direction of medicare weight-bearing on the vine. and so, we see a situation where they put forth a budget which doesn't even honor their own agreement in terms of what the amount of budget should be. rakes the medicare guarantee, raises cause, cuts jobs. it is simply not a statement about national values that a budget should be. and i will yield to mr. hoyer and mr. cliburn for any comments. ..

>> without the president we would not have this. everyday since the passage of the bill, the administration has moved in a very positive direction to implement so that

we stay on schedule. many of the benefits that people are enjoying now, many cabinet secretaries -- people in the administration are taking the message fully in the country, and without the president -- i'll just tell you this, the day after the bill is passed, the president called me and said last night when the health-care bills bill was passed in the house, i am happier than when i was elected president of the united states. >> if you weren't elected pledge event of the united states, we would not be passing this historic legislation. for the american people. we are very grateful for the president's leadership. >> [inaudible question] do have anxiety about what may happen next week, and if the

court rules against the mandate and what you're talking about -- >> i am thinking much more positively than what you just posed. it is a fair question, and if my colleagues have anything to say about the president's anticipation, it will be the case next week. what we were doing when we pass this bill -- what happens in the courts is another matter. but we believe that we are in good shape going into the court. it is interesting, because our republican colleagues -- maybe this is more than you want to know -- they have been opponents of judicial review. they have said that the congress -- when congress acts and the president signs the bill, that is the law of the land, and they oppose judicial -- only the courts can review the constitutionality of the law. in fact, they even said,

mulberry immerses medicine -- it was wrongly decided. that is what they say. that was then, so opposed are they to opposing the industry of insurance that they have broken with their opposition to judicial review to take this important bill, which mean so much to the american people and the courts. but i had faith in the reports and the bill and we will see what happens next week. but we won't know next week. but i know all of america will be watching to see the proceedings. every american who has a child with an existing condition, it a family history, any woman who is concerned about her health or the health of her family, anyone who it is concerned about

medicare and a person's health and their economic situation. anyone who cares about innovation in our country -- and you kind of healthcare that is not just about the healthcare in america but the good health of america. that prevention and the rest of that innovation that will take us to customize, personalize care. anyone who cares about lowering costs, expanding access and including the quality of health care, that sounds like it should include a lot of people. people who are aware of what is in the bill. so i hope that all of you will help to make people more aware what is in the bill, because it really honors the greatness of our country. senator kennedy said this is the great unfinished business of america that all people should have access to quality,

affordable health care as a right for all americans and not just a privilege for a very few. in that spirit, we are proud of the work that was done. it was a compromise, it wasn't the bill that i would have written, but it is the bill that is making a big difference. i pray that the courts will make the right decision. they have been sent the right bill. so i thank you all very much. i think real people who are here today. i think the real people who are here today. thank you all, very much. [inaudible conversations] [inaudible conversations]

[inaudible conversations]

ben bernanke is the first chief to hold regular town hall meetings. he formally taught at stanford, and by you, and princeton. this is one hour and 20 minutes. >> okay, let's go ahead and get started. i would like to welcome the students back for our second lecture today, as well as our faculty. i know we have some new guests and friends that are here today.

you are in for a treat. if it is anything like it was to say, this will be another great session. without further ado, here is chairman bernanke. >> thank you, very much. you came back. that is good news. as you know, today is the second of four lectures on the financial crisis in the federal reserve. as i said, i think it is very helpful to try to put the recent crisis and the ongoing recovery into a historical context. last time we talked about the origins of central banking, going back to england and the debates of the 19th century. the origins of the federal federal reserve, and the federal reserve's first great challenge, which was the great depression of 1930. we drew some lessons from the 1930s that will come back to be relevant as we discuss more

recent events. today, i'm going to pick up the history after world war ii, talking about some important episodes after the war. but i will be getting in today to the beginnings of the crisis. the latter part of today's lecture and all of next week will be about the crisis. now, as we go along, i just want to make sure you keep your eye on the ball. the two basic ideas, the tube asic missions of the central banks, are the first macroeconomic stability, maintaining stable growth and keeping inflation low and stable. and of course, as you know, the principal policy tools for maintaining macroeconomic

stability is maintaining monetary policy. in normal times, the feds or central banks will use market operations, purchases and sales and securities in markets to move interest rates up or down. in doing so, creating a more stable macroeconomic environment. that is an important part of any central bank's mission. the other part of this mission is financial stability. central banks are focused on trying to ensure the financial system is functioning properly, and in particular, they want to prevent, if possible, and if not, mitigate the effects of a financial crisis or financial panic. when we talk about a lender as last resort function, in financial panic, the bank will follow its rule of lending freely against collateral at a penalty rate, and providing short-term credit to financial institutions, if central banks can offset the effects of a

panic and company damage to a financial system in the economy. but, let's move ahead and talk about the history. we left off at world war ii, which ended the depression, which led to a sharp drop in unemployment as people were put to work building and serving the home front. one of the aspects of war that economists pay attention to is how wars get financed. nor normally once wars get financed during world war ii, to pay for the war, the feds, in cooperation with the treasury, used its ability to manage interest rates to keep interest rates low, so as to make it cheaper for the government to finance world war ii. so that was the level during the

war. now, after the war ended, the debt was still there. the government was still worried about paying the interest on the national debt, which was at a very high level. there was considerable pressure on the fed to keep interest rates low, even after the war. but there was a drawback to that. if you keep interest rates low, even when the economy is growing and the -- were covering, you are risking inflation. by 1951, the fed was very concerned about inflation prospects of the united states. after a series of complex negotiations, the treasury agreed to and the arrangement independently as needed to achieve economic stability. that agreement was called a fed charge of 1951, it was very

important because it was the first cleric knowledge meant by the government that the federal reserve should be allowed to operate on an independent basis. today, around the world, there is a very strong consensus that central banks that operate -- operate independently than those who are dominated by the government. in particular, a central bank whose independent can ignore short-term political pressures, for example, those who pump up the economy before an election. in doing so, they can take a much longer perspective and get better results. the evidence for this is quite strong, and it is a result that major central banks around the world are at typically independent. which means they make their decisions irrespective of short-term political pressures. in the 1950s and 1960s, the primary concern of the fed, was

macroeconomic stability. you see the picture there of the chairman from 1951 to 1973 he was the leader of the fed. the chairman's term ended at 18 years and six months. he unfortunately, didn't break the record. i know he was disappointed about that, but in that case we have to federal reserve chairman's between them who accounted for 37 years of leadership at the fed during the postwar period. now, monetary policy during the 50s and 60s was simple. the economy was growing. again, after world war i and world war ii, the u.s. economy was done at. the fears about a renewed depression did not come true. as a result, a lot of growth was occurring. what the fed's try to do was lean against the wind. it means that when the economy

is growing quickly, perhaps too quickly, the feds tighten to try to restrain overeating. when the economy is growing more slowly, the feds try to lower interest rates, create expansionary stimulus, in order to avoid a recession. william jesse martin was very attentive to the risks of inflation. there is a quote from him. the quote about a thief in the night. he tried against the policy to keep inflation and growth stable. indeed, despite the fact that the 50s were more tumultuous than you might think, they were, after all, -- it was a serious war -- korea, nevertheless, it was basically a productive and prosperous decade as the economy went back to operations after

the end of world war ii. however, as usual things were not to be and remain trouble-free, starting in the mid- 1960s, for a variety of reasons, monetary policy became too easy. after a period of time, given the feds didn't change their policy stance, easy monetary policy in surged inflation and expectations. on the right, you see a graph of inflation. you can see from 19621964, inflation averaged over a little over 1% per year. it picked up during the vietnam. in 65 and 69. even higher in the 70s. by the end of the 70s, the inflation rate peaked at about 13%. you can see inflation was a growing problem starting in the 1960s and into the 70s. an important question is, why

was monetary poly so easily -- monetary policy so easy to allow inflation to be a problem in the 70s? >> one issue is a technical issue, which was that monetary policymakers became too optimistic about how hot the economy could run without generating inflation pressures. it was the general view that unemployment should be kept at the lower level, three or 4%, by keeping inflation higher, you would be able to get that better performance, that higher employment level, and again, in the prosperity of the 1950s and early 1960s, the feds began to follow that approach. there was actually quite a subtle issue here, which was backed economic theory and practice in the 1950s and early 1960s suggested that there was a permanent trade-off

between inflation and employment , the notion being that if we could keep inflation above normal, that we could get permanent increases in employment and reductions in unemployment. that was the view taken by economists during that time. it was actually built in friedman, a monetary economists who wrote in the 1960s, hypothetically that this was going to cause trouble. he argued that increasing inflation may get a bump up of employment, and cause it to fall for a wild, but it will be a transitory effect. the analogy might be to a candy bar. if you take the candy bar in the short run, it gives you a burst of energy, but after a while it makes you fat. monetary policy was an idol is to that. friedman argued and he turned out to be correct that if you

keep monetary policy too low, you will keep feeding inflation. that issue is one reason why monetary policy was too easy. there are also debates still today about whether or not there were political pressures put on the feds. after all, this was a period of government deficit because the government was trying to deal with vietnam and society. that may have also influenced the feds behavior. the fed -- you cannot have sustained inflation without monetary policy being too easy. another famous quote from milton friedman is that inflation is everywhere a monetary phenomenon. there are actually many factors that made the problems worse and made it difficult for the feds to offset the increase in inflation. first, there were a number of shocks to the prices of oil and

food. a very striking example was in 1973, october of 1973, the war in the middle east broke out. in reality action -- in retaliation to israel and opec, found some cartel power, put an embargo on oil exports, and in a short period of time, in the early 1970s, the price of oil almost quadrupled. there was a very sharp increase in gas prices in oil prices. people were lining up at gas stations to make sure their gas tanks were full. there was a system of rationing. if your license plate was even, you could go on tuesdays and thursdays. if it was odd, you could go on wednesdays and fridays.

there is a correlation between gas prices then it is now. fiscal policies were overall to loose during the late 1960s and early 1970s. the vietnam war and other government programs increased government spending and increased deficit, which put additional pressure on the capacity of the economy. another element that i will mention briefly is when inflation got up to 5% in the 1970s, nixon introduced wage price control, which is a series of laws that prevented them from raising prices. there were exceptions in all kinds of ways of trying to find exceptions. it was a successful -- unsuccessful policy. as you know, prices are the thermostat of an economy. they are a mechanism by which an economy functions. putting controls on the wages

and prices mean that there were shortages and other problems rough economy. but, in addition, as milton friedman put it, this was like dealing with an overheating furnace by breaking the thermostat. the problem was the fact that there was too much demand driving up prices, and simply passing a law that says people can't raise prices does not address the underlying problem of excessive demand. the way price control kept it artificially low for a couple of years made it harder for the feds to find out what was going on. at the time a collapse, -- by the time it collapsed and cause problems in the economy, inflation surged. it was like eight spring was released. there were a lot of reasons

supporting the increase in inflation. i think a general lesson here is the picture of arthur burns, who was the chairman of the feds during the 1970s. in a rapidly changing world, the opportunities for making mistakes -- one way to think about this episode is after world war ii, the end of the conquest of the depression and the prosperity that we saw, the economist and policy makers became too confident about their abilities to keep the economy on an even keel. there was some fine tuning -- the notion that the fed and other fiscal policy and other government policies to keep the economy on course. to not worry about bumps and wiggles in the economy. that turned out to be too optimistic.

