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


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

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

                                HEARING

                               BEFORE THE

                       SUBCOMMITTEE ON OVERSIGHT

                                 OF THE

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             FIRST SESSION

                               __________

                            DECEMBER 6, 2023

                               __________

                          Serial No. 118-OS04

                               __________

         Printed for the use of the Committee on Ways and Means
         
 [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
 
                              __________

                   U.S. GOVERNMENT PUBLISHING OFFICE                    
55-784                  WASHINGTON : 2024                    
          
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                      COMMITTEE ON WAYS AND MEANS

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

                       SUBCOMMITTEE ON OVERSIGHT

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

                              ----------                              

                           OPENING STATEMENTS

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

                               WITNESSES

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

                    MEMBER QUESTIONS FOR THE RECORD

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

                   PUBLIC SUBMISSIONS FOR THE RECORD

Public Submissions...............................................    95
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   HIDDEN COST: THE TRUE PRICE OF FEDERAL DEBT TO AMERICAN TAXPAYERS

                              ----------                              


                      WEDNESDAY, DECEMBER 6, 2023

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

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

    Mr. DRIESSEN. Chairman Schweikert, Ranking Member Pascrell, 
and members of the subcommittee, my name is Grant Driessen, and 
I am a specialist in public finance at the Congressional 
Research Service. Thank you for inviting me to testify----
    Chairman SCHWEIKERT. Can you pull the mic closer?
    Mr. DRIESSEN. Yeah. I never think it is----
    Chairman SCHWEIKERT. The room has poor acoustics.
    Mr. DRIESSEN. Yep. Yep. Every time, I will make that 
mistake.
    Thank you for inviting me today to testify on behalf of 
CRS. As requested, I will provide background on Federal debt 
management, briefly summarize current practices, and discuss 
developments and policy issues in light of recent budget and 
economic outcomes and projections.
    Congress now holds the authority to issue debt on behalf of 
the United States through the power granted in Article I, 
section 8 of the Constitution. While this power was delegated 
to the Treasury in 1789, Congress retains control over spending 
through the budget and appropriations process, revenue levels 
through tax legislation, and total borrowing through the 
statutory debt limit.
    If spending exceeds revenues, Treasury determines what type 
of debt instruments are used to finance the borrowing necessary 
to fulfill all obligations. Treasury aims to fulfill the 
government's borrowing needs at the lowest cost over time, 
while also acting predictably in maintaining sufficient 
liquidity for financial--or Federal financial operations.
    Beyond financing the government, Federal debt management 
also affects global markets due to the influential role of the 
United States in the world economy.
    Federal debt management has more influence on future budget 
and economic performance in the current high-debt, high-deficit 
environment. Persistently large deficits have led to 
significant increases in Federal debt in recent decades, with 
heightened increases during the Great Recession and pandemic, 
but also with steady or increasing real debt in other, more 
normal economic periods.
    Debt held by the public was $26.8 trillion at the end of 
November of 2023, or about 98 percent of gross domestic 
products, GDP. As the stock of real debt and average Federal 
interest rates rise, budget forecasts project that net interest 
payments will grow faster than both the general economy and 
other Federal spending and revenues.
    CBO's long-term baseline projects that, under current law 
and average economic conditions, net interest payments will 
grow from 2.5 percent of GDP in fiscal year 2023 to 6.7 percent 
of GDP in the fiscal year 2053. That 2053 figure is larger than 
projections of either total discretionary spending or Social 
Security spending.
    The Federal Government currently issues debt through 
several instruments, including Treasury bills, notes, and 
bonds, with maturities varying from several weeks to 30 years. 
These Federal securities are issued through an auction process. 
Auctions and their offering amounts are scheduled and announced 
in advance of the auction date.
    The Federal Reserve, or Fed, works with Treasury's Office 
of Debt Management, acting as their fiscal agent. Because they 
are also backed by the full faith and credit of the United 
States Government, Treasury securities are often seen as one of 
the safest investments available, which significantly lowers 
Federal net interest costs relative to other investment 
vehicles.
    Federal securities are owned by both individuals and 
institutions, domestic and foreign. In June of 2023, Federal 
Reserve banks were estimated to hold about 20 percent of 
Federal debt held by the public, other domestic entities were 
estimated to own another 50 percent, and the remaining 30 
percent or so was attributed to foreign entities.
    Longer term securities generally command higher interest 
rates compared to shorter term securities because investors 
demand greater compensation for incurring risk over a longer 
period of time.
    Generally, a strong economy or high inflation will be 
accompanied by high interest rates, which may make the 
prioritization of short-term issuances more attractive. This, 
however, could lead to more volatile and uncertain yearly 
interest payments as Treasury would have to enter the market 
more often. It involves a degree of uncertainty over future 
market behavior.
    During periods of economic downturn and low interest rates, 
Treasury may decide to prioritize instruments with longer 
maturities to take advantage of lower borrowing costs, though 
such periods may also present an elevated need for predictable 
behavior and higher levels of liquidity to respond to economic 
turbulence. Interest rates can shift suddenly throughout the 
business cycle, underscoring the value of a flexible portfolio.
    Developments in recent years presented new challenges for 
Federal debt management. Treasury responded to an 
uncharacteristically long period of low interest rates between 
the mid-2000s through the peak of the COVID pandemic by relying 
more heavily on debt instruments with a longer maturity period, 
locking in the low interest rates experienced at that time.
    Interest rates have subsequently increased in the past 
couple of years, and Treasury securities faced an inverted 
yield curve with shorter term debt instruments having higher 
rates of interest than longer term ones for much of 2022 and 
2023. These shifts further complicate the strategic choices for 
Federal debt moving forward.
    Thank you for the opportunity to testify today. I look 
forward to any questions that you may have.
    [The statement of Mr. Driessen follows:]
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    Mr. SCHWEIKERT. Thank you.

