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tv   U.S. House of Representatives  CSPAN  February 9, 2010 10:00am-1:00pm EST

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libraries also pick up some host: of the tab what is the role of the military in these guest:: primarily, planning, logistics, execution. think of the ronald reagan funeral and the military components. think of the fligy-by. it is understandable that is is the military district of washington. host: democratic line. good morning. turn the television down. caller: my question is, i saw on the history channel were the talk about abraham lincoln's tomb being desecrated. how many have been desecrated and he was responsible for their security? guest: that is a great question. abraham lincoln's tomb was broken into on election night 1876. a group of counterfeiters hoping to spring their boss from jail.
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they were in full treated. they got into the tomb and opened it to, and then they were arrested. from the best of my knowledge, it is interested when use a desecration, it is interesting, both washington and abraham lincoln had their caskets opened years after the president's died. ostensibly by groups of people who wanted to make sure that that was who was in the casket. that might be a form of desecration. in 1901, the last time abraham lincoln was moved, there was a grave robbing an effort. abraham lincoln now lies under 10 feet of concrete and steel out there in springfield, illinois, but they cannot help themselves. there is this group there that opened the casket. one of the members said to get on your bike and come up here. when the boy grew up and died in
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1961, a man had the distinction of being the last team in being to gaze at the face of abraham lincoln. host: richard norton smith, we have run out of time. there many more stories in the book including new chapters and a new foreword by one of our contributors, richard norton smith. douglas brinkley also contributed. that does it for today. we will be back tomorrow. we want to bring in up to the senate budget committee. they're looking at the economic crisis and its aftermath and the impact on the federal budget and debt. .
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>> i don't know whether the boats scheduled the second will come off or not. for those who are thinking about tomorrow, we have a hearing scheduled for tomorrow. we will make a decision about that very soon because we have witnesses lined up. one thing we are considering is moving the hearing tomorrow until the next day and light of the threat of additional snow. this afternoon and through the evening and into tomorrow is when it will happen. if we get another 10-12 inches it might be very difficult for witnesses to get here.
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i am fortunate because i live about 10 blocks away. i can always get here. i want to thank the witnesses. this is an important hearing on the economic outlook for the federal budget and debt. we're joined by an extremely distinguished panel of witnesses, dr. carmen rhinhart. welcome. good to have you here. dr. simon johnson, professor and entrepreneur shik/ atí@ mit an institute for international economics. he has appeared before this committee in the past for it we always enjoyed his commentary. and his testimony. dr. donald marin from georgetown and a former acting director of the congressional budget office. always good to have you back for
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the committee, as well. he has served in a very distinguished way in the congressional budget office. we have always been indebted to him for his service there. this is dr. rhinehart's first appearance before the budget committee and we want to make her feel at home. dr. johnson and dr. marin are both well known here before the committee. as the title of our hearing suggests, we will focus on the nation's economic outlook and the rest we are facing that could affect the outlook, the federal budget, and the nation's debt. i would like to begin with a brief review of our economic situation. i think we all know that when a president obama took office, we were in the midst of one of the worst recessions since the great depression. the president moved quickly to follow up on the steps that have been taken by the previous
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administration to avert an even sharper economic decline. those policies, i think, are clearly working for the actions taken by the federal government or the last year have clearly helped pull us back from the brink. we have seen a dramatic turnaround in economic growth in the first quarter of last year. it was a -6.4%. but last quarter of last year, it had improved to a positive 5.7% growth. it is important to say that none of us anticipated that that level of economic growth will continue. many of us seek a more tepid level going forward. we have seen a steady improvement in the jobs picture. according to the estimates we received last february -- last friday, in general lester, the economy was losing more than 800,000 private-sector jobs in one month. that was up from a previous
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estimate of 700,000. looking back, we can see that in january of last year, the job loss was running about 800,000 per month. by this january, the economy was losing about 12,000 jobs in one month. that is a dramatic improvement but still short of where we need to go in terms of dramatically reducing unemployment. i must say that all of these numbers, to those who are suffering the consequences of a weakened economy, their numbers on a page. if you are someone who is unemployed or cannot find sufficient work or are underemployed, these numbers are cold comfort to you. it is important to realize that things are improving, at least the freefall that we are in has been stabilized and we are starting to move back in the right direction. according to estimates we received friday, the unemployment rate did fall to
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9.7%. that is still far too high. last year's recovery package is still providing stimulus. we know that the impact on economic growth probably peaked during the third quarter of 2009. according to an estimate from goldman sachs, the recovery package provided 3.3% of the increase in real gdp at its peak during the third quarter. following the third quarter, the contributions to growth from the recovery package start to diminish. given the high unemployment rate, the continuing concerns about the economy, and the fact that they impact of the recovery package has started to wane, i'd think it is appropriate for us to consider additional job creation measures at this time. i would like to hear from our witnesses, their views on the benefits of enacting such measures at this time.
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the economic downturn and the federal response to it has contributed significantly to the worsening of our budget out loud. this is the other side of the picture. in the short term, measures that were taken to stabilize the economy and stop a precipitous collapse, have been affected. we know there is a price to be paid and the price to be paid is increases to our deficits and debt. this chart depicts the projected deficit under president barack obama's proposed budget over the next 10 years. it shows the deficit coming down from a high of $1.56 trillion in 2010 to $706 billion in 2014 and then slowly resuming its climb back to $1 trillion in 2020. i have said before that i can understand increases and deficits and debt in the short term to deal with an economic
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weakness and to prevent economic collapse but i am increasingly concerned about the out years. we're 0(ñ on an unsustainable path. i'm concerned that the president's budget does not focus sufficiently on our long- term need to deal with the debt threat. athe nation's debt outlook is even worse, particularly over the long term. the fact is, we are on a completely unsustainable course long term. i personally believe we need a two-prong strategy going forward, one for the near term, one for the long-term. in the near term, i believe we must emphasize policies that encourage job creation in the private sector. for the long term, we must give it to control our debt. the economic security of our nation depends on it.
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with that, i will turn to senator sessions for any opening remarks he might want to make and will go to our witnesses and we will have a chance for questions from the panel. again, senator sessions, thank you so much for being here. it speaks very well other man from alabama to be here with the weather conditions we are currently experiencing in this city parade in north dakota, no big dea. i am sure in alabama this would. be an all-out emergency. >> it is fine for me. i walked around and saw the beauty of the snow. it is really a stunning sight. it causes difficulties for travel. >> if you like the beauty of the snow, i would like to invite you to north dakota. [laughter] any time in january or february of next year, maybe spend all of january and february. >> maybe we can invite you south
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would be a better idea. thank all of you for coming and i look forward to your discussion. i, frankly, don't know how well our actions worked after the collapse in the financial markets. those who supported it, promoted it, funded it, ran it all tell us that if we had not done it, we would be so much worse than we are today. forgive me if i am not sold. i just believe that a lot of things had to be done. i supported a number of things but the fundamental actions that we took were troubling to me. we know we had to act and the congress had some things that we needed to do. i am troubled by it all.
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tarp -- $700 billion had to come in before the asian markets opened the next morning, they told us. when president bush left office, he had not spent half of it yet. one man was allocating $700 billion. 4 give me if i am uneasy about that. that $700 billion was distributed in ways directly contrary with what congress was told her we were told it was about toxic assets. in one week, there were buying stock in companies, insurance companies, then by an automobile companies. just forgive me if i am not happy and the american people are not happy. second, the stimulus package, the $787 billion, is now $840
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billion because we are spending more under the commitment we made in intended when we passed it. i think it has produced little. in fact, i think it is one of the great tragedies in the history of the country that we have gotten so little out of such an incredibly large expenditure, the largest single expenditure in american history. i don't think it has gone very well. i don't think it has created jobs they projected it would create, even. the bill that some of us supported for half the cost, according to christina romer's analysis would have created twice as many jobs and have the debt impact in our country. we have some serious problems.
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one thing that happens with budgets that the cbo might be aware of. most americans are not part of the only year that really counts is the year you were in. the year we are in, for as a result of the stimulus package, like a house version that he praised the state of the union, it has $100 billion more. he is counting 170 billion in the next 10 years but he is not counting the $100 billion this year. it is a violation of last year's budget. we will have to have vote
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sufficient to raise the spending levels through emergency designation, i guess, to spend that money this year. i guess what i am saying is that what i am hearing from the incumbent administration that concerns me is is it is always next year, next year. we have to do all this this year. we will not worry about how much debt is being run up this year. we will worry about it next year. the chart you put up, mr. chairman, is, however, the budget that they are sorting. we have to. reduce the to -- we have to reduce the budget. the democrats are saying to take the budget we passed last year and follow those numbers. that was basically to% increase over the next five years but we did not get the 60 votes necessary to pass it. that would have been a real step, i think, to help us send a
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message to the whole world and the american people that we are going to contain discretionary spending, at least, for a while. mr. chairman, you have discussed how we can reduce our entitlement spending. we have to act. i hope to look forward to hearing from you. the american people are unhappy with us. they're not happy with us. unemployment is high for the numbers were not good as last week. another 20,000 increase in unemployment and i think it takes about 800,000 increase to begin to reduce the number, the total unemployment number. i am really worried about unemployment. we want to have growth and ñ=rhopefully, we can. mr. chairman, thank you.
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i'm sorry senator gregg is not here. i know he has difficulty getting here. i know you and he had worked on a number of issues that i hope to be able to work with you, too. >> thank you, senator. thank you for being here. we will now turn to the witnesses. dr. carmen rhinehart, professor of economics at the university of maryland. it is timely for you to be given developments on the international front. please proceed with your testimony and we will go to dr. johnson and dr. marin. >> thank you anmembers of the committee for the opportunity to comment on the u.s. economy and the budget and the debt. & department of economics at the university of maryland. i suspect that i was invited here today because for more than a decade, my research has been
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focused on various types of financial crises. that includes the fiscal implications and other economic consequences. one of the main lessons of emerging from this work is that across countries and over time, severe financial crises followed a similar pattern. in a paper written over one year ago with my co-author, we examine the depth and duration of the slump that invariably follows financial crises. the recession's following severe post-world war two crises tend to be protected affairs. asset market collapse were deep, prolonged and realizing -- housing prices declined at least 35% for this decline stretched out over six years.
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equity prices collapsed on an average of 55%. the recovery from the bottom was quicker. to put it in context, in the present downturn here in the united states, a real housing prices have already fallen 36% from their february, 2006 peak. not surprisingly, banking crises are associated with profound declines and output in employment. the unemployment rate rises an average of 7% over the down the face of the cycle. it last an average of four years. we are following this tractor the u.s. unemployment rate bottomed at 4.4% in december, 2006, about six buns before the crisis broke. at its recent peak level, in october, 2009, the unemployment rose 5.7%.
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historically, these conditions produced a budget deficit. correspondingly, the real value of government debt xsoars, rising an average of 86%]x in te major post-world war two episodes. the main cause of the debt explosion is not the widely cited cost of bailing out the banking system nor is it the fiscal stimulus. many countries in our samples did not estimate such policies. the critical factor is the collapse in tax revenues. that follows in the wake of deep and prolonged economic contraction. our estimates of the rising government debt are likely to be conservative as they do not include increases in government guarantees which also soar. the government debt has been
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soaring in the wake of the recent global maelstrom expect in the epicenter countries. i completed work a few weeks ago that calculated the increase in inflation-adjusted public debt that has occurred since 2007. for five countries with systemic financial crises, which includes the united states and united kingdom, the average debt levels are up by about 75%. this is even in countries that have not had a major financial crisis, that rose an average of 20% in real terms between 2007 and 2009. our main focus is on the longer term macroeconomic implications of much higher public and external debt. we examined in this work, the experience of 44 countries,
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spending up to two centuries of data on central government debt, inflation, and growth. ain findings is that across advanced countries and emerging markets, high debt to gdp levels, debt levels, gross debt about 90% are associated with notably lower growth outcomes. above 90%, median growth rates fall by 1%. average growth rates fall considerably more. in addition, for emerging markets, there appears to be a tighter threshold for external debt, a lower threshold so that when external debt reaches 60% of gdp and the growth decline by the about two% and for higher levels of debt, growth is cut about in half. our international and historical
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experience shows that seldom do countries simply grow their way out of their debt burdens. there are also household thresholds of debt near 90%. the exact mechanism is not certain, we presume that at some point, interest rate premiums react to unchecked deficit to, forcing governments to tighten fiscal policies. higher taxes have an especially deleterious effect on growth. we suspect that growth also slows as governments turn to financial repression to place debt at sub-market interest rates. there are other vulnerabilities associate with debt buildup that depend on the composition of the debt itself. one common mistake is that the sources for government could play the yield curve, shifting to cheaper, short-term debt to economize on interest costs.