we learned that collectively during the 1970s when the efforts of policymakers resulted not in the lower unemployment rate, which was the original goal, but instead into a sharp increase in inflation. i think one of the themes here is that -- and this applies in any complex endeavor -- humility never hurts. there was a reaction to the increase in inflation in the 1970s. the key person in this. is chairman volker mac -- ♪ ♪. to deal with double-digit inflation, i should say first that president carter, whose reelection was under serious threat by performance of the u.s. economy, appointed paul to be the new chairman of the fed.

and in part he did so because president carter felt that volcker was a top banker to get inflation under control. paul volcker, who smokes a big cigar and stands tall, created an impression of somebody who is willing to take strong action. paul volcker came into office. he was in office for a few months when he determined that strong action was needed to address the inflation problem. in october of 1979, he and the federal committee, the policy committee of the feds, in -- instituted a strong rate in the way that monetary policy was managed. it is not necessary to go into detail of what that rate was and how it works. basically, what it did was allow

the feds to raise interest rates sharply. again, as you know, raising interest rates slows the economy and brings inflation pressures down. as paul volcker said, to break the cycle we must have credible and disciplined monetary policy. it worked. in the years after the program began, inflation fell quite sharply. you can see from 1980 to 1983, inflation fell from 12 or 13% to 3%. relatively quick was the decline in inflation. it offset the problems of the late 1970s. in that respect, the policy of the 1980s were quite successful. they achieved their objective of bringing inflation under control. however, nothing is free.

one of the effects of the policy was to raise interest rates quite sharply. i do remember vaguely -- i had just got out of graduate school in 1981 or 1982. i remember looking at the possibility of buying a home and being informed that the mortgage rate was 18 and a half percent. interest rates were quite high, and as you might expect, that brought down economic activity and effective inflation as well. if you look at the graph, you see this as the unemployment rate. the high interest rates, which were necessary to bring down inflation, caused a very set sharp recession. the unemployment rate in 1982 was 11%, even higher than the most recent recession. there was definitely a very negative side effect from

tran-ones activity. now, i think in interesting aspect of this is that the political pressure that you can imagine on the fed and chairman volcker was intense. during this period, it was common practice to mail to the fed two by fours. on the two by fours it would say, stop killing construction or save the farmer, whatever it might be. the high interest rates were having negative effects in the economy. i have a few goodies on my just to remind me that inflation is a concern and that we always have to pay attention to price stability. , this is also an example of why this is important. if paul volcker hadn't been reelected, he wouldn't have been able to sustain this policy, but

instead he maintained it and received sufficient support from president reagan and from the congress and he was able to carry through the policy, which again was helpful in bringing inflation down. now, during the 70s, obviously inflation was volatile. we saw how much it moved around. we saw that there -- i didn't mention, but there was a sharp recession also in 1973, 1975 after the opec embargo. then, of course, there was in the 1980s volcker brought down inflation as the economy went into recession. paul volcker left the chairmanship in 1987. he was replaced by mr. greenspan, who, was again, held the position for almost 19 years from 1987.

as the court suggests, one of the combatants of his tenors was achieving greater economic stability. it helped achieve greater living in the united states. there was so much improvement in the united states that the period has become to know -- to be known as the depression is the '30s. the graph covers from 1950 to the present. the lines to show you quarterly growth rates and gdp, so a sharp line -- a sharpie shows increases, gdp growth, negative

declines, it shows the following gdp growth. these are quarterly numbers. you can see the bounciness series of growths followed by slower growth. the yellow bar is one standard deviation band. essentially, it is a measure of average volatility of gdp growth during the period between 1950 and 1986. you can see that the growth was very able to route the period. >> now, amazingly, starting from 1986, look at what happens to their ability between 1986 into 2007 the durability from quarter to quarter is much less, and the blue line shows the average.

ability of one standard deviation band, growth in the latter period. it is striking how much more stable economy was over this 20 year period. this was true not only through gdp growth, but also true for inflation. this is the same picture, basically, the vertical line in the middle of the graph, that is the time. from pre-1986 and post- 1986. the graph shows inflation, quarter by quarter, measured by the consumer price index. again, the bar shows standard deviation average volatility of inflation in the pre-1986. you can see that huge spikes in the 1970s. in post- 1986, you see much more stable and lower volatility.

so both growth and inflation were much more stable. it was to a quite remarkable extent. something that economists commented on frequently. this was called great moderation. why was the economy so much more stable? why was it stable between the mid- 80s and the mid- to thousands? wow, there r. a lot of issues, a lot of papers. i think there is a bit of evidence that monetary policy played a role in creating better stability. in particular, bulger's contribution was, even though his short-term efforts to bring down inflation in the early '80s led to a high recession, led to a lot of pain, there was a payoff. that payout was an economy that was much more stable with low

stable inflation, a more stable monetary policy. more competence on the part of people in households, and that contributed very importantly to broader stability. so remember that friedman pointed out that there was no long-term trade-off by keeping inflation a little higher, you couldn't lawyer -- lower unemployment. in a different sense, lowered it stable inflation does make an economy more stable. it supports healthy growth and productivity of economic activity. low inflation is obviously a very good thing to have. the reduction in inflation that occurred in the 1980s was really a global phenomenon. a lot of countries had inflation problems in the 1980s, but all around the world, even

developing countries brought down inflation rates quite considerably. that has been a positive for economic growth and stability since the mid- 1980s. not all of the great moderation's cost by monetary policy, there are other factors that play a role. i mentioned general structural change in the economy. an example would be that over time, firms have learned how to manage their inventories much more effectively. the practice of inventory management is a practice whereby, instead of having large stocks of inventory on hand, burns only a choir materials when they need them to produce. without large stocks, it reduces the fluctuations in the economy because if demand slows down, you don't do any more production for quite a wild until you run down the inventory.

it is just an example, and many others to be cited, of better business practices. in the economy, it made things more stable. it could be that it was better luck. fewer oil shocks and other things happening. that could have contributed to the great moderation. those previous pictures show, i hope it is clear, it was quite a striking change in the way the economy operated after the mid- 1980s. okay. this takes us up to the mid- to thousands. we can begin to talk about financial stress and recent developments. just a final word about great moderation. one of the other aspects of that. is that there weren't any big

damaging financial crisis is in the united states. there was the stock market crash in 1987, but it did not do much damage. was the that was the economy was

all everybody talked about was cartel parties and how much money are you making on your home and made working unnecessary because all you had to do was check your real estate listing. so there is a lot of excitement and enthusiasm about the fact

that house prices are going up and making everybody rich. at the same time, the standards for underwrite a new mortgages were getting worse and worse which in turn was bringing more and more people into the housing market and pushing up prices even further. so let's talk a bit about mortgage quality and what happened. prior to the early 2000's, homebuyers were typically asked to make a significant down payment, 10%, 15%, 20% of the home price and of course they had to document their finances, their income, their assets and so on and failed to persuade to make them alone which in many cases might need four or five times their annual salary. unfortunately as house prices rose, many began to offer

mortgages to less qualified borrowers, called sub-prime mortgages and these mortgages often required little or no down payment. i think nonprime instead of sub-prime. sub-prime with the lowest quality in terms of the credit of the borrowers but there were other mortgages that were below so-called prime mortgages and other types of mortgages that were also not up to the additional standards of credit underwriting so i say nonprime. what was happening again was that essentially lenders, mortgage lenders were moving further down the credit spectrum lending to more and more people whose credit was less stellar. you can see this in a number of different ways. on the left side of this picture is the percentage of mortgage

origination's that new mortgages created that were nonprime. that is sub-prime or all-day or some other lower-quality mortgage and you can see a sharp increase particularly in the middle of 2,002,006 almost a third of all mortgages that were originated were nonprime. another indicator of the consideration of mortgage quality in the right figure is% of nonprime loans with no or low documentation. if you're going to make a loan to somebody whose credit is shaky, who doesn't have a down payment and maybe their fico fico fico score is low and so one you would want to ask them even more questions about their income and their prospects but in fact it went the other way and 60% of nonprime loans had little or no documentation to

describe the creditworthiness of the borrower. so it was clearly an ongoing consideration of mortgage quality. now this situation could not go on forever. this picture shows, i'm sorry. this picture shows the net service ratio as house prices went up-and-up. the amount of income or the share of income being spent on their monthly mortgage payment went up, and as you can see eventually the mortgage payments became quite large share of personal social and calm, finally reaching the point that the cost of homeownership was high enough to begin finally to dampen the demand for new housing and as we see that mortgage, debt-service ratio

collapsed after that basically because interest rates came down but des moines -- main point here is high payments on mortgages finally meant that there were no longer new borrowers, new home purchase or so house prices burst, the bubble burst and here's a picture of home prices. you can see again the sharp increase from the late '90s up until about 2006, but from 2006 until today, house prices have fallen more than 30% so there has been a very sharp decline in home prices across the country. now one comment about this picture, if you look at this picture you might say to yourself oh my -- we have a long way to go he could as we see today are still a little bit above where they were 15 years

ago. but remember, these prices are in dollar or nominal terms. they are adjusted for inflation so if you even there were 2% inflation a year over a period of 15 years that would raise prices by 30 to 40% so if you adjust this for inflation you get the house price now coming closer to where they were before the beginning of the bubble. now, the house price collapse had some significant consequences. one consequence is that many people who had felt rich because their home values have gone up and they have a lot of equity, suddenly they found themselves underwater which means their mortgage and the amount of money they owed was greater than the value of their home. so this is negative equity, so

this is an upside down situation where the borrower is in fact, has negative wealth or negative equity in the home and you can see that starting in 2007, the number of mortgages that were in negative equity grew very sharply. currently there are 12 or 13 million mortgages out of a total of 55 million or so in the united states so roughly 20 to 25% of all mortgages are now currently underwater. that is a very big change from the situation we saw before. at the same time, given the decline in house prices, given the fact that a lot of people borrowed more than they could afford, the decline in house prices also lead led to a big increase in mortgage delinquencies and people not paying on time and ultimately the bank taking over the

property for foreclosure and reselling the property to somebody else. these mortgage delinquencies, you can see that in 2009 there were more than 5 million mortgages in delinquents he, which is again almost 10% of all mortgages. so a very high rate of delinquencies. now of course, what we just looked at was the effect of the house price bust on borrowers and homeowners. those are quite serious but of course there is another side to this which is the lenders, the people who made the loans and obviously was something close to 10% of mortgages in delinquents say, banks and other holders of mortgage related securities suffered by the losses in that prove to be an important trigger of the prices. there is an interesting question

here. in 99, 2,002,001 we had a big increase in stock crisis including not only.com or the tech bubble prices, and those prices fell very sharply in 2,002,001 and a lot of wealth was destroyed by that. and in fact the amount of paper wealth destroyed by the decline in.com and other stock prices was not radically different from the amount of wealth restored via the housing boom and yet as you know, the dotcom bust led only to a mild recession. the 2001 recession went from march to december of 2001, really only eight-month recession. unemployment rose but it was not anything nearly so dramatic as the 80's or more recently.

