[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
WHY DEBT MATTERS
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
MARCH 25, 2014
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-71
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
GARY G. MILLER, California, Vice MAXINE WATERS, California, Ranking
Chairman Member
SPENCER BACHUS, Alabama, Chairman CAROLYN B. MALONEY, New York
Emeritus NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York BRAD SHERMAN, California
EDWARD R. ROYCE, California GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma MICHAEL E. CAPUANO, Massachusetts
SHELLEY MOORE CAPITO, West Virginia RUBEN HINOJOSA, Texas
SCOTT GARRETT, New Jersey WM. LACY CLAY, Missouri
RANDY NEUGEBAUER, Texas CAROLYN McCARTHY, New York
PATRICK T. McHENRY, North Carolina STEPHEN F. LYNCH, Massachusetts
JOHN CAMPBELL, California DAVID SCOTT, Georgia
MICHELE BACHMANN, Minnesota AL GREEN, Texas
KEVIN McCARTHY, California EMANUEL CLEAVER, Missouri
STEVAN PEARCE, New Mexico GWEN MOORE, Wisconsin
BILL POSEY, Florida KEITH ELLISON, Minnesota
MICHAEL G. FITZPATRICK, ED PERLMUTTER, Colorado
Pennsylvania JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia GARY C. PETERS, Michigan
BLAINE LUETKEMEYER, Missouri JOHN C. CARNEY, Jr., Delaware
BILL HUIZENGA, Michigan TERRI A. SEWELL, Alabama
SEAN P. DUFFY, Wisconsin BILL FOSTER, Illinois
ROBERT HURT, Virginia DANIEL T. KILDEE, Michigan
MICHAEL G. GRIMM, New York PATRICK MURPHY, Florida
STEVE STIVERS, Ohio JOHN K. DELANEY, Maryland
STEPHEN LEE FINCHER, Tennessee KYRSTEN SINEMA, Arizona
MARLIN A. STUTZMAN, Indiana JOYCE BEATTY, Ohio
MICK MULVANEY, South Carolina DENNY HECK, Washington
RANDY HULTGREN, Illinois
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
C O N T E N T S
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Page
Hearing held on:
March 25, 2014............................................... 1
Appendix:
March 25, 2014............................................... 55
WITNESSES
Tuesday, March 25, 2014
Bernstein, Jared, Senior Fellow, the Center on Budget and Policy
Priorities..................................................... 15
Cote, David M., Chairman and Chief Executive Officer, Honeywell
International.................................................. 10
Holtz-Eakin, Douglas, President, the American Action Forum....... 13
Rivlin, Hon. Alice M., Senior Fellow, Economic Studies, the
Brookings Institution.......................................... 12
APPENDIX
Prepared statements:
Bernstein, Jared............................................. 56
Cote, David M................................................ 65
Holtz-Eakin, Douglas......................................... 89
Rivlin, Hon. Alice M......................................... 97
Additional Material Submitted for the Record
Fitzpatrick, Hon. Michael:
Letters from 8th grade students Tia Farese, Elyse McMenamin,
and Alexander Frischmann discussing their concerns about
the national debt.......................................... 103
List of additional 8th grade students who submitted letters.. 109
WHY DEBT MATTERS
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Tuesday, March 25, 2014
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:07 a.m., in
room 2128, Rayburn House Office Building, Hon. Jeb Hensarling
[chairman of the committee] presiding.
Members present: Representatives Hensarling, Bachus,
Capito, Garrett, Neugebauer, McHenry, Bachmann, Pearce, Posey,
Fitzpatrick, Luetkemeyer, Huizenga, Duffy, Hurt, Grimm,
Stivers, Stutzman, Mulvaney, Hultgren, Ross, Pittenger, Barr,
Cotton, Rothfus; Waters, Maloney, Capuano, Clay, Lynch, Scott,
Green, Cleaver, Ellison, Perlmutter, Himes, Carney, Foster,
Kildee, Delaney, Sinema, Beatty, and Heck.
Chairman Hensarling. The committee will come to order.
Without objection, the Chair is authorized to declare a
recess of the committee at any time.
This hearing is entitled, ``Why Debt Matters,'' and is the
first of a series of hearings I expect our committee to hold on
the subject of the pending national debt crisis.
I have one short announcement. If Members have not seen the
announcement, Secretary Lew was scheduled to testify before our
committee tomorrow on his annual state of the international
financial system testimony. His office has announced that he is
having minor surgery today. We wish him well. He expects to
recoup for the rest of the week and be back at Treasury next
week, so it is our hope that we can reschedule Secretary Lew
sometime in the next several weeks prior to the Easter break.
I now recognize myself for 4 minutes to give an opening
statement.
Recently, I saw in the newspaper a headline that read,
``Debts, deficits, once a focus, fade from the agenda.'' Shame
on us if we allow that headline to prove accurate.
In the last 6 years, we have accumulated more national debt
than we did in our Nation's first 200 years. We are
experiencing debt-to-GDP ratios not seen since the aftermath of
World War II. That level of debt was episodic and temporary.
Today's is structural and unsustainable.
As a veteran of the supercommittee, Simpson-Bowles, and now
Chair of this committee, my laptop is regrettably full of
reports describing our debt as unsustainable. Yet denial,
justification, and inaction continue to rule the day.
We have had many sobering warnings that our Nation is
headed for a crisis. Renowned economics writer Robert Samuelson
has written that our failure to solve this dilemma could
``trigger an economic and political death spiral.'' Erskine
Bowles, co-chairman of President Obama's fiscal commission
said, ``This debt is like a cancer. It is truly going to
destroy the country from within.''
We need not look much further than Detroit or Greece to see
just how hurtful and harmful a debt crisis can be. In Greece,
according to the latest official report, the unemployment rate
is almost 30 percent. With unemployment so high, according to
press reports, many college graduates have had to turn to
subsistence farming in the country. Closer to home, a report
from Detroit last year indicated that approximately 40 percent
of the City's streetlights did not function. Only a third of
the City's ambulances were working. And approximately 78,000
buildings were vacant.
Will our Nation as a whole ever experience a debt crisis
comparable to Detroit or Greece? I do not believe so, but I do
not know for sure. And I am greatly troubled by the fact that
there are few instances in world history of republics existing
much beyond 200 years, and most most met their demise through
some type of fiscal crisis.
But unsustainable levels of debt are not just the stuff of
apocalyptic nightmares for some yet to be born and unknown
future generation of Americans. No, unsustainable levels of
debt are harming our country today as we speak. Just look at
our lackluster economy.
Bernie Marcus, former chairman of Home Depot, spoke for
many job creators when he said, ``If we don't lower spending
and if we don't deal with paying down the debt, we are going to
have to raise taxes. Even brain-dead economists understand that
when you raise taxes, you cost jobs.''
Small business owners all over America feel likewise. As
one of them told me, ``Jeb, I know somehow, someway, I am going
to have to pay for all this debt, so now is not the time that I
am going to buy a bunch of new equipment or hire a bunch of
folks.''
The national debt is clearly keeping people unemployed and
underemployed. And it is estimated that we will spend $233
billion this year on interest payments alone. That $233 billion
is more than 7 times larger than the requested annual budget
for the National Institutes of Health. Let us reflect upon all
of the childhood cancer studies going unfunded today because of
the national debt.
Regrettably, the situation will get worse. The
Congressional Budget Office projects as much as $630 billion a
year of additional interest payments to be added to the debt.
And interest payments on the debt are cannibalizing our
discretionary budget, including our national defense.
As interest rates rise, it is not just the Federal budget
that will be squeezed. It will be the family budget, as well,
especially as more Federal borrowing crowds out private
borrowing on everything from credit cards to mortgages to
student loans. In short, it has an adverse impact on almost
every issue within this committee's jurisdiction.
And that is why, as chairman, I am launching a series of
hearings to be focused on our pending debt crisis. There is
much at stake. We can no longer allow the debt-deniers among us
to mask the threat or to change the subject. I believe any
reasonable examination of history and economics will show that
we are, indeed, headed for a debt crisis. It is the most
foreseeable crisis in our Nation's history.
As Members of the House of Representatives, we can
certainly disagree about the solutions to avert the crisis, but
we should unanimously agree that debt matters and that debt
matters today.
I now recognize the ranking member, Ms. Waters, for 5
minutes for an opening statement.
Ms. Waters. Thank you, Mr. Chairman. I ask for unanimous
consent to speak out of order for 1 minute to recognize--
Chairman Hensarling. Without objection.
Ms. Waters. --the distinguished services of a member of the
committee staff. Thank you very much.
I would like to take this time to express my sincere
gratitude for the dedication offered by Lawranne Stewart to our
committee since 2001. She has offered her expertise in all
facets under the committee's jurisdiction to members of this
committee, including Ranking Member LaFalce. Then, we had
Chairman Barney Frank and myself.
Over the course of her service, she has played a lead role
in crafting key reforms, not the least of which is the Dodd-
Frank Wall Street Reform and Consumer Protection Act, and I am
pleased to say that she will be continuing her excellent record
of public service at the Commodity Futures Trading Commission.
Lawranne, we wish you all the best. Please stand for a
moment so everybody can see you.
[applause]
Ms. Waters. Thank you very much, Mr. Chairman, for
scheduling today's hearing to discuss the important role that
fiscal policy plays in contributing to full employment and
economic growth.
As we continue to climb out of the worst recession since
the Great Depression, it is essential that we get our fiscal
policies right and that we hold firm our commitment to
promoting growth and reducing economic inequality. And while my
colleagues on the other side of the aisle endlessly use the
national debt as an excuse to slash funding for important
government programs, the fact remains that putting America back
to work in an economy that works for everyone is undoubtedly
the most effective and efficient way to reduce our debt and
deficit.
With that in mind, I am pleased to see that many of the
witnesses here agree that Congress can best tackle the long-
term deficit and national debt by pursuing short-term increases
in discretionary fiscal stimulus. I similarly urge such an
approach and would suggest the chairman consider similar
proposals in the President's Fiscal Year 2015 budget request.
As we have learned in recent years, both at home, as well
as in Europe, government austerity during a recession such as
the sequester impedes growth. Unfortunately, we have learned
this lesson the hard way. In contrast to previous recessions
when the government provided much-needed fiscal stimulus, the
recent drastic cuts to discretionary programs have been a
headwind to our full recovery.
Regardless, our progress toward shrinking the deficit in
recent years leads me to believe that the timing of this series
of hearings seems to be more inspired by politics than
enhancing good policy. Especially given the fact that since
President Obama took office, the budget deficit has fallen from
10 percent of GDP in 2009 to 3 percent, which is the average
size of the deficit over the past 40 years. President Obama's
new budget proposal will help grow the economy even faster,
reducing the deficit to 1.6 percent of GDP by the year 2024.
As further cuts are made to the deficit they must be
balanced with spending priorities that boost growth and fulfill
our moral obligation to those in need. The social safety net
has proven to be a crucial tool in lowering poverty rates by
half. Pretending that cutting these programs would somehow
magically lift people out of poverty is neither sensible nor
fair.
This committee should also advocate for a strong and stable
financial system that protects consumers and safeguards the
savings of working Americans. Doing so requires full funding
for our Nation's regulators, the Securities and Exchange
Commission (SEC), and the Consumer Financial Protection Bureau
(CFPB), to ensure that the financial services industry adheres
to the rules of the road. And we should provide stability to
our Nation's business community by quickly reauthorizing the
Terrorism Risk Insurance Act, known as TRIA, and the Export-
Import Bank, both of which increase employment and investment.
We should support initiatives to reduce poverty by fully
funding HUD's programs that provide public housing, work to end
homelessness, and preserve access to affordable rental housing.
And this committee should focus on sensible housing finance
reform, not the radical remake of our housing finance system as
called for by the PATH Act.
And finally, Mr. Chairman, this Congress must avoid self-
inflicted wounds that have become all too commonplace, like the
recent Republican shutdown of the government, threats of
defaulting on our debts, and the sequester, all of which hurt
economic growth, slowed job creation, and widened the gap
between rich and poor. I think we can do better.
I thank you, Mr. Chairman, and I yield back the balance of
my time.
Chairman Hensarling. The gentlelady yields back.
The Chair now recognizes the chairman emeritus of the
committee, Mr. Bachus, for 1 minute.
Mr. Bachus. Thank you. I appreciate the panelists being
here.
I think we all agree that some of the measures that
Congress has taken have helped in the short term in funding our
deficit, but in the long term I think we would all agree that
the debt is a threat to our economic growth, that it is not
sustainable, and that it actually is, as the Chairman of the
Joint Chiefs of Staff, Michael Mullen, says, a threat to our
national security.
Now, I would say that Chairman Bernanke probably has come
up with the best advice, and he says we have to reform our
entitlement programs--Social Security, Medicaid, and Medicare--
and that is probably the biggest step, and he said that if we
act immediately, with long-term structural changes that don't
even have to take effect now, that it would pay immediate
benefits. He has also said that has to come from Congress and
the Executive Branch. That is not monetary policy by the Fed.
I think my time has expired, but I think it is simply
whether Congress and the President have the will to act on our
entitlement program. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Massachusetts,
Mr. Lynch, for a minute and a half.
Mr. Lynch. Thank you, Mr. Chairman.
The focus of today's hearing, ``Why Debt Matters,'' is
certainly an important topic, and I thank the chairman for
raising it. If the purpose of this hearing is to make the point
that our national debt is on an unsustainable long-term
trajectory, and we need to craft reforms to address the main
drivers of that debt, I think you would find unanimous support
for that proposition on this committee, in the House, and,
indeed, in all of Congress.
What makes this a challenging topic is not that we disagree
about whether debt is a serious threat. It is that we
fundamentally disagree about the best way to reduce our long-
term debt. Sequestration, which was the result of a deal cut to
defuse a debt limit showdown in August of 2011, has
significantly slashed domestic discretionary spending, slowing
the growth of the U.S. debt, and our deficits have
correspondingly declined from $1.4 trillion to a projected $514
billion in this fiscal year. And Congressional Budget Office
projections show that our deficit will be about 2.6 percent of
GDP in the next fiscal year.
But while this deficit reduction is important, it has been
accomplished in a way that is in itself unsustainable and
dangerous over the long term. We cannot simply cut ourselves to
prosperity, and we certainly can't achieve a sustainable fiscal
path when we attempt to balance our budget by slashing programs
that invest in our future, programs like Head Start, medical
research, housing programs, and infrastructure.
I look forward to working with my colleagues on both sides
of the aisle to find a solution to our fiscal challenges. And I
look forward to hearing the thoughts of the witnesses about how
we can best reach one of those solutions. Thank you, Mr.
Chairman, and I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from New Jersey, the
chair of our Capital Markets Subcommittee, Mr. Garrett, for 1
minute.
Mr. Garrett. Thank you, Mr. Chairman. I would like to begin
by thanking you for holding this hearing on our Nation's
unsustainable fiscal path. I would also like to thank all of
the witnesses for appearing today, as well.
It is fitting that this hearing takes place as the House
Budget Committee is preparing the Fiscal Year 2015 budget
blueprint. Basic math dictates that you cannot fix the debt
problem until you get your budget under control. As many have
long said, we need a balanced budget plan to prevent further
dipping into the red.
Our Nation has long enjoyed something akin to an ultra-
platinum credit card status. Our credit limit is continually
increased. Interest rates remain very low, at so-called
introductory promotional levels. However, we know this deal is
too good to be true. At some point, if we remain on our current
course, reality will set in, and the bill will become due.
So it is my hope that this hearing will underscore the
fiscal threats on the horizon, that the horizon is not too far
away, so that the American people will recognize the urgency of
the situation and, most importantly, this Congress will, as
well.
With that, I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Colorado, Mr.
Perlmutter, for 1 minute.
Mr. Perlmutter. Thanks, Mr. Chairman.
I think today's hearing should be titled, ``Why Revenue
Matters.'' And there are two sides to a balance sheet--we all
know that--the expense and revenue. And this requires us to
consider both of these, not just the expense side, and we know
that when President Clinton left office, we had a budget
surplus. Revenues exceeded expenses.
But due to two wars, two tax cuts, and a crash on Wall
Street, all under the Bush Administration, we added trillions
to our national debt. Now, thanks in large part to the efforts
of the Obama Administration, our economy is recovering from the
depths of the worst recession since the Great Depression.
So I appreciate the panelists being here today, and I thank
you for your work on trying to look at both sides of the
ledger, not just the expense side or the debt side, because it
takes both things. Our revenue is lower now than it has been in
40 years in terms of a percentage of GDP. We need to have both
sides in sync. We have to watch our expenses, but we have to
have revenue for the priorities of this Nation. And I thank you
for your service and your testimony today.
I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Texas, the
chairman of our Housing and Insurance Subcommittee, Mr.
Neugebauer, for 1 minute.
Mr. Neugebauer. Thank you, Mr. Chairman, for holding this
important hearing titled, ``Why Debt Matters,'' talking about
the Nation's excessive spending and debt, and how it impacts
and impairs the Americans' confidence in the future.
