollar budget deficit today, but, really, as large as that is, 
that problem is dwarfed by our long-run fiscal problems from 
the entitlement programs.
    We know some of the basic reforms, bipartisan reforms that 
can be enacted that will go a long way to getting Medicare and 
Social Security, in particular, on a more sustainable path. And 
that is where the Congress should be looking as we debate 
fiscal policy this year, beginning with the debt ceiling.
    Mr. BRADY. Do you think investors look beyond that debt-
ceiling issue to those fundamentals you talked about, answering 
the question, is America serious about getting its financial 
house in order over the long term? Do you think that really 
creates the most uncertainty going forward over the long term?
    Mr. FOSTER. It is certainly a tremendous source of 
uncertainty. There are others, but that is a major source of 
uncertainty that credit markets most assuredly look at, as 
indicated by the letter transmitting the credit rating 
downgrade the last time.
    Mr. BRADY. All right.
    Thank you, Mr. Chairman. I yield back.
    Chairman CAMP. Thank you.
    Mr. Rangel is recognized for 5 minutes.
    Mr. RANGEL. Thank you. And welcome back, Mr. Chairman.
    Chairman CAMP. Thank you.
    Mr. RANGEL. I am under the impression that the debt ceiling 
is to give the authority to the President to assure our 
creditors that each and every nickel that we would borrow will 
be paid back. I also believe that we have to have some 
guidelines on the spending in order to share with creditors and 
Americans alike the fact that we are going to reduce 
unnecessary spending. Having said that, there are some people 
who believe that we have to have to be involved, this debt 
ceiling, and with the deficit. And, of course, that is 
controversial.
    Under the system of prioritizing payments, as some people 
are pushing forward, they would believe that we can determine 
just who we were going to pay out interest to while we get a 
better handle on the spending part of this dilemma. And I just 
want to ask Dr. Johnson some questions.
    These programs, I think you pay your interest on your debt 
as the number-one priority. I think every family would like to 
pay off interest; Social Security; and then third, somewhere 
active duty military. And I think that is patriotic as well as 
political.
    But under this scenario, Dr. Johnson, will we be paying the 
people that we borrowed from in China, the debt that we owe 
China, the biggest creditor, or one of the largest, before we 
would pay our American military that got caught, like I did, in 
Korea, fighting the Chinese? Does this work out, that in terms 
of avoiding the payment of our debt, that we would pay off our 
debtors before we pay off our military? Is that part of this 
plan?
    Mr. JOHNSON. Well, Mr. Rangel, it is hard to know. I mean, 
I don't think these plans are very detailed, worked-out, 
credible plans. They are vague notions, the ones I have seen.
    But, yes, I have seen the notion expressed that the United 
States would pay its debts in the form of interest and 
principal on bonds, a substantial fraction of which are held by 
the Chinese Government, for example, ahead of payments that it 
would make of other kinds, which would include, presumably, the 
way that is framed, payments to active service military 
personnel, for example.
    Now, that just seems like a very strange notion----
    Mr. RANGEL. It seems to me, if you owed anybody any money, 
no matter whether it was the country or your company, and you 
were not giving the executive director the authority to pay 
what has already been borrowed, that that shouldn't make our 
lenders feel comfortable.
    But about the question of reducing spending, is there a 
vehicle that the Congress can exercise its ability without 
jeopardizing the reputation of credit? I mean, we have to deal 
with it, but you say and I think most people believe, don't 
attack the debt ceiling and integrity of the United States of 
America, but use the constitutional vehicles you have. What can 
the Congress do to express America's concern about spending?
    Mr. JOHNSON. Well, Congressman, as you know far better than 
I do, you have a wide range of tools, and, in fact, you have 
more than 200 years of fiscal history in which the Congress did 
exactly that. Congress exerted for many, many years both a 
reasonable tax base that was consistent with the spending that 
they wanted, and nobody ever put the debt ceiling or the U.S. 
willingness to pay its obligations on the table in the way that 
it was placed in the summer of 2011 and the way that I fear it 
is now being placed on the table again.
    It was a big mistake in 2011 to create this degree of 
uncertainty and fear in the United States and around the world, 
and it is a big mistake to do it again today.
    Mr. RANGEL. Why would any good-thinking, patriotic American 
who loves the country as well as we all do want to use the debt 
ceiling as a vehicle to reduce spending rather than the other 
legislative opportunities we would have? What would their 
reasoning be? Certainly not to embarrass the United States of 
America.
    Mr. JOHNSON. I have no idea, Mr. Rangel. But I can tell you 
that----
    Mr. RANGEL. Well, if you don't have any, then maybe it is 
to defeat the objectives of this President at whatever cost, as 
some leaders or so-called leaders have said: That they want to 
stop this President, and they were unsuccessful in that 
measure. So maybe, maybe they have decided to change tactics. 
And maybe this discussion is unnecessary and we find some other 
way to get a handle on the deficit.
    Let me thank you for your contributions to this hearing, as 
you have contributed so many times before.
    Mr. Chairman, I yield back the balance of my time.
    Chairman CAMP. Thank you.
    Mr. Johnson is recognized.
    Mr. JOHNSON OF TEXAS. Thank you, Mr. Chairman.
    Mr. Foster, in his famous farewell address, President 
Eisenhower said, ``We cannot mortgage the material assets of 
our grandchildren without risking the loss also of their 
political and spiritual heritage. We want democracy to survive 
for all generations to come, not to become the insolvent 
phantom of tomorrow.''
    In your testimony, you say that with respect to our fiscal 
future, ``a change of course is inevitable.'' The question is, 
what kind of change? You warn that one such change may be 
brought by credit markets increasingly intolerant of 
Washington's fiscal imprudence.
    In essence, you are saying, if we don't do anything, it is 
only a matter of time that financial markets will, so to speak, 
blow the whistle on Washington and say, ``The game is over.'' 
In other words, we are on borrowed time here, aren't we?
    Mr. FOSTER. Yes, sir, I am afraid we are.
    And this is rather an unusual posture for Americans to be 
in. We are not used to thinking in these terms because, 
traditionally, even though we have had a fair amount of 
government debt, it has ranged in the order of 40 percent of 
our economy, which is completely manageable. It has since shot 
up dramatically and is going to continue to shoot up under 
current policies.
    And the evidence is very clear in the academic literature; 
it is very clear in international observation. There comes a 
point where your debt, as a share of your economy, reaches 
levels at which credit markets become noticeably disturbed. 
They become very worried. And it is expressed, in part, as 
rising interest rates, which then spread throughout the 
economy. We are not just talking about Treasury interest rates 
but mortgage rates and consumer rates and so forth.
    Mr. JOHNSON OF TEXAS. Well----
    Mr. FOSTER. This is a certainty. And it is a path that we 
are on that will have extreme consequences that we are not used 
to thinking about in this country.
    Mr. JOHNSON OF TEXAS. Well, I ask the question, how much 
time do we really have? You know, with the U.S. per-person debt 
now 35 percent higher than that of Greece, when do you think we 
face our Greek moment if we fail to take meaningful action to 
get our fiscal house in order?
    Mr. FOSTER. Well, right now we are having a good news/bad 
news situation. The good news is that, despite all that we have 
done wrong, we are still one of the safest places in the world 
to invest. And there are a lot of places around the world that 
capital wants to avoid. So it keeps coming into this country, 
driving down our interest rates, even as we are raising debt 
rapidly.
    Well, at some point that is going to reverse, and that 
capital will flow out again, and interest rates will rise 
rapidly. When that will happen I cannot say because I don't 
know when, for example, Europe is finally going to get its 
fiscal house and monetary houses in order. But once they do, 
this process will reverse and we will see the consequences of 
what we have done.
    Mr. JOHNSON OF TEXAS. Yeah, Germany is making moves now.
    Mr. Hoagland, would you care to comment?
    Mr. HOAGLAND. I agree with Dr. Foster that we are probably 
the best-looking horse in the glue factory today. That may not 
last.
    I would also say that I am very worried about, as I said in 
my opening statement, the fact that we are looking at debt-to-
GDP that is close to 77 percent. And while in the past we have 
had debt-to-GDP after World War II at that level, we didn't 
have 50 percent of it being owned by foreign investors. And 
that is what scares me in terms of our sovereignty. We think we 
have to deal with this going forward.
    I agree also that the real issue here is mandatory spending 
and putting in procedures, processes, and building upon a 
regular-order process up here of getting budget resolutions 
adopted, conference agreements, a reconciliation bill, and 
working it through the regular order. And that is why I would 
say that while this is not the perfect solution in terms of the 
3-month extension, it puts you back closer to what would 
normally have been a regular-order process. And I think that is 
positive.
    Mr. JOHNSON OF TEXAS. Well, I would like to know what both 
of you think, if we don't get it in order, you know, to our 
small-business owners, to our young families, to our aspiring 
college students, what kind of future are we looking at for 
these folks? Either one of you.
    Mr. HOAGLAND. I think the standard of living that we 
experienced and enjoyed, we have to be honest with ourselves 
that we are lessening that standard of living for future 
generations, our children and our grandchildren. I don't think 
there is any question that this level of debt would lower that 
standard of living that we enjoyed.
    Mr. JOHNSON OF TEXAS. Yeah, and people will stop wanting to 
come here, won't they?
    Thank you, Mr. Chairman. I yield back.
    Chairman CAMP. Thank you.
    Mr. McDermott, you are recognized for 5 minutes.
    Mr. MCDERMOTT. Thank you, Mr. Chairman.
    I have to tell you, listening to this hearing is like we 
are living in ``Alice in Wonderland.'' Here we are hearing from 
witnesses telling us how to use default creatively or use it to 
get some leverage or something. And simply talking about it 
here is destructive. The whole world is watching this hearing. 
It is the first hearing on this issue.
