[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
DEPARTMENT OF THE TREASURY FISCAL YEAR 2012 BUDGET
=======================================================================
HEARING
before the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
HEARING HELD IN WASHINGTON, DC, FEBRUARY 16, 2011
__________
Serial No. 112-5
__________
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COMMITTEE ON THE BUDGET
PAUL RYAN, Wisconsin, Chairman
SCOTT GARRETT, New Jersey CHRIS VAN HOLLEN, Maryland,
MICHAEL K. SIMPSON, Idaho Ranking Minority Member
JOHN CAMPBELL, California ALLYSON Y. SCHWARTZ, Pennsylvania
KEN CALVERT, California MARCY KAPTUR, Ohio
W. TODD AKIN, Missouri LLOYD DOGGETT, Texas
TOM COLE, Oklahoma EARL BLUMENAUER, Oregon
TOM PRICE, Georgia BETTY McCOLLUM, Minnesota
TOM McCLINTOCK, California JOHN A. YARMUTH, Kentucky
JASON CHAFFETZ, Utah BILL PASCRELL, Jr., New Jersey
MARLIN A. STUTZMAN, Indiana MICHAEL M. HONDA, California
JAMES LANKFORD, Oklahoma TIM RYAN, Ohio
DIANE BLACK, Tennessee DEBBIE WASSERMAN SCHULTZ, Florida
REID J. RIBBLE, Wisconsin GWEN MOORE, Wisconsin
BILL FLORES, Texas KATHY CASTOR, Florida
MICK MULVANEY, South Carolina HEATH SHULER, North Carolina
TIM HUELSKAMP, Kansas PAUL TONKO, New York
TODD C. YOUNG, Indiana KAREN BASS, California
JUSTIN AMASH, Michigan
TODD ROKITA, Indiana
FRANK C. GUINTA, New Hampshire
ROB WOODALL, Georgia
Professional Staff
Austin Smythe, Staff Director
Thomas S. Kahn, Minority Staff Director
C O N T E N T S
Page
Hearing held in Washington, DC, February 16, 2011................ 1
Hon. Paul Ryan, Chairman, Committee on the Budget............ 1
Prepared statement of.................................... 1
Questions submitted for the record....................... 51
Hon. Chris Van Hollen, ranking minority member, Committee on
the Budget................................................. 2
Prepared statement of.................................... 4
Hon. Timothy F. Geithner, Secretary, U.S. Department of the
Treasury................................................... 5
Prepared statement of.................................... 7
Responses to questions submitted for the record.......... 51
Hon. W. Todd Akin, a Representative in Congress from the
State of Missouri, submission for the record: Wall St.
Journal article, ``5,100 More IRS Agents''................. 24
Hon. Marcy Kaptur, a Representative in Congress from the
State of Ohio:
Submission for the record: Report, ``Foreign Portfolio
Holdings of U.S. Securities,'' Internet address to..... 41
Questions submitted for the record....................... 54
Hon. Michael M. Honda, a Representative in Congress from the
State of Caliornia, questions submitted for the record..... 52
Hon. Ken Calvert, a Representative in Congress from the State
of Caliornia, questions submitted for the record........... 53
DEPARTMENT OF THE TREASURY
FISCAL YEAR 2012 BUDGET
----------
WEDNESDAY, FEBRUARY 16, 2011
House of Representatives,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to call, at 2:54 p.m., in room
210, Cannon House Office Building, Hon. Paul Ryan [chairman of
the committee] presiding.
Present: Representatives Ryan, Garrett, Akin, Stutzman,
Lankford, Ribble, Flores, Mulvaney, Huelskamp, Young, Rokita,
Woodall, Van Hollen, Schwartz, Kaptur, Blumenauer, Yarmuth,
Pascrell, Honda, Ryan of Ohio, and Wasserman Schultz.
Chairman Ryan. The hearing will come to order.
Sorry about the delay. We understand that everybody here is
under a time crunch. I am going to, in the interest of time,
make my opening remarks, as prepared, into the record instead
of sharing the full text of my remarks now.
But, briefly, I just wanted to say how disappointed we are
that the President has failed to lead on the most important
fiscal challenges of our time. There has been a lot of talk
about the politics of taking on these challenges, and the
conventional wisdom is that the politically safe thing to do, I
suppose, is to do nothing. But I sincerely wonder about that.
I wonder how long Americans are going to tolerate empty
promises about their retirement security. I wonder how long
they will put up with leaders who fail to lead us when we are
staring a debt crisis in the face. Yes, we are running up to a
statutory debt limit, but we are also running up to a real debt
limit called the credit markets.
We feel that it is our responsibility to do things
differently, to lead where the President has fallen short. And
that is exactly what we intend on doing in the days, months
ahead.
With that, I will submit the rest of my statement in the
record, and I will yield to Ranking Member Van Hollen for some
brief opening remarks.
[The prepared statement of Chairman Ryan follows:]
Prepared Statement of Hon. Paul Ryan, Chairman,
Committee on the Budget
Thank you, Secretary Geithner, for coming before our Committee
today to discuss the President's budget.
The President has disappointed us by presenting us with another
budget that spends too much, borrows too much and taxes too much. It is
a budget that will stifle job growth today and leave a diminished
future for the next generation.
Last year, the long-term fiscal trajectory in the President's
budget was so bad that it came with a warning label, like a cigarette
pack: Warning: Must appoint fiscal commission to fix this problem.
But then, when his own commission put forward a set of fundamental
entitlement and tax reforms, he ignored them.
Despite the urgent need to rein in our runaway debt, the
President's budget would add $13 trillion to debt--an unconscionable
burden we're imposing on our economy today and our children tomorrow.
To be sure, both parties share the blame for the unsustainable
trajectory we're on.
Nevertheless, this President has made our spending problems much
worse with policies such as the failed stimulus and the new health care
entitlement.
To listen to my colleagues on the other side of the aisle, you
would think these massive new spending programs have nothing to do with
it. They blame the Bush tax cuts--even though they agree that most of
these tax cuts should be made permanent.
In fact, one of the President's own economic advisers, Austan
Goolsbee, recently defended the Administration's use of rosy economic
forecasts to make its deficits look smaller by saying that the
forecasts actually understated near-term growth, because the estimates
hadn't factored in recent tax relief for all Americans.
So the Administration is admitting that low tax rates are good for
growth, even as their budget is calling for $1.6 trillion in higher
taxes on American families, businesses and entrepreneurs just two years
from now.
Ironically, that's when the Administration's forecasts predict that
economic growth will really take off. Must be all those tax increases.
On our nation's most pressing fiscal challenges, the President has
failed to lead. Former Clinton Chief of Staff and co-chair of the
fiscal commission, Erskine Bowles, said the White House budget request
goes ``nowhere near where they will have to go to resolve our fiscal
nightmare.''
The policies contained in this budget would commit us to the
bankruptcy of our entitlement programs and the managed decline of our
economy.
The President has asked us to raise the debt limit. But the
experience of Europe teaches us that we cannot keep making unaffordable
promises without eventually hitting a real debt limit--a limit on our
borrowing imposed by credit markets in a state of panic.
The politically safe response, I suppose, would be to do nothing.
But I wonder about that.
I wonder how long Americans will tolerate empty promises about
their retirement security. I wonder how long they will put up with
leaders who fail to lead us--when we are staring a debt crisis in the
face.
We feel that it's our responsibility to do things differently--to
lead where the President has fallen short. And that's exactly what we
plan to do.
With that, I will yield to Ranking Member Van Hollen for an opening
statement.
Mr. Van Hollen. Thank you, Mr. Chairman. And I will also
work to shorten this up.
Welcome, Mr. Secretary.
I think that the President has laid out a proposal that is
tough but responsible--tough because it cuts nonsecurity
discretionary spending by $400 billion over the next decade to
the lowest share of the economy since the Eisenhower
administration; responsible because it steadily reduces the
deficit, while making targeted investments in areas like
education, clean energy, infrastructure, and scientific
information--investments that the Chairman of the Federal
Reserve, Ben Bernanke, said would help strengthen the economy
in his testimony here last week.
That approach, the President's balanced and responsible
approach, stands in stark contrast, I believe, to the
Republican majority's reckless approach that they are taking on
the floor of the House as we speak. That proposal will put more
Americans out of work when too many families are still
struggling to make ends meet and do virtually nothing to
address our Nation's long-term deficit problem.
That is one of the reasons that the bipartisan commission
on deficit reduction recommended against taking deep and
immediate cuts, because they recognize the economy remains
fragile.
Now, one other point here, because yesterday, in this
committee, we heard a lot of our Republican colleagues
criticize the President's budget for it not reaching primary
balance--in other words, no longer spending more than we have--
by the year 2017. In fact, many ridiculed the notion that
reaching primary balance over the next 10 years was an
important milestone.
I would point out first that the bipartisan commission did
not reach full balance in that 10-year window. And yesterday,
in the spirit of recognizing that achieving full balance in the
short term is difficult, I pointed to the one Republican plan
that has been put forth and scored by CBO. And that is the plan
that the chairman of the committee has put forth. And he has
put it forth in good faith.
But I had hoped that my comments in that regard would have
been somewhat cautionary, because, as I indicated, CBO has
looked at that plan, and it doesn't reach primary balance by
the year 2020, and--in fact, I misspoke yesterday--it doesn't
reach primary balance by the year 2040. It doesn't reach
balance until sometime between 2040 and 2060--until after 2060,
actual balance.
So I would just caution my colleagues that, to the extent
that you are going to be criticizing the President and the
administration for not reaching balance fast enough and
ridiculing the notion of primary balance in the next 10 years,
you are also criticizing the one proposal that has been put
forward to date, and you are doing it more so, because the
President's budget gets to that balance----
Chairman Ryan. Would the gentleman yield?
Mr. Van Hollen. I am happy to yield.
Chairman Ryan. This proves how tough this is. This proves
what kind of a hole we are in. And it is not your fault; both
parties are responsible for where we are. It proves how
difficult this is.
And the reason we are so disappointed in this current
budget is because it does nothing to address the drivers of the
debt. And when you even do address the drivers of the debt, you
can see how tough it is to get out of the hole we dug ourselves
into.
Mr. Van Hollen. Yeah. If I could just say, I agree it is
difficult. In fact, I am offering this caution in the spirit of
a common recognition that it is difficult.
But I had hoped that, just by making that remark, sort of
in the spirit of recognizing how difficult it is, that we
wouldn't have heard so much from some of your Members
criticizing the President's budget on that particular point.
Because it is an important milestone, to reach primary balance
in this 10-year period. And, as Jack Lew pointed out, by
definition, you have to go through primary balance before you
get to full balance.
So I only say this, Mr. Chairman, to say how hard it is,
but we spent the rest of the day listening to your Members
criticize the President for reaching primary balance in 2017
rather than full balance. So I think it is only fair play to
say that the one good-faith effort on the Republican side that
has been scored to date doesn't get close to that in 2020 and
doesn't do it until after 2040.
But I hope that--obviously, you are going to be presenting
a budget this year. That will be the next effort. And let me
just close with this: We look forward to working with you
wherever possible to find common ground in that effort.
Thank you.
[The prepared statement of Mr. Van Hollen follows:]
Prepared Statement of Hon. Chris Van Hollen, Ranking Minority Member,
Committee on the Budget
Thank you very much, Chairman Ryan. Welcome, Secretary Geithner and
thank you for joining us today.
President Obama has laid out a budget proposal that is tough but
responsible. Tough because it cuts non-security discretionary spending
by $400 billion over the next decade to the lowest share of the economy
since the Eisenhower Administration. Responsible because it steadily
reduces the deficit while making targeted investments in areas like
education, clean energy, infrastructure, and scientific innovation--
investments that Federal Reserve Chairman Ben Bernanke said would
strengthen our economy when he testified here last week.
One key area of investment that the President has proposed is in
our nation's infrastructure. The American Society of Civil Engineers--
hardly a left wing group--issued a report card on the state of
America's deteriorating infrastructure. They give us practically
failing grades, mostly Ds and D-minuses for the state of our roads,
schools, transit, and drinking water--not grades that we'd want our
kids to bring home from school. I'm very pleased that the President has
announced he wants to make investments in this area. As reported
yesterday in USA Today, using the analysis of the Associated General
Contractors--again, not a liberal group, his plan could create about
5.4 million construction jobs and 10 million more jobs in related
industries and the broader economy. At a time when the construction
industry is facing over 20 percent unemployment, these are exactly the
kind of smart investments that will help grow our economy.
The President's balanced and responsible approach stands in stark
contrast to the Republican majority's reckless plan for this year,
which is being debated on the House floor today. That proposal will put
more Americans out of work at a time when too many families are still
struggling to make ends meet, and do virtually nothing to address our
nation's long-term structural deficit. The Economic Policy Institute
found that the Republican proposal would likely put 800,000 Americans
out of work. Indeed, that's why the Bipartisan Commission charged with
reducing the deficit warned against making deep, immediate cuts when
the economic recovery is still fragile. And why would Republicans cut
essential investments in kids, cops, cancer research, and consumers
rather than eliminate huge taxpayer subsidies to the oil industry?
House Republicans have also taken a reckless approach to the debate
on the debt ceiling--an issue that you, Mr. Secretary, have raised
serious concerns about. In fact, you have said that ``even a very
short-term or limited default would have catastrophic economic
consequences that would last for decades. Failure to increase the limit
would be deeply irresponsible.'' Chairman Bernanke stated that
defaulting would be ``catastrophic.'' We simply cannot play games with
the full faith and credit of the United States. Nor should we provide
payments to foreign creditors--including China--before payments to
American contractors, Social Security and Medicare recipients, and the
salaries of our Armed Forces, as various Republican proposals would do.
This is reckless and wrong.
Yesterday, we heard many of our Republican colleagues criticize the
President's budget for not reaching primary balance--no longer spending
more than we have--by 2017. In fact, many ridiculed the notion that
reaching primary balance over the next 10 years was an important
milestone. I would point out that the Bipartisan Commission did not
reach full balance in the 10-year window. Yesterday, in the spirit of
recognizing that achieving full balance in the short-term is difficult,
I pointed to the one Republican plan that has been put on the table and
scored by CBO--that of the Chairman. That good faith effort does not
get to primary balance in 2020. In fact, it doesn't get to primary
balance until sometime between 2040 and 2060. And it doesn't reach full
balance until sometime after 2060. So today, as we speak with Secretary
Geithner, I would caution our colleagues that criticizing the
President's budget on that score also applies--but to a much greater
extent--to the one Republican proposal that has been made to date. We
look forward to seeing the next budget effort that House Republicans
put forward, and we stand ready to work with you to find common ground
whenever possible.
On another note, it is interesting that our Republican colleagues
have criticized the President for not including more of the Bipartisan
Commission's recommendations in his budget when every single House
Republican serving on the Commission voted against their final report.
That being said, in order to tackle our longer-term fiscal
challenges--beyond the 10-year period of this budget--it is important
that the White House and the Congress, Republicans and Democrats, come
together to seriously discuss and consider the ideas in the
Commission's proposal. Compromise is not a dirty word. Getting things
done requires give and take. We should begin that conversation now.
Thank you, Mr. Chairman, and we look forward to Secretary
Geithner's testimony.
Chairman Ryan. Great. Great. We will stick with all our
other criticisms of the President's budget then.
Secretary Geithner, the floor is yours.
STATEMENT OF HON. TIMOTHY F. GEITHNER, SECRETARY,
U.S. DEPARTMENT OF THE TREASURY
Secretary Geithner. Thank you, Mr. Chairman and Ranking
Member Van Hollen and members of the committee. It is a
pleasure to be before you today to talk about these important
questions.
I should say at the beginning, Mr. Chairman, that I agree
that you deserve a lot of credit for laying out a comprehensive
plan. I don't agree with a lot of the content of that, but I
agree that you deserve a lot of credit for laying out something
comprehensive. And you will have the chance, now that you are
in the leadership, to put together a resolution that lays out a
10-year path for dealing with these challenges. And, of course,
we look forward to working with you on how best to get there.
The President's budget presents a comprehensive strategy to
strengthen economic growth and expand exports with investments
in education, innovation, and the Nation's infrastructure. And
we do that by presenting a detailed, comprehensive, multiyear
plan to cut spending and to reduce deficits.
Our deficits are too high, and they are unsustainable. Left
unaddressed, they will hurt economic growth and leave us weaker
as a nation. We have to restore fiscal responsibility and go
back to living within our means.
The President's budget cuts the deficits he inherited in
half, as a share of the economy, by the end of his first term.
These cuts are phased in over time to protect the recovery. In
order to make it possible for us to invest in future growth and
to restore sustainability, the President proposes to reduce
nonsecurity discretionary spending to its lowest level, as a
share of the economy, since Dwight Eisenhower was President.
To achieve this, the budget proposes a 5-year freeze of
nonsecurity discretionary spending at its 2010 nominal level,
which will reduce the deficit by more than $400 billion over
the next 10 years. As you know, the President also proposes to
reduce the request for defense, to freeze civil service
salaries, to improve efficiency in government by reducing and
eliminating a range of programs.
These savings create the necessary room for us to make
targeted investments in support of reforms that will help
strengthen future economic growth.
And the most important thing we can do to help promote
long-term growth is to improve the quality of our education
system, to invest in innovation, and to rebuild our Nation's
infrastructure. Without these investments, we will be weaker
and less competitive.
As part of this strategy for growth, the President proposes
reforms to our tax system designed to encourage investment. We
propose to put in place a permanent and expanded tax credit for
research and development; to eliminate capital gains taxes on
investments in small businesses; to encourage advanced
manufacturing in clean energy; to keep taxes on investment
income--this means dividends and capital gains--low; and to
make college more affordable for middle-class Americans.
These tax incentives are accompanied by reforms that would
reduce incentives to shift income and investment outside the
United States and to close loopholes and tax preferences that
we cannot afford.
Now, in addition to these changes, we propose to pursue
comprehensive corporate tax reform that would lower the
corporate tax rate. Our present system, as you know, combines a
very high statutory rate with a very broad range of expensive
tax preferences for specific industries and activities. We need
a more competitive system that allows the market, not tax
planners and lobbyists, to allocate investment, a system in
which businesses across industries pay a roughly similar share
of earnings, a system that provides more stability and
certainty, that is more simple to comply with. And we have to
do all of this without adding to our future deficits.