One of the things that I do as I travel around the country
and around my district is, when I am in the audience, I ask
everybody in the room this question: How many people in here
are living a bigger, more prosperous life than their parents
and their grandparents? And almost everybody raises their hand.
The next question I ask them is, how many people in this
room think that if we keep spending and borrowing at these
excessive amounts that your children and your grandchildren
will have a bigger and more prosperous life than you do? Nobody
raises their hand.
You see, what is going on right now is with all of this
spending and borrowing, we are mortgaging the future of our
children and our grandchildren, and the people who are in this
generation today realize it. And it causes a lot of
uncertainty, uncertainty with families, uncertainty with
businesses, and so debt does matter.
And, Mr. Chairman, I am so glad that you are holding this
hearing, because I think it could be one of the most important
hearings going on, on the Hill today. And with that, I yield
back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Connecticut,
Mr. Himes, for 2 minutes.
Mr. Himes. Thank you, Mr. Chairman. And thank you for
holding this hearing. I would like to thank the witnesses who
are here who have spent years now, I think, advising this
Congress on the challenges that we face with respect to our
fiscal sustainability.
I am actually very hopeful that we might have a good
hearing today in which we discuss this in an honest fashion,
where we acknowledge that very significant progress has been
made in the last 5 years against an unsustainable budget.
Almost $4 trillion by some estimates found that we will
acknowledge that has not come free, that the workers at
Sikorsky in my district, that people who rely on food stamps,
that our infrastructure in this country has suffered
dramatically because of those choices. And I hope that we will
acknowledge that the fix here is actually not that challenging
mechanically, that if we just find some targeted cuts and some
egregious preferences in the tax code, we could get there on
the current budget, and that if we are willing to do the hard
work to make Medicare, Social Security, and Medicaid
sustainable in an equitable way in the future, we will have
solved this problem.
No topic, of course, activates the moral high dudgeon of my
colleagues quite as much as this one, and I would like to just
offer a couple of thoughts, having spent a lot of time in rooms
with the witnesses. Number one, if you can't agree that
defense, where we currently outspend all of our conceivable
enemies combined by a factor of 4 to 1, if you don't see that
as an opportunity to reduce spending, you are not serious. If
you can't find a single tax preference in the code to
eliminate, you are not serious. If you voted against raising
the debt ceiling and preserving the full faith and credit of
this country, you are not serious. If you don't acknowledge
that Medicare and Social Security in the long run need some
equitable reform, you are not serious about this conversation
we are having today.
I hope we can be serious, because this is important. Let's
use this to continue this discussion, not to pillory the
President, not to score partisan points, not to suggest that it
is my way or the highway.
Mr. Chairman, if I may close with a quote from your
editorial this morning in the Dallas News: ``This is America.
We can and must do better.''
I yield back the balance of my time.
Chairman Hensarling. I am always happy to yield the
gentleman more time if he wishes to quote the chairman.
[laughter]
The Chair now recognizes the gentleman from Illinois, Mr.
Hultgren, for 1 minute.
Mr. Hultgren. Thank you, Mr. Chairman.
Our Nation faces a massive debt crisis, as our debt
surpasses $17.5 trillion, as we can all see, or around $55,000
per person, and that is not to mention my home State of
Illinois' debt of almost $25,000 more per person.
Unfortunately, many of our Nation's policymakers are
ignoring this crisis, despite its real consequences for
Illinoisans and Americans. This crisis translates into higher
interest rates as we spend more money on interest to service
the Federal debts and less, for example, on national defense
and vital services.
It also hurts working families, as mortgage costs go up and
companies pass their increased borrowing costs onto consumers
who pay more for daily staples of life and life becomes less
affordable.
And make no mistake. This debt crisis is a spending crisis.
I have four children, and I refuse to stand by while Congress
sacrifices their future and that of my constituents because it
didn't address our spending addiction or place our entitlements
system on a sustainable footing. That is why I am looking
forward to this hearing.
Thank you, Mr. Chairman. I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now yields 30 seconds to the gentlelady from Ohio,
Mrs. Beatty.
Mrs. Beatty. Thank you, Mr. Chairman and Ranking Member
Waters. And thank you to the witnesses for being here.
Today's debate, as you have heard, is about how to balance
the budget, spending, and taxation with that of future
obligations and expectations. Although it seems that Democrats
and Republicans agree that increasing the public debt is
unsustainable in the long term, the disagreement always comes
back to how to achieve the same goal of reaching a balanced
budget.
I tend to believe that there is a need to address this
problem from both sides of the equation by increasing the
revenue and cutting where appropriate.
Thank you.
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the gentleman from Florida, Mr.
Ross, for 1 minute.
Mr. Ross. Thank you, Mr. Chairman, for calling this
important hearing.
In these discussions, we toss around a lot of numbers, like
the fact that we are over $17.5 trillion in debt, but what do
these numbers really mean for Americans? Let me tell you.
Young families in central Florida are struggling and
sacrificing to make ends meet under the burden of high taxes
and slow economic recovery. Every day I receive letters and
phone calls from constituents I serve telling me about their
financial struggles in this economy.
The average family, in my home of Polk County, makes
$37,000 a year. Yet if you divided up the country's debt, the
amount of debt that each taxpayer owes would be $151,000 a
year. That is more than 4 times their annual salary.
These families are struggling already, struggling to get
jobs, struggling to make ends meet for basic necessities like
food and electricity. In 10 years, these same families will
continue to struggle, even more so if we fail to enact
meaningful spending reforms. Federal programs have been
arbitrarily expanded without improving the efficiency or
effectiveness of taxpayer dollars. The solution isn't spending
more money. The solution is spending money more wisely.
Republicans aren't looking simply to eliminate lifetime
programs. We are looking to solutions and reforms to very real
problems with potentially large consequences for inaction.
I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Kentucky, Mr.
Barr, for 1 minute.
Mr. Barr. Thank you, Mr. Chairman. I want to thank you for
calling this important hearing and refocusing all of us on the
consequences of our massive and growing Federal debt. Like you,
I reject the premise that concern about the debt is fading. As
I travel my district in central and eastern Kentucky, people
consistently tell me that restoring fiscal responsibility is
their top priority.
And the reason is simple: People in my district are smart.
They know it is a problem that the Federal Government spends
significantly more than it takes in. They know that
Washington's spending problem only gets worse the longer we
delay honestly confronting it. And they know that future
generations will have to work longer and harder in order to
receive less as they shoulder the burden of debt that our
Federal Government is now creating.
In addition to reforming unsustainable mandatory spending
programs, which are crowding out critical investments in
education, medical research, transportation, and national
security, our focus needs to be on durable, long-term economic
growth and job creation. And we cannot create that job creation
and growth if we are in a debt crisis that automatically
imposes austerity on the American people.
I yield back the balance of my time.
Chairman Hensarling. The time of the gentleman has expired.
We will now turn to our panel of witnesses. First, Mr.
David Cote is the chairman and CEO of Honeywell International,
where he has served for 12 years. Prior to his tenure at
Honeywell, Mr. Cote held positions at other manufacturing
companies, including 20 years at GE.
Mr. Cote was appointed by President Obama to serve on the
National Commission on Fiscal Responsibility and Reform, also
known as the Simpson-Bowles Commission. He serves on the
Steering Committee of the Campaign to Fix Debt, a bipartisan
effort. He serves as the vice chairman of the Business
Roundtable, and holds a bachelor's degree from the University
of New Hampshire.
Second, Dr. Alice Rivlin is clearly no stranger to our
committee or Capitol Hill. She is a senior fellow in the
economic studies program at the Brookings Institution. She also
served on the Simpson-Bowles Commission. Prior to that, Dr.
Rivlin has served in a number of very important roles in public
service, including Director of the Congressional Budget Office,
Director of the Office of Management and Budget, and Vice Chair
of the Federal Reserve Board of Governors. She holds a Ph.D. in
economics from Harvard.
Third, Dr. Douglas Holtz-Eakin serves as the president of
the American Action Forum. Like Dr. Rivlin, Dr. Holtz-Eakin
previously served as Director of the Congressional Budget
Office. He also served on the Financial Crisis Inquiry
Commission in 2009. He earned his Ph.D. in economics from
Princeton.
And last but not least, Dr. Jared Bernstein is a senior
fellow at the Center on Budget and Policy Priorities. From 2009
to 2011, Dr. Bernstein served as Chief Economist and Economic
Advisor to Vice President Biden. Dr. Bernstein currently sits
on the Congressional Budget Office's advisory committee. He
earned his Ph.D. in social welfare from Columbia University.
Without objection, ladies and gentlemen, your written
statements will be made a part of the record. Each of you has
testified before Congress before, so hopefully, you recall the
green, yellow, and red lighting system, and I would
respectfully ask that each of you observe the 5-minute rule.
And due to the acoustics of our room and the less-than-
desirable AV equipment, please pull the microphone very, very
close to you as you speak.
Mr. Cote, you are now recognized for 5 minutes.
STATEMENT OF DAVID M. COTE, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, HONEYWELL INTERNATIONAL
Mr. Cote. Chairman Hensarling, Ranking Member Waters, and
distinguished members of the committee, it is my pleasure to
appear before you today to discuss the importance of our long-
term debt, and thank you for doing this.
As a country, we have a lot of strengths, but the world
isn't standing still. We need to recognize: one, that we are in
a different global economy than we were 20 years ago; two, that
the global economy will change substantially over the next 20
years; and that three, it will move forward with us or without
us.
The chart above shows that in 1990, the United States
represented 27 percent of world GDP. By 2010, it was 26
percent. And over the next 20 years, the percentage declines to
24 percent. Other developed countries--Western Europe, Japan,
Canada, et cetera--declined from 50 percent in 1990 to 41
percent in 2010 and will decline further to 29 percent of by
2030. And importantly, high-growth regions, or what some call
developing economies, have grown from 23 percent of world GDP
to 33 percent in 2010 and will continue growing to 47 percent
of world GDP by 2030.
In other words, what we think of as developing countries in
20 years will account for almost half of world GDP. That is a
big deal. If we are going to compete and win in this new world,
we need to have an American competitiveness agenda.
There are eight areas where we can make a difference now to
ensure our future competitiveness: long-term debt;
infrastructure; math and science education; immigration; tort
reform; patents; energy; and free and fair trade. And for the
purpose of today's hearing, I am going to focus on the long-
term debt.
We should look at our debt, our spending, and our tax
profile in terms of increasing global competitiveness. While we
can put our heads in the sand for a few years and talk about
declining deficits, the demographic freight train caused by
Baby Boomers is still coming. If we just focus on this decade,
on this chart, we can probably argue there is no issue, even
though we are at a debt level comparable to some of the
troubled European countries. If we expand this to the next
decade, though, we can see it doesn't look as bright.
And, remember, this doesn't predict any recessions. In the
course of the next 20 years, there is a good chance of at least
2 or perhaps 3 recessions that will worsen this picture.
Additionally, in 2025, we will be spending $1 trillion a year
just in interest.
So how do you put a trillion dollars into perspective? You
can see on this chart, if you had spent a million dollars a day
since Jesus Christ was born 2,013 years ago, you still would
not have spent a trillion dollars. And that will be our annual
interest bill. It is unconscionable.
To put our debt in further perspective, our debt as a
percentage of GDP is about the worst in our history, only
eclipsed by World War II, when we had a really good reason to
borrow.
Now, for those who think this is just a Wall Street
problem, look at it this way: When 10-year Treasury notes go to
7 percent, and as a result home mortgages go to 10 percent and
car loans to 13 percent, families will have fewer dollars, and
that is a Main Street problem.
In addition to the amount of spending, the composition of
spending changes over the next 10 years, with mandatory
spending on autopilot, going from about two-thirds to three-
quarters of our total budget. Another way to think about it is
that government spending overwhelmingly focuses on transfer
payments, not investment. Transfer payments help perhaps to
equalize distribution, but investment is what grows the pie.
Changes made now can have a big effect in the second decade
and allow people and systems time to adjust so it is much less
onerous. Entitlements need to be reformed and a revenue
increase is needed as a reasonable compromise. Revenue should
be approached through tax code simplification. And Congressman
Dave Camp's efforts to get this effort going should be
applauded.
If we had set out to create a system that was unfair,
confusing, and globally uncompetitive, we couldn't have done
this good a job. We need to rid ourselves of tax expenditures
and significantly reduce rates. Then, we can raise revenue
through a slight increase in those rates.
To compete effectively in this increasingly competitive
stage, we have to have a strong balance sheet. We don't have a
strong balance sheet today. If you want another way to think
about the impact of our debt in this new world, think of it
this way: In 25 years, at current rates, China will eclipse the
United States as the biggest economy in the world. At that same
time, at current projections, U.S. debt will be over 100
percent of GDP. Is that the legacy we want to leave our kids
and grandkids?
There is an economic Olympics going on right now. We can't
just focus on beating the other Americans on the team. We need
to look at all the other teams that are competing, and we have
to beat them. It is important to have a vibrant democracy. At
the same time, we can't let our commitment to democracy evolve
into an excess of discordant pluralism and infighting that
incapacitates our ability to make a collective decision.
I do believe our form of government is the best there is.
We shouldn't wait for a crisis to act on our long-term debt. We
should start acting now.
Thank you.
[The prepared statement of Mr. Cote can be found on page 65
of the appendix.]
Chairman Hensarling. Dr. Rivlin, you are now recognized for
5 minutes.
STATEMENT OF THE HONORABLE ALICE M. RIVLIN, SENIOR FELLOW,
ECONOMIC STUDIES, THE BROOKINGS INSTITUTION
Ms. Rivlin. Thank you, Mr. Chairman.
I, too, am very glad you are holding this hearing. A couple
of years ago, we all seemed obsessed by deficits and debt, and
now the issue has dropped from conversation. People sort of
say, ``Oh, didn't we solve that?'' Well, no, actually, we
didn't.
We still have a very high level of debt in relation to the
size of our economy, and that ratio is increasing, and we still
have a practical problem looming at us. I like to think of it
as a practical problem rather than a crisis. We have the number
of old people increasing dramatically in the next couple of
decades. We have to figure out how to pay for commitments to
older people, especially in health care, and provide other
essential services of government at the same time. We have to
figure out how to increase the productivity of younger people,
people who will be in the workforce, so that it is easy to pay
for government, as well as all the other things we want. I
believe strongly that this practical problem will be solved
only by bipartisan compromise and cooperation across party
lines.
Now, admittedly, the projections look better than they did
back in 2010, when Dave Cote and I were serving with you, Mr.
Chairman, on the Simpson-Bowles Commission. Then, we had a very
fragile recovery, unemployment close to 10 percent, and
deficits around 10 percent of the GDP. Those deficits were
necessary, and we knew they would come down. But the scary part
was that as the economy recovered and resumed normal growth,
this demographic surge would start driving Federal spending up
by the end of this decade.
We were especially worried about Medicare and Medicaid,
because historically, health spending has grown much faster per
capita than GDP. Multiplying those rates of health spending by
more older people would widen the wedge between spending and
revenues, the revenues from our creaky tax system.
Debt was on track to rise faster than the economy could
grow. And all the bipartisan groups, including Simpson-Bowles,
had the same prescription: Don't emphasize austerity right now,
because the economy is fragile, but put in place reductions in
the rate of growth of entitlements and raise more revenue from
our creaky tax system by reforming it.
Now, we have a short-run and a long-run budget outlook that
is a little less scary. The economy is recovering. Deficits
have plummeted. But looking ahead, we still see the rise in the
2020s of the debt faster than the GDP can grow. We bought time
in this recent agreement to work on this practical problem.
But we also have to remember that the improvement in the
projection is due to two factors that may not last: cuts in
nonentitlement spending, especially discretionary spending,
which account for most of the smaller projected debt increase;
and slower assumed increases in health care costs. Both of
those may be temporary.
Yes, debt matters. We have to pay interest on it. We have
been living in a fool's paradise with low interest rates. Debt,
high debt, and high interest payments make us more vulnerable
to foreign holders. They constrain our fiscal policy
flexibility in the future.
And if we don't do something, we might have a debt crisis--
ably described by my colleague on the left--a spike in interest
rates. I don't think that is the most likely consequence. More
likely is slower growth squeezing out public and private
investment.
The practical problem of an aging population is that we
have more dependents and fewer people in the labor force. So we
have two choices, and we have to do both. We can grow the labor
force with immigration and encouraging people to work longer,
or we can invest in productivity of the labor force, modernize
our infrastructure, and upgrade skills. We have to do both.
And I think, Mr. Chairman, it is time to end the blame
game. Stop pointing at the Bush tax cuts or the Obama stimulus.
Those may have played a role in the past, but going forward,
the problem is managing our way through this aging population.
We need both higher growth and a declining ratio of GDP to
debt. That is going to take delivering on slower growth of
entitlements and more revenue from a reformed tax code.
Our system requires compromise and bipartisan cooperation
to get anything serious done. The parties have common long-run
objectives--higher growth and lower debt. The budget truce buys
us some time to work together on how to solve those problems.