    And the whole point of a society is to create and run a 
government in order to make order for people. People don't like 
chaos. And this hearing is about how to create chaos to get 
what you can't get politically with votes. Businesses and 
workers in my district think this kind of talk is crazy.
    Today we are talking about a crisis manufactured by the 
Republicans, a crisis they have manufactured to achieve 
policies that the voters wouldn't vote for at the ballot box. 
The Republicans are taking the economy hostage every single 
time they get a chance. There are threats for workers and 
businesses, investors, retirees. And job growth stops every 
time the Republicans have a crisis; the economy falters. This 
is the Republican governance and economic policy at work--or 
not working, really.
    The biggest problem with the Republican arguments that are 
before us--and we just heard it again--is that spending and 
debt are problems. And this is a misdirection. Republican 
Congresses and Republican Presidents were happy to run up huge 
deficits to wage wars they didn't pay for, or take tax cuts for 
individuals and industry and give billions to oil companies.
    Now, deficits aren't what the Republicans care about. What 
Republicans want to do is end the guarantees on Medicare and 
Social Security. We just heard somebody say it is the 
entitlement payments that are the problem. I disagree. I think 
this country can have a social safety net that covers people 
and pay for it.
    And that ought to be happening, but what is happening on 
the other side of the aisle here is that they want everybody 
who is lucky and doing well to just do well, and if you aren't 
doing well, well, you have to deal with it. It is your problem. 
It is social Darwinism; it is survival of the fittest put into 
public policy in this Committee.
    That is the Republican policy. And I respect that they want 
a different policy than I do, but we ought to be honest about 
the debate. Instead, we just watch people say ``spending'' in 
the TV cameras again and again and again. ``Spending'' is just 
a term that the polls like. Republicans won't say what they 
want to cut because the public doesn't want their policies. But 
the word ``spending'' polls very well, so we hear a lot of it. 
But we don't hear debate because the Republicans want crisis 
but no solution.
    If we were serious about having a debate here, we would 
start talking about what in Medicare should be cut, or how are 
we going to change it, or how are we going to finance 
physicians. All those things would be on the table. But we 
don't hear that. What we say is, ``Let's just cut.'' And when 
you start talking across the board, you are talking about 
medical research, and you are talking about NASA, and you are 
talking about NOAA, and you are talking about all these 
government agencies as though they don't do anything that add 
anything to this society.
    So when we are spending our time here talking about this 
deficit stuff and raising the debt limit, we are simply saying 
to the world, for the first time, America is not going to pay 
its debts.
    Now, my question to you, Mr. Johnson, is this: If this was 
such a good idea, why haven't we done it before? We could have 
saved a lot of money by not paying our debts. Why have we 
suddenly decided that this is the time to do it?
    Give me some understanding so the American people can 
understand why, after all these years since the First World 
War, we have paid our debts under Republicans and Democrats. I 
voted under George Bush--both of them--to raise the debt limit. 
But now we are going to stop paying. Please tell me why they 
are doing it.
    Mr. JOHNSON. Well, Congressman, it is not a good idea, and 
it is not the way fiscal policy was run not just since World 
War I, but going back to 1789, after the initial assumption of 
debt at the Federal level and the restructuring of debt with 
which Alexander Hamilton began fiscal policy in this country; 
policy has absolutely been to always pay your debts and your 
other obligations. And it took a long time to convince the 
world that the United States was the safest place to put your 
reserve assets or your rainy-day money. And it was a great 
achievement. And now it is being squandered and thrown away 
for, I presume, some negotiating purpose. It makes no sense 
from a broader economic perspective.
    Chairman CAMP. Thank you. Time has expired. I would ask 
unanimous consent to place in the record a Statement of 
Administration Policy on H.R. 325, the temporary suspension of 
the debt ceiling, where the Administration says, ``For these 
reasons, the Administration would not oppose a short-term 
solution to the debt limit and looks forward to continuing to 
work with both the House and the Senate to increase certainty 
in the stability for the economy.''
    Without objection, so ordered.
    [The submission of The Honorable Dave Camp follows:]
    
    
    
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       Mr. Tiberi, you are recognized for 5 minutes.
    Mr. TIBERI. Thank you, Mr. Chairman.
    Thank you, gentlemen, for coming and testifying.
    Let me expand a little bit on Mr. McDermott's line of 
questioning and just get a quick response from the four of you. 
Back in 2006, speaking on the Senate floor, then Senator Obama 
announced that he intended to vote no on the debt-ceiling 
increase. He went on to say, and I quote, to oppose the 
effort--``I oppose the effort to increase America's debt limit. 
We now depend on ongoing financial assistance from foreign 
countries to finance our Government's reckless fiscal policies. 
Over the past 5 years, our Federal debt has increased by $3.5 
trillion dollars to $8.6 trillion.'' Oh, to have those numbers 
today. Since then, we now have a $16.4 trillion debt, nearly 
doubled in 6 years. In fact, since this President has become 
President in 2009, he has added more than four times, more 
than--more debt in 4 years, excuse me, than the previous 
President did in 8.
    So, to the four of you, a quick question. Was the President 
right, is this a failure of leadership? And is there a better 
direction?
    Mr. Casey.
    Mr. CASEY. Well, I certainly think he was right that we 
oughtn't to continue to run the store based on borrowing. There 
is a lot of ways you can pay your debts, and they don't all 
include incurring----
    Mr. TIBERI. But since he made that speech, it has gotten 
worse; we have done nothing to change the trajectory.
    Mr. CASEY. I agree.
    Mr. TIBERI. It has gotten worse. So is the President right, 
it is a leadership failure?
    Mr. CASEY. Yeah, I would agree with that, it is.
    Mr. HOAGLAND. Congressman, it didn't say that he was right 
to say what he said. I would be careful to point out that some 
of that increase in that debt that took place was a result of 
obligations that were incurred long before he was ever 
President of the United States or he----
    Mr. TIBERI. Oh, right.
    Mr. HOAGLAND. Or wherever. And I just would make that very 
clear.
    Mr. TIBERI. Oh, sure.
    Mr. HOAGLAND. Also, I would simply say, the House-passed 
budget resolution last year under Congressman Ryan, which was 
going in the right direction of controlling spending, still had 
a debt for the end of this year at $17.1 trillion.
    Mr. TIBERI. Right. It is getting worse.
    Mr. HOAGLAND. It is--and getting worse. It is built into 
the pipeline.
    Mr. TIBERI. Thank you. Agreed.
    Mr. Foster.
    Mr. FOSTER. Yes, sir, thank you. There is no question that 
allowing debt to continue to build more rapidly as a share of 
GDP is reckless; it is irresponsible. Under some circumstances, 
it is inevitable. Those circumstances are not what we have 
today. We should be getting it under control and doing so 
quickly.
    Mr. TIBERI. Mr. Johnson.
    Mr. JOHNSON. Congressman, figures 2 and 3 in my written 
testimony address this issue directly; where did the debt come 
from? These are the Congressional Budget Office numbers. This 
is figure 2, and you can see the impact of the tax cuts; the 
two foreign wars; Medicare Part D, which was not paid for; the 
2008 Bush tax cut; and then, of course, the financial crisis. 
The largest swing, if you move to figure 3, this shows you the 
swing in medium-term debt projected by the CBO before and after 
they realized the severity of the financial crisis.
    Mr. TIBERI. Let me ask you a quick question.
    Mr. JOHNSON. That is a 50 percent of GDP increase in debt.
    Mr. TIBERI. Was the President right, yes or no?
    Mr. JOHNSON. The President was right when he spoke of the 
reckless fiscal policies at the moment. What he didn't realize 
was how bad it was going to get as a result of reckless 
financial policies----
    Mr. TIBERI. And so the President is right today, then, you 
are saying as well. Even though the debt has nearly doubled and 
we had a deficit actually that was on the decline with what you 
talked about, two wars, prescription drug benefits, tax cuts, 
it was actually less than $200 billion the year that Rob 
Portman, now Senator, was budget director and has now since 
gone over a trillion dollars 4 years in a row.
    Mr. JOHNSON. Congressman, we had the largest financial 
crisis since the Great Depression.
    Mr. TIBERI. I have heard this before.
    Mr. JOHNSON. We lost a huge amount of revenue, according to 
the Congressional Budget Office that is 70 to 80 percent of the 
swing in debt. These are the CBO's numbers.
    Mr. TIBERI. We are not going to solve it. I have another 
question for Mr. Hoagland.
    Mr. Hoagland, I notice that you have some experience on 
budget issues in the Senate. How many years did you work in the 
Senate, and when you worked in the Senate on budget issues, did 
they pass budgets when you were there? How many times? Or did 
they fail to pass a budget 1 year, 2 years, or maybe 3 years?
    Mr. HOAGLAND. I was with the Senate Budget starting with 
the CBO in 1975, with the Budget Committee since 1982, and left 
the Senate after Majority Leader's Office in 2007. Over the 33 
years that we have had budget resolutions, beginning in 1979, 
seven times have we failed to get a conference agreement on a 
budget resolution. Unfortunately, over that 33 years, three of 
those times have been in the last 3 years. There is one time 
when I 
was staff director of the Senate Budget Committee with Chairman 

Pete Domenici that we did not get a concurrent resolution on 
the budget, and that had to do in 1998 when John Kasich was 
Chairman of the House Budget Committee, and we had just 
finished the 19--but one time.
    Mr. TIBERI. One time.
    Mr. HOAGLAND. The Senate not----
    Chairman CAMP. Time has expired. Thank you.
    Mr. TIBERI. Thank you.
    Chairman CAMP. Mr. Doggett.
    Mr. DOGGETT. Thank you very much, Mr. Chairman.