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unfortunately, a government with massive short-term debts to rollover its ill-positioned adjustment does not work. even aside from high and rising levels, many advanced countries, particularly in europe right now, are saddled with extraordinarily high levels of externalv debt or debt issued abroad by both the government and private entities. in the case of europe, the advanced country average exceeds 21% of gdp. -- 200% of gdp. in private debt, u.s. debts exceed 300% and they are at their highest level since 1916 or the historical statistics of the united states beginyf/imoo record this data.
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current high private domestic and external debt burdens would also seem to be an important vulnerability to. to monitor. downgrades follow desperate given these risks of higher government debt, how quickly should governments exit from fiscal stimulus? this is not an easy task, especially given weak employment in the united states and elsewhere. in light of the likelihood of continued weak consumption in the u.s. and europe, rapid withdrawal of stimulus could easily tilt the economy back into recession. to be sure, this is not the time to exit. it is, however, the time to lay out a credible plan for a future exit. the sooner our political leadership reconciles itself to accepting adjustments to lower the risk of;çñ truly paralyzing
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debt problems down the road, the likes of which we are seeing in europe right now. although most governments still enjoys strong access to financial markets at very low interest rates, market discipline can come without warning. countries that have not laid the groundwork for adjustment will regret it. this time is not different. thank you. >> thank you for your excellent testimony. we'll go to dr. johnson next and then dr. marin and we will open one year ago, i was before this committee and i came to the conclusion that we faced a pretty tough year. i think that discussion turned out to be exactly right. my recollection is that we discussed contraction in the global economy for the first time since world war two, roughly around 2% on a year-
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over-year basis. the latest number for 2009 is eight -0.8% decline. we are exactly the right place. at this stage, we should discuss the recovery. when you have a sharp decline, you have a fairly rapid recovery. the numbers that you showed us for the fourth quarter of last year are encouraging in that direction. i am worried about the dynamics that we face during this year. i think there is a great deal of volatility ahead, some of which is domestic for the reasons that professor rhinehart was talking about and some of the global origin. while the headline numbers of this year, the year over year average numbers will indicate a modest recovery if you look at the fourth quarter on fourth quarter numbers, look with in
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2010, you will see something quite different. in the second half of this year, i think there will be a slowdown. i am not suggesting that we will have a double dip recession. i think that the pace of growth is slow and the pace to come back will be slow and i think this is a major concern for the budget and for job creation. my overall projection on the fourth quarter on a fourth quarter basis is that the global economy will grow around 3%. traditionally, that is where the imf would draw the line on global recession. they have moved the goal post over the last couple of years. the 3% global is fairly slow. this rate will be held up by what is happening in emerging markets. we can probe to what extent that is sustainable beyond 2010, if
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5the weaknesses in the u.s. economy are well known. the consumer income is weak and they have a substantial debt with an overhang in housing prices. asset prices, based on the particular global picture, will remain volatile houses do not feel that wealth has gone back up matching the recovery in stock prices. n9xal will not leave this recovery. investment may be stronger but are issues of credit availability for the small business sector, this component of volatile demand is not big enough to pull the u.s. back to the kind of growth you might want. in addition to that, net exports, which has been a brighter part of the picture in the united states over the last 12 months, is likely not to be so strong over the next 12 months.
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the fiscal stimulus continues butted in packs as growth -- but it impacts as growth weakens but we should expect the federal reserve to withdraw support as we go into this spring despite the weakness of the economy and despite the high unemployment. this is what the fed is very clearly indicating. this adds up to a difficult second half that is not the worst part of the picture. the worst part is i am afraid that a serious crisis is brewing in western europe. there are many people who claim that this time is different. i would apply the conclusions that greece has a serious sovereign debt problems. these issues are spreading to portugal and spain. there may be implications for ireland and italy.
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there's a great reluctance on the part of the stronger european countries to help the weaker european countries. basically, they don't have an institutional mechanism in place. they will not, in my assessment, bring in the international monetary fund. i will be happy to expand on the procedures behind that assessment. put all this together and you're looking at a substantial shock to government credit. you'll see this in interest rates and credit defaults swaps spreads. ñ'the big unknown in this pictue is what will happen to the financial sector. we still have too big to fail banks. we can reasonably argue that as we wait for financial reform to come through, this problem has not been addressed. it has gotten worse. the europeans have it -- have
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this problem on a much larger scale. they're big banks are bigger relative to their economies. some of these big banks are in small economies that cannot sustain, from a fiscal point of view, and additional big financial shock. switzerland has two mass of banks with assets and liabilities roughly six or seven times the gdp of switzerland parted we can argue about the right medicare but if the bank fails, -- about the right metrics but if the banks fail, that will not be a good situation. there's a mass of contingent liability. it is the same on our balance sheet. it is right to stress that the experience where you asked to derive money for toxic assets to buy shares in banks and other companies, i don't think that is off the table. in europe, i fear it will come
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back to haunt us in the united states. that continued liability is very big. i would say is at least 40 percentage points of gdp. if you follow the professor's book, that bears that out. it is hard to say how this will spread to the financial system? some of it will spread to the credit defaults market. it is completely opaque and has not been addressed the problems have not been addressed since the crisis of 1998. these all had fiscal implications. in conclusion, i would like to reinforce what the senators have said and the professor has said about the necessity of the framework. i think you do not want to have fiscal austerity member that would not be the right measure.
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if you're swings into this mode, that would be bad for growth. the euro will weaken any way in my assessment anyway. they and we need an exit strategy and a framework that tells you how entitlements will be handled over a 15-year from work and what the tax base is and what the gap is between those. when you said the debt has to be controlled, you are absolutely right. japan's sustained as for a long time but this is catching up with them in the last 20 years. most of the debt is held domestically. a large amount of our debt is held by foreigners this has a large consequences. think you. >> thank you. dr. marin, welcome back, always good to have you here. please proceed. >> thank-you for having me up to
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talk about the economic outlook and fiscal situation. i want to say that i have previously appeared before you in a professional capacity working for the congress and i am appearing as a private citizen and i find this incredibly liberating to have my own opinion. so, watch out. as this committee and its members are aware, our nation is on an unsustainable fiscal path. we will run $1 trillion deficit in the years ahead even after the economy recovers. persistent deficits and rising debt will undermine prosperity and weaken our position in the world. those threats deserve immediate attention but as this committee is well aware, our economy remains fragile. payroll employment has fallen by 8.4 million jobs since the beginning of the recession and unemployment levels are record highs.
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we had strong gdp growth in the fourth quarter but the economy has a long way to go. you face a difficult challenge of balancing concern about current economic conditions with a meaningful response to our fiscal crisis. the first point i want to make is that we should not expect a rapid recovery. it is a good sign that the economy grew in the last quarter of last year but for a whole host of reasons, i would not anticipate that to continue. we're in our recovery path but it is a moderate or modest path. second, uncertainty is one factor that has been holding the economy back. uncertainty discourages investment and hiring and undermines a growth. put yourself in the shoes of someone to -- who might make an investment or hire someone.
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the good news is that economic concern has gone down dramatically. the economic environment has improved and is more conducive to grow pretty bad as that policy uncertainties are high. some of your constituents are met with you and i spoke to some business people and many of them are upset about the uncertainty. they do not know what is happening with tax policy or health care in addition to what they don't know what is happening with theb economy having worked in government for a long time, i understand that these uncertainties exist but i think there are opportunities to get rid of unnecessary uncertainty and to give people more clarity about what the future hold pretty extreme example would be what is happening with the estate tax which is a personal thing. there are many other examples on the tax side. number 3, persistent deficits and rising debt poses serious risks to long-term growth.
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concerns about the near-term economic outlook should not deter congress from taking steps to strengthen our fiscal position over the next decade. fiscal consolidation should not take place immediately. congress should begin now to plan for deficit reduction and stabilization in later years. we need an exit strategy and that include clear goals and credible means for achieving them. president barack obama outlined some steps in that direction in his budget but i feel they fell short of what is required. vgxsto address that concern, the president proposed the creation of a fiscal commission that log up until 2015. first, i don't think the target is aggressive enough. it would have the effect of stabilizing jet -- debt to gdp.
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my own personal preference would be to see it come down to a number by 60% of gdp. i would like the target to be more aggressive. the institutional procedures of the proposals are troubling. in natural -- a natural -- a national statutory commission i have concerns about whether a statutory commission can get there. i would look for something that has the power where everything would be onwc÷ the table. i am troubled when some people say that social security should be off the table and tax revenues. i think if we try to address the fiscal concerns, you need to look at everything. i am looking forward to seeing with the details of that corporate we need an exit strategy, definitely fourth,
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bringing long-term to the present day, a credible plan to reduce future deficits is not just about the future. if we do it well, it will help keep long-term interest rates low today. that will help the recovery. fifth, g restraints. that should receive greater emphasis because spending is the primary driver of our budget balanced and higher government spending retards growth. as policy-makers consider how to finance a larger government, they should give special attention to figure out ways to make our tax system more efficient. think about ways to tax consumption rather than income. think about ways to broaden the tax base rather than increased rates. the about ways to tax undesirable things like pollution rather than desirable things like working. thank you. >> excellent testimony, all
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three,mwi just terrific. i appreciated very much. let's go right to it. this committee has special responsibility to our colleagues with respect to the budget and it is hard to find a time in our entire history, since the budget committee was formed, when budget policy can have such a profound effect on economic issues and economic growth and all the breast. so, dr rhinehart, you have this responsibility -- if you have this responsibility, what would you pursue? short term, long term, with respect to deficits and debt with keeping your eye on the effect on the economy. what would you advise this committee to do short-term and long-term? >> let me begin by saying that
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in my remarks, i highlighted that i think this is the time to lay out a credible plan for deficit and debt reduction but it is not the time to start implementing that. i would like to elaborate on that remark especially as it pertains to the experience of other episodes including here in the united states. in which victory was declared prematurely and stimulus was withdrawn. this was the case in japan which has had a decade-long lingering crisis. this was the case in the great depression. my work as documented these episodes.