We have begun the process of building support for
comprehensive tax reform on the corporate side. I think we have
a chance to do that now, and I hope we can work with this
committee to help make that possible.
The President's budget also outlines some responsible
reforms on the individual side. We propose, as we have in the
past, to allow the 2001 and 2003 tax cuts for the wealthiest 3
percent--2 percent of Americans to expire; limiting certain
deductions for those same high-income Americans; restoring the
estate tax to 2009 levels; and closing the carried-interest
loophole.
These proposals will help ensure that the savings we
achieve together through spending cuts are devoted to deficit
reduction, not to sustaining lower tax rates for the most
fortunate 2 percent of Americans.
This budget would achieve the dramatic reforms and
reductions in our deficit over the next decade that are
necessary to stop the national debt from growing as a share of
the economy and to stabilize the debt burden at a level that
will not threaten future growth. But these are only a first
step, a down payment on the longer-term reforms necessary to
address those long-term deficits.
To deal with those longer-term deficits, as you all know,
the deficits we face over the next century, not just the next
decade, we are going to have to build on the cost-reduction
reforms that are achieved in the Affordable Care Act. And
although it is not a contributor to our short- and medium-run
deficits, we need to work together across the aisle to
strengthen Social Security for future generations.
We can't grow our way out of these deficits. They are not
going to go away on their own. And they won't be solved by
cutting deeply into programs that are critical to future growth
and competitiveness. We have to find a consensus on a multiyear
plan that cuts where we can so that we can invest where we need
and that reduces deficits. Making a multiyear commitment will
allow us to make sure that the changes are phased in as the
economy recovers. And making a multiyear plan will give
businesses and individuals adequate time to adjust and prepare
for future changes.
This is a starting point for the discussion, and we
recognize there are many ideas on both sides of the aisle. And
we know, as you do, that we need both parties and both houses
of Congress to come together to enact solutions that work best
for the country.
Now, in December, we were able to find bipartisan consensus
on a very strong package of tax incentives to help sustain the
recovery and restore confidence. We want to bring that same
commitment, that same spirit of bipartisanship to the challenge
of restoring fiscal responsibility.
Thank you.
[The prepared statement of Secretary Geithner follows:]
Prepared Statement of Hon. Timothy F. Geithner, Secretary,
U.S. Department of the Treasury
Chairman Ryan, Ranking Member Van Hollen and members of the
Committee, thank you for the opportunity to appear before you today to
discuss the President's Fiscal Year 2012 Budget.
i. introduction
When the President took office two years ago, the U.S. economy was
in the middle of its deepest recession in more than 50 years. The
economy was contracting at a rate of 5 percent per year, and private
businesses were cutting more than 700,000 jobs per month.
In the face of this crisis, this Administration and Congress put in
place policies that helped pull the economy back from the brink and
established the basis for the ongoing recovery. Today the economy has
grown for six straight quarters. Businesses have started to hire again
and have added more than 1.3 million jobs since the labor market began
to recover. Economic activity has accelerated over the last few months,
supported by strong private demand.
This past December, the Administration and Congress agreed to a
bipartisan tax package that will help ensure that the recovery
continues. This agreement prevented a tax increase on middle class
Americans, and also included crucial Administration initiatives--such
as a temporary payroll tax cut, an extension of unemployment insurance
benefits, and immediate expensing for certain business investments--
that will provide a substantial boost to economic activity.
Consumers and businesses are now expressing more optimism about the
future, suggesting momentum that will sustain growth in the coming
months. At the same time, private sector analysts have issued more
optimistic near-term forecasts and are projecting stronger growth in
2011 and 2012.
However, we still face very substantial economic challenges.
Millions of Americans remain out of work, and families across the
country are still struggling to make up for losses in their savings and
in the value of their homes.
The President has outlined a broad strategy to help strengthen
economic growth with investments in education, innovation, and the
nation's infrastructure. Alongside those investments, we must reform
the nation's finances to restore fiscal responsibility. Our deficits
are too high and they are unsustainable. Left unaddressed, these
deficits will hurt economic growth and make us weaker as a nation. We
must go back to living within our means.
The Budget presents a detailed plan to cut spending and reduce
deficits. The President's Budget cuts the inherited deficit in half as
a share of the economy over his first term; includes proposals that
will reduce deficits by more than $1 trillion over the next 10 years;
and cuts non-security discretionary spending to its lowest level as a
share of the economy since Dwight Eisenhower was President. These cuts
are phased in over time to protect the recovery.
In addition, the Budget sets priorities by balancing spending cuts
with the need to protect investments in education, innovation and
infrastructure. Under-investing in these areas would compromise our
competitiveness. Finally, the Budget reaffirms our commitment to reduce
tax expenditures and reform entitlement programs.
ii. a credible commitment to fiscal responsibility
The President's Budget meets the following five imperatives, all of
which are necessary components of a credible commitment to fiscal
responsibility:
First, we must lower deficits over a multi-year period to
stabilize or reduce the national debt as a share of the economy.
Deficit reduction needs to be gradual to avoid endangering the
recovery.
Second, we need to reduce overall spending as a share of
the economy, with spending cuts targeted at programs we cannot afford.
Third, we need to protect and expand investments in
targeted areas crucial for future economic growth.
Fourth, we must develop tax policies that promote growth
and investment while maintaining fairness and fiscal responsibility.
Fifth, we must restore fiscal responsibility over the long
term by reducing the rate of growth in health care expenditures and by
strengthening and extending the solvency of Social Security.
The following sections outline in detail how the President's Budget
meets each of these imperatives.
A multi-year commitment to stabilize the national debt
While our deficits will decline in coming years as the economy
continues to recover, economic growth alone will not be enough to
stabilize our finances. In the absence of further action, the deficit
is projected to remain near 4.5 percent of GDP for the rest of the
decade, even after the economy is fully recovered. Under this scenario,
the national debt held by the public will grow from 62 percent of GDP
in 2010 to nearly 85 percent of GDP by 2021, the highest share since
1948. Without reform, debt will continue to grow after 2021, as
mandatory spending and interest payments on the debt grow faster than
revenues.
Roughly speaking, stabilizing the debt as a share of the economy
requires that outlays, excluding interest payments on the national
debt, must equal revenues. This requires us to cut the deficit to
approximately 3 percent of GDP and maintain deficits at about this
level into the future.
The President's Budget accomplishes this over the medium term. Our
proposals cut the deficit in half by 2013, reduce it to 3.2 percent of
GDP by 2015, and maintain deficits around 3 percent of GDP for the
second half of this decade. Under our proposal, the national debt held
by the public as a share of the economy stabilizes around 76 percent
starting in 2013, although it rises slightly at the end of the 10-year
budget window. Excluding the financial assets held by the government,
such as student loans and other investments, our proposals stabilize
the national debt held by the public as a share of the economy at
around 68 percent.
The pace of deficit reduction has to be calibrated to the path of
recovery. Under the path envisioned in the Budget, significant deficit
reduction starts in 2012 and accelerates in 2013 and 2014, due mainly
to economic recovery and the expiration of support measures, and also
due to Budget proposals that reduce the deficit. Starting in 2015, when
the economy is projected to be closer to operating at full capacity,
the Budget proposals will reduce the deficit by more than $150 billion
each year on average through 2021.
The tension between the need for fiscal responsibility in the
medium term and supporting the recovery in the short term creates a
difficult challenge for policy makers. Because changes made one year
can easily be altered the next, the best way to resolve this tension is
for Congress and the Administration to commit to a multi-year plan of
fiscal responsibility, phased in over an appropriate time horizon.
Committing to a multi-year deficit reduction plan would give
businesses and individuals more certainty about the impact of future
government policy. This can improve confidence today and help keep
borrowing rates low. Moreover, committing to a multi-year plan would
give businesses and individuals adequate time to adjust and prepare for
future changes.
Cut spending and eliminate programs we cannot afford
Meaningful deficit reduction requires serious cuts to government
spending. The Budget proposes a five-year freeze of non-security
discretionary spending at its 2010 nominal level, reducing the deficit
by more than $400 billion over the next decade, and bringing the level
of non-security discretionary spending to its lowest share of our
economy since the Eisenhower Administration.
This will not be easy. The President has asked each agency to make
tough choices, and the Budget includes more than 200 terminations,
reductions and savings proposals. The President has also asked civilian
government employees to share responsibility for reducing deficits and
has proposed freezing their salaries for two years, which will save
more than $60 billion over the next 10 years. Finally, we are
continuing to make government more efficient by reducing administrative
overhead costs, reforming the government purchasing process, and
embracing competitive grant programs.
In addition to cutting current non-security discretionary spending,
the President is asking departments and programs outside of the
spending freeze to reduce their future spending. Specifically, the
Department of Defense is pursuing a variety of strategies to reduce
defense spending; as a result, the Budget reduces defense spending by
$78 billion over the next five years, relative to last year's Budget
proposal. Secretary Gates believes these savings can be realized
through reducing overhead costs, improving business practices, and
cutting excess or troubled programs, and will not weaken our national
security.
In addition to cutting spending, the Budget includes two proposals
that will reduce our future obligations. The Budget proposes giving the
Board of the Pension Benefit Guaranty Corporation (PBGC) the authority
to adjust gradually the premiums it charges pension plan sponsors. This
will encourage companies to fund their pension benefits fully while
improving the PBGC's long-term financial position. Premium increases
would be phased in, starting in 2014. The Budget also includes a
proposal that would provide short-term relief to states and employers,
while encouraging states to put their unemployment insurance programs
on firmer financial footing. Together these two proposals would reduce
the federal deficit by $60 billion over 10 years.
Increase investment in areas important to economic growth
It is not enough to spend less; government must also spend more
wisely. The President's Budget sharply restrains overall spending, but
it also invests in important areas where the government has a clear
role to provide public goods that promote future economic growth and
competitiveness: education, innovation and infrastructure.
Education: An educated and skilled workforce is critical
for the United States to compete in the global economy. Workers with a
college education not only earn higher wages for themselves, but
increase the productivity of those who work with them and of the
economy overall. The need for additional investment in education is
striking: America has fallen to ninth among advanced countries in the
proportion of young people with a college degree. The Budget proposes
targeted investments in education to help us regain our competitive
edge.
We propose to strengthen investments in programs across every stage
of a child's education. The Budget includes $350 million for the Early
Learning Challenge Fund, a program that would apply the lessons learned
from the successful Race to the Top program to early education, and
dedicates $100 million to help prepare 100,000 new teachers in science,
technology, engineering and math over the next 10 years. The Budget
also recommits to maintaining the maximum Pell grant award and to
making permanent the American Opportunity Tax Credit, which provides up
to $10,000 for a student for four years of college. These two programs
help make college affordable for millions of students and their
families.
Innovation: Investments in research and development (R&D)
produce the technological advancements that contribute to productivity
growth and improvements in U.S. living standards. However, businesses
may under-invest in R&D because they do not capture the full social
returns on their investments. The President believes that government
has an important role to play in promoting technological progress, and
the Budget includes $148 billion in R&D investments for this year to
support basic research and clean energy.
These include maintaining the Administration's commitment to
doubling the investment in basic research conducted at the National
Science Foundation, the Department of Energy's Office of Science, and
the National Institute of Standards and Technology labs. The Budget's
proposal to increase the federal investment in the National Institutes
of Health to a total of $32 billion will support innovations in
biomedical research, improving future health care outcomes and economic
growth.
The Budget also provides $8.7 billion for clean energy technology,
including more than doubling investments in energy efficiency research,
development, and deployment; increasing renewable energy investments by
over 70 percent; and expanding investments in the Advanced Research
Projects Agency--Energy (ARPA-E).
Infrastructure: Infrastructure is critical to economic
growth and competitiveness, and yet our current investments in
infrastructure are insufficient and often inefficiently allocated. In
addition to a $50 billion up-front investment in transportation
infrastructure to create jobs in occupations that have been hit hard by
the recession, the Budget lays out a long-term plan for sustained,
targeted investments in the most effective infrastructure programs and
projects.
The Budget proposes a six-year surface transportation
reauthorization that increases average annual investment by $35 billion
per year, in real terms, over the previous six-year authorization plus
passenger rail funding appropriated in those years. This proposal
includes $30 billion to create a National Infrastructure Bank, which
will attract private capital to infrastructure projects while improving
the process of allocating infrastructure funds. The proposal also
includes $32 billion in competitive funding to encourage states and
cities to reform their transportation programs to focus on more
efficient and effective investments. We are committed to working with
Congress on a bipartisan basis to ensure that there is sufficient
revenue to keep the underlying Transportation Trust Fund solvent,
because these investments must be fully paid-for.
Taken together, the Budget balances two priorities that guide our
approach to government spending. First, spending cuts are necessary to
lower the deficit. At the same time, we must protect targeted,
responsible investments that allocate limited government resources
towards programs that will boost economic growth and promote job
creation over the long run.
A tax system that supports growth, fairness and fiscal responsibility
Strengthening our competitiveness and restoring fiscal
responsibility will require reforms to our tax system.
Starting with revenue provisions that promote investment in
innovation and clean energy, the President's Budget includes a series
of specific tax policy changes that help us move towards a more
efficient, fair and competitive tax system that will support economic
growth.
Specifically, the Budget proposes making an expanded research and
experimentation tax credit permanent, thereby increasing certainty for
businesses making crucial long-term investments that will lead to more
innovation. In addition, in order to support investment in clean energy
technology, the Budget proposes tax credits for advanced manufacturing
facilities, energy-efficient commercial buildings and an improved
credit for plug-in vehicles.
The Budget proposals also reduce the incentives for multinational
firms to shift income and assets to their foreign subsidiaries.
Finally, the Budget proposes a fee on financial firms to recoup the
costs of the extraordinary financial assistance the government put in
place to resolve the crisis.
In addition to these proposals, we must pursue comprehensive
corporate tax reform to create a competitive tax system that raises
sufficient revenue in the most efficient, simple and fair way. The
current system for taxing corporations and business hurts economic
growth by placing burdens on U.S. businesses that negatively affect
their investment and employment choices. Because of various loopholes
and carve-outs, some industries pay an average rate that is four or
five times higher than others, and although our statutory corporate tax
rate is one of the highest in the world, we raise about the same amount
of corporate tax revenue as our major trading partners.
Moreover, because of the high rate and because of the various
loopholes and carve-outs, too many businesses end up making investments
based on what their tax planners recommend, instead of what sound
business judgment would suggest. This puts our entire economy at a
disadvantage. As the President has announced, in consultation with the
business community and other stakeholders, the Administration is
examining ways to lower the corporate tax rate and to eliminate
provisions that negatively affect investment. By pursuing these two
objectives together, we can enact reform that does not add to current
or future deficits. I look forward to working with you on this
important endeavor.
Balancing the budget requires sacrifice from all Americans, but
should also promote fairness for the middle class.
The Budget proposes reducing the value of certain tax expenditures
on the wealthiest Americans by limiting the value of itemized
deductions to 28 percent for high income households. This is a down
payment on reform of the individual income tax system.
This provision alone will generate enough revenue to fully protect
the middle class from a dramatic expansion of the Alternative Minimum
Tax (AMT) for three years. The Budget calls on Congress to find
additional ways to pay for permanent AMT relief, because if left
unaddressed, the AMT will inappropriately sweep up tens of millions of
families into this parallel tax system. Working with Congress to fully
pay for AMT relief after 2014 would lead to an additional one percent
of GDP in deficit reduction by the end of the decade.
In addition, the Budget proposes to reform the taxation of carried
interests in financial partnerships, to close the loophole that allows
some to pay tax at lower capital gains rates on what is effectively
compensation.
We must also allow the 2001 and 2003 tax cuts for married couples
with household incomes above $250,000 (and $200,000 for single filers)
to expire and return the tax on large estates to 2009 levels. The
President has been clear that we cannot afford these tax cuts for the
wealthiest Americans, which do very little to support economic growth.
Allowing these temporary tax cuts to continue indefinitely would
increase the deficit by nearly $1 trillion over the next 10 years.
Fiscal sustainability over the long run
While stabilizing the debt-to-GDP ratio over the medium term is an
important down payment on long-term fiscal stability, we must also
reform entitlement programs, as entitlement spending is projected to
increase more quickly than revenues due to an aging population and
growing health care costs.
We made important progress on entitlement reform last year by
passing the Affordable Care Act (ACA). Independent analysts have
estimated that the ACA will significantly slow the growth of medical
costs, relieving both government and businesses of some of the pressure
of rising medical expenditures. According to the most recent analysis
from the Congressional Budget Office, the ACA is estimated to reduce
the deficit by more than $200 billion from 2012 to 2021, and by more
than $1 trillion in the following decade. The most important step we
can take right now for long-term deficit reduction is to implement the
ACA fully and effectively.
Still, we know that more is needed, which is why the Budget
includes additional provisions that address our rising medical
expenditures. The Budget proposes $62 billion in specific savings in
health programs that will fully pay for two years of relief from
physician payment rate cuts called for by the Sustainable Growth Rate
formula. The Budget calls for a long-term, fiscally responsible reform
of physician payments that provides incentives to improve quality and
efficiency while ensuring that payments will be predictable. A long-
term solution will build on the fully paid-for, one-year relief for
physicians enacted this past December. In addition, the Budget includes
$250 million in grants to encourage progress on medical malpractice
reform, which can reduce over-utilization of some expensive procedures
without compromising patient outcomes.
Finally, the President is committed to strengthening Social
Security. Together with Congress, we will consider ideas that put
Social Security on more sound financial footing over the long term.
However, we will reject plans that slash benefits; that fail to protect
current retirees, people with disabilities and the most vulnerable; or
that subject Americans' retirement savings to the whims of the stock
market.
iii. conclusion
America is at a fiscal crossroads. We cannot pretend that our
budget problems are merely the result of the financial crisis, nor can
we pretend that we can restore fiscal responsibility without real
sacrifice that affects all Americans.
Unless we act today, the national debt will continue to grow as a
share of the economy over the medium run, even after the economy is
fully recovered. Without reform, an aging population and rising health
care costs will cause entitlement spending to grow more quickly than
revenues in the long run, putting increasing strain on the budget and
causing deficits to remain elevated far into the future.
If the debt were to continue to grow as a share of the economy, an
ever-increasing share of revenues would have to be devoted just to
paying the interest on the national debt, so that in 2020 interest
payments would be nearly as large as all defense spending. Such
escalating interest payments would create an unsustainable cycle that
would eventually force dramatic adjustments. Without appropriate
reforms, this path would have consequential effects on the U.S.
economy.