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

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

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

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

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

    Mr. FAULKENDER. Chairman Schweikert, Ranking Member 
Pascrell, members of the subcommittee, thank you for the 
opportunity to testify today on the costs to the American 
people arising from increased Federal debt service. I have been 
a finance professor for more than 20 years and had the 
privilege of serving as the assistant secretary for Economic 
Policy at the Department of Treasury from 2019 to 2021.
    In fiscal year 2018, outstanding public debt was just under 
$16 trillion. Cost of servicing that debt totaled $351 billion. 
By the end of fiscal 2023, public debt had risen to more than 
$26 trillion. Debt service increased to $666 billion.
    So while the cost--while the debt outstanding has risen 67 
percent, the cost of servicing that debt has risen 90 percent, 
the result of the higher interest rates were seen recently.
    Even before COVID hit, our Nation was on an unsustainable 
fiscal path. While the CARES Act was necessary to mitigate the 
economic harm from the pandemic, that spending was entirely 
debt financed. Spending has not returned to its pre-COVID 
levels. According to CBO, as was just said, government spending 
will continue to rise, consuming 23 to 25 percent of national 
output each of the next 10 years compared to the last 50 years 
of just 21 percent. Revenue forecasts are at 18 percent of 
national output, which are above where revenues have been for 
the last 50 years at 17.4 percent.
    This permanent spending increase means debt as a percentage 
of GDP will rise unsustainably. A financial report of the U.S. 
Government forecasts that if this current policy were extended 
over the next 75 years, it would result in a debt-to-GDP ratio 
of 566 percent, compared to just 78 percent 5 years ago.
    Debt service costs are the result of both the amount of 
debt outstanding and the interest rate environment. One might 
think that minimizing interest costs is accomplished by simply 
issuing the maturity with the lowest yield. However, it depends 
upon the time horizon over which one is minimizing debt service 
costs.
    In 2020, interest rates on 1-year bonds were less than 10 
basis points, while coupon rates on the 10-year were at 0.625 
and, on the 30, were as low as 1.25 percent. If one were merely 
looking to minimize debt service costs in 2020, one might think 
Treasury should have only issued short-term debt. Instead, the 
Secretary increased the quantity of long-term debt in 2020 that 
was issued. While that marginally raised debt service costs, 
the American people today benefit from the fact that we issued, 
quote, higher-cost debt because, today, Treasury is still just 
paying 62 basis points on the 10 years that were issued at the 
time rather than the 4 to 5 percent that they would be rolled 
over at today.
    Significant academic work on the term structure of interest 
rates of debt issuances at different maturities find it to be 
upward sloping because, as was mentioned, investors bear 
greater risk on long-term bonds. One might, therefore, conclude 
that interest costs would be minimized by issuing just short-
term debt. However, the bonds issued in 2020 demonstrate that 
there may be market conditions where Treasury will reduce long-
term borrowing costs by issuing long-term bonds.
    As the chairman mentioned, recently, long-term bond 
auctions have shown less demand than normal, particularly from 
international buyers. The central banks of both Japan and China 
have been reducing their ownership of U.S. Treasuries, likely 
reflecting that investors are growing more concerned about our 
Nation's long-term fiscal stewardship.
    Whether we should pull back on issuing long-term Treasury 
bonds depends on whether government policy succeeds in reining 
in the recent 40-year high inflation. Reductions in budget 
deficits, deregulatory unleashing of the American economy would 
bring down inflation more effectively than the Federal Reserve 
merely raising interest rates.
    Issuing short-term debt that can be rolled over at lower 
bond yields would reduce long-term debt service costs. If, 
instead, we continue running unsustainable budget deficits and 
disincentivizing output, locking in today's interest rates 
might best mitigate the potential costs of having to roll over 
debt at even higher interest rates.
    I know that some have expressed concern that foreign 
holdings of U.S. Treasuries are problematic for Americans. I 
would differentiate Chinese holdings in technology firms who 
provide inputs into sensitive national security tools or the 
purchases of farmland near military facilities as different 
than holdings in U.S. Government debt.
    I believe we should welcome lower Treasury borrowing costs 
arising from foreign countries wanting to invest in our 
Nation's future, provided that those investments don't 
sacrifice defensive capabilities.
    I believe we net benefit from being the world's reserve 
currency. In addition to lowering borrowing costs, it 
facilitates implementation of our National Security Strategy to 
monitor arms dealing, drug trafficking, and other illicit 
activities. Further, it facilitates using sanctions as an 
economic tool to punish bad actors, enhancing potential 
military and diplomatic activities.
    The impact on the American people of higher debt service 
costs extends beyond future tax rates. Rising interest costs 
will likely crowd out funding for other government services. 
Additionally, mortgage rates paid by American home buyers 
directly result from the long-term borrowing rates for the U.S. 
Government.
    I believe the best way for us to improve access to home 
ownership for young people is to get interest rates back down, 
which means the fiscal and regulatory policy need to assist the 
Federal Reserve in bringing down inflation.
    I look forward to answering your questions.
    [The statement of Mr. Faulkender follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman SCHWEIKERT. Thank you, Doctor.
    As chairman's prerogative and an idiosyncrasy, I will go 
last in my questions. Think of it as batting cleanup.
    Mr. Fitzpatrick.
    Mr. FITZPATRICK. Thank you, Chairman Schweikert, for 
holding this hearing.
    There is no question that the greatest economic and 
national security threat we face is our long-term debt and 
deficit. We can point fingers and argue all day long about 
whether it is a revenue or a spending issue, but one thing is 
clear, there is only one thing that will fix the problem, and 
that is a bipartisan, bicameral solution where everybody comes 
to the table.
    Our national debt has increased more than $6 trillion just 
in the past few years alone. The United States is currently--
our debt stands at $33.8 trillion in debt. And as we know, the 
primary objectives of the Treasury's debt management strategy 
is to issue debt in a regular and predictable manner, to 
provide transparency in the decision making process, and to 
seek continuous improvements to the auction process.
    So, Mr. Smetters, I will start with you. Do you believe the 
Treasury's current debt management strategy is meeting these 
objectives?
    Mr. SMETTERS. The auction design is, I think, fairly 
efficient. It is a very large market. The secondary market is 
very liquid. From an economist's perspective of we are going to 
start all over again, I actually would have the U.S. Treasury 
mostly focus on long-term debt issuance, even if it means a 
higher interest rate that is paid.
    And the reason why we currently have the situation that we 
have is that we have debt markets who are making bets against 
what they think Treasury will issue in the future, Treasury 
making bets against the debt market, and that is not 
competition; that is just an incredible source of uncertainty. 
Instead, Treasury should focus on what it actually does.
    So it is a big bias currently in the budget right now, 
where it rewards Treasury for lowering the expected costs, 
freeing up money for other things, but it doesn't penalize for 
anything like rollover risk that comes associated with that 
shorter term cost. I would remove that budget bias. I have an 
idea in my written remarks to do that.
    But the real value that Treasury brings is the thing that 
private markets cannot bring, and that is the long-term, risk-
free asset.
    Mr. FITZPATRICK. Thank you.
    Mr. Faulkender, as I understand it, the Treasury's debt 
servicing strategy not only impacts private investment income 
growth and things like mortgage rates, but also impacts the 
Federal Government's ability to spend on other policies and 
programs. Is this correct, number one?
    To put it another way, how does the dramatic increase in 
debt servicing costs impact the Federal Government's ability to 
spend money on other policies and programs?
    Mr. FAULKENDER. So, yes, it is correct, in that the 
Treasury rate serves as the base rate for most, if not all, 
world--you know, global financial transactions. When we think 
about pricing out the interest rates, we would see on whether 
it is mortgage securities, whether it is on car loans, but even 
international bond issuances, the Treasury rate serves as a 
base reference rate that is used.
    And so while I would not--while I wouldn't argue we should 
push towards entirely long-term, I think it is beneficial that 
we have--that Treasury issues the whole spectrum of interest 
rates to provide those base rates for a variety of 
transactions, and I think that their work with the Treasury 
Borrowing Advisory Committee to get guidance on where there are 
clientele effects or gaps in the maturity structure is 
beneficial.
    Mr. FITZPATRICK. Thank you.
    I yield back, Mr. Chairman.
    Mr. SCHWEIKERT. Thank you, Mr. Fitzpatrick.
    Mr. Pascrell.
    Mr. PASCRELL. Thank you, Mr. Chairman.
    Mr. Kogan, we have had a front-row seat in the last couple 
years as America's credit has been endangered. We have only 
escaped fiscal calamity by the skin of our teeth, listening to 
all of our great speakers here today.
    So, over a decade ago, our committee heard testimony from 
the former IMF chief economist who said the impacts of default 
would be 10 times worse than the Great Recession. That is what 
he said 10 years ago.
    Can you detail what a default would mean for everyday 
Americans, as quickly as possible?
    Mr. KOGAN. Sure. So there are two points I want to make on 
that, Congressman. Appreciate the question.
    The first is on the credit side, and then the other is on 
the government side.
    Mr. PASCRELL. Right.
    Mr. KOGAN. So as my fellow panelist was saying, the entire 
financial system is capitalized through the U.S. Treasury 
market, and so any single transaction that involves credit 
would be more expensive. The whole point is that, if the 
government says it is going to pay you a certain amount in a 
certain time, you believe it. But if we are in default, that is 
no longer the case.
    And so home loans, auto loans, anything that involves 
credit is more expensive. But even if you are just buying from 
a business and you are not doing any credit, if the business is 
involved in the credit market and that is more expensive, then 
now the business costs are up. So any kind of purchase from an 
individual is more expensive. So that is on the credit side.
    And on the government side, the government is not allowed 
to issue new debt, which means it has to dramatically pull back 
its spending as we are no longer allowed to run deficits, and 
that means that any of the benefits that the American people 
rely on are no longer assured to come on time in the full 
amount--veterans benefits and disability compensation, child 
care, Medicaid payments to the States, you name it--those are 
all no longer guaranteed. So it would be cataclysmic for the 
country and for the world that also relies on the global 
financial market.
    Mr. PASCRELL. And I think you would agree with me that, 
when we look back historically, both parties are at fault in 
getting to the red line, some more appreciably at different 
times, obviously. But in 2011 and 2013, in 2015, in 2023, this 
was driven by the Congress.
    The debt extortion--I use that word strongly--has led to 
devastating consequences. Our Treasury debt has long been the 
world's safest asset, historically, but default extortion has 
lowered credit ratings and created higher borrowing costs. You 
guys have referred to that.
    Can you explain how even threatening a default on our debt 
impacts our Nation's economy and the ability of the Federal 
Government to maintain a stable market for Treasury securities?
    Do you understand my question? Am I clear?
    Mr. KOGAN. Yes, Congressman. So absolutely, as we said, the 
entire--the entire financial market is capitalized by these 
Treasuries. So if you are no longer certain--even if we don't 
default, if you now have in the back of your mind that we might 
default, then, especially for the longer term bonds, you are 
going to want to price in some uncertainty. And that is going 
to raise up--that is going to raise rates.
    Now, it is not going to be cataclysmic in the way that the 
actual default would be, but that raises the bar and cost in 
the margin of everything. So it is--if you want to talk about 
government waste, that is pure government waste. It is 
uncertainty out of nothing that raises borrowing costs both for 
the government and for everyday Americans.
    Mr. PASCRELL. Thank you.
    The deficit fell by a record $1.7 trillion during President 
Biden's first 2 years. The President has a plan to reduce 
deficits--have you seen that plan--by nearly $3 trillion over 
the next decade.
    We have been focused on looking and protecting Social 
Security, Medicare. Members on both sides have different views 
of that.
    Can you explain why spending programs like Social Security 
and Medicare are not primarily responsible for our deficit? Why 
is it necessary to increase revenue and close the tax gap to 
reduce the deficit?
    Mr. KOGAN. Thank you, Congressman. So taking the second 
part of your question first, the tax gap for anyone listening 
who is unfamiliar, it is the difference between the amount that 
is legally owed under law and the amount that we take in. So 
the tax gap is the mixture of people cheating on their taxes 
and then accidentally paying the wrong amount. It is estimated 
to be over $600 billion a year. Again, that is how much we 
don't take in that we are supposed to.
    That is bigger than the fiscal gap. So if tomorrow--
obviously, you actually--it is impossible to recoup all of it, 
and then you actually have to spend money to get it. But if 
tomorrow everyone started voluntarily paying the correct amount 
and not making mistakes, that would be enough to change our 
fiscal trajectory to having debt decline indefinitely. So it is 
an incredibly important source.
    The fiscal gap is 1.7 percent of GDP, and it is bigger than 
1.7 percent of GDP. So, therefore, it is just a mathematical 
truth; that will be enough to have debt declining indefinitely. 
It is a great source of revenue to have people pay the taxes 
that they already owe.
    As to the first question for why it is spending--so why it 
is not spending, again----
    Mr. SCHWEIKERT. Yeah.
    Mr. PASCRELL. Let him finish his answer.
    Chairman SCHWEIKERT. No, no, no. Let you finish, and then 
we can get----
    Mr. KOGAN. Okay. Sorry. As to the first part of your 
question, it is just--as I said in my testimony, these two tax 
gaps are bigger than the fiscal gap, so regardless of whether--