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that risk is one that should be borne in mind and that is what i stress the credible path. the credible path, i think, we could benefit from looking also at the experience of our neighbor to the north, canada in the mid-1990's which implemented very significant debt reduction programs. >> what was the result? >> the result was, i would describe it as a three-fold. one was they achieved their intended goals in bringing their deficits and their debt, the canadian debt profile, that has been reflected in their risk premia which had risen and was
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moving in tandem with the emerging markets by the mid- 1990's. >> higher interest rates? >> higher interest rates, higher debt servicing costs. more volatility. let me add that a second element of their program was also, which i highlighted briefly in my remarks, is paying a lot of attention to how when you have a lot of debt, how dead is managed. d and reducing their reliance on short-term debt end their currency issues. >> dr. johnson, same question to you. what would your advice be to this committee, short-term and long-term? >> i am not a fan of fiscal stimulus i testified before this committee more than one year ago and i said that it was only the extraordinary circumstances due
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to the collapse of our credit system and the other problems that led me to suggest that we should have a stimulus around $500 billion. roughly speaking, i think we wound up in the same ballpark. i would hold back again from further stimulus. i think we need to see what happens. within the menu that the correctional -- congressional budget office assessed for you, addressing payroll taxes, if we comecw that, may be an appropriate approach to consider. i am not ready to do that. in terms of the short term, i am not advocating for stimulus at this time buried in the longer d5lg > is an important one. dr. marin hit the key points like not leaving anything off the table. this is not a call for fiscal austerity immediately. i fear that may happen in europe which will have a negative
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impact on the global economy. that should be avoided. i am calling for them to not do that in europe and by the ways to help themselves. i think that the fiscal commission addresses the colmes of our debt where the project three -- where the trajectory is going. everything should be on the table. that is absolutely critical if you have a credible medium in the united states now, you would have a lot more room to maneuver on short-term measures. i might even right now call for a reduction in payroll taxes if we had a media from work but we don't. that is dangerous. >> you are, in some ways, linking the two in your mind. it would be more credible to do something with respect to payroll taxes, to provide additional lift to the economy if you had some credible process
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in place to deal with a longer- term debt? >> absolutely. fiscal stimulus is something we have moved away from in industrialized countries in the last 20 years because it comes with a lag. it tends not to hit the economy as you hoped. and also when you open. -- and also when you hope. if you can persuade everyone that you're dead is not on an explosive path and you have the legislative or other institutional mechanisms in place that this is not a big promise -- the british government faces huge problems because of their commitment on the fiscal side which are not credible. we don't have that problem the in the united states, yet. you need a fiscal commission to make sure that goes forward. >> doctors marin, same question to you.
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your responsibility is to advise this panel, short-term and long- term, what with that advice be? >> starting with the long term -- what i would personally like to see is a numerical target that lays out in the latter part of the budget what we want to accomplish and what you should -- and what it should be. we should not just make up numbers. you should say something like you want to cap the growth of debt to gdp at like 72% in 2013. >> can i interrupt? you went to an alabama school? that is an excellent school. the lady in the front row is wearing a hat with a big "a" on it. as a great school. >> in north dakota, we make that same claim.
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>> you have a comparative team and we usually lose to them in the playoffs. thank you for coming. >> thank you. >> i had a hard day and this know you're probably enjoying it. sorry to interrupt you. >> no problem at all. >> 70% of the debt to gdp ratio in 2013 is a goal. >> 70% by when? >> and then 60% by the end of the budget window. the peterson commission put out a goal of getting to 60% by 2013. i'm talking about being less aggressive than they are. this morning, i looked at a plan that would get us on that path. >> it is daunting. >> it is, it is truly daunting.
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i hope that my colleagues understand how serious the situation is that we confront. it is dire. the long-term circumstance that we confront is truly dire. we are not in as bad a shape as japan, debt to gdp. we are not in as serious a shape as parts of western europe that confronted debt crisis today but it is very clear that we could, in very short order, confront our own debt crisis and the consequences to this country would be enormous. i wish it were not so. i wish it were not so. if you study the trendline that dr. marin and dr johnson, and
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doctors rhinestone, if there's anything that jumps out to you 10 years and out, we are really facing consequences that could have enormous adverse impact on this nation's economy. do you agree with that statement? >> absolutely. >> what leads you to that conclusion? i said something that in some circles is very controversial. why do you think that is true? >> this is something i have relied on the research of my colleagues. if you look at history where this has been experience in other countries, getting a path ends in tears. it is something where we remain foot the cost about as a beneficial thing to do. we have not covered all the
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reasons for iit. there might be a snowball effect and you have yourself a much worse a circumstance. our ability to borrow is our rainy day fund. we have used up -- it has been raining so he had used a lot of that opportunity walked that back down so if something unforeseen happens eight years from now, you can go to the world capital markets again and borrow more money. you lose that flexibility if you do not get a more sustainable path. >> i have used my time dirty cinder sessions? -- i use my time. senators sessions? >> i disagree with that last statement. there is almost too much margin you have a crisis and we are using that up today as if we will never be another crisis. i am a little disappointed that
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you seem to be going along with the idea that we cannot begin to ask about spending now. i just do not believe that we can afford to throw another $270 billion of stimulus package when we have so little from the one that we have done dr. johnson, you said you recommended $500 million but it is $845 billion which is quite a bit over, in my view. we have used this margin of. i would criticize the thinking during the bush administration. word leaked out that deficits don't matter. that is what it seems. >> not from me. >> it did and mr. greenspan has
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talked about that, actually. he did not realize what was occurring politically and morally in the country, what was happening was we were losing our discipline and people were buying into that language. yes, we could have carried more debt in 2001 and 2002 but was used -- lose your discipline, it seemed like we went forward as it did not matter and we are now reaching this level of debt above which we are endangering our nation if we go above. i'm just really word about it. dr. marin, you mentioned one thing that is important and i need to put on the table, economists, masters of the universe, i call them, think they could pull the strings to manipulate this massive economy and that is a lot of us and a lot of american people do not
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believe in a growing government. you mentioned that in your remarks about. that about if we get a bigger government. many of us oppose that. we don't believe in that. some modest contentment of spending today may be not enough to satisfy my concerns. and doctors rhinehart, you read commentators and the essence of a lot of things you see in financial magazines and newspapers and articles in all this, a concern the real world out there where people are buying and selling and loading money -- following monday is that it could lead to the devaluing of the currency and a surge in debt can lead to a difficulty like the brits have had in selling their debt and
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could drive up interest rates and a flight to currency. one man called me after a speech last week when i was expressing concern about the debt, he said that we will inflate our way out of it. that is what we always do and don't worry about it. would you share with us any thoughts you have about the danger of that kind of thinking? is that a danger? >> i think the danger -- there are two kinds of danger that i would like to highlight. one is one what i mentioned about higher risk. that will translate to higher interest rates which we are taking for granted the very low, near-zero interest rates and we should not take that for granted. we are on the same line. the second risk i would like to highlight which i briefly mentioned in my remark is the
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growth. one has to take seriously that at high levels of debt, and we are close to the gross debt being at that 90% threshold 3 we are close to it. growth declines by about 1%. this is a fairly robust results. lower potential output growth in and of itself is absent and a source of concern. a weaker dollar would not hurt us. one of the things that has been a drag on this recovery from the crisis is that of one looks at the typical recovery from such a crisis, exports and other episodes, we have not had the
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benefit because a good chunk of the rest of the world is in crisis and in part because the dollar has not really, relative to other experiences, budged. my concerns have to do with the interest rate, the risk, and with the growth of what happens to the dollar. it has been known to go up and down. there is less of a lesson there as far as i can make it. >> dr. johnson? >> i think the situation is considerably worse than you might think. first of all, the debt numbers we are discussing, our federal government debt and if you look across the country, usually the imf procedures are for general government debt which involves other levels of government and that would increase the debt target in dr. marin's target and
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pushes closer to the dangerous threshold that profess rhinehart mentions. the taboo subject is fannie mae and freddie mac. the imf would say to you if they were in a position to speak to the united states, they would say that unless you show was a plan for privatizing these entities which have been talked about, we have to start thinking about these as liabilities to the u.s. government. they hold assets. i would not exaggerate losses but if you're talking about debt owed by the public sector, fannie mae and freddie mac would enter into that picture. . .
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>> if those banks fail, they will come to you and say that we thattarp -- that we need tarp 2. i just spoke to the banking committee last thursday, but i think this is a budget issue -- a contingent liability of this magnitude, an important -- and avoidable one -- reforming
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medicare is a big thing and we have to discuss that and the tax base to support paying health care for people over 65. but contingent liability of the banking system is largely avoidable if you take it on and regard as a budget matter. i think that's a major step in the right direction. >> i would like to welcome the kids from montgomery, alabama. we are glad this group could join us this morning as we're talking about things, mr. chairman, he said earlier, that will affect how much they have to pay growing up. >> on this question of fannie mae and freddie mac, my understanding is is in the cbo numbers and not in the other
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numbers. our determination was we would follow cbo because we think it has to be on budget. if you cannot say this is somewhere off in the wilderness, not accounted for. we have made a determination that would be included in the numbers. >> but that has not been in the past. >> it was not in the past. >> thank you for that decision. >> my understanding is that they have larger numbers in the deficit for the conservatorship of fannie mae and freddie mac, but when you look at their publicly held debt numbers, they have not gone up yet if i understand correctly. they have taken a step, but they have not gone quite as far as dr. johnson would suggest. your question was about inflation and the concerns our fiscal troubles might lead us to pursue inflation as a strategy to dealing with it.
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that's a legitimate concern given what folks have done around the world in the past. but i want to point out that will not work well for the united states. on the spending side, we have an enormous number of spending programs, social security being the most obvious, that are indexed. there is a one-for-one increase in our spending and that's also true for medicare and other programs. increasingly, we started issuing inflation index debt. we have treasury index four protected security, who's in -- whose inflation will rise. -- his index will rise if inflation takes off. it is short term and it could go down because of surprise inflation but the market will charge a premium interest rate and say you fooled us once but we will charge you a higher rate on your three-year bonds. in practical terms, inflation is not going to be an effective strategy, even though it may be a legitimate concern to some folks.
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>> thank you. we do expect, according to the cbo score, interest on the public debt last year was $170 billion. they are projecting in the 10th year of this budget and $800 billion annual interest payment. hugely significant as to how much that would actually be in the out years. thank you. >> thank you. >> thank you for your testimony. professor reinhart, you know that government debt tends to soar in the wake of a financial storm. that is often a result of a drop in revenue rather than spending on stimulus. could the deficit we incurred in the united states have been even larger if we had not invested in building a financial bridge through the stimulus?
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>> one of the things about this situation, to answer you honestly, as we do not know the counterfactual. in the fall of 2008, confidence worldwide was shattered. the stimulus package played an enormous role, not just the stimulus package in the united states, the stimulus packages that went into effect in different orders of magnitude in restoring confidence. you pose a very difficult question for me to answer. i do think that absent a stimulus, i cannot quantify or give a counterfactual as to the student -- as to the stimulus would have been worse. our gdp declined relative to declines in other severe financial crises is smaller.
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our unemployment increases are close to the average, but are still below average. i would have to imagine that given the magnitude of this crisis, which we have not seen the likes of since the 30's because of its global nature as well, absent those actions, we would not be below the average in growth declines and unemployment increases. we would be doing much worse. >> for me to restate that, although you cannot prove the counterfactual, it's possible we could have had the same levels of debt but no signs of the recovery that have been created partially by the stimulus or that we might have even had lower-level of employment and had additional current year deficits, which would be the worst of all cases. >> which is why i tried to
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highlight the japanese experience in that regard. japan, in the mid-1990s, assuming the crisis was over withdrew stimulus, so i'd double dip, and wound up with the worst of two worlds. it is important to remember japan's debt, which today stands at about 200%, was around 70% of gdp before the crisis started. they wound up with both. >> thank you. prof. johnson or mr. marron, with either of you like to comment? >> i would give this to military positive assessment. i'm not a fan of stimulus in general. by think this was a very unusual set of circumstances and i think it saved jobs and prevented damage to potential output you would have seemed otherwise.
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the price of confidence was global and everywhere. the stimulus was an essential part of leadership in turning world economy around. remember the g-20 summit in april where president obama took a very positive brought role and brought a lot of companies with him in recapitalizing the imf and also help to rebuild confidence. that would not have been possible and would not have been credible without the u.s. fiscal cent -- that the u.s. fiscal stimulus. i don't again would have been higher in the short term if we had not been a stimulus, but the medium term prospects would have been much more bleak for this country. the medium term budget issues are mostly, not entirely, about medicare. that's a longstanding problem we have not got around to addressing even though it has been in the cards for a while. that is driven by demographics and the rising cost of health care.