[The prepared statement of Dr. Rivlin can be found on page
97 of the appendix.]
Chairman Hensarling. Thank you.
Dr. Holtz-Eakin, you are now recognized for 5 minutes.
STATEMENT OF DOUGLAS HOLTZ-EAKIN, PRESIDENT, THE AMERICAN
ACTION FORUM
Mr. Holtz-Eakin. Thank you, Mr. Chairman, Ranking Member
Waters, and members of the committee, for holding this hearing
and for the privilege of appearing before you today.
In my opening remarks, I will be brief and repeat some of
the dire things that are true about the fiscal outlook and then
emphasize that inaction on the long-term fiscal outlook is not
costless. It harms the structure of the U.S. budget. It
threatens the financial stability of this Nation. It leads to a
situation in which the policy actions necessary to fix it are
more draconian and undesirable. And ultimately, it visits great
costs on the American people, and I would urge the Congress to
begin addressing this problem immediately.
As everyone knows, there is a brief window of stability in
the debt as a fraction of GDP and the deficit as a fraction of
GDP for the next couple of years, but that the fundamental
problem remains and that, as we move forward over the 10-year
budget window, the debt-to-GDP ratio rises continuously and
dramatically in an unsustainable fashion upward.
This is driven primarily by the large mandatory spending
programs, in particular the health programs that Dr. Rivlin
mentioned, and even with above-average revenue, we are going to
have the deficits and debts rise. That is the core problem, and
it leads to some real costs.
The first, which has already been noted, is that mandatory
spending and interest costs rise dramatically. Mandatory
spending rises to be 62 percent of the budget. Interest costs
rise from about 6 percent now to about 15 percent of the budget
in 2024. So now you have 77 percent, almost 80 percent of the
budget locked up in those, and that crowds out everything else
which is in the discretionary accounts, which is everything our
founders would have recognized as the role of government:
national security; infrastructure; and basic research. And the
structure of that budget fundamentally has the legacy programs
of the past crowding out our future. It is unfair to the next
generations, and it is a disservice to those trying to be more
productive in the labor force.
The second thing that happens is that it harms economic
growth right now. This is a contentious issue in the economics
literature, but if you look at the U.S. budget as an investor
thinking about whether to build a factory in the United States
or hire in the United States or expand in the United States,
you have a trajectory that says there are three possible
futures: one, a crisis; two, draconian tax increases to close
the budget gaps; or three, control the mandatory spending
programs.
The first two of those are decidedly anti-growth. It is
simply not a pro-growth strategy to sail straight into a crisis
or to promise the kinds of tax increases that are necessary.
The third is something that needs to be done.
If investors come to the conclusion that number three is
off the table, it will make the United States a completely
inhospitable place to invest and expand. It will harm our
competitiveness, as has been noted, but the chance of that
happening is harming our growth now. How big it is, we don't
know. But taking action can improve the economic outlook and
improve growth in the near term. That is really important.
Failing to do it puts us in a very undesirable situation.
No one knows when such a crisis would actually rise, but for
purposes of illustration in my testimony, we said, what happens
in 2024? Suppose credit markets send the signal to the United
States that this is it, we are going to downgrade you, we have
had enough. Simply to keep the debt-to-GDP ratio constant, not
to get it to come down, but just keep it at 78 percent means
that in that year we have to get about $885 billion in deficit
reduction.
Now, that is not going to come out of the programs that are
the problem. We can't change Social Security, Medicare,
Medicaid, or the Affordable Care Act that fast. It is going to
come out of discretionary spending and sharp tax increases.
That means a 9 percent across-the-board increase in taxes, if
that has half of it. It means a 30 percent across-the-board cut
in discretionary spending, if you put half of it there. These
are draconian policy moves that would harm the structure of our
government and harm the people in the economy.
And that would just keep it there for a year. You would
need another $8 trillion of such actions over the succeeding
decade just to stabilize debt-to-GDP. Waiting puts us in a very
untenable position. It also raises the chance that we get the
sharp spike in interest rates, which turn a mortgage from a 4
percent interest rate to a 14 percent. That means monthly
mortgage payments go from something like $1,200 to $3,600. It
means that car loans go from $350 to $450. Student loans go
from $350 a month to $641 a month.
These are the kinds of things we cannot risk imposing on
the U.S. economy and the families who live and work there. It
is time to take action now to reduce the costs we are seeing in
our budget structure, the drag on the economy, and the risk we
run of financial instability coming from the Federal
Government.
Thank you for the chance to be here, and I look forward to
your questions.
[The prepared statement of Dr. Holtz-Eakin can be found on
page 89 of the appendix.]
Chairman Hensarling. Thank you.
Now, Dr. Bernstein, you are recognized for 5 minutes.
STATEMENT OF JARED BERNSTEIN, SENIOR FELLOW, THE CENTER ON
BUDGET AND POLICY PRIORITIES
Mr. Bernstein. Thank you, Chairman Hensarling and Ranking
Member Waters, for the opportunity to testify before you today.
As we have heard today, it is common for some policymakers to
label our debt as unsustainable. This is only the case if
policymakers fail to undertake further steps to put the debt on
a sustainable path, reinforcing the significant improvements in
recent years. Those steps must involve a balanced fiscal policy
that includes both new revenues and spending cuts, as well as
building on recent progress in slowing the rate of growth of
health care costs.
Increases in the national debt do not automatically signal
a fiscal problem and, in fact, are necessary in special
situations. There have been numerous times in our Nation's
history, times of war and of large market failures like the
recent Great Recession, where temporary expansions of deficit
and debt have been essential to meet the challenges we faced.
In fact, austerity measures that seek to reduce deficits
and debt too quickly undermine the economy's ability to recover
from the downturn, leading to reduced job and wage growth for
the vast majority of households. Historically, the last time
the debt was falling consistently within the latter 1990s, when
strong growth and more balanced fiscal policy contributed to
low deficits, declining debt ratios, and ultimately budget
surpluses. In the 2000s, large tax cuts and weak growth
reversed these fiscal gains. Those tax cuts, most of which were
made permanent in 2012, are clearly implicated as a major
factor driving deficits and debt since they were enacted.
Now, since 2010, policymakers have legislated considerable
financial consolidation, and the budget deficit has fallen very
quickly in historical terms, as we have heard from
Representative Waters. This decline, however, has led to fiscal
headwinds that have significantly slowed economic growth and
hampered the expansion.
In fact, projected 10-year deficits have decreased by $5
trillion since 2010. Now, a bit more than $4 trillion of those
deficit savings have come from legislation, including the
Budget Control Act and other measures. Importantly, 77 percent
of that $4 trillion in deficit savings has come from spending
cuts, meaning only 23 percent are from higher revenues.
Now, these facts have at least two important implications
for policy. First, the oft-cited notion that the current
Administration has been profligate spenders is demonstrably
wrong. Outlays adjusted for inflation and population growth are
up 3 percent relative to 2008, 3 percent, thus including the
significant anti-recessionary ramp-up in 2009. If we go from
2009 to 2013, outlays are down 12 percent.
Second, future fiscal consolidation much be more balanced
with significant contributions from new revenues. The optimal
time to reduce the budget deficit is when private sector
economic activity is generating enough demand to fully utilize
our economic resources, including human capital. With elevated
unemployment, particularly long-term unemployment, weak labor
force participation, only moderate job growth, and large
holdings of investment capital on the sidelines, the economy
still needs fiscal support, not fiscal consolidation.
Expanding unemployment insurance to the long-term
unemployed is warranted as the expiration of extended benefits
at the end of last year occurred, even though the long-term
unemployment rate was significantly above its level at past
expirations. But considering this committee's jurisdiction, a
number of programs that support low- and middle-income
families, as well as the broader economy, have been cut through
the various budget deals noted above, including the
sequestration cuts from the Budget Control Act.
These programs include regulatory functions of the Consumer
Financial Protection Bureau, the government-sponsored
enterprises supported the secondary mortgage market and the
backstop for an affordable 30-year fixed-rate mortgage,
financial oversight to avoid systemic risk, housing support for
veterans, the elderly, and the disabled, rental assistance for
low-income households, and neighborhood stabilization programs
that remove blight, while creating jobs.
Finally, turning to the long term, it is clear that our
long-term debt picture has significantly improved in no small
part due to the deficit savings that have been legislated since
2010 as I referenced. Also, one of the main factors driving the
long-term debt is the intersection of our aging demographics
and the growth of health care costs.
However, in recent years these costs have slowed
significantly thanks, in part, to measures introduced by the
Affordable Care Act, and that, too, has lowered our debt
projections, although as Dr. Rivlin says, we don't know if
these are here to stay.
However, while our debt forecasts are improved, they still
reveal significant pressures with debt projected to exceed 100
percent of GDP before 2040. This projection strongly supports
the need to continue to implement the efficiency-enhancing
measures of the Affordable Care Act, continue to monitor and
build on the recent progress we have seen in health care costs,
and to pursue the balanced fiscal measures that I have
discussed so far.
Thank you very much.
[The prepared statement of Dr. Bernstein can be found on
page 56 of the appendix.]
Chairman Hensarling. Thank you, Dr. Bernstein. And I thank
all of the panelists.
The Chair now yields himself 5 minutes for questions. Dr.
Holtz-Eakin, we have heard much discussion today about a
balanced approach to dealing with the pending debt crisis. I
was struck by your testimony about--assuming GDP levels and
CBO's baseline, the balanced approach in the fiscal
consolidation split evenly between tax increases and spending
cuts would require a 30 percent discretionary spending cut. Do
I read that correctly?
Mr. Holtz-Eakin. That is correct, in 2024.
Chairman Hensarling. Within the 10-year budget window. Dr.
Rivlin, I read a piece recently--perhaps you saw it--from
Robert Samuelson in the Washington Post. Let me quote from it:
``Something strange is happening in Washington. We are slowly
dismantling the Federal Government, even as spending is growing
larger. An aging population and higher health spending
automatically increase budget outlays, which induced the
President and Congress to curb spending on almost everything
else, from defense to food stamps.''
So we have heard many argue about a dichotomy between
addressing the unsustainable debt and spending on certain
discretionary programs, Section 8, LIHEAP, WIC. Is entitlement
spending going to be the blob that ate discretionary
government, Dr. Rivlin?
Ms. Rivlin. Mr. Chairman, I think it already has been. In
my opinion, we have cut discretionary spending to unsustainable
levels, from 8 percent of the GDP, if you believe where it is
going in the CBO projections, to 2.3 percent. I don't know that
we can run our government and do the things that we need to do,
all the things we are agreed we need to do, national defense
and national parks and all that--
Chairman Hensarling. So you would say the national debt
today, as we speak, is harming discretionary government,
including national defense?
Ms. Rivlin. I think that the measures taken to control the
debt have focused on discretionary spending and some other
mandatory programs, which are not the big part of the problem.
We haven't addressed either entitlement reform or tax reform.
We need to do both.
Chairman Hensarling. Mr. Cote, in my opening statement, you
heard me quote the former chairman and founder of Home Depot
about the connection between the debt and jobs and economic
growth. I know the CEO of AutoNation has also said, ``The best
thing that this town could do to help economic recovery become
sustainable is to deal with the deficit and to see tax
reform.''
In my very unscientific survey of speaking to small
businesspeople in the Fifth Congressional District of Texas,
when I ask them what is impeding the growth of your small
business, what is preventing you from hiring more people,
frankly, Obamacare comes up number one, but this is not the
place or the time to have that debate. Other regulations in
general use comes in number two, but I can always tell you, the
debt certainly makes the top five and also comes in three.
I am not asking for you to speak on behalf of Honeywell and
what you do on behalf of the shareholders of Honeywell, but
given your vast business experience from your position at the
Business Roundtable, is the size and unsustainability of our
debt impacting current hiring decisions in America today?
Mr. Cote. The way I would describe it--
Chairman Hensarling. Could you pull the microphone a little
bit closer?
Mr. Cote. The way I would describe it is, I pulled together
our top 300 global leaders at Honeywell every year. And for the
fourth year in a row, the theme of the conference was growing
in a slow-growth economy. And I just don't see us taking the
actions that we need to as a country to get growth above that
2.5 percent to 2.8 percent range. And so far, despite forecasts
from a lot of economists, that is the way it has pretty much
worked.
And when we plan for our own company, we look at it and
say, over the next 3 years, this is the right way to think
about it, because something like the debt, which I think is an
overwhelming issue, just isn't being addressed. So, yes, it
does have an impact, because that is how we plan for a slower
growth economy.
Chairman Hensarling. My time is winding down, and I
occasionally attempt to set a good example, but in the few
seconds I have remaining, if we don't change the course we are
on--and I understand, Dr. Bernstein, I thought it was an
interesting choice of words to say we are not on an
unsustainable path if we basically fix it, again, something is
not broken if we fix it, something isn't dead if we resurrect
it, but at the moment, it is unsustainable.
If we do not change the path we are on, who will be hurt
most, high-income individuals, middle-income individuals, or
low-income individuals? I am already over my time, so, please,
a one-word answer. Low, middle, or high?
Mr. Cote, do you have an opinion on the matter?
Mr. Cote. Yes. My view is it is low-income people who will
be hurt the most.
Chairman Hensarling. Dr. Rivlin?
Ms. Rivlin. Yes, I agree with that.
Chairman Hensarling. Dr. Holtz-Eakin?
Mr. Holtz-Eakin. Yes, low.
Chairman Hensarling. Dr. Bernstein?
Mr. Bernstein. Probably middle- and low-income people.
Chairman Hensarling. Middle and low. My time has expired.
The Chair now recognizes the ranking member for 5 minutes.
Ms. Waters. Thank you very much, Mr. Chairman.
I certainly believe--and I think it has been either said or
alluded to today--that recent increases in the debt held by the
public reflect costs associated with the Bush-era tax cuts, the
wars in Iraq and Afghanistan, and the economic downturn
following the financial crisis.
However, I really don't want to dwell on that. I want to
talk about how we stimulate the economy. Republicans have been
highly critical of the ability to grow the economy through
fiscal stimulus, even in response to a recession. Similarly, my
Republican colleagues have been highly critical of any effort
by the Federal Reserve to stimulate growth.
If we took their advice and eliminated both of these tools,
how would you expect the economy to fare through the business
cycle or through a devastating downturn, such as the one we
experienced in 2008? Mr. Bernstein?
Mr. Bernstein. I think the economic outcomes would have
been considerably worse than they have been. And, in fact, one
of the things that I mentioned in my testimony is the extent to
which fiscal headwinds--that is, this very quick decline in the
budget deficit from 10 percent of GDP calendar year 2009 to 3
percent calendar year 2013, is widely agreed upon to have
created fiscal headwinds that have slowed the economy's growth.
Chairman Bernanke has made that point many times testifying
before Congress, because when the private sector is still down
on the mat, has yet to recover fully from the expansion, the
gap in aggregate demand needs to be replaced by fiscal policy
on one hand and by stimulative monetary policy on the other
hand to lower the cost of borrowing.
Ms. Waters. The Honorable Ms. Rivlin, would you respond to
that? I am talking about stimulating the economy. Basically, I
have said that the Republicans have been critical of the
ability to grow the economy through fiscal stimulus even in a
response to the recession and they have been critical of any
effort by the Federal Reserve to stimulate growth.
What would happen if we took their advice and if we
eliminated both of these two? How would you expect the economy
to fare through the business cycle or through a devastating
downturn such as the one we experienced in 2008? Yes?
Ms. Rivlin. I agree with what Dr. Bernstein has just said.
I think we have had too much near-term austerity and not enough
attention to the long-run growth of debt.
What I would prescribe now is not so much more stimulus as
more investment in future growth. I don't think it should be
seen as a job-creation program as much as a productivity-
creation program, maybe do some of both, but that involves
infrastructure, research, and upgrading the skills of the labor
force by major amounts.
Ms. Waters. Thank you very much.
I have a little time left. Mr. Cote, would you weigh in on
that question about stimulating the economy?
Mr. Cote. I would agree with Alice. The only thing I would
add is that we should be taking the time now to address our
long-term issue, which is very real. That demographic freight
train is coming.
Ms. Waters. You mention actions we need to take to
stimulate the growth. Do you have any specific recommendations?
Mr. Cote. Yes. In my written testimony, I have eight areas,
one of them being the debt, that I think we should focus on.
Ms. Waters. Okay. What is the most important thing we
should do?
Mr. Cote. In the short term, I think things like
immigration and infrastructure. In the longer term--and I would
refer to it as seed-planting--I agree with Alice on just basic
education, specifically math and science.
Ms. Waters. So you believe immigration reform is good for
this country--
Mr. Cote. Yes.
Ms. Waters. --that it would help stimulate the economy?
Mr. Cote. Yes.
Ms. Waters. Oh, thank you very much. Does everyone agree
that immigration is good for the economy and would help to
stimulate? Ms. Rivlin?
Ms. Rivlin. Yes, I do. And there is a good CBO report on
that.
Ms. Waters. Mr. Holtz-Eakin?
Mr. Holtz-Eakin. I do, and there is a good Holtz-Eakin
report on that.