    I know opinions clearly differ about where we are headed in 
the future, but I think as Mr. Johnson's chart demonstrates, 
when we concluded the Clinton Administration, we had a surplus 
for the first time in recent memory, and a huge tax cut, where 
Alan Greenspan sat where you are sitting, Mr. Johnson, and told 
us that the justification for this tax cut in part was that we 
were reducing the debt too fast, that we would create some 
uncertainties in the bond market because we were moving so 
quickly, but an unpaid tax cut, unpaid prescription benefits, 
two unpaid wars. Now we are told we can no longer afford, by 
some of our Republican colleagues, to provide health security 
for people at 65 or 66 that you just--you would like to do it, 
but we just can't afford to do it anymore.
    And as it relates specifically to the proposal we just 
heard the Administration's statement on, I gather your opinion, 
Mr. Johnson, is, you know, better than have a Valentine's Day 
cliff to at least have some additional time to help resolve 
this, but if we keep moving in 3-month or 1-month or 6-month 
spurts, the effect on economic growth will be very damaging.
    Mr. JOHNSON. Absolutely, Congressman. If we could pull up 
figure 1 from my written testimony----
    Mr. DOGGETT. Please.
    Mr. JOHNSON [continuing]. What you would get is the spike, 
this is the spike from August 2011, you are going to have that 
every 3 months. That was a disastrous month for hiring because 
who wants to hire when you don't know if there are going to be 
payments made by the government or if various other disruptions 
are going to take place? These are big numbers for the U.S. 
economy. You are going to do this every 3 months, for how long? 
Until you have another election? That is far too long for the 
health and sanity of the American people.
    Mr. DOGGETT. And at the same time we had that phenomenon, I 
believe the General Accountability Office has estimated that 
the direct cost of Republicans taking us right up to the brink 
on the debt, on the full faith and credit of the United States 
last time was over a billion dollars in increased interest 
costs. We could also expect to see an increase in borrowing 
costs for taxpayers if we don't get this debt ceiling resolved.
    Mr. JOHNSON. That is a definite possibility, Congressman. 
To the extent we disrupt debt markets, if we worry investors, 
if we create risk, and we are hurting not just the Federal 
Government; this has implications for State governments and for 
local governments that, of course, do not generally borrow at 
the low interest rate the Federal Government borrows at, so 
they have a risk premium in there. You are driving up risk 
premia around the world when you generate this kind of 
uncertainty.
    Mr. DOGGETT. Your written testimony indicates that, for a 
decade, actually for a couple of decades, we have seen income 
inequality increase dramatically with little change in income 
for 90 percent of wage earners and a 50 percent increase for 
those at the top. What are the policies that you think we most 
need to address other than getting stability on this full faith 
and credit of the United States to change that and to ensure 
that there is a more equitable share in the success of the 
American economy?
    Mr. JOHNSON. Well, the evidence is completely compelling 
that education, human capital, the ability of people to work 
with information technology, these are huge determinants of 
what has happened to income inequality. And many people in 
American society today cannot afford by themselves to get that 
kind of education. 
To the extent that you can make resources available to support 
younger people, support families in the pursuit of high 
productivity human capital, that is good for them, that is good 
for the economy, and that is good for the tax base, so over the 
medium term, that is absolutely going to strengthen the budget.
    Mr. DOGGETT. And in terms of competitiveness worldwide, 
building a stronger workforce from, as you mentioned, early 
childhood education to access to a college education is really 
vital to American competitiveness, isn't it?
    Mr. JOHNSON. It is the number one determinant of both our 
competitiveness, the extent to which we can compete with other 
countries, and our productivity, how much do we actually 
produce per person in this economy. The number one determinant 
looking forward is human capital; that is about education. It 
is about ability to innovate, ability to work with those new 
technologies.
    Mr. DOGGETT. And over the short run, what is the effect of 
across-the-board cuts on early childhood education, on Pell 
grants, on research funding for medical research and other 
basic scientific research?
    Mr. JOHNSON. It is all going to be negative for growth and 
for human capital, and it is going to impact equality, and to 
the extent that you don't have a progressive tax system, it is 
also going to give you negative impact on the budget.
    Mr. DOGGETT. While the most immediate concern, I know, and 
the main focus of your testimony is upholding the full faith 
and credit of the United States, is it your feeling that at 
this time in our economy, we need to see a contraction of 
government spending?
    Chairman CAMP. All right, time has expired, I am sorry.
    Mr. Reichert.
    Mr. REICHERT. Thank you, Mr. Chairman.
    My first question is to all the panelists. Thank you for 
being here. There are a lot of--there is a lot of talk across 
the aisle about raising revenue to solve our debt problem. Is 
it possible to raise taxes enough to permanently sustain 
programs such as Social Security and Medicare without reforming 
the programs themselves? And what sort of tax increase would 
this be on the middle class, and what would this sort of tax 
increase do to our broader economy?
    Mr. CASEY. I would ask the Committee if I may pass on that 
since it goes beyond my legal expertise. I will defer to the 
economists.
    Mr. HOAGLAND. I believe that it would require a balance 
between both spending, controlling entitlement spending, 
mandatory spending, and revenue increases to lower the debt-to-
GDP figure to a goal of about 60 percent. I believe the last 
proposal that was on the table before the fiscal cliff 
discussion was that the House Republican leader's proposal was 
$800 billion in tax increases; the President's was $960 
billion. You get $600 billion; there is $200 billion there that 
you are still looking at for this next 10-year window, but I 
think that has to be coupled with changes to mandatory spending 
programs.
    To Mr. McDermott's position, there are specific proposals 
as it relates to changing the Medicare program that does not 
harm current recipients of Medicare but protects the program 
for the future beneficiaries out there.
    Mr. FOSTER. There is an illusion that you can solve all 
these problems with tax increases without getting into the 
question of whether or not you should, or that you could. The 
answer is you can't. The costs in these programs are rising so 
rapidly over the next decades, not 2014 or 2015, but over the 
near future, that you can't solve them with tax increases. We 
would not have much of an economy left if we tried that.
    So you must understand, the starting point for getting our 
fiscal house in order is reducing the growth in the entitlement 
spending, just as Mr. Hoagland suggested. Then it is a 
political point, a debatable point, as to whether or not you 
want to mix in tax increases as part of that solution. That is 
a political decision at that point, not an economic decision, 
understanding that the tax increases we tend to enact tend to 
be those most harmful to the economy, thereby slowing the 
growth of the economy as well as the tax base. But you have to 
start with the entitlement reform, slowing the growth of that 
spending. That is a necessary and unavoidable component of 
getting our fiscal house in order.
    Mr. JOHNSON. Congressman, I actually wrote a book on this 
topic, which I would be happy to send you.
    Mr. REICHERT. Congratulations.
    Mr. JOHNSON. Thank you. And the bottom line is that Social 
Security you could rebalance relatively easily with new 
revenue, and some relatively minor----
    Mr. REICHERT. What kind of impact would that have on the 
middle class, just using revenue, just taxing people?
    Mr. JOHNSON. The impact on the middle class would be 
relatively small, and again, I can send you the numbers. The 
key issue there is that they are raising the cap on earnings 
subject to Social Security, which was not indexed last time 
that was changed by this Congress in the mid 1980s.
    The big problem is healthcare spending, Congressman, but it 
is not Medicare, per se, it is healthcare spending. If you 
shift that, the responsibility of health care from Medicare on 
to families, individuals, and companies, you will raise 
healthcare spending as a percent of GDP, that is the CBO 
scoring of that issue. And that is not going to help American 
families. You need to find a way to control, limit healthcare 
spending as a percent of GDP. That is the key variable to focus 
on, how the healthcare system functions, how it delivers, and 
what it costs.
    Mr. REICHERT. If tax increases were the only solution that 
you are talking about here, you are just relating the tax 
increase to Social Security. Medicare, Medicaid, what is the 
impact there? What is the impact of just raising taxes on the 
broader economy totally?
    Mr. JOHNSON. The problem, Congressman, is the healthcare 
spending. If healthcare spending increases, you can either pay 
that out of the budget, in which case it would be very high 
cost, or you can shift that on to individuals, in which case it 
ruins them. Either way, it doesn't make much difference. It is 
the healthcare costs that you have to focus on.
    Mr. REICHERT. I want to go to some of the discussion that 
was occurring earlier. Why are we focusing on spending today, 
now? Why now? I may not have enough time to get to that 
question. I see the yellow light is on. So, Mr. Chairman, I 
will yield back before. It is a long question.
    Chairman CAMP. All right. Okay.
    Mr. Larson, you are--I am sorry, Mr. Neal has come back in.
    Mr. Neal is recognized for 5 minutes.
    Mr. NEAL. Thank you, Mr. Chairman.
    As we debate increasing the debt ceiling this afternoon, I 
think a bit of history is important as we acknowledge the 
current fiscal situation. In January 2001, CBO estimated that 
the total budget surplus for 2002 to 2011 would be $5.6 
trillion, surplus. Instead, after years of reckless spending 
and tax cuts, the Federal Government ran deficits from 2002 
until 2011. The total deficit over that 10-year period amounted 
to $6.1 trillion, a swing of $11.7 trillion from January 2001 
and its projections.
    We began down this path by enacting tax cuts that cost the 
government $2.3 trillion. The other major expenditure during 
those years that contributed mightily to these deficits is the 
engagement in two wars. By the time we got to January of 2009, 
the debt was $10.6 trillion, setting a record for debt for any 
Administration. Pursuing two wars and massive tax cuts was the 
reason, and Mr. Johnson, while he was temporarily holding the 
chair for Mr. Camp, indicated that we were all responsible for 
many of those positions. Having voted against the war in Iraq 
and having voted against the Bush tax cuts in 2001 and 2003, I 
think I have earned an element of credibility on these 
questions.
    So today we are debating another increase in the debt 
limit. I don't understand how anyone who voted for the Iraq war 
could now vote against raising the debt ceiling. In reality, 
arguing over the debt ceiling is essentially an argument over 
whether or not we should pay our bills. We should pay our 
bills.