and so, here we had a big balloon bust and an asset price but without too much real serious or lasting damage to the financial system or the economy. now, in recent days we had a housing boom and bust. if we were looking back at 2001 we would think well that is going to cause a slowdown in the economy but it probably won't be that serious. that was one of the views that we were discussing in the fed. might this be more like the 2001 episode in something different? ..

again, we will talk about this in detail next week. just a preview, there was vulnerability from both a private sector and also in the public sector. on the private sector, many borrowers and lenders took on too much debt, too much leverage. one reason they might have done that is because of the great moderation. there were 20 years of relatively calm economic and financial positions, so people became more confident, they became willing to take on more debt. the problem with taking on too much debt is that if you don't have much margin, the value of your assets go down. the value of your house. pretty soon you find out that you have an asset which is worth less than the amount of money that you borrowed. the second problem, a very important problem, was that throughout this period, financial contracts and transactions are getting more complex. in ways which i will describe. the ability of banks and

financial institutions to monitor and measure and manage those was not keeping up. their it systems, their resources be devoted to risk management, were insufficient for them to understand fully what risks they were actually taking and how big the risks were. so if you would have asked a bank in 2006 that house prices fell 20%, they would have greatly a underestimated the impact of that on their balance sheets. they did not have the capacity to measure accurately or completely the risks that they were chasing. risks that they were facing. on the funding side, financial firms, it in a variety of contexts, relied on short-term funding which can have a duration of love one day or most of it is less than one day.

most of it is less than 90 days. the banks that were in the 19th century when the process of making loans, they had essentially -- they had a very short-term liquid form of liability, which we will see with subject to runs, which the same way deposits were subject to runs in the 19th century. the final private sector on our ability was the use of exotic financial instruments, complex derivatives, and so on. an example of this was the default swaps instituted by the aig products company. aig used the credit flop to sell insurance to investors on complex financial instruments that the investors held. basically, what they were promising was that if they lost money on the collateralized debt or whatever these things are, as

long as the economy was doing well and the financial system was doing well, they were collecting premiums. there was no problem. when things went bad, it meant that they were exposed to normal -- enormous losses. those are some of the problems that occurred on the private sector. we talk a little bit about the public sector. there are also serious problems as well. first, the financial structure -- had been changed a number of times. a sickly, it was the same structure that was created in the 1930s after the -- during the depression. particularly, it couldn't keep up with all kinds of changes in the structure of the financial system. one aspect of that was that there were many important financial firms that didn't really have any serious comprehensive supervision by any

financial regulator. an example of this was aig. they were an insurance company. the insurance regulators looked at the products he sold it the office of supervision looked at the small banks that they owed. the small banks that they owned. nobody was looking carefully at this problem that i have just described. another category of firms that didn't have much oversight of investment banks, like lehman brothers and bear stearns and merrill lynch. there was no statutory oversight of those firms. they had a voluntary agreement with the sec for oversight. but there really was not conference of oversight of those firms. as i talked about, another group of forms was the government-sponsored firms, fanny and freddie.

for reasons, those were inadequate. there were a lot of holes in it, and there were many firms that proved support in the crisis but did not have good oversight. even where the law was provided for regulations and supervision's, it also wasn't done as well as it should've been. while this was true across a whole range of agencies and parts of the government, let me talk about the feds, the feds made a mistake in supervision regulation. i think i would point out two things. one moment would be our supervision of banks and bank holding companies. we did not press hard enough on this issue of measuring. i mentioned before that a lot of banks simply did not have the capacity to really understand the risks that they were taking. the supervisor should have pressed him harder to develop

that capacity. if they did not develop that capacity, they should have a good there ability to take these risky positions. i think the fed and other bank supervisors did not press hard enough on this, and that turned out to be a serious problem. another area where the fed, i think, performed poorly was in consumer protection. the fed had some authorities to provide protections to mortgage borrowers. if used effectively, would have reduced at least some of the bad lending that occurred during the latter part of the housing bubble. but for a variety reasons, that was not done to the extent that it should've been. in 2007, when i became chairman, we did undertake some of these protections. it was obviously too late to avoid the crisis.

where there were authorities and powers, they were not always effectively used. that obviously lead to some weaknesses. a more subtle point, the way our system is set up, our regulatory system, individual agencies like the fed or like the occ or the office of supervision, typically had a responsibility of a specific set of firms. the office of supervision was only responsible for this and similar institutions. unfortunately, the problems that arose during the crisis were much broader base than that. they transcended any single firm or small group of firms. they transcended the whole system. essentially, what was missing here was intention -- enough attention being paid to affect

the system as a whole, as opposed to just individual firms. nobody was really in charge of looking to see whether there were problems related to the overall financial system, or the relationship between different markets and different firms that could create stress. or even a crisis. those were some of the vulnerabilities in the public sector. we are going to come back to these phone abilities and how they played out

this was one of the reasons that house prices went up as much as they did and in fact it is true that low interest rates will, that the monetary policy achieves is to increase the demand for housing and thereby to strengthen the economy. now as i say this is very controversial but it's also very important not only because we want to understand the crisis but because going forward we want to think about you know what should we take into account when we look at monetary policy and to what extent should we be thinking about things like housing bubbles when we make monetary policy? we looked at this in great detail inside the fed and a lot

of research outside the fed and i know -- just warn you there is no consensus on this and you'll probably hear different points of view but the other thing i see what we have done within the fed suggest monetary policy did not play an important role in raising house prices during the upswing. we need to talk a little bit about some of the evidence on discretion. one piece of evidence is the international comparison. people don't appreciate that the united states, the boom and bust in the united states was not unique. many countries around the world had rooms and busts in the house prices and those booms and busts were not very closely related to monetary policies of other countries. for example, the united kingdom had a house price boom that was as big or bigger than that of the united states but monetary policy was much tighter in the u.k. than it was in the united

states so there was a bit of a puzzle for the monetary theory of the house boom. another example which is not on the slide as you know germany and spain both share the euro so they have the same central bank, european central bank in the same monetary policy. germany's house prices flattened throughout the entire crisis. spain had an enormous house price increase considerably larger than that in the united states so the cross national evidence leads to at least some concerns. the second issue is the size of the puzzle -- size and as i said, there is a lot of evidence if you look at that over a long period of time but when you look at how much interest rates changed including mortgage rates and how much house prices bones, based on historical relationships we can only explain a very small part of the

increase in house prices. in other words the increase in house prices was way too large to be explained by the relatively small change in interest rates associated with monetary policy in the early part of 2000. the final piece of evidence i would raise is the timing of the bubble. robert schiller, an economist who who is well-known for his work on the bubble including the housing bubble argued that the housing bubble began in 1998, which of course was well before the 2001 recession and therefore it the cut in the federal reserve interest rates. moreover, house prices rose very sharply after the tightening began in 2004 so the timing does not line up particularly well. now what the timing does suggest there might get couple of other possible explanations. one is obviously 98 was right in the middle of the tech bubble,

the tech boom and it could be that again the same psychological optimism and the same mentality that was exceeding stock prices may have been exceeding house prices as well. another possibility is that has been pointed out by a number of economists, is that in the late '90s there was a very serious financial crisis called the asian financial crisis that hit a number of asian countries and other emerging market economies as well and after that crisis was tame one response was that many emerging market countries began to accumulate large amounts of reserve and to acquire same dollar assets. there was a big increase in demand for assets including mortgages they came from abroad as countries decided to require more dollar assets in the reserves. i think interest really probably

the strongest correlation across the country that you can find the house price increases is capital inflow, the amount of money coming in to buy mortgages and other safer or at least seem to be safe for assets and that timing would fit with a in 98 or so beginning. so, those are some arguments against the view that the monetary policy was a big source, an important source but i emphasize economists need to face this issue and it's a very important issue because going forward we also have to think about the implications for low interest rates on the economy and on the financial system and in particular currently just out of caution we are doing a lot of financial oversight and a lot of regulatory oversight to make sure that nothing is getting unbalanced in the financial

system. here are a few references to take with you if you want to get into this more. the bottom one i did a couple of years ago which summarizes some of the evidence. the result of all the internal federal reserve research. there is a paper there by carmen reinhart which makes the point that interest rates did not move enough to move house prices and they also make a point about capital inflows and it is a recent survey which comes to the conclusion again that there was no connection. but again i emphasize this is something that is continuing to be debated. what were the consequences of a crisis? we will talk more about the crisis next time but the economic consequences, here is a measure of financial stress. in index which combines a variety of financial indicators that indicate the financial

system is under great stress and you can see what happens in 2008 and 2009. a sharp increase in financial stress and the financial market. stock market plunged. we have been talking about the first declined their, where it says the 2,002,001 recession. that was the very large decline in tech stocks but notice the decline in the stock market and the more recent recession was even bigger than they won in 2,002,001. here as home construction and you can see the sharp decline there. home construction fell before the recession because of course there was a trigger to the crisis are looking to the right you can see it still hasn't really begun to recover. and then finally unemployment rose very sharply and peeked around 10% and is currently falling down to about 8.3%.