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i would say in contrast to other countries, they're almost all in the same place, they just don't recognize it. the european commission is counting and they are much less obvious than the cbo cost accounting. we're looking at getting growth back on track, preventing the destruction of potential output is very important and helpful, so the stimulus was worth doing. hopefully it will help us tackle the medium term problems. >> i had a bunch of other questions and i am running out of time. >> the standard model and that the cbo uses to analyze the stimulus have technical multipliers that would imply a stimulus does not pay for itself. the choices that you end up with more debt as dr. johnson suggested but you also get economic bang in the short run and there's a tradeoff. >> thank you.
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you had noted that uncertainty is a problem and you mentioned establishing the estate tax. what about the rules of the road in general? prof. johnson noted we had not addressed credit defaults swaps and proprietary trading, derivatives, leverage, many of the risk factors that were inherent in completing the trio here -- professor reinhart noted that following financial crises, there are problems with output. this is the rules of the road for a financial community that does not result in high risk taking followed by a collapse. how important is that we get the rules of the road back in place to address these risks with our financial structures? anyone who would like to jump in on this, i appreciated. >> it is fundamentally
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essential. the problems you just laid out are all wrapped up in what happens if there is another financial crisis? what if major financial players have failed? how does that add to the system? if it's a big enough shock, you could be called upon to use automatic stabilizers are a good thing -- but the problems you identified are fixable, they're not being fixed, they must be fixed for at a responsible budgetary point of view. >> in your written territory -- your written testimony, you addressed europe and greece and so forth. the argument that the stress test we put our banks through has not been -- was not i high- level stress, if you will. if we do not prepare for that, we may have another wave of stress coming that could result in a second financial crisis.
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is that a fair summary? >> yes. the financial system is undercapitalized. the stress tests or not enough. they were not that stressful. i don't think we're facing more financial collapses, but we're facing banks that do not have big buttresses against bigger losses. you'll see a tighter credit conditions throughout the united states and this is a global side -- a continuing weakness in the consumer sector. >> i am out of time. >> because others have gone over and because of the attendance we have because of the weather, i think you should feel free to use another two minutes for 2 1/2 minutes. senator white house, i would do the same for you. >> thank you. >> the issue is that we need good rules and if possible, it would be good to get good rules
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sooner rather than later so that everyone can begin to plan with -- plan with the new environment looks like. i emphasize there are a lot of policy uncertainties hanging over everyone at the moment that makes them difficult for them to plan. some of them in both the previous administration and current one, where it -- we fell back on a lot of discretionary government actions. there was confusion about the role of park and other things. those may have been necessary in the heat of the moment they have created doubts about how we run the system. in clarifying that and clarify ways for firms to behave -- for firms to behave appropriately is a very important. >> we face two issues -- the challenge in the commercial real-estate world that will be coming up. it is here now but will continue over the next year or two. the second is undercapitalized community banks and their ability to do additional lending. on the community bankside, i
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have proposed in the administration proposed recapitalizing banks to enable them to do more lending to small businesses and unable those firms to recharge the economy. on the commercial real estate side, i have heard very few ideas for how we address the challenges folks are rolling over balloon mortgages but trying to do so with a drop in the value of their assets and decreased cash was due to tenants and have lost during the recession. should we pursue strengthening community banks to lend more to small businesses and what we do about commercial real estate? >> the issue of recapitalization, i think helping banks recapitalize should come with a carrot and stick approach. one of the concerns i have about
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the way we have gone about addressing the toxic loans is that it is to japanese. meaning it is too much for parents. i think if -- to much of forbearance. that's very important for lending behavior going forward, if you feel you have a lot of bad debt overhang, it will be reflected in your lending practices. that's the lesson i have taken from the very long japanese experience. even helping the banks that lend to small business recapitalize, a proviso toward more capital write-downs is important. >> thank you. commercial real estate? >> i think commercial real station left to itself to sort
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itself out. unsympathetic in about trying to recapitalize community banks -- i am sympathetic about trying to recapitalize community banks. it will be worried about the signal their sunday, but i would be surprised if we could run a program begun to have a macro impact, unfortunately. >> final comment? >> building on the uncertainty point, the other issue for community banks is to what extent there are strings attached. that may discourage them. >> thank you very much. >> thank you, senator, excellent questions and interesting responses. >> thank you. thank you to the witnesses were being here on this challenging day for travel in washington. we are caught between this is
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your blades here of on the one hand wanting to support the economy so people are employed and we can begin to have the nascent recovery we're seeing work for everyone and not just ended years. on the other hand, having the overhang of debt that has dominated our discussion today. it strikes me that where we have a very significantly degraded or in the structure, in rhode island, for instance, we have a bridge to what are the major cities that carries highway 95, a major national artery. it's under a weight restriction said that they have to take a route around it. that will have to be fixed sooner or later. we cannot have that.
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getting worse and not better. there is a bypass in providence at the department transportation is refusing to put any more maintenance money into because it is so degraded and needs to be replaced. it is very hard to get those jobs than -- jobs done. does it make sense to focus on the old-fashioned theories of, if you are going to have to fix it anyway, it's not really adding to your dad and the proverbial stitch in time saves nine, when you do it more quickly, it tends to reduce the overall cost to focus particularly intently on degraded and in the structure that will have to be repaired sooner or later anyway as a way to increase employment without adding to the nation's overall
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actual liabilities? >> the remarks i'm going to make have to be taken with a grain of salt because they weigh heavily with the experience of one country. in the structure spending is at the forefront of the japanese stimulus plan. the streets of tokyo were paved every other week. it does add to that. >> of the streets of tokyo don't have to be repaved every other week. if you are creating make work, if you are building bridges to know where, that's a different proposition. that's why i focus on things you have to fix any way. if my roof had a whole lot in it, and rain comes in, the sooner i fix it, the less the
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long-term cost of repair. if my son needs to make money for the summer, it seems to make a lot of sense. why doesn't that simple wisdom prevail? or does it when you are dealing with truly irreplaceable necessary and the structure like bridges that are condemned? >> if we're talking about things that need to be replaced, the subset of the more general proposition of in the structure as a way to go forward in terms of channeling, which is what my remarks were addressing, in the end, anything, be it in the structure or be it a transfer,
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it does impact that. -- it does impact debts. i cannot discriminate across types. they just add that. >> done we have a defective accountability, for accounting in an all in way, who -- if i were budgeting and it was my house and had a hole in the roof had been together a family budget, i would put in there that i had the sixth hole in the roof. whatever the cost, i would put it in, even if it was five or 10 years, if i had to put something away to cover it in the meantime -- >> i understand and i take your point, but i would just add that we should go toward looking at any activity as activities that do have that consequences over the short run. >> i have used a lot of time on
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that question and would like to shift to another. since it is just the two of us, -- >> i will give you some additional time. >> i would look at the cbo's scoring dan the advantages of payroll taxes over infrastructure spending. second, your point about having a proper capital budget is essentially right. one way to think about that in the context is toll roads. we should be discouraging things are bad like ingestion on the major roads. as somebody who is unhappy user of an easy pass scanned tag on my card, and this is not a federal issue, but if you move people toward a system where they are paying to use roads that are more expensive to maintain, that will help address the issue and raise revenue for
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specific issues which are much broader than rhode island. >> i think -- i agree with you on the theory. if you could end of fighting she would have done anyway and move them up, that's incredibly logical stimulus, but there are some is in there. the first is the have budget discipline that says if i spend an extra million dollars today, i literally will come at myself to spending a million dollars less in 2013. you know how highway funding works. that's a hard discipline to institute. the second concern is that in our political system, this is the mean and flip a diversion -- -- a mean and flippant version -- our system requires us to fund 435. this theory yet described maybe true for a handful of projects
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-- >> the theory is true that the politics make it hard. >> yes. >> let me jump to health care. you have said twice that medicare is a big item. i'm not disagreeing, i just think it's important we look at this. medicare is a big item. according to a variety of different sources, the amount of waste, duplication, excess cost, and efficiency in the health- care system runs between $700 billion and a trillion dollars a year. we have ways to get at that, but as cbo has testified, it requires a certain amount of
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flexibility and experimentation. it's a continuing management problem to work your way through it and it requires providing the executive branch with some tools. but i happen to believe significant savings can be achieved that way. when they are, they are achieved in a beneficial way. it's the extra test you did not need. it is the hours in the hospital waiting for your paper records to get there and having tests redone in an emergency. it's all the clutter and clumsiness of our existing health care system. what i worry very much about is if we get into a physical condition, statutory commission, it gets very narrow and is given a very urgent charge because it's an urgent problem. if you do not have people who understand the possibilities to
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understand taking advantages of the efficiency gains in health care system, and they're hard to quantify -- cbo cannot quantify them effectively -- you can not quantify it because it requires executive administration to make it succeed and they cannot predict that. but it worries me that we are laying out an incredibly easy short cut for fiscal hawks to take hold this thing and say i can document we will have real savings in the medicare system if we just throw these people off the system. the pressure to do that becomes irresistible because we have whipped up a great panic about the debt and given people only understand those jewels decontrols over this expedited, high-powered system. i think that would be a terrible, terrible mistake. when you look at a system as wasteful and complicated and grotesque, more doctors are paid for doing more procedures rather than out of, everywhere you look
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at it, the system is somewhere between $700 billion and a trillion dollars in waste and excess cost. how do you go with that in the time frame? let's say it takes four or five years to deal with it. how you relate that in two -- how would you relate that to the urgency of the fiscal that given the primacy of the medicare problem and that this will that equation? -- and that fiscal that equation? >> the fiscal situation we're worried about here is something that approaches this over the next decade or decade and a half. but we are fortunate and we should look at countries in europe that are now is set by the financial crisis, particularly in blood. they have a decade or decade and half. -- particularly in england.
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they don't have a decade or decade and half. >> the date the efficiency gains could be somewhere between $700 billion and a trillion dollars a year? do you think we can get it out question but i'm not an expert, so i would not want to comment. >> that is systemwide and not just medicare? >> some process of rationalization would make sense. also, i'm sorry your colleagues have left, but passing an unfunded prescription medicine component to medicare under the bush in restoration was unfortunate in this context also. they're going to be some very tough choices about who gets access to what kind of care. the big difference between our projections and yoursçó are expected cost of technology will change for treating patients,
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which has been very much the same across the u.s. and other industrial countries. we are more honest about it. europeans only take into account demographic changes. there are very tough choices at and i'm not on the side of saying throw people off medicare. i think that is acceptable. but the budget issue we cannot duck forever. >> i have gone well over the time and i think you. >> -- i thank you. >> let me just say to the gentleman from a profile of that i believe the rest is the flip of what you see. i believe the risk to medicare and social security recipients is a failure to act in a timely way to deal with the long-term debt trajectory that virtually every expert that has come before this committee says is unsustainable. that is, as i look ahead, i am
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the beneficiary of social security. i lost my parents when i was young. social security helped me through college. i have seen it in the lives of my family and i have seen that care in the lives of my family. i have seen it in the lives of my constituents. my great fear for the very positive things those programs do, is that our failure to act to deal with the long-term trajectory is what really threatens them. that is my belief. >> mr. chairman, i cannot agree with you more. i think we have a window of time, as the witnesses have said, we're fortunate. we have a window of time. the wolf is not fully at the door right now. the fiscal my aides do not have to come up in an emergency way you are suggesting. the will have to if we do not
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get ahead of this. we have lost a year in this administration already before we can deal with this and that fact is agonizing for me. while we are in this window, we should be focusing relentlessly on that while we can because that is the tool that evaporate as it gets closer. the fiscal might will always be there. you can always throw people off programs and shut them down. it would be a human tragedy to do so and we can avoid it if our responsible about delivery system reform in the time we have. >> i agree. delivery system reform that for some reason got no attention in this debate on health care. yet every serious expert that came before us told us it is the single most important thing. frankly, i think the media have done a grave disservice to the
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american people for chasing every red -- chasing every rabbet of an issue that matters very little to dealing with that -- dealing with what has to be done. i'm largely pointing the finger of blame on network media that has a minute and half for a story and never has a chance to explain to people what are the things that really matter to this debate? instead, they obsess of things are a complete side issue. that has been an enormous disservice to the american people. i would also blame ourselves for not -- for not doing a good job of coming back to what really matters. it is the delivery system reform that every serious expert that came before us said is the number one opportunity to get costs under control.