While it is apparent that adjustments are necessary, we need to
choose our path wisely. Cutting services and programs too much, too
soon would jeopardize the recovery and destroy tens of thousands of
jobs. Cutting the deficit today without making a long-term commitment
to fiscal responsibility could enable a return to profligacy in the
future. Cutting spending indiscriminately would force us to cut
investments in vital public goods, and focusing reform solely on
spending would impose an undue burden on those most in need while
ignoring the opportunity to make our tax system more simple, fair, and
efficient.
The President's plan navigates these challenges. The Budget lays
the foundation for long-term growth while cutting spending in order to
reduce the deficit. Making a multi-year commitment to the principles
embodied in the President's Budget will reduce the risk of future
crises, reassure investors and provide certainty about the future path
of spending and taxes. In addition, a multi-year commitment will help
ensure that borrowing costs remain low, making home ownership and
higher education more accessible for Americans and making long-term
investments more attractive for American businesses. Together the
increased certainty and improved confidence will contribute immediately
to economic growth and job creation.
History provides many examples of how past Congresses have made
similar multi-year commitments. In some cases, Congress made permanent
changes to policy that lowered the deficit over many years. For
example, the 1983 amendments to Social Security extended the solvency
of the Social Security Trust Fund for several generations. In other
cases, Congress adopted budget rules that locked in a path of deficit
reduction, limiting future deficit spending. For example, discretionary
spending caps and PAYGO rules for mandatory spending and revenue
legislation adopted in 1990 and 1993 contributed to reductions in the
budget deficit, and eventually to budget surpluses.
Restoring fiscal sustainability will require courage from both the
Administration and Congress, as we cannot move forward without
compromise. We know compromise is possible. The December tax agreement
proves that we are capable of forging agreements that move our economy
forward.
There is no doubt that Members of this Congress--in both parties
and both houses--have many good ideas of their own for promoting fiscal
sustainability. While we believe the President's Budget is
appropriately balanced in its priorities, we look forward to working
with you to make a commitment that reflects our common ground--creating
American jobs and promoting long-term economic growth.
Thank you, and I look forward to taking your questions.
Chairman Ryan. Thank you, Secretary.
A couple of questions, but first I want to get into credit
ratings.
Would you agree with me that if we stay in the current
fiscal trajectory indefinitely, that we are not going to be
able to maintain a AAA credit rating?
Secretary Geithner. Let me say the positive way of saying
it: that I am very confident that this body will make the
changes necessary for us to preserve that status. It is very
important we do that.
You know, I think if you look at markets today, there is a
lot of confidence in the political will of this country to get
ahead of this problem, but we have to earn that confidence over
time.
Chairman Ryan. Agreed. So, last month, Moody's gave us a--
they laid out a debt trajectory in which the U.S. Could face a
credit rating downgrade by mid-decade. Obviously, you take that
risk seriously, and confidence matters a lot.
So if the administration continues to punt, using The
Washington Post's words, on entitlement reform, aren't we
inviting a credit downgrade and market turmoil? I mean, how
does that inspire confidence?
Secretary Geithner. Well, I would like to come back to
where you--this is the central choice in strategy. I think as
you know better than anybody, we face two different types of
deficit problems, drivers to the deficit. Over the next 5 to 10
years, we have an unsustainable fiscal position. We have to get
that down to a level where the debt is not growing as a share
of the economy.
Without that, nothing else is possible, and we will do a
lot of damage to future growth and confidence. That is very
important. That is why you need to bring the deficits down over
the next 3 to 5 years to something that achieves primary
balance. That is a minimum necessary.
Now, the entitlement programs we have in place today are
not contributing significantly at all to those near-term
deficits, but they are the substantial driver of the deficits
that come in the next decades. As you know better than
anybody----
Chairman Ryan. Which is the long-term trajectory.
Secretary Geithner [continuing]. Without addressing those,
we are left with commitments that will eat away too large a
share of income--completely unsustainable.
Now, the Affordable Care Act, although I know it is not
popular on your side of the aisle, does make a very substantial
contribution to reducing the rate of growth in costs and will
reduce our deficits over the next two decades by $1.2 trillion.
Now, we would like to build on that with you. The President
has laid out some additional suggestions we think we can do
with you on that, but we need to build on those thing. But that
is a pretty good first step towards entitlement reform.
Chairman Ryan. The way we want to build on it is repeal it
and then go in a different direction. That is, I guess, what we
would call building.
I am not going to get into the claim. I would definitely--I
could throw some charts up--I could definitely go at the claim
of the savings from the Affordable Care Act. That is not the
path I want to go down.
Secretary Geithner. Luckily, you and I don't get to decide
that. The CBO gets to decide.
Chairman Ryan. That is right. That is right. And if you
want to go down that rabbit hole, we can. When they say that
this law is going to increase the debt, I don't know how you
get there without increasing the deficit.
But putting that aside, the assertion on primary balance is
an important one. And the assertion in the budget on the
primary balance assumes we are going to have, you know, in
2013, 4.4 percent growth rate; blue chip is at 3 percent; CBO
is at 3.1. In 2014, your budget assumes 4.3 percent growth;
blue chip is at 2.8 percent; CBO is at 3.5 percent. You don't
get to primary balance if those projections by CBO or blue chip
materialize.
And so the question I have is, in 2013, the top income tax
rate goes to 44.8 percent. That is the Federal. You throw in
all the States that have income taxes, and it is above 50
percent in most States. The top income tax rate will be
higher--because international competition obviously matters
here--it will be higher than France, than Britain, than Italy.
Our capital gains tax will be higher than China. Our capital
gains tax goes to 23.8, and the top rate on dividends in that
year alone goes to 45.4 percent.
Are we going to have this boom of economic growth that you
are predicting, which is how your budget achieves primary
balance, if we are hitting small businesses, entrepreneurs,
successful investors, or job creators with huge tax increases
in that very year? How can you claim all this growth in the
year of 2013 when you have this massive tax increase on job
creation and then get primary balance?
Secretary Geithner. Let me just say a couple things in
response.
The growth assumptions in the President's budget imply a
level of growth, on average, that is lower than what occurred
in the last two recoveries. It is a reasonably conservative
assumption.
Now, CBO's is lower because CBO was forced to make the
assumption that all those tax cuts on every American expire at
the end of 2012. And that would hurt growth, absolutely. But we
are proposing, of course, to maintain and extend those tax cuts
for 98 percent of Americans. And so, these proposals would not
result in that damage to growth that CBO has to build into
their estimates.
Now, one other point on this----
Chairman Ryan. But tax increases affect economic vitality
and affect behavior and growth.
Secretary Geithner. Well, you know this debate, you know
this debate. And I will give you two responses, because you are
comparing us to the other major economies in Europe.
The best way to compare the tax burden that is projected in
this budget to those economies is to look at what happens to
revenues as a share of GDP over the budget horizon. And they
will leave us slightly above the long-term average but way
below--way below--the amount of revenues those countries
collect from their citizens and their businesses. So that will
leave us with a much more competitive tax system than any of
those countries are contemplating facing in this context.
Now, one other thing about these forecasts, or two other
things. One is, OMB estimates this year's budget much higher
than CBO----
Chairman Ryan. The deficit, you mean.
Secretary Geithner. Yeah, sorry, the deficit--much higher,
much more conservatively estimated. It is probably too high.
So there are some things in this forecast that are more
conservative than CBO, some things perhaps a little more
optimistic, a little more confident than CBO. But, in the end,
CBO will rule, in this case. That is a good strength of our
system.
And you are right to say, if CBO--when CBO----
Chairman Ryan. About 3 weeks.
Secretary Geithner [continuing]. Scores the impact of our
projected policies on their projected economy, they will show a
somewhat larger budget deficit than we estimate in this
deficit.
And, again, one strength of our country is, CBO is
independent, nonpartisan, and they govern in this context. So
you and I don't need to debate these assumptions, because they
will choose for us.
Chairman Ryan. Yeah. So the point I am trying to make here
is, I question the assertion of primary balance, given that the
final arbiter, CBO, on this is using a different set of
projections. And you are not going to get there with what I
think is a deeply inadequate budget.
Secretary Geithner. No, but you are--I would distinguish a
couple things. And, again, you are going to have the chance to
propose a 10-year budget----
Chairman Ryan. Right.
Secretary Geithner [continuing]. That does better, and you
will make different choices than we did. But I think we can all
agree that it is necessary but not sufficient. Achieving
primary balance doesn't go far enough. We will have to do
better than that over time.
Chairman Ryan. Okay. Because I don't want to chew up too
much time, on debt limit you sent us a letter saying you want a
clean debt limit because you think it ought to be done
standalone.
I simply just want to point out--and I don't want to get
into it, because I want to get to these other Members--last
time the debt limit occurred, in the last session, PAYGO was
attached to it. It was the engine that, sort of, drove the
train off, you know, through Congress. And the President was
perfectly complicit with this. He was obviously in favor of it;
he signed it. The fiscal commission, itself, was attached and
passed through Executive order in exchange for the debt limit.
So let's not say that we are only for clean debt limits
when, just a year ago, the President was fine with attaching
things on debt limit. That is just a point I want to make.
Last thing, the corporate tax reform. It is a little vague
in corporate tax reform in the budget. What do you mean
exactly?
And then I assume you are talking about deferral, I assume
you are talking about foreign tax credits as one of your
revenue-raising or base-broadening provisions. Wouldn't just
going to a territorial system, kind of, fix those problems? And
what is your position on going to a territorial system?
And then I want to turn it over to Mr. Van Hollen.
Secretary Geithner. Okay. Just one quick thing on the debt
limit. We are suggesting it is best and easiest and cleanest
and most responsible to do a clean debt limit extension for
reasons you understand. You know, this is not a popular thing
for people to do, and if you let people negotiate over the
terms, the risk is you leave people with expectations you can't
meet. And it is just that that suggestion leads us to suggest
you should do it clean.
Now, we recognize that we are going to have a big debate
about how to bring down these deficits over time. And we are
looking forward to having that debate. And I believe, as I
think you do, it would be good for the country now for us to
come together and agree on a multiyear plan that would lay out
enforceable commitments. Because then the markets would have
more confidence in our political system's willingness to deal
with this. So we are for doing that.
But one last thing on the debt limit. I would just
encourage you not to do anything that will call into question
the commitment of this country--we are the United States of
America; we don't play around with this stuff--to make sure we
meet our obligations. And don't allow the markets to build in
any concern about our willingness or ability to do that,
because that would put at risk this recovery and set us back
substantially. We can't afford that risk.
Now, on the question about corporate tax reform, you are
right that, in the budget, we did not propose a comprehensive
plan for corporate tax reform. But we are beginning the process
of trying to lay out the foundations of that.
And what we would like to try to do is do a comprehensive
reform that would lower the statutory rate significantly, bring
it much closer to the range of our trading partners, do that by
broadening the base substantially, eliminating these expensive
expenditures and special preferences, do that in a way that is
revenue-neutral and strengthens incentives for investing in the
United States.
As part of that, we are going to have to examine how we tax
the worldwide income, foreign income of U.S. corporations.
Chairman Ryan. Right.
Secretary Geithner. But as we look at that and we look at
all forms of territorial, we have to be careful, again, not to
be increasing opportunities or incentives to shift income and
investment outside the United States. That will hurt jobs in
this country. That is a difficult thing to do, but we will look
at all ideas in that context.
Chairman Ryan. You have no explicit position on worldwide
versus territorial----
Secretary Geithner. No, because, again, I think this--you
would want us to take this approach. We have to be careful,
again. Overwhelmingly, why would we do this? We do it because
we want to improve incentives for investment----
Chairman Ryan. We want jobs and competitiveness.
Secretary Geithner. Exactly. That is why. So, as you look
at that test, you have to make sure everything meets that test.
And when you look at a lot of the proposals for
territorial, they usually fail on two grounds. They either lose
a huge amount of income, because they make it easier to shift
investment income outside the United States, or they hurt jobs
by, again, magnifying the incentives to shift investment
outside the United States. And so, for those reasons, you have
to be careful, looking at those.
But, again, we will look at everything----
Chairman Ryan. Yeah.
Secretary Geithner [continuing]. But we will be governed by
those tests: lower the rate, broaden the base, revenue-neutral,
and more competitive, stronger incentives for investment.
Chairman Ryan. We will pick this up at Ways and Means, I
think.
Mr. Van Hollen?
Mr. Van Hollen. Thank you, Mr. Chairman.
Mr. Secretary, thank you, again, for your testimony.
I want to pick up on a couple points that the chairman
raised, first with respect to the debt ceiling. We had the
chairman of the Federal Reserve, Ben Bernanke, here, who has
said that a failure of the United States to meet its debt
obligations and to make sure that we protect the full faith and
credit of the United States would be, quote, ``catastrophic.''
You have said similar things.
There have been proposals introduced in the Senate and the
House by Republican Members which take the position that we
should pay our bondholders, like foreign governments, like
China, first before we would pay Medicare recipients, Social
Security recipients, members of the armed services, U.S.
Government contractors.
Could you just talk briefly about two things: One is what
the impact would be of that on the credit markets; and, two,
what you think about the fairness of that proposal.
Secretary Geithner. Well, you know, I have written and
spoken publicly on this before, and you know the arguments very
well. But let me try and do as an example--I think this is the
most simple example you can use.
If you think about a family sitting around the table, if
they decide they are going to not pay their utility bill, not
pay their credit card, not pay their mortgage, so they can pay
their car loan, they will be judged in default by their
creditors.
So this idea that somehow you can minimize the pain to the
country, minimize the damage to our credit and our credibility
by, in effect, not meeting your obligations, some obligations,
while you meet others is, I think, mistaken.
And it won't buy us any time, and it won't deprive this
Congress of the responsibility of raising the limit. So I
wouldn't go there and don't think it helps at all.
And, again, we will be, every month, letting economists
know what our latest estimate is of when we will run out of
room. And we will be very open with the Congress of where we
have some flexibility to buy a little time. But the important
thing to recognize is, because our deficits are so large, the
traditional forms we have do not buy that much time.
So, again, I know this is a challenge to do and not a very
fun thing to do. You are going to have the privilege a lot of
your predecessors have had of doing this. And my suggestion is,
do it in a way that makes sure the markets understand that we,
the United States of America, will meet our obligations. We
will never cast doubt on our commitment to meet our
obligations. We are a serious country.
And we will do that while we have a debate about how we
figure out how to bring these deficits down to a sustainable
level. And we recognize, as you do, that that is going to
require, again, both houses, both parties working together.
Mr. Van Hollen. Well, the chairman of the Federal Reserve
warned not only about the catastrophic consequences of it, but
he urged the Congress not to use the debt ceiling as a, quote,
``bargaining chip.'' And I hope that we won't play politics
with the full faith and credit of the United States.
Let me pick up on some of the other questions raised by the
chairman regarding tax policies. You indicated the President's
budget assumes that we will continue the current tax rates for
98 percent of the American people but that we can no longer
afford to provide a tax break to the folks at the very top.
By our rough calculation, over a 10-year period that saves
close to a trillion dollars if you include the debt service.
Does that square with your calculations, approximately?
Secretary Geithner. That is right. Another way to say it
is, the cost for extending those tax cuts for the top 2 percent
of Americans and the more generous estate tax exemptions and
rates would be roughly a trillion dollars over 10 years.
Mr. Van Hollen. Now, during the Clinton administration----
Secretary Geithner. Another way to say that is that, to
make that affordable and still reduce deficits, you have to
find another trillion of spending cuts to make that possible.
That is another way to think about it.
Mr. Van Hollen. That is right.
Now, during the Clinton administration, of course, we had
higher tax rates in effect for the 98 percent of Americans we
are talking about, and we also had it, obviously, at the top
income. Do you remember what the GDP growth during that period
was? We had Jack Lew here, who served during that period.
Secretary Geithner. Well, it is true that, to allow those
rates to revert to their level--they do without extension--
would restore them to the level that prevailed in the 1990s.
And that was a period when you had probably the best record of
small-business expansion we had seen in decades, best record of
private investment growth, productivity growth, broad-based
income growth, employment growth. So it was a very good time
for the American economy at rates similar to those.
Now, as the chairman might remind us, it is a little
different because that doesn't capture some of the provisions
of the Affordable Care Act. But, again, you are talking about
rates that, in broad magnitude, prevailed in the 1990s. And
that was an excellent period of remarkable growth in employment
investment, led by small businesses in this country.
Mr. Van Hollen. While we are on the Affordable Care Act,
just a couple things, because the director of the CBO was right
where you are last week on this question of their deficit and
essentially said very flatly and clearly on the record that the
CBO did not engage in, quote, ``double counting'' in coming up
with the $230 billion savings.
Now, there has been a lot of conversation in the last
couple days about the need to bring some of the long-term
health-care costs under control. And I think it is worth
reminding people that the Affordable Care Act included some
changes. For example, we got rid of the large subsidy for
Medicare managed care plans. We made some other reductions. In
fact, I think a lot of our Members are well aware of it,
because they were on the receiving end of a lot of ads against
them in the last campaign for some of the decisions they made
in terms of reforming Medicare.
Could you speak to that? Because I think that has been a
little bit lost in the discussion over the last couple days.
Secretary Geithner. Well, again, you guys have been talking
about this for a long time, and I think you know everything
there is to be known about this, but I would be happy to repeat
the core tenets of this.
Again, in our system, CBO scores for us savings and costs.
In CBO's judgment--and, traditionally, they have been very
conservative about estimating the savings that you get from
health-care reform--health-care reform will save, over the next
two decades, $1.23 trillion.
Now, that is very substantial entitlement reform. It
doesn't solve the problem completely. We recognize that we want
to go beyond that. But if you put that in jeopardy, you will
end up adding very substantially to our long-term deficits, and
that will hurt our credibility in the markets more generally
and undermine the market's confidence in our ability to get a
hold of these basic deficits.
Social Security, in contrast, is not a meaningful
contribution to our long-term deficits. And there is a very
good case to try to figure out how to lock in reforms in Social
Security now that would help secure those benefits for future
generations, but they are not a material contributor to our
long-term deficits in any foreseeable time frame.
Chairman Ryan. Because we started quite a bit late from the
votes, we are doing 4 minutes. I think that gives everybody
ample time so everybody can talk. It is not our intention to
keep doing this. It is only because we want to make sure that
people at the ends of the dais have a shot to ask.