where you kind of want to place blame, like, we can--we 
mathematically know that they are enough to stabilize debt. And 
then the question about why we think that that is more fair 
than spending, it is just that spending is down and not up.
    Chairman SCHWEIKERT. And for management of the room, we are 
just going to start doing two to one just because the ratio 
is--Mr. Steube.
    Mr. STEUBE. Thank you, Mr. Chairman.
    When I was elected to Congress only 5 years ago, the debt 
was $21 trillion. Today, it is almost $33 trillion. So in 5 
years, we have put $13 trillion on the debt, and it is a 
staggering number that seems almost incomprehensible, 
especially to those in my district.
    When I try to explain that Washington has a spending 
problem and we are not addressing and balancing our budget, I 
come from the State of Florida, where we are required by 
constitution to balance our budget every single year. And so 
the legislature is very good about making sure that we are 
operating like you would operate your family or operate your 
business and not getting ourselves into the incomprehensible 
levels of debt that we have gotten our country into.
    Unless Congress gets serious about our spending problem, 
the consequences of Congress' failure to govern responsibly 
will have a disastrous impact on lives of several generations 
of Americans.
    It is true that deficit spending is nothing new. With only 
a few exceptions over the past several decades, the Federal 
Government spends more money than it receives every year. Since 
we do not actually have the money to pay for our spending, the 
government borrows money by issuing debt in the form of 
Treasury bills, notes, and bonds.
    In just the past few years, the amount we are forced to 
borrow has grown dramatically. The national debt increased by 
almost $2.5 trillion just in this past year alone. Despite 
Congress' best efforts to bury its collective head in the sand, 
the bill will ultimately come due.
    The interest payments on our existing debt are growing at 
an unsustainable rate. In fiscal year 2023, Federal net 
interest payments skyrocketed up to $659 billion, a 40 percent 
increase from just the prior year. Debt servicing costs will 
soon be the second largest line item for Federal spending, 
which will put it ahead of Medicare and defense spending.
    In recent months, both Fitch Ratings and Moody's downgraded 
their credit ratings on the government due to the large fiscal 
deficits and rising interest rates. We have been able to issue 
debt on favorable terms in the past because investors viewed 
them as a low-risk investment. Unfortunately, our bad decisions 
are catching up with us, and the market is starting to notice.
    We got away with spending like this for too long because 
interest rates were historically low. However, rates are on the 
rise, and our government does not appear to be ready for the 
consequences. Politicians from both sides of the aisle share 
blame for our addiction to spending money we do not have, and 
we are just now beginning to bear the consequences.
    Mr. Faulkender, I will start with you. Given the dramatic 
increase in debt servicing costs that we are experiencing, 
shouldn't this encourage Congress to tighten our belt instead 
of borrowing more money at a higher rate?
    Mr. FAULKENDER. Certainly, yes. We definitely need to 
tighten our belts.
    Mr. STEUBE. Your testimony points out that demand for 
Treasury securities at long-term bond auctions has declined. 
Why is that?
    Mr. FAULKENDER. That is correct. So if we look at the last 
couple--there was a 10-year auction and a 7-year auction 
recently where there was less demand, particularly from 
international buyers, and so the prime dealers who participate, 
they had to soak up more of the issuances than they normally 
would have to.
    Mr. STEUBE. Well, and you said two. What--like, what are 
the implications for that on the taxpayer?
    Mr. FAULKENDER. So the implications are that yields, 
therefore, are going to be higher. The auction outcome at which 
the issuance actually goes through results in a higher yield, 
which means that interest payments are higher than what they 
were expected to be.
    Mr. STEUBE. So, in the last exchange with Mr. Pascrell, Mr. 
Kogan was talking about, if we were able to magically get $600 
billion of people to pay what they are supposed to pay, do you 
guys have any response to that or do you have a difference of 
opinion on that issue?
    Mr. FAULKENDER. Well, I think there are two parts, right. 
There is the tax gap, and then there is also had we not engaged 
in some of the tax cuts. If that were the case--remember that 
the Tax Cuts and Jobs Act, for instance, made the Tax Code more 
progressive, not less. And so, you are talking about a time of 
an affordability crisis for many American households, and the 
argument seems to be if only middle-class taxpayers were paying 
more taxes.
    Mr. STEUBE. Mr. Smetters.
    Mr. SMETTERS. So even if we collected all the uncollected 
tax revenue, it is not going to come close to----
    Chairman SCHWEIKERT. Can you move closer to your 
microphone?
    Mr. SMETTERS [continuing]. It is still not going to balance 
the budget. It is simply the numbers aren't there. That is a 
big hypothetical if we can even get a lot of that money.
    I mean, the bottom line here is, you know, taxes have 
come--revenues come down, spending has gone up. And both sides 
are really to blame. In particular, if you just look at 
spending for fiscal year 2023, it is about $600 billion, $700 
billion more than you would have guessed just by trending the 
line pre-COVID. So, both are happening.
    Mr. STEUBE. Do you have anything to add to that in the 
remaining time I have?
    Mr. DRIESSEN. Yeah. So, you know, I think $600 billion 
would be helpful if we could kind of improve that on that side 
of the ledger. And I think, while I think some of the numbers 
that we have been throwing out are quite pessimistic, one thing 
I would want to communicate is, the sooner we act, even if it 
is only partially acting, the better, whether it is on the 
revenue reside or on the spending side.
    I think, you know, it would not get rid of the deficit 
entirely. Collecting $600 billion more in revenue every year 
would probably go some way to improving our debt trajectory, 
though how much is kind of uncertain.
    Mr. STEUBE. Thank you.
    I yield back.
    Chairman SCHWEIKERT. Thank you, Mr. Steube.
    Ms. Tenney.
    Ms. TENNEY. Thank you, Mr. Chairman, and thank you to the 
witnesses for your expertise. We greatly appreciate it.
    I just want to first say, one of the reasons we are here 
today is Ways and Means has sole House jurisdiction over the 
Federal debt and to fulfill this committee's duty to ensure 
that existing Federal debt is being managed at the lowest cost 
to the American taxpayer. Part of this means ensuring that the 
American people have more transparency surrounding the 
Treasury's debt management practices.
    So, with that being said, Mr. Driessen, it is my 
understanding that the Treasury has discretion over the debt 
management process. Is this correct? And, if so, where does 
this discretion derive from?
    Mr. DRIESSEN. Yeah. Treasury does have a relatively broad 
discretion within--to manage Federal debt. So, there is a lot 
of places in statute where that is provided. One of the big 
places is 31 U.S.C. in the 3100s. And so, you know, Congress 
can certainly make changes to what sort of powers they delegate 
to Treasury, but there is a lot of power with the Treasury 
Secretary and more generally----
    Ms. TENNEY. So, rulemaking also under the Code of Federal 
Regulations, I see, has happened over the years as well?
    Mr. DRIESSEN. Yes. Yes.
    Ms. TENNEY. So do you know, since that time of that 
statute, like, when is the most recent modification that this 
statute--well, to the statute that was made that is impacting 
the ability of the Treasury, either----
    Mr. DRIESSEN. Yeah.
    Ms. TENNEY [continuing]. For better or worse, to manage our 
debt?
    Mr. DRIESSEN. Sure. So I think the most observers would say 
it is kind of the last significant changes made to those 
portions of the Code were several decades ago. I think there 
were large changes in the 1970s and 1980s, largely to make the 
process a little bit more predictable and transparent.
    There have been some small changes since then, 2010 and 
others, but I think significant, you are talking several 
decades.
    Ms. TENNEY. Still significant ability to manage the debt?
    Mr. DRIESSEN. Right. Exactly.
    Ms. TENNEY. Thank you so much.
    As many know, the United States has benefited from 
historically favorable credit ratings, allowing the Federal 
Government to issue Treasuries on relatively favorable terms. 
However, as funding deficits and projected debt-to-GDP ratios 
have grown over time, the country's credit rating has not.
    For example, on August 1, 2023, Fitch Ratings downgraded 
the country's long-term foreign currency issuer default rating 
from AAA to AA+, which was the first time a ratings firm 
lowered its assessment of the U.S. Government's ability to pay 
its debt on time since 2011.
    Mr. Faulkender, can you please describe the relationship 
between Treasury's debt issuance strategy and credit ratings?
    Mr. FAULKENDER. Sure. So all bond issuances have to be 
rated in order for many mutual funds and different fund 
families to hold them, and so Treasury--there is--the rating 
agencies differently model out governments, corporates, 
utilities, and financials, and then they set a rating on the 
likelihood of being repaid.
    Treasury meets with the three major rating agencies each 
year to discuss the fiscal outlook and to give--and from that 
information they obtain, the rating agencies then provide a 
rating that is, as has been said by my panelists, the 
foundational interest rates that are provided in global 
financial markets.
    Ms. TENNEY. Well, let's bring this home. How does this 
affect American families, the bottom line there?
    Mr. FAULKENDER. So, the higher the borrowing costs for the 
U.S. Government, the higher the borrowing costs for nearly 
every other form of credit for the American people. So, it is 
not just that they are going to pay higher taxes in the future 
to support higher interest costs, but any borrowing they are 
doing in their own household is going to be higher if U.S. 
Treasury rates are higher because their bond rating is lower.
    Ms. TENNEY. Thank you.
    So, quickly, since--I will stick with you, Mr. Faulkender. 
You may recall a slide that Mr. Kogan shared earlier today 
during his testimony which argued that revenue and spending are 
both lower than earlier projections, suggesting that low 
revenues are responsible for the persistent primary deficits.
    So, what are your thoughts on this, and do you agree with 
Mr. Kogan's proposal?
    Mr. FAULKENDER. Well, again, the revenue forecast relied 
upon current law extending in ways that it is not clear 
Congress actually would have. So, we suffered, for instance, 
from what is known as bracket creep, which is that, as people 
made more money, a higher portion of their income was then 
thrown into a higher tax bracket.
    In order to have those CBO projections continue, you would 
have had to assume that Congress would not have fixed that. 
Likewise, as we know, the alternative minimum tax, for 
instance, was implemented to capture a couple of millionaires 
that weren't paying very much in Federal income taxes, and yet 
by the--into the 2000s, you had, you know, a few million 
taxpayers being hit by the AMT, and so Congress came in and 
modified it because it extended beyond what its original 
objective was.
    One has to presume that Congress would not have made those 
fixes that American households would be paying about 25 percent 
higher taxes today.
    Ms. TENNEY. Well, let me ask you this: Aren't a lot of 
these things static numbers? Isn't there a lot of growth that 
happened because of the Tax Cuts and Jobs Act?
    Mr. FAULKENDER. So that is the other piece, is that you 
have to presume that we would have continued to have the growth 
output we had. We saw higher growth rates following the Tax 
Cuts and Jobs Act. There is some recent academic work that 
shows that. It is hard to argue that we would have had the same 
economic output and the same spending levels had tax rates been 
significant--substantial.
    Ms. TENNEY. So, historically, where are we with revenues 
today?
    Mr. FAULKENDER. Revenues is a percent of GDP, which is, I 
think, the best way to look at it. In 2022, for instance, we 
are about fourth highest on record.
    Ms. TENNEY. Thank you.
    My time has expired. Thank you, Mr. Chairman.
    Chairman SCHWEIKERT. Thank you, Ms. Tenney.
    Ms. Chu.
    Ms. CHU. Mr. Kogan, I want to address an accusation leveled 
against Treasury Secretary Janet Yellen alleging that she 
committed the biggest blunder in the Department's history by 
not refinancing the public debt when interest rates were 
historically low. This accusation assumes that the Treasury 
could have easily auctioned trillions of dollars in long-term 
securities at a very low interest rate on the bond market.
    Of course, the Secretary cannot compel investors to 
purchase the securities at Treasury auctions. And, in fact, 
former Treasury Secretary Mnuchin explored the idea of 
refinancing the debt this way under the Trump administration 
and found that there was no viable market for these bonds.
    So, we already know that there is no quick fix to reduce 
debt servicing costs. The reality remains that Republicans' 
commitment to cutting taxes for the wealthy and corporations is 
the reason for the country's rising debt ratio.
    So, Mr. Kogan, can you talk more about the issues with this 
proposed simple fix for reducing debt servicing? Why did 
Secretary Mnuchin find that this option was not viable when he 
studied it in 2019?
    Mr. KOGAN. Thank you for the question, Congresswoman. Yeah. 
Precisely as you said, you cannot induce demand--you cannot 
force people to buy stuff. But even if you--it is even deeper 
than that, because even if you could compel people to buy at 
the rate you want, the Treasury deliberately tries to 
diversify, you know, how it is doing the bond market. It 
deliberately wants to make sure that there is not too much 
demand for certain kind of Treasuries, too little demand. It 
has a vested interest in making sure that the entire market is 
stable, and that is far more important than kind of winning a 
little bit in the margin. Maybe you could do a little bit in 
the margin, but the stability is the most important thing.
    And then I would be remiss if I didn't point out, even if 
you then did do this and you were able to--you were able to 
lock in really low rates for a lot of the debt, that has 
nothing--that has very little to do with kind of the long-term 
trajectory. Eventually that debt rolls over, and then you are 
right back where you started. Yes, you kind of gained a little 
bit by getting the benefit from lower stuff, but the long-term 
issue is driven by the fact that revenues are lower than 
primary spending, not that, you know, we locked in interest a 
little bit higher or a little bit lower. And that is kind of 
the big issue. And as I said, that is caused by these tax cuts.
    Ms. CHU. Mr. Kogan, unfortunately there are far too many 
tax loopholes that benefit the wealthy in our Tax Code, and I 
am working with Senator Sheldon Whitehouse, chair of the Senate 
Budget Committee, on legislation to close one of those harmful 
loopholes in the Tax Code.
    Normally, the wealthy are subject to capital gains taxes 
when they sell appreciated assets like stock. But if those 