so if the next two elections we are going to get into the crisis in more detail and talk about how the housing boom and bust and vulnerabilities in the financial system led to the worst financial crisis at least since the great depression and possibly worse than the depression and how the fed responded to that crisis and in lecture for we will talk about the recession recovery in the aftermath and again the policy responses there. so, that is what i wanted to cover today and we have a few minutes and i would be happy to take questions. >> in the previous -- >> what do we take a mic? >> in the previous lecture, --

and lat lead to a double dip. [inaudible] >> it is challenging. it is certainly one of the reasons that you know we have so many economists and everything we can use to try to figure out what the appropriate moment is to tighten or to ease policy and it's not an easy thing. forecasting is not very accurate and so we have to provisionally keep looking at what is happening and making adjustments as we go along. the 70s were particularly difficult because at at that time inflation expectations were not at all tied down. one thing that happened then was that if gas prices went up, then people began to expect higher inflation and then they began to

demand higher wages to compensate for the higher prices and then of course higher wages lead to higher prices and so on and so one and that in turn was the result of the fact that everybody expected inflation to go up and nobody had any confidence that the federal government in general would keep inflation stable. a very different situation now unfortunately and this is -- after a long piers of low inflation people are comfortable that inflation will stay reasonably low despite the fact that there are ups and downs, gas prices and so on and that helps a lot because with inflation staying low, the fed has more leeway. if policy is easy for it period, that is not necessarily going to feed into a wage price spiral that will create a bigger inflation problem down the road so keeping expectations low and in fact one of the great accomplishments of chairman volcker and chairman greenspan

an important objective of central banks around the world, so the environment changes over time and the difficult task of the 70s was particularly difficult because at that time with expectations so volatile, any kind of inflation pressure from gas prices quickly said -- fed into wage demands and other prices so it's a much more difficult situation. >> i had a question about the monetary policy -- [inaudible] [inaudible]

cim chairman now. [laughter] >> if you were chairman in 2001 would you think it was the correct thing to do? >> the very first speech, i was the governor of the fed board and i was on the fed board at that time in the first speech i wrote when i became a governor in 2002 was about bubbles and financial regulation and the theme of my speech was use the right tool for the job. the problem with tying interest-rate policy to perceived bubbles in asset prices is like using a sledgehammer do you know, kill a mosquito. the problem is how do we only do one part of the economy if interest rates are dedicated to achieving overall economic

stability? so we estimate that in order to have stop the increase in house prices and interest rates would have had to have been raised are medically during a period time when inflation was falling down towards zero and so generally speaking the right way to use monetary policy use it to achieve overall macroaccountability. that doesn't mean you shouldn't use more macroimbalances and i think what we could have done, the federal reserve could have done if we had been more aggressive on the rig the tory side to make sure for example the mortgage is being made for better quality and firms were appropriately monitoring their risks and so on so i think the first line of defense should be regulation and supervision. now i think not to be too sure of anything, keeping humble and for that reason i think we should never rule out the

possibility that if all of our regulatory and other types of interventions don't achieve the stability that we want that as a last resort monetary policy might be modified to deal with that but again because monetary policy is such a blunt tool which affects all prices and affects the entire economy you can get a focused laser type of tool that will be much better for everybody. [inaudible] [inaudible] >> well, first of all we would like to get a better balance in

general so monetary policy stimulates capital formation as well. it also takes exports so we would like to get overall, over time it better balance in consumption and investment and exports as well as government spending so monetary policy is consistent with a better balance. with that being said we are now way below where we were before the crisis. consumer spending has not recovered and it's quite relative to where it was before the crisis. private debt has come down and importantly we are talking about the current account imbalance with the trade deficit that the u.s. has. it has come down quite significantly so all those things that moved, if anything the short-run because we lack a source of command to keep the economy growing. now again ahec read that just as every country needs to have an

appropriate balance, capital formation exports and government spending and that's an important task for us going forward but right now dead in consumption and so one, we are still way low relative to the pattern before the crisis. >> the latter part of your lecture was about policy and the dotcom bubble. you argued that was not a trigger to increase in the housing prices but to look at it from another point of view, what is your take on the argument that the low interest rates caused private investors and banks to make riskier trades because of the low interest-rate at the time and how could that

have also figured into the crisis? >> that is a good question and i think there is some effect of low interest rates on risk-taking. once again similar to the previous question the issue of getting a right balance. during a recession generally speaking on most dimensions, investors become very cautious and certainly that is where they have been for much of the recent past. again, you want to get an appropriate balance for the amount of risk being taken, not too much and not too little but once again this is another reason why financial supervision and regulation needs to be playing a role. particularly with institutions, large institutions, banks. we need to be looking directly at those firms and making sure that they are managing their risks appropriately so again it's a question, what is the right tool for the job?

>> the slides on the housing bubble show how clearly one thing led to another, rising prices eventually falling. when you are serving in 2000 what did you think would happen to the rising house prices and the housing bubble? do you think it would eventually lead to a recession and there's a book called the big short by some investors and -- that link. what is your take on that? >> as i tried to argue the decline in house prices itself, by itself was not obviously a major threat. when i was the chief, i was the head of the chairman of the council of economic advisory under president bush than in 2005 we did an analysis of what would happen if house rates came down and what we concluded was we would have a recession but we

didn't anticipate that the financial crisis, we didn't anticipate the decline in house prices would have such a broad-based effect of the stability on the financial system and when i became chairman in 2006 house prices were already declining in two weeks after it became chairman i gave that testimony that house prices were falling and that would have a negative impact on the economy and we are not sure of the consequences and so on. the fact that house prices might come down you know that was always the possibility that the really hard thing at least in my view to anticipate fully was the effects of the decline in house prices would be so much more severe than the similar decline in.com stocks and again the reason as i will get into more next time are the ways in which the decline in house prices affected mortgages, effective the soundness of the financial system that created a panic which in turn led to the

instability of the financial system so we have a whole chain of events that was critical. it was not just the decline in house prices. it was the whole chain. miles? >> my name is miles mcgreevy. amidst the dispersion of cheap credit in the years preceding the housing crisis and there is a bipartisan push for american homeownership spearheaded by president clinton in later carried on by george w. bush. to what degree could be argued that aggressive policies and lending during this period country but just the eventual eroding of standard prices? >> another controversial question. there was some pressure to increase homeownership and there was the american dream aspect of owning a home and so on. homeownership arose during this period. but i think to put it all in the government is probably wrong in this case. most of the worst loans were made by private-sector lenders

and had been sold to private-sector securitizations. it didn't touch freddie and fannie for example. it went directly to investment. fannie and freddie did acquire subprime mortgages but that was later in the process rather than the beginning of the process so that think there was some of this going on everywhere including the private sector without encouragement from the government who was a big player in the decline in mortgage underwriting and in the selling of packaged mortgages to private investors. yeah. >> so i think one of the hallmarks of the fed under your leadership has been transparency i am wondering whether you think perhaps too much transparency could damage credibility of the central banking and get things wrong, i guess.

>> we didn't get the transparency today but just generally i think i agree. transparency is very important. important for at least a couple of reasons. one is, i talked to ready about the central bank being independent so there is one reason they are there but if the central bank is independent and making important decisions which affect everybody, then obviously it has to be accountable because people have to understand what it is doing and why it is doing it and what is the basis for the decision so for democratic accountability it's important for the central bank to be transparent and i testify all the time, give speeches and i have all kinds of town halls and other meetings like this and i think it's very important for me at press conferences for me to explain what we are doing and why we are doing it. that is one reason for transparency. the other is that over time this increase understanding that most of the time transparency can make monetary policies work better so for example if the

federal reserve communicates that its future actions will be extrawide and conveys that information to the markets, the markets may respond to that by building into their interest rates and may have a more powerful effect on the economy so communications also produce uncertainty and helps increase the impact of monetary policy in the financial market. i have time only for one more. guest? >> thank you mr. chairman. my question is with regards to instability and you mentioned macroinstability and long-run economic growth and given the massive amounts of liquidity that has been pumped into the market recently house have been able to maintain expectations so low? >> we will have to come back.

let's try to stick with a different topic. on the last day we will be talking about current monetary policy and there will be plenty of opportunities but let me answer in a reef way which is that i think we owe something to our predecessors in this respect, chairman volcker in particular and also chairman greenspan. they got inflation down low and kept it there and people get used to what they see, right? in a world in which inflation remains low, year after year, people become more confident that the central banks in the fed or whatever will meet its mandate to keep inflation low so it has been very striking even though we have had movements in oil prices and other shocks in the deep recession throughout most of the period. inflation expectations have been very well tied down to the 2% range that the fed is trying to

hit. thanks and next week we will go into mortgages and prices. thank you very much. [applause] >> this has certainly exceeded my expectations and we are grateful that you stayed all the way to 2:00 it again. as what to say about there is still questions and so why don't you send one or two questions to the blackboard site so we can capture them and talk about them not next week but the following week only have part discussion. have a great weekend everybody and we will see you next week. [applause] [inaudible conversations]

with the tax filing deadline weeks away, the irs commissioner douglas shulman came to capitol hill to talk about the tax enforcement agencies budget.

the agency is seeking an 8% budget increase for 2013. last year irs caught $14 billion in fraudulent refunds. we also hear about the difficulties same-sex couples face in filing their taxes due to differing state and federal laws. this house ways & means subcommittee hearing is an hour and 10 minutes. >> the hearing on the internal revenue service fiscal year 2013 budget request and the 2012 tax season. hard-working american taxpayers have faced incredible challenges over the last several years. many have struggled with unemployment, sluggish economic growth and doubts about her country's economic future and because of out-of-control spending and public debt. this tax season comes around. the tax code which has tripled in size since 1975 continues to burden american families and small businesses with too many taxes, too many loopholes and

too many pages. it's estimated that the average taxpayer spends 21 hours and over $250 combined with tax code each ear and keep track with a complex and difficult to understand tax code were released hire someone else who does. internal revenue service of course has the unenviable job of administering and enforcing our convoluted tax code. as we meet today we are in the middle of the 2012 tax return filing season and millions of taxpayers and employers are willing to meet their tax filing obligation. some have reported experiencing delays in receiving tax refunds and programming errors at irs have delayed some 6 million returns which we will discuss at today's hearing. we will also talk about the frustrating issue of tax fraud and improper payment. taxpayers are exasperated because while they work so hard to comply with the tax code,

they see press reports as thieves robbing the treasury of billions of dollars each year. one recent press report detailed how an identity theft ring in florida committed $130 million in fraud through stolen social security numbers. on top of this tens of billions of dollars tax money is lost each year through improper payments as refundable tax credits including $17 billion a year for the earned income tax credit alone. finally we will talk about the administrations fiscal year 2013 budget request for the irs for fiscal year 2013 administration requesting $13 billion in appropriations for the agency and an increase of 8% from fiscal year 2012. included in this request for over 360 million nearly 900 new

to implement portions of the affordable care act including a controversial individual mandate tumulty. we look forward to discussing this and the other new initiatives that they irs plans for fiscal year 2013. with that i would like to welcome commissioner douglas shulman here today and i look forward to a full discussion of this agency, his mission and the ongoing tax return filings. before i yield to the ranking member mr. lewis i ask unanimous consent from all members of written statements be included in the record. without objection, so ordered. i will also ask unanimous consent that gao's report on the 2011 tax filing season and fiscal year 2012 budget request be included in the record. without objection, so ordered. mr. lewis. >> thank you very much madam chair for holding this hearing on the internal revenue service.