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it is almost no wear in the debate. instead, it is death panels and things that don't even exist and get the attention. if i could, let me go back to the question of where we are. you testified once we get to a debt of 90% gdp, that has and adverse affect on economic growth of roughly 1%. is that correct? >> my calculus tells me that we will hit gross debt to gdp of just over 90%. if we stay on the path we are on, that will continue to rise with no policy changes, no policy changes to 97% in 2012 and then start coming down very, very gradually.
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almost imperceptibly. according to your research, we already face the consequences of reduced economic growth in the future because of debt levels today. would that be a correct interpretation of your testimony? >> that would be a correct interpretation. i try to highlight that in my remarks and written statement that while the plan should not necessarily start today because of weakness in economic activity, a conception of a clear plan to reduce the debt would be or should be forthcoming today. one thing we can say with a fair amount of certainty is that we never know when the wolf will be on our door. the wolf is very fickle and markets can turn very quickly. a high debt level makes us very
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vulnerable to shifts in sentiment we cannot predict. >> thank you. what i have heard the three of you say -- very clearly, you would not take immediate steps to reduce deficits and debt because of the risks it could create to a double dip. what i have heard each of you say is that you do have to put together a credible, long-term plan to deal with the debt threat. if we do not, jury of the country going forward. is that a correct restatement of the testimony? >> if i could clarify, my position would be falling what is the imf practices, to focus
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on next government debt. the numbers would be slightly lower than yours. >> we should say for people who might be listening, when i talk about gross debt, and talking about the debt owed to the public plus the debt owed to the various trust funds of the united states. i use that figure of gross debt because in a budget context, that is what matters the most. all of that debt has to be serviced and serviced out of current income. economists like to look at what is called publicly held debt, which is a lower percentage, in a 60% range of gdp, because they look at the effect of government borrowing on the public sector. >> general government would push it higher toward 80%. the imf position is that all
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industrialized countries to face a similar situation. new taxes or revenue between 4% and 8% over the medium term. that's my position which is not inconsistent with the spirit of what you're saying. >> i cannot speak for senator gregg, but he and i have gone on this effort to have a commission because we have been convinced that you have got to have an overall plan. when that takes account of where we're headed in recognition that dr. reinhart's research is accurate and as you add that, you fundamentally weaken economic growth. let me go to the next point, if i can, and we're going to come back -- i will stop and recognize him next because he
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has not had a round. as we look ahead to this medium and long-term plan, spending has got to be adjusted, and yes, that means shall security, medicare -- social security and medicare have to get on a lower growth trend. it has to be because that is where most of the spending is. i also think the revenue side cannot be exempt. we have the lowest revenue of shares of gross domestic product in 60 years and the highest spending at a share of gdp in 60 years. so we have the lowest revenue, the highest spending, i don't know of any logical conclusion that you don't have to deal with both sides of the equation. that goes to the question of what should the balance beat? i would like each of you to answer this question -- going
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forward, in the longer term, should most of the emphasis be on the spending side, should most of the emphasis be on the revenue side, or what do you think the appropriate balance should be between spending and revenue? contributions to dealing with this long-term debt. dr. reinhart? >> i think both the spending and revenue side have to be addressed. i had mentioned in my earlier remarks that looking at what canada did it would be useful. nose down with a downturn. -- no stone was left unturned. unemployment insurance, decisions involving retirement age, and of course, the revenue side as well. when one is dealing with gaps that we're dealing with right now, even abstracting from the
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cyclical component that is very big right now, you cannot leave any stone unturned. >> but less you bend the curve for medicare -- unless she bends occur for medicare, that is first and foremost. >> that the 800 pound gorilla. >> absolutely. and it's a very unfortunate thing. it is perhaps more about ethics and economics to decide what to do there. that's a very hard social conversation. but taxes, you have to address that. this is a fantastic country. it is based on a thin and fragile tax base. if the united states wants to be one of the leading powers in the world, i see any alternative but tax reform. i would emphasize what dr. marron did before -- our tax
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reform group and we have not redesigned this in a long time and not try to think about what do we tax to discourage, rather than taxing income, which will allow people to earn. we have to address the low private savings rate. witnesses them where people don't feel they have to save and as a counterpart to our foreign borrowing. when they haven't talked about today as we finance so much of the budget deficit by borrowing from china and the chinese government. it makes no sense at all in geostrategic terms. even if you address and we come up with a strong fiscal framework, you still have the current account issued a low private sector savings. and as you wish for the united states to slip into the right of second-rate powers, that has happened to many countries in the past. >> i could not agree with you
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more. if this fiscal commission does its work, one part of it should be fundamental tax reform. we have a tax system that is an efficient and by that, i mean a high percentage of what is owed is not being paid. we have incredible leakage through offshore tax havens. if anybody doubts that, go punch in offshore tax havens and sewage you get. google that and see what you get. we also have a tax system that was never designed for the time we're in. it was designed when america was completely dominant in the world and we did not have to worry about our competitive position. we have a tax system that now this incentivizes savings and this incentivizes investment. -- dis-incentivizes investment.
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it's almost an upside-down system, given the circumstance we're in today. dr. marron. >> the first point is a budget process in terms of where should the emphasis be on taxes or spending -- we are in a situation where it's going to be difficult have an intelligent conversation about that. if there is one view that has taxes expiring, -- as you saw on the recent cbo report, if you add them up, the difference is three percentage points of gdp in 2012. i'm not going to have an answer of which one is right or wrong, but politically it's hard conversation to have intelligently because people will differ in what they choose. in terms of substance, the basic story is, once the economy is on a recovery path, what happens every year is spending makes the situation worse because it grows
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faster than the economy and tax revenues make it better because they grow faster than the economy. it has to be the case that spending is going to get more of the emphasis than the revenue side because they're growing faster and that is what is causing the challenge. but if you look ahead and ask and we go back to a historical 18% of gdp tax level and finance types of things are government and society appears to want our government to do, my answer to that is no. the arithmetic does not add up. that finding a way to raise more taxes in the future seems inevitable given introductory whereon. if you are going to do that, scaling up our existing tax system is not an intelligent way to do it. as you just described, what you want do is revisited and ask what that system makes sense the economy we have today, if we have decided instead of 18%, we're going to raise 20% in terms of tax revenues.
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>> thank you for calling this meeting. i think this discussion is critically important to our committee and to our country. thank you for doing this. i welcome all three of our witnesses, particularly dr. reinhart, but i thank all three before your testimony. the bottom line is, what are we doing about the standard of living for people living in our nation. i know we cannot rewrite what happened in the past, but we need to understand and learn from our mistakes. i find it inexcusable that when we had a growing economy, we still allowed the dead to go up. there was no excuse for cutting taxes and increased spending without paying for it. we had a booming economy. dr. johnson's point about savings, when our economy was
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performing the strongest in the world by far, when we were a leading indicator on every good economic indicator you want for america, during the 1990's, into 2000, then defined our savings ratios during that time to be among the worst of the industrial world, and we said that's ok. we have to worry about saving because americans are saving because they're getting the value of their homes increasing by a dramatic amount. then to find out what happened to the value of our home, we need to learn from the mistakes we made when our economy was growing. it is the mismanagement of debt and the failure to enact policies that encourage savings. many of us, including the chairman, tried during that time. i was proud of the work we did on the house side to try to
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focus on policies that would increase our national savings. we did not do what we needed to do. now we're in a recession. so now it is difficult to get attention to reducing the debt or cut spending or increase taxes when you are in a recession, or it's difficult to develop policies for americans to say because you want them to spend when you are in a recession. my concern is, as we look at how we're going to deal with the national debt, and the german's commission is by far one of the most credible proposals to address focus on national debt and had to deal with it, i am concerned the focus may be short term rather than long term. because we're in recession. we to grow and create jobs and spend. we need to make taxes less burdensome.
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but that may not be in america's best long-term interests. certainly allow the debt to increase and deal with the issues the chairman raise about tax policy that encourages savings. i know my friend, senator white a space house -- center white house raised -- senator wh itehouse raised. to reduce the costs america and reduce the federal government cost costs so that we are reducing health-care costs and reducing the budget. my concern is if you look at health care costs solely in light of the federal government's budget and say we have succeeded if we can reduce the entitlement costs of the federal government.
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we do not look at it as to how much seniors might be asked to pay. we don't look at as to how much businesses might be asked to pay. we don't look at it in the context of what individual workers are going to be asked to pay. at the end of the day, we might be weakening the economy, strengthening our federal government budget commitment as far as reducing cost. reducing our economy, certainly reducing the standard of living for people in this nation. i have a concern as to how we focus today in a recession and focusing on how to get and what our debt. we're all saying the right things, we want to bring the debt down and increase national savings. but what to increase the standard of living for people living in our nation, but if we tunnel vision this health care debate in to the federal budget and don't look at health care costs as growing, long term,
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we're doing a major disservice to the people are country. how do you put this in context? how do you deal with the current recession? how do you deal with the current crisis americans are facing and still allow our economy to grow and deal realistically with the problems americans are facing, of whether a small business owners trying to maintain health insurance for employees or a senior is struggling to decide whether they can afford madison this month for workers find themselves falling further and further behind, when they look at their payroll and look at how much might have to spend on health care, they are wondering what happened during this prosperous time and why should we trust you now to get this right when you didn't do a when the economy was growing -- didn't do it when the economy was growing? >> my view is if you create a
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fiscal commission with everything on the table and people regard that as being a credible step forward, which i think they would if it came with the right framework, that gives you the scope in the short term -- >> if the commission's charges to deal with the federal budget deficit and we are in recession when this commission is required to issue its ruling, how does it overcome those two major obstacles to the long-term issues that you raised on the tax code, for example? >> the good thing about being the united states in our current position in the world, we have the only reserve currency. the euro is seriously under pressure. this gives us time. it means, to go back to the
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german's mask, we will be able to run up more debt -- the chairman's comment, we will be brought word that are unsustainable tax base. we have 10 or 15 years, maybe the budget, we have 20 years to confront those issues. the fiscal commission's mandate would not be to slash the budget now. it would be to get the budget on to a sustainable basis and take it on according to cbo projections. will allow us to -- >> i am not sure we have other options. i'm not sure there are any better suggestions that have been made. all i can tell you is a lot of us worked on the savings issues
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and we did not have a lot of support out there to try to do things to bolster national savings. we got some things done, relatively minor when you look at the overall problems that a nation. it was not easy getting that done. i just hope the political will will be there to deal with some of the fundamental issues that have been raised here. when you start looking at we shouldn't be talking about how much revenue to raise but how to raise its, -- how to raise it, i happen to believe our tax code does need major revisions of lead to rely more on consumption-based revenues and we have to do it in a progressive way. i will be interested to see whether the type of political support -- dr. reinhart? >> i would like to address the issue you raised that in good
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times, our policies have tended to be pro cyclical, namely in good times, there are two things the government can do. can save during good times directly and that it can create incentives for the private sector to save. during the last boom, we did not do either. i think the role of the commission to ensure during boom times, we did not congratulate ourselves too much. the seeds of the next crisis are sown during the boom. that's when over spending has this directly to ending -- tended to take place. i do agree that -- i said earlier, no stone left unturned, the tax code, this is also simon johnson's point -- we need to address the issue of low savings
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rates and dependent on borrowing from abroad as part of the medium term issue. one last comment i have is i do not know that we do have 10, 15, or 20 years. we just do not know. the sooner we can articulate a plan -- you raised the issue of uncertainty -- people today, if the debt is perceived to be growing out of bounds, that will create uncertainty not only about future investment, but what people expect as to future benefits. so a credible plan cannot be articulated. >> thank you. i would just say this to my colleagues. i have just gone through an exercise to get the deficit down to 3% of gdp by the fifth year of the budget and to balance by
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the end of a 10-year budget window. i've just gone through that exercise. i ask all of my colleagues to go through that exercise before we get into our budget negotiations. i think you will find it as sobering as i have i think you will find it as sobering as i have. what it really takes, in 10 years to get the balance, on a very modest downward trajectory of deficits and debt to gdp. it is very sobering. when we go to the question of political will, what is going to be necessary to get this under control. that means to get back down to 60% of gdp. by publicly held basis. -- on a publicly held basis.