assets are instead donated to a 501(c)(4), the donor pays no 
capital gains taxes at all, even if the organization sells the 
assets immediately after receiving the donation.
    This loophole effectively gives a public subsidy to the 
wealthy for engaging in political activity like lobbying and 
seriously reduces tax revenue. For example, earlier this year, 
billionaire Barre Seid donated $1.6 billion in stock to a 
rightwing nonprofit organization that engages in political 
activity, avoiding a tax bill of up to $400 million.
    So, Mr. Kogan, can you talk about the impact of closing tax 
loopholes like this one? Can Congress improve our fiscal 
condition by ensuring that the wealthy pay their fair share?
    Mr. KOGAN. Thank you, Congresswoman. Yeah, making sure that 
the--kind of these forms of capital are not getting 
preferential treatment is an important way of--both of kind of 
increasing equity in society and also in terms of helping the 
Federal Government.
    I think the estimate is that more than half of capital 
gains have never been taxed and will never be taxed. You get 
the full buildup, and then the example you give, they get to 
pass it over, and then the basis is reset. And so, then, if 
they sell it immediately, there is no gains, right. It is 
another way in which--yeah, in the case of Mr. Seid, most of 
the gains from his business will never be taxed, and that is a 
major problem that has huge effects on our Federal outlook.
    The one thing I want to say, so the President proposed a 
tax plan that would be only above 4--only bring in revenue 
above folks making 400K in profitable businesses. That itself 
is--his proposal is almost enough by itself just to stabilize 
our long-term outlook. It is slightly below the fiscal gap. If 
you did a little bit more, that will be enough. This is a 
major, major, major source of revenue.
    Ms. CHU. And, in fact, earlier, somebody on the other side 
of the aisle said that despite our $688 billion in the tax gap, 
that how could we magically pay for this? But is there a way to 
pay for it?
    And let's talk about IRS funding.
    Mr. KOGAN. Sure. So the tax gap, as I say, it is bigger 
than the fiscal gap. So you cannot get it all. You have to 
spend money to get it. That ends up, you know, netting down the 
costs and, regardless, you won't be able to get it all. But it 
is a major source of lost revenue of people simply cheating on 
their taxes or kind of mispaying.
    As I said, if we could get it all--we can't, but if we 
could get it all, that would be enough not to balance the 
budget but to stabilize our debt ratio.
    Ms. CHU. Thank you. I yield back.
    Chairman SCHWEIKERT. Thank you, Ms. Chu.
    Mrs. Fischbach?
    Mrs. FISCHBACH. Sorry. Had to find my button.
    Thank you, Mr. Chair.
    Dr. Faulkender, I----
    Chairman SCHWEIKERT. Mrs. Fischbach, can you get close to 
your mic?
    Mrs. FISCHBACH. I can't, actually. The chair is too big. I 
will lean in.
    Chairman SCHWEIKERT. Just scream.
    Mrs. FISCHBACH. Okay. I will lean in.
    And thank you very much.
    But I know that Congresswoman Tenney kind of was--led up to 
some of this, but maybe you could describe the impact that the 
higher Treasury yields have on the American family in layman's 
terms. So, what is it really doing to the American family 
budget?
    Mr. FAULKENDER. Sure. So, let's think about--the mortgage 
rate that the American person--that the American household pays 
on their 30-year mortgage is going to be priced off of a 10-
year Treasury bond. So, think about where 10-year Treasury bond 
yields were back in the 2020, 2021 timeframe. They were around 
1 percent. And so, therefore, you were able to get households 
to get 30-year mortgages at around 3 percent. There is going to 
be a gap because there is, of course--the Federal Government is 
going to be a higher quality credit than an individual 
household, and so there is a spread that households pay.
    Today, the 10-year bond is closer to 4, 4.5 percent, and so 
you have got mortgage rates closer to 7 percent. Again, as the 
10-year Treasury yield went up, so did the borrowing rate for 
households.
    Now, this has enormous problems because, for instance, a 
$250,000 mortgage on a house back in early 2021 would have 
about a thousand dollars a month in a principal and interest 
payment. At today's interest rates, that would be closer to 
$1,700 per month.
    That doesn't just make home ownership less affordable for 
people newly looking to purchase a home, but it also means that 
people are somewhat trapped in their existing homes. So, 
imagine for a moment that, you know, you got married and your 
spouse and you bought a house, but you were looking to maybe 
move to a different school district or get a larger home when 
it was--when the kids were of school age.
    Right now, if you move, you don't get to take your mortgage 
rate with you. And so that means that, if you move, you lose 
the 3 percent mortgage rate that you had when you refinanced 
back in 2020, and now you are possibly going into a 7, 7.5. And 
that makes it nearly unaffordable for many not just to start 
home ownership, but then continue on the path that we normally 
think about families engaging in.
    Mrs. FISCHBACH. Thank you very much.
    And, you know, can you maybe talk about some of that in 
comparison to what is going to happen with the economic growth?
    Mr. FAULKENDER. Sure. Oh, my. Okay.
    Mrs. FISCHBACH. See, you get up close and it scares you.
    Mr. FAULKENDER. I barely moved.
    Mrs. FISCHBACH. That is what is going on with me.
    Mr. FAULKENDER. So the other thing, though, it does is 
there is something called labor mobility, which also, because 
we have locked people into their houses, it makes it more 
difficult for people then to move if--so let's say that a new 
work opportunity arose in another town, again, it is now 
significantly more expensive for somebody to move and take that 
alternative job because, again, you don't get to take your 
mortgage rate with you.
    Also, purchases of automobiles, any kind of purchase that 
consumers are making on credit is now that much larger. Small 
business loans are now higher interest rates. So that is going 
to curtail the type of investment we see. And that is why we 
have seen, for instance, that the number of pending home sales 
is at 20-year lows. So there is reductions in a variety of 
economic--of industries as a result of this higher interest 
rate environment.
    Mrs. FISCHBACH. Thank you very much. I appreciate it. And 
it really is important, I think, that the American people 
understand, you know, how this really is affecting and their 
inability to purchase a home and to purchase the cars.
    And I appreciate the effect that you mentioned, the labor 
mobility issue too, because there are lots of other job offers 
going around and it makes it difficult. So thank you, and thank 
you all for being here. I appreciate it.
    And with that, I yield back, Mr. Chairman.
    Chairman SCHWEIKERT. Thank you, Mrs. Fischbach.
    Ms. Van Duyne.
    Ms. VAN DUYNE. Thank you very much.
    The reality is Biden inflation is driving our national debt 
to unprecedented levels, not only burdening future generations 
but also actively punishing working families and forcing people 
across the country to choose between putting food on the table 
and paying for things like rent. The American people are 
suffering and tightening their budget right now. The Federal 
Government should be doing the same thing. The last few years 
of spending levels weren't just unsustainable, they were 
reckless and unfair to future generations who will be forced to 
foot the bill.
    To borrow from my friend, the Budget Committee chairman, we 
didn't get into this massive amount of debt overnight and we 
won't get out of it overnight, but we cannot get ourselves out 
of this mess just by cutting spending. But through sound tax 
policy, we can and need to grow our way out of this.
    I am looking forward to the Tax Subcommittee hearing later 
today, which we will look at the successes of TCJA, which 
brought in record revenues and created unprecedented growth. 
And this is our Tax Cut and Jobs Act, as all of you are 
familiar.
    I have got a question for Mr. Smetters. Since 2021, we have 
seen the Federal debt balloon by more than $6 trillion all the 
way up to an unprecedented $33.8 trillion. This debt not only 
strains the Federal Government's ability to service the debt, 
but also costs American families and taxpayers tremendously 
through increased mortgage rates, car loan rates, and every 
other day necessities.
    Mr. Smetters, what can Congress do to help mitigate the 
cost of servicing this extremely high debt for American 
taxpayers?
    Mr. SMETTERS. The main thing it can do is simply reduce the 
deficits over time, and that is either through more revenue, 
less spending, or a combination of both, and that would lower 
interest payments that are required to be paid on that debt.
    And, you know, there is a lot focused on these ratings, but 
keep in mind, ratings really focus on technical default or the 
failure of the government to pay. Markets are much more 
concerned about potential for monetization of future debt and 
through higher inflation, and that is not going to be captured 
in ratings at all. So there is much more scare out there than 
is captured by ratings alone.
    Ms. VAN DUYNE. I appreciate that.
    Mr. Faulkender, in fiscal year 2023 alone, debt increase 
soared to $659 billion, a nearly 40 percent increase from 
fiscal year 2022. And on top of that, within a few years, debt 
service costs alone are expected to become the second largest 
Federal Government outlay only behind Social Security.
    So is there anything the Treasury can or should be 
implementing in this debt servicing and management strategy to 
help mitigate costs for the American people?
    Mr. FAULKENDER. I think the most important thing Treasury 
can do, as Kent just mentioned, is work to reduce the budget 
deficit. So, for instance, we saw Treasury issue rules 
regarding the electric vehicle tax credits that were much more 
generous than they needed to have been. We have seen, for 
instance, just earlier this week, there was an article in The 
Wall Street Journal about Treasury opening up COVID money for 
States that, instead, could be reprogrammed towards other 
activities.
    Anything we can do to bring down the budget deficit would 
lower our future debt service costs.
    Ms. VAN DUYNE. I appreciate that.
    And, Mr. Kogan, in your testimony, you said that our 
current rising debt ratio is due entirely to both Bush and 
Trump tax cuts, not spending increases. Can you honestly sit 
here and justify the current spending levels that we have seen 
over the last few years?
    Mr. KOGAN. Thank you for the question, Congresswoman. Yes, 
I can. I think, you know, the important thing for us to figure 
out as a society is what we want our government to look like, 
and then we should figure out how to make sure we have----
    Ms. VAN DUYNE. Well, we know what our government looks 
like. I am asking you not what the government looks like. I am 
asking you, can you sit here, look me in the eye, and justify 
the spending levels that we have seen since the Biden 
administration took over, when you are complaining that it is 
all the Bush and tax cuts--Bush and Trump tax cuts that caused 
it, even though we have seen record amounts of increased 
revenue as a direct result of things like the TCJA?
    Mr. KOGAN. Thank you for the question. So I would make 
three points on this. The first is that we had the strongest 
recovery in the world among G7 countries. That is a really, 
really important thing. I am glad that we are serious about the 
COVID response.
    Ms. VAN DUYNE. So you are glad that we are at $33.8 
trillion debt. It is a good thing.
    Mr. KOGAN. I am glad that we did not have an economic 
calamity. I am glad that we responded correctly.
    Ms. VAN DUYNE. But do you not think that it is short term 
and that we will potentially have that when you are looking at 
$33.8 trillion in debt?
    Mr. KOGAN. The stock of debt is different from the long-
term trajectory. So what the recession spending did was we 
pushed up the stock of debt, but that has little effect on the 
long-term trajectory of our debt ratio. We are starting from a 
higher level.
    Ms. VAN DUYNE. We are going to be at a point where the 
second largest Federal Government outline is going to be 
servicing that debt. That is long term.
    Mr. KOGAN. Right. But the long-term debt ratio is driven by 
the flows in the future, rather than----
    Ms. VAN DUYNE. Thank you. I yield back.
    Chairman SCHWEIKERT. Thank you, Ms. Van Duyne.
    I want to get to Mr. Schneider, because he has another 
place he belongs right now.
    Mr. SCHNEIDER. Thank you very much. And I thank the 
witnesses. A lot of good things here.
    Let me start with just a question for Mr. Kogan. In the 
opening remarks, it was noted that we had a balanced budget in 
1999 with a Democratic President, Republican House. What was 
the--do any of you know the spending or the revenue--I am 
sorry, the revenue side as a percentage of GDP in 1999?
    Mr. KOGAN. I don't have 1999, but the highest that we got 
was 20 percent of GDP. Yeah.
    Mr. SCHNEIDER. Right. It was actually 19.6, to be precise. 
And by the way, I will agree with my Republican colleagues, we 
all rightly should be concerned about our level of debt. I 
think we are talking about it. $33 trillion is a massive number 
and, as you said, Mr. Kogan, it is not sustainable if we stay 
on the current trajectory. We have to take specific action.
    Dr. Smetters, you made a comment just a moment ago. It is 
not just the drop of our ratings with the credit agencies; it 
is if there is a loss of confidence. One of the things I 
believe the credit agencies noted in the ratings cut is that it 
is the failure of Congress to take the necessary steps to show 
that we are serious about that.
    Do you think that was a fair assessment of Fitch and 
others?
    Mr. SMETTERS. Sir, do keep in mind Fitch is really focused 
on the narrow question of whether payments will be made.
    Mr. SCHNEIDER. But S&P took that position when they did it 
a number of years ago. Do you think others are looking at us 
and saying, if Congress can't act, there are reasons to be 
concerned about United States' future fiscal trajectory?
    Mr. SMETTERS. Absolutely. Once capital markets believe that 
fiscal balance will not happen, you will see a big unraveling.
    Mr. SCHNEIDER. And, Mr. Kogan, maybe you know this. Our 
discretionary spending, is it significantly higher than it was 
in 1999, when the two lines crossed at 19.6 and 20 percent?
    Mr. KOGAN. No. Our recent kind of post-Budget Control Act 
levels are significantly below average in the post-1986 kind of 
world. And, in fact, nondefense discretionary minus the VA 
shrank this year from the previous year, which itself shrank 
from the previous year. We have kind of a semistable, somewhat 
shrinking trend for NDD.
    Mr. SCHNEIDER. So, if I follow your logic, going back to 
when we had things in balance at roughly, let's call it, 20 
percent for sake of argument, revenues and spending both end at 
20 percent of GDP. Our revenues today are what percent?
    Mr. KOGAN. We are down to 16.5, not among the highest ever 
but, instead, the lowest ever in good economic times.
    Mr. SCHNEIDER. Wait. I thought we were at record. Is 16.5 
less than 20 percent?
    Mr. KOGAN. Significantly less, Congressman.
    Mr. SCHNEIDER. Okay. So let me stick on this for a moment. 
Because if the revenues are lower, there are a number of 
reasons that might be. One is, as you have noted, the tax cuts 
in previous administrations. The other one also noted is this 