i'm pleased that we have the commissioner in force today. i have serious concern about the effects of regions budget cuts on taxpayers, tax collection in the agency operation. in our most recent report to congress the national taxpayer advocate stated that the most serious crime on taxpayers at the irs is not adequately funded to serve taxpayers. i fully agree with that statement. this year the agency's budget was cut by over $300 million. this cut -- telephone calls have increased by 34% and had decreased by 20%. over 65% of taxpayers seeking telephone assistance are able to speak to an irs employee and an

average of 17 minutes. taxpayers seeking a personal assistant also have been harmed. this is clear from the very long wait times at taxpayer assistant clinics. the budget cuts also harm agency operations. the cut force agencies to lay off thousands of employees. the majority of these employees work in enforcement. their reduction does not help tax collection or reduce deficits and it makes no sense. i look forward to discussing these issues in the agency proposed budget for next year. madam chair, finally i would like to take a moment to thank him for his service and dedication to the agency and to this congress. as many of you know lloyd is the legislative affairs director for

the irs and he plans to retire this summer. floyd began his government service as a congressional page undersecretary fulbright of arkansas many years ago. i thank the senator from -- i worked with floyd on this committee and i know that he will be missed. i wish him the best as he retires. thank you for your great service. and with that madam chair i yield back. >> thank you mr. lewis. i would like to welcome back the commissioner of the internal revenue service, mr. douglas h. sheldon who has served as commissioner since march of 2008. commissioner shulman thank you again for your time today. the committee has received a written statement and it will be made part of the formal hearing

record. you will be recognized for five minutes for your oral remarks in you can begin when you are ready. >> thank you very much to all the members of the subcommittee for giving me the opportunity to testify today. i want to talk about, little pout filing fees and our strategic initiative and that presidents 2013 budget which would give us much needed increase over the 2012 enacted level. a significant portion of the presidents 2013 budget would restore congressional reduction in irs funding made over the last two years. i want to start by saying i believe it is incumbent upon all of us in the government to be as efficient as possible and to spend taxpayer dollars wisely. for the irs, that means finding savings where we can and continuing to invest in strategic priorities that allow

us to improve service in voluntary compliance. from fiscal year 2009 through the 2013 proposed budget, we will have achieved nearly $1 billion in budget savings and efficiencies in core irs operations. the savings and efficiencies reflect an across-the-board commitment at the irs to find better and more efficient ways to administer the tax system. at the same time, we collect $200 in revenues for every dollar spent on our budget. we also collect $2.4 trillion last year. we issued 110 million refunds for $345 billion to hard-working americans, taxpayers. are compliance activities brought in a direct revenue of

$55 billion we blocked another $14 billion from going out the door to taxpayers who were trying to commit fraud on the government. in this regard i want to point out the administration's proposal for irs funding includes critically important enforcement initiatives that would be funded through a program integrity cap adjustment let me just say that this proposal makes sense and is a reflection of the president's administration's belief that irs funding actually helps to reduce the deficit. congress is literally leaving money on the table, which would allow for deficit reducing initiatives and tax compliance well we make specific funding decisions to the normal annual appropriation process.

let me just talk about a couple of things we have done over the last few years that have moved the agency forward to position it for the future and do a better job of serving taxpayers and making sure they comply with the tax code. let me just start with filing fees. our fee file continues to grow. this year we have issued about 59 million refunds for a total of $174 billion. that is about the same number as last year. and we deployed several new large technology systems, and i would be happy to talk about those as we get further into the filing season. in strategic areas, this year for the first time in history, we have moved from a weekly batch cycle to daily processing of tax returns through k2.

k. k2 delivers on the promise of irs modernization going back two decades and we are very proud of this achievement. a couple of years ago i told the committee we restructured our technology program and we were going to deliver major technology initiative and this year we have delivered those initiatives. we also have the highest score ever last year on the american customer satisfaction index rating, which is the overall score we track for taxpayers satisfaction with their interaction with the irs. we scored 73 on this index and we are very proud of this achievement and constrained budget environments. are returned prepare program is now up and running. to date more than 840,000 paid prepares have registered with the irs and both the testing and education requirements are well underway. this is going to be one of the most important initiatives in the tax system and several

decades. we have also made significant progress in our battle against offshore tax evasion. we have collected more than $4.4 billion to date through our offshore voluntary disclosure program. we are getting people back into the system through this and other offshore initiatives. and i think we have made significant progress as i said. we cut $1 billion out of our core are bringing budget through the 2013 budget statement or budget proposal that we had given. let me conclude my opening statement with one concern that i want to emphasize for the subcommittee. i think it's quite important to the ways and means committee as a whole. in recent years it seems taxpayers increasingly face uncertainties about what the tax law will be for the next filing season. this year we have the irs are

very concerned what with the status of the amt and the so-called extenders. if the anc and extenders are not dealt with in a timely fashion, we may have to delay the start of filing season for many millions of taxpayers, as we have done in prior years. and i have written to this committee before that it is imperative that whatever actions congress decides to take on amt and extenders that this action happens by the end of the year which will still be laid from an operational perspective but not longer than that in order to prevent even more widespread interruptions of next year's tax filing season. >> thank you commissioner shulman. i think we will turn to questioning now. we will alternate between five minutes and get to every member.

last year he testified in front of the committee that enforcement of customer service are not an either/or proposition. providing quality taxpayer service especially during the filing season is important to help taxpayers avoid unintentional errors, inadvertent noncompliance and other post-filing interactions with the irs. so far this filing season access to live irs is down to 65% and taxpayers are waiting an average of 18 minutes to talk with and irs the system. the rate of taxpayer payers getting busy signals or that are disconnected from the irs has roughly doubled, get this is not a new problem but rather seems to be a bad trend. sen so for the percentage of answer calls has dropped from 87% to 70% in 2011.

lasted average wait time was 12 minutes and in 07 it was five minutes or less. personally i have heard from campus eta said it's not uncommon to be on hold for 30 minutes. according to g8 out this decline in customer service has occurred despite the number of full-time people dedicated to answering the phones, having increased from 8000 in fiscal year 2007, 288-2011 and despite greater use of automated answers and self-service to whether shiite shiite -- web site options. seems to me the irs has placed greater emphasis on enforcement at the expense of surface yet as you told us last year the lack of service for those who have questions will only lead to greater noncompliance than if those questions have been answered. so can you help me better understand a few things. first what actions are being

taken to ensure that taxpayers are able to reach a live irs assistant and secondly given your belief that the irs must deliver enforcement and customer service, do you think the budget request focuses too much on enforcement while sacrificing customer service and then finally does the irs consider this to be an acceptable level of service? >> thanks for bringing up a set of important issues. first, let me repeat what i told you last year and what i talk about a lot with our employees and members of congress and everyone involved in the tax system, which is that it is not an either/or proposition. we need to run service operations and compliance operations to make the nations tax system worked. let me put in context the resources that we have this year to put towards both enforcement

and customer service. we had a 300 million-dollar budget cut which was $1.2 billion less than the president had requested for service and enforcement last year. we also had to exhort for rent and increases about $200 million in inflation and $66 million was put into our technology accounts that we were very appreciative of so if we take 300, 266 we had a 566 million-dollar reduction in our core services and enforcement accounts. what we are trying to do is do the best that we can with the resources we were given. last year our level of service was about 17%. this year it is running at about 66% even though he predicted about 61% and the reason for that that is we really squeezed

efficiency and we routed more calls and more people are using automated system and people are not using our web site. as you said the wait is longer. at a certain point we can squeeze many of agencies out of technologies and other efficiencies as we can but it comes to how many people do we have answering the phones? the numbers you gave us that we have more people and we have more taxpayers and the more it's complicated tax code right now. another number that is interesting to look at is how many people hang up in the first couple of minutes because we have added a feature that tells them how long they will wait and if we tell them if you want to use our web or automated phone or callback, then our phone level of service this year 77% if you look how many people have hung up in the first couple of minutes. my view of this is where taken we have taken a whole bunch of action and at a certain point we need money to invest and you need people to answer the phones were live service.

i am pretty proud that while services down, it has not degraded to a point where it could have gone given the cuts and the answer to your last question, which is do we think it is accessible? i want everyone who contacts the irs to get what they need from the irs. this year, everyone is not getting what they need from the irs but i think we are doing a pretty good job given the resources we were given. >> thank you commissioner. i am just looking at data and the budget cuts compared to the level of service aren't always, they don't always follow, given this information from the gao. so we would just encourage you to continue to work on that and we would be delighted to work with you in any way we can. with that i would recognize mr. lewis for five minutes. >> thank you very much madam chair. mr. commissioner, the gao notes

a 34% increase in the number of calls for this filing season and about a 50% increase in calls answered by the related service. can you tell us what that taxpayers are calling about? what are the nature of the calls? >> calls can be anything from people want to set up a payment plan to people are curious. i'm filling out my return and i am going to take this deduction. how does that work? just general tax law questions to questions about where is the refund i filed last friday and my preparer told me i would get a refund on wednesday and i haven't gotten it. the calls very so we can get you a specific example of the calls are. >> thank you very much. a question of cap adjustment of

$700 for next year's budget for an enforcement program. what are your plans if any if you do not receive these resources? >> we are still early in the congressional budget and the appropriation cycle and so we are quite hopeful and in the past we have had broad bipartisan support for cap adjustment. the most recent cap adjustment was 2006 and 2007 with a republican president and a democratic-controlled congress, so we actually think that this is a bipartisan proposal. it reflects the administration's belief that prudent investments in the irs are good for deficit reduction and so there should be cap adjustments for our budget. and investments are good for the

long-term for the tax system. and so right now our position is that this budget program integrity cap adjustment are good for the system and people should agree with it and we have had good productive conversations in both a house the house and the senate about it. >> mr. commissioner could you tell me and the subcommittee how has the 300 million-dollar budget cuts impact of the tax service this year and what taxpayers services have been reduced? >> yeah, so i walk through the notion of the 300 million at the top but the impact is greater given where the resources were put in our budget. so i think we have a slight dip in the number of taxpayers served in walk-in centers but we had a corresponding increase in the number of taxpayers served in volunteer sites where we

encourage them to go to work in partnership with community organizations. our phone level of service is down by about 4% as compared to last year although automated calls are up and the wait times are longer, so i guess the way i characterized it is there has been a predictable effect because of less resources. with that said i'm quite proud that we have been able to mitigate some of that effect by making sure we work smart and we really drive efficiencies as hard as we can. >> thank you are area much mr. commissioner and i yield back madam chair. >> thank you mr. lewis. thank you mr. lewis. now we will give five minutes to the representative from minnesota. >> thank you madam chair. thank you commissioner for being here today. i just wanted to follow up on

the letter he sent to you not too long ago and you have been talking a great deal about this concept of a real-time tax system and it had a number of public meetings on the issue as well. i noticed there are benefits to receiving real-time verification and having that information on hand but i'm concerned that the cost could outweigh the benefits particularly in the sense that this filing system would lead to a burden that is similar to the 1099 provision being rolled out as part is that presidential health care law which would he a nightmare for american employers large and small so the irs is going to make this real-time system mark i'm sure you are going to want to have all this data earlier than required and you will probably want want more 1099 date as well. looking at what has been discussed today it seems compressing this timeline will make it more challenging for important requirements and an onerous and burdensome process right now. let me ask you this. what are you doing now to work