Ms. Waters. And--
[laughter]
Mr. Bernstein. I do, as well, and I like the Holtz-Eakin
and the CBO reports on that.
Ms. Waters. Okay.
Mr. Bernstein. I think that these issues--by the way, when
we were talking about infrastructure and education and
immigration reform, what we are really talking about is
improving the supply side of the economy, improving the
economy's capacity to grow its labor force in terms of
immigration and its productive capacity in the terms of
investing in our public good infrastructure, widely agreed
upon--
Ms. Waters. Mr. Chairman, this is a good panel. Can we hold
them over and keep talking?
[laughter]
Chairman Hensarling. That works for me.
Ms. Waters. Thank you very much. I yield back.
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the chairman emeritus of the
committee, Mr. Bachus from Alabama, for 5 minutes.
Mr. Bachus. I thank the panelists. I think we all agree it
is the calm before the storm. We have a short window of
opportunity. I am going to go through something, and when I get
through, I am going to ask if I have missed anything major.
First, reform our entitlement programs, Medicare, Medicaid,
Social Security. That is at least half the battle. And I think
that both sides should agree that we are not talking about
cutting spending. We are talking about slowing the growth of
spending.
And I also think that what Ms. Rivlin has said, and others,
is that we can talk about job training, when we talk about
Social Security, people on unemployment, people's Social
Security, disability, because they are not--they don't have the
skills, and I think because of the demographics, it is very
important that we maximize the labor force we have.
Now, the second component is economic growth. Tax reform
has been mentioned. Trade agreements hadn't been mentioned, but
I think that is a tough one, and I think we have to address
that. A third one, immigration reform--the Senate did pass
something. I have been on record as saying that I am for a
pathway to legalization. The demographics there are also key.
We need young, highly skilled workers. And I think we have to
come together, and that may be more of a problem for
Republicans.
The fourth one is regulations. And Dr. Holtz-Eakin has done
a lot of research on this. The Small Business Administration
said that 14 percent of our national income is absorbed by
complying with Federal regulation. Now, I think the first thing
that we have to agree on is that all regulations aren't created
equal. They are not all bad; they are not all good.
But surely--and, again, I have heard Mr. Cote and Ms.
Rivlin talk about velocity. We are growing at 2.5 percent. We
need to grow at 4 percent, 4.5 percent. If Federal regulations
absorb 14 percent of our national income, surely we can find 2
percent--or one out of seven--of those regulations that don't
have a good cost-benefit or actually are a drag on our economy.
And, recently, we sort of turned the corner on this energy
thing, because of what has happened in the Ukraine, and I think
that is going to be positive. But I would ask you, is there
anything I have missed of a big nature. Is aging population
going to overwhelm us if we don't solve these problems?
Mr. Bernstein. Can I just give a quick answer? On the
reforming entitlements, I agree with the points you have made.
I wanted to add one point. The median income of the typical
Social Security or Medicare beneficiary is about $24,000,
$25,000. So I don't think there is much we can do in terms of
slowing the growth of their benefits without hurting vulnerable
retirees. I do think there is something to be done for wealthy
retirees, in terms of slowing the growth of their benefits, but
there is less there than meets the eye when you actually look
at the economic circumstances of the median beneficiary.
Mr. Bachus. Right, and I agree. Social Security, I think,
is less--less savings than Medicare and Medicaid. Anyone else?
Mr. Holtz-Eakin. Congressman Bachus, I agree with your
list. Not on your list was education reforms. I think those are
crucial. We have documented the failure of the U.S. K-12
education system down to the student, teacher, principal,
school, district, county. We have the data, but we have yet to
turn the corner and improve outcomes. We need to do that and
improve, at the same time, lifelong learning and skills
training. I think the quality of our labor in the end will be
how we compete internationally, and we need to do that.
Mr. Bachus. Education--I think maybe that should have been
the first thing out of the box for the Administration. I agree.
Ms. Rivlin. I would agree with the list, too. Let me make
two quick points. One is, we need smarter regulation. Often,
the goal of the regulation is a good thing; we just do it in an
unnecessarily costly way.
And second, the biggest thing in slowing the growth of
entitlements is delivering health care services more
efficiently and effectively. That is hard to do, but it is
where the money is.
Mr. Bachus. Thank you.
Mr. Cote. And I agree substantively with everything you
said. The trade point is one of the eight areas that I put in
my written statement, and I agree on TPA.
The only other thing I would add is putting all of this
into context. And I oftentimes say that in Honeywell, you can't
formulate a strategy and not look at what your competitors are
doing, what your markets are doing, what is happening in
technology. And that is a thing that seems to be missing in a
lot of our discussions, is looking at what is going on in the
world around us.
And that first chart I showed is one that I show throughout
the company that says this is how we need to start thinking.
Our competitive world has changed. We need an American
competitiveness agenda, and we ought to be thinking about all
our actions in that context, because 75 percent of world GDP is
outside the United States and it is changing rapidly.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Missouri, Mr.
Clay, for 5 minutes.
Mr. Clay. Thank you, Mr. Chairman.
And let me start with Dr. Bernstein. Is it realistic to
balance the budget in the next few years by cutting spending?
Or do increases in revenue have to be a part of the equation?
Mr. Bernstein. I think the latter. Increases in revenues
have to be part of the equation, in part because of the $4
trillion in deficit savings accomplished thus far since 2010 in
the various programs I mentioned in my testimony; 77 percent of
those cuts--70 percent of those deficit savings have come from
spending cuts, only 23 percent from revenues. There is a real
imbalance there.
And as one of the Representatives said earlier--I believe
it was Mr. Perlmutter--revenues as a share of GDP are
historically low. Part of that is the economy, but part of that
is the legacy of tax cuts that I think were irresponsible in
the context of trying to achieve a sustainable path.
Mr. Clay. Ranking Member Waters mentioned the comprehensive
immigration reform. And just this morning, the CBO issued a
report on it about--should not the--do all of you think that
the Congress should be more proactive about pushing legislation
and policies that help stimulate the economy?
The CBO said this morning that over the next 2 decades, if
we pass H.R. 15, we would reduce the deficit by $900 billion,
and $200 billion in the first decade. That would be
significant, don't you think? And anyone can address it.
Ms. Rivlin. I haven't seen this report, but, yes, clearly,
that is significant.
Mr. Clay. Let me ask Ms. Rivlin. At a recent Monetary
Policy and Trade Subcommittee hearing, Josh Bivens, one of the
witnesses, wrote in his testimony that it was too bad that the
Fed's actions to stimulate the economy have not also encouraged
higher levels of Federal spending. Do you share the view that
it is unfortunate that lower rates have not resulted in more
accommodative fiscal policy in recent years?
Ms. Rivlin. As I said earlier, I think that in the last
couple of years, Federal fiscal policy has been too austere. It
is a mark of the resilience of the U.S. economy that we have
survived this and the economy is growing. I think it would have
been better to do less deficit reduction in the near term,
especially on the spending side, and more in the longer term.
Mr. Clay. Ms. Rivlin, what could the Congress do with
respect to fiscal policy to complement the Federal Reserve's
monetary policies and grow the economy? What productive steps
can be taken to lessen the burden on the Federal Reserve?
Ms. Rivlin. The Federal Reserve has been aggressive in easy
money, and is now realizing that it can pull back a little bit.
I think that is right. And the Congress, I think, needs to
think about how to create jobs in the long run, which I think
is investing in growth and infrastructure and skills
development, and how to reduce the growth of the long-run debt,
which requires tax reform and entitlement reform.
Mr. Clay. And if the Congress and the Federal Reserve push
stimulative policies at the same time, is there any inherent
reason this would call the Fed's independence into question, as
some have suggested?
Ms. Rivlin. No, I don't think so. And former Chairman
Bernanke has been very clear, it would have helped them if the
fiscal policy had been less of a drag on the economy.
Mr. Clay. Thank you for your responses.
And, Mr. Cote, what do you consider to be the major drivers
of the current deficit today?
Mr. Cote. This is one where I think there are a lot of
places to point to, and I would not point to any single item
that has caused us to get to where we are today. The recession
obviously had a huge impact. But instead, there is a phrase I
use a lot in the company that says we are where we are, and I
think it is more important for us to look at, what do we have
to do going forward? And I completely agree with Alice's
prescription.
Mr. Clay. Thank you so much.
Mr. Chairman, I yield back.
Chairman Hensarling. The Chair now recognizes the gentleman
from Texas, the chairman of our Housing and Insurance
Subcommittee, Mr. Neugebauer, for 5 minutes.
Mr. Neugebauer. Thank you, Mr. Chairman.
Dr. Holtz-Eakin, one of the things that concerns me is that
the dirty little secret here is we have had historically low
interest rates. And we have had the Fed basically printing
money at a fairly rapid rate.
And so, one of the things that has kind of masked the
consequence of these huge deficits is the fact that the Fed has
bought down the yield curve to nearly zero and is furnishing
about half the money to support these deficits.
The question I have is--and I think you kind of started
down that road--what happens if we then go to a more typical
rate period and the Fed starts to unload their portfolio? I
have seen some estimates where at some point in time, here in
about 10 years, the interest at more historic rates would
eclipse what we are spending on discretionary spending.
Mr. Holtz-Eakin. There is no question. The CBO baseline,
for example, is a good--is illustrative of this. They show
rates essentially normalizing to historical levels. The
interest costs go to $1 trillion. It exceeds what we would be
spending on the Pentagon, national defense, for example.
Interest is by itself over 3 percent of GDP, so it is an
unsustainable deficit all by itself.
And I think the important thing is not to focus on the
numbers, right? It is the risks that you incur. And that is
with normal interest rates--anything above that quickly may
even double the interest costs, that gives you no flexibility
in your budgetary activities and really hamstrings the Congress
and the Administration in trying to execute any future policy.
It is a disservice in a democracy, quite frankly, to tie
the hands of the future in that way. And that is the risk we
are running with our current budget policies.
Mr. Neugebauer. Yes. And I think to just kind of amplify on
that, Mr. Cote, you pointed out the fact that the U.S. GDP
portion of the global economy is diminishing, and that these
emerging markets that--China and other countries. So if you
have a country that is on the pathway that we have all agreed
is on here, and you are looking at not only what percentage of
the economy--of the global economy is produced in the United
States, the question is, is what about investment--are people
going to want to invest in a country that has these potential
liabilities?
Because it is a deferred liability. If we are not
recognizing those today, at some point in time, we have to pay
for those. So how does that impact our global competitiveness
to kind of stem the tide of the chart that you presented there,
that is showing diminished activity in the United States?
Mr. Cote. To be clear on the chart, it is the percent of
world GDP. We are still growing during that time. And for the
next 20 to 25 years, we should still be the world's biggest
market. If the growth rates continue, though, with us at about
2.5 percent, China at about 6 percent, in about 25 years, China
is the world's biggest economy, and then things really start to
change.
There are a lot of things we need to improve our
competitiveness and to attract people to the biggest market in
the world, and that includes infrastructure, math and science
education, immigration, trade, and all of the stuff we talked
about. But debt has to be one of the biggest items.
I just don't see how a company or a country competes if
they have a bad balance sheet. And, again, if we take a look at
the 20-year outlook, there is no assumption of any recessions
in there, and we are not done with recessions, and my guess is
everybody here would agree with that. There will be some other
ones. If we don't have the firepower to address them when that
time comes, I just don't know where things are going to go.
Mr. Neugebauer. So is there a concern right now--we are the
world's reserve currency, people want to hold dollars--that at
some point in time people are concerned about, and has that
already started?
Mr. Holtz-Eakin. I think this is an important issue. People
are starting to wonder about that. Having a reserve currency is
good for international trade, and to have the United States no
longer be a reserve currency would harm the global trading
system. I think that is a real concern. The bad news has been,
because we are a reserve currency, we are given more rope than
other countries, and we have unfortunately used it and put
ourselves in a very dangerous position.
Mr. Neugebauer. Ms. Rivlin?
Ms. Rivlin. I agree with that. It is sort of a fool's
paradise, as I said in my testimony, that we have been living
in, because we could borrow essentially without limit at very
low interest rates, and we need to worry about what happens
when that is no longer true.
But I think one can exaggerate the problem of China being
the biggest economy--with all due respect, Dave--they have a
lot more people than we do, and their per capita income is
still quite low. We are doing pretty well as a developed
economy. We just have to do better. We have to invest more and
reduce our long-run debt.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Georgia, Mr. Scott,
for 5 minutes.
Mr. Scott. Thank you. Thank you, Mr. Chairman.
Let me just say at the outset that I think we are really
going to have to, as a Nation, understand that we just cannot
cut our way out of this deficit and our debt problem.
The other thing is that we cannot solve our deficit and
debt problem by omitting the very people who owe more to the
greatness of the country and the sacrifice of this country, of
the middle class, of the poor, of our veterans, and that is our
multibillionaires and our multimillionaires.
And my good friends on the other side of the aisle--my dear
Republican friends, many of whom I love very dearly; they are
wonderful, wonderful people--we cannot solve this debt problem
on the backs of the middle class, on the backs of the poor
people, on the backs of our veterans, while not asking the
very, very wealthy to just make a sacrifice.
The jobs deficit is part of the way out of this. But we
have this overemphasis on cutting entitlements. We are a
growing Nation. Social Security for our elderly is important.
This is not so much an entitlement. These seniors paid into
this. They sacrificed into it, many of them from when they were
9 and 10 years old working. Their paycheck was taken. This is
no giveaway.
And when we look at unintended consequences, I think the
best point I can make on this is the cutting of our military so
haphazardly at this time, to cut our military below the
manpower in the Army of below 430,000 soldiers, back at the
time of the 1930s. Now, why do I say that? Because no thought
has been given to the impact of what is going to happen to
those veterans. What is going to happen to those who are going
to be unloaded onto the system? Right now, 6,000 veterans are
committing suicide every year; that is 17 every day.
The fastest growing group of food stamp recipients, one of
those programs that the other side wants to cut, 1 million
veterans are on food stamps feeding their families. No thought
is given to that.
And when we dump all of these other veterans out of the
Afghanistan war, and the Iraq war, we are coming home, is there
any wonder, but nobody raises a question, where are we going to
find jobs when the highest rate of unemployment in this country
is on young veterans, 22 percent of whom can't find jobs?
My friends of the other side of the aisle, when we look at
this, I want you to say, yes, these billionaires and
millionaires who have made their billions on the backs of our
veterans over there dying on the battlefield, to protect their
wealthy interests, need to begin to pay their fair share,
because, folks, we can't solve this problem of our debt without
increased revenue. And you are going to get it from the poor
lady on Social Security?
You are going to get it from the person who needs health
care, while many right now can't get health care, because many
of our Republican governors are stopping the Medicaid
expansion? That would bring billions of dollars and jobs to the
very people who need it the most.
So, this bothers me greatly. Three weeks ago, I think, when
Ms. Yellen was in here, I asked her about the dual mission,
about the Fed; 90 percent of the American people don't even
know that the Fed has a dual mission, employment. Where is the
emphasis on jobs? That is the way that we are going to solve
this debt problem, putting our veterans to work, stopping them
from having to commit suicide because they have lost hope, and
then telling our billionaires to help pay the cost.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from North Carolina,
the chairman of our Oversight and Investigations Subcommittee,
Mr. McHenry, for 5 minutes.
Mr. McHenry. Thank you, Mr. Chairman. And this has
certainly been an interesting hearing. I commend the ranking
member for her words. She now sounds like a supply-sider. And I
am grateful for that.
In terms of the discussion today, we have seen some
columnists around the country, Dr. Rivlin, who say that debt
doesn't matter, that we don't have a debt problem. What would
you say to those who don't believe that we have a debt problem?
Ms. Rivlin. I would say they are wrong. All of us today
have emphasized that a debt rising faster than your economy can
grow is a big problem.
Mr. McHenry. Can we just resolve this on the revenue side
of the equation?
Ms. Rivlin. No, but I don't think we can resolve it on the
spending side entirely, either. And up to now, we have been
doing more spending cuts than revenue increases. But I think of
it as managing our way through the problem of the baby boom and
retirement and longevity. We have to do that. We have to figure
out how to pay for that and how to reduce the growth of the
debt in the long run.
Mr. McHenry. Dr. Holtz-Eakin, do you agree? Can we do this
purely on the revenue side of the equation?
Mr. Holtz-Eakin. No. No, you cannot tax your way out of
this problem.
Mr. McHenry. Okay. Now, in terms of Social Security, I
believe--as the panel does, and most Members of Congress, as
well--that Social Security is a very important program that we
have to protect. We have to preserve it for those who are
receiving the benefits today and those who are at or near
retirement age, as well.
But for my generation, who have time to plan, look, I am
due to retire long after the Social Security system is broke.
And under current law, it is going to be my generation that
receives a fraction of the benefits they have been pledged. And
so, I believe the insolvency of Social Security in 2023 to be
real. Dr. Rivlin, would you agree?
Ms. Rivlin. Yes, and 2023 isn't so long from now. People
who will retire in 2023 are not our great-grandchildren. They
are already in their mid-40s and need to know that the system
is there for them.