tax gap, and that is something I have been very much focused 
on.
    You said we can't get all of it. I think one of the reasons 
you expressed that was because there is going to have to spend 
money to get it. Compliance is a key piece of this.
    What would happen if we cut the investment that the 
administration has asked for and Congress approved in 
increasing our compliance? What is likely to happen to the tax 
gap?
    Mr. KOGAN. It absolutely will increase. It will send a 
signal to would-be tax cheats that, not only is the United 
States not serious about going after tax cheats, but that even 
if we--in the one time where it looked like we were going to 
get serious, that there was massive mobility against doing it. 
So I believe it would increase lack of compliance.
    Mr. SCHNEIDER. Okay. So, if there is a greater tax gap and 
there is a greater need to try to get to a place where we are 
bending the curve and reducing our deficits, who is the burden 
going to fall upon?
    Mr. KOGAN. I am sorry. Could you please repeat the 
question?
    Mr. SCHNEIDER. I guess it is a leading question. I will ask 
it even more leading. If we signal to the tax cheats that it is 
open season, if we let the tax gap expand because the IRS 
doesn't have the ability to enforce the laws on the books, 
doesn't that put a greater burden on law-abiding taxpayers?
    Mr. KOGAN. That is right. Thank you, Congressman. Yeah, it 
is a deeply unfair thing for the super majority of us who pay 
our taxes. Democrats, Republicans, Independents, nonvoters, 
most of us pay our taxes. To give special preference to tax 
cheats is bad for fairness, and it is bad for America, and it 
is bad for our Federal coffers.
    Mr. SCHNEIDER. Maybe not just calling them tax cheats, but 
freeloaders and free riders, people who are taking advantage of 
those who obey the law, because there are too many people in 
this body, in Congress, who are trying to eliminate the ability 
to go after those tax cheats and make sure that we are doing 
what we can to serve those who are honoring the law.
    With that, I yield back.
    Chairman SCHWEIKERT. Thank you, Mr. Schneider. And I 
appreciate your patience. I know you needed to run on us.
    Mr. Feenstra.
    Mr. FEENSTRA. Thank you, Mr. Chair. Thank you for holding 
this hearing.
    I want to thank each of our witnesses for your testimonies 
today. I think each of you made it very clear that we are in 
some very serious times with our debt, and it is on the backs 
of our children and grandchildren. And if we don't act, there 
are going to be severe ramifications. We have also just heard 
about the 10-year yield, how that affects families and 
businesses. And when it comes to loans on houses, cars, 
operational loans for businesses, this is real.
    But I want to talk about more macroeconomics and the risks 
that are out there. And one thing that is not talked about is, 
when you start having all this spending, when you are having 
all these treasuries being sold, you are flooding the market 
with treasuries, in effect, it affects private investment, 
literally affects private investment. And that is what I want 
to talk about.
    Dr. Faulkender or Mr. Faulkender, can you expand on this, 
that how would the private enterprise and the private sector, 
private investment be affected by all this flooding of paper on 
the market?
    Mr. FAULKENDER. Sure. So the reason that firms are going to 
engage in the private investments is because spending money 
today is going to generate better outcomes in the future. But 
because it is now going to be more expensive to move that money 
from the future back to today in terms of the higher interest 
rate environment, that is going to make incremental investments 
less valuable. They are not going to look as strong. And so you 
are going to see companies----
    Mr. FEENSTRA. Less competitive.
    Mr. FAULKENDER. Less competitive, less beneficial to engage 
in that investment. And that means companies are going to pull 
back on the kind of infrastructure investment and facilities 
and equipment investments and intellectual property.
    Ultimately, real wage growth comes from matching capital 
with labor. And if we reduce the incentives on businesses to 
allocate capital to match with that labor, you are reducing 
real wage growth, and that reduces income for future Americans.
    Mr. FEENSTRA. Exactly right. And that is my greatest fear. 
I mean, we can talk about the interest rates and all this 
stuff, but there is this big macro effect that is going to 
affect so many other things, especially when it comes to GDP. 
And I want to talk to Mr. Smetters about that.
    Staying on the topic of macroeconomics, you stated in your 
testimony that if Federal debt is allowed to increase to 180 
percent of GDP over the next 30 years, the economic 
consequences would be severe. GDP would fall to around 8 
percent. Wages would fall by 4 percent. Interest rates would go 
up by 1.5 percent.
    I want you just to discuss the scenario further, and what 
timeframe do you see? I mean, this is big stuff. This is really 
serious stuff. I want your thoughts, Doctor.
    Mr. SMETTERS. Yes. In fact, this is the good news, because 
that is the most optimistic that we could actually project our 
framework. And in particular, because of this crowding out 
effect that was just described of the reduction in investment, 
it is going to shrink the capital that is available, and it is 
going to reduce GDP relative to where it otherwise would have 
been at about 8 percent.
    Literally, we cannot solve the model after that point. 
There is just not enough national saving. A lot of times people 
make a comparison against Japan. It is just not right for many 
reasons.
    And so this is the most optimistic that we can even get 
with the model. If capital markets really believe that Congress 
is not going to take action, everything unravels even faster.
    Mr. FEENSTRA. Yeah. So, Dr. Faulkender, I want to go back 
to you then. On that same front, right, if you look at the 
global world and where we stand with the European Union and all 
this stuff, if we continue to slide down this path of lowering 
our GDP and continue with, you know, flooding the bond market 
with paper, what does this do to the rest of the world? What 
does this do to our dollar?
    Mr. FAULKENDER. So traditionally, the strength of our 
economy and the strength of our ability to engage in foreign 
policy, engage in our national security is a result of the 
strength of our underlying economy. So if we reduce our growth 
rate, that reduces our ability to, for instance, maintain our 
status as the world's reserve currency.
    Mr. FEENSTRA. That is right.
    Mr. FAULKENDER. The world's reserved currency, as I 
mentioned in my opening remarks, facilitates our ability to 
engage in sanctions, on the national security. It allows us to 
monitor illicit financing, drug dealing, arms dealing around 
the world.
    All of those activities are endangered if we don't get our 
fiscal house in order. And if we continue down this path, it 
would jeopardize our status as the world's reserve currency.
    Mr. FEENSTRA. I want to thank you for those comments. I 
mean, this is catastrophic not only to our Nation but around 
the world and what it does to our U.S. dollar. And that is why 
we have got to get our arms around this.
    And I thank the chairman for putting this together, as it 
is so critical. So I look forward to figuring out a fix. I hope 
you guys are all involved in trying to understand what a fix 
looks like.
    With that, I yield back.
    Chairman SCHWEIKERT. Thank you, Mr. Feenstra.
    Ms. Malliotakis.
    Ms. MALLIOTAKIS. Thank you very much, Mr. Chairman.
    The national debt has skyrocketed by more than $6 trillion 
over the last 2 years and is now nearing $34 trillion, and that 
represents over $100,000 in debt for every American man, woman, 
and child.
    The current fiscal trajectory is unsustainable, and 
American families are already feeling the financial hit through 
higher interest rates on mortgages, cars, and other goods and 
services financed in the economy. Servicing this debt has 
crowded out other government spending and forced the government 
to prioritize interest payments at the expense of American 
families.
    As early as next year, paying off the interest on the debt 
alone could become the second largest Federal outlay after 
Social Security, more than Medicare and defense outlays at a 
time when Medicare part A is predicted to be insolvent by 2031.
    There has been a lot of discussion today about what happens 
if we continue on this current trajectory, but I want to shift 
to the circumstances around who holds our debt, specifically 
foreign and international holdings, which now accounts for $7.3 
trillion. And this includes foreign adversaries like Communist 
China, which holds roughly $800 billion in America's debt.
    I will turn to you, Mr. Smetters, first. Many believe that 
the risk could be mitigated by addressing foreign countries' 
role in bidding for and ultimately owning our national debt. 
Can you please speak more about the role that foreign 
adversaries and other nations play in our debt servicing 
process, and is it beneficial, and what are the challenges?
    Mr. SMETTERS. Sure. So as testimony given earlier pointed 
out, there is a really big difference between China buying our 
debt versus them investing in our critical infrastructure and 
things like that. Right now, if anything, they are giving us a 
subsidy so we can build up our critical infrastructure. The 
international component of that is, if anything, right now a 
good thing for us, and it is not really a major risk.
    Ms. MALLIOTAKIS. Okay. Does anybody else want to comment on 
that point? You guys all look tired.
    Mr. FAULKENDER. I would just say I agree.
    Ms. MALLIOTAKIS. Okay. You agree. Great.
    I would like to turn--I would like you guys to expand a 
little more. I mean, you have brought up some really important 
points as it relates to keeping America's dollar as the reserve 
currency. And I want to just give an opportunity for you to 
expand on some of the other benefits that it is for the 
American taxpayer.
    Mr. DRIESSEN. I think it actively lowers our net interest 
costs. I think estimates range on exactly how much that is 
worth, but I have seen things around, you know, 25 basis points 
in terms of the interest rates that Treasury is phasing. That 
is quite large when you kind of map it out in terms of Federal 
cost per year if we were to cede the reserve currency to 
someone else.
    Mr. FAULKENDER. I would just add that being the world's 
reserve currency facilitates our sanctions activity. It 
facilitates capital flows not just to the Federal Government 
but to American businesses and companies as well as households. 
And then it also enables us to monitor illicit transactions, so 
everything from sex trafficking to arms dealing to drug 
trafficking.
    The fact that dollar denominated securities pervade the 
global financial system means that financial institutions 
around the world willingly participate in our oversight of 
these transactions, and that is enabled by the fact that we 
have the world's reserve currency.
    Ms. MALLIOTAKIS. And how threatened do you think this is 
right now, the U.S. debt and the impact it could have on us 
being the reserve currency?
    Mr. FAULKENDER. I had the privilege of testifying to the 
Financial Services Committee about this a couple of months ago, 
and I think our view is there are kind of three factors at 
play. You want to maintain a regulatory environment such that 
we have the most liquid, transparent markets in the world; 
second, you want to be a strong financial steward such that 
reserve banks want to hold your assets denominated in your 
currency; and then, third, you want to make sure that you don't 
abuse your position as the reserve currency when it comes to 
engaging in unilateral sanctions or unilateral punishments that 
abuse that position. And so maintaining those three things, I 
think, are essential to maintaining status as a reserve 
currency.
    Ms. MALLIOTAKIS. Thirty seconds left if anyone else wants 
to add.
    Mr. SMETTERS. The biggest threat for the U.S. economy is 
still the longer term. So certainly we could maintain a reserve 
currency, but if financial markets get nervous about our 
willingness to monetize that debt, which is the last channel, 
that is what has to happen mathematically if we don't close 
this imbalance, then that is when the financial markets are 
going to demand a much higher return, and this whole thing 
could literally unravel.
    Ms. MALLIOTAKIS. Well, thank you very much.
    And thank you, Mr. Chairman, for your commitment in getting 
our fiscal house in order.
    Chairman SCHWEIKERT. Thank you, Ms. Malliotakis.
    Ms. DelBene.
    Ms. DelBENE. Thank you, Mr. Chairman, and thanks to all our 
witnesses for being with us today.
    Mr. Kogan, I wanted to give you an opportunity to respond 
to an earlier question about the impact the Bush and Trump tax 
cuts had on the Federal debt, and I would love to hear your 
view on what that is and--well, let's start there.
    Mr. KOGAN. Thank you for the question, Congresswoman. I 
think the right way to look at kind of the long term is this 
concept called the fiscal gap. It measures how much primary or 
noninterest deficit reduction you need to go from having debt 
beyond its upward trajectory as a percent of GDP to being 
stable as a percent of GDP, not balanced budgets, not flat 
debt, but debt as a percent of GDP stable. And the most recent 
estimate using CBO numbers is 1.7 percent of GDP.
    The size of the Bush and Trump tax cuts under current law 
is bigger than that. So that means, even if you want to say, 
well, you could blame other things as well, regardless of where 
you want to place the blame, that just means that they are big 
enough that if you hadn't done them or if you undid them today, 
that debt would be stable as a percent of GDP. And that is kind 
of the starting point.
    I then think that it is right to focus on them because our 
spending trajectories--our long-term spending trajectories are 
down, not up. So we used to have a system where revenues and 
spending would keep pace, regardless of your assumptions about 
AMT. Now we don't. Since then, both revenue and spending are 
down. So it doesn't make sense to me to blame spending if our 
long-term trajectories are actually down instead of up.
    Ms. DelBENE. And sometimes the investments we make, make a 
big difference on the long term. Child poverty costs our 
country a trillion dollars a year in lost productivity, crime, 
health disparities.
    And so how can programs like the enhanced Child Tax Credit 
that increase children's opportunities for success and help 
rebuild the middle class, how can those benefit long-term 
economic growth?
    Mr. KOGAN. Thank you for the question, Congresswoman. So I 
think there is broad agreement investing in children is a very 
wise thing to do. You see higher birth rates. You see higher 
graduation rates. You see higher wages. You see, therefore, 
more money into the Federal Government. You see lower crime 
rates. You see lower recidivism rates.
    And then at the same time, you see the moral benefit of 
millions of children lifted out of poverty. There is strong 
agreement. In fact, CBO just released a working paper a couple 
weeks ago that showed that their estimate was that, even if you 
didn't offset it, enrolling children in Medicaid on a net 
present value basis paid for half of itself, and that if you 
did then offset it, then it was a two-to-one return. So there 
is strong, strong agreement that investing in children is a 
very wise thing to do, even aside from the moral imperative.