with existing stakeholders with the business community to kind of get their feedback and thereby end because there is no doubt increased regulatory compliance costs are at it till now and one of the reasons that level of uncertainty in the tax rate issues. this is a factor as well. can you talk a little bit about that? have you contacted any studies of the cost for changing deadlines for reporting informational returns or would you agree to an independent study is part of that process? would that make sense? >> thank you mr. paulson, to great question and important set of issues. let me give you some perspective on it. one of my jobs as commissioners to make sure i am helping bring the taxes come forward so it works better for the american people 10 years in 20 years from now than it does today and the combination of consumer expectations of us working

better and quicker and more timely with taxpayers with the advances in technology. clearly there is room for us to think about a future that works better for people and what really struck me is the average taxpayer. if they have an interaction with us beyond just filing, that interaction, they have their economic activity one year and they file their return the next year and it can take up to a year or two years to reach out to them so by the time we go back to them they have either spent their refund or their records and all the memories gone whether it is a small business or an individual and the current system actually has a lot of burden to people and we have heard that. i laid out the vision that would have taken a clear everything up rather than coming back on the backend of the time they file which is the simplest way to think about this. but i also recognize all the things which is this is something that would affect all

stakeholders from taxpayers to tax prepares to information return filers so the way we went about this is the way i think a public agency should go about this which is we held a series of public meetings which i hosted with stakeholders, a broad range of stakeholders to get their input. what we heard universally is basically, we would all love to have everything work faster in the tax system, but we need to make sure we work through the details together in a constructive fashion so that we don't add verdon to the process. so what we are doing now is taking the next step and really developing detailed visions about what this would mean. i think there has been some misunderstanding so we never suggested beating up are adding more information reporting. we have asked questions about what do people laugh now?

when is it ready and when did they get it to us? not, is is there more over they have to start doing what they already do faster? we have asked ourselves internally, how do our systems work and when can we do this kind of matching? >> let me just ask you this before time is running out here. how much more would an upgraded system cost to encapsulate all of this and that would be needed to run this type of system? you are here justifying the budget in terms of the request their request congress was given to the of to run an operation. >> this is this is a vision where -- having conversations with stakeholders in the first up is laying out exactly what it would mean. they're a bunch of things we can do right away which is processing for a system picker so we can have quicker engagement and so i can't tell you. there is no blueprint right now. we have laid out a vision and we have had a broad set of

stakeholder engagements and we are now moving and to have the next round of stakeholder engagements. >> would be fair to say you have a proposal at some point as a part of your vision? >> i think for sure we will have public proposals and we will have plenty of time for interaction. >> thank you. we will recognize representative becerra for five minutes. >> thank you madam chair. commissioner it's always good to see you in by the way thank you for the work you are doing give in the real budgetary constraints that you are facing and if you'll pass along to each and every one of your employees who are doing yeoman's work, i can imagine the stress that they are under given you have got thousands of americans waiting 10 or 20 minutes and many of them very unhappy that they have to wait that long. i think after two or three minutes most americans tend to hang up on any phonecalls where

they are on hold. .. and to artists as the go-between between your agency and the congress. so we are going to miss him. we want to say thank you for the

service be provided to you. one more thing. your initiative untaxed preparers that universe of people out there who are representing themselves as competent, qualified american tax returns and get paid to do it. and we know there's some great ones, but we know their business of search is hurt that the american public. it is hard to believe you need a license to cut someone's hair, but an american you don't need a license to prepare someone most important tax or financial documents. i thank you for the initiative to bird dog and make sure competent folks are the ones who are preparing our taxes. i am distressed. as i sit and listen to what you say coming plus 5000 employees. your budget was cut $300 million. we know when you do tax compliance enforcement the dollar you spend to have the

investigator and most folks follow through to make sure people as they're complying with the payment of the taxes to say he returned $6 for every $1 you invested you that. for us to be getting $300 million from your budget, it is distressing because the last thing we want is how some overzealous taxation goes in by someone's door down to try to collect taxes. the truth is for the most part you have employees who do the work to help their fellow americans prepare taxes. so i hope that she will sound the alarms if there are alarms on the ability for us to pay our taxes the right way voluntarily. my understanding and correct me if i'm wrong that we now estimate some $385 billion annually is not the end taxes that are either avoided or intentionally not peek in this

country. is that the estimate now? >> that is the tax gap estimate for tax year 2006. >> and so, that is more money. that is more money than we would fund you for how many years? >> a lot. >> it is just incredible. we have americans who are voluntarily paying taxes. so the whole bunch of other americans who unfortunately are doing with a should and so the responsible taxpayers in this country are having to cut her for those who aren't. and you could go figure out who they are if you just have the compliance money, to go out there and find them. many of them make simple errors and most of those americans are ready to pay their fair share. others aren't. others are trying to send money overseas and do things they shouldn't. and we should make them pay their fair share.

i just hope we go out there and do this the right way. is there any hope that with the funding you're getting commented she can fulfill everything that we are asking you to do? >> well, look, one as it is very much the prerogative of congress to fund has been whatever, since it giving us will do the best that we can. i am quite proud of this agency delivering on multiple funds over the last several years and especially this year and it decreased budget environment and trying to balance compliance and service. and i think we are doing a good job. >> thank you. the time is expired. ms. black is recognized for five minutes. >> thank you, madam chair and thank you for being here. we're all talking can eliminate dollars and we need to spend our dollars and the best we possibly can.

i was reading a report recently from the treasury inspector general for tax administration newfound billions of dollars in education credits that were issued in error. when i'm really trying to get to his number one to make sure we give money to people who deserve the money so that we can use it in the budgetary process to fund those places such as yourself i can continue to do a good job. but it is very disturbing what i see here how much money this represents that was potentially given to those who don't deserve it. i just want to read a couple of things that of the report. 1.7 million taxpayers received 2.6 billion in education credits for students for whom there was no supporting documentation and the irs files that even attended an educational institution. almost 380,000 individuals

claimed students were not eligible because they did not attend the required amount of time for postgraduate students resulting in an estimated 550 million erroneous education credits. 64,000 taxpayers erroneously received $88 million in education credits for students claimed as dependents or spouse on the other once returned. so with a double payment. 250 prisoners erroneously received over 255,000. and then it says here that there was identified that a valid social security number is required for federal student aid, but not for these educational credits. now not just me away. i know we're talking about the child tax cut to one of the hearings that was sold to us that there wasn't a requirement that they have a social security number. so i'm not sure how you track

that when you don't have a social security number being used. but i want to go to trying to find ways to help you. but we can do, the kind of tools we can do it give you so you can have the authority to say we are not going to process return. it doesn't have the proper information on their period and social security numbers seems like an easy thing for me. not sending it to a prison with him like an easy thing as well as making sure that they attended the classes or at least attended a college and perhaps may be a balance will yet again number would help to make sure that when credits are being processed that you have all the information to verify that surely they qualify for those. so can you help me out that? sure. thankthank you for bringing thap but i appreciate the offer. we can always use help.

a couple of things. one is the have significantly stepped up our effort to crack down on fraud. last year we stopped $14 billion in potentially fraudulent or mistaking credits from going out the door. the specific report that she reference i just want to point out a couple of things. there is a reporter couple years earlier that shows a huge error rate on the 1099 -- 1098, the education reports we get. so while they said that reports that there could've been a level of fraud, there's also a recognition that the documents they used to match might not have been accurate documents, meaning the education institutions often don't send in the great information so it's not clear that the student wasn't there even though it came out. with that said, the answer to what we can get to help, if we want to block the credit because

we think there's not write documentation, if we don't have not authority, we have to go through full-fledged audit which is resource intensive and comes to people. because even if we see an issue, if we don't have people who follow upcoming answer the phone , engage at the taxpayer, we can't block it because we can't change their return. if we have not air authority type to provisions we can block and change the returned without going through full-fledged audit. so we've requested in the budget not their authority for a couple of things. the second as you mentioned, prisoners. authorization for us to share information so there can be a real punishment, like losing privileges are putting in solitary confinement if they try to defraud the system are authorization in congress to actually share information with prison so he can have that kind of dialogue expired at the end of last year. so we have the authorization is another thing you'll could do to

help. >> so you need to be given not. is that by law? do you already have the authority to require a social security number on that form? >> does whole different issue because certain tax credits you have to have a social security number for. certain tax credits ito. the ones you mention you don't. it is not a requirement. so people bring it up. so congress decides only people with social security numbers can get that credit, though it have to be up to congress. we can't stop it because it is not a requirement at this point. >> i know some ways estimates he can help help you. thank you. >> commissioners, john then, good to see you. i apologize for arriving very late to this hearing. before a recognize mr. reid for his questions, i'm going to recognize you, but i also want to take a moment to recognize floyd williams for his 18 years

of service at the higher estimate the total of 35 years of government service. we want to thank you is a move on to what they hope is a good retirement? thank you for your service. an attack on the recognize five minutes. >> thank you very much, mr. chairman and commissioner for being with us today. i would like to explore. i really try to rely on data when they make decisions here in congress. one thing i have a concern with us on the enforcement initiatives you have projections on return of investment for this enforcement initiatives. i'm sure you are familiar with the issue we talk about here. i believe 2013 he proposed enforcement initiatives or return on investment will be 1.921. 2015 the project, my understanding the return on investment will be 4.321.

historically i read some report that projected by 2012 was supposed to be a 7.8 return on investment. so does -- do you confirm those numbers? those projections with actual data? and if you do, how do you do that? if you don't, why don't you do that? >> great question. let me give you how i think about return on investment and exactly what accident. first of all, we are very conservative in the numbers we gave you. the people we know do those jobs be rolling ten-year average on the exact inverse of initiative. swiftly higher 20 great 13 examiners for an excise tax, we look at 2000 tenure rolling average of how comes indirectly

from those make an adjustment that comes into the treasury. so to say the fact tenure rolling average for those numbers. i actually think those way understate the impact because the real gain for burning the tax system that would object to visit $2.4 trillion that comes in every year, which most of those people we don't engage with in that kind of activity. so our job is to rank a service that when people call that can answer a question. compliance coverage, where there is the most risk so if you could not meet your neighbors know you couldn't audit around specific issues and drive voluntary compliance. so another way to look at numbers is $12 billion budget give or take, $2.4 trillion in revenue. every dollar invested rings the 200. for a smaller rate to the candidates we have what we call her turk numbers, which are real dollars than the door every

year. last year was 55 billion comment here before 67, the year before 39 and that is literally people go out, make an adjustment. people go through the adjudicatory process and bring money into s. that is a five to one return. but the numbers you gave us are based on very specific activities, looking back 10 years and how does that tie to those numbers? >> is it fair to say it is based on actual data when you go back and confirm the numbers? i mean, are you looking at data? when you project the 1.9 to 2013 return on investment come you be able to show us at the end of 2013 the actual data that confirms whether or not she had 1.921 turn on investment? >> what i said was it is very good numbers. it is a tenure rolling average.