    This debt is about the past, not about the future. If you 
voted for the war in Iraq and the Bush tax cuts, the bill is 
here. Remind our colleagues and friends: 1.7 million new 
veterans, 45,000 of whom have served us honorably, as the other 
1.7 million have, but they have been wounded. Half of the 
45,000 have claimed disability.
    So we hear from some of our friends, the default deniers, 
that they think hitting the debt ceiling is no big deal, that 
we could raise the debt ceiling only if we cut government 
spending as well. But where were they during those years, those 
very difficult years? And incidentally, I have compiled the 
voting records on the debt limit increases that President Bush 
requested during those years.
    And I hope, Mr. Chairman, I could insert that into the 
record.
    Chairman CAMP. Without objection.
    [The submission of The Honorable Richard Neal follows:]
    
    
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    
        Mr. NEAL. Thank you, Mr. Chairman.
    Many of the most senior Members of this Committee routinely 
voted to raise the debt ceiling during those years, even though 
the money for the tax cuts and the wars was put on emergency 
basis for the purpose of hiding the costs. So I am pleased that 
we are coming around to a more reasonable position today, and I 
hope that we are going to find a common path forward on many of 
these issues.
    Mr. Johnson, you state in your testimony that low--
unemployment depresses tax revenue, and this is the major 
reason for our current deficits and why they are so large. Once 
the economy recovers fully and the unemployment rate is 
lowered, it certainly will take some of the pressure off of 
these discussions, acknowledging there are long-term challenges 
that we have to address. I have been making this point inside 
of my own caucus, not to overreact to the situation in which we 
find ourselves, and if we could only find that common path 
forward that I referenced, we would find that you could have a 
conversation that would be worthwhile past the political 
talking points.
    Now, getting Americans back to work should be the number 
one priority, and as we address this fiscal situation, toying 
with the debt, considering that American companies are 
estimated to be sitting on $1 trillion domestically and more 
than $1.8 trillion offshore. If we offered a picture of 
stability, and again a conversation worth having, we might be 
able to ameliorate some of the tension that surrounds this 
issue.
    Would you comment, Mr. Johnson?
    Chairman CAMP. You have 8 seconds. You can follow up with a 
letter, but we are going to stay on time here.
    Mr. JOHNSON. We should pay our bills. That is the number 
one priority. If we don't pay our bills as a government, we 
will disrupt the economic recovery and push unemployment 
higher.
    Mr. NEAL. Thank you.
    Chairman CAMP. Thank you.
    Mr. Boustany, Dr. Boustany is recognized.
    Mr. BOUSTANY. Thank you, Mr. Chairman.
    I want to put this in perspective for a moment. The former 
Chairman of the Joint Chiefs of Staff, Admiral Mullen, was 
quoted as saying the debt of the United States is a threat to 
our national security, and while it might not rise to that 
level acutely immediately, it certainly is a serious strategic 
restraint on the ability of the United States to operate in an 
international environment. And it is clearly a threat to our 
economic prosperity.
    I want to make it clear, nobody on this side of the aisle 
is talking about default, none of us are talking about default. 
We are talking about a serious solution going forward with a 
big problem, which is widely acknowledged to be a spending 
problem.
    Now, several of you made a number of points. Mr. Casey, you 
talked about Congress having the power of the purse and using 
it wisely, with discretion, to enact spending reforms which are 
desperately needed.
    Mr. Hoagland talked about going back to regular order, 
something we all believe needs to happen. You also mentioned 
temporary extraordinary measures that are currently being used 
and talked a little bit about prioritization, and I want to 
bring that up again in a moment.
    Mr. Foster, you spoke about process not being a substitute 
for real policy reforms. We all agree with that, I think both 
sides could agree with that.
    But the bottom line is this: We have a spending problem, 
and we have to also recognize that in the context of how it 
plays out in the economy, it is not just spending, but it is 
also a need for growth. This is why we want to do tax reform, 
real tax reform, fundamental tax reform that puts our Tax Code 
on a 21st century basis that promotes American competitiveness 
and growth.
    Now, historically, and I went back and I read a CRS report, 
short-term debt limit increases have been used just to buy time 
in order to get to a point where you couple it with real 
spending reforms. This has happened historically. Am I correct?
    Mr. HOAGLAND. Yes, sir.
    Mr. BOUSTANY. So we are not talking about something out of 
the ordinary as we talk about this current proposal on the 
table.
    But I want to go back, Mr. Hoagland, to prioritization 
because we know there are extraordinary measures already being 
done by Treasury, and prioritization, we wouldn't have to be in 
this crisis if the President had come forward with a real plan. 
He has had opportunities with four budgets and hasn't done that 
and has continued to perpetuate the problem.
    Now we are caught in a situation where we are waiting with 
the budget and the timing, but the bottom line is this: We 
don't need to be in this. We didn't need to be in this crisis, 
but we find ourselves in it. Now if prioritization is going to 
be used as one of these extraordinary measures, talk a little 
bit more, elaborate a little more on the fact that we have 
uneven receipts coming in and how this plays out. I want this 
to be real clear for the public that might be paying attention 
to this.
    Mr. HOAGLAND. The Treasury has estimated that the cash 
flows in are very unprecise. Even in a 1-week forecast out, the 
estimate is that varies on statistically plus or minus $18 
billion, just 1 week out, just estimating the receipts coming 
in. Two weeks out, the estimates are a $30 billion variation 
plus or minus. When you combine that with the requirements, in 
terms of statute, the payments going out, you create a 
tremendous level of difficulty in terms of being able to set 
the timeframe in which you should pay those when you don't know 
exactly, when you are doing prioritization, paying with income 
coming in with the degree of variation that exists in the 
receipts coming in. It is just very, very difficult.
    Mr. BOUSTANY. For the interest payments, there is a 
different computer system, right, than what is used for the 
other payments?
    Mr. HOAGLAND. Correct. The interest payments is a separate 
computer system. It is possible that you could just prioritize 
those interest payments, but I think the Fitch report last week 
said that you could avoid an actual default, default being 
defined as paying the interest, but then those other 
noninterest obligations will be looked at as another form of 
default, which would also affect Fitch's rating.
    Mr. BOUSTANY. I see. How much time do you think we would 
have with prioritization? How much time could be bought?
    Mr. HOAGLAND. Congressman, I mentioned in my report that we 
are talking about the pay-fors, the Prompt Payment Act, the 
Impoundment Act; I think you have a long time in terms of you 
determining prioritization.
    Chairman CAMP. Time has expired.
    Mr. Larson, you are recognized.
    Mr. LARSON. Thank you very much, Mr. Chairman, and it's 
always good to see you back here and in good health. Let me 
start by saying thank you to our panelists for their testimony 
and thank you for your service to your institutions and the 
country and I thank the Chairman for this hearing.
    I think it is a good news/bad news story. On one hand, the 
good news is that we have avoided yet another immediate crisis. 
The bad news is that we are just kicking the can down the road 
for 3 months and, in essence, then are dealing with default and 
not paying on our bills just 3 months later. That creates an 
enormous problem and one I think that--I would hope that this 
Committee, above all others, could solve because I do believe 
in this Committee and its bipartisan membership in our ability 
to address this issue. We know that what we have to do is both 
stabilize this economy, invest in this economy, reform this 
economy, and grow it in terms of what everyone has testified 
and what the people on this Committee believe in.
    No less than Speaker Gingrich said on ``Face the Nation'' 
that, look, take the debt ceiling off the table, at least 
provide the American people with a modicum of security that 
they know we are not going to hold this hostage, too. We ought 
to be adults about it, as the former Speaker said, and take 
that off the table. That doesn't mean to desert the issue or 
back away from the issue of dealing with debt. And there are 
still appropriate opportunities, as he pointed out, whether 
through sequester or continuing resolution to do it, but we owe 
it to the American people to make sure we take this uncertainty 
away from them. We saw what that uncertainty does in terms of 
impacting their pensions and their 401(k)s, and they look to 
this Congress, and frankly, I think the Congress looks to this 
body to return to regular order. And I know we have the 
leadership on this body to do that, and by returning to regular 
order, we can go after the difficult things.
    Mr. Johnson pointed out that the issue is healthcare costs. 
That is true. Mr. Ryan, who serves on the Budget Committee and 
this Committee, has pointed out the issue is healthcare costs. 
How do we go after those costs? It just simply isn't 
entitlements, aka insurance that people have paid. They have 
paid for that; that is their insurance. What are the actuarial 
assumptions around that? What do we have to do to change and 
alter that? We ought to be able to carry that out in regular 
order, not in meetings in the White House, not in meetings in 
the Senate, where they won't do a budget and where they will 
wait to do some kind of bill themselves. We ought to be doing 
it in this Committee.
    Mr. Johnson, I was confronted in my hometown by our CFO, 
who said, ``Listen, if you guys don't provide us some certainty 
again, we have to go out to the bond market again in this very 
difficult time, and what happens to us is we end up in a 
situation where we have to raise people's property taxes 
because Congress twiddles and diddles and plays hostage 
politics.'' What is your experience with respect to the impact 
that this will have on local municipalities, our cities, and 
our communities?
    Mr. JOHNSON. Well, Congressman, the impact is going to be 
bad, and it could be dramatically bad, depending on what 
happens in 3 months. I don't agree with Mr. Gingrich on many 
fiscal issues, but I think on this one, he is right. Take the 
debt ceiling off the table permanently. Investors around the 
world are watching this hearing. They are looking at your 
words. They are trying to understand, what does prioritization 
mean? How does this not involve default? The degree of 
uncertainty that is being multiplied by this conversation is 
extraordinary, the impact on municipalities is going to be 
tough. They will face higher borrowing costs to the extent that 
risk premia rise in the United States and around the world and 
that means either they are going to fire people or they are 
going to raise property taxes or they are going to face some 
other problems. So this is a very bad route to go down from 
that perspective.