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it is very sobering. senator sessions. >> that is an insightful challenge to us, mr. chairman. i think you are correct. i would just share a few thoughts that -- i think we have to light a treatment to the wasteful spending now. contain spending now that is not producing much for the economy. the $800 billion for medicaid, welfare, many things that need to be strengthened, but the extent of it was so great that we have not had enough emphasis on job creation to pull out of this. i would just ask you to think about how will we pay back $800
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billion? the president proposed at the state of the union, saving $15 billion this year and that might amount to two under $50 billion over 10 years. that's a lot less than $800 billion. now we're talking about another stimulus package. these numbers are so large that you cannot spend today in an unlimited way. we will pay this back one way or another. going to be a burden. my democratic colleagues have to recognize that we just cannot ignore the year that we are in and the next year as if we are in this severe recession and therefore all the rules don't apply and the money we borrow is not going to be a burden on us. will be a burden. -- it will be a burden. dr. reinhart, i would like to
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follow up with your comments and that of the chairman about the amount of debt that we have. maybe all of you discussed this generally, between the internal debt and the public debt. would you not agree that 30 years ago, 20 years ago, there is a bigger difference than there is today because we did not see quite the dramatic actuarial and soundness of our entitlement programs? . .
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>> a lot of these other hidden
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debts need quantification. along the way. it just so happens that gross debt is something that we can measure more readily and more transparently than some of these other explicit or implicit liabilities that we have. >> senator those who are listening i think it's a hugely important point you are making. the publicly held debt. that is the money we have borrowed from the public is at 60% of gdp today. the gross debt is at 90%. the difference is the gross debt that you're referring to includes the money that we owe to the trust funds it's confusing. so it's important they
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understand that the gross debt. the reason you're focused on it, i'm focused on it is because all the debt has to be repaid. and from a budget standpoint, debt can only be paid out of current income. by definition the only money we have to the social security has to come out of current income. so there is a real budget consequence when those trust funds that have been producing more money than was needed all of a sudden flipped and now all of a sudden they are spnding more money in social security and medicare than is coming in trust fund income. that has happened to both those programs today. both are cash negative today. that's why i wanted -- sorry for interrupting. it is so important -- >> i couldn't agree more. >> to understand the implicailingses of this. >> when i came here i kind of
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ackquiested into the idea that public debt, we'll argue over it as a basis, the public debt, and use those numbers. as i have come to realize the actuarial unsoundness of medicare and social security you really can't do that. of course they do show up, mr. chairman, as you know to be fair, they are showing up on the surge of the public debt increase as these bonds that are the treasury executes to these trust funds called. that's one of the reasons is it not, mr. marin, that's one of the reasons the public debt is moving as dramatically as it is. >> right. the debt subject to limit. >> it's beginning to move. transfer. we are having less and less internal debt, i assume, because it's being converted to public
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debt inevitably as we go forward because there's not enough money to fund social security, medicare without calling the bonds that are out there. i'm just -- would say that anybody you would -- my time's about up. so if any of the two of you who haven't commented, i wish you would -- >> just a couple thoughts. you notice whenever i speak of the debt i focus on the publicly held debt which is the notion of debt we need to go play with world capital markets to finance ourselves. it's not because i don't worry about the other ones. when you worry about the other issues, the gross debt understates the scope of the problem from those programs. we have raised money for social security into a much lesser extent for a part of medicare and labeled them as trust funds for budget accounting and adding those up we can have a larger measure of debt. if you take seriously the commitments we have made for
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medicare for the other parts of it not covered by a trust fund, you have seen these numbers millions of times. here people come in with the $40 trillion number, and $60 trillion number. these guy nantic numbers which are an attempt to measure the overall commitment. i won't call it a debt because we can dial it up and down, hopefully down in the future, i think even the gross debt understates just how severe the trajectory is that we are on. >> understates. do you agree with that? >> yes. i think dr. marin said it very well. in addition the conbegin tent liabilities of which we know is there, that doesn't fit our sentiment as all. we have one or two more crises we'll change that methodology. dr. marin, i think is right. don't think of the gross debt as the extent of our problem. focus on the -- focus on the publicly held debt for what you have to sell and find for the market will or will not buy. then you have to look at the projections going forward, including the contingent
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liabilities. >>ç briefly, the uncertainty tt dr. marin and others have mentioned, i believe a lot of that and throughout the entire economy, throughout the entire financial world is the concern over the debt. would you not agree it creates a cloud of economic growth and productivity psychologically as well as otherwise, and that the sooner we get a clear path out of this fix we are in, the better it will be for -- to restart economic growth. >> i think one of the scenarios that i alluded to earlier is one in which if there is no plan for
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-- containing debt and deficits medium term, i think uncertainty is a enactor -- factor why we get the results that we get. that higher debt levels are associated. >> you are factoring that in. yes. dr. johnson. >> i think we should take events of the past few weeks in europe, senator sessions, as a wake-up call. exactly on the lines you are suggesting. you need a fiscal commission, you need it now. if you don't have it, in the second half of the year it is a substantial slow down, which i'm expecting, you room for maneuver. the root doesn't matter. whichever way you want to go you won't have that room because financial markets will become more difficult. that's what the europeans have woke yield back the balance of my time up to. tomorrow they have a big meeting in europe, summit, this is for
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them is the topic. how do you limit the damage. how do you make the fiscal judgments credible. we don't want to go there. that's raising tax, cutting spending, you don't want to do that in the second half of the year. if the financial markets force you into it, that's a disaster. >> do either of the other senators want a second round? senator whitehouse? >> if it's not too much 6 an ordeal -- of an ordeal for our witnesses. >> they are here and ready to answer. >> thank you. dr. marin, in your written testimony you looked at the 11 million households that are under water on their home mortgages and conclude, a, they are likely to default, and b, that that will eat away at the thin capital cushions of many banks. to what extent do you believe
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that the liability for these mortgages has already been written down by the banks, and would you distinguish between mortgages that have been securitized and mortgage that is are actually held by the bank? >> i don't have a good answer to your first question. maybe dr. johnson does. on the second, there are, as you know, some of these mortgages have been secure advertised and have been moved in various places including back on to the federal balance sheets. you have other ones out there held by the banks. the reality is, this goes back to the uncertainty point to what extent have we realized the difficulties we are in. financial institutions still differ in the degree to which they have recognized their losses. some have been more aggressive about it than others. and that that cash continuing uncertainty over the financial viability of various firms is ultimately hard to track this through. >> isn't it advisable to move through that uncertainty as quickly as possible?
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>> at some level the ends that you want is where everyone honestly appraises what their losses are and moves on in life. the difficulty we faced over the last couple years it's very -- very hard to get people to go through that process. >> go ahead. >> i think the lack of success of the government programs have had, particularly the one that's supposed to buy distressed assets from the bank, just haven't got up to stale because the banks don't want to sell. i don't think they have written this down. but i think that the strategy that they have had, been encouraged by the previous administration, this administration, sit on your losses and wait for the economy to recover. that works unless you have a double dip or further losses or more strategic default which i think is, to my mind, what we are looking at here. >> the reason that i was asking
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that question is that it strikes me we are prolonging the agony by continuing to forbid the residential mortgage holder if they are in appropriate financial circumstances to simply go to bankruptcy court and settle their debt the way everybody else does. in fact, i saw a news article earlier today, the mortgage bankers association argues developmently against allowing -- vehemently against allowing regular folks go to bankruptcy court and get that debt settled the way every other debt can go to the bankruptcy court and get settled. i guess it turns out that they may have written down their own mortgage on their building here in washington. because it's a commercial mortgage, they can get away with it. so they are -- they know it's the right thing to do. they know it moves you quickly
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to a market based solution. then everybody can adapt and move on as opposed to being in this sort of throws and states in which banks are asked now to determine what their losses are going to be mortgage by mortgage and then the nightmare begins for the person on the other end. we don't have a balance sheet that quantifies the nightmare for the family that has to put up with this, but clearly it's a nightmare. we don't have a balance sheet that quantifies the loss in property values around that house as it gets forecasted and abandoned and stripped. quantification of what that means in revenue to municipalities that are struggling. there's a whole piece of collateral damage that i think is avoided if we solve that problem. in addition to moving quickly to a market base for those. it's so disingenuous of the mortgage association to be here lobbying against it for regular people when they are doing it with their own darn building themselves. and i would just -- i would be
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interested in your thoughts on -- wouldn't that be the quickest way to find the bottom. as soon as people could cut to bankruptcy court and have a quick, fair final determination of it, then everything adapts. there's your finality. mr. marion -- marron. >> i'll take a stab. i'll confess i haven't thought about chapter 13 in those issues for some time now. my memory is hazy. i'm an economist, i'm going to invoke many. on one hand i'm generally reluctant to do things that are changing the rules in the middle of the game. i'm sympathetic. i may not find it dispositive, but i'm sympathetic to the argument the mortgages were initiated under a set of expectations about what the rules of bankruptcy here. >> over the past year -- >> i know. i'm going to be whatever the many handed right thing is. i'm sympathetic to that. with the passage of time, the emphasis i place on that goes
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down as we seem -- i don't know what federal program we are on, six, seven, eight trying to address this problem. i no disparagement to the previous administration, current one, and the congress it's a hard problem. it's not surprising it's taken this long. i don't remember -- there is an issue that houses are different than most of the assets that normally go through chapter 13 bankruptcy procedures. you need to think about ways -- most of those things are cars, boats, whose asset value is depreciating rapidly. it's more challenging to apply that to housing. you need to figure out a way to do it. over time i have become more sympathetic to the notion that some reform in bankruptcy could be part of the help. the numbers i saw a year ago when i used to think about this more seriously suggested that even if you did kind of your dream scenario on that front. it's still only a relatively small fraction of the homeowners who are facing these difficulties. but would be a portion of it. >> can you think of any other
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circumstance, ever, in which there are actual market losses that need to be processed through and a system whereby you didn't get to the actual market loss but instead allowed an interested party to be the definer of how much they are going to lose on something with an efficient or effective way of finding -- letting the market operate? >> the first part is, yes, i can think of folks trying that separately. the commercial real estate is an example. there are plenty of balloon mortgages under water for which the lenders are doing things lie extending--- extending terms by year. the problem is certainly not unique to residential real estate. at the end you have the second part of your question, then it works well. history does not suggest that it works well. >> clarity is what works well and finding the actual value, correct? >> yes. >> mr. johnson. >> let me ask both of you to
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answer then i'll conclude. >> i completely agree. your mortgage through bankruptcy makes sense. this did come up last year and defeated by the lobbies involved. that's a problem. these are not -- this is not lifetime inservitude. this is a no recourse loan. the more people who default, the more people walk away, the lowerer cost of other people walk away. this will change over time. most of the bankruptcy laws in this country has emerged been response to big debt crisis. this confrontation and crisis. this will change, too. in five or 10 years you will be able to modify first leans in bankruptcy. won't do us good right now, throw. >> extremely briefly, i think when we talk about overleveraged households and financial institutions, restructuring is a viable way of bringing down at
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least partially that overleveraging. and part of my remarks about forebarons, delaying the inevitable, in the case of banks, and the common -- your comments delaying the inevitable on the parts of households are doing just that. delaying the inevitable and making the slowdown much more protracted than need be. >> making the slow down much more protracted than need be. thank you. >> thank you. i would like to just conclude by trying to make sure that we clear up for those who might be listening the gross debt publicly held debt, then we got into unfunded liabilities which is a third category. so that we don't leave that confused in the record or confused perhaps in public mind. the gross debt is all of the debt that is owed by the federal government to all of the entities, publicly held as well
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as to the trust funds, medicare, social security. for example. the publicly held debt is just that debt that is due to the pub lick. that doesn't count the debt to the trust funds. the unfunded liability is still another concept that looks at the differences between the promise that is have been made in legislation versus the revenue streams that go with those spending commitments. that is a more future oriented look at where we are headed. and the unfunded liability of the united states is in the trillions of dollars. and the biggest part of that is medicare. medicare is the unfunded liability, my memory serves me correct, in medicare six or seven times the unfunded liability in social security. so they are three separate
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concepts. the reason that we were focusing here i think, i can't speak for senator sessions, but we were talking about that as from a budget standpoint. from what we have to deal with. we have to produce the money in this committee to meet those debt obligations. both the publicly held and the gross debt. because those obligations to the trust funds are backed by the full faith and credit of the united states. they are real obligations. but they can only be funded out of currentok resources. so when medicare's cash negative, social security's cash negative that has budget consequences. we are the budget committee. i know economists like to look at publicly held debt. dr. rhine heart -- reinhart is demuring.