    Ms. DelBENE. And not investing has a cost. As I said 
earlier, child poverty costs us a trillion dollars a year. 
Sometimes if we don't invest, it actually costs us more money 
over the long run, which I think has been left out of this 
conversation a little bit.
    In your testimony, you discuss how earlier in the 21st 
century CBO forecasted long-term debt stability despite its 
initial outlook projecting primary spending to rise as a 
percentage of GDP.
    I wondered if you can speak to the role our tax system 
played in CBO's calculation of long-term debt stability and 
what has changed since then.
    Mr. KOGAN. Thank you, Congresswoman. Yeah. So in the CBO 
baseline, they assume bracket creep. I think some of my fellow 
panelists are against that concept. I don't think it is a bad 
thing that needs to be fixed. If I get a raise that outpaces 
inflation, then more of my income is taxed at a higher rate. 
That is the natural part of a progressive tax system. That is 
not a bad thing.
    And so regardless of whether you then went in and changed 
your AMT assumptions, we used to have a tax system where our 
revenue was going to grow to match our spending. And that is 
kind of the most important part. Since then, we have done these 
tax cuts. They not only lowered the level, they not only did a 
level increase, but they also flattened the Tax Code. The jump 
from one tax bracket to the next tax bracket is smaller than it 
used to be and kind of the income bands in some places have 
changed. That leads to less bracket creep than there used to be 
and, therefore, less kind of natural--natural income gains from 
the real wage gains when Americans get them.
    So those two components led to our revenue no longer 
keeping pace with our spending and, in fact, no longer growing 
quite as much when we have a good economy. We used to see, when 
the economy was great, revenues shot way up. Now they shoot up 
some. The fact that we have this economy and have revenues down 
at 16.5 percent of GDP, that shouldn't happen.
    Ms. DelBENE. Thank you.
    I yield back, Mr. Chairman.
    Chairman SCHWEIKERT. Thank you, Ms. DelBene.
    Ms. Moore.
    Ms. MOORE. Thank you, Mr. Chairman.
    I want to thank all of the witnesses for appearing. This is 
certainly a master class, and one of the great privileges of 
being a member is to have such expertise here.
    I just want to clear some things up. I think, Mr. Kogan, 
you just shared with the committee an explanation of what 
constitutes a fiscal gap, and you said that the 1.7 percent 
fiscal gap of GDP, that the tax cuts from Bush and Trump exceed 
that.
    One of the things that I really want to clear up is whether 
or not we regard tax cuts as spending. We seem to not think 
that providing trillions of dollars of tax cuts to the 
wealthiest 1 percent of Americans, that somehow that is not 
spending.
    Can you help me understand why that distinction is made? 
Maybe I understand why it is made, but is that not calculated 
as a part of spending?
    Mr. KOGAN. Thank you, Congresswoman. In terms of how the 
NIPA tables might show it, you know, they are going to classify 
it for the reason that you want. But to the point of your 
question, it is a cost regardless of how you are classifying 
it. It is the deficit or the primary deficit. It is just the 
difference between how much you are taking in and how much you 
are putting out.
    And so one way to change that is to change how much you are 
putting in or taking out, and another way is how much you are 
taking in. And so these are true costs that are borne by the 
American taxpayer.
    Ms. MOORE. So, when we reduced the tax bill down to 21 
percent, that was a loss of revenue and it was spending. Am I 
correct?
    Mr. KOGAN. I would say the way that it shows up in spending 
is with the future interest payments. We have to pay the--we 
have to bear the interest payments that then come from these 
tax cuts.
    Ms. MOORE. Okay. So you assert in your testimony that both 
revenues and spending are lower than earlier projections, 
meaning low revenues are responsible for persistent primary 
deficits. So we hear all the time that spending is going up, 
up, up, up, up. And we have many worthy things that we need to 
spend on, you know, healthcare costs and, you know, defense.
    So, your statement really contradicts people's notion of 
what is causing these deficits. Can you explain that statement?
    So, actually, we are not spending as much as we used to. 
Those projections are lower, but the revenues are lower. Can 
you explain that?
    Mr. KOGAN. Thank you, Congresswoman. So spending is going 
up, but it is going up at a slower pace than we used to project 
it to be. And so I think people focus that this year was higher 
than the previous year which, you know, aside from blips, is 
that is roughly the trend is the upward trajectory.
    But the reason that I don't think that that is the right--I 
mean, that is basically driven by demographic changes and 
excess cost growth. And so mostly what is going on is it costs 
more to do the same. It is not like profligate spending. It is 
that it costs more to take care of our seniors than it did 
before. And that is okay, because we used to have a tax system 
that would keep pace with that. The problem is we now no longer 
have a tax system that would keep pace with it.
    Ms. MOORE. Just very quickly, you know, I wrote down here, 
D equals S minus R, deficits equals spending minus revenues. 
Can you just sort of explain that for the record?
    Mr. KOGAN. Yes, Congresswoman. So the annual deficit is the 
difference between how much we spend in total. You take all of 
our program spending--Medicare, Medicaid, Social Security, 
SNAP--and then also the interest. You take all of that spending 
and then you look at how much we bring in in Federal tax 
revenue, and the difference between those is the deficit.
    Ms. MOORE. So when we talk about having high deficits, we 
are talking about having a lot lower revenue?
    Mr. KOGAN. That is right, Congresswoman.
    Ms. MOORE. Okay. So in my remaining time, I just want to 
associate myself with the comments, particularly of Ms. 
DelBene, with regard to the Child Tax Credit and the 
investments that we make in children.
    Would you agree that that should not just be regarded as 
spending but should be regarded as investments, you know, just 
as, similarly, Republicans like to associate tax cuts as 
investments?
    Mr. KOGAN. I think we can all agree that putting money for 
our children in the future is a wise investment. It is moral 
and, as I say, some of the benefits then redound to the Federal 
taxpayer.
    Ms. MOORE. Thank you so much.
    And thank you for your indulgence, Mr. Chair. I would yield 
back.
    Chairman SCHWEIKERT. Thank you, Ms. Moore.
    Dr. Murphy.
    Mr. MURPHY. Thank you, Mr. Chairman. And thank you for 
having this conference.
    And thank you all. I appreciate the expertise you all 
bring.
    I am just a dumb surgeon, so I am just going to have to 
approach this in a little bit different regard. I think if you 
look at what our biggest challenge is in the future, really, it 
will be healthcare spending. And let me say why I feel that 
way.
    1965 began with the Great Society programs with Medicare. 
At that age, you thought life expectancy was 70. You were going 
to live 5 years. Now we pushed it to 80, 2 or 3 percent live to 
90. But there was never any type of calculation ever put in 
that system at that time to account for what would be growth in 
longevity. Nothing.
    And so now we are chasing the fact that we are adding 
10,000 Americans a day to the Medicare rolls, but there was 
never any chase about that. And now the fact we are living to 
80, not 70, there was never any planning done with that. And so 
we are hitting the cliff because of that.
    And as for what we are doing with child tax credits, also 
with the Great Society programs we began rewarding, actually 
punishing the nuclear family. So if you look in the State of 
North Carolina now, 52 percent of the births in North Carolina 
are on Medicaid. I see these patients, okay? I see them face-
to-face. And I see the 16-year-old mothers. I see the 22-year-
old mothers having children. They are Medicaid.
    And all of a sudden, these poor children--and they are poor 
children because they are being raised by children themselves--
are now the government's problem. These are, again, problems 
that have been caused by policies put into effect with the 
Great Society programs.
    So now we have this huge massive occurrence. Mr. Kogan, 
this is fact. We now have this massive occurrence, more and 
more people on Medicare because, hey, great, technological 
advances that have occurred that are allowing us to live 
longer, which are more expensive. So now we are paying more and 
more for people on healthcare, which is great, but we never 
thought of changing the formula as we are going along.
    And anybody now who wants to reform the formula, oh, we all 
want to cut Medicare. We want to do this. We don't want to do 
that. No, the numbers, just like you guys are pointing out with 
our deficit, the numbers just don't work. And so as we move 
along this curve, we have to do something with mandatory 
spending.
    And we talk about this great recovery during the Biden 
administration. The great recovery was because you absolutely 
extinguished America. And instead of 100 widgets a day, we were 
only allowed to produce 40 widgets a day. And the framework was 
put in during the Trump era for this great continued recovery 
to occur.
    I will agree with my Democratic colleagues, everybody who 
should pay taxes should pay taxes, period point-blank. I have 
no issue with that whatsoever. But our revenues are at record 
levels now. So it can't be just blamed on one side of this. 
This is a blend. This is an absolute blend.
    One question that I love to ask, some of my social media, 
let's just say, favorite people are all espousing the modern 
monetary theory that none of this really matters, we can just 
keep printing money, and all the debt doesn't even matter at 
all.
    I just wondered if each of you could just spend 2 seconds, 
really. Does debt matter? Is modern monetary theory actually a 
thing or is it just a stupid pie in the sky idea? How does that 
fit in relation to what is happening with our debt?
    Mr. SMETTERS. I don't think anybody here would endorse 
modern monetary theory.
    Mr. MURPHY. I am so glad to hear that. Debt does matter, 
correct?
    Mr. SMETTERS. Yes.
    Mr. MURPHY. It does. It is critical. And modern monetary 
theory was a great thing with unicorns and rainbows and pie in 
the sky and we could just keep printing money. It is not the 
case. It is not the case. Our national debt does matter, and it 
is actually truly a matter of national security.
    So, you know, what would I ask--I heard one person say one 
time, just because of this debt, what happened if we just 
devalued our currency? What would that look like?
    Mr. FAULKENDER. You would lose world reserve currency 
status, and then we would have all of the national security 
problems that we discussed previously of not being able to 
monitor illicit financial activity, nor be able to use 
sanctions.
    Mr. MURPHY. Right. It would just absolutely undermine our 
economy and our national stature, correct?
    Mr. FAULKENDER. Yes. And in addition to the national 
security issues, you would raise borrowing rates for every 
household.
    Mr. MURPHY. And you know what, this may be heresy, but a 
Republican said that. And I just put my head in my hands.
    This committee usually is fairly bipartisan. Math doesn't 
take any politics with this. And so we see how critically 
important this issue is. Yes, we need to collect our revenues, 
but yes, we need to cut our spending, and yes, we actually need 
to stop paying people not to work.
    Thank you. With that, I will yield back, Mr. Chairman.
    Chairman SCHWEIKERT. Thank you, Dr. Murphy.
    Before I recognize Mr. Beyer, will you explain to us how AI 
is going to help us stabilize spending?
    Mr. BEYER. I couldn't do that in my 5 minutes, but we are 
working on it.
    Chairman SCHWEIKERT. But I know you are working on it.
    Mr. BEYER. Mr. Chairman, Ranking Member, thank you for 
doing this.
    Dr. MURPHY, I would suggest there are no dumb surgeons. And 
thank you for shouting out----
    Mr. MURPHY. I must disagree.
    Mr. BEYER [continuing]. MMT. I think Herb Stein said years 
ago, if something is too good to be true, it is not true. That 
is exactly where we are. And also, thank you for going through 
the increase in our social services over the years--Social 
Security, Medicare, Medicaid--and how that has completely 
changed what we spend money on in the Federal Government. It is 
very different from when I was a child.
    The challenge is that it seems like the American people 
love most of those things, which is why it has been so 
difficult to cut back on them. Even President Trump has said, 
don't you guys go touching Social Security, because he knows 
that this is--so then the question is, how do we pay for it? 
How do we begin to balance what the American public has come to 
expect from government?
    By the way, Mr. Chairman, I do completely share your 
concerns that our budget deficit at $33 trillion must be a very 
high priority. But we look at it--and thank you, Mr. Kogan, for 
all of your purposing.
    One of the things that is missing as we look at this budget 
and cutting spending in a lot of different ways is, what is the 
fiscal effect of the disinvestment in our people? I mean, how 
much growth comes from the fact that we are putting money into 
our children, into education, into social services, and what 
happens when we slash that back?
    Mr. KOGAN. Thank you for the question, Congressman. So five 
things that I mentioned in my written testimony that I didn't 
have room for in my spoken testimony. I wanted to highlight 
some of the cuts that were proposed by this body in this 
Chamber, right?
    So the idea was, oh, well, we need to reduce our spending, 
and that is the great way to help the future. And in going 
about trying to write the appropriations bills that would find 
the spending cuts, this Chamber called for an 80 percent cut to 
Title I education grants, which helps poor public schools in 
every State. Called for a 59 percent cut to the Federal program 
that helps make sure our drinking water is safe across the 
country. It called to cut our NIH cancer and stroke research. 
You know, across the board, these were kind of cuts to the 
future.
    And I would just say, as you are saying, these sorts of 
cuts are fundamentally shortsighted. You might lower a Federal 
dollar here or there, but then you wouldn't have the redounding 
effects in the future that are critical to us kind of being 
competitive in the future.
    Mr. BEYER. Thank you.
    You know, again, historically, I remember I used to prepare 
a little family's businesses taxes in the seventies and 
eighties, and the first $50,000 is a relatively low rate, and 
then it jumped up to 78 percent. So, I think both our personal 
and our corporate tax rates were much more progressive in the 
fifties, sixties, seventies.
    How did that affect our GDP growth?
    Mr. KOGAN. We had strong and robust GDP growth in the 
fifties and sixties.
    Mr. BEYER. Thanks very much.
    Dr. Faulkender, is there any plausible method of closing 
the fiscal gap that doesn't involve generating new revenues?
    Mr. FAULKENDER. Certainly. We could bring spending down 
significantly, and that would also close the fiscal gap.
    Mr. BEYER. Let me put it back to--in the real world, is 
there any way, given the political realities of the American 