    Mr. LARSON. I have great respect for Dr. Boustany, but we 
are talking about default. And whether we are talking about 
immediate default or default 3 months from now, that is a 
policy issue.
    Mr. Hoagland, you also talked about bringing balance to 
this issue. I thought that was an excellent point, and you said 
that it ought to be done through regular order. How do you see 
that proceeding?
    Mr. HOAGLAND. I see that proceeding by the President 
submitting a budget. I see that proceeding by the Budget 
Committee passing budget resolutions. I see that by a 
conference agreement between the House and Senate on a budget 
resolution. I see that by including a reconciliation 
instruction to achieve the savings over the time period, and I 
see that working through the normal course.
    Mr. LARSON. I have been in Congress 14 years; we have not 
completed that once since I have been here in full complete 
order.
    That is why I think it is incumbent upon our Committee, and 
I know the great integrity that our Chairman and Members of 
this Committee have. I think that we can achieve those goals. I 
know my time is up.
    Chairman CAMP. Thank you. Thank you very much.
    Mr. Paulsen is recognized for 5 minutes.
    Mr. PAULSEN. Thank you, Mr. Chairman, also for holding the 
hearing.
    I want to thank each of the witnesses for being here. You 
know, it is pretty clear to me that there is actually broad 
bipartisan consensus that our country is on a fiscally 
unsustainable path right now. The 2010 report by the Bipartisan 
Policy Center's Debt Reduction Task Force--Mr. Hoagland, I 
believe you were a member of that Task Force--included the very 
sobering warning that the Federal budget is on a dangerous, 
unsustainable path. Federal spending is projected to rise 
substantially faster than revenues, and the government will be 
forced to borrow ever-increasing amounts. Federal debt will 
rise to unmanageable levels, which will push interest rates up, 
endanger our prosperity, and make us increasingly vulnerable to 
the dictates of our creditors, including nations whose 
interests may differ from ours. We have talked a little bit 
about that earlier from some of the other questions.
    My constituents are, quite honestly, very perplexed that 
Washington continues to borrow 40 some cents of every dollar it 
spends. They can't get their arms around that. And there is a 
recognition now that without significant changes to our fiscal 
policy, the national debt itself is going to become an 
existential threat. I would like each of the panelists, if you 
could, just comment what are the implications of current debt 
levels? What are the consequences of increased levels? And what 
really is the turning point where our debt becomes 
unmanageable, where it becomes an unmanageable situation?
    Mr. Casey.
    Mr. CASEY. Well, I think on most of that question, I will 
defer to the economists, but I will say that one thing I think 
we need to keep in mind is that we are not--we fling around the 
term debt ceiling. What we are talking about here is Congress' 
power to borrow money and how we should be paying our bills 
based on that or based on some other method of raising revenue, 
so I think it is very important to keep that clearly in mind.
    Mr. PAULSEN. Mr. Hoagland, you were a member of that Task 
Force as well.
    Mr. HOAGLAND. Yes, and in fairness, Congressman, that Task 
Force also recommended a balanced plan that included tax 
increases as well as spending cuts going forward, more on the 
spending side than on reduction of the rate of growth. The 
implications of the debt level, that we are headed at 77 
percent going into the future, I think has a major--will 
jeopardize, quite frankly, our standing in the world. When we 
have about 40, 50 percent of this debt owned by investors 
outside of the United States, we are questioning, we are 
raising questions about the sovereignty of this country going 
forward.
    In terms of, where is the turning point, I think that is 
the problem; most economists would say they can't answer that 
question. Who knows when that last drop into the test tube 
turns the water blue? But it will turn at some point, and that 
is the problem. When it turns, it will turn fast. That is why I 
think you have to have a plan going forward to avoid that date 
coming. I don't know. There is a book out on this called, 
``This Time is Different.'' This time is not different. 
Something will happen. We just want you to control that so it 
has some process behind it.
    Mr. PAULSEN. Now, knowing that the United States is still a 
safe haven in terms of money flocking here, based on what is 
happening in Europe, I mean, can we learn anything of what is 
happening in Europe basically on how capital----
    Mr. HOAGLAND. We are not Greece. We are not Italy. We are 
not Spain, but I think when you look at the level of spending 
there relative to their assets, I think you end up with a 
situation where you do create social disorder which is very 
dangerous.
    Mr. PAULSEN. Mr. Foster.
    Mr. FOSTER. There are three basic things. The first is that 
with all that debt, you are going to see in the future a lot 
more of government's resources, the Federal Government's 
resources being used just to pay off the interest on the debt 
from the past. As I said in my testimony, Americans expect 
services from the taxes they pay; they don't expect just that 
you service the debt from previous deficits.
    Second, interest rates are going to rise. We have now 
increased the debt sufficiently that all previous debates about 
whether deficits matter for interest rates can be set aside. It 
has now risen enough that it will matter, and it will matter a 
lot. Interest rates will rise and they will rise a lot faster 
and further than they ever would have otherwise.
    Third, as my colleague was just saying, it is like a family 
or any business, if you take on far too much debt, you lose 
control of your own future. You lose control of your path 
forward. Somebody else is going to be able to dictate the terms 
to you as to what you are going to do. The dictator in this 
case will be the bondholders and the credit markets. We lose 
control of our future as a Nation. Ask these countries in 
Europe, Mr. Hoagland knows, we are not Spain or Italy or 
Greece, but we will have one thing in common if we keep this 
path: We will lose control of our future as they have lost 
control of theirs.
    Mr. PAULSEN. Can you comment in terms of if there is even a 
1 percent or a 2 percent increase in interest rates what the 
effect is going to be on interest payments, on a dollar amount?
    Mr. FOSTER. Well, if you think about it, 1 percent payment, 
and you have $15 trillion out there, that's $150 billion----
    Chairman CAMP. All right, thank you, time has expired.
    Mr. Kind is recognized for 5 minutes.
    Mr. KIND. Thank you, Mr. Chairman.
    I want to thank you for holding this hearing and thank the 
panelists for your input and your discussion today, which is 
important. I think we all understand what the ultimate solution 
is of the debt ceiling: We need a long-term, bipartisan deficit 
reduction agreement in this place that is comprehensive and 
that will get our fiscal house in order, especially dealing 
with the demographics and the aging population. That is the 
answer. I equate this to the Middle East peace plan. We all 
know where we need to end up; it is just finding the political 
process and the will to get there. Every bipartisan commission 
that has met and been tasked to come up with a solution has 
reached the same conclusion, there is going to have to be some 
additional revenue and some major spending reforms in the 
budget for this to make sense in a balanced and a fair fashion.
    Mr. Foster, I appreciated your testimony here today where 
you said there is some additional room on the revenue side, 
even given where we ended up with the fiscal cliff, a little 
over $600 billion over 10 years in new revenue, but that was 
short of where things stood during the previous conversations.
    But, Mr. Johnson, in your written testimony and also your 
oral testimony here today, I think you have been fairly clear 
that the greatest if not the chief contributor to the deficits 
and the fiscal shortfall today has been the underperforming 
economy and the high unemployment rate, so I would assume then 
that one of the responses if not the response to help with the 
fiscal situation is to get the economy back fully functioning 
with good-paying jobs and lowering the unemployment rate. Is 
that right?
    Mr. JOHNSON. Absolutely, Congressman, and it would be, in 
that context, disastrous if you were either not to extend the 
debt ceiling or create a lot of uncertainty about who is 
getting paid and how they are getting paid because of the debt 
ceiling or because of the sequester or because of some sort of 
government shutdown. All of those things are bad for the 
recovery. They are bad for revenue, and all those things would 
tend to push up interest rates, which has the adverse 
consequences that my colleague just described.
    Mr. KIND. So I really don't understand the argument for 
holding the debt ceiling hostage and jeopardizing the full 
faith and credit and possibly defaulting on our financial 
obligations for the first time in our Nation's history, given 
the safe haven that we have enjoyed. In fact, the great irony 
in this recession is the fact that people have been willing to 
pay us to take their money, which is, in effect, what has been 
going on. It has been a lifesaver for us economically, and all 
that, I assume, would be in jeopardy overnight if we do default 
on our financial obligations. Would you agree?
    Mr. JOHNSON. Absolutely. The most obvious risk we face is 
that we will, through our own deliberate irresponsibility, 
undermine the safe haven status of the United States. The world 
is a complicated, dangerous place; people look to the United 
States as a safe place to keep their reserves, keep their 
money, but we can throw that out the window very, very quickly 
if irresponsible actions are taken around the debt ceiling.
    Mr. KIND. I would also submit that, you know, both sides, 
both political parties need to be a little more realistic in 
our approach to this whole discussion, and not to sound too 
partisan, but we have just come off two national campaigns 
where my colleagues on the other side accused Democrats of 
taking $700 billion out of Medicare and promising to restore 
that money while at the same time promising to increase defense 
spending by $2 trillion over the next 10 years. Those are the 
two largest spending programs we have in the Federal deficit, 
and that is a $2.7 trillion proposition of new spending that 
they were offering in two national campaigns, and now they want 
to sit back and criticize the President for not being realistic 
in his budget choices? They lose me on that argument.
    But, Mr. Hoagland, you have had a lot of experience and 
especially with Dr. Frist, and we do understand that the 
largest and fastest growing area of spending is rising 
healthcare costs. I think there is a solution to getting 
enhanced quality of care but at a better price. We need to 
change the way we pay for health care in this country, so it is 
value- and outcome-based and no longer volume-based, which fee-
for-service brings. Would that help improve the fiscal outlook 
if we can make that conversion to a different payment system?