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but we have a special obligation to our colleagues to deal with the revenues that are going to be needed to meet these requirements. not only of the publicly held debt but also the gross debt, the obligations to the trust funds. and that has significant budget consequences. we have been in this long-term period where the trust funds were producing more money. there was more money coming in than going out. that has been a very happy circumstance. that is all changing now. and i think when the changes occur that it's often least recognized. it kind of gets missed by our colleagues. this is going to have very, very significant budget consequences. it's important for our colleagues to know that and it's important for those who are watching to understand. let me just --
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>> follow up on that. with regard to -- the way we account for the money in our government allows this confusion to continue. it was very dramatically revealed to me, and i didn't fully understand it until just before the final vote on the health care bill, president obama submitted a score from the medicare that said if you raise medicare taxes and you cut medicare benefits as they propose to extend the life of medicare for nine years, i believe, i think -- as it was stated, that is a true fact. but in the report from the c.m.s. chief actuary from medicare, he had a little parenthetical and it said, but of course you can't simultaneously use that money to fund a new program. and also extend the life of
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medicare. all right. but the c.b.o. score, dr. marron, you used to be at c.b.o., the c.b.o. said that you could. because the c.b.o. scores does not score internal debt. and so the president also used the c.b.o. score to say that he could fund his medicare program and extend the life of funded new health care program, extend the life of medicare by nine years. and he had a c.b.o. score that agreeed with him. and basically what -- they don't score the internal debt. so the -- you had an increase in revenue out of medicare and it was spent on the health care, new health care program, and it didn't score as increasing the debt. where didi] the money come from? it was borrowed from medicare.
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a debt instrument shows that debt. when medicare gets back into its deficit, it will call that debt. it did increase the debt as c.b.o. eventually said, by about $226 billion. the whole argument this health care reform was going to save the country, $130 billion, was wrong. it actually was going to add to the gross debt of the country, 200-plus billion dollars according to c.b.o. when they finally got the numbers straightened out. we have got to watch that. somehow that is a mixup in the way we score. both agencies scored according to their accounting conventions, but together they created a misimpression. that's one of my sore spots. >> i'm sure that senator sessions did not want to create any misimgregs himself. but i believe he said the president was cutting medicare benefits. i think it was clear he was cutting medicare spending and -- >> right.
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the president did contend he could cut spending without reducing benefits. >> particularly in the area of the insurance companies making 14% profits on medicare and areas like that. >> i would just say that had -- if we can extend the life of medicare nine years without cutting any benefits, let's do it today. the problem is you can't use that saving to fund a new program and also extend the life of medicare, which the c.b.o. is absolutely crystal clear. >> it's going to be an interesting year, isn't it? let me just say this. i think we do have an extraordinary challeng. the question -- challenge. the question for all of us is are we up to this challenge? in the short term, and where differences among us on this issue, but i believe the testimony here has been quite clear.
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it would be a mistake to start to reduce the deficit too soon. we have seen what happened in the depression when that was done. the japanese warned us against doing that. at the same time it would be a profound mistake not to have a plan to deal with this debt challenge longer term. because this burgeoning debt fundamentally threatens economic growth, economic security, and the position of our country in the world. and this is not just numbers on a page. i want to emphasize i think sometimes people listen to us and they hear us talk about this number and that number. why are these numbers important? the reason they are important is because they ultimately affect people's lives. the ability of people to have a job, to buy a home, to get a
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college education. all of these things are directly affected by the strength of our economy. and the strength of our economy is fundamentally affected by the decisions the united states makes with respect to its budget obligations and its debt obligations. the federal government represents 20% of the economic activity of the country. and has a broader impact with respect to our long-term economic position. because if we take on too much debt, as dr. reinhart has testified in a very compelling way here, she's looked at the history for extended periods going back and looked at countries that faced similar circumstances and saw what happened. what she's telling us is very clear. you take on too much debt it affects the rate of economic growth in a country adversely.
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>> we'll leave these last few minutes of this hearing as the u.s. house is gaveling in for morning hour speeches. we'll take you there now. no legislative business today. live coverage here on c-span. [captioning made possible by the national captioning institute, inc., in cooperation with the united states house of representatives. any use of the closed-captioned coverage of the house proceedings for political or commercial purposes is expressly prohibited by the u.s. house of representatives.] the speaker pro tempore: the chair lays before the house a communication from the speaker. the clerk: the speaker's room, washington, d.c., february 9, 2010. i hereby appoint the honorable donna f. edwards to act as speaker pro tempore on this day. signed, nancy pelosi, speaker of the house of representatives. the speaker pro tempore: pursuant to the order of the house of january 6, 2009, the chair will now recognize members from lists submitted by the majority and minority leaders for morning hour debate . the chair will alternate recognition between the parties with each party limited to 30 minutes and each member other than the majority and minority leaders and the minority whip limited to five minutes.
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the chair recognizes the gentleman from washington for five minutes. >> thank you, madam speaker. small business is the number one source of new job growth in our country and their success will be critical to our country moving oud of economic recovery and toward recovery. one of the key things is access to capital. recovery act and small business administration lending programs such as 504 loans, 701 loans or arc loans are helping stem the tide of job loss and getting our economy going again but more needs to be done.
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we must strengthen our community banks to allow them to lend to deserving small businesses. our nation's community banks play a vital role in small business lending but the financial crisis has hamstrung their ability to give these loans. i'm looking forward to see how the proposal will help our community banks provide loans to give small businesses access to the tools they need to build their own businesses and to start hiring again. i've heard from many community banks in my district that federal regulatory policies are also inhibiting their ability to lend. these banks are struggling because federal regulators are requiring them to increase capital over capital levels and strengthen their balance sheets. as a result, they're forced to restrict their lending activity in order to meet these standards. so i've urged this treasury department and the fdic to review the effect that the current regulatory environment has on credit lending and to ensure an appropriate balance between prudent and necessary regulation and a robust lending market. in northwest washington, the
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state of commercial real estate is also threatening our economic recovery. community banks in my strict have been devastated by these troubled real estate loans. this problem must be addressed so we can free up much-needed capital to jump-start the small business lending. while i appreciate the fdic and other october's guidance on prudent commercial real estate workouts, this is not working to stabilize the market. the treasury department and fdic must look to ensure the problem is helped. the banks can help us towards longtime economic growth. with that i yield back the balance of my time. the speaker pro tempore: the gentleman yields. the chair recognizes the gentlewoman from north carolina, ms. foxx, for five minutes. ms. foxx: thank you, madam speaker. madam speaker, last week president obama enveiled his
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fiscal year 2011 budget. i hope it doesn't run into a deficit like last year. this budget spends too much, taxes too much and borrows too much. it includes $3.8 trillion in federal spending for 2011, a record high. it projects a $1.6 trillion deficit, a record high. it assumes $2 trillion in tax hikes over the next 10 years, a record high. and it estimates $14 trillion in government debt that will be inherited by our children and grandchildren. in fact, the president's budget will more than double the federal government's public debt. one of the most touted parts of this budget is its call for a spending freeze which is a good idea. just like the millions of americans who've adjusted their budgets, the federal government
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should respond to record deficits by halting its spending expansion. but unfortunately this budget freeze is merely papering over our record federal deficits. instead of a meaningful freeze, the proposed freeze in the budget covers only 1/8 of the federal budget. that means that 80% of the federal government will continue to grow under this so-called freeze. a freeze allows a vast majority of programs to stay on the path of unsustainable growth will not solve our budget prost. and so this budget predicts another year of record deficits. more than one in three dollars spent by the federal government next year will be borrowed. with such astonishing deficits and debt, we need much more than a freeze on 1/8 of government spending. we just be taking a hard look for underperforming areas where we can reduce spending. congress could also start tackling our debt problem by
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immediately passing strict budget caps that will limit federal spending each year. unfortunately, this looks unlikely to happen also. instead democrats in congress, along with president obama, appear to be dead set on pushing $1 trillion government takeover of health care and another multibillion dollar stimulus plan. just last week democrats in congress showed their true colors by passing an increase in the national debt limit making way for more deficit spending. after all, reckless spending requires reckless borrowing. federal spending on digs cessary borrowing increased over the past two years and these increases have been financed entirely by new debt. the time has come to stop these out-of-touch spending increases so we don't have to keep jacking up the national debt. the president's budget lacks the sort of spending accountability americans want
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from washington. it contains more spending, more debt and more taxes which will not restore our economy or help the unemployed in north carolina and around the country find work. government growth and exploding debt are just more of the same big government policies that americans are weary of and watching in washington. while president obama's budget does get some things right, it unfortunately gets most things wrong. as north carolina taxpayers continue to tighten their belts, we can do better than $1.6 trillion in new debt for more wasteful washington spending. republicans are ready to go line by line to cut wasteful spending. the debt congress is racking up will not -- are going to go away if we don't get a handle on spending. and during a time of double-digit unemployment, the american people want solutions that will encourage economic growth and help create jobs, not just more debt for our children and grandchildren to pay off.