So, Mr. Garrett?
Mr. Garrett. So I will say thank you and keep my remarks
fast, and just a couple questions.
But just, to the gentleman from Maryland, with regard to
playing politics with the debt limit and what have you, I don't
think anyone up here honestly wants to play politics with it. I
think we want to all take a look at it seriously. But I think
we also understand that no one in America believes that we can
simply borrow our way into prosperity. And that would be the
result if we simply take no action, as far as addressing our
debt circumstance.
To use your little example of sitting at the kitchen table
paying your mortgage first, you pay your mortgage first, you
don't go out and take another mortgage on top of that if you
are in those dire circumstances.
Turning to----
Secretary Geithner. And I agree with you on that. We want
to work together----
Mr. Garrett. Right.
Secretary Geithner [continuing]. To put in place multiyear
commitments that reduce our deficits over a period of time in
ways that don't kill future growth. We want to do that with
you, and we don't want to wait to do that. We would like to do
that. We just want to make sure that we don't call into
question our basic credibility as a country on our obligations.
Mr. Garrett. And one of those areas that I look forward to
working with you on and I appreciate that the administration
has come out with publicly with their position with regard to
the GSEs, Fannie Mae and Freddie Mac, with regard to
dismantling that, trying to get the private sector back into
that sector. Better late than never, as far as your report, but
I do appreciate it. Unfortunately, of course, your report, as
you know, did not specify specifically one plan. It gave us
various options.
But one thing it did specifically say in there is that the
Federal Government will stand behind the debt of these
obligations, right? It says, ``Our commitment to ensuring
Fannie and Freddie have sufficient capital to honor any
guarantees issued now or in the future and meet any of their
debt obligations remain unchanged.'' That means the Federal
Government is behind it. And, ``Ensuring these institutions
have the financial capacity to meet their obligations is
essential to their continued stability.''
So this is pretty explicit. Even though you and I have had
the discussion as to whether this is sovereign debt or not,
that off the table, that is still pretty explicit.
The interesting thing here, just as an aside, is, we have
been asking private sector, right, if they have these off-
budget things, to bring them back on the budget. Wouldn't that
be good here? And I will just give you two examples. One, I
have a legislation to do that. I would appreciate your comment
on that.
And, secondly, at a hearing just this week at Capital
Markets, someone came up with an idea on this and how it
actually may help save money to the taxpayers. That is, if you
bring these things on line and put it on budget, both the
portfolio, which would be the assets, and the outstanding debt,
which would be the liabilities, on your own balance sheet, with
the idea of assuming the debt, there would be basically a
negligible impact upon the budget.
And because of the spreads--then if you had the Treasury
actually reissue the debt from these--and there is a spread of
around 25 basis points difference between them, over the long
term the amount of money that the taxpayers will actually pay
out on these, as opposed to the way we are doing it now, if you
brought it on budget, would be a cost savings to the taxpayers.
Your comment on either one of those proposals?
Secretary Geithner. First, I appreciate your comments on
this reform plan and look forward to working with you on how
best to put them in place. And you are right, we have to craft
an ultimate solution in legislation.
The two most important things of this are the following.
One is, the markets have to understand that we will make sure
these institutions have the resources they need to meet their
commitments over time. And we are going to make sure we do
that. And you know why that is so important.
The second thing I would say is that you are right, there
are lots of different ways to account for this stuff. But we do
the necessary thing, which is we put on the budget, in a fully
transparent way, the full costs of providing this support
over----
Mr. Garrett. You know that the CBO treats these things
different than the way the OMB does. And that is why we are
suggesting that we have commonality in treatment. And this
would not be--we were basically suggesting that the Treasury
would have to do it the same way the rest of America would have
to do it.
Secretary Geithner. Yeah. But, again, I think we are
meeting the best test of credibility, which is we show
transparently the full cost on our budget of the mistakes these
guys made in the past and what that means in the future on our
budget. And we are going to continue to do that.
But I know we will have a chance to talk about this more. I
would be happy to do so.
Mr. Garrett. Okay. And I am looking at the little clock in
front of you that continues to go all over the board.
Secretary Geithner. Yeah, exactly.
Chairman Ryan. Jose, we have to buy a new clock.
Ms. Schwartz?
Ms. Schwartz. Well, I can't see the clock, so someone is
going to have to let me know when it gets close so I can figure
it out.
Mr. Secretary, I want to thank you for your comments, and I
appreciate what is really sounding like a pretty complex set of
questions and answers. And I just want to do a couple of things
quickly, if I could.
First, I want to acknowledge that the President has put
forward a very serious and very timely budget that does reduce
the deficit in a way that doesn't hurt our fragile recovery--we
are grateful for that recovery; we want to see it stronger--and
then invests in our future. We appreciate that. In terms of the
focus on reducing the deficit by $1.1 trillion, that is really
important, bringing financial stability to the Nation, and the
focus on spending cuts. It is all there. Tough cuts--I mean,
$400 billion--getting to a trillion dollars is a lot of money.
So what I wanted to ask you about--just before I get there,
I want to just say that I appreciate the comment about the cuts
that we did under the health law. We have neglected to talk
about that, for the last week or so. I believe it was every
Republican who was here at the time voted against what is
essentially $1.2 trillion, almost $1.3 trillion, in deficit
reduction. That is what it does. I believe it could do more.
But we have to implement it, and we have to get about the
business of making sure that we can bring down the cost of
health care under Medicare, for Medicaid, for our government,
and of course for the private sector, as well. So we need to
talk more about that. And the President's leadership on that is
to be acknowledged, in bringing down the deficit.
The President's leadership also--and it has been mentioned
here, as well--is also about the fact that tax expenditures
also, if they are not paid for, add to the deficit. Just
``yes'' or ``no,'' I mean, does a trillion dollars' worth of
tax expenditures, if we don't pay for it, does it add to the
deficit?
Secretary Geithner. Yes, absolutely.
Ms. Schwartz. All right. The other side of the aisle seems
to not count that. In fact, their rules say that they don't
count tax expenditures as spending.
I think the President has taken real leadership on this, in
acknowledging that and in wanting to follow through on the
budget deficit commission. And I want you to talk about that.
I can't see the clock, but hold on to that notion. I want
you to answer that, but I also want you to, if you would just
very briefly, address an issue that came up in Ways and Means,
I understand, around the trade adjustment assistance. And I did
want to give you the opportunity to clarify your statement
about how important it is to do trade adjustment assistance on
its own as soon as possible. That has expired. And I did want
to just give you an opportunity to say something about that.
Secretary Geithner. Yes, thank you for giving me that
chance. I will start with trade, and I will come back to the
question about tax policy.
It is very important we move ahead on trade adjustments.
This is for reasons you all know. We would like to do that as
quickly as possible. We expect to bring a Korea deal, a very
strong Korea deal, to the Congress to consider relatively soon.
We are working to strengthen the Colombia and Panama trade
agreements.
Ms. Schwartz. Uh-huh.
Secretary Geithner. And if we achieve the improvements we
seek, then we will consult with Congress on how best to move
those forward.
But a critical part of our strategy for growing this
economy is going to rely on getting exports to grow more
rapidly. They are growing pretty rapidly now, but we want to
build on that. And it is very important that we move trade
adjustments as quickly as we can.
Ms. Schwartz. Even before that. Thank you.
And if you have anything----
Secretary Geithner. On the tax--you know, again, I think
the commission did a great service in pointing out to people
how expensive these tax expenditures are. It is not just that
they cost a huge amount of money, but if you look at who
benefits from them, they are not particularly targeted to
things that are that helpful for growth, and they go
substantially to relatively fortunate Americans.
So our view, as the commission suggested, is a critical
test of reform of fiscal restraint, of fiscal responsibility is
going to be to start to dial back some of those that are the
most expensive, the least targeted, have less basic benefits
for growth or for middle-class Americans.
Ms. Schwartz. And if we did that, we might be able to lower
the corporate tax rate, for example, and----
Secretary Geithner. Well, on the corporate side----
Ms. Schwartz [continuing]. On the individual side we might
be able to make some changes, too.
Secretary Geithner. Yeah. Thank you.
Ms. Schwartz. I think my time is up, but my guess is we are
going to be talking a good bit about that, as well. Thank you.
Chairman Ryan. Thank you.
Mr. Akin?
Mr. Akin. Thank you.
Mr. Secretary, a couple of questions. A lot of us have a
number of questions. This is pretty straightforward. It
appears, from a Wall Street Journal article, that we are going
to increase the IRS budget by 9.4 percent, hiring an additional
5,000 or 5,100 agents, at the cost of $460 billion.
I suppose some of the reason that some of the tax money
that the IRS thinks could be collected is not coming in could
be because those tax manuals, when you stack them up on a
little wagon, you know, they are about a yard high.
Don't you think that perhaps we could save money and do
things a lot more simply if we were just to simplify the Tax
Code and skip the 5,100 IRS agents, not to mention the fact
that it would make us all look better if we don't have a goon
squad of 5,000 more IRS agents tromping around the country with
the economy the way it is?
Secretary Geithner. You are absolutely right. If we were
able to simplify the Tax Code, not just corporate but
individual, it would be easier for citizens to meet their
obligations, easier to enforce, and that might save us some
enforcement resources over time.
But, you know, just a couple of comments in response to
what you said. All the people that look at the way the IRS
works say that, if you put a dollar carefully into enforcement,
customer services, things like that, you get more than $4 back.
Why is that fair? It is because, by helping people meet
their obligations, you make sure that other people aren't
bearing too large a cost of being citizens of the country. So
it is just part of the test of a democracy and part of the test
of fairness.
And what we are proposing is a set of modest improvements
in resources for customer service, for technology designed to
make it easier for people to meet their objections. But, of
course, you are right, if we were to dramatically simplify the
code, that would help save some resources, too.
Mr. Akin. I appreciate that. Somehow, rather the 9.4
percent and the 5,000 IRS agents, I thought, oh, my----
Secretary Geithner. Just one clarification. It is not 5,000
IRS agents. A relatively small fraction of that is people you
might call involved in the process of enforcement. A
substantial fraction of those are customer service people and
technology people, again, designed to make it easier for people
who want to meet their obligations to meet their obligations.
There are some people who don't want to meet their
obligations----
Mr. Akin. I appreciate your trying to make that
distinction. ``I am from the IRS, I am here to help you.'' That
is hard to sell in the State of Missouri. But let me----
Secretary Geithner. Remember, the IRS doesn't set what your
tax obligations are. That is set by the Congress, by you in
this room.
Mr. Akin. I wanted to just mention that, you know, we have
talked about the debt limit several different times, with
different people asking you questions. And it has been pointed
out that the PAYGO and some things were attached to it.
If nothing else from sheer politics, it is helpful to put
something with the debt limit, because you want people to vote
for that silly thing. That is like swallowing a radioactive
pill, and particularly for some of us that have just gotten a
message from taxpayers.
But I guess my concern is, if you submit a budget, the way
you have, that has not really dealt with the entitlements and
the massive problem there, and then you put in these
assumptions about a tremendous level of growth while you are
increasing taxes--I mean, I could understand it, looking at May
of 2003, and you take a look at capital gains, dividends, and
death tax. In flat-line scoring, it looks like, by golly, we
are going to lose more money. And yet, when you take a look at
it, the employment goes up, the GDP goes up, and, by the way,
Federal revenues go up substantially year after year.
But you are trying to make the same magic happen by
increasing taxes. So I don't know, somehow, to me, it is hard
for me to see the budget that you have submitted as really
being politically willing to step up to a very, very hard
challenge.
And that being the case, how can you then say to us, we
want you to swallow this debt limit thing and don't put
anything on it at all? I mean, the people back where I come
from, they want fiscal responsibility, they want it now, and
they don't want any excuses. And we are the ones that have to
listen to them when they call us on the phone.
And so, I don't know how you can say, well, the debt limit
is just going to be a straight vote. There are going to have to
be some guarantees, or it is just not going to get through.
Thank you.
[The Wall Street Journal article referred to follows:]
Chairman Ryan. His time is up. We will just put him down as
a supply-sider for IRS agents but not on tax policy, I guess.
So, who was next?
Secretary Geithner. Can I say that I have been a consistent
supporter of, and there are in the budget, a variety of well-
designed incentives to encourage investment and low rates on
investment income, because we recognize that that is important
to future growth.
And, as you know, Mr. Chairman, in the tax package we
agreed to at the end of last year, we included some very
powerful incentives for business investment, I think the most
powerful we had ever seen--100 percent expensing for capital
investment for 1 year for all businesses across this country.
So we are----
Chairman Ryan. That is one thing we liked, actually.
Secretary Geithner [continuing]. We are earning some--we
are demonstrating that we think that matters to growth.
Chairman Ryan. Mr. Blumenauer?
Mr. Blumenauer. Thank you.
Mr. Secretary, appreciate you clarifying about the
dedicated people who work for the IRS. To label these people as
a goon squad, I think, is offensive on so many levels, and it
might be the sort of thing that inspired that maniac to crash a
plane into the towers. It was Congress that gave the IRS this
mess to interpret.
And, with all due respect, looking at the last time
Republicans were in charge of the Tax Code, look at--I think it
was a million extra words that were added to it. So let's--I
welcome your call to tax simplification. It is Congress that
made their job a nightmare.
And any of you can try what I have done. I have met with
accountants and attorneys in my community who wonder why in the
heck we are not auditing anymore; why don't we invest
strategically to collect money? But they do appreciate the work
on customer service.
And I hope we are not being reckless about talking about
the people who work for you as being part of a goon squad. That
is reprehensible.
Secretary Geithner. Thank you for saying that. Of course, I
completely agree. There is somebody----
Mr. Blumenauer. But I want to get to my questions.
Secretary Geithner. I am sorry. Go ahead.
Mr. Blumenauer. I wanted to thank you. But we have had a
lot of talk around here about the administration punting on
entitlement reform. And I appreciate your reference to the fact
that the single most important element of entitlement reform,
the entitlement that is out of control, is Medicare. And you
are committed in this budget to actually administrator that
health-care reform, which has in it every single proven
potential cost-bending effort----
Secretary Geithner. Almost every one.
Mr. Blumenauer. We didn't lay many of them out. They are
not as strong as they could have been because people were a
little nervous. What we should be doing is taking the newfound
backbone and accelerating and strengthening them.
These elements used to be bipartisan. In fact, they used to
be nonpartisan. And so, we can battle all this other stuff, but
zero in on the cost containment that is there.
We had Dr. Berwick testify--I forget whether it was before
our committee here or Ways and Means--pointed out that areas
like Medicare Advantage, we have actually a reduction in
premium. We have 12 million more beneficiaries. And there is a
5 percent increase in the highly rated programs.
This, to me, is a success story. And we ought to, as a
Congress, be focusing on the facts and make it work better.
Because if we don't do that, if we repeal the reform with
nothing in place, we are going to have higher deficits, no
matter how much we cut.
But I want to get to the tax reform. I think Chairman Camp
is very interested in working with you, as, actually, the last
two administrations have been, to try to fix this corporate
mess.
I want to just point to one specific item. In fact, I will
be offering an amendment on the floor in a while to implement
what the administration called for, closing some of these tax
benefits to the oil industry, some dating back to 1916, that
most people think makes no difference on the production of oil.
But I want to just zero in, because you have been in the
middle of this debate. In a $2 trillion to $3 trillion global
oil market, would the loss of $5 billion to $8 billion a year
of tax benefits to oil companies make any difference on the
price of oil?
Secretary Geithner. No, it would have no effect on price,
no effect on price.
They are expensive, though. And, again, the more you
sustain tax preferences like that for individual companies,
industries, activities, all businesses across the country pay
higher taxes to make that possible. So it is not good policy,
it is not fair, it is not consistent with the kind of things we
want to do to make the country stronger. So getting rid of
those things is better for our competitiveness.
Mr. Blumenauer. Thank you very much, sir.
Chairman Ryan. Mr. Ribble?
Mr. Ribble. Thank you, Chairman Ryan.
And thank you, Secretary, for coming. I have enjoyed the
conversation so far, and I have especially appreciated your
tone. I think this country, more than anything, needs to really
have an adult conversation among ourselves about what we want
to see for the future, particularly entitlements. And I think
you brought a bit of that adult tone today to this hearing, and
I wanted you to know how much I appreciate that.
Before I ask one other question, yesterday I heard from the
President that this budget would stop adding to the national
debt. Do you concur with that?
Secretary Geithner. Well, what this budget does, again, on
our assumptions for what Congress--if Congress enacts this, it
will reduce the deficit to a level that achieves what we call
primary balance, meaning it is balanced except for interest
payments. And for an economy like ours, growing at the rates we
expect over time, meaning our economy normally grows somewhere
between 2\1/2\ and 3 percent over the long run, that means you
have to get the deficit to around 3 or slightly below to
achieve primary balance.
And if you achieve that in the time frame we are
suggesting, then you will stabilize our debt burden, net held
by the public, net of financial assets, in the about 60, high
60, 70 percent of GDP range. And that is a level that does not
threaten future growth. That is a level that is sustainable
over time.
Now, we don't hold that over time because, without doing a
better job on health-care costs, without building on the
Affordable Care Act, those deficits will start to grow again,
and the debt will start to rise again as a share of GDP. And
that is why, again, it is so important to move.
Mr. Ribble. Because wasn't the debt actually----
Chairman Ryan. Will the gentleman yield for a second on
that?
Mr. Ribble. Yeah.
Chairman Ryan. I don't see how you can square Mr. Carney--
is that your new press secretary's name--Mr. Carney, Mr. Lew,
and the President's comment that we are not adding to the debt.
Your own Table S-14, the debt goes from $13 trillion to $26
trillion, debt subject to the limit.
How can you say you are not adding to debt?
Secretary Geithner. No, no. The----
Chairman Ryan. The statement wasn't deficits. It was debt.
Secretary Geithner. I am just making a point about math and
economics.
Chairman Ryan. What? I am looking at your own chart.
Secretary Geithner. If you get the deficit down to that
range--you need to get it slightly below 3 percent of GDP----
Mr. Ribble. The deficit?
Secretary Geithner. The deficit. When you get it to that
point, if you can hold it at that level, then the debt stops
growing as a share of the economy. And the question is, is it
still going to be too big at that point? And it will be--again,
net of financial assets, the assets we hold, net held by the
public, will stabilize roughly around 70 percent of GDP.