    Mr. HOAGLAND. Yes, Congressman. I don't want to scoop my 
bosses. Senator Frist, Senator Daschle, Senator Domenici, and 
Alice Rivlin will be coming out with a report here in the 
middle of March, where we are looking specifically at this 
question, and one of the areas where we are focusing, we have 
to move away from the fee-for-service payment system to a more 
orderly system and move it away, and we believe that in the 
long run will help control costs overall in the Medicare area, 
but that also some 50 percent of health care is----
    Mr. KIND. Well, I knew you guys were involved in that work 
because the Institute of Medicine is doing a comparable report 
coming out in a couple months. I also appreciated Mr. Brady's 
comment, he is going to be the new Chair of the Health 
Subcommittee, about getting away from SGR and moving to a 
quality-based physician reimbursement system, too. I think that 
is going to be key to the fiscal outlook as well, but there is 
a lot here we can follow up on.
    But, Mr. Chairman, thanks again for this hearing and the 
feedback here today. Thank you all.
    Chairman CAMP. Mr. Reed is recognized for 5 minutes.
    Mr. REED. Thank you, Mr. Chairman.
    I have been listening to this testimony all afternoon, and 
I just have to say, I am embarrassed to hear some of the 
comments that have been made today about what I believe to be 
the biggest threat to the future security of our country, the 
security of our country, when it comes to our kids and our 
grandkids, and that is the debt. So I am going to ask you, 
point blank, each and every member of this panel, is the 
present debt path sustainable? Does anybody think that it is?
    Mr. HOAGLAND. No.
    Mr. REED. Mr. Casey.
    Mr. CASEY. No.
    Mr. REED. Mr. Foster.
    Mr. FOSTER. No, sir.
    Mr. REED. Mr. Johnson. It is a yes or no question.
    Mr. JOHNSON. No, sir, not over the long term, Congressman.
    Mr. REED. Thank you. Why is it not sustainable? Can each of 
you briefly answer that question?
    Mr. Casey, starting with you.
    Mr. CASEY. Well, frankly, as a layman, there comes a point 
when they start cutting up your credit cards, and we will reach 
it.
    Mr. REED. Mr. Hoagland.
    Mr. HOAGLAND. And when the rate of growth in terms of 
payment on the interest of that debt is faster than the rate of 
growth of the economy, then you are, the country is defaulting.
    Mr. REED. Mr. Foster.
    Mr. FOSTER. That is the heart of it, sir, when your 
interest expenses are growing faster than your income, you are 
in trouble.
    Mr. REED. Mr. Johnson.
    Mr. JOHNSON. Healthcare costs, Congressman, it is the 
failure to control healthcare costs, as just discussed.
    Mr. REED. So that is the debt, but the debt crisis, why it 
is not sustainable, is eventually the interest on the debt 
becomes so large that you can't pay that payment, correct?
    Okay, because I have done some calculations on that point, 
and I have looked at, what is our--if our present debt at $16 
trillion, just close to 3 percent, what is the debt service 
payment on that for our interest costs? Do you guys know that 
off the top of your head? Well, it is $492 billion. Let's say 
it goes to 6 percent. Does anybody know what that is?
    Mr. FOSTER. Twice.
    Mr. REED. That is $985 billion. Do you know what that 
means? What are we presently paying on our debt service 
payment? Do any of you know that number off the top of your 
head?
    Mr. FOSTER. It is about $250 billion I believe.
    Mr. REED. Yeah, so if you take the difference between the 
two, it goes up to 6 percent, you have $765 billion of 
additional need for cash payments to service the debt. What do 
we pay on our national defense budgets in an annual year?
    Mr. HOAGLAND. We pay about $700 billion.
    Mr. REED. So overnight, because that is an annual number, 
we are going to have to find the amount that we pay on our 
national defense lines in our Federal budget, an equivalent 
amount of dollars to service our debt. Is my understanding 
correct? Does anyone disagree with that math?
    Mr. JOHNSON. You are right, Congressman, but if you have a 
big fight over the debt ceiling, that is going to push up 
interest rates and cause exactly the effect you are worried 
about.
    Mr. REED. So if we just take care of the debt ceiling, put 
our head in the sand and say, we are never going to worry about 
the debt ceiling, at what point in time does the debt become so 
large that our creditors say, you know what, we are going to 
charge you a little bit more interest, and that interest then 
goes up to 6 percent on the $16 trillion. Don't we just get to 
the same problem that you are concerned about in the short term 
on a long-term approach by not dealing with the underlying 
problem at all?
    Mr. JOHNSON. Congressman, I am totally in favor of dealing 
with the budget, that is the point of the book we wrote called 
``White House Burning,'' a dramatic enough title I hope, but 
the point is you need a balanced approach, as Mr. Levin said at 
the beginning, and you have the forces to do it----
    Mr. REED. Mr. Johnson, if I could, it is my time, it is my 
time. And I have heard the balanced approach now for a year and 
a half, and I heard it today from the panel. There has been 
$600 billion of additional revenue that--as a result of the 
fiscal cliff negotiations. A balanced approach to me was if you 
gave revenue, you got spending reforms. Has the President 
offered any spending reforms as of yet in regard to that $600 
billion of additional revenue?
    Mr. FOSTER. We are hoping to see some in the budget, sir.
    Mr. HOAGLAND. When he, when the President put--when 
Secretary Geithner put forth his proposal on November 29th, he 
had spending reductions of like $400 billion.
    Mr. REED. So $400 billion in relationship to $600 billion 
of new tax revenue, and the President offered $400 billion in 
spending cuts.
    Mr. HOAGLAND. In fairness, the President proposed $1.6 
trillion in revenues for $400 billion in spending cuts.
    Mr. REED. That doesn't sound too balanced to me, in my 
opinion. So I will just end with this. It is clear that Admiral 
Mullen had it right; this debt--and I could care less about all 
the people here in Washington, D.C.--I am really concerned 
about the people back at home, my constituents, my kids, my 
grandkids. This isn't sustainable, and to have this bickering 
over these issues without putting a real concrete proposal in 
front of the American people to say these are the visions of 
how we deal with this problem, that is why I wholeheartedly 
support this 3-month extension, and I am glad to hear the White 
House supports it also because at least now we will put in 
black and white hopefully in the Senate and in the House a 
vision to deal with this number one threat to our national 
security. Thank you.
    With that, I yield back.
    Chairman CAMP. Thank you.
    Mr. Pascrell is recognized for 5 minutes.
    Mr. PASCRELL. Three-quarters of the deficit reduction to 
date has been spending cuts, and I would rather err on the side 
of what Roosevelt said in his second inaugural, and that was, 
``The test of our progress is not whether we add more to the 
abundance of those who have much; it is whether we provide 
enough for those who have too little.'' He said that in 1937 in 
the second inaugural.
    I am more concerned about one-fifth of our children living 
in poverty, and I am more concerned about the guys who are 
working out there--male income compared from 1969 to the 
present, and what do we have? We have people making, males 
making $1,000 more back in 1969. That is what I am concerned 
about. We have had a redistribution of wealth, all right, in 
this country. It was all upward. It was all upward. Let's get 
our facts straight here.
    This storied Committee, Mr. Chairman, is even discussing 
the idea that America will not pay our bills, that we will be a 
deadbeat Nation, as the President said, and that is 
unbelievable to me. Certain things are unbelievable to you. 
That is unbelievable to me because if you read Article XIV and 
Section 4, questioning whether or not to pay the public debt 
may be unconstitutional from this body. It is not a long 
section. It is the public debt. It is right there.
    And about the public debt, it also says--Mr. Foster, you 
didn't read the whole section. It says, if the House--if the 
Congress doesn't do it, the Executive must do it. It says that 
right in the bill. Am I not correct?
    Mr. FOSTER. I will leave that to the constitutional 
scholars.
    Mr. PASCRELL. I will read it to you.
    Mr. FOSTER. Go ahead.
    Mr. CASEY. No, sir, it doesn't say that, but please read 
it.
    Mr. PASCRELL. I will. If Congress won't pay them, then the 
Executive must.
    Mr. CASEY. In Section 4 of the 14th Amendment.
    Mr. PASCRELL. Well, I am talking about the interpretation 
of Section 4 of Article XIV.
    Mr. CASEY. Okay.
    Mr. PASCRELL. You disagree with that?
    Mr. CASEY. I disagree most wholeheartedly.
    Mr. PASCRELL. So the Executive has nothing to say about the 
debt?
    Mr. CASEY. Well, the Executive has no power to raise the 
debt, certainly. He has an obligation to pay the public debt, 
which is to say pay the amounts of money that have been loaned.
    Mr. PASCRELL. And how is he going to do that if the 
Congress does not give him the ability to do that? That is a 
little problem, isn't it?
    Mr. CASEY. It is obviously a problem.
    Mr. PASCRELL. Okay. Well, let me go on here. We are not 
going to default on our obligations and not just to our 
bondholders, because another thing that we are talking about, 
which is questionable, is whether we can prioritize the 
payments to make everybody happy. I have heard that here. Go 
ahead.
    Mr. HOAGLAND. I just want to be clear that I was not 
proposing prioritization. I was just pointing out the 
difficulties of prioritization.
    Mr. PASCRELL. So you understand it is questionable under 
the Constitution?
    Mr. HOAGLAND. Yes, sir.
    Mr. PASCRELL. We all saw the economic impact that the last 
debt ceiling had on the economy. The Dow dropped 2,000 points. 
We added $18.9 billion to our deficit just in that time, and 
for the first time in our history, we were downgraded for our 
credit rating. That was all when we didn't default, either. The 
mere threat of default and irresponsible discussions of default 
is what I am talking about right now, like the one we are 
having today, were enough to do significant damage to our 
economy, just the discussion of it. And we saw that.
    So let's give the American people some certainty. We have 
been saying that for the last 2 years. You have heard that. 