public and the American public's expectations, is there any way 
to do this without generating new revenue?
    Mr. FAULKENDER. Yes. In the real world, we could bring 
spending down to the 2021 percent that it has been historically 
of GDP.
    Mr. BEYER. But our revenues are at 16 percent right now. 
Doesn't that leave us a gap of----
    Mr. FAULKENDER. Last year's revenues were much lower. If 
you look at 2022's revenues, they were at 19.5 percent of GDP. 
So I don't think we want to cherry-pick a single number.
    Mr. BEYER. Well, that is a cherry-picked number, though, if 
you look back over the many years. And that is a number driven 
by all the investments we have made, the money we doled out as 
part of the pandemic, the CARES Act, et cetera, which is why it 
surged in that 1 year. That is certainly not where it was in 
the years right after the TCJA.
    In any case, I have a couple seconds left, which I would 
love to yield to my friend Ms. Moore.
    Ms. MOORE. Thank you so much, Mr. Chairman.
    I just want to say that I just basically resent us bringing 
up the old tropes about paying people not to work. We are not 
paying people not to work.
    I guess I would like to ask you, Mr. Kogan. I mean, would 
it be fair to say that our social services programs, like 
Medicare and Medicaid, are taking care of old people, disabled 
people, kids? Most of the people who are on food stamps work. 
And that is an old welfare queen trope that these moneys are 
going to people of bad character. Is that correct?
    Mr. KOGAN. I completely agree with your assertion, 
Congresswoman. The idea that this money is immoral--is wrong, 
is poorly spent, is really disgusting.
    Ms. MOORE. Thank you so much for that.
    And I yield back. I yield back to Mr. Beyer.
    Mr. BEYER. And I yield back.
    Chairman SCHWEIKERT. Thank you for yielding back.
    All right. Now for the lightning round. Oh, how could I 
possibly forget Lloyd, you know? So you don't want to take your 
time so I can just go?
    Mr. SMUCKER. Mr. Chairman, you can do whatever you want.
    Chairman SCHWEIKERT. No, go ahead, Lloyd. And I apologize.
    Mr. SMUCKER. Well, I do appreciate, Mr. Chairman, the 
opportunity to participate in this hearing.
    I think this is a really important topic. I know this is a 
topic you have been interested in for a long time, but I think 
it is difficult for the American public or even Members of 
Congress to understand the weight of what we are dealing with 
here.
    And I think particularly, Mr. Smetters, what you have 
described, what could occur here, what will occur here, 
according to your testimony, over the next 20 years if we don't 
change course, is really--it is a five-alarm fire. It is 
cataclysmic.
    History has plenty of examples of countries and empires 
that have risen, have maintained their dominance in the world 
for a long period of time, and then essentially have 
overextended themselves. And we, I would say, are potentially 
at the brink of that occurring here. And it could be a slow 
decline, where rising interest rates are affecting the economic 
conditions, or it could be catastrophic, which I think, Mr. 
Smetters, you have alluded to.
    A sovereign debt crisis will occur when the capital 
markets--when investors no longer are willing to hold the U.S. 
dollar because they believe the government has the inability to 
pay or doesn't have the will to put ourselves on the right path 
to be able to pay.
    And, Mr. Faulkender, you have talked about the softening. I 
don't know if I am misstating what you are saying, but 
certainly a few weeks ago we saw a softening of purchases and 
the demand, which potentially is probably driving up interest 
rates now. But, you know, if that trend continues, whether it 
is individuals or institutions or foreign countries that are no 
longer willing to hold our debt, we are in real trouble, are we 
not? I mean, am I overstating the condition that we are in now?
    I see. Go ahead.
    Mr. SMETTERS. So debt crises historically are the worst of 
all crises. If you look back at COVID, look back at 2008, how 
did we deal with those crises? We issued more debt. We were 
able to use debt to cover those crises.
    But when the crisis is caused by debt itself, there is not 
much you can do at that point. And we have seen many societies 
completely reordered as a result of debt crises. Those 
societies cannot handle economic hits.
    Not to be dramatic about it, but think about the Nazi 
Party, 1928. They only got 2.6 percent of the vote. Then 1929 
happens. A complete reordering of society in the face of 
large----
    Mr. SMUCKER. And we have seen the failure of nations. You 
know, and it is why I appreciate Mr. Pascrell's earlier 
comments that, I think, we have to come together as Members, 
regardless of party, and understand the situation that we are 
in. We have to accept responsibility. I think both parties, as 
Mr. Pascrell said, have led to the situation that we are in 
now.
    Mr. KOGAN, I know that you have in your testimony been--you 
have been intent on blaming Republicans. Could you agree with 
me that both parties have brought us to where we are today?
    Mr. KOGAN. My testimony was clear it was a bipartisan 
extension of the Bush tax cuts was an instrumental part of it.
    Mr. SMUCKER. Do you feel like both parties contributed to 
the situation that we are in today?
    Mr. KOGAN. I mean, it was a bipartisan bill. So yeah, both 
parties were involved.
    Mr. SMUCKER. Besides the bill, would you say?
    Mr. KOGAN. I think--I mean, I think----
    Mr. SMUCKER. I will stop there. And the reason I put you on 
the spot is because I think it is really important that we have 
to get beyond blaming one another for where we are. And it is 
why I support a debt commission, which I think is critical to 
us to change the trajectory going forward.
    We really need to come together and understand that this is 
far beyond blaming one another. It is far beyond politics. This 
is something, we are talking about the future of the country 
for future generations. And so it is critical that we act on 
this now.
    So I hope, Mr. Kogan, that we can get past just blaming a 
particular party. And that is why I appreciated Mr. Pascrell's 
comments.
    But one of the things I want to say as well, I don't think 
the American public really understands the situation that we 
are in now. And I have been looking, particularly if we do a 
debt commission, I think the role of the commission is going to 
be to help the public understand where we are and knowing that 
we are going to have to make tough decisions and everything 
should be on the table.
    But in a very brief amount of time, I haven't seen a lot of 
work done out there in regards to past examples in history of 
what has happened and sort of looking at our current situation 
relative to that. And I would be very interested in hearing 
from any of you on where we could go to help to explain to the 
American people what happens if we don't address this.
    Maybe, Mr. Smetters, I will start with you on that.
    Mr. SMETTERS. Sure. I mean, the impact on the economy, the 
American people, the wages, the borrowing rates are all going 
to be very negatively affected. And there are lots of examples 
in Asia, in Latin America, in Europe where this has happened.
    And there has been bipartisanship certainly in the past. 
That is what 1986 was all about. You know, the joke before 1986 
was paying. One reason why these high rates didn't really 
matter is because paying your taxes was a civil obligation, 
just not a legal one before 1986. There were so many different 
ways to dodge those taxes.
    But in 1986, incredible bipartisanship to--and most 
economists agreed with that approach. And so I think there are 
examples that you can point to.
    Mr. SMUCKER. Thank you. I am out of time. Thank you, Mr. 
Chairman.
    Chairman SCHWEIKERT. Thank you, Lloyd.
    Chairman Arrington.
    Mr. ARRINGTON. Thank you, Mr. Chairman, for your passion 
and concern about what I believe is the most significant threat 
to the United States and one that, if left unaddressed, in 
probably nearer term than we think will cause not only 
significant but irreparable harm that will impact interest 
across the political spectrum, by the way.
    For those who care about climate and want more climate 
spending programs, safety nets, entitlements, or for those of 
us who think that the job of the Federal Government is mainly 
to keep us safe and free and most everything else is delegated 
to the States and the people, we still have to put a military 
on the battlefield such that protects our freedom and security 
interests. All of that is in jeopardy, as well as America's 
leadership in the world, if we slip into a sovereign debt 
crisis.
    So I want to focus on how things are being managed at this 
point with respect to Treasury bonds and the issuance of debt 
and especially the rise in interest expensing, which some 
people think is the key measure of when we start to trip the 
wire and we start seeing a chilling effect, if not worse, in 
the Treasury bond market.
    I just talked to an economist literally before coming to 
this hearing who said the 14 percent interest per revenue, 
Treasury revenue, tax revenue, is a tipping point where you 
start to see the effects in the Treasury bond market. And that 
hasn't been hit in over 30 years, but we are now over that.
    And then this gentleman mentioned the two significant--he 
said the most significant events in his 27-year career as an 
economist and a policy adviser, which is the August and 
November Treasury Debt Issuance Advisory Committee saying, wait 
a minute, we are $250 billion short of the money we need to 
service the debt--that is significant--and we need a whopping 
$1.6 trillion in debt in the fourth quarter of this year and 
first quarter of next year.
    The bottom line is, we are entering into this vicious 
cycle, and the interest and debt are going from unsustainable 
to completely running away from us.
    Now, the Treasury Advisory Group and the Treasury 
Department has started issuing shorter term debt rather than 
longer term, like 80 percent more. That hasn't happened in 
recent history if not modern history. And that means the yield, 
they call it an inverted yield, where we are getting higher 
interest rates. And the tradeoff is keeping the economy propped 
up versus the cost to the taxpayer, and I would suggest future 
taxpayers, and the cost to generations of Americans who will 
pay a higher price for our widening deficits and mounting debt.
    Help me understand that dynamic, the shift to short-term 
Treasury issuance versus long term with higher yields, lower 
cost. What are the implications of that?
    Maybe, Dr. Smetters, you can start, but I welcome any 
input. And for the remainder of the 1 minute, I will yield to 
our witnesses.
    Mr. SMETTERS. Sure. And I will try to be then brief. The 
cycle that you mentioned is exactly the right word. In 
particular, you could issue enough debt that interest rates 
become high enough that you actually now have to issue even 
more debt and interest rates would go up even more. There is no 
market clearing that happens anymore. You can literally have an 
economic collapse that way.
    And what you mention about moving to shorter term, it looks 
in the short term like, hey, that is a win. We are taking 
advantage of lower rates. The problem is that you now take on 
more rollover risk. And that is not being costed and priced 
into the budget, and that is really a budget bias right now. We 
reward you for the lower expected interest rates. There is no 
pricing on the credit reform or anything like that for the 
rollover risk.
    Mr. ARRINGTON. But the rates for the 10-year Treasury are 
now five and a quarter.
    Mr. SMETTERS. Right.
    Mr. ARRINGTON. So we are actually paying more----
    Mr. SMETTERS. Even then, yeah.
    Mr. ARRINGTON [continuing]. For the 10-year Treasury. Why 
the shift, this extreme shift to the shorter term Treasury to 
issue debt? Anybody else have any thoughts about that?
    Mr. FAULKENDER. What the TBAC has told Treasury is that 
there are not sufficient buyers out there for the longer 
duration stuff. You can go ahead and find additional buyers for 
the shorter term stuff.
    To add to what you said earlier, one of the issues that the 
economic literature has shown is, once you get above 90 percent 
debt to GDP--so you were talking about debt service to revenue. 
Another one is aggregate debt to the size of your--once you get 
above 90 percent, that is where fiscal crises, debt crises 
start to occur.
    We are above that. The belief in the literature is that we 
can go above that because we are the world's reserve currency, 
but there is no test--nobody out there can model where it is. 
And so as Kent just said, you know, 20 years from now, at best, 
we get into that permanent spiral that you can't recover from.
    Now, in terms of the maturity mix, we currently have an 
inverted curve. So 1 years are higher than 10 years. We would 
be cheaper issuing tens in the short run. Normally, tens are 
going to cost you more than one. The reason is that most people 
think interest rates are going to come down.
    So it is okay to issue short. If, indeed, interest rates do 
come down, we may actually end up with lower debt service 
costs. But those debt service costs will not be lower if rates 
don't come down because we don't get the budget under control.
    Mr. ARRINGTON. Listen, I think--thank you for that. Not 
sufficient buyers of U.S. Treasury treasuries. That is a very 
explosive statement when you are thinking about slipping into a 
sovereign debt crisis.
    Again, I think there is this false sense of security that, 
as the world's reserve currency, we will just forever be able 
to act like we are all modern monetary theorists and spend and 
borrow and print with no significant consequence. It doesn't 
sound like that is the case.
    Thank you, Mr. Chairman.
    Chairman SCHWEIKERT. Thank you, Jodey.
    All right. And I saved myself partially because I want to 
spend a little time doing sort of technical, so I am going to--
and listen up, because you have actually come close to this.
    Dr. Faulkender, what does a failed bond auction look like? 
A failed bond, an undersubscribed bond auction, what does it 
end up to ultimately look like.
    Mr. FAULKENDER. Well, ultimately what happens is that the 
primary dealers who are part of the Treasury Borrowing Advisory 
Committee have to step in and take on the portion that was not 
subscribed, and it ends up being at higher yields. And 
ultimately what could happen is that those participants choose 
not to be in future auctions.
    So because they are obligated to take on the portion that 
is not subscribed, they may very well withdraw from future 
auctions, and that creates additional problems in the future 
when we have got to re--when we have got to issue more debt.
    Chairman SCHWEIKERT. So what is the ultimate definition of 
undersubscribed? I mean, we had a 10-year recently that 24 
percent was taken by the primary dealers, which, you know, that 
is double what we would have seen traditionally.
    Mr. FAULKENDER. Right. So I don't know that there is a 
formal--it is going to be a historical reference that it is--
you are asking the primary dealers to come in and take a much 
larger portion than they are normally taking, and they may not 
themselves have set aside sufficient capital in order to fill 
all of that need.
    Chairman SCHWEIKERT. That was actually what I was looking 
for, is, at what point does the piping, let's call it the 
plumbing, our primary dealer network not have enough cash on 
the books? If they had to take 50 percent of an issuance, is 