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madam speaker, we cannot borrow, spend and tax our way back to a growing economy. and i yield back. the speaker pro tempore: the gentlewoman yields. the chair recognizes the gentlewoman from arizona, mrs. kirkpatrick, for five minutes. mrs. kirkpatrick: i request unanimous consent to revise and extend my remarks. the speaker pro tempore: without objection. mrs. kirkpatrick: as we face the challenges of a stalled economy and a record debt, it's important that we find jobs without spending millions of dollars. i rise today in support of job creating projects in greater arizona that will require federal action, not federal money. the copper basin jobs project and the forest restoration initiative. the copper basin jobs project will create more than 1,000 well-paying 21st century jobs in district one, jump-starting our recovery and diversifying
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our economy. the four forest restoration initiative will create more than 600 jobs across greater arizona, revitalizing key industries while preserving our environment and protecting our communities from wildfires. these projects will produce new opportunities for our families and serve as economic engines for my district and the entire state. they will attract new businesses and investment, creating jobs, not handouts. that's why they have both earned support from across the region, across the state and across party lines. last week, i had the opportunity to share the value of these projects with u.s. agriculture secretary tom vilsack. we traveled across greater arizona to meet with stakeholders on each project and visit with folks in the community that will benefit
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from these projects. it was a real milestone for our efforts. arizonans were able to make their voices heard on the project and let the secretary know about the positive impact they could have on our economy. along with the communities, i'd like to thank the secretary for his time. i hope his trip helped him gain a better understanding of these projects and what they can do for arizona. efforts like these will help end the downturn and get folks back to work. creating jobs has to be our top priority and these projects are my top priority. i yield back the balance of my time. the speaker pro tempore: the gentlewoman yields. pursuant to clause 12-a of rule 1, the chair declares the house in recess until 2:00 p.m. today. >> you heard the house back at 2:00 p.m. for pro forma session. no legislative business scheduled. all legislative work on hold as washington and the northeast in
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general braces for an additional 10 to 20 inches of snow. that flag flying oot half-staff over the u.s. capitol in honor of representative john murtha, pennsylvania democrat died yesterday from surgical complications. he'll be buried at arlington national cementtary. special election will take place to fill his seat and reports are that governor ed rendell is targeting may 18 for that. there is activity at the white house today. president obama earlier today met with congressional leaders, republicans and democrats, talking about a jobs bill and the federal deficit. here's a look at the gathering before they actually met. >> i want to thank both democratic and senate leaders, democratic house leaders, as well as republican leaders from the house and senate for joining us. as i said in my state of the union part of what we would like to see is the ability of congress to move forward in a
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more bipartisan fashion on some of the key challenges that -- i think it's fair to say that the american people are frustrated with the lack of progress on some key issues. and although the parties are not going to agree on every single item, there should be some areas where we can agree. and we can get some things done even as we have vigorous debate on some of those issues that we don't agree on. a good place to start and what i hope to spend a lot of time on in these discussions today is how we can move forward on a jobs package that encourages small business to hire, that is helping to create the kind of environment where now we have economic growth people actually are starting to add to their payroll. i think there's some ideas on both the republican and democrat side that allow us potentially, for example, lower rates for
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small businesses on their taxes. to help spur on some growth and my hope is that both in the house and senate we'll see packages moving over the next several weeks that can provide a jump-start to hiring and start lowering the unemployment rate. another area where i hope we can find some agreement is on the issue of getting our deficits and debt under control. both parties have stated there are concerns about it. i think both parties recognize that it's going to take a lot of work. i have put forward the idea of a fiscal commission and i'm going to be discussing both with my democratic and republican colleagues how we can get that moving as quickly as possible so we can start taking some concrete action. i think the american people want to see that concrete action. i'm also going to be talking about some more mundane matters. things like making sure that we have our government personnel in
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place on critical positions, in critical positions that involve our basic government functioning and seeing if we can accelerate that and try to find some agreement in those areas. and then i'm going to spend time listening because there may be some priorities that both the republican and testimonyic leaders have that -- democratic leaders have that they want to raise at this meeting. i my hope is this is not going to be a rare situation. we are going to be doing these on a regular basis and i'm very thankful that everybody here is taking time to come. i'm confident that if we move forward in the spirit of keeping in mind what's best for the american people that we should be able to accomplish a lot. all right. thank you very much, everybody. >> thank you. >> president obama meeting this morning with speaker pelosi, majority leader hoyer and john boehner from the house and
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senator leaders harry reid and mitch mcconnell. after that meeting they came out to the driveway and spoke with reporters for under 10 minutes. >> good morning, everyone. we had a good meeting with the president and what i'd like to emphasize is there are some areas of potential agreement. he mentioned in the state of the union his support for nuclear power, for offshore drilling, for clean coal technology, and for trade agreements, presumably with colombia, panama, and korea, the ones that have been languishing for a year and a half or so. these are areas where i think there could be pretty broad bipartisan support to go forward on a collaborative basis. obviously there will be areas of disagreement. but emphasizing the things that we might be able to work on
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together, i would mention those four areas, all of which i think would be job generators. nuclear power, offshore drilling, clean coal technology, and pass those languishing trade agreements which we know create jobs here in the united states. >> we also had a long conversation about spending. the american people know washington has been on a spending binge now for over a year. and i urged the president, if you're serious about cugget spending, why don't we do it now? why don't we start with a rescission package. the president's got decisions up to the hill. i urged him to put one rescission in each bill. send it up to the hill. let members vote up or down on wasteful washington spending. we don't want to put this to some spending commission. we can start cutting spending now. when it comes to -- we didn't talk about health care. apparently that will be
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discussed in several weeks. but we are trying to understand from the white house what it is we are trying to accomplish with the health care meeting. that's why we sent a letter down here yesterday, we are hopeful we'll get some answers as we consider what to do about the february 25 meeting. we are interested in a bipartisan conversation with regard to health care. but bipartisan conversation ought to be that. bipartisan from the beginning. we have been asking to be involved in these health care conversations going back to a letter we sent to the president last may. we got no response to it. so we outlined our concerns about this conversation that the president wants to have. we certainly want to have the bipartisan conversation, but we need to know where we are going to start from. >> have you decided whether or not you will attend the meeting? >> we would like to attend the
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meeting. we are interested in having these bipartisan conversations. and look forward to continuing conversations with the administration. we are considering it. >> senator mcconnell, mr. boehner, did you make any progress on the jobs legislation? did you exchange any ideas? >> there were a lot of conversations about various parts of it. the house has already passed a stimulus bill, it's over in the senate. i yield to the senator. >> we discussed the senate package that's been percolating if you will. it's kind of a work in progress with some members of the financial committee. frankly it's not ready yet. most of my members have not seen it yet. we are certainly open to it. there's a chance that we could move this forward on a bipartisan basis. we hope it's not just another stimulus bill. we hope it is truly a job generator. we know that wasn't the job generator. but i think there's a chance the
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senate could get there with a small package. >> concerns about the health care cost? >> yeah -- >> a good way to start would be to listen to the american people. they are overwhelmingly opposed to the 2,700-page bill that the house and senate have looked at. what we need to do is start over. go step by step on a truly bipartisan basis, and try to reach an agreement. my members are open to doing that. >> start over, start over where? >> focus on cost. costs are the problem. the rising cost of health care in america. we need to target costs by doing things like targeting junk lawsuits against doctors and hospitals. potentially equalizing the tax code to make it more possible for purchase of insurance on the individual market has the same kind of tax treatment that corporate purchasers do. there are a lot of things you
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can do to expand the number, reduce the number of uninsured, and to target the cost issue. >> if the white house were to start over -- >> we need to start over. look, you need to listen to the american people. the surveys are overwhelming. the also n.p.r. poll, national public radio poll, last week indicated that by a 58 to 38 the american people were opposed to this bill. why would they want to keep pushing something that the public is overwhelmingly against? okously the answer to that is -- obviously the answer to that is put that measure on the shelf, start over, go step by step and get it right. >> the democrats are saying, you guys have proposed allowing people to purchase insurance across state lines is actually in the bill that has come together in the discussions between the senate and house. have you guys heard that up on the hill? do you have a response to that?
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do you agree with that assessment? >> we are going to have the health care meeting on the 25th. what i'm telling you is, what i'm saying is, we need to put that bill on the shelf. the 2,700-page bill, start over with more modest goals, go step by step, and deal with the problems the american people would like us to deal with. >> the president wants to have bipartisan conversations. it's going to be very difficult to a bipartisan conversation with regard to what 2,700-page health care bill that the democrat majority in the house and the democrat majority in the senate can't pass. so why are we going to talk about a bill that can't pass? it really is time to scrap the bill and start over. let's talk about commonsense things we can do to make health care more affordable for the american people and expand access. >> do you think the president is listening to you. >> we'll see.
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>> senator mcconnell, on the health package, what specific areas would you -- >> well, it's hard to predict. this is a package that's kind of a work in progress sess -- progress. the jobs package. we want to make sure it's not just another stimulus bill that will not create any jobs. it's too early to tell what that package is going to look like. and the weather is sort of interfering this week with our ability to do business as well. thanks. >> thank you. >> and the republican leaders join their democratic counterpart, speaker pelosi, majority leader hoyer, and leader reid in a meeting this morning with president obama. we are likely to hear more about that coming up in about 40 minutes or so, the briefing with robert gibbs scheduled for 1:30 eastern. we'll have that live here on c-span. coming up next, former u.s. ambassador to the united nations, john bolton, talks about the obama administration's
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foreign policy. mr. bolton who served from august, 2005, to december, 2006 criticizes the administration on its policy on terrorism in the middle east. he's at a conference hosted by the hudson institute in new york. and this runs about 45 minutes. >> thank you. thank you very much. it's a great pleasure to be here today. i think this is a very worthwhile endeavor and appreciate all of you being here in support of it. i wanted to talk today at lunch about the situation we find ourselves in concerning our national security. and to look at it from the perspective that foreign policy issues don't take place in a vacuum. they are the result of decisions that specific individuals make. i don't believe in predestination or historical
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determinism. and i think it's very important that we understand the broad picture that's presented when we have circumstances like we do today under the obama administration. we are just about one quarter through it. he said optimistically. but i think it's important to understand that many of the things the president believes are representative of large segments of the american population and representative of what is probably the predominant, elite view in europe, not the popular view but the elite view, and it's also widely shared around the world. so his policies and his decisions are not idiosyncratic. i think it demonstrates why the country does face enormous
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challenges going forward. i want to talk a little bit about the mindset i think that governs the administration's foreign policy and talk about some specific examples of how it plays out. how it has played out during the first year. how it will play out during the next three years and try and explain why i think the performance to date and the likely performance coming has been so detrimental to our national security. first, i don't think the president really cares about foreign policy or national security. now, that may seem a remarkable statement, but i think his history demonstrates that it's never been a major part of his career. even though he has lived overseas as a child. his record in politics, which is the only record he has, has been focused exclusively on domestic
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policy. i think it's clear from the first year he would rather spend his time restructuring our health care system, restructuring our financial system, restructuring our energy and environmental regulations, you get the point. that's what he wants to do. so foreign policy while he will deal with it when he has to, for him is more of a distraction than a priority. a really remarkable development for an american president. closely related to that is i don't think the president believes we live in a threatening world. he has bought wholesale the notion that the end of the cold war means that there is no current exy tension threat to the united states nor is there likely one will develop. he doesn't see any of the threats that many others do from terrorism, from proliferation, from other countries in the
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world that don't necessarily have our best interest at heart. he doesn't see them as threatening. he's not concerned about a decline of american power in the world. some people think that in fact he thinks our power is ill-gotten. we don't deserve it. that we took advantage of circumstances over the past century. so we come down a peg or two, no big deal. so you can see that this combination of a president who doesn't care much about foreign policy to begin with, doesn't think the world is terribly threatening is going to be focused on issues that amount to threats to our country. now, that is actually when you think about it a formula for isolationism. but unlike the classic american isolationists, this president is decidedly wilsonian of his view
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of the u.s. in the world. he gives new meaning to the phrase, multilateralism. and i think that ties in as well with the view he holds and his unique in that regard, too, why i call him a post-american president. our first post-american president. and i use that term very advisedly. i don't say un-american. i don't say anti-american. i want to be very clear about that. he is post-american. he's above all that patriotism stuff. and in that respect he's very similar to those european elites that i mentioned a moment ago. they are not french anymore or belgian. they are european. and as the president has said, and obviously takes pride in saying, he views himself as a citizen of the world. that's not just a throw away
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phrase for him. i think it's something that reflects deep beliefs. now, when you put all that together, i think you can see why so many of the president's policies overall and those particularly i think we'll see coming in the next three years, constitute a clear decision on his part to participate, to have the united states participate in the process of global governance. now, there was a time when people talked about world federalism, some people actually talked about world government. they don't say that anymore because they recognize that because they recognize that among the overwhelming majority;


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