That is a level we can sustain, but not--it doesn't hold
for a long period of time because, again, the health-care costs
start to eat away at that over a longer period of time. So you
have to go beyond that.
Mr. Ribble. Yeah, because it looked like----
Secretary Geithner. It is a necessary but not sufficient
condition. That is a way to think about it.
Mr. Ribble. Yeah. The numbers I saw yesterday added about
$9 trillion to the debt in the next decade.
Secretary Geithner. Well, the period between now--you know,
again, our deficits are unsustainably high. The period before
you get them down to 3, absolutely, you are adding to debt,
absolutely. And the debt is growing as a share of the economy.
That is why you want to move as quickly as you can. You can't
put it off indefinitely.
In that period when you are trying to get it from 10 to 3,
the deficits are so large that they will keep adding to the
debt, and the debt will be growing as a share of the--more
rapidly in the economy as a whole, and that is what makes them
unsustainable.
But once you get it down to 3, you will stabilize them at a
level that is more acceptable.
Mr. Ribble. Do the assumptions, though, take into
consideration that if the economy begins to recover like it is
proposed, don't interest rates typically go up, as well?
Secretary Geithner. Well, you are right, the economic
assumptions that matter most for this are, how fast does the
economy grow, what happens to interest rates, what happens to
inflation. And, as I said before, you know, there is no
certainty around these things. It is a matter of judgment.
And, ultimately--and this is a great strength of our
system--CBO's judgments will govern the choices you make. And,
as the chairman said, when CBO estimates the impact of our
proposed policies on the economy over time, they are going to
show slightly higher deficits than we have shown in the budget.
Mr. Ribble. Just changing gears a little bit, do you know
what percent of mortgages are currently held by Fannie Mae and
Freddie Mac, U.S. Household mortgages? Is it in the high 80s or
90 percent?
Secretary Geithner. No, it is not that high. If you look
at, on an ongoing basis, the share of mortgages financed today
in the market, a very substantial fraction of those are by a
combination of Fannie, Freddie, FHA, VA. Their combined share
of new mortgages today is well north of 80 percent.
Mr. Ribble. Okay, north of 80 percent. Well, what
assurances can we give the American people that we are not
going to have another housing crisis as a result of that high
risk? It is not spread out across the economy anymore; it is
kind of held in the GSEs.
Secretary Geithner. Well, two points on that. One is, as we
said last week, you know, we need to wind them down and bring
capital back into the mortgage market. And we proposed a series
of graduated reforms that will make that possible over time.
And that is absolutely essential to fixing what was broken in
the system. And we are not prepared to live with the mess that
helped create this crisis.
Now, it is important to recognize that you want to do that
in a way that is careful, because you don't want to be adding
to mortgage costs, hurting home values as we start to recover.
So you have to do it carefully.
But one point about Fannie and Freddie: The losses that
they face today are the result of the mistakes they made during
the boom. On an ongoing basis, looking forward, the guarantees
they are making today are on much more conservative terms--more
equity in homes, better underwriting standards--and there are
more expensive guarantee fees. So that is why the independent
estimates that have looked at this suggest that we are at the
peak of losses, likely, and those will start to come down and
we will start to get more of the government's, the taxpayers'
investments back.
Mr. Ribble. Okay. Thank you, Mr. Secretary.
Thank you, Chairman Ryan.
Mr. Pascrell. Good afternoon, Mr. Secretary.
I like when we look at alternatives and options. And
obviously, with all due respect to a gentleman I have great
respect for, Mr. Ryan, he has presented the alternative and the
option as he did in 2010 before the election, what his
alternative was and what kind of an effect it would have on the
budget. The alternative was very specific. He did deal with the
entitlements, some of them. In fact, he dematerialized one of
them. He basically started the process of looking at Medicare,
and it does not exist.
Chairman Ryan. Will the gentleman yield for a moment?
Mr. Pascrell. Sure.
Chairman Ryan. If you want to talk about budgets, why don't
you look at our 2009 budget, which was the last budget we as a
conference actually did, instead of an individual piece of
legislation that I introduced?
Mr. Pascrell. May I respond? Because this was presented to
us in September of 2010 as a legitimate--I thought it was a
legitimate alternative before we got to the 2011 budget, and
before we got to the massacre of the CR. So I thought it was a
legitimate presentation, and I said so at the time, Mr. Ryan. I
didn't have to wait to look at the results of the election. But
it is an alternative.
And I was going to ask the Secretary, with your permission,
whether or not the Secretary thinks that this option--Mr.
Ryan's option, the Republican option to what we are talking
about as a budget and what we are talking about in terms of
health care in much of this, what does it do to the budget, in
your eyes?
Secretary Geithner. Well, in some ways the chairman is best
positioned to speak to his proposal. But I would make the
following suggestion, which is that as the chairman of this
committee, he is going to have a responsibility of putting out
a 10-year budget resolution in the next several weeks, and that
is going to have to provide a comprehensive plan for how you
get these deficits down and what you should do to revenues,
spending, discretionary, defense, entitlements in that time
frame. And that will give us a chance to see a different
strategy for doing deficit reduction, and then you will be able
to compare two different comprehensive plans. And I guess I
would reserve judgment to see what he proposes then.
Mr. Pascrell. But is that the center--the budget proposal,
whatever that proposal is, it is quite obvious in terms of the
money we are talking about in this entitlement, it is the
centerpiece of the entire budget. Would you not agree with
that?
Secretary Geithner. In the chairman's road map, as I
understand it, he does propose very, very, very substantial
cuts in the basic level of health benefits we provide in
Medicare and Medicaid and Social Security over a long period of
time, and the deficit reduction that plan achieves is
substantial, although, as Mr. Van Hollen says, it comes in over
decades, not over months or years. It achieves that through,
again, very substantial reductions in those basic benefits.
Now, again, the test of credibility should be what
comprehensive plan achieves the amount of deficit reduction we
need, and what does it do for growth and for fairness? And
again, we are going to have a good debate, important debate,
about what is the best way to get these deficits down over
time.
Mr. Pascrell. I think we could both agree with that, right,
Mr. Chairman?
Chairman Ryan. Yes. I would only put a caveat: My plan does
not reduce. It just slows the rate of growth. These benefits
continue increasing year after year after year throughout the
century.
Secretary Geithner. That is an important reminder, because
the approach we are bringing to the budget on the discretionary
side is a similar approach. We are saying we want to stop the
rate of growth, and in real terms what that means is very
substantial reductions over a period of time, but it happens in
a way that is gradual.
Mr. Pascrell. Can I finish with one quick question?
Chairman Ryan. Yes.
Mr. Pascrell. Mr. Secretary, can you explain why it is so
important for the deficit that cuts not be made to CMS in order
for them to be able to fully implement the health reform law?
Secretary Geithner. Well, you know the answer to that
question. If you don't allow these reforms to get traction, to
be implemented, then you will not get the savings these reforms
provide. If you delay them by slowing down the pace of it, you
will delay and reduce the savings. It is just a simple
proposition.
Mr. Pascrell. Thank you, Mr. Chairman.
Chairman Ryan. Mr. Flores.
Mr. Flores. Thank you, Secretary Geithner, for your
testimony today. Earlier in the conversation you talked about
one of the bases in the budget is simplification of corporate
tax rates, and the reason for that was competitiveness and more
jobs, lower rate, broader base. That way you create more
investment and more jobs.
Now, on the other hand, you say with respect to high-income
individuals that those same rules don't apply, and so that when
you raise taxes on the highest tax brackets of Americans, the
group of people that creates 50 to 60 percent of the small
business jobs in this country, that it is okay, you can do it
there and still create jobs. But that you use exactly the
reverse logic for corporations. Can you explain the obvious
problem in that logic?
Secretary Geithner. Absolutely, and, again, I am happy to
talk about it. It is a very important question, because, again,
the test of everything we do should be measured through the
prism of not just how are we reducing deficits, but what are we
doing to growth, job creation, and investment centers in the
United States. That is the critical test.
Now, what we propose in this budget is a series of very
narrowly targeted, modest changes in taxation that only affect
2 percent of the richest individuals in the country----
Mr. Flores. Where 50 percent of the small business jobs are
created.
Secretary Geithner [continuing]. And less than 3 percent of
small businesses. And those small businesses that will be
affected by this are those structured where their income gets
treated--they are flow-through entities. Those are
overwhelmingly businesses that are earning very substantial
money. The median earnings annually of the businesses affected,
those 3 percent, are north of $700,000. They are not small
businesses in that definition. And a substantial number of
those businesses are what we would call--look more like law
firms or investment partnerships or hedge funds, not like the
hardware store on Main Street.
Now, again, those are the rates that prevailed in the
1990s, which was the best period for small business growth, job
creation, investment that we have seen in generations. And so
we think that at a time when we have to make choices, we don't
have unlimited resources, that is a prudent and responsible
step. And again, as we cut spending, we want to make sure that
those spending reductions go to reduce the deficits, not to
sustain tax preferences, tax subsidies that are very narrowly
targeted and don't help growth, that we can't afford.
Mr. Flores. The next direction I would like to go is talk
about the President's position on the debt ceiling increase.
The President has said he wants a clean debt ceiling increase.
One of the issues he has got is there is a credibility gap. On
this committee alone on the other side of this room, we have
got 39 votes against debt ceiling increases. The last time the
President voted against one, he said there was failure of
leadership to vote for that ceiling increase.
Help us out on this side of the aisle. We came in on a
group of American voters that said, enough is enough. No more
debt ceiling increases. Help us walk down that path and show
why it is not a failure of leadership today to vote yes.
Secretary Geithner. I did not create this system, and you
did not either, and it is not a way to run a country.
Mr. Flores. I would concur.
Secretary Geithner. Congress decides the obligations we
have as a country. We have to meet those obligations. That is
our responsibility. But you set the obligations. You set that
through a process. It is not a terrific process, but you set
that through a process every year. And the debt we have taken
on is a function of the choices all of your predecessors made
over time, Republicans and Democrats over time.
There is no country on the planet that puts its members
through this kind of torture. You have to vote occasionally
around increasing a limit that has already been locked in over
time. It is not a sensible way to run a country.
Mr. Flores. I would concur with that.
Secretary Geithner. Again, I think Mr. Hoyer has spoken to
this question the best way. Mr. Hoyer said it is a mistake--
when I voted against, it was a mistake. It is not a responsible
thing to do. And I don't think you want to put the country
through the position of having to have too much politics around
something that goes so to the core of our credibility as a
country.
And again, I don't envy the position you are in, and I
wouldn't want to be in your position. There is nothing good to
say about it except to say that you have to do it. There is no
choice.
Mr. Flores. We have to vote.
Chairman Ryan. That is inspiring. Thank you.
Secretary Geithner. I want to compliment what the chairman
has said and what your leadership has said. They recognize
right away that we have obligations as a country, and we don't
play around with these things. We have to do it. And again, we
completely recognize and agree with you, and we owe it to the
citizens of the country that we have demonstrate to them that
we have to find a way to bring the deficits down over time.
But we are just making the pragmatic judgment that if you
make it complicated and hard, something that is already very
hard, there is greater risk that you are going to mess up the
expansion because of that. The world looks to us and they say,
gee, is politics going to overwhelm common sense? Then they are
going to start to be worried, and you will see rates rise, and
we cannot afford that.
Your leadership has done a very good job of saying this,
that there is no risk that the United States of America will
not meet its commitments in a timely manner. But again, we
recognize the position that you are in, and that is why it is
good for us to find a way to lock in a medium-term plan,
multiyear plan that brings down the deficits in a way that are
going to be reasonably good for growth and investments.
Chairman Ryan. Mr. Honda.
Mr. Honda. Thank you, Mr. Chairman. And I welcome Secretary
Geithner.
As these budget hearings are unfolding against the backdrop
of the slash-and-burn continuing resolution on the floor, it is
clear that this is a debate between two competing visions of
this country: the Democratic vision of helping America's small
businesses and working families forging a 21st century economy,
and a Republican vision that is cold-hearted, foolhardy and
actually dangerous.
Secretary Geithner, the Republicans are trying to build a
straw man out of entitlement reform, but we know that for the
next decade our budget deficits are driven by an endless war in
Afghanistan and tax breaks for the wealthy.
Your budget does not continue all of the tax cuts that
expire at the end of 2012. The budget documents indicate that
this would save 953 billion compared to extending all of the
tax cuts, including interest savings. So if you wish to make
all the tax cuts permanent, you would have to find nearly a
trillion dollars in additional deficit reduction in order to
match the deficits in the President's budget. Is that a correct
statement?
Secretary Geithner. Absolutely. And again, I think it is
important to recognize that tax cuts are not free. They don't
pay for themselves. We have to go borrow money to finance them.
And I know we are having a big debate about what the
appropriate role of government is. The country is a divided
country on that question at the moment, but there is no
credible argument that the role of government is to go out and
borrow a trillion dollars to finance tax cuts for the top 2
percent of Americans.
I think there is no--it is not good for growth. It is not
necessary for growth. It is deeply irresponsible and will
deeply magnify the challenge of restoring fiscal
sustainability. If you don't make those modest reforms in tax
provisions, very limited targeted reforms, you will have to
find another trillion dollars in benefit cuts or in spending
cuts, and that is going to be a very hard thing to do.
Mr. Honda. Thank you.
And also the President made it clear that we need to invest
in education. Today you mentioned three critical areas for
investment: early childhood, teacher preparation, and financial
support for higher education. In contrast, Republicans believe
that cutting our investments in education is critical to
creating jobs and growing the economy.
These are vastly different approaches, and only one can be
correct. Can you explain why the President is investing in
these three areas of education? And also can you hazard a guess
as to what the effect the Republican alternative of cutting
education investments would be on job creation and economic
growth?
Secretary Geithner. Again, I think there is an
overwhelmingly strong, compelling case to recognize that we
have been experiencing a very damaging erosion in the relative
quality of education in the United States. You talk to any
company in the United States and ask them how hard it is to
find the people with the skills they need to be competitive in
high-end manufacturing, it is overwhelming and compelling. The
world is not standing still, the world is getting much better
at these kind of things.
So if you--remember, businesses have a choice about where
they build their plant. And if they don't find the talents here
in the United States, they will have greater incentives to go
build that plant where they can find the engineers to do that.
So whether you care about opportunities for all Americans,
whether you care about our children having a chance to earn a
better living, whether you care about inequality or the
competitiveness of the American economy, you have to care about
reforms with investments that are going to do a better job of
improving education outcomes in the United States. And I don't
think that there is any argument that you can help make growth
stronger if you are cutting into those kinds of investments
that are so obviously critical to our competitiveness.
Chairman Ryan. Mr. Mulvaney.
Mr. Mulvaney. Thank you, Mr. Chairman.
Thank you, Mr. Secretary.
Very briefly, I am one of the new folks, and I can tell you
that after having been here only 5 weeks, my patience with the
level of rhetoric, and probably better described as
doublespeak, is probably already worn out. If you paid
attention, you heard the ranking member today move very easily
between the terms ``primary balance'' on one hand and ``full
balance'' on another, which we both know are entirely different
things. You heard folks talk about not playing politics with
the debt ceiling, yet with the exception of Mr. Yarmuth, there
is not a single person on the other side of the aisle that has
not voted against one.
Mr. Van Hollen. Will the gentleman yield?
Mr. Mulvaney. No, sir. I have only got 4 minutes remaining.
Mr. Van Hollen. Well, you should look the at record before
you distort the statement.
Mr. Mulvaney. And we have a situation where the President
has done the same thing. Just yesterday this is what he said
about his budget: What the budget does is put forward some
tough choices, some significant spending cuts so that by the
middle of this decade our annual spending will match our
revenues. We will not be adding more to the national debt. So
to use a sort of analogy that families are familiar, with we
are not going to be running up the credit card anymore.
And that is just not true, is it? That is not accurate.
Secretary Geithner. No, it is true, because, again, you
said this in your opening remarks, this is just a matter of
numbers and math and economics. Not disputable. Primary balance
is not balance. Balance is balance. Primary balance means you
are balanced except for interest costs. For a country like
ours, we need to be at or below 3 percent of GDP to stabilize
the debt burden and stop it from growing. That is necessary,
but not sufficient. We get there in this budget over a 3-year
time frame. It is very hard to do, but it is not as hard as
doing it in a way that is going to not kill future growth
prospects for the country.
And the challenge is a political challenge in trying to
make sure you bring those deficits down without, again, hurting
investments that are important to our capacity to grow, and
doing it in a way that is just and fair to people.
But I do not do rhetoric----
Mr. Mulvaney. I appreciate it, and I have not accused you
of it. But to suggest that we are not running up our credit
card, we will be adding to our debt as we go on. And I would
suggest to you, for the American family, that is not balanced.
Secretary Geithner. Just one clarification, which is we
said this. Again, we are very clear about this. We want to
stabilize the level of debt as a share of the economy. The
economy is going to be growing. So you are right, the debt is
growing in that case, but what matters economically is it
stable at a rate that is not going to hurt growth.
Mr. Mulvaney. Mr. Secretary, I am not here to pick a fight
with you today, despite what a lot of folks think. I would
simply put to you that I am not the only person who interprets
it differently. The IMF has recently released a report that
concluded that the United States is falling behind on a promise
it made to other top economic countries to halve its budget
deficit by 2013.
But let us get to the bigger issue, which is I have heard
you today talk about the importance of lowering the tax rate,
broadening the base. This budget does not do this. I have heard
you today talk about the importance of entitlement reform, and
I agree with you on these things, but the budget does not do
these things.
Until we can have a debate that is removed from this
rhetoric, it is going to be very difficult to discuss policy
issues with you. It is the exact point I made to the OMB
Director yesterday, that we have to be able to move past the
rhetoric in order to do what the folks want us to do, which is
have a discussion on policy.
Let me ask you a specific question on math. I have heard
this term ``sustainable deficit.'' I have heard you talk about
trying to stabilize it at 3 percent of GDP. That 3 percent of
GDP is not the critical number. It is the ratio that is more
important, which is the ratio between the size of the debt--
excuse me--the size of the deficit on an annual rate and the
growth of the GDP.