Mr. McHenry. Thanks. Dr. Holtz-Eakin?
Mr. Holtz-Eakin. I just want to emphasize that you can
look--the debt is a real problem and the mandatory spending
programs are driving that debt, but the programs themselves
need to be fixed for the beneficiaries. It is a great
disservice to run a pension system that says, we are going to
keep it solvent by cutting benefits 25 percent across-the-board
for people in retirement. No one runs a pension system that
way. That is terrible. It should be fixed right now on behalf
of those people trying to make retirement plans. And Medicare
is worse. Right now, the gap between money going in and money
going out, payroll taxes and premiums and then spending, is
about $300 billion. We have 10,000 new beneficiaries every day.
That is not a program that will survive.
And so, we have a big debt problem. It is hurting our
competitiveness, but we have problems with our problems that
are not going to serve these beneficiaries well. So, it is not
just a matter of cutting. We have to fix their structure. We
have to reform them so that they survive.
Mr. Bernstein. Can I make a point to that?
Mr. McHenry. I have one final question for Dr. Holtz-Eakin.
So in terms--moving back to the revenue question, you have
written about the need for tax reform. You praised Chairman
Camp's--the chairman of the Ways and Means Committee--tax
reform draft. He has asked for feedback from Members. I have
provided it, along with over 55 of my colleagues signing on to
a letter pointing out one of the flaws of his proposal and
asking him to fix it, and that is a new tax within this tax
reform draft, the only new tax in the draft, and it deals with
a quarterly excise tax on banks and financial institutions
generally.
This is what I regard as an asset tax. And assets for banks
are loans. So it runs counter, I believe, to our economic
interest. Do you concur?
Mr. Holtz-Eakin. I do. I have been supportive of the
process of tax reform. It is very important that we get this
done. Our tax system is harming us in both growth and
competitiveness.
But this excise tax on the very large--on a handful of very
large financial institutions is at odds with tax reform, which
should treat all economic activity more equally and not single
out an industry or a size for a special tax. That seems very
bad to me.
This is going to hit the institutions that have about half
the deposits in the United States. The implications are going
to be found in households as much as anywhere else.
Mr. McHenry. Thank you, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Massachusetts,
Mr. Capuano, for 5 minutes.
Mr. Capuano. Thank you, Mr. Chairman. I apologize for
missing some of the hearing, but, well, we all have other
things to do.
I have read the testimony, but I would like to hear from
the panel. Does anybody here think that we can--first of all, I
want to be really clear. I don't know who said the debt doesn't
matter. Whoever said debt doesn't matter doesn't have a credit
card, doesn't have a mortgage, never bought an automobile--a
car is what we call it, but I figured I would say automobile so
you would know what I was talking about--and didn't have any
kids who went to college. Debt matters. Of course it matters.
For me, that whole issue is--I guess it is good politics,
but it is a useless discussion. There are two questions. Number
one is, what do we do about it? And the other part of that, I
think history is important. How did we get where we are today
so that we don't make the same mistakes or at least we know
what the truth is?
And does anybody here think that we can handle our debt
situation on--and, Mr. Holtz-Eakin, I look at you, because I
presume you might be the closest who might say yes to this--can
we handle the debt problem just on the spending side? You don't
think we should look at the revenue side at all?
Mr. Holtz-Eakin. I think we should look at the revenue side
in tax reform, and it will generate more revenue. I think that
would be great.
Mr. Capuano. Fair answer. We can always have the debate of
what does and what doesn't, but I think that is a fair answer.
So I think that kind of--and I assume none of the other panel
would disagree with the concept that we have to look at the
revenue side.
So that kind of gets that off the table. So now the
question is, okay, details. First of all, how did we get here?
And do people disagree that there are a million ways, but from
what I see, the most important--if I had to pick one thing that
put us in the situation we are here at the moment is the tax
decisions we made in the early part of this century. Does
anyone disagree with that?
Again, Mr. Holtz-Eakin, I look at you, because, again, you
are the most likely to disagree with me.
Mr. Holtz-Eakin. We were asked this question again and
again and again during my tenure at the CBO, and if you look at
the changes in the forecasted surpluses--that was what I
inherited and that turned into deficits--the tax cuts are not
the majority of that. It is, in the end, economic performance,
which has been subpar, and the spending side, which are the
dominant increases in the debt over that period.
Mr. Capuano. Okay, so you don't think that--you think it is
the spending side?
Mr. Holtz-Eakin. I don't think that is a fair
characterization--
Mr. Capuano. Mr. Bernstein, what do you think, if you had
to pick one item?
Mr. Bernstein. I disagree on the facts there. And there is
a chart in my testimony, figure three, which tries to answer
that question by apportioning the growth in the debt to the
wars, the Bush-era tax cuts, recovery measures, and the
economic downturn, and if you look at figure three, you will
see that, in fact, the Bush tax cuts are the primary factor
there.
If I may, can I speak to your question?
Mr. Capuano. Hang on a second, Mr. Bernstein. I need to get
to the others.
Mr. Bernstein. Okay.
Mr. Capuano. Ms. Rivlin, what do you think is the single
most important factor that got us to where we are at the
moment?
Ms. Rivlin. At the risk of disrespect, I don't think that
is a good question. I think we are where we are.
Mr. Capuano. There are lots of bad questions on this panel.
Ms. Rivlin. There is lots of blame to go around. Repealing
the Bush tax cuts now is not an option, and we need to think
about going forward.
Mr. Capuano. Why is it not an option?
Ms. Rivlin. Because a big tax increase on everybody,
including low-income people, right now would be a disaster.
Mr. Capuano. So, that is a political judgment. Very
interesting, Ms. Rivlin.
Ms. Rivlin. That would be an economic decision.
Mr. Capuano. Fair point. Yes, I think you are sitting a
little too close to Mr. Holtz-Eakin. Maybe we should split you
two up.
Mr. Cote, what do you think, if you had to pick one?
Mr. Cote. First, coming from New Hampshire, you sound like
a very smart guy to me.
Mr. Capuano. There we go.
[laughter]
Mr. Cote. At the end of the day, I am not sure that it is a
useful exercise. I am kind of with Alice on this one.
Mr. Capuano. Fair enough.
Mr. Cote. We are where we are, and we need to look at it
as, where do we go from here?
Mr. Capuano. Fair enough.
Mr. Cote. And that is what we ought to be focusing on.
Mr. Capuano. I think those are fair answers. I do want to
point out, me trying to figure this all out and trying to
figure out--getting ready for today, I did run across one
interesting study by the Heritage Foundation that kind of
ranked both debt--and, again, I accept the fact that we have a
debt problem, so that kind of becomes null and void to me, but
I also--they ranked a whole bunch of things. They do it--they
seem to do it regularly, an index of economic freedom, they
call it. And they rank tax burden as a percentage of GDP, which
to me is more important than actual numbers.
And they rank the United States of America as number 60 in
taxes as a percentage of GDP. France is 65 percent, ahead of
us. Italy is 58 percent. Germany is 51 percent, ahead of us, on
and on and on. Russia has a higher tax burden. China does have
a lower tax burden than we do.
So the question is, when we are talking about
competitiveness, which I think is what is important when it
comes to taxes, who are we competing against? And I don't mean
to be rude about it, but I really don't think that, for the
most part, the United States is competing against Mauritius or
Panama or Kenya or Malawi. Those are not countries we are
competing against. The countries we are competing against,
other than China, all have--or pretty much all have equal or
larger tax burdens.
And on China, the one thing nobody wants to talk about, the
Heritage Foundation also ranks other things. And I don't get a
chance to do it, because I let you answer my questions. I will
have to come back to this. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from New Jersey, the
chairman of our Capital Markets and GSEs Subcommittee, Mr.
Garrett.
Mr. Garrett. Thank you, Mr. Chairman.
I will start with Mr. Cote. In looking over your testimony,
you draw the real connections between debt and interest rates
and the impact on the economy, that more debt can mean less
economic growth and fewer jobs at home on Main Street.
And when you look at our current job recovery, such as it
is, CBO recently reported that the Nation is significantly
lagging behind the average job recovery, and the most striking
factor is rather than closing that gap, our job market is
actually getting worse, relative to the average recovery.
Now, the President has been in office for 5\1/2\ years now.
And we have seen during that time what some of us would call
the tidal wave of spending. In light of all that, could you
just comment on how does debt and spending, specifically
entitlement spending, which brings us to, some of us would say,
the brink of a bankruptcy, how does that affect a major
corporation such as yours? And how does the fiscal instability
that we have because of this looming debt affect you and your
hiring decisions?
Mr. Cote. It affects the way I think about how we run the
company and how are we going to hire going forward. And when I
put all this together, including all the other things that we
are not doing anything about, whether it is math and science,
infrastructure, immigration. There is a lot of stuff where we
are not doing anything.
As a result of that, I look at it and go, I need to plan
for a low-growth environment. And when you look at a low-growth
environment, we will say in the 2.5 percent range, companies
generally don't need to hire, because they can be just that
little bit more productive every year. And in a low-growth
environment, you just don't need to bring any additional people
on. In my view, we need to get growth up above 3 percent. And
one of the ways to do that is to start addressing our debt now.
Mr. Garrett. Thank you.
Moving on, Dr. Rivlin, when I was out of the room, you
mentioned our need to do smarter regulation, right? So I want
to ask you to elaborate on just one specific thing. We passed a
bill that I spent a lot of time on to improve cost-benefit
analysis over at the SEC.
I just want your opinion on that. We also introduced a bill
that would require cost-benefit analysis over at the Fed on all
of the regulations that they do now that they are encompassing
the entire financial marketplace.
Is that the smarter type of regulation to which you are
referring?
Ms. Rivlin. I think cost-benefit analysis can be useful in
figuring out where to go in regulation. It is very hard to do
well, so I think just passing a bill to say we have to do it is
just the beginning. It is really very hard to do well. But the
basic spirit, yes, we need to look at, what is the cost of
regulation compared to the benefits that we get out of it? That
is important.
Mr. Garrett. Yes, we are just trying to do the first step,
just by getting the bill passed, and we are hoping that the SEC
and then eventually the Fed will do the right thing.
So moving down, as I said, the President has been in office
now for 5\1/2\ years, and you hear a lot of people outside this
room and inside this room who say that the solution to the
problem, the debt problem, is what, is just raising revenues,
raising taxes, and if you do that, that will right the
proverbial ship of state.
Wearing your former hat, I guess, or coming from where you
did at the CBO, can you explain what the real-world impacts are
once we get down the road, not too long from now, when we are
going to hit over $800 billion in interest payments--and maybe
you can estimate as to when we will be hitting that again--and
what will be the impact on the economy when that day comes?
Mr. Holtz-Eakin. When that day comes, you will have the
Federal Government competing with the private sector for scarce
investment funds. And we hope that we don't hit $800 billion
until we are back at full employment, but from that point
forward, those $800 billion in interest payments are going to--
about a third of that is going to crowd out private investment.
And that will hurt productivity. It will hurt the incomes and
the job prospects of people in 2019, 2020, 2021, whatever year
it is we hit that, and those are real-world costs.
It will also impede the flexibility of the Congress, which
won't be able to spend the money on something else. It is
locked into the budget. And if something untoward should
happen, if we have another recession at some point, the ability
to respond will be quite limited. And so it is a very negative,
predictable impact. Plus, it impedes your risk management.
Mr. Garrett. So hearing all that, but also hearing what
some of the folks on the other side said during their opening
comments, is it really credible to say that we are addressing
our fiscal crisis, that we have been doing the right things
over the last 5\1/2\ years, if that is the--what did you say--
predictable pathway?
Mr. Holtz-Eakin. We haven't addressed our problems in the
past 5 years, not at all. Our problem is in the mandatory
spending programs. And I have been saying the same thing for 10
years. This town loves to talk about tax policy. Great. Have a
ball. Once you spend the money, you have to pay for it one way
or another, and the spending is on the mandatory side. That is
what we have to deal with.
Mr. Garrett. Thank you. Thank you very much.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Texas, Mr.
Green, for 5 minutes.
Mr. Green. Thank you, Mr. Chairman. I thank you and the
ranking member for the hearing. I thank the witnesses for
appearing today. And I would like to thank all of them, because
some of your testimony, candidly speaking, has been a little
bit surprising, but it has been pleasant to hear.
And, Ms. Rivlin, I would like to thank you for something
that you said. You seem to have a little bit of consternation
as to whether or not we will eventually do the right thing. And
I want to assure you, ma'am, this Congress will do the right
thing, after we have tried everything else. We will do it. So
today, hopefully, will get us closer to the right thing.
Let me start with poverty prevention, if I may. There are
programs, according to what the staff has accorded me, that
have helped us prevent poverty from going to 29 percent
compared to 16.1 percent in 2011. Let me pause and thank the
staff, also, because the information that I have today is
excellent, and I never want to neglect them, because they do
outstanding work.
But I do want to ask this about poverty prevention. Do you
consider Social Security as a part of the poverty prevention
effort in this country? Has Social Security kept people out of
poverty? Is Social Security a program, a safety net program
worthy of maintaining because of the way it impacts poverty?
Mr. Bernstein, would you like to take that?
Mr. Bernstein. Yes, very much so. If you took away Social
Security from the elderly right now, their poverty rate would
be 44 percent. That is a pretty scary thing to imagine. Adding
Social Security back in, as we do in the real world, their
poverty rate is 9 percent. Now, 9 percent seems high to me for
our elderly population, but the fact that 44 percent of the
elderly poor would be poor absent Social Security gets to the
point that I was trying to make earlier, which is that while
there is an appetite, I believe, from folks in this room today,
and even some on the committee, to slow the growth of
entitlement payments--and I share some of that appetite--it has
to be done in a way that doesn't hurt economically vulnerable
recipients, and most recipients are economically vulnerable.
This notion that you can balance these programs by
significant benefit reductions is illusory, because once you go
down that path, you are going to very quickly hit the very
folks we are talking about right now.
Mr. Green. Thank you. Let's also talk for just one moment
about the regulators. How important is it to fully fund the
regulators, Mr. Bernstein? And what impact might fully funded
regulators have on an economy?
Mr. Bernstein. I think it is extremely important. And I
noted in my testimony, as I tick through some of the areas that
this committee oversees, talking about financial stability and
consumer financial protection, I think we tend to have very
short memories when it comes to regulation in this country. And
as Alice said a few minutes ago, there are definitely costs,
but there are also benefits.
And the reason we are here talking about large debt levels
and climbing out of the deepest recession since the Great
Depression is because we had a housing bubble that was driven
by financial practices that were, I think, widely recognized at
this point to be terribly underregulated and got us into this
mess in the first place. So the notion of regulating systemic
risk and consumer protection in financial areas under this
committee's purview is essential.
Mr. Green. Thank you. And I will use the remaining time to
make this brief comment, Mr. Chairman.
I think that when we sent our troops into harm's way, we
did it off-budget and there was no question as to how we would
fund it. I am picking up on something that Reverend Scott to my
right said, with our veterans. When they return, it really is
sinful to talk about, how are we going to fund the programs
that are necessary to reintegrate them into society?
I am not saying that is not a good discussion to have, but
if you are going to have it, you should have it when you send
them and you should have it when you bring them home. To treat
them with anything other than that level of respect, in my
opinion, does not serve us well.
I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Missouri, Mr.
Luetkemeyer, for 5 minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
Mr. Cote, you have an international company, and you do
business on an international basis, and I am sure you compete
with other businesses around the world. How do you believe that
whenever you are competing for business in other countries,
they take our debt into consideration, when they are looking at
doing business with you, doing business with other companies?
Is that a factor in your business at all, do you believe?
Mr. Cote. Do you mean in terms of how other countries look
at us?
Mr. Luetkemeyer. Right.
Mr. Cote. At Honeywell as a competitor?
Mr. Luetkemeyer. Right.
Mr. Cote. No, I don't think so.
Mr. Luetkemeyer. Okay. You do business with them, though.
Do you have a sense that they have a consideration of our debt
as a concern?
Mr. Cote. That part they definitely do, not so much in,
say, dealing with us, but I do get comments in other countries
that I go to wondering when we are going to do something. They
all recognize that it needs to happen.
Mr. Luetkemeyer. Okay. Can you elaborate a little bit
further? Okay. How many of them talked to you about this, all
of them, some of them, just a few?
Mr. Cote. I think some of them. I travel extensively. In
this job alone, I have been to over 100 countries over the last
12 years, so I end up in all kinds of conversations with all
kinds of people. But I would say, it is certainly something
that they are all aware of.
Mr. Luetkemeyer. I know, sitting on this particular
committee, we have the opportunity to meet with a lot of
foreign finance ministers around the world, and these finance
ministers, especially from Europe, sometimes come in and they--
one of the questions I always ask is, when do you get your
economies going? Because you can keep stretching out your debt
forever, but until you get your economy going, you can't pay it
down.