i think thinks they can move so this is an estimate. 2013 might not be exactly that. it might be higher or lower but over a tenure. you will see it average out to that amount. >> that is my question because in 2012 is projected to be 10.8 to one return on investment. was it 7.8? what was the member for 2012 on air force and initiative return on investment? >> i don't think you want to look at these things is your point in time and you don't want to encourage us to do that. you want to encourage the resources at overtime will desire the right behavior. these numbers are ones we can certainly consult with gao, omb, work for a comfortable with the numbers that we have ongoing dialogue. >> you bring up a great point because my understanding that in their materials as they are concerned that you are not using actual data to confirm those

projected return on investment numbers you are giving to us. >> at how i wouldn't characterize it as concern. we can work on methodology and we are having the staff conversations on a regular basis. >> so you work with gao to come to some sort of -- >> yet come absolutely. i feel very comfortable on numbers and if anything they state the return. >> i appreciate the work you do. i really do because it's a tough job. >> these are great questions. >> thank you. >> commissioner shulman, again, welcome. does the irs has available resources to tackle new responsibilities? do you have the resources available to take on new enforcement responsibilities? >> earlier i was saying, we tried to do the best we can with

the budget that congress gives us. obviously we have a big chunk to do a we tried to balance across the board all of the things that we do. we have requested in the 2013 budgets and new resources for of the new legislation that has come through and were quite hopeful we'll get that. >> and return the president's 2013 budget proposal, this proposed saddling the irs if additional enforcement responsibilities by shifting alcohol tobacco tax and trade. duties of enforcing tax provisions related to alcohol, tobacco to the irs with no funding allocated in this budget to pursue those kinds of violations. is that something the youth had internal discussions with others in the administration about? >> i'm sorry, mr. chairman.

what are you referring to in the budget? i don't think there's a major shift in the budget. >> 2013 budgets gives you responsibilities by shifting alcohol and tobacco trade bureau >> i should get back to en masse. in the past week unreimbursed to have investors help with investigations and that not as i'm aware of. >> if you could just get a clarification i would appreciate it. >> one other question. it's come to my attention. i've got a number of letters. recently we've seen some press allegations that the irs is targeting certain tea party groups across the country, requesting what has been described as onerous document request, delaying approval for tax exempt status and that kind of thing. can you elaborate what is going on with that?

can you give us assurances that the irs are not targeting particular groups based on political leanings? >> thanks for bringing this up because they think there's been a lot of press about this and a lot of moving information, so i appreciate the opportunity to clarify. first, let me start by saying yes i can give you assurances. as you know we pride ourselves on being a nonpolitical, nonpartisan organization. i am the only -- man or chief counsel are the only presidential appointees and presidential appointees and have a five-year term beyond, just so we will have none of that kind of political intervention in things that we do. for 501c4 organizations, which is what has been in the press, organizations do not need to apply for tax exemption.

organizations can actually hold themselves out as 501c4 organizations and file and 990 with this. the recommendations that have been in the press are all ones that are in the application process. so first of all, i think it is very important to emphasize that all of these organizations came involuntarily. they did not need to engage the irs in the back and forth. they could've helped themselves out, filed a 990 and the food is being an issue would've engaged, but otherwise we would. the basic rule are around 501c4 programs that they need to be primary engaged in general where further community. they can be involved in political campaigning dvd, but it can't be your primary purpose. when people apply for 501c4 status, what we do is engage

them in a number of questions about making sure that we understand their primary purpose around this and other sorts of engagement. and so, what it's been happening has been the verbal back-and-forth that happens. none of the alleged taxpayers and obviously can't talk about individual taxpayers and i'm not involved in these in an examination process commercial ended into voluntarily. and so, there's absolutely no targeting. this is the back-and-forth that happens and people apply for 501c4 status. >> is it fair to say there's been no change with regard to what triggers audits and so forth with regard to tax exempt organization as a whole? >> as a whole, we have audits based on this criteria coverage et cetera.

but in the area of political activities, just to make extra sure that folks are very insulated, we actually have a committee of three career professionals who are raised in washington d.c., at any time and audible betray. because of potential political activity or as a referral from a member of congress and other kinds of things that could be viewed as political, that group of 31st looks at it so no single individual can luncheon on it that has to be an agreement amongst three. then the decision would be made for an audit based on resources, risk, allegations, fax, et cetera and it would be shipped out to an auditor to do that day. that has been the pack is for many years for anything to do with both collected it in that is the practice now. >> i thank you for your answer.

dr. mcdermott, do you want to acquire? you may inquire. >> thank you, mr. chairman. i want to shift the question just a little bit for the issues have been dealing with here. i have a lot of lgbt clients or constituents. and they have been approaching me about the problems of dealing with the irs and how to file their income taxes. and i have been the experience of having more than one source gives them a different and very. so they're not quite sure and they are spent eating, some of them twice as much as a married couple would spend to get their income tax done. they've got married under the law, but suddenly the irs -- when asked questions about certain things, it is just not clear what the answer is.

so i'm wondering, is there any single place or perhaps should there be a place or we can call and find out the answer to a question? or someplace in the irs where they take the issue to get definitive answers? >> great question. i'm aware of the issue. we actually try to do a bunch. first of all this is a very complex issue for these taxpayers. because under state law, these taxpayers have a different pic of status than under federal law because of some of our federal laws. so under state law, the offense with the income, but under federal law, they have to actually file separately because of the federal laws. we recognized that there was a lot of confusion. and so, we actually consolidated and put a group together who

worked and put out a whole set of frequently asked questions that answers a lot of these questions. and so, we realized as laws have changed around the country, this has been an issue. we have been engaging with the community around this and i think we've clarified a lot of questions. let me just say it though until you have state laws and federal laws recognizing couples the same way, this is going to remain difficult for people because some of the things asks us to do we can't do under the law. >> when they are finally there and come tax federally, i suppose if you had different things at the state level, the fed really if they're doing it together -- they can't do it together. >> it all depends. different states have different domestic partnerships, laws. but the state returns often piggyback on federal returns. the recognizing couples as

couples is different depending on whether you're in the state or depending which state and federal laws are different. >> so that the piggybacking off the federal tax return sort of works in reverse at the state level. they will have to change them stay at us to actually this rational. >> it adds complexity to these taxpayers filing. we have tried very hard to make sure we do our job like we do with all taxpayers, which is we've got a set of taxpayers of the issues in a team together. we worked on these did outreach and engagement and try to really clarify will be to clarify. >> if i do question, what number what i call? to get the answer. >> you would dial every hundred number. >> and that number should get you to somebody who would give you the same answer day after day after day? you'll get two different answers quite >> that is our hope that we that we trackback whose inconsistency and there was in the high 90s.

>> okay, great. i appreciate that. it is initially here for the district a lot and i want to know what it is this you have tried to do and we will see if there's problems or need to do something about a become look at it. >> thank you. >> with your indulgence, commissioner shulman, mr. becerra has a follow-up question. >> mr. chairman, thank you for generously allowed me to ask one last question. commissioner, two weeks ago i sat down with my tax preparer and went over my taxes in preparation to file. he's been doing this forever. his license in all the rest and he said to me, you know, i was always supportive of what you all were doing with regard to the tax prepares in trying to get us to be a more defined groups about way -- because he gets folks to comment to correct taxes that have been filed and properly pay folks who prepared these things to charge people money did it the wrong way.

but he asked me a question. he said, seems to me like a lot of us would've done this for a long time for the ones that are being asked to go through the process to certify that we are confident about the rest. i say to him, my sense is that everyone is going to be at some point touched by the iris is moving towards the effort of trying to certify that folks are confident to be out there representing themselves as qualified prepares of tax returns for money. the chairman was gracious enough to embrace me. i'm wondering if you could tell us what the status for the initiative that the irs to help do the bird dogging, the oversight of tax repairs and maybe respond to the questions of who is going to follow. he said he had to go through sob courses or programs to test his

qualifications and so forth. so figure just give us a quick sense of where things stand. >> sure. first, similar to attach both real-time system is a big initiative. we had multiple public hearings around the country embedded with the report, that regulations about the public comment is we've had a lot of engagement with the prepared community around us because this is about partnering is to prepare community to make sure taxpayers are served well. status is about 840,000 people apply and receive pecans, which is repaired taxpayer identification number. about 60% of those were not already been enrolled agent, cpa or lawyer. now, enrolled agents, you're prepared and cpas and lawyers

who already had high-level qualifications authority gone through their own set of confidence the, testing, already had ongoing education requirements were not require you to take the test because they party taken the test or have continued education. and so your preparer should not have had to take a test if he was 30 and enrolled agent. and so with 840,000 people signed a period last fall we started administering the competence the examination and we have a number of people through that. one of her promises to the american people as we weren't going to cut out repairs services. when it should make sure people could get service that has a lot of confidence prepares to have been preparing for 20, 30 years who have taken this test in a while. and so we gave them three years to pass the test.

so people are now starting to pass the test. you don't actually become a registered tax return preparer until you pass the test. so now people are starting to move through the past we've had several thousand who have taken the test and we expect that number to grow. we have started approving continuing education providers because this year, continuing education requirements kick in. we are well underway to move there. the last thing is this filing season we had to piece 10, process and everything faster rate than the lot better data analytics and we are able to look at prepares to the really egregious problems with returns go out to them immediately in late january with david letters, phone calls and really start to engage the community to make sure they treat taxpayers well. so i'm very pleased with the initiative and that is a broad

overview. >> chairman, thank you very much. >> thank you, mr. chairman. i apologize i was late. commissioner shulman for the work you're doing. obviously a lot of issues are pending, but i've had a chance to review the national taxpayer advocate report and i'm sure you bought the irs to pay attention to that as well. obviously the disturbing trends they see in that report is mainly the inadequacy and sunday for the iris to do your job adequately insert citizens of our country. in particular they were concerned about because of funding cuts in the inadequacy of resources, but that means to the irs ability to address the noncompliance issue have you got tax gap opposite everyone realizes, the concern is will only grow wider if there is a lack of confidence or belief in the irs when it comes to compliance measures it will only exacerbate the situation. but you agree with the report was standing in regards to

enforcement of noncompliance? >> bulloch, we have budget cuts and they try to do the best we can. we touch for a while about service and we haven't to let about compliance. you know, clearly we are doing less expands this year and we have the triage and find places. it will result in less money coming in than otherwise would've come in. the big trend i am worried about is if we don't stem the tide in the 23rd team and 2014 budget is you get to a point where there is enough news about compliance rates being so low that still bothers people will pay taxes because they are honest, hard-working americans and they want to pay the society they feel benefits them. but if people want to push the envelope, which some do cut corners if they think we are not on the job, then they will do so. and so i think the general

comments about you cannot have a long-term trend at degrading compliance resources because fabulous stories to hit voluntary compliance is accurate and the specific of spending these last dollars and that is simple math. >> we are approaching the second anniversary passage of the affordable care act and one of the provisions of small businesses to provide health care coverage for workers, 35% this year was supposed to go to 50% at 2014 with creation of exchanges. there are moments back home and small-business owners come to me and complain about complexity of tax credits and having to fill that out. what is your opinion on that? is that an item or the irs or is working that you can try to simplify that process to make it easier for small businesses to qualify for the tax credit? >> yeah, it's obviously an important tax credit for small businesses to help them avoid paying for health coverage for

the workers, which is a key component of the affordable care act. it is a very complex credit. we heard from a lot of prep dictionaries and small businesses that this saves us around that and other issues have made it very hard to understand if they can hit the sweet spot where you get the credit mp, sometimes discourage people from actually taking advantage of the credit. the president's budget has a proposal, which works on the phaseout and other issues which make it much more attractive to small businesses in congress taken up in passing that would eat beneficial. >> you think that makes sense that the administration about their proposing to do? >> but about 201450 exchanges come as it's going to be credits going for the individuals within the exchange market?