I am concerned that over all of this budget, with the
exception of 2014 and 2015, even though you do manage to get
the deficit to around 3 percent on an annual basis, that you
are only at GDP growth of roughly 2.5, 2.6, 2.9; that in every
year except two, the budget deficit is larger than the growth
in the overall economy, which to me means that as a percentage
of our GDP, our deficit will continue to grow. I know I am out
of time, but I would be curious to know your thoughts on that.
Secretary Geithner. I am not sure that is right, but I
don't think it is worth debating, because, as I said, CBO in
our country makes these judgments for us. They will estimate
for you what the consequence of our policies will be if they
were enacted on the economy. You will be able to look at those.
As I said, they are going to conclude that we need to go
further. We are going to agree with that.
But a phrase that I use which is not rhetoric is ``a plan
beats no plan.'' We lay out a comprehensive plan. You are not
going to like features of that plan. You might want to go
further or do it differently. The chairman is going to lay out
a competing vision for growth and fairness. And we should have
a debate then on what makes most sense for the country.
But one thing in our Constitution, the executive has to
propose, but Congress has to legislate. And in our country now,
given how divided the country is, it is going to take both
Houses and both parties to legislate. And it is not something
we can put off. We have to do it not just because people expect
it from us, but because our overall confidence in our Nation
will depend on you all being able to demonstrate that we can
find a way to bring these down over time. But remember as you
look at how to cut, make sure you are worried about stuff that
is important for growth.
Chairman Ryan. Mr. Ryan.
Mr. Ryan of Ohio. Thank you, Mr. Chairman.
Thank you, Mr. Geithner, and I appreciate it. I think it is
important as we have this long-term discussion as we--a lot of
times we hear questions asked of you and the last couple of
visitors we have had here where there has been a complete
disregard for the economic crisis that we just went through.
And I think this budget, as much as I don't like a lot of it,
does make the kind of investments that we need to be
competitive. That tax rates, as you stated earlier, are not the
only indicator for growth. It is quality of workforce, it is
infrastructure, it is all of these other things. And I just
want to say that I think you guys have done--with a horrible
economic situation over the past couple of years--have done a
pretty good job. And I can't imagine having to do this without
dealing with the politics that the President and you and the
administration has to consistently deal with.
And I think if we look back to the number of jobs that were
being lost in January of--the month the President got sworn in,
if we look the at direction of the country and look what the
stimulus bill has done--although it has not--I mean, I am from
Ohio. Clearly unemployment has not gone down quick enough, but
we have stabilized. You guys have saved the auto industry. I
just had some folks in my office from Ford, where they have now
850 people working in the Parma plant. Lordstown General Motors
now has a third shift. They are making the Cruze. They are
selling like hotcakes. That would not have happened if it were
not for the courage of this administration.
So talk about rhetoric in Washington, D.C., let us be fair
to each other who are trying to make some pretty difficult
decisions here. I just wanted to say that. You know, I wanted
to get in my questions, but if we are going to change the tone,
if we are going to have adult conversations that everybody in
the Capitol wants to start having, I think it starts by
saying--do you remember when Paulson came here, and everybody
was running around the Capitol with their hair on fire because
we were going to go into a global depression in a matter of
days? And if you contrast that with, I think, some very
difficult and mature decisions that you guys have made--and I
am not here to blow smoke, but we have to appreciate the
difficult decisions that were made under President Bush, then
President Obama, then the stimulus package and all of these
other things, and now to propose a budget as we start to turn
the corner and move in another direction where we made these
critical investments, continue to say this is a priority for
our country, I think this is important, and I think you guys
are showing some leadership in spite of what some of the
critics are saying.
Two quick questions. One--and we talked about this a
million times--China currency. I think it is a major issue. I
think it could be a major stimulus for the United States if we
do it. Where are we at with currency? Are you continuing to
push this? I feel like this could be a major, major stimulus.
It does not cost us any money.
Secretary Geithner. It is very important to us and very
important to a lot of people up here. They are moving, and
moving very gradually. But what you can see in the exchange
rate understates the pace of appreciation, because, as you
know, they have moved about 3.5 percent over the last 6 or 7
months.
But inflation in China is much higher than in the United
States, in part because of their exchange rate policy. What
that means in real terms is they are moving about 10 percent a
year at an annual rate. If they continue that, that would make
a big change, and it is already having a much bigger effect
than just what that 3.5 percent would imply.
Businesses have to look forward, and what they see is a
sustained increase in wages in China, sustained loss in
competitiveness for China, so they are less likely to build the
next plant there, more likely to look to other places to buy
the goods they need and services they need, and that will help
reinforce this recovery. But they are just at the beginning of
that process. We want to it continue, and we are going to
continue to encourage them to move.
Mr. Ryan of Ohio. Well, we are going to continue to push. I
want to remind my new Members who are here, we passed that
China currency bill last year with 380 votes, bipartisan
support. We need to continue to give you that hammer.
Please advocate for the health care tax credit as well. A
lot of these auto jobs and people in Ohio have lost it, and the
increase up to 80 percent. We need the help of the
administration for that and the trade adjustment benefits.
Secretary Geithner. Thank you. Thank you for what you said.
Chairman Ryan. Mr. Huelscamp.
Mr. Huelscamp. Thank you, Mr. Chairman.
Mr. Secretary, it is a pleasure to have you here today.
I want to make a comment. I made a comment with Mr. Lew
yesterday, but I just wanted to point out again that the
President's claim--and you echoed the claim here, Mr. Lew
echoed the claim as well, that the President has met his pledge
to cut the deficit in half. And, of course, when he made that
pledge, he said nothing about tying it to economic growth. It
was a flat pledge to cut it in half, and it is still $175
billion short.
With that said, even with that in mind, and restating that,
exactly how does the President plan on helping this Congress to
make sure--for instance, the freeze on discretionary
nonsecurity spending. He made the comment, the President
proposes and the Congress disposes, and I have a third grader,
and that is the way they understand it. That is not the way it
works. In 1997, President Clinton stepped up when we had the
debate over the debt ceiling and said, let us talk about
balanced budgets.
My question is does the President have any desire to make
some concrete proposals in this time period other than simply
presenting this budget, which we all agree is unsustainable? Is
there anything concrete?
Secretary Geithner. As part of the debt limit or reducing
deficits?
Mr. Huelscamp. I think when we talk about the debt limit, a
vote on the debt limit is a referendum on past spending by your
administration and previous Congresses. That is what we are
doing. But what about going forward in the future? I understand
the President would like to not have to face a discussion about
the future in the debt limit, but, frankly, that is why I think
the discussion should be----
Secretary Geithner. We absolutely want to have a discussion
about the future. Again, the important thing we face is to try
to figure out how we come together on a credible, comprehensive
plan to reduce those deficits. That is what our citizens except
of us. That is what the world is going to require. That is what
is important to recovery going forward.
But it is more complicated, of course, than just trying to
figure out how to get them down. You have to get them down in a
way that is going to be acceptable, pass the Congress. Of
course, you are right. We can't leave it to you. We will be an
active part of trying to shape consensus, and the President
will help play an active role in that process.
But again, the budget is the beginning of that process. It
does not solve all the Nation's problems. There are other
things we have to do, and we recognize that you are going to
have different ideas on how to do it. And what we look forward
to is hearing your alternative suggestions for how we get
there; how quickly we get there, and how we get there. And then
we will have two contrasting visions, and we will figure out
what makes the most sense.
Mr. Huelscamp. And I appreciate that. I believe your
timetable is maybe April or May for the debt ceiling vote. But
we will not anticipate anything from the administration before
we have that vote as far as serious discussion on the deficits?
Secretary Geithner. No, we are beginning a serious
discussion on the deficit right now. That is what the budget
starts. And again, we laid out a comprehensive plan.
Mr. Huelscamp. But there is nothing about entitlement
reform in there.
Secretary Geithner. Again, I don't think that is really a
fair way to look at the record of what this President has done.
The Affordable Care Act, parts of it, delivers very, very
substantial entitlement reform that delivers very, very
substantial deficit reduction over time.
Mr. Huelscamp. I understand that. But you also agree that
it is unsustainable to have a $768 billion deficit. In 2 years
we will still be at $768 billion.
Secretary Geithner. Yes, as I said, we propose to bring it
down to roughly 3 percent of GDP over a 3- to 5-year period. We
phase it in because we do not kill growth.
Mr. Huelscamp. I understand that. I am just about out of
time. I just want to note that Mr. Obama may not be here in 3
to 5 years. He promised by the end of his administration. We
have 2 years, and actually I think we have a couple of months'
window here, and I encourage the President to step up and
provide an opportunity before April to provide a real proposal
to help reach an agreement. But I appreciate it.
Secretary Geithner. Again, I just want to make this one
point again. Again, we have got a lot of strengths as a country
and a lot of strengths in our budget process, although it is
not working very well for the country right now. But please
consider this as you consider how to help us fix this problem.
We need a multiyear plan that brings them down over time that
you can lock yourself into, because if you do it year by year,
nobody will have any confidence you will deliver on it. So it
has to be a multiyear plan. Other countries have found a way to
do this. We need to find a way, too.
Mr. Huelscamp. Thank you, Mr. Chairman.
Chairman Ryan. Mr. Yarmuth.
Mr. Yarmuth. Thank you, Mr. Chairman.
Mr. Secretary, nice to see you again. Thank you for being
here.
I would like to echo Mr. Ryan's and others' comments that I
think the administration has done a terrific job of trying to
strike a balance of trying to get our house in order, and also
respecting the need to make the kind of long-term investments
that will keep this country competitive a generation and two
generations down the road.
Secretary Geithner. You are referring to both Ryans in the
room?
Chairman Ryan. I was going to make the same clarification.
The gentleman from Ohio?
Mr. Yarmuth. Mr. Ryan from Ohio.
Obviously not everybody is going to agree with every
provision in this budget, and there is something that causes me
a great deal of concern--you and I have had this conversation
in public before--and that is the repeal of the LIFO accounting
method, which will have a devastating impact on one of
Kentucky's primary industries, the bourbon industry.
In my district alone, Brown-Forman Distillers, which
employs about 1,300 people in my district, would effectively
have its taxes raised by hundreds of millions of dollars, they
estimate, when they have, in fact, relied on an accounting
method which was approved in 1939. But not only would this
budget anticipate repealing it prospectively, it recaptures
their reserve. And, to me, that is like saying you bought a
house 30 years ago, you took advantage of the mortgage
deduction, not only do you lose the mortgage deduction going
forward, you are going to have to pay back all of that money
that you saved, which seems to me to be incredibly unfair.
So I would like to get--other than the fact it is a lot of
money sitting there that you could go after to balance the
revenue side of the ledger, what is the rationale for that kind
of essentially retroactive penalty?
Secretary Geithner. Congressman, let me start by saying I
understand your concerns, and these changes, like many, are
painful changes. And we do propose ways to make sure that we
try to minimize the burden by giving people time to meet that
change in tax treatment.
But the basic rationale for this is one of fairness. We
want to put industries on a level playing field and not favor--
not create favors or create preferences that disadvantage other
industries in favor of one industry. And it is a complicated
thing to do. Our Tax Code is ridden with all sorts of other
examples of unfairnesses like that. We think this just puts
people on a level playing field. But I understand your
concerns, and we are happy to talk to you in more detail about
how to address those. And I understand why it would be a
challenge for you.
Mr. Yarmuth. And not just for my industry, but for the wine
industry. There are many industries that are faced by this
problem, and particularly the bourbon industry, which the law
requires them to age their product. In many cases these
products sit on the shelf 15, 18, 20 years. And just as we
provide depreciation benefits for some companies that gives
them an advantage over others, I just want to raise that point.
Thank you. I look forward to working with you on that.
I yield back.
Chairman Ryan. Mr. Rokita. Did he not come first before he
did?
All right. Mr. Young.
Mr. Young. Mr. Secretary, thanks so much for being with us
here today.
I wanted to pivot to the housing market. As we know, it has
been lethargic for some period of time. That, in turn, is
impacting consumer consumption. It is having some effects on
our labor market and the ability to match up jobs with a mobile
workforce.
And I did not see it in the budget. I am thoroughly new
here. So I looked in, and I thought it was a glaring absence.
And I did some digging here and found out that CBO actually
scores Fannie Mae and Freddie Mac differently. CBO says that
Fannie Mae and Freddie Mac are entities of the government
because they are under the control and ownership of Treasury.
The President's budget, on the other hand, as you know, says
Fannie Mae and Freddie Mac are nongovernmental entities, and
therefore leaves them out of the budget.
As a Member, my colleagues and I, it is our job to oversee
such matters. How can Treasury assure us that the President and
the administration is fully accounting for the risks associated
with their management of Fannie Mae and Freddie Mac?
Secretary Geithner. Excellent question. And again, I would
be happy to talk to you in more detail about this or explain
exactly how we do this.
What we do is we show--and CBO does a similar thing--they
show on a rolling basis the estimate of likely losses over
time, what the ultimate cost might be to the taxpayer as a
whole. And we try to explain how we are trying to minimize
those costs.
And what FHFA does, which is the responsible authority as
conservator, is they provide a range of different estimates
under different scenarios, a stress test, a base case scenario
about what losses might actually be. And what we lay out for
people is how, through a strategy of more conservative
underwriting standards, requiring homeowners to hold more
equity in their homes, more conservative eligibility
requirements and higher guarantee fees--we lay out the clean
economics of why we think the guarantee business going forward
is much more conservatively managed. And because of this, both
OMB and CBO show those losses coming down now over time.
Mr. Young. You are still estimating losses. And why isn't
your most likely scenario, or an average of certain scenarios,
included in the budget itself?
Secretary Geithner. No, we do build into the budget the
estimated cost of this to the taxpayers over time, and those
estimates change over time. Again, they are likely to come down
a little bit. They are still significant, but they will come
down over time because, again, these companies pay us
dividends, and that helps offset some of those costs.
We are very transparent and open about this. We account for
it in the budget. It is there for everybody to see. And people
can come to their own estimates what it might cost. But
ultimately, as in many cases, CBO will determine for you what
the right way to account for this is.
Mr. Young. I know the administration is in the process of
reforming in various ways Fannie and Freddie and its
operations. I didn't see that included in the budget either.
Secretary Geithner. We proposed last Friday--before the
budget came out, we put in a white paper, a comprehensive plan
for winding them down over time, reforming the market, fixing
what was broken. Doing that in a gradual way doesn't hurt the
housing market. And we will begin the process of consultation
on the Hill about how to translate those reforms into
legislation that would fix what is broken in the system. But
the details are not in the budget. We did those separately
ahead of the budget release.
Mr. Young. I have got 30 seconds left. Should there be a
government guarantee in the housing market? And if so, to what
extent?
Secretary Geithner. A very important question. I think what
we laid out in this proposal was three different options for
the future. One option leaves the government's role to a
limited role through the Federal Housing Administration so that
low- and moderate-income Americans would have the ability to
take advantage of a guaranteed mortgage. Two other options
might complement that, one that would provide you might call it
emergency assistance in a recession, deployed only in an
emergency, to help cushion the effects of the housing market
collapse. The third option would be a much more targeted,
narrower guarantee that the market would pay for. And if the
government was exposed to any losses, we have to make those up
by a fee on the market like we do with deposit insurance.
We are going to begin debate on those options. Ultimately
you could choose a mix of those options, but that is a judgment
that we will have to reach with Congress. And we can go through
that process carefully because we already have the authority
now to begin to put in place reforms that will wind down those
institutions and bring the private markets back into the
mortgage finance business as we try to figure out what the best
ultimate choice is about the future.
Chairman Ryan. Thank you.
Ms. Kaptur.
Ms. Kaptur. Thank you very much.
Welcome, Mr. Secretary.
As you know, America is enduring a housing crisis of
monumental proportions, and it is amazing to me that you have
not addressed that in your testimony today. President Obama did
not mention it in his State of the Union Address, nor did
President Bush in the recent book that he published on his
career here as President.
Just in 2010, more than 1 million more homes were
repossessed. Since 2007, 3 million homes were taken back.
Almost one in five American homes remain under water, worth
less than what families owe on their mortgage. And the Wall
Street Journal reported that home prices are declining in all
28 major metropolitan areas as of the fourth quarter of 2010.
Back in the 1980s and 1990s, the costs of the savings and
loan crisis precipitated by reckless bankers were placed on the
American people; $170 billion placed squarely on the backs of
our taxpayers to pay for their misdeeds. Now the costs of this
housing crisis caused by Wall Street abuses through the
creation of asset-backed securities made a few very, very
greedy bankers quite wealthy at the expense of millions of
ordinary citizens and doing great harm to our Republic.
This cost is also being placed on the backs of U.S.
taxpayers. Reports show that the true direct costs involve
trillions of dollars, and according to numbers I have, these
include 12 Treasury programs thus far have cost taxpayers over
$700 billion of which the TARP is nearly $380 billion; 24
Federal Reserve programs have cost $1.738 trillion; and for the
next 3 years, Treasury has engineered unending support,
regardless of the dollar amount, to Fannie Mae and Freddie Mac.
So far we have spent 61 billion on Freddie Mac and 83 billion
on Fannie Mae.
All of this debt is being financed by foreign borrowing,
with China now number one financier to our country, followed by
Japan and the Middle East oil-exporting countries. But snug up
against them is the major role of the Cayman Islands. And I
would like to ask unanimous consent to place in the record a
report on foreign portfolio holdings of U.S. Securities.
Chairman Ryan. Without objection.
[The report, ``Foreign Portfolio Holdings of U.S.
Securities,'' as of June 30, 2008, may be accessed at the
following Internet address:]
http://www.treasury.gov/resource-center/data-chart-center/tic/
Documents/shla2008r.pdf
Ms. Kaptur. I thank the chairman.
My question, I have three, is there a transparent--I will
read all three--is there a transparent list of which Cayman
Island financial institutions hold the lion's share of the debt
that they are financing? Number two, who exactly will lose
money if Freddie and Fannie default on their obligations? And
number three, how much interest will our government pay this
year to foreign interests who finance our debt?
Secretary Geithner. The first I would like to respond in
writing.
On the second----
Ms. Kaptur. So you don't know, sir, if there is a
transparent list of which Cayman Island institutions hold the
lion's share of U.S. Debt in asset-backed securities? It is
quite striking when you read the report that almost all of the
what are called corporate debt securities are held in the
Cayman Islands, more than any other country in the world. Very
interesting. Who would that be, from everything that you know
at the moment?
Secretary Geithner. I have not seen that report, but I
would be happy to look at it and happy to respond in writing.