And we are in the same situation. We have to get our
economy going so we start paying it down. But I think all of
you this morning have sort of hit on what I believe we have to
have--I don't necessarily like the words ``balanced approach,''
but I think you have to both cut spending and you also have to
generate revenues. That is pretty obvious.
But I think, as I go back home each weekend--and we have a
district workweek each month--you talk to the small business
people, even some of the larger businesses in my district, they
are sitting on a lot of cash, but they are not going to do
anything because the uncertainty that is in our economy right
now. And most of it is caused by the Federal Government, either
with our tax policy, our regulatory policy, some of them trade
policy. For the bigger guys, it is trade policy. But for most
of the small folks, regulatory policy is their biggest concern.
And as the chairman indicated in his opening remarks,
Obamacare is a big part of it, but it is all of the regulation
together, whether it is DOL, the tax situation, it just is
continual intrusion into their business that causes a level of
uncertainty.
And so until we get our heads wrapped around that and kind
of stop this nonsense, I am not sure we are going to see any
progressive improvement in our economy. The growth that we have
experienced is basically all due to the energy sector of our
economy. The rest of it has been flat over the last year, 2
years, 3 years.
So I am just kind of curious, Dr. Holtz-Eakin, you have a
tremendous background in this area. Can you tell me, at what
point do these regulations become so punitive that it drives
everybody out of business? We are close to that already, I
think. But do you think they can hold on for a while yet? Or
where do you see us headed with the small businesses,
especially?
Mr. Holtz-Eakin. I am deeply concerned about the burden
cumulatively on them from the spending that leads to the debt,
the regulatory environment. I think Dr. Rivlin has it right.
This is a very resilient economy. I am stunned again and again
at the capacity of it to recover and grow, but you have to be
respectful of the burdens that we are placing on it.
And so when I think of the idea of doing cost-benefit
analysis, I applaud that. Even though it can't always be done
as well as we would like, the discipline of sitting down and
saying, ``What are the costs and what are the benefits of this?
And does it make sense to launch into this?'' is very useful.
The thing I would urge the Congress to do would be for the
first time to look back at existing regulations and take off
the books some things that don't merit inclusion anymore. We
never get rid of regulations. And that is a problem.
Mr. Luetkemeyer. If we don't get our economy going, at what
point--whenever we passed our budget resolution back in
December, a lot of the ratings agencies were ready to downgrade
us if we didn't do that. And at what point do you believe that
they will start downgrading us or the markets will stop buying
our debt?
Mr. Holtz-Eakin. I believe that our most likely scenario is
we go out 10 years and we are a slow-growth economy still, low
wage growth, a very, very frustrated populous. And at that
point, 10 years from now, the rating agencies are going to have
to be concerned about our ability to service our debts, no
question.
Mr. Luetkemeyer. But they are already raising alarms. We
just need to be listening to them.
Mr. Holtz-Eakin. Yes, I think the thing to worry about is
not the apocalyptic crisis hitting in the next 10 years, but
the consequences of doing nothing after a bad economic
performance for a decade.
Mr. Luetkemeyer. Very good. Thank you. Thank you, Mr.
Chairman.
Chairman Hensarling. The time of the gentleman has expired.
And with all due respect to the earlier opinion of the
gentleman from Texas, we will now yield to the real reverend in
the room. The Chair now recognizes the gentleman from Missouri,
Mr. Cleaver, for 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman.
Dr. Bernstein, in response to Congressman Green's question
about Social Security, the number of elderly, was that 44
percent on top of the existing percentage of seniors or Social
Security recipients? Or is that the total, 44 percent of--
Mr. Bernstein. That is the total percentage of seniors, 65-
plus, who would be poor if we took Social Security out of the
picture. Instead, the actual poverty rate for them is 9
percent.
Mr. Cleaver. Right, yes. Yes, that would include my 91-
year-old father. My three sisters and I were trying to figure
out if he ever missed a day at work that we can remember. He
remembers too much. But one of the problems we are having is--I
don't think people realize who we are talking about when we
talk about the poor.
And all of them are Americans, but one of the interesting
things--my district was changed with redistricting. I now
represent three of Ike Skelton's former counties. And one of
the things that I have discovered--in fact, there was a chart
in Sunday's New York Times, the highest growing areas of
poverty in the United States are the rural areas. And in my
three rural counties, the percentage of individuals on some
kind of Federal food programs, SNAP and so forth, the
percentages are higher than in Kansas City, which is the
largest city in my district.
I don't think people realize that there is a symbiosis with
rural and urban. And so because we have in our heads decided
that when we talk about poverty, we are talking about urban
centers, I think it does some damage, some distortions to the
conversation.
And prior to the 2008 expiration of the farm bill, the
Department of Agriculture made 400,000 payments in terms of
safety net payments, 400,000, and if they had had the money, it
would have gone another $500 million. These are farming areas,
rural areas. And so, I think we have to re-design the
discussion.
Minimum wage is $7.25, $2.13 for tipped individuals. So I
would like to hear from all of you--is there a need for--I
really would like if we had more time for you to talk about the
need to change the discussion to Americans, but I want to find
out if you can--if you can talk about the minimum wage and the
need for raising the minimum wage.
This year, the value of the minimum wage is scheduled to
drop 1.7 percent. And if it continues to go in that direction,
we are going to make more and more poor people who work every
day. Can I just get a response from all of you?
Mr. Bernstein. I think it would be very helpful to raise
the minimum wage to boost the earnings of some of the very
constituents you are talking about. A recent analysis by the
Congressional Budget Office found that an increase of the type
that you are describing would lift the pay of 24.5 million
people. Now, it would also displace 500,000, but once those
persons got a new job, that job would be a better job.
Mr. Holtz-Eakin. I would just politely disagree. I think it
is a case of someone's heart being in the right place, but it
is a bad policy. The dividing line between poverty and non-
poverty in the United States is having a job. And the minimum
wage does not help people get jobs. It harms their chances to
get jobs. It is also not targeted very well on poor people.
In the same CBO study, of the $31 billion that would be
generated, only 19 percent went to people in poverty. So we can
do better in worrying about the poor than to raise the minimum
wage. I think it is a mistake at this point in time. The
evidence is in the teenage unemployment rate that is over 20
percent. We continued raising the minimum wage through the
Great Recession, and those workers are now priced out of the
labor market. We can't do that again.
Ms. Rivlin. I favor raising the minimum wage, which hasn't
been raised in a long time, but I think even more important is
to raise the Earned Income Tax Credit, which is a more
effective, more targeted way of reaching low-income people. And
I also think it is a mistake to think that anybody who is in
favor of controlling future deficits is against poor people.
That is not what this is about.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Michigan, Mr.
Huizenga, for 5 minutes.
Mr. Huizenga. Thank you, Mr. Chairman. I appreciate that.
And if I could just revisit very briefly with Ms. Rivlin
here, what you were just saying, a long-term--if you could just
maybe repeat or repackage what you just said about long-term
deficit restraint not being an attack on the poor. I don't want
to mischaracterize. I just want to make sure I was clear and
understood what you said.
Ms. Rivlin. Yes, that is what I did say. I think we have a
serious poverty problem in the United States which needs to be
attacked by raising incomes of low-income people and the
opportunities to get out of poverty, but also the bad effects
on the economy, which we have been discussing here for a long
time, of not addressing our long-run debt, the increase in debt
faster than the economy can grow, will injure the low- and
middle-income people most, much more than higher-income people.
Mr. Huizenga. All right, good. I just wanted to make sure I
understood that, and I would wholeheartedly agree. And I had
the pleasure and the opportunity to serve a former member of
the Budget Committee, Peter Hoekstra. I served as his District
Director for 6 years. It was early 1997 when I sat down with
Pete and a guy named Mark Neumann from Wisconsin. John Kasich
was Chair of Budget at the time. And I clearly remember
Congressman Neumann at the time saying, ``Pete, we are going to
come into balance this year. And if not this year, it is going
to be by the second quarter next year of where we are going.''
And as these policy wonks were diving into the numbers and
all those things, it came to light and it came very apparent
that it was mostly based on two things. First, our restrained--
not cut, but restrained--rate in the government growth. And
second, economic activity. The economic activity that was being
spurred along, some of--I remember the debate well. A lot of it
was pent-up demand. A lot of the same things that we are even
talking about now, seeing some of the economy going in, in
where we are currently.
What I am concerned about is when we are using $230
billion, $240 billion to service our long-term debt, how long
before we see interest rates go up--we have had Chair Yellen in
those very seats. We had Ben Bernanke prior to that. Every
person on the Fed has indicated which direction those interest
rates are going, which is up. And I am concerned that with that
level of debt that we have, as we see on the debt clock over
here, servicing that debt, when we just go to where Germany is,
much less Greece and Italy and Spain, that we are going to
swamp the boat here. Is that not fair? A fair characterization,
at least?
Ms. Rivlin. No, I think that is a fair characterization, if
we don't act, but we need to act sensibly and on both sides of
the budget and to phase in reforms, in both taxes and
entitlements, that will reduce the debt over the long term.
Mr. Huizenga. The other thing that I am very concerned
about--and I just met with someone who is in the venture
capital space and management space--and we were having this
discussion about what is going to pull us out of this debt
situation, what is going to pull us out in the long term? I
have seen some projections that anywhere from a 6 percent to an
8 percent growth rate would need to happen here in the United
States for us to take care of what our spending problem has
created.
And I know China is going into a tailspin because they are
going to drop to a 7 percent or 8 percent. We could only dream
to be at that kind of growth rate. Dr. Holtz-Eakin, would you
mind maybe addressing that a little bit? And, Mr. Cote, I would
like to hear from you, as well, what that would mean for your
business, really quickly?
Mr. Holtz-Eakin. It is very simple, and it has been true
for a decade. We won't grow our way out of this problem. We
will not tax our way out of this problem. The problem is the
growth in the spending programs driven by demography and health
care costs, and you have to get that. That is it.
Mr. Cote. And I would agree. There is no way we can grow
our way out of this. And getting back to your first point, with
$20 trillion in debt and a 5 percent rate, which is not a crazy
number, that is $1 trillion a year in interest, and it starts
to feel more like a credit card where you just can't get ahead
of it at that point. We are better off addressing it now.
Mr. Huizenga. I appreciate that. And my time has expired,
but that is exactly where, when I talk to especially the
younger generation, they are just starting to figure out that
the math isn't adding up.
So thank you, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has, indeed,
expired.
The Chair now recognizes the gentleman from Delaware, Mr.
Carney, for 5 minutes.
Mr. Carney. Thank you very much, Mr. Chairman. And thank
you for having this hearing today. It is very interesting and
very important.
The title is, ``Why Debt Matters.'' We seem to have lost a
little bit of focus on this issue recently, because of the
agreement, the budget agreement for this year and for next, all
the focus when we had deadlines, the deadline on the debt
ceiling, the deadline on shutting down the government, kept a
really, I thought, important focus on solutions to this issue,
so now we don't--there is not a lot of discussion, so this has
been very helpful.
I am fairly new to the body. I was elected in 2010, one of
the few Democrats. And when I first arrived here, I learned
pretty quickly that we had a big fiscal problem. I am a former
secretary of finance for the State of Delaware. We had to
balance our budgets every year, and we had to make the
difficult decisions in order to do that.
We don't have to do that at all here, in terms of making
those difficult decisions. There is a group--some of you are
part of that or are aware of it, certainly--called Fix the
Debt. And they have a spreadsheet of things that Congress could
do to address some of these fiscal imbalances. I have been
doing that as part of a group that I chair with Democrats and
Republicans in going down the individual list.
It is not easy, particularly when you get people in the
room who have different perspectives on taxing, on spending, on
how to address the issue of the poor and the like. One of the
things that struck me over the last couple of years, Ms.
Rivlin, is your co-chair, I guess, former Senator Domenici, who
said that it is really all about health care. And I remember in
a session with Maya MacGuineas, I asked her, so what are the
solutions for health care? And she didn't have any good ones.
Do you? Does anybody at the table have any suggestions with
respect to what we do to bend the cost curve down for health
care?
Ms. Rivlin. Yes. I think there are quite a lot of things
that we can do. And some of them are in process already and I
think are already having an effect. A really important thing is
to move away from the fee-for-service system of compensating
providers, which incents them to provide more services, rather
than better services. And accountable care organizations--
Mr. Carney. We talk about that all the time, by the way,
pay for performance and all that. It is hard to do.
Ms. Rivlin. It is hard to do.
Mr. Carney. Practically.
Ms. Rivlin. And that is why it is a work in progress.
Mr. Carney. Right.
Ms. Rivlin. But I think payment reform and more competition
in the health system are both part of the solution.
Mr. Carney. Thank you.
Dr. Bernstein?
Mr. Bernstein. A few ideas that kind of hitchhike off of
where Alice stopped. What seems to be helping so far--and,
again, we don't know how deep this is, in terms of whether it
will stick, but we have seen very notable progress in recent
years in slowing the growth. We have actually bent the curve.
Whether it stays bent remains to be seen.
Efficiencies have occurred in bundling care, reducing
unnecessary testing, and reducing hospital readmissions. All of
those have made a notable difference in moving, as Alice
suggested, from quantity to quality. The one area where we
haven't done nearly enough is in the price of medication. There
have been some extremely, I think, compelling exposes of the
amount that we spend on medicine that in other advanced
economies is a fraction of ours. I think that is a rich area of
pursuit, and it will be--
Mr. Carney. One of the targets, by the way, on that list,
all the things that you mentioned are on the list that Fix the
Debt is--Dr. Holtz-Eakin, did you have--
Mr. Holtz-Eakin. I would just say two things. The first is,
I think it is important to continue on this and not to get
complacent. It is true that health care spending has grown more
slowly recently, but that happened in the mid-to late-1990s for
4 years, and it came right back.
We are coming out of a recession. The Affordable Care Act
is intended to have people spend more on health care, so there
are a lot of things that could go the other direction.
The second is, the strategy cannot be just cutting
reimbursements to providers. We have done that before. It has
always failed and been unwound. And then I think in the things
that the Congress is looking at right now, there are two places
where we are making a mistake.
One is too aggressively cutting Medicare Advantage
payments. It is the one thing that is not fee-for-service. It
is not perfect. A lot of things are wrong that could be fixed,
but it is not fee-for-service. We need to move people in that
direction. And home health, where it is the one place with a
very elderly and frail population, we get the care coordination
that keeps people out of the hospital.
Mr. Carney. Mr. Cote, last word, really quick?
Mr. Cote. Yes, Erskine Bowles and Alan Simpson issued
Simpson-Bowles 2.0 specifically for this, and that is about 20
line items, and I would be happy to forward them to you.
Mr. Carney. Great, thanks very much.
Thank you, Mr. Chairman.
Mr. Huizenga [presiding]. The gentleman's time has expired.
And with that, we go to the gentleman from Wisconsin, Mr.
Duffy.
Mr. Duffy. Thank you, Mr. Chairman.
I thank the panel for coming in today and, frankly, to see
the bipartisanship, all agreeing that we have a problem with
our debt is nice to hear.
Many people on this committee have a majority of their
constituents who are not millionaires and billionaires. Most of
them are middle-class Americans. Many of them are poor
Americans. And so, I think there is a consensus that we want to
look out for those who are less fortunate in our districts and
middle-class Americans in our districts.
So I just want to get all of your opinions, that if we stay
on the current course, we don't change, no modifications, can
we just raise taxes on millionaires and billionaires, bring in
enough revenue, and sail on our merry way? Is there enough
money with millionaires and billionaires to fix our problem?
Can we fix the problem there, Mr. Holtz-Eakin?
Mr. Holtz-Eakin. No.
Mr. Duffy. Mr. Bernstein?
Mr. Bernstein. No.
Mr. Duffy. Ms. Rivlin?
Ms. Rivlin. No, but that doesn't mean that we shouldn't
reform our tax system in a way that gets rid of a lot of
special privileges for upper-income people. If we do that, we
can lower the rates.
Mr. Bernstein. It is a good place to start. But you can't
finish there.
Mr. Duffy. Mr. Cote?
Mr. Cote. I would say the answer may not always be as
credible coming from me, but the answer is still no. It is not.
[laughter]
Mr. Duffy. Point well made. And I think--my point for
bringing that up is, we can't get a consensus about changing
the drivers of our debt, modifying it, and I think some who
don't want to change the current system continue to argue that
we just go after millionaires and billionaires and we are fine.
And I think the point that you all are agreeing to is that you
can go there, but you can't get all the money there if you
don't change. You are going to go for middle-class Americans,
aren't you? You are going to go for poor Americans, correct?
Mr. Holtz-Eakin?
Mr. Holtz-Eakin. Yes, I think it is very important to
recognize that if you sort of follow that line of reasoning, so
you go get the millionaires and billionaires first, that staves
off a little bit of the problem, the deficit narrows, you put
off fixing the spending program, but the problem hasn't been
solved, so now the mandatory spending ramps up and you have a
big deficit again. What are you going to do?
As I pointed out in my testimony, in the end, you are going
to raise a lot of taxes. You have already used up the rich
people.
Mr. Duffy. Who is next, right?