When are we going to solve that problem? When we solve this 
problem. How are people going to invest if they don't really 
know what is coming toward them? So let's end the talk of 
default, the irresponsible discussion. Responsibly default, 
could we responsibly default? Let's get an end to that 
discussion. Let's pass a long-term increase in the debt ceiling 
so that the phrase ``backed by the full faith and credit of the 
United States of America'' continues to mean something, and I 
believe it does mean something to all of you, and thank you for 
coming today.
    Chairman CAMP. Thank you. I would just note for the record 
that this discussion may not be as harmful as we think as the 
Dow S&P 500 just hit a 5-year high today. With that, I will----
    Mr. PASCRELL. I am sure it is because of our discussion, 
Mr. Chairman.
    Chairman CAMP. Yes, I am sure it will be.
    With that, I would recognize Mr. Young for 5 minutes.
    Mr. YOUNG. Thank you so much, Mr. Chairman.
    I thank all our panelists for being here today.
    It is clear, based on all your testimony, that really the 
big issue here, I think Mr. Hoagland put it most succinctly, 
the real issue is mandatory spending, and, you know, we are 
entering budget season, what ought to be budget season here in 
Washington, D.C., and I am just curious. First, Dr. Foster, I 
will start with you. As the President submits his budget for 
fiscal year 2014, what do you anticipate the likelihood is that 
his request will include any reforms of significance to make 
sustainable Medicare and Social Security in that budget 
request?
    Mr. FOSTER. Well, sir, despite being an economist, I am 
also an optimist, so I am going to say I think he may take the 
opportunity and really choose to lead on this, and until he 
proves otherwise, that is what I am going to believe.
    Mr. YOUNG. Well, good. I share your hope. I spent a couple 
of years on the Budget Committee before being on this Committee 
and was hopeful then, too, so I think that is the most 
important thing that certainly could be done because it is 
important that we act quickly. There is a cost to waiting, and 
perhaps, Mr. Hoagland, you could discuss the important benefits 
of acting quickly here, coming up with a clear, specific, 
comprehensible, and comprehensive plan to make these largest 
unsustainable programs of government sustainable.
    Mr. HOAGLAND. Congressman, I think it is necessary that a 
plan be put together that shows a path toward regaining 
sustainability in the Medicare program long term and in the 
Social Security program. The President back in November had 
proposed about $400 billion in spending reductions. I am, like 
Dr. Foster, I am optimistic he will come forth with that. The 
proposal here by the Republican leadership was $600 billion. 
This is over a 10-year period. The only comment I would have, 
Mr. Young, would be that the issue of controlling healthcare 
costs in a 10-year window is difficult. What we really should 
be looking at is a much longer window because some of the 
fundamental changes we have to make in the healthcare delivery 
system will take time to implement, such as Mr. Ryan's proposal 
last year.
    Mr. YOUNG. Well, fair enough, and I supported Mr. Ryan's 
proposal last year. I was encouraged that it received some 
bipartisan support. I would hope in the future it might get a 
bit more.
    But, Mr. Hoagland, to continue with you, the road map, if 
you will, in order to arrive at a spot where we can get 
concrete ideas from Democrat leadership, from the President of 
the United States about how to make these largest programs of 
government sustainable is through regular order. Could you 
bring us through that regular order as we have articulated it?
    Mr. HOAGLAND. I am a regular order guy. I have spent my 
career up here. I believe the power of making legislative 
decisions lies with committees such as this very powerful 
Committee here, and I think it is better that the decisions in 
terms of what legislation could flow forward come out of the 
committees. Therefore, that is why I believe a budget 
resolution that is put together that sets the broad parameters 
for how much you are trying to achieve in the way of deficit 
reduction worked through the committees of jurisdiction is the 
most salient way of achieving a goal and expressing to the 
American public we really are serious about a fiscal blueprint 
that puts us on a path of sustainability, and we are lowering 
that level of debt to GDP in the future.
    Mr. YOUNG. It strikes me as an orderly approach, a 
collaborative approach, one that ought to receive bipartisan 
support, and one that by design is set up to come together with 
some degree of consensus about what our Nation's priorities 
are, and then give the markets a degree of certainty about what 
is going to happen in the future, allowing us to create more 
jobs, et cetera.
    Incidentally, this is exactly the approach that the House 
Republican Conference has taken with respect to the debt limit 
increase. We have tied increasing this debt limit contingent 
upon the Senate finally producing a budget for the first time 
in several years. It strikes me as eminently reasonable. It 
happens to also be very popular among the American people. So I 
do agree that talk about default is irresponsible to 
characterize this hearing as about something other than an 
effort to bring us back into balance and to try to get a budget 
out of the U.S. Senate and a clear budget out of the President 
of the United States. I think it is irresponsible to 
characterize it otherwise.
    And I would just say to Mr. Johnson, I will give you a 
brief opportunity to respond, sir, that you spoke a great deal 
about policy uncertainty, but really it strikes me the greatest 
uncertainty longer term exists when you have Medicare, 
Medicaid, and Social Security unsustainable and no plan to make 
them sustainable.
    Chairman CAMP. All right. Mr. Johnson will have to respond 
to that question in writing as time has expired.
    Mr. Davis is recognized for 5 minutes.
    Mr. DAVIS. Thank you very much, Mr. Chairman.
    I certainly want to thank our witnesses for coming. You 
know, it appears to me that as we continue to raise the specter 
of possible default, that we undermine the confidence of our 
citizenry, and we certainly do a disservice to our country. You 
know, if you are living every day with the idea wondering, are 
we going to be able to make it until next week, or are we going 
to be able to make it for the next 3 months, I am not sure that 
that is the most effective way of convincing our citizenry that 
we are a stable, viable government, able to solve its problems, 
to meet its needs, and bring resolution to whatever crisis 
there might be facing us.
    Dr. Johnson, let me ask you, after the 2011 crisis, we had 
the worst job creation month in 27 months. Why? Why did that 
occur?
    Mr. JOHNSON. That occurred because of the additional 
uncertainty created for everyone, including companies that make 
the hiring decisions about what is going to happen next week or 
next month. This is a classic problem many countries have, but 
those are usually countries much poorer and less well organized 
than the United States. It was in 2001, extraordinary and 
unbelievable to people that we would come so close to default, 
and it is extraordinary again today that you would put the debt 
ceiling on the table in these negotiations when the last thing 
you surely want to do is get into any of these complicated 
games about prioritization, nonpayment or this or that creditor 
or potential default.
    Mr. DAVIS. Let me ask, how do business interests, how does 
a company respond to this short-term kick the can down the 
road, when they have to make decisions about their company, 
people they must hire, or products they must develop? How does 
the business community respond to that?
    Mr. JOHNSON. They delay decisions; they wait. That is the 
finding, overwhelming finding, for example, by Baker Bloom and 
Davis but also other people who studied uncertainty, the 
effects of uncertainty. We don't know what is going to happen; 
therefore, we hesitate to make commitments. We are not going to 
buy that new equipment. We are not going to expand. We are not 
going to hire people. Let's wait and see. And while uncertainty 
remains elevated as it is today, there will be hesitation in 
hiring and hesitation for the overall macroeconomic recovery.
    Mr. DAVIS. It is my position that one of the great needs 
that we have to get out of the economic crisis that we have 
been facing and creating and wondering about is to create jobs. 
I mean, it seems to me that if more people were working, that 
that means more people would be paying taxes; they would be 
putting more money into the Treasury. And if jobs are not being 
created, then I don't think we can just keep dallying around 
and dallying around and still there is no bottom line. How does 
this impact job creation and really provide the kind of 
assurance that people are going to be able to work and 
contribute significantly to further development of our economy?
    Mr. JOHNSON. Job creation is going to be impacted 
negatively by the uncertainty around fiscal policy, 
particularly any discussion of the debt ceiling, any of the 
debt-ceiling-related points that have come up today. Those are 
negative in terms of increasing uncertainty. Those are going to 
cause more hesitation in hiring. Those are going to slow 
employment growth below what it would otherwise be. And those 
are not helpful to the economic recovery or, as you say, 
Congressman, to the budget.
    Mr. DAVIS. So, in essence, we are kind of kidding ourselves 
about being able, without creating jobs, to solve economic 
problems; that just making decisions to shift thoughts and 
ideas and processes, and at the end of the day, there are still 
no more people working.
    Mr. JOHNSON. You need an economic recovery, Congressman, 
for everything else that you want to do. And that requires jobs 
to come back to where they were. We are still at least 3 
percent below peak employment pre-financial crisis. This is the 
longest, worst recession in American history since the 1930s.
    Mr. DAVIS. Thank you very much.
    And thank you, Mr. Chairman.
    Chairman CAMP. Thank you, Mr. Davis.
    Mr. Griffin is recognized for 5 minutes.
    Mr. GRIFFIN. Thank you, Mr. Chairman.
    Thank you all for testifying today. I want to be really 
clear as well. I haven't heard any talk on this side of the 
aisle about default, wanting to default, using default as 
leverage. That is a straw man. The only people I have really 
heard a lot about default from are on the other side of the 
aisle. So I just want to make that abundantly clear.
    And it reminds me of what now Majority Leader Reid said 
back in 2006. He is the one that was talking about default. He 
said, ``Americans know that increasing debt is the last thing 
we should be doing. After all, I repeat, the Baby Boomers are 
about to retire. Under the circumstances, any credible 
economist would tell you we should be reducing debt, not 
increasing it. Democrats won't be making argument to support 
this legislation, which will weaken our country, weaken our 
country. We are being asked to do what shouldn't be asked of 
us, to increase the debt to almost $9 trillion.''
    So there is a lot of politics going on here. And what I 
would like to do--and most of the questions I had to ask have 
been asked. So I would like to just go over a couple of things 
to clarify. We have heard a lot of talk about the Bush tax cuts 
and the wars adding to our debt. And I was looking here at 
revenue as a percentage of GDP. And it is interesting that in 
the mid-1990s, when taxes were higher--1995, for example--
revenue as a percentage of GDP was 18.4 percent. During the 
Bush years, in 2007, after the economy recovered from 9/11, it 
was 18.5 percent. So the idea that revenue dipped significantly 
during the Bush years because of tax cuts is just not true. 