Ms. Kaptur. It is actually a Department of the Treasury
report along with the Federal Reserve of New York, which you
used to chair, sir, I think; am I correct?
Secretary Geithner. Was the CEO of that. Right.
Ms. Kaptur. And the Board of Governors of the Federal
Reserve System.
Secretary Geithner. I am not sure what you are getting at,
but I would be happy to respond in writing.
On your second question, Fannie and Freddie will not
default on their obligations. It is not going to happen.
Ms. Kaptur. But if they did, who would lose money?
Secretary Geithner. I will not contemplate it.
Ms. Kaptur. But theoretically, who holds the paper?
Secretary Geithner. The American people would lose on that
because you would cause devastating damage to the housing
market, and you would cause a huge increase in the losses for
the taxpayer that came from the mistakes of entities made
before the crisis.
Ms. Kaptur. How much interest will we pay this year for
foreign interests?
Secretary Geithner. I will be happy to respond. I don't
know that number myself.
Ms. Kaptur. It is sizable, is it not, Mr. Secretary, and it
is growing?
Secretary Geithner. Yes, it is, because our deficits are
very large, which is why we have to bring them down.
Ms. Kaptur. I think the American people are deeply worried
that this country is in hock to foreign interests. This Member
is worried.
Secretary Geithner. Well, I think what the American people
should be worried about is that we have unsustainable deficits,
and we need to bring them down. But you cited a bunch of
numbers earlier in your remarks that were not correct about our
financial investments, and I would happy to respond in writing
on that.
You raise the S&L crisis. The S&L crisis cost the U.S.
Taxpayers about 3 percent of GDP. This crisis all in, looking
at the direct costs of our programs under TARP, the GSEs,
meaning Fannie and Freddie, what the Fed did, what the FDIC
did, what the Treasury did directly, will cost almost certainly
less than 1 percent of GDP. The investments we made in the
banking sector will earn a substantial positive return to
taxpayers. The FDIC's programs, the Fed program will earn
billions and billions of dollars for the taxpayers because they
were incredibly carefully managed. I would be happy to report
in detail.
Ms. Kaptur. I thank you, Mr. Secretary. My time is up, but
I would just say back in the early 1990s and late 1980s,
foreign interests were not financing the majority of our debt
securities, and they are today.
Chairman Ryan. Thank you.
Mr. Rokita.
Mr. Rokita. Thank you, Mr. Chairman.
Thank you, Mr. Secretary, for your time today.
I just went and looked back at the record, asked the staff
to do it, because I could not believe what I was hearing when
you said that--when we asked about whether or not the President
was really getting to entitlement reform as a driver of this
budget, and you pointed to Obamacare. Mr. Elmendorf, who was
here, I believe, last week, said, and I quote: Rising health
costs will put tremendous pressure on the Federal budget during
the next few decades and beyond. In CBO's judgment, the health
legislation--he was talking about Obamacare--enacted earlier
this year does not substantially diminish that pressure.
Do you want to respond to that?
Secretary Geithner. Again, I can only quote his estimates,
and those are the ones that, again, govern what Congress does
in this area. And what CBO's estimates are, and he reaffirmed
them, are that the reforms that we refer to as the Affordable
Care Act will reduce our deficits by $1.23 trillion over the
next two decades, $230 billion in the next decade, a trillion
in the subsequent decade, and that is because they
substantially reduce the rate of growth in health care costs to
the taxpayer. They still leave us--even with those reforms,
they still leave us with unsustainable commitments, obligations
in Medicare, Medicaid and Social Security. So they are a
beginning, but they are unsustainable----
Mr. Rokita. Okay. We are talking about the things that are
going to drive deficit and debt reduction into the future are
what you just mentioned, and we are not touching it in the
President's proposed budget.
Secretary Geithner. No, no, again, that is not quite
accurate. The first obligation we all have is to make sure over
the next 5 to 10 years we take an unsustainable deficit that is
not a result of entitlement commitments and bring that down to
Earth. That is absolutely essential to maintain confidence in
our recovery, keep interest rates low.
Now, you are right, even with the Affordable Care Act, if
you look at over the next several decades beyond that, we have
an unsustainable set of obligations, and we need to try to
build on those reductions to try to do that. But what the
Affordable Care Act did was the most important cost-saving
entitlement reform this country has done in decades, not just
paid for fully, but deficit reducing on a dramatic scale.
Now, we are happy to work with you on how best to go beyond
that, and the President laid out some initial suggestions, like
malpractice reform, to try to do that. But we have to figure
out how to build on that commitment. But don't look past--I
know you won't--don't look past the next 5 or 10 years, because
that still presents an enormous challenge.
Mr. Rokita. Okay. I will try not to. Thank you for the
answer, Secretary.
I still don't--when you talk about covering 40 million more
people in a government-controlled system and plan, you can't
tell me that you are actually going to get deficit reduction.
Secretary Geithner. You don't need to rely on my judgment.
Use CBO's.
Mr. Rokita. I did. I just quoted the man.
Anyway, let me ask unanimous consent to put this chart in
the record.
Chairman Ryan. Without objection.
Mr. Rokita. Thank you.
You used the word ``torture'' to talk about this debt
ceiling vote that we are going to have to go through.
Secretary Geithner. Could I withdraw that?
Mr. Rokita. I appreciate your empathy. And you are right.
Politicians before us put us on this path, and here we are
having to clean up. I take that responsibility. I don't use the
word ``torture;'' I use the word ``responsibility'' and also
use the word ``leadership.'' And we will pick up if we have to
where your budget proposal left off, and then we can work
together and get some things done. I think that is important.
But I also don't understand--and let me give you 20 seconds
to respond--why we couldn't attach--why it is politics to
attach some things to it that would actually guarantee or help
cure this situation so it does not have to happen again,
whether it is balanced budget language, whether it is making
sure that our interest payments are paid first, and all of
them; not just the car payment, to your earlier analogy, but
others? I don't see that as politics. I don't see that as
irresponsible. I think that is what we ought to do to make sure
that our kids don't have to pay for this.
Secretary Geithner. Again, I did not use those terms. I
will say it this way. As you work with your colleagues on the
other side of the aisle and work with us to figure out a way to
put in place a credible deficit-reduction plan that allows us
to go back to living within our means, make sure you don't call
into the question the basic obligations of this country. And we
are just making the pragmatic observation I know your
leadership shares that this is a really hard thing to do. You
are finding it really hard to do. People will disagree on the
right path to do it. Do not complicate it up, because we can't
afford to take any risk that people call into question our
commitment to meet our obligations.
Chairman Ryan. Ms. Wasserman Schultz.
Ms. Wasserman Schultz. Thank you, Mr. Chairman.
Mr. Secretary, it is great to be with you and see you
again.
We have had a number of different individuals testify,
Chairman Bernanke, CBO Director Elmendorf, Mr. Lew from OMB,
and each of them affirmed--I have asked each of them this
question, and I will ask it of you as well--related to the
draconian cuts proposed in the continuing resolution that we
are considering right now by the Republicans and the impact
that they would potentially have on the recovery. Could you
comment on that? Because each of the previous three individuals
that I asked all confirmed that that was a significant concern.
Secretary Geithner. Well, I am a little reluctant to do so
because we haven't seen how this comes out, and, of course, it
has not passed the Congress. But as American people observed,
by putting so much of the burden in cutting discretionary
spending, which is a small share of our budget, in 1 year, and
going down deeply into critical services that are important to
future growth, in my judgment, if Congress were to pass those
cuts, they would hurt our competitiveness, hurt our growth
prospects, and in that way in some ways make the long-term
deficit problem worse.
Ms. Wasserman Schultz. So it is risky and potentially
reckless to cut too deeply.
Secretary Geithner. Again, I would say be careful as you
cut spending to make sure you are reducing deficits, too, but
focus on doing it in a way that is not going to hurt our future
growth prospects.
Ms. Wasserman Schultz. Thank you.
Secretary Geithner. Again, can I just say one thing? These
things that we all care about for competitiveness are things we
can afford. You know, if you look at the costs of the reforms
for the Department of Education, they are not expensive for a
country like the United States. The suggestions we are making
for incentives in innovation are not beyond our means as a
country. And if you try to balance the budget on the strength
of deep cuts on that relatively small share of the budget and
not bring a comprehensive plan that helps future growth, then
you are going to hurt growth.
Ms. Wasserman Schultz. Just an extension of what Mr. Rokita
referred to, would you say that it is not responsible for us to
hold the lifting of the debt ceiling hostage with items that
might warrant debate and that we might ultimately be able to
find some common ground on, but that irresponsibly would tie to
the lifting of the debt ceiling?
Secretary Geithner. I would, of course, say that. But every
predecessor who has had my job would say that, as would every
President faced with this basic choice. And you would expect us
to say that because, again, the stakes are too high. We can't
afford to take any risk with a recovery that is still in the
early stage after a recession that was traumatic. We are still
living with 9 percent unemployment, and we can't afford to take
any risk of jeopardizing the process of repairing that damage.
Ms. Wasserman Schultz. Thank you.
And just in the last minute, I am really pleased to see
that the President has made a commitment to making sure that
intellectual property rights are preserved in the budget, and
glad to see that he has made a commitment to that. I think we
all understand the obvious benefits to that.
But on closing tax loopholes specifically, we know that in
terms of winning the future and the concepts that the President
has pushed in allowing us to outinnovate and outeducate and
beat our global competitors, what does the President's budget
do specifically to close those corporate loopholes and shut off
incentives to ship American jobs overseas?
Secretary Geithner. We proposed a series of reforms to
reduce both the opportunities and the incentives in the current
Tax Code to shift income to low-tax jurisdictions and to shift
investment outside the United States. And we also propose,
though, some very positive incentives for investment in this
country. We propose to make permanent an expanded R&E tax
credit. We propose very substantial cuts for small business,
small businesses themselves. And if you look the at the
combined impact of the reforms we are proposing, I think they
would be very good for growth and very good for investment in
the country.
Chairman Ryan. Mr. Woodall.
Mr. Woodall. Thank you, Mr. Chairman.
Thank you, Mr. Secretary, for being here. I am the newest
member to this subcommittee and have a steep learning curve as
I have been trying to pore through the numbers in the
President's budget and listening to what he has said when he it
out talking about reducing the deficit and attacking the debt.
Can you tell me in simple terms, true-or-false terms, this
budget never, ever, ever reduces the debt; is that right?
Secretary Geithner. That is correct. It does not go far
enough to bring down the debt, not just as a share of the
economy overall, you are right.
Mr. Woodall. It does not bring down the debt at all.
You have said a lot, which I very much appreciated, about
preferences for industries. It started with Mr. Blumenauer, and
Ms. Wasserman Schultz followed up on that. You said it is not
good policy, that it is not fair, that preferences for even Mr.
Yarmuth's folks were bad policy. But as I read your written
testimony, you go right into we are going to start with revenue
provisions that promote investment in clean energy; that we are
going to go on and promote--to make revenue changes that make
investments in manufacturing facilities with energy-efficient
commercial buildings and plug-in vehicles, and on and on and
on.
Can you tell me why it is that tax preferences for the
bourbon industry are bad and for the oil industry are bad, but
tax preferences for these other industries are good and
procompetitive?
Secretary Geithner. Absolutely. Fair point. We do include
in the budget a series of targeted tax incentives that go to
support investments in clean energy. You know why we are doing
that, because we think it is important for the country as a
whole to move to less carbon-intensive energy as a whole.
Mr. Woodall. I guess my question, Mr. Secretary, would be
why you? If we want wanted to do it on the spending side of the
ledger, I think that is absolutely right. But you have said
over and over again that your job is to collect revenue. I will
associate myself with Mr. Blumenauer's comments. It is not the
IRS agent's fault; it is our fault. Here we have an
opportunity, what seems like agreement on both sides of aisle,
to move to lower rates, a simpler system, and yet even though
we agree on that, here we are again using your agency, using
your Department to continue to create these market distortions.
If we want to distort the market, why don't we do it on the
spending side of the ledger instead?
Secretary Geithner. You and I can agree on that more than
you think. And as I said, we are in favor of trying to find a
basis for doing comprehensive tax reform that will lower the
rate and broaden the base. And where we preserve incentives for
investment, we want to make sure they meet a very, very high
bar; very powerful, very strong impact on investment incentives
that we can all justify as a whole. We won't be perfect on
cleaning them up completely, but we think it is worth doing.
And you are right to say that in this budget we are
proposing a set of changes built on the current tax system on
the corporate side that we think shifts the incentives in a
positive direction for investment. But we also say that if we
can, we would like to move to comprehensive reform that would
clean it up more dramatically.
Mr. Woodall. Would you agree with me that businesses don't
pay taxes, that their consumers and their shareholders pay
those taxes, but that there is no secret drawer at the business
to pay those taxes?
Secretary Geithner. I am not an economist, but all
economists would agree with you that those costs are borne by a
mix of shareholders, employees, managers and customers.
Mr. Woodall. What is the downside, then? We talk about
reducing the corporate tax rate and simplifying the compliance
process. What is the downside of eliminating the corporate tax
rate altogether so that we are certain that we are a magnet for
jobs, so that we are absolutely certain that we are not moving
folks overseas, and since we are absolutely certain that the
only taxpayers in the world are consumers, employees and
shareholders?
Secretary Geithner. Sounds to me like you could do fine
explaining the arguments against doing that.
Mr. Woodall. I just need you on my team, Mr. Secretary.
Secretary Geithner. I will just make a pragmatic argument
that if you do that, you are asking individuals to directly
bear a much higher tax burden, and I think you are going to
find that untenable politically.
Mr. Woodall. I will have to bring you down to the Seventh
District of Georgia, where folks are pleased to shoulder that
personal responsibility.
Chairman Ryan. Mr. Lankford.
Mr. Lankford. I want to continue on this conversation on
the corporate tax side as well. You mentioned earlier in your
testimony in the conversation about territorial or global and
how we want to land on that. And you mentioned you were looking
for those ideas on how we handle that, and do we set our
criteria and expectations on that.
What country do you look at that is doing global taxation
that you say that is a good model in how they transitioned and
what they have done? Is there another country out there that
you say, gosh, they do global taxation well?
Secretary Geithner. Excellent question, but I don't see
anything out there yet that we can fit to our particular
circumstance as a country. You know, we are a little special in
many ways. The countries in Europe are not really a good model.
Mr. Lankford. Like to keep it that way.
Secretary Geithner. Yes, we want to keep it that way, too.
We would be happy to talk to you about it in more detail. We
are beginning a very careful process of consultation to look at
all alternatives out there, but, again, we want, like I think
you would want, to make sure that we are not eroding the tax
base substantially, and we want to create more incentives, more
opportunities to move that stuff outside of the United States.
Mr. Lankford. As a general principle, though, and following
up on Mr. Woodall's comments as well, as a general principle,
if you subsidize something, you get more of it; if you tax
something, you get less of it. Do you generally assume that?
Secretary Geithner. I am not an economist, but I think most
economists would agree with you.
Mr. Lankford. The issue then comes back to the energy side.
Obviously we are trying to subsidize heavily one side of it,
this clean energy side, and traditional energy is about to get
whacked based on the President's proposal on it.
Secretary Geithner. ``Whacked'' would be overstating it,
but I would say the existing preference is somewhat diminished.
Only some of them----
Mr. Lankford. Well, they would definitely have a pretty
hard hit on it, on how they are going to handle it. So that
would decrease our energy supply there to try to increase it on
another side of energy. But it is not actually there.
My question is based on your statement you said earlier.
You didn't feel like raising taxes on traditional energy
sources. Your statement was it would have no effect on price.
And I am kind of astounded by that to say, well, add a tax
burden on them, which will cause them to drill less and to
research less for things like IDCs and such. And so supply then
goes down, your tax amount goes up, and you are saying that it
will have no effect on price. It is almost astounding to me, I
guess.
Secretary Geithner. Don't rely on my judgment. I am just
saying economists would say that these prices in a market like
oil are set by the global market, and modest changes in the tax
preferences for where some production happens won't affect
those prices.
Mr. Lankford. Well, I would say in the same vein, if that
would have no effect on the price on that, then what if we stop
subsidizing ethanol as much, for instance; would that have no
price effect on ethanol, you think, as well?
Secretary Geithner. You know, I am a little reluctant to
speak to that because that is a little different market in
terms of size in that context.
Mr. Lankford. I am just saying on the energy side, we can't
say that we subsidize things and we get more of it, and we tax
it and we get less of it. The exception to that is in energy
that we can kind of switch it. Because I get this feeling from
reading speeches from the Carter administration, they tried
this same experiment. I am sure you are very aware of that.
Jimmy Carter made the statement that by the year 2000, 20
percent of our electricity would be produced be solar power.
And there was a heavy push towards all the clean-energy
options, with the exception of coal. He was a big fan of coal.
But then it didn't occur. We dumped a lot of money in that, and
it didn't occur. You can't just flip it on and say, we are
going to do that as a country.
Let me just make a couple of quick statements just as
observations on it. I am also a new Member in this, and coming
from central Oklahoma, some of the words and the phrases that
are coming out don't ring true in just normal Americans that we
are interacting with. The statements that you made earlier
like, we are worried about more generous estate tax rates,
gives the impression that the Federal Government owns the
property of people who die, and we get to choose whether they
are going to have more generous rates or not, which they have
now, and whether they are going to have less rates. You
mentioned fortunate Americans. The primary balance we have
already talked about. It is a great frustration. Sustainable
deficits.
I just don't hear anyone that I am interacting with saying,
you know, if we just get to $26 trillion in debt, I think we
will be fine. I just don't hear anyone saying that except for
the administration. The administration continues to say, we
will have sustainable debt, we will have $26 trillion in debt,
and we will be just fine.
Secretary Geithner. You will never, never, ever hear me say
that.
Mr. Lankford. Well, that is what is coming across in our
budget, and we have got to serious about that. My fear is right
now we are more worried about balancing the budget and what
effect that will have on our economy than we are about dealing
with our debt. And I just think more people are more worried
about--let us get back to balance.
Chairman Ryan. Mr. Stutzman.
Mr. Stutzman. Thank you, Mr. Chairman, and thank you, Mr.
Secretary. I have enjoyed our conversation today.
Did you have any involvement in putting the budget together
for the President?
Secretary Geithner. I did.