Mr. Bernstein. Can I just say, I don't disagree with that
analysis. Actually, I agree with it. The one thing I will say,
though, is that if you look at where all the growth in this
economy over the last, say, 4 or 5 years, even going back
further has accumulated, it has been at the top of the scale.
Middle-class people, the folks you are talking about, really
have gotten very little out of the economy's growth going back
a few decades. And so in that sense, there is a logic to that
is where you start. That is all.
Mr. Duffy. Sure. And I am not going to go there, because I
could talk about what is happening to our forestry industry in
Wisconsin, what we are doing with energy exploration, what we
are doing with mining, rules and regulations that impact
manufacturing in my community. We will stay away from that. We
are having a debt hearing here.
And, Ms. Rivlin, you are not considered a rabid
conservative, are you?
Ms. Rivlin. I hope not.
[laughter]
Mr. Duffy. I would think not. And you agree that--listen,
if we are looking to fix this problem, it is not inconsistent
to say we are looking out for poor Americans and fixing a
future debt crisis, right? As a nonconservative, you would
agree with that statement? And you have made it here, right?
Ms. Rivlin. Absolutely. We all have a stake in this,
especially people who don't earn enough.
Mr. Duffy. And, Mr. Bernstein, you are making comments
about what happens to our seniors today who make $24,000,
$25,000 a year. I have a lot of those people in my district. I
am concerned about what happens with these programs for them.
But 15 years from now, there will be another group of
seniors who are going to retire, right? And they are going to
be making $24,000, $25,000, $27,000 a year. And if this system
isn't fixed, these programs won't be available for them, will
they?
Mr. Bernstein. No, they will be 75 percent available to
them, but that is not adequate. So, I agree with your point.
Mr. Duffy. So we are cutting our future poor seniors, if we
don't fix--
Mr. Bernstein. My only point is, don't break Social
Security to fix Social Security. In other words, if someone
says, fix Social Security, I am not sure what they are saying.
If they are saying, let's broadly cut benefits across the scale
or slow the growth rate of benefits across the scale, you are
going to end up hurting people who actually depend on that
income. That is the point.
Mr. Holtz-Eakin. Can I--
Mr. Duffy. And by not fixing the problem, you are going to
hurt poor people and those who haven't saved as much as they
should have either way? Mr. Holtz-Eakin, you have--
Mr. Holtz-Eakin. I think that is unnecessarily alarmist.
There have been a lot of Social Security reform plans. Dr.
Rivlin is the author of some of them. All of them involve
raising the minimum benefit. People are very cognizant of the
need to fix the system and take care of poor people, but I
don't think this is even on the table.
Mr. Bernstein. I think it is on the table, because it is
not just the minimum benefit. Remember, I am talking about the
median recipient.
Mr. Duffy. And just--I have to yield back in one moment,
but when--maybe we have--
Mr. Huizenga. Or right now.
Mr. Duffy. Or right now. I think--
[laughter]
Willie Sutton said he robs banks because that is where the
money is. I think, as you said, Ms. Rivlin, in health care,
that is where the money is, and I think that is where the
conversation has to start. I yield back.
Mr. Huizenga. The gentleman from Wisconsin kindly yields
back.
And with that, we go to the gentleman prepared for the snow
today in his sweater, Mr. Himes from Connecticut.
Mr. Himes. Thank you, Mr. Chairman. And let me thank you
all again. We are deep into hour number 3, and I really
appreciate your work.
I sometimes joke that in the last 5 years, I have put on
probably 10 pounds in various dinners with Maya MacGuineas and
Alan Simpson and Erskine Bowles and others. You have been in
those rooms, too, really helping to educate us, and thank you
for that commitment and for your time today.
I have actually been encouraged by the fact that the
conversation, I think, has been pretty real today. We have
minimized the partisanship and the politicking. So I want to
just ask three categories of questions. The first is, one of
the things that I think has actually set us back, perhaps more
on this side of the aisle than the other, is that for the last
5 or 6 years, we have heard these constant sort of apocalyptic
warnings that we are 1 week from being Greece, that we are, as
Alan Simpson--and don't get me wrong, I have an immense amount
of respect for him--labeled it, the moment of truth, the
possibility that we are months away from skyrocketing interest
rates. I understand this is a difficult question, but I think
it is important.
The kind of specter of skyrocketing interest rates, a loss
of faith in the U.S.'s credit, is anybody willing to sort of
offer a projection? Are we weeks, months, years, decades? How
long do we have? Because I actually do think we will address
this problem. How long do we have?
Ms. Rivlin. I think we are quite a long way from an
apocalypse of a sovereign debt crisis, but that doesn't mean we
can wait to fix the problem, because the things you need to do
to fix it take so long to phase in, if you do it sensibly, that
we needed to start 2 years ago or 20 years ago to do them
right, and now it is the time to start.
Mr. Cote. I find it interesting, with a prediction of a
crisis, that there is oftentimes a feeling that you can just
start from where you are and then start drawing the line. Then
it is just a linear growth of what the explosion possibility
is, when in reality you can't predict when the herd turns. And
when the herd turns, it is too late.
And to the extent that you wait to find out when that is,
that is going to be extremely painful for everybody, so it is
not predictable. The specter is there, but none of us knows
exactly where it is and when that herd turns against you. And
when it does happen, it is too late.
Mr. Himes. I appreciate that. So it is fair to say--and I
completely agree--it is better to have addressed it long ago or
now than to postpone. But it is fair to say that we are not a
year or 2 away from skyrocketing interest rates--and, Ms.
Rivlin, you said apocalypse, but this is not a next week or a
next month problem?
Ms. Rivlin. Yes, I agree with that.
Mr. Himes. Okay, all right. Let me--one of the really
disheartening things that occurred in the last couple of years
was the President, at great cost to his own standing with his
party, in his last budget offered meaningful and uncomfortable
entitlement reform, so-called entitlement reform, in offering
up the chained CPI. It is real. That is real money. It hurt him
with his party. It hurt him with progressives, because, of
course, chained CPI means that some of our least wealthy
seniors will get a little less money in their Social Security
checks in the months and years to come.
That good-faith and costly attempt at entitlement reform
was met with the head of the RNCC saying, ``We will attack the
President for hurting seniors.'' So that gives you a sense for
the challenge that we face when partisanship torpedoes costly
and good-faith efforts at entitlement reform.
So my question is, I do actually believe that most people
in this room want to see Medicare and Social Security reformed
for the long run in a way that insulates the disenfranchised
and the vulnerable. I only have a minute. But I am wondering if
you could each perhaps give us 2 or 3 thoughts on those actual
initiatives within Social Security and Medicare that we should
be willing to embrace on both sides of the aisle to achieve
this.
Mr. Holtz-Eakin. I would say just one thing. I think both
sides of the aisle have to be very clear to the American people
that these programs need fixed. And until we stop pretending
they are fine--you can keep Medicare as you have and Social
Security as we know it--then any attempt to change it proceeds
to be either partisan or pernicious in its foundations. We have
to explain to them that the changes are necessary, the number-
one--
Mr. Himes. No, I hear that. I asked for specific measures.
And I hear you. And, look, it is a tiny minority of my
colleagues who actually will stand in front of anybody and say
this is fine into perpetuity. I think it is a little bit of a
straw man.
I am asking, what two or three things should we embrace
across the aisle to address this problem?
Ms. Rivlin. I think it is a package. And the mistake of the
President was to pull out that one thing. I would favor chained
CPI as part of a Social Security reform that included an
increase in the minimum benefit and the benefit for people who
live a very long time, but a reduction in the revenues over
time--in the benefits over time of very high-income people, not
to zero, but phase it down, and increase in revenues. I think
we should raise the cap on the Social Security payroll tax
going forward.
Mr. Bernstein. I was going to agree with raising the
maximum cap, as well as another idea that was in Rivlin-
Domenici, which had to do with taking some revenue from the
employer tax exemption for health insurance. It is worth
looking into. It is a little more than we can get into right
now--
Ms. Rivlin. Yes, that is very important.
Mr. Bernstein. --but I think it is a good idea.
Mr. Cote. Chained CPI is one that always made sense to me.
On the other side, I have always wondered--20 years ago, I was
saying, I can't count on Social Security being there for me,
yet I am going to receive it. Great.
Mr. Himes. Thank you for your forbearance, Mr. Chairman.
Mr. Huizenga. Yes, it is a rookie Chair mistake.
[laughter]
I got caught up in trying to make sure that we were
equitably distributing our time here, and you snuck one past
me. I guess maybe that was a make-up for the sweater comment.
So with that, we go to Mr. Mulvaney from South Carolina for
5 minutes.
Mr. Mulvaney. I thank the chairman, and I thank the
participants. I always enjoy the opportunity to do this. I
always enjoy the opportunity to sit down and talk about these
very important issues. Obviously, it is a pleasure to have a
chance to listen to Ms. Rivlin and Mr. Holtz-Eakin, for whom I
have a great deal of respect.
I don't know you, Mr. Cote. It is the first time I have met
you, but I have enjoyed what you have had to say today. Mr.
Bernstein, you know that you and I don't agree on many things.
And as someone who is trained in economics, not in music and
social welfare, as you were, to hear your comments on economics
is sort of like listening to somebody scratch a blackboard,
but, still, I appreciate the opportunity.
And then I sit here and I wonder, does it really make a
difference? Are we really accomplishing anything? We are
sitting here today. We are trying to make our points. The other
side is trying to make their points. And we are not going to
fix this. We have a leader in the White House who refuses to
engage, someone who doesn't even--many members of this
committee don't even know who the White House liaison is.
You are not going to solve this problem without leadership.
They are not going to convince us that Mr. Bernstein is right.
We are not going to convince them that Dr. Holtz-Eakin is
right. That takes leadership and the type of leadership that
traditionally in this country has come from the White House.
Whether it be Ronald Reagan or Bill Clinton, we have had a
President who was willing to engage on the difficult issues to
try and drive some sort of resolution to these very, very
complicated issues.
And if we don't get that, then the really important thing
is something entirely different we haven't discussed here. The
really important thing then is, if we don't fix it, all that
really matters is, who is in charge when it breaks, us or them?
That is what it comes down to. That was the issue in 2008, when
we had the Great Recession, and the other side was entirely in
charge and we had stimulus and bailouts and monetary policy
that makes many of us pull our hair out.
So the question becomes, who is going to be in charge the
next time the system breaks? Who gets to fix it, us or them? So
I think it is important that everybody knows who we are and
what we stand for, who they are and what they stand for, and
then they can decide.
So with that, Dr. Bernstein, if I utter the phrase to you,
``From each according to his abilities, to each according to
his needs,'' do you look upon that generally favorably or
generally unfavorably?
Mr. Bernstein. Generally favorably.
Mr. Mulvaney. Thank you, sir. I have no further questions.
Mr. Huizenga. The gentleman yields back in a very unusual
move, giving up time, but I appreciate it.
With that, we go to Mr. Foster from Illinois for 5 minutes.
Mr. Foster. Thank you, Mr. Chairman.
And, let's see. I believe I had a slide coming up on the
monitor, which maybe we caught the monitor operator golf cart.
This is the graph that I hope--there it is. This is Peter
Orszag's graph of the year, which shows the bending of the cost
curve. The fraction of GDP devoted to Medicare spending both
current to the current law projection and according to what
is--what you would anticipate according to the measured growth
rate from 2008 to 2012.
As a scientist, I am very data-driven, and so I think it is
very interesting to look at this and to see that, instead of
rising from 3.5 percent to roughly 7 percent, that actually if
you look at the data for the last 4 years, you will see that it
affects--it bumps up slightly as the boomers retire and need
the Medicare, and then goes back to 3.5 percent.
And so my question, if this is, in fact, the way things
play out, if we have, in fact, bent the cost curve, with a
combination of the stimulus spending and medical health records
and everything in Obamacare, the restructuring of the medical
industry simply to be more--you can argue about what the reason
is, but if this is the truth, this is the way things play out,
is it broken? Is it a crisis?
Mr. Bernstein. If costs truly grow in the health care
system at 3.5 percent instead of 7 percent for all those
years--
Mr. Foster. This is not a--this is the fraction of GDP,
right? The--
Mr. Bernstein. Oh, okay.
Mr. Foster. The Y axis is the fraction of GDP currently--
roughly 3.5--
Mr. Bernstein. Same comment. As a fraction of GDP, if those
costs stay there, Medicare spending stays there as opposed to
the blue line, we have successfully bent the cost curve, which
is--as I think all of us have said--an essential goal of
achieving a sustainable budget path. I actually think there is
no sustainable path that doesn't pass through that gateway.
The question is, the gains that have been achieved, 2008 to
2012, are assuming to continue to 2085. That is a very broad
assumption. I very much hope it is correct, and I also very
much--and I am a student of Peter's work on this--believe that
he is on the right track when he identifies the very
mechanisms, some of which you ticked off, that appear to be
working.
So what I have said in my testimony and what I come from--
and what I take away from that graph is that we have to monitor
these gains and make sure that they stick. The last thing you
would want to do is to repeal measures that have helped to
generate them.
Mr. Foster. Okay, thank you. Ms. Rivlin?
Ms. Rivlin. I agree with that, but I think we need to work
very, very hard to make sure that curve doesn't start
accelerating again, because there are extreme upward pressures.
Doctors are learning every day how to do more things and extend
life, and some of those things are very expensive. So we have
to keep working on, how do we keep that curve bent?
Mr. Foster. All right. But if we succeed at bending the
medical curve like this, then can we solve it much less
painfully on the revenue side?
Ms. Rivlin. Yes. If health care spending isn't going up
faster than GDP, we have a much smaller problem to solve.
Mr. Foster. Mr. Holtz-Eakin?
Mr. Holtz-Eakin. I would just worry about the timescale on
that. You will notice that it keeps going up through--it looks
like 2035, and we are already at 78 percent debt-to-GDP at the
end of the budget window, Social Security is going up, this is
going up, all the other health programs go up. I am not sure
you get to the part where it goes down. We have a big fiscal
problem, and we need to fix it.
Mr. Foster. Yes, Mr. Cote?
Mr. Cote. Yes, from my perspective, given the 30 years of
history prior to that, I don't know that I would bet on this
unique 5-year period following the Great Recession as
indicative of what the future is going to be. So I have all the
same cautions that the other witnesses expressed. I hope it
works out this way. It will clearly make it better. But I sure
wouldn't bet on it.
Mr. Foster. Yes. In fact, it is my belief--this is only
through 2012--that 2013 numbers are, in fact, lower, so that we
are, in fact, better off than the dashed red line. This plot is
about a year old.
Let's see. If I could change subjects a little bit, there
was some discussion about uncertainty. And there are several
things that have come through this committee having to do with
uncertainty generated by government. And one of the big things
that people come to me with is the business of terrorism risk
insurance and that there are a number of contracts that have
this written into it. If it is not reauthorized, there is a big
problem with a very large number of commercial agreements.
And I was wondering if you agree that this is a significant
contributor to uncertainty when these key programs, like
terrorism risk insurance, like the Export-Import Bank, and
whether even a 30-year mortgage will exist, if this also
contributes to uncertainty.
Mr. Bernstein. Absolutely. I would argue even more so than
some of the other factors discussed today.
Mr. Foster. Okay. Thank you, I will yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Kentucky, Mr.
Barr, for 5 minutes. Oops, I'm sorry. Excuse me. Too quick. I
recognize the gentleman from Illinois for 5 minutes, Mr.
Hultgren.
Mr. Hultgren. Thank you, Mr. Chairman. I appreciate that.
Thank you, Mr. Barr, too.
Thank you for being here. This has been a very interesting
hearing for me and an important start, and I think we would all
agree that this is such an important start. So, Mr. Chairman,
thank you for doing this. I look forward to these next months
that we can hopefully really dig into this and see some
significant steps.
Mr. Cote, I want to start with you. First, I want to thank
you for your great work. Another thing I am passionate about is
STEM education and I appreciate you, I think, being recognized
as one of the 100 CEO leaders on STEM education. Thank you for
your great work there. That is very important for all of us, as
well.
I want to ask you--I know, with your role at Honeywell, you
have had a great opportunity to meet with other business
leaders around the world, world leaders. I know you have
touched on this a little bit, but I wonder if you could talk a
little bit more about how you hear for them, their perspective
of our debt, impacting our competitiveness on the world stage.
Mr. Cote. I think the way to think about it is that when
you look at developed economies, everybody is looking to us to
provide leadership for how we are going to get out of this
thing. And I am struck by a comment that the ambassador from
Romania told me at one point, and this is when I was on the
Simpson-Bowles Commission. His comment was, ``We really hope
you address your debt.''
And I said, ``Well, yes, I understand, and it is important
for us.'' And he said, ``No, no, it is not just important for
you. It is important for us, because in a lot of our countries,
we look at it and say, if even the United States can't figure
this out and we count on them being the people to provide
leadership, then what are we going to do?
That really struck me at the time. And I said, that is a
very good point. We need to provide leadership to the world. If
you take a look at, whether it is Europe, the United States,
Japan, or India, everybody is dealing with these big debt
problems. This is an opportunity for us to provide leadership
to the world.