Sure, it went down after 9/11.
    I didn't see 9/11 labeled on this chart, Mr. Johnson.
    But I think that that is a critical part of the equation.
    The other thing that I would point out, a key change--and 
Majority Leader Reid referred to it--the key change has been 
demographics. We all agree we have spent too much in Congress, 
a lot of it long before I got here. But the issue now is not 
who spent too much. The issue now is, who is willing to fix the 
problem and who is not? That is ultimately the issue.
    And we have heard a lot about a balanced approach, and we 
just had an agreement here in the House, in the Congress, that 
raised taxes.
    Now, from my calculations, before the taxes that were 
raised on the American people recently--a few weeks ago--we had 
a deficit of about $1 trillion. After those tax increases, we 
have a deficit of about $1 trillion. Does anyone disagree with 
that?
    Mr. Casey, do you agree that it had no significant impact 
on our deficit?
    Mr. CASEY. I agree.
    Mr. GRIFFIN. Mr. Hoagland.
    Mr. HOAGLAND. I agree that the deficit for fiscal year 2013 
will still be about $1 trillion.
    Mr. GRIFFIN. Even after the tax increases?
    Mr. HOAGLAND. Yes. But of course those tax increases phase 
in over a longer period of time.
    Mr. GRIFFIN. If you take $60 billion a year and subtract it 
from a little over $1 trillion, you are still right at $1 
trillion. Correct, Mr. Foster?
    Mr. FOSTER. That is the simple math, sir.
    Mr. GRIFFIN. And Mr. Johnson.
    Mr. JOHNSON. No, Congressman. Look, the way that you have 
discussed the budget and the way you argue about the budget 
is over a 10-year timeframe. Those were insufficient, I agree, 
to completely address the budget issue. I supported larger, 
stronger strengthening of revenue--not immediately, though. 
Phasing it in over time is the right way to do it. You don't 
want to shock the economy too much. Phasing it in over 10, 15 
years.
    Mr. GRIFFIN. I am running out of time. The bottom line is, 
I understand you look at things over 10 years. And we all know 
that in 10 years, there is no control over what is going to be 
spent and what is going to be coming in. But the bottom line 
is, the tax increases we got with no cuts did nothing to impact 
the deficit of any significance--it is still about $1 trillion. 
You could say it is $910 billion. Okay. It is still about $1 
trillion. The bottom line is, we still are about $1 trillion in 
the red every single year. And I will be waiting with optimism 
to see the President's budget.
    Again, thank you all for coming today. And I yield back.
    Chairman CAMP. Mr. Hoagland, in your 33-plus years of 
dealing with budget issues in the Senate on the Senate Budget 
Committee and in other areas, have you ever known in the 
history of our country of four successive years of trillion-
dollar deficits?
    Mr. HOAGLAND. No, sir.
    Chairman CAMP. So it is an unprecedented position we are 
in, in terms of the annual deficits?
    Mr. HOAGLAND. I never thought I would see trillion-dollar 
deficits.
    Chairman CAMP. And the debt--and I tend to use gross debt 
as a percentage of GDP.
    Have you ever seen the gross debt as a percentage of GDP at 
the level that we are seeing right now?
    Mr. HOAGLAND. Only after World War II. But then we owed it 
to ourselves, and we brought it down rather substantially 
there.
    Chairman CAMP. So since World War II, the level of GDP----
    Mr. HOAGLAND. Has averaged about 40 percent.
    Chairman CAMP. Okay. And I was on the President's fiscal 
commission. And at that time, it was about 90 percent. Now it 
is over 100 if you look at gross debt. And we had a 
presentation there by doctors--it was by Drs. Carmen Reinhart 
and Kenneth Rogoth--who indicated that a country's economic 
growth would--and I am using their words--deteriorate markedly 
when its debt-to-GDP ratio was above 90. And obviously, we are 
at that point now.
    Mr. HOAGLAND. Correct.
    Chairman CAMP. What impact do you believe that will have on 
the economic growth and job creation in the United States in 
the future?
    Mr. HOAGLAND. I believe, again, that has a very negative 
impact upon the growth of this country going forward in terms 
of our credit rating around the world, in terms of our economic 
growth pattern will be negatively affected by that level of 
debt to GDP. While it is not a good example, all we have to do 
is look at what is happening in Europe and see the consequences 
that that has had over there.
    Chairman CAMP. We recently got a Fitch ratings report. And 
I am quoting from their report that said, ``In the absence of 
an agreed and credible medium-term deficit reduction plan that 
would be consistent with sustaining the economic recovery and 
restoring confidence in the long-run sustainability of the U.S. 
public finances, the current negative outlook on the AAA rating 
is likely to be resolved with a downgrade later this year, even 
if another debt-ceiling crisis is averted.''
    How do you think the financial markets and the broader 
economy would react if Congress simply increased the debt limit 
and there was no credible commitment to addressing the current 
fiscal situation, as we have just discussed?
    Mr. HOAGLAND. Mr. Chairman, I think that the debt limit 
bill does not control or limit the ability of the Federal 
Government to run deficits or incur obligations. But I do 
believe there is a limit on our ability to pay obligations. So 
I think that while this is not the perfect solution, at least 
you do have the opportunity here by--if you simply raised it 
without some form of a process, which I hope would come about 
through going back to regular order, I think that would be 
looked upon very favorably. But if you simply raised it with no 
process involved, I think that would be looked upon negatively 
by the market.
    Chairman CAMP. All right.
    Dr. Foster, any comment on that?
    Mr. FOSTER. I think that is exactly right. The markets are 
looking. They understand something of Washington and how 
Washington works. They understand there are only a few moments 
in a given year or 2- or 4-year period in which we have a 
forcing moment, a time when Congress must actually do 
something. And the critical value of the debt limit and the 
debate around the debt limit that is a simple enough issue that 
the American people can understand it. The budget is 
complicated. They don't understand the budget. They do 
understand debt. They have debt. They understand. They don't 
understand trillions. But the concept, they get.
    The second value is that it is a forcing moment. It forces 
Congress to act when the regular order of the budget process 
has failed. Mr. Hoagland talked about this--and I completely 
agree with him regarding the importance of the regular order. 
But Congress has a regular habit of ignoring the regular order. 
This is a forcing moment, and it is a critical time to take 
action.
    Chairman CAMP. And Mr. Hoagland, again, given your 
experience on budget, we have had other short-term extensions 
of the debt limit in the history of this country, have we not?
    Mr. HOAGLAND. Yes, we have a number of times. Looking it 
up, I think it was at least--in my career up here, we have had 
it at least seven or eight times, we have had a short-term 
limited increase.
    Chairman CAMP. And we have also had extensions of the debt 
limit that have had policy reforms attached to them as well, 
have we not?
    Mr. HOAGLAND. Oh, I think the most important one--I said my 
first experience here was with the 1985 Gramm-Rudman-Hollings 
Act, which was tied to debt limit increase because we were 
going over $2 trillion.
    Chairman CAMP. So when the President and many Democrats 
call for a so-called clean increase in the debt ceiling, which 
they mean has no other reforms or other proposals attached to 
that or changes in spending behavior, how do you see the path 
forward? And what should advocates of lower spending expect 
from the Administration? Or other budget reforms that might be 
attached with it? You mentioned Gramm-Rudman-Hollings. And I 
would like you to comment and then Dr. Foster.
    Mr. HOAGLAND. As I say, I don't think the debt limit bill, 
per se, it controls spending. It controls--it is a limit. But I 
do think that there are other tools. And they are not pretty. 
But you do have a sequester. I would certainly argue--and this 
is just myself speaking, not BPC--that you would look at the 
sequester as something that really does reduce spending. And I 
would also argue that one thing to do there would be to modify 
the sequester so that it actually does affect more than just 
the discretionary portion of the budget and maybe, and with 
some trepidation, also tax expenditures.
    Chairman CAMP. All right. Dr. Foster.
    Mr. FOSTER. Yes, sir. As I mentioned, the debt limit is a 
forcing moment. And one of the things it can force is a shift 
in budget processes to make them more effective, to get 
Congress to take actions that it might not otherwise take under 
the regular order as it then stands, Gramm-Rudman-Hollings 
being the great example.
    One of the things we should be looking for in this current 
debate is, how do we tighten up, make more rigorous the budget 
process regular order so Congress takes it seriously and then 
puts forward the kinds of resolutions and reconciliation bills 
that Mr. Hoagland was talking about?
    Chairman CAMP. Thank you.
    And Mr. Casey, I just want to clarify this point before we 
adjourn. The Constitution grants Congress the sole authority 
over fiscal powers to tax, spend, and borrow; is that correct?
    Mr. CASEY. Absolutely correct.
    Chairman CAMP. And because the power resides in Congress, 
the debt limit is not actually a limitation on the Executive's 
power to borrow; is that correct? It is the statute that 
contains the debt ceiling is actually a grant of authority to 
the President.
    Mr. CASEY. It certainly can be read that way. I mean, it is 
a limit on the amount that Congress is permitting the Executive 
to borrow.
    Chairman CAMP. But it would be authority he would not 
otherwise have----
    Mr. CASEY. Absolutely. Absolutely. Without it, he cannot 
borrow a nickel.
    Chairman CAMP. So when that authority runs out, it is 
actually the Constitution of the United States that is 
preventing the President from attempting to borrow on the 
credit of the United States?
    Mr. CASEY. Yes.
    Chairman CAMP. All right. Thank you.
    I want to thank all of our witnesses and certainly the 
Members for participating in this hearing today.
    And with that, this hearing is now adjourned.
    [Whereupon, at 4:36 p.m., the Committee was adjourned.]
    [Submission for the Record follows:]





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