Mr. Stutzman. Okay. I guess what I am curious is, I would
like to go to--off of page 202 and the economic assumptions in
growth, especially in particular GDP; 6.1 percent is the high,
and the low that I see there outside of 2010 is 4.0 in 2011,
and I think I heard you say earlier that average growth of GDP
is around 2 to 3 percent.
Secretary Geithner. I think you are quoting nominal GDP
rates, not real GDP rates.
Mr. Stutzman. Even with real GDP rates, they are still very
optimistic in the short--right after 2013--or right in 2013,
2014, what gives you the idea that we are going to see that
type of growth? Because when I mention that to folks back home,
they are trying to figure out what to buy.
Secretary Geithner. Again, I am repeating a conversation we
have already had at some length.
Mr. Stutzman. I am sorry. I came in a little late.
Secretary Geithner. It is an important question. Again, you
want to have realistic, conservative assumptions as you make
budgets. In the end, of course, it is CBO's estimates that will
govern what you do and how that affects--how we estimate the
cost of these policies in the economy long term.
If you look at the full mix of these assumptions, I think
they are actually reasonably conservative. Again, the growth
rates we assume in the budget over time are lower, materially
lower, than the average of past expansions. So they are
conservative in that sense. The fiscal year 2011 budget
estimate is substantially above CBO's estimate because it is
very conservatively estimated. It will much--it will be lower
than that almost certainly. But again, the way our system
works, CBO will look at those independently, and you will be
able to look at their judgments, too, about what is a prudent
set of assumptions.
Mr. Stutzman. But why the big spike in 2013, 2014, and
everything levels back off to--you have 2.9, 2.6 and then 2.5
the remaining 3 years.
Secretary Geithner. The way I think economists think about
how recoveries happen is that in the early stages of recovery,
you should grow above what they call the trend rate of growth.
And ultimately you return to the trend rate of growth. Again,
for our economy, trend growth is like 2\1/2\ percent of GDP in
real terms over time. But as you are digging out of a hole like
this, you put more people back to work, you start to absorb
that excess capacity in factories across the country, you will
grow more rapidly in the initial stages. But all economists who
look at our economy now would agree that growth would be faster
in the near term than it will be if you look out 5 to 10 years.
Mr. Stutzman. But my fear is if we are going to continue to
grow the national debt--I mean, we are looking at interest in
2010 of 196 billion, expenditure to the Federal Government. In
2021, 844 billion in interest payments is what I see on page
176. When are we going to give people confidence that they can
start investing money here, because a deficit just may take--
potentially a tax increase is coming. I am going to take my
money, and I am going to invest it somewhere else where the tax
climate is better, where I see a government that is under
control.
Secretary Geithner. Again, this is not rocket science. You
are exactly right. What you need to give the American people is
clarity of what it is going to take, what is going to happen to
taxes and spending that bring those deficits down, and we can
afford them over time. That is what our responsibility is. And
it is very important to confidence that you start to put in
place those sets of changes and let that happen. And again, you
need to lock them in over time so people don't think you are
going to change every year.
Mr. Stutzman. But do you really believe this budget--I
mean, we have talked about it earlier. Some of the folks said
that, you know, it is Congress that passes legislation, and I
agree with that. But if Congress passed this bill, this budget,
I mean, to me, I think it is irresponsible. And to send a
message to the American economy that we are going to continue
to grow deficits, we are going to continue to grow--not
deficits--grow debt, where is the confidence going to come out
of this budget?
Secretary Geithner. Let me take the slightly more
optimistic side of it. If Congress were to legislate a set of
tax polices and expenditure policies that achieved this level
of deficit reduction, then two things would happen. One is the
world would be much more confident than they are today that we
have the political will to act, to live within our means. But
people would also say that that is a pretty good step, pretty
good start, but ultimately we are going to have to do better
than that longer term.
But if you did that--I don't mean just a precise mix,
because we are not suggesting you legislate exactly this mix of
things, but if you legislated that deficit reduction, and it
was clearly committed and locked in over that period of time,
that would be an enormously positive first step towards
restoring people's confidence that this will work.
Mr. Stutzman. I appreciate that, and I am looking forward
to taking action with that. Thank you.
Chairman Ryan. Obviously, we dramatically disagree with
your interpretation of your budget, but we will leave it at
that.
One final housekeeping detail. I ask unanimous consent that
Members be allowed 7 days in which to file questions for the
record. So ordered.
[The information follows:]
Questions Submitted for the Record and Their Responses
questions submitted by chairman ryan
1. The President's Budget requests a 34% increase for U.S.
contributions to the multilateral development banks reflecting recently
concluded negotiations for the replenishment of the concessional
lending facilities and general capital increases of several
institutions. These replenishments and capital increases were
negotiated by the Treasury Department while the U.S. was facing
deficits in excess of $1 trillion each year.
For each institution for which replenishment is requested, please
provide a table showing how much the U.S. pledged in the previous
replenishment and how much the Treasury has pledged in this
replenishment.
u.s. pledges in new replenishments (vs. previous)
International Development Association: $4,075.5m ($3,705m)
African Development Fund: $585m ($468.05m)
Ongoing Replenishments (vs. Previous):
Asian Development Fund: $461m ($461m)
International Fund for Agricultural Development $30m ($18m)
Multilateral Investment Fund: $150m (This is the first
replenishment of the MIF.)
Global Environment Facility: $575m ($320m)
2. The U.S. has for over a decade provided less actual funding than
the Treasury Department had pledged in replenishment negotiations. Was
this historical pattern considered during the most recent round of
negotiations and what steps could be taken to better align the Treasury
Department's pledges with the amounts likely to be appropriated by
Congress?
As we approach any new pledging at the multilateral development
banks, Treasury is mindful of only making pledges where we can deliver.
As a result, we work closely with Congressional staff during the
negotiation process to get their input and feedback. This process
directly influenced what amounts we were willing to pledge in the
replenishment negotiations last year.
3. For each institution for which a capital increase is request,
would the U.S. voting share decline (and by how much) if the U.S. share
of the capital increase is not fully funded?
The decline in the U.S.'s relative shareholding would depend on the
extent to which U.S underfunds the pledge to purchase shares, the rate
at which other countries purchase their shares and the governing rules
of the institutions themselves. However the following consequences are
clear:
International Bank for Reconstruction and Development GCI
and Selective Capital Increase (SCI): If the United States were to make
no payment towards the IBRD's GCI and SCI, and if other shareholders
were to obtain the shares that had been allocated to the United States
for these capital increases, U.S. shareholding would fall from 16.8
percent to 11.6 percent. With this decline, the United States would no
longer be able to veto changes to the Bank's Articles of Agreement.
This could affect issues such as the role of the President of the World
Bank, entities eligible to receive loans from the Bank, membership, and
role and responsibilities of the Board of Executive Directors.
African Development Bank GCI: The United States' present
voting power in the AfDB is 6.616 percent. The United States is the
second largest AfDB shareholder (after Nigeria), the largest non-
regional shareholder, and the only member to have a single-country
constituency in the Executive Board. If the United States were to make
no payments to the AfDB's sixth general capital increase (GCI-6), U.S.
voting power would decline to 2.197 percent once all GCI-6 shares were
fully subscribed. This assumes other shareholders (e.g. China, South
Africa) would take up the shares not subscribed by the United States.
This could put the ability of the U.S. to hold a single country chair
in serious jeopardy--the U.S. has never shared a chair with any country
at any MDB and it is unclear whether or how the voting mandates could
be implemented in such a case. If the United States fails to pay its
first installment of GCI-6 by mid-June 2012, when the grace period for
payment of the first installment expires, the United States would
forfeit its right to the full amount of shares designated to it under
GCI-6, and these shares would be made available for subscription to
other shareholders.
Asian Development Bank GCI (First year in US budget
request = FY2011): If the United States were to make no payments to the
AsDB's GCI, U.S. shareholding would decline to 5.19% from the normal
shareholding of 15.57%. A normal voting power under full GCI payment
would put the U.S. at parity with Japan for leadership of the
institution and retain the joint veto with Japan. However, because we
have not yet made our payments, the United States has fallen to number
7 in shareholding at the AsDB, behind China, India, and Indonesia.
Japan, Canada and Australia are also ahead of the U.S. because those
countries have provided their entire capital contribution.
Inter-American Development Bank General Capital Increase
(GCI): Under the Bank's Articles of Agreement, no increase in the
subscription of any member to capital stock can become effective if it
would reduce the voting power of the largest member (the United States)
to below 30 percent. Given that the current share of the United States
is just above 30 percent, if the United States fails to provide its
subscription, the GCI cannot go forward. The outcome would be that the
capital base of the IDB would stay at $101 billion instead of
increasing to $171 billion. Given that the IDB is the largest source of
development finance in the Western Hemisphere, this would have
considerable economic and political repercussions.
questions submitted by mr. honda
1. Thank you Secretary Geithner. As these budget hearings unfold
against the backdrop of the slash and burn Continuing Resolution being
debated on the floor, it has become clear that this is a debate between
two competing visions of the country. The Democratic vision of helping
America's small businesses and working families forge a 21st century
economy; and a Republican vision that is coldhearted, foolhardy and
dangerous.
Secretary Geithner, Republicans are trying to build a straw man out
of entitlement reform. But we know that for the next decade our budget
deficits are driven by an endless war in Afghanistan and tax breaks for
the wealthy.
Your budget does not continue all of the tax cuts that expire at
the end of 2012. The budget documents indicate that this would save
$953 billion compared to extending all of the tax cuts, including
interest savings. So if you wish to make all of the tax cuts permanent,
you would have to find nearly $1 trillion in additional deficit
reduction in order to match the deficits in the President's budget. Is
that correct?
Yes, that statement is correct. The figures you cite refer to the
cost over the ten year budget window of permanently extending the 2001
and 2003 income tax cuts for high-income taxpayers (those married
filers with incomes over $250,000 and single taxpayers with incomes
over $200,000) and the estate tax cut enacted by the Tax Relief,
Unemployment Insurance Reauthorization, and Job Creation Act of 2010,
which expire at the end of 2012. The total amount is comprised of $709
billion from extending the income tax cuts for high-income families,
$98 billion from extending the estate tax cut, and $147 billion of debt
service associated with the foregone revenue.
2. The President has made it clear that we need to invest in
education. Today you mentioned three critical areas for investment:
early childhood, teacher preparation, and financial support for higher
education. In contrast, Republicans believe that cutting our
investments in education is critical to creating jobs and growing the
economy. These are vastly different approaches and only one can be
correct.
Can you explain why the President is investing in these three areas
of education--and also can you hazard a guess as to what the effect of
the Republican alternative of cutting education investments would be on
job creation and economic growth?
It is crucially important to invest in education. As the President
noted in his State of the Union address, America has fallen to ninth in
the proportion of young people with a college degree. Having an
educated and skilled workforce is critical to competing in the global
economy--workers with a college education not only earn higher wages
for themselves, but also increase the productivity of those who work
with them and of the economy overall.
The President's goal is to have the highest proportion of college
graduates in the world by 2020, and as such, the Budget proposes
targeted investments that address every stage of a child's education to
help us reach that goal. Providing children with high-quality early
learning programs before gaps in learning develop can reduce the need
for more costly and difficult interventions later on. Research suggests
that high-quality early learning programs can have a significant impact
on participant outcomes as adults, including on earnings.
questions submitted by mr. calvert
One area that I believe has a major impact on our nation's economic
recovery is the stability of the commercial real estate industry. A
healthy commercial real estate market provides more than 9 million jobs
and generates billions of dollars in federal, state and local tax
revenue. However our commercial real estate market continues to suffer
from reduced operating income, property values (down 43% across the
board), and equity and this has a direct and lasting impact on the
stability of tens of thousands of small businesses and small and mid-
size banks.
An estimated $2.2 trillion worth of commercial real estate loans
will be coming due over the next decade, with a very limited capacity
to refinance. This has a potential to wreak havoc on the broader
economy. As we've all seen falling commercial real estate values have
forced many small regional and community banks to take steep write-
downs, which has resulted in bank failures and a reduction in credit.
1. What specific policy prescriptions do you think are necessary to
reverse this trend?
2. In terms of the banks, what can be done to minimize these write-
downs and failures, without further constraining commercial real estate
lending?
3. Is there something the U.S. Treasury can do to help mitigate
this problem?
We share your concerns regarding commercial real estate, small
businesses, small and mid-size banks, and, more generally, the broader
economy. In order to promote robust small business activity, the
Administration and Treasury have taken various measures to address the
health of commercial real estate market, increase liquidity for small
and mid-sized banks and incentivize small businesses to drive the
economy forward.
To promote liquidity in the securitized commercial real estate
sector, the Department of the Treasury launched, or partnered to
launch, two liquidity initiatives, the Term Asset-Backed Securities
Loan Facility (TALF), a joint Treasury and Federal Reserve program, and
the Public Private Investment Program (PPIP). Both TALF and PPIP have
played a significant role in supporting market functioning,
facilitating price discovery and helping restart this $600+ billion
market.
Since the announcement of PPIP in March 2009, prices for legacy
CMBS securities eligible for PPIP have appreciated between 70% and 300%
with many of these securities now trading at or above par value. With
increased liquidity and tightening of spreads, holders of these
securities, such as banks, have capital available from which new
lending activities can be supported.
In addition, there have been 19 new CMBS transactions representing
more than $16 billion in new issuance following an 18-month period in
which there was no new issuance. Although smaller than the levels of
annual issuance prior to the onset of the financial crisis, this level
of new issuance represents a meaningful step in the recovery of the
markets for CMBS and commercial real estate.
In addition to TALF and PPIP, in September of 2010, the President
signed into law the Small Business Jobs Act. The Small Business Jobs
Act established the Small Business Lending Fund (SBLF), an initiative
that encourages lending to small businesses by providing capital to
community banks and other eligible institutions. The SBLF incentivizes
financial institutions to provide credit to small businesses by tying
the cost of capital to the volume growth of the institutions' small
business lending portfolio helping to get small businesses off the
sidelines. To date, over 600 banks have applied to participate in the
program. In addition to the SBLF, the Small Business Jobs Act includes
eight small business tax cuts and extends Recovery Act provisions
temporarily eliminating SBA fees. The Act also established the State
Small Business Credit Initiative, which will provide $1.5 Billion to
cash-strapped states to support innovative credit programs, supporting
the creation of $10 of new private sector lending for every $1 of
federal funding. These measures encourage small business hiring and
investment and help creditworthy businesses secure the capital they
need to restore our economic prosperity.
As you know, I remain concerned about the economic risks posed by
commercial real estate and am curious about what your thoughts are on
the need to restructure some $1.5 trillion of commercial real estate
debt that remains on bank balance sheets.
Credit availability in the commercial real estate market today is
scarce, and we need to be on the offensive to aid this sector. It may
be that one of the factors inhibiting foreign capital coming into this
sector is the Foreign Investment in Real Property Act (FIRPTA), a law
that penalizes foreign investment in real property versus other asset
classes.
In 2007, the Treasury made a ruling to tax the proceeds of
liquidating real estate investment trusts (REITs) as the sale of real
property rather than as stock, thus subjecting them to FIRPTA. This
ruling helped dry up foreign investment in real property in the US.
1. Wouldn't this be a relatively cost-effective way to help fill
the estimated $1 trillion equity gap in commercial real estate?
2. Do you have any plans to reexamine the 2007-55 ruling?
The Foreign Investment in Real Property Tax Act of 1980, or FIRPTA,
generally subjects foreign investors' gains from the sale of U.S. real
property to the same net-basis taxation that is imposed on U.S.
taxpayers. IRS Notice 2007-55 clarifies that foreign investment in U.S.
real property that would otherwise be subject to tax under FIRPTA
cannot avoid tax simply by placing the U.S. real property in a REIT.
We do not see a sound policy reason to favor investment through
REITs over direct investment in U.S. real property or investment
through other structures. In addition, we are not aware of any evidence
that suggests that changing the result of IRS Notice 2007-55 would
significantly increase foreign investment in U.S. real property. In
fact, in the years since the issuance of Notice 2007-55, foreign
investment has continued to increase as a percentage of U.S. net real
estate investments.
questions submitted by ms. kaptur
1. The cost of this housing crisis caused by Wall Street abuses
through the creation of asset-backed securities made a few very greedy
bankers quite wealthy at the expense of millions of ordinary citizens
and doing great harm to our republic.
This cost is also being placed on the backs of U.S. taxpayers.
Reports show that the true direct costs involve trillions of dollars,
and according to numbers I have, these include 12 Treasury programs
thus far have cost taxpayers over $700 billion, of which the TARP is
merely $380 billion; 24 Federal Reserve programs have cost $1.738
trillion. And for the next three years, Treasury has engineered
unending support, regardless of the dollar amount, to Fannie Mae and
Freddie Mac. So far, we've spent $61 billion on Freddie Mac and $83
billion on Fannie Mae.
All this debt is being financed by foreign borrowing with China now
number one financier to our country, followed by Japan and the Middle
East oil exporting countries. But snug up against them is the major
role of the Cayman Islands, and I would like to ask unanimous consent
to place in the record a report on foreign portfolio holdings of U.S.
securities.
Is there a transparent list of which Cayman Island financial
institutions hold the lion's share of the debt that they are financing?
The Department of the Treasury's reporting systems on foreign
portfolio investment in the United States collects information annually
on the holdings of U.S. securities held in the aggregate by all
residents, both public and private, in a foreign country. The
information is provided to Treasury by U.S.-resident custodians who
hold in custody U.S. securities for the account of foreign residents.
The information provided is the amount, in aggregate, for a country. It
does not identify holdings by specific foreign entities in that
country. This basic data is supplemented by data on net purchases,
again collected on an aggregate basis, to make estimates of monthly
holdings of U.S. Treasury securities.
As of December 2010, Treasury estimates that total holdings of U.S.
Treasury securities by residents of Caribbean Banking Centers were
$168.3 billion, or 1.2 percent of total Treasuries outstanding. Total
holdings attributable to the Cayman Islands were $92.3 billion, or 0.7
percent of total Treasuries.
2. How much interest will our government pay this year to foreign
interests who finance our debt?
Approximately half of the projected $250 billion in net interest
payments on the debt for 2011 will be paid to foreign holders of
Treasury securities.
Chairman Ryan. We have kept you a while, and we started
late, so I thank you for your indulgence, Secretary. This
hearing is adjourned.
[Whereupon, at 4:55 p.m., the committee was adjourned.]