Mr. Hultgren. Thank you. I agree.
Let me--Mr. Cote, in your testimony, you talked about how
this isn't just a Wall Street problem, but also a Main Street
problem. In my opening remarks, I mentioned something that I
hear all the time from my constituents, that life is less
affordable these days. Even people who have been working,
haven't lost their job, to them, life is less affordable.
I wondered if you could--I would open it up to any of you
for a quick comment on, how do you see this impacting costs of
goods, daily goods that people use, the fact that the debt is
as significant as it is? Is there a connection of it really
flowing down and impacting consumers? And I would open it to
any of you.
Mr. Bernstein. I don't see a clear connection between
consumer prices. One of the things that tends to happen in the
history of these variables, the economy slows down, the debt
increases, and because of the economic slowdown, inflation
tends to taper off, and that is what we have seen. So certainly
there are longer-run stories where pressures could occur on
interest rates and on prices, but in the near term, no.
Mr. Hultgren. Does anyone else have any thoughts on this?
Ms. Rivlin. I suspect--though I don't know--that many of--
when many of your constituents say life is less affordable,
they mean they aren't earning as much as--their incomes haven't
gone up as fast as they expected them to. It is not so much the
prices. It is the slow growth in wages.
Mr. Hultgren. I am hearing both. Certainly, filling up your
gas tank is one of those things that people feel. Like going to
the grocery store, you just don't get as much, and I think all
of this ties back together.
Dr. Holtz-Eakin, did you have--
Mr. Holtz-Eakin. I think this is the key point. This has
been a bad recovery from a jobs perspective, but it has been
even worse from an income perspective. And so for those who
have jobs, real wages aren't rising. And then, when you get
spikes in food and energy prices, it feels bad. I don't think
that is any--I think that is the key.
Mr. Hultgren. Let me cover one last thing. I have just a
minute left. But Dr. Rivlin mentioned the idea that part of the
problem we have in getting this on the national agenda is our
short national attention span. I wondered if you have any
suggestions for us of how--what is one message that Americans
need to hear from their Members of Congress so that they will
focus more on this problem?
Ms. Rivlin. I think the message is, we can get together
across the aisle and fix it, rather than just talking about it.
We need to be working on solutions.
Mr. Holtz-Eakin. In my experience, no one cares about the
Federal budget or the debt. They do care about the economy. And
this is about better economic performance.
Mr. Cote. I agree on the economy. And what I would love
politicians to be doing out there is talking about this as a
holistic issue, not just a tax issue, not just a spending
issue. Not just, ``They are trying to take advantage of you.
These guys ate your lunch.'' Rather, it should be a discussion
about, ``Look, we really have an issue here, and we have
overextended ourselves, and we need to work together to figure
it out.''
Mr. Hultgren. Yes, and my time is winding down, so I
appreciate, again, all of you. Thank you for being here. And I
do hope that this can be something we can come together on and
find real solutions.
With that, I yield back. Thank you, Mr. Chairman.
Chairman Hensarling. The Chair now recognizes the gentleman
from Maryland, Mr. Delaney, for 5 minutes.
Mr. Delaney. Thank you, Mr. Chairman.
And, Mr. Cote, I liked the way you just talked about the
holistic issue, because it seems to me that--and you touched on
this, I think, beautifully in your comments--the issue we have
is a competitiveness issue. And that competitiveness issue is
informed by the big macro trends in the world, which are
globalization and technology.
Unless we position ourselves as a country to spread out the
benefits of globalization and technology more broadly around
our society, we will continue to have the kind of economic
picture we have today, which is very barbelled.
And that is really the central issue. Our debt is a
problem. Our debt ultimately, we all know, threatens the
republic, but it is a particular problem in that context, it
seems to me. It is not a problem in terms of today, does it
affect--and you have obviously--you are closer to this than I
am, but does it affect hiring decisions? Or does it affect the
cost of living of average Americans? Because the data would
probably suggest that it doesn't, because our interest rates
are so low, so even though the number is really big, the actual
cost of the debt that is trickling down to consumers is not a
big number.
So it seems to me this problem is, in part, being described
incorrectly. And I used to say in, when I was in the private
sector, that you can't solve a problem unless you can describe
it well. We are not necessarily describing this problem well,
because the problem with the debt is, number one, it does now
and it will prevent us for a long time from doing the things we
need to do to get our economy growing.
And it also puts us in a position that if something really
bad were to happen at the same time rates were going up, and
those things could actually correspond, we have very little
financial flexibility, and that is just a risk factor that we
are carrying with us as a Nation that we don't fully
appreciate. In other words, we have no margin of safety right
now.
You want to run the country with a margin of safety. I am
sure you think about the balance sheet of your--you don't run
at your maximum leverage all the time, because you never know
what is going to come up, but part of the issue is I think we
look at the $17 trillion number and we say, we have to get that
to zero, right? And that is just a totally unrealistic way to
look at this problem.
I am just interested in the panel's opinion on whether we
are actually thinking about this the right way, because it
seems to me what we should be focusing on is the ratio between
our economic growth and our debt as a percentage of our GDP. If
we could have economic growth at 3 percent, like, Mr. Cote, you
optimistically mentioned earlier, and if we get our debt down
to 1.5 percent of GDP, if we could do that, we are done, right?
Because it seems to me, over 20 years, if our economy grows
at 3 percent, it will go from like a $17 trillion economy to a
$30 trillion economy. And if we have 1.5 percent debt as a
percentage of GDP over 30 years, it will go from like $12
trillion to $18 trillion, and so these ratios will go from 72
percent to 60 percent. That should be our goal.
Do you all agree that is the way we should be thinking?
Because we don't actually have to have zero deficit as a
country. And I think to think that we are going to have a
deficit of zero in light of the demographics of our Nation
right now, I just think is almost an unrealistic goal. And if
you set an unrealistic goal, you can't achieve it, because
people kind of give up before they start.
I am just interested--maybe I will start with Mr. Cote, and
go quickly down the line--if that is the right framing for us
to be thinking about this question.
Mr. Cote. I would have to run the math. Conceptually, what
you said sounds interesting to me. My concern, though, would
still be that we never forecast recessions.
Mr. Delaney. Right.
Mr. Cote. And as I understand it, CBO is actually asked not
to forecast recessions.
Mr. Delaney. Right.
Mr. Cote. The thought that over the next 10 years there
won't be another one and how bad might it be and what kind of
firepower we need and what kind of hole does that dig for us,
over the next 20 years with the demographic bubble really
hitting us in the second decade, not this one, and the prospect
of at least two recessions during that time, that needs to be
factored into our consideration. And I am just fearful that it
isn't.
Mr. Delaney. Right. Ms. Rivlin?
Ms. Rivlin. I agree with the general spirit of your remark,
which is what matters is the ratio of the debt to the GDP. And,
remember, we have run this experiment. After World War II, that
is exactly what we did. We grew the economy faster than the
debt. It was a big success.
Mr. Delaney. But it seems to me, if we do what we all know
we have to do--there is a screaming need in this country for us
to reform the entitlement programs and the mandatory spending
programs. We cannot get the debt as a percentage of GDP down to
that kind of 1.5 percent level, unless we do that. And we need
to do things, Mr. Cote, you spoke about, in terms of a
competitiveness agenda.
And whether the number is 2 percent, 2.5 percent, or 3
percent economic growth, because you are right, 3 percent is
good years, you get a couple of recessions along the way, it
averages down to 2.5 percent, that math still works, if we can
get 1.5 percent to 2.5 percent.
Dr. Holtz-Eakin?
Mr. Holtz-Eakin. I am just going to agree with what has
been said. The key indicator is debt relative to GDP. Our goal
should be to stabilize it as quickly as possible and then send
it south. And the--
Mr. Delaney. Where do you think across, say, the next 10 or
20 years, the deficit as a percentage of GDP is a reasonable
target for us?
Mr. Holtz-Eakin. I wouldn't target the deficit. I would
target the debt. Get the debt down, by either growing rapidly--
Mr. Delaney. To what percentage of our economy?
Mr. Holtz-Eakin. Get it back down to 30 percent, please,
quickly.
Mr. Delaney. You think the--
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Kentucky, Mr.
Barr, for 5 minutes.
Mr. Barr. Thank you, Mr. Chairman. And I appreciate my
friend, the gentleman from Maryland's, comments and questions
relating to competitiveness and relating to the screaming need
for entitlement reform, as he suggested. I agree with him, and
I appreciate his perspective.
To the point of competitiveness, Dr. Rivlin, I have a
question for you. I wanted to ask whether you believe that
raising taxes is a solution from a competitiveness standpoint
or whether raising taxes would be a self-defeating effort.
And I would reference a couple of observations about this,
one from former CBO Director Peter Orszag, who said that tax
rates would have to be raised substantially to finance the
level of spending that we are projected to pursue on the
baseline. The tax rate for the lowest tax bracket would have to
be increased from 10 percent to 25 percent. The tax rate on
incomes in the current 25 percent bracket would have to be
increased to 63 percent. And the tax rate of the highest
bracket would have to be raised from 35 percent to 88 percent.
And the top corporate income tax rate, which by the way is the
highest in the world right now, would also have to increase
from 35 percent to 88 percent.
And then, also, a second observation--the Third Way
Foundation, which is, I believe, a liberal-leaning think tank
in a 2012 report indicated that relying on taxes alone to hold
long-term deficits at 3 percent of GDP would require phasing in
a 60 percent tax increase on median-income families, raising
their annual tax burden $6,200 in 2012 dollars.
So with that in mind, is raising taxes a sound deficit
reduction strategy? Or would it compromise American
competitiveness and be self-defeating as we look to reduce the
deficit?
Ms. Rivlin. I think all of us have agreed that we can't
solve this problem by revenues alone or by spending alone or by
growth alone. That is not controversial. And I am not
personally in favor of raising tax rates at all. I think we can
reform our Tax Code, and Chairman Camp has a good example of
how to do this, by broadening the base, by getting rid of
spending in the Tax Code or reducing it drastically, and that
will allow us to lower the rate--
Mr. Barr. Republicans often--
Ms. Rivlin. --and get us more revenue in the bargain.
Mr. Barr. Dr. Rivlin, Republicans often talk about tax
relief and Democrats often talk about focusing on raising
revenue. Are there tax cuts, are there tax relief proposals
which would also produce the kind of growth that would raise
revenue? And could you identify those for us?
Ms. Rivlin. Yes, I think that the plan in Simpson-Bowles,
and the plan in Domenici-Rivlin, which was even better, are
examples of such an approach.
Mr. Barr. Okay. And to Dr. Holtz-Eakin, Keynesians
regularly and accurately, in my opinion, describe fiscal
restraint as austerity. They criticize spending cuts as harmful
to growth. Two questions. One, are the Keynesians right? Do
spending cuts necessarily impair economic growth? And, two, are
all spending cuts equal? And which spending reforms are the
kind of reforms which would have less negative impact on the
economy?
Mr. Holtz-Eakin. I will take the second one first. Not all
spending cuts are created equal. Some are truly investments,
and we genuinely need better infrastructure programs in the
United States. I was on a commission that recommended some. I
would be happy to get you the report. Those are very
different--cutting those is very different than cutting a
transfer program. And so, that is point number one.
And the spending cuts we need to worry about. The spending
we need to focus on is where the money is, in the mandatory
spending.
Mr. Barr. Mandatory spending. Thank you. And for any of the
panelists here, I wanted to ask you about the impact that the
national debt could potentially have on our foreign policy
decision-making in this country. In an article in Barron's last
week on Russian holdings of U.S. Treasuries, an adviser to
President Putin said that they hold a decent amount of Treasury
bonds, U.S. Treasury bonds, more than $200 billion, and if the
United States dares to freeze accounts of Russian businesses
and citizens, they can no longer view America as a reliable
partner, and they will encourage everybody to dump U.S.
Treasury bonds, get rid of dollars in an unreliable currency,
and leave the U.S. market.
In evaluating possible responses to Putin, Putin's
aggression in Ukraine, how much weight should be put on the
fact that Russia owns a material amount of U.S. Treasuries?
Mr. Holtz-Eakin. I don't think you should look at that
incident in isolation. The point is that the United States is a
reserve currency, which helps us in all aspects of our
international affairs. The U.S. Treasuries are the foundation
of the global financial system. And liquid Treasuries are
important.
Preserving that, the reserve currency and the liquid
Treasury, means getting our fiscal house in order. If we do
that, we negotiate in all circumstances from the high ground.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Pennsylvania,
Mr. Fitzpatrick, for 5 minutes.
Mr. Fitzpatrick. I thank the chairman for calling the
hearing. Chairman Hensarling has really had a laser focus on
the issue of the national debt since he took the chairmanship,
which is really important, given the challenges in this town.
And I agree that, when I came here in the class of 2010, there
was an awful lot of focus on spending, debts, deficit, and the
like, not so much anymore as issues sort of evolve around us,
as Dr. Rivlin said in her opening comments.
There is not as much attention today, although earlier this
morning, the Peter G. Peterson Foundation issued a press
release that says Americans remain troubled by the long-term
fiscal outlook. Only 29 percent of Americans say the country is
headed in the right direction in addressing our national debt,
with 59 percent believing the country is heading in the wrong
direction. It goes on to say that voters are deeply concerned
about America's long-term fiscal challenges.
And although I don't hear it as much as I used to, I still
hear it when I go back into my district in Bucks County,
Pennsylvania. Mr. Chairman, these letters have all been
received in my office since January of this year. And they are
all about the national debt. I would ask unanimous consent that
they be submitted as part of the record, if I could.
Chairman Hensarling. Without objection, it is so ordered.
Mr. Fitzpatrick. I appreciate that.
The interesting thing about these letters is that every one
of them was written by a teenager concerned about the national
debt. Alex Frischmann of Newton, which is in Council Rock
School District, a great school district in south-central Bucks
County, wrote to me in February. He said, ``This enormous debt
that our country is experiencing is depressing growth right
now. For Americans, this means fewer jobs, lower incomes, and
depressed behavior/attitude. I believe if our nation continues
to go deeper into debt, unemployment rates will continue to
increase, and businesses in our country will feel the
effects.''
Tia Farese, in January, wrote that, ``I am worried because
interest costs on debt takes away from the United States
Government spending on important programs like education. I am
especially worried about how increasing the national debt will
affect future generations, including mine, because we will be
paying off the debt and the interest for the spending by others
today. I believe forcing future generations to pay for debt
created today is not fair, because we were not the ones to
cause our country to go into debt.''
And we have had a great discussion here today in the
hearing about debt-to-GDP and ratios and baselines. But there
is a whole moral question, as well, that all of us need to
address and need to think about as we go about making the
important decisions.
And I would ask each of you, if you would, if Alex were
here or Tia were here, what would you say to them about the
future of their country?
Mr. Cote. I would say their letters are right on the money,
and I wish they would write to all the other teenagers in the
country to do the same thing, because they are absolutely
right. They are the ones who are going to be the most affected
by this and the ones who are going to inherit all the problems
that we are creating.
Mr. Fitzpatrick. Dr. Rivlin?
Ms. Rivlin. I agree. And I do think it is a moral issue.
But it isn't a simple issue. We really have to work through
this problem in a bipartisan way.
Mr. Holtz-Eakin. I am deeply concerned that we will default
on the traditional commitment to leave behind an economy that
is larger and stronger and a Nation that is more secure,
because we will not take care of these problems. And I think
that is a tremendous immorality visited on future generations.
Mr. Bernstein. I hope that they maintain that level of
insight as they grow up. Those are some very precocious
constituents you have there.
Mr. Fitzpatrick. Elyse McMenamin suggests removing baseline
budgeting from annual Federal budgets permanently. The theory
is that you just--you start with a baseline, and you increase
each and every year. Any thoughts on removing baseline
budgeting? Dr. Bernstein?
Mr. Bernstein. I think baselines are--we have a couple of
former CBO Directors up here. I think it has become incredibly
confusing. There are numerous baselines, and I think the
average person, even if they wanted to, would have a very hard
time making sense of this, so somehow we have to do a better
job of explaining it.
Sometimes I think it would be good if we occasionally
thought about zero-based budgeting, where we actually built the
budget from the ground up and looked at every piece of it with
a more careful eye.
Mr. Fitzpatrick. Dr. Eakin?
Mr. Holtz-Eakin. I am not a big fan of zero-based
budgeting, because realistically that is almost impossible to
do. There are lots of improvements that can be made to the
baseline budgeting, so build a better baseline. Don't throw it
out.
Ms. Rivlin. I agree with that. You have to start from where
you are, and you need to know where you are.
Mr. Fitzpatrick. I yield back. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
There are no other Members in the queue.
I would like to thank our witnesses for their testimony
today. And the Chair would note, notwithstanding the compelling
nature of the testimony, the national debt clock increased
roughly $385 million during your testimony.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
This hearing stands adjourned.
[Whereupon, at 12:53 p.m., the hearing was adjourned.]
A P P E N D I X
March 25, 2014
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