that more cash than they have? And at that point, have we hit a 
black swan where interest rates pop to bring in new capital? I 
am trying to understand our fragility, to use a sort of pop 
culture economic term.
    Mr. FAULKENDER. I don't know that I would say there is a 
specific number, because I don't want to ever give the 
impression that we can march right up to that number, right. 
And so it does depend upon how much capital is available, what 
are the other things that they are funding, what does their 
reserve status look like. And that is going to change over time 
as to how much just excess capital the primary dealers have 
available in reserve to step in for these kind of 
contingencies. That is not something that, for instance, there 
is N dollars necessarily set aside that I can give you a 
specific number such that you think that they can march up to 
just below that and be okay.
    Chairman SCHWEIKERT. Dr. Smetters, you have been bouncing 
your head up and down on this one.
    Mr. SMETTERS. Yeah. I completely agree with that. There is 
no magic number. To take that example, even at the current 
values right now, if all of a sudden the primary dealers really 
believe that Congress is either going to spend it wildly or tax 
very little going forward, if they just lose confidence even at 
current values, things could unwind.
    And so it is really about their expectations of the future 
rather than a given auction. If they are confident in Congress 
going forward, they are able to raise the capital. If they are 
not confident in Congress going forward, the capital markets 
are not going to give them the capital.
    Chairman SCHWEIKERT. Okay. I was going to go this way, but 
could we spend 30 seconds, does anyone have an expertise on, 
you are a broker-dealer. You actually are in contract 
functionally with Treasury to be a market maker in the first 
takedown. How do you raise your own capital?
    Mr. SMETTERS. Well, that is really costly capital, because 
that is equity capital that you would have to raise in order to 
meet your obligations. And so that could cause great dilution 
of the primary dealer. It would not be the case that they can 
just go out and engage and leverage themselves, because this is 
a very much more challenging market to do that. And that is why 
it is--once they get spooked, that is going to be a serious 
problem.
    Chairman SCHWEIKERT. You see, and that is something I don't 
believe Members of Congress and even many who actually write 
about this area understand is they have to actually raise the 
capital. They often have certain relationships. I promised we 
weren't going to talk too much about repo, so we will stay away 
from, you know, some of the swaps and the pledges.
    Do any of you see any potential stressors--I am agnostic on 
these because I haven't read enough--on the SEC wanting to go--
and this is sort of for the secondary market--to sort of a 
single trading platform, or I will also ask you to speak to 
Treasury's plan to basically look at some of older issuances 
that are thin and repurchase them and add that to current 
capacity.
    Do any of those make differences in the breadth of markets 
on capital or are those just grounding errors in the plumbing? 
Anyone that feels they have an expertise on either of these 
weird issues.
    Mr. SMETTERS. Sure. I mean, I view Treasury as a current 
idea of, I call it operation twist with a twist. I mean, they 
have done some----
    Chairman SCHWEIKERT. Yeah, but you don't game it, I mean.
    Mr. SMETTERS. That is right. That is right. And so I don't 
think it is going to be a first order event. I think but it 
does point to a much broader problem, and that is markets are 
making bets against Treasury, Treasury are making bets against 
the market. It is that two-sided betting that is actually 
inefficient.
    Treasury could over time create more consistency in supply 
and really focus and eventually reduce risk premiums if they 
made the maturity structure much more predictable and really 
focusing on what they can actually provide that capital markets 
cannot, and that is long-term risk-free assets.
    Chairman SCHWEIKERT. But hasn't one of the problems been on 
Treasury's long-term funding outlooks is some of the spending 
bills, discussions of tax extenders, where they are suddenly, 
like we had in, you know, fourth quarter and even first quarter 
of this fiscal year, we were way off?
    Mr. SMETTERS. Right. I mean, the projections were 
incredibly off. And this is a problem why I say the blame game 
is not that useful, because it doesn't tell us the best path 
forward.
    You know, if we even think about the Bush era, remember 
their Medicare part D, the long-term effect of that was even 
bigger than the tax cuts there. I mean, it all comes down to 
your baseline and what you incorporate as your baseline.
    I don't think looking back is the way to go. I think it is 
really about our best decisions going forward, whether it is 
investing in children or other things is independent of all 
that.
    Chairman SCHWEIKERT. All right. And it is not heresy, 
because the math is the math. CBO, OMB, even a couple of your 
groups, if you actually look at the numbers, basically say from 
today through the next 30 years, 100 percent of the future 
borrowing is basically demographics and interest. Okay?
    So we can spend--which broke my heart, and I have already 
shared with my friend here. Our staff sometimes live in a 
partisan bubble, but that is what they know. This hearing 
wasn't about--because I have plenty of charts, and so when you 
do the dynamic effects, some of the things you said drove me 
nuts, but that is the game we do here.
    What I want to know is, from today forward, what do we do 
policy wise, or should we just stay the hell away from it? 
Stability, price efficiency. Price efficiency, stability, and 
if you have suggestions there.
    And then my weird question--they get weirder--have any of 
you ever seen--Professor Shiller 10 years ago wrote an article 
about something he called a Trill, which was almost selling an 
equity interest that actually would be sympathetic to receipts 
going up, you got a little bit more. It is sympathetic if 
receipts went down, you got a little bit less. And that way you 
had an instrument that was a sympathetic bond where often what 
we have here is sometimes those bonds, you know, are 
countercyclical.
    Should Congress dive into, what do we do for stability, 
what do we do for liquidity? And should we also be looking at 
some alternative debt management instruments?
    Let's start at one end. What would you do?
    Mr. DRIESSEN. Yeah, I mean, I think the biggest thing I 
would say is that I think there are different management 
approaches that could be considered, and I think Treasury is 
looking at those. Some of my colleagues have presented, you 
know, encouraging to kind of look at longer term instruments, 
which I think has some value.
    Chairman SCHWEIKERT. And I know I am interrupting. Going 
back to Treasury Secretary Lew, because he and I had a 
wonderful argument years ago about wanting to sell super bonds, 
and it was basically to get beyond our demographic bubble.
    Mr. DRIESSEN. Yeah.
    Chairman SCHWEIKERT. He fussed back to me that there wasn't 
an appetite. And I said, you haven't really looked. When you 
talk about longer term bonds, are you talking 40s, 60s?
    Mr. DRIESSEN. Yeah. I mean, I think both Secretary Mnuchin 
and Secretary Yellen at least expressed a desire to look at 50-
year bonds and 100-year bonds. They do have the discretion to 
do that, as we talked about earlier. There was some feedback 
that there wasn't sufficient demand at that point.
    I do think that, you know, it is going to be kind of a 
circular loop there where, you know, if you are looking at 
longer term, providing longer term supply, there is also going 
to be a demand issue. And all of that is going to kind of feed 
back to what the market views as the long-term debt trajectory.
    So it really is going to go back to how do we bring down 
the deficits and how do we stabilize debt. That would probably 
help in terms of stoking demand for some of those longer-term 
vehicles that might help in the way that my colleague 
suggested.
    Chairman SCHWEIKERT. Okay. Because there is the powerful 
argument that type of bond actually has a certain credit 
enhancement because of U.S. demographics. You know, you get 
beyond some of the cost structure, but that is----
    Mr. DRIESSEN. Sure, sure.
    Chairman SCHWEIKERT. Doctor?
    Mr. SMETTERS. Yes. No, I agree with this. I mean, one of 
the problems that I have when people look at the current market 
and they talk about demand, that demand is all based on what 
they think Treasury is going to do in the future. They are 
trying to make forecasts. If Treasury created a much more 
predictable environment, then the private market could actually 
create this shorter term duration asset.
    So, for example, in theory, economists would say, what 
textbook says, is that the government really just has to 
produce something similar to the asset you just talked about 
that is called a console. It just is an infinitely lived bond 
that pays interest rate forever. The U.K. has had some of these 
things.
    Chairman SCHWEIKERT. So a perpetual.
    Mr. SMETTERS. That is right, or perpetuals. And the private 
market, if they knew there was a constant supply of that, they 
can create all the intermediate durations--the repackaging is 
actually very simple--without counterparty risk. That is 
something that easy custodial relationships can deal with.
    But the problem is that we--sometimes people call the 
supply and demand side of the Treasury market competition. That 
is just wrong. We can actually have no equilibrium when 
Treasury is trying to optimize against the bond buyers and bond 
buyers are trying to optimize against the Treasury.
    I think the goal is that the Treasury, at least over time--
because current contracts are written around what was issued in 
the last few years--over time Treasury should get to a longer 
term maturity, ideally quite a bit longer, and let the private 
market be the one who dices up and creates the more 
intermediate securities. Right now, the budget scoring process, 
though, really favors much shorter term issuance, because the 
rollover risk is simply not priced in.
    Chairman SCHWEIKERT. That is helpful. That is helpful.
    Mr. Kogan, what would you do in that sort of--would you 
offer alternative instruments? What would you do?
    Mr. KOGAN. I think--I mean, I--I agree with what has been 
said previous, that I think there--I think you can look into 
trying to do stuff in the margin. I know in the Clinton 
administration they did a little bit at the margin. But I think 
you run the risk, if you kind of are messing with the bond 
market too much, of having unintended consequences.
    I think the long run, interest is a product of debt, and so 
the right thing to do is to look at the long-run trajectory of 
our primary deficit.
    Chairman SCHWEIKERT. Okay. Dr. Faulkender?
    Mr. FAULKENDER. I was at Treasury when Secretary Mnuchin 
asked the TBAC to look at 50s. I was surprised that they came 
back and said that there wouldn't be sufficient demand for 
them, simply because, as people are living longer, both pension 
plans and insurance companies, it seems to me, would have even 
more need for locking in interest rates over 50-year time 
periods. And yet TBAC did come back and say there wouldn't be 
sufficient demand for them. I do worry that if we can't even 
issue 10s and 7s, as to whether or not there would be demand 
for 50s, particularly from our international potential 
purchasers.
    In terms of other structures, I like TIPS, if for no other 
reason--the Treasury inflation protected securities--if for no 
other reason they get the right incentives, so interest costs 
to the U.S. Government are lower in low-inflation environments, 
higher in higher inflation environments.
    One worries about whether the market would actually take 
the wrong signal if we start saying we are going to pay you 
more when the economy is doing well and pay you less when the 
economy is doing poorly. Is that going to be a signal that we 
think the economy is going to do badly?
    So I think there is some perverse signaling that maybe we 
are----
    Chairman SCHWEIKERT. But there is possibly alignment of 
incentives?
    Mr. FAULKENDER. It is--yeah. So I like the idea of 
encouraging, you know, and having the American people have--I 
mean, there are already plenty of instruments, though, where 
people can share in an improving economy. You know, generally 
the stock market, more broadly. Usually, Treasury securities 
have served as a hedge.
    I think what you are saying--and I would have to give it 
more thought and go look at Professor Shiller's paper--as to 
whether or not there really is need for yet another security 
that already provides upside in good economies.
    Chairman SCHWEIKERT. Okay. But how do you feel, though, 
about the discussion in a perpetual?
    Mr. FAULKENDER. Again, we would need to establish--I like 
longer term ones. There have been some corporate bonds issued 
with 100-year----
    Chairman SCHWEIKERT. Oh, yeah.
    Mr. FAULKENDER [continuing]. Maturities on them.
    Chairman SCHWEIKERT. Apple did 60s last year.
    Mr. FAULKENDER. Yeah. Yeah. So that was why I was a little 
surprised by the conclusion of the TBAC, because if AA and AAA 
companies can issue at 100 years, why can't Treasury find a 
sustainable market for 50s? I thought that market should have 
been there because, as I mentioned before, it seems like there 
is natural hedging demand from life insurance companies and 
pension plans.
    Chairman SCHWEIKERT. All right. Gentlemen, thank you. I am 
probably going to send you all a note asking for a little bit 
more of your thoughts, and I know you have been incredibly 
generous to do this.
    And part of the argument in sort of my place here in 
Congress is trying to make the argument that, you know, 
demographics is our destiny. Demographics is debt. Work through 
it. It is why, as we were here talking, we were talking about 
what could we do to disrupt the price of delivering health 
services, because Medicare is the primary unfunded liability in 
our society. And we are very uncomfortable talking about that, 
because most of what we talk about is financing of Medicare, 
not the actual cost of keeping someone healthy.
    But with that, I have a powerful interest on are there some 
things we should do in our debt markets that show that we are 
going to try to reach beyond the demographic bubble?
    You know, as I pointed out, I have a 17-month-old little 
boy we have adopted sitting in the back, and the math says, 
when he is functionally just become an adult, U.S. tax rates 
almost have to double just to maintain baseline services.
    It is no longer, though, about the next generation. I will 
argue it is about all of our retirements now if the stressors 
continue, and I am terrified of a black swan. So I want to 
communicate to markets that stability, liquidity, and that we 
are paying attention.
    So with that, I am going to bring this hearing to a close. 
I will--oh, you wanted to give me the script.
    Please be advised that members have 2 weeks to submit 
written questions to be answered later in writing. Those 
questions and your answers will be made part of the formal 
hearing record.
    And with that, I really, really appreciate your time.
    And to Mr. Pascrell, thank you for letting me chat on your 
ear and try to be really annoying.
    And with that, the hearing is over.
    [Whereupon, at 12:13 p.m., the subcommittee was adjourned.]
      

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