is the irs making preparations to do with that? >> we are making preparations. we are on track. the majority of the work we do is to build technology systems to interact with the state exchanges in the federal exchange so that an estimated 30 million people get over a ten-year period, $400 billion of tax credit. i testified yesterday before our appropriations committee and what i said to them as i understand it there is heartfelt policy debate about the affordable care act and there some members of congress who don't like it. there's members who like it. but the bottom line is come 2014, there's going to be constituents in every district to expect the tax credit when they show up at the exchange that we need to get funded appropriately in the 2013 budget to prepare for that.

so we are on track. we are spending money now based on authorization it came to the bill, but we need to get financial support because we have a big job to do. we're not about health policy. we're involved in moving the money to help make the law work. >> thank you, commissioner. thank you, mr. chairman. >> the broader look at the tax code gives impetus to look at tax reform. the governor said that a call and i think it's something we should do in a bipartisan way. commissioner shulman, thank you for appearing before us today. as is customary, please be advised members may submit additional questions and those questions in your response does will be made part of the official record. and with that, we'll conclude this subcommittee hearing. [inaudible conversations]

[inaudible conversations] to hel

bootlegger for us for leader tomorrow president obama signed a patient protection and affordable care act into law. it was the greatest single step in generations toward insuring access toward affordable quality health care for every american regardless of where they lived or how much money they make. millions and millions of americans have already felt the benefit of this law. seniors are saving money, millions and millions of dollars, on their prescriptions and their free checkups. the doughnut hole is rapidly disappearing because of this bill. this law, i should say. insurance companies can no longer set arbitrary lifetime caps on benefits.

mr. president, what they would do is you thought you were in good shape. you had an insurance policy, a health insurance policy, and you get in a car accident or you get cancer or some other dread disease, and you're in the process of being taken care of, and you're told your bill is not being paid anymore. your limit was $10,000 or $50,000, and they stopped paying benefits. under this legislation that can no longer be done. that's why the president signed the bill. under this legislation that is now law, children can no longer be denied insurance because they have preexisting conditions, a protection that will soon extend to all americans. and in two short years, in fact, less time than that, every man, woman khaoeupbld in america will -- child in america will have access to the health care insurance they can afford. mr. president, they will have the same kind of insurance you and i have. basically the same insurance. and for people to rail against

this plan of president obama's they call it, i haven't seen a single one of the republicans rail against this law, saying we don't want our insurance because it's government insurance. every member of the united states senate has the same insurance that we by law are giving to everyone in america. my republican colleagues who berate this bill, let them drop their government insurance. they hate this so much that we're trying to give the american people, have them drop what they have because it's the same thing basically. no longer will hundreds of millions of americans live in fear of losing their insurance because they lose their job. and no longer will tens of millions rely on the only care they know exists: an emergency room. the most expensive care in america is an emergency room.

some people go without care because they have no insurance at all. mr. president, this is not just a story i've heard from other people. there are people who today have no insurance just like my family had no insurance when i was growing up. mr. president, we didn't go to the doctor. we didn't go to the doctor. no insurance. the only time that i can remember going to the doctor was when i was deathly ill. literally deathly ill. we had no -- my parents had no car, and i had something wrong. i had been sick for a long time. and my brother had somebody visit him. my mother asked if they would be good enough to take us over to the hospital, which was 50 miles away. they did, and i had a growth on

one of my intestines or something. i was very, very sick. mr. president, there are many people today just like i was as a little boy. they have no insurance. and they may be looking the same as me, with no transportation, to have a visitor take them to the nearest emergency room. what happened to me. the problem was our emergency room was 50 miles away. unfortunately, republicans continue to stop rights under that law. if republicans have their way, insurance companies would once again be allowed to deny care to sick children because that child has asthma or diabetes or some of the other situations that young people get. in nevada, thousands of children with preexisting conditions would once again be at the whim of insurance companies who care more about making money than

about making people better. if republicans have their way, young adults just out of college would be kicked off their parents' insurance plans. mr. president, also that's something that i know exists today. in the little town of searchlight, where i have my home, a young man named jeff wanted to go to school. he started community college, doing pretty well. and he got pain in his groin. first it started out as a little ache and then it got to where he couldn't take it anymore. but because he was at an age where he was no longer able to stay in his parents insurance policy, he didn't know where to go. so he went to the so-called county hospital, indigent hospital. he was diagnosed as having

testicular cancer. he had been on his dad's insurance policy, but he arrived at an age where tpho*efs longer eligible -- where he was no longer eligible. his parents had certainly not much. his mother worked part time at a post office. his dad worked at a steam generating plant 50 miles away from searchlight. so they they begged -- that's stretching a little bit. but they borrowed and borrowed and borrowed to take care of his two surgeries, a number of hospital visitations, chemotherapy. they paid for that. thousands and thousands of dollars that they had to find a way to pay for their boy. under the law that's now in existence, they can stay on their parents' insurance policy for three or four years more, allowing many young boys and girls to go to college, go find

a job. they can stay on their parents' insurance policy. in nevada, thousands of children with preexisting conditions would once again, as i indicated would be without the ability to be taken care of when they're sick. almost 23,000 young adults in nevada would once again have to defer their dreams to take a job, or as i just indicated, go to college. or risk going without any care. if republicans have their way, seniors will pay more for prescriptions and checkups. we've had about a quarter of a million nevada seniors who now get wellness visits, cancer screenings and other preventive services. this bill goes away, it won't happen anymore. tens of thousands of seniors will save millions and millions of dollars in nevada alone on prescription drugs last year, once again will be forced to

choose between buying food and buying medicine. if republicans have their way, taxes will increase for small businesses, and so will the deficit. repealing health care reform would add almost $1.5 trillion to the federal debt. not billion. trillion. when democrats undertook health care reform, it wasn't just about saving money. it was about saving lives. and we did that. while the numbers i just discussed are very important, there is one number that matters more than all the others. 45,000. mr. president, in the year 2011, 45,000 americans died because they lacked health insurance. that's almost a thousand a week. that doesn't include the tens of thousands more who are sick or dying because they have health insurance but still can't afford the care they need. after the rest of the affordable

care act has taken effect over the next year and a half or two years, no american will have to bear what president lyndon johnson called, and i quote -- "the unjustice which denies the miracle of healing to the old and the poor." end of quote. president johnson living in a country with the best medical care in the world doesn't matter if you can't access that care. that's why almost 47 years ago he signed medicare into law. on that day in july, president johnson celebrated an american tradition that -- quote -- "calls upon us never to be indifferent to our despair. it commands us never to turn away from helplessness. directs us never to ignore those and spurn those that suffer in a land that is burning with abundance." close quote. so, mr. president, we save $500 billion in wasteful programs and other things. in medicare, we extended the life of it for a dozen years and gave seniors the things that i

have talked about today. filling the doughnut hole, prescription drugs, wellness checks and all the other things that are so important to them. the affordable care act continues the tradition that president johnson celebrated because it calls upon us never to be indifferent to our despair, commands us to never turn away from helplessness and directs us to never ignore or spurn those who suffer unintended in a land -- unattended in a land that's bursting with abundance. the law mix certain that the richest in the nation, this great world of ours, never again turns its back on spare helplessness and many times hopelessness and suffering of the least among us. it guarantees that no insurance company will ever again be putting a price sign it into law. now, on another matter, mr. president, yesterday i outlined a number of the broken promises we have seen in

connection with the new obamacare law. from the promise of being able to keep the plan you have and like to the promise of protecting medicare to the promise of lowering premiums to the promise of lowering health care costs. democrats also said that taxes wouldn't go up and existing conscience protections would be respected. looking back, it seems like there wasn't anything our democratic friends, including the president, weren't willing to promise in order to get the bill across the finish line. but there is another category of disappointments, too, and that's all the aspects of this bill democrats didn't even talk about before it passed. we all remember when speaker pelosi famously said we have to pass this bill so we can find out what's in it, and one of the things americans found out about was something called ipab, the independent payment advisory board. this is an unelected,

unaccountable board of bureaucrats empowered by this law to make additional cuts to medicare based on arbitrary cost control targets. as a result of this new board, 15 bureaucrats would now have the power without any accountability whatsoever to make changes to medicare. what's more, there is no judicial or administrative review of ipab personnel or recommendations. in other words, they are accountable to no one. ipab isn't answerable to voters, and it can't be challenged in the courts. its main role, as "the wall street journal" editorial board put it, will be the inevitable dirty work of denying care. the inevitable dirty work of denying care. in an effort to control spending, ipab will limit patient access to medical care. it's that simple, and frankly

it's totally unacceptable. republicans recognize the problem of medicare spending and the need for reform. we also recognize that ipab isn't the answer. this is just one more reason obamacare needs to be repealed and replaced. that's why even democrats are cosponsoring a bill to repeal it over in the house, calling it a flawed policy that will risk beneficiary access to care. so this isn't just a republican issue. there is strong bipartisan opposition to this new law. look, if the president himself doesn't even want to talk about this law anymore and even democrats are sponsoring repeal of parts of their own law in the house, it should be pretty obvious there is a fundamental problem here. we need to reform health care, but this reform made things worse. the evidence and broken promises are all around us. it's time the president acknowledged it, and it's time

the two parties came together and did something about it. it's time to repeal obamacare and replace it with the kind of commonsense reforms americans really want, reforms that actually lower costs and which put health care back in the hands of individuals and their doctors rather than bureaucrats here in washington.bishov and ne granted floor privileges for the duration of today's proceedings. the presiding officer: without objection. mr. harkin: again, tomorrow, we celebrate the second anniversary of the signing of the affordable care act into law. our democratic leader, senator reid, in his opening remarks today i think outlined the tremendous progress that we have made in this bill. listened to the comments made by our distinguished republican leader, and all i heard was repeal obamacare, repeal obamacare, but i never heard what they want to replace it with. they just want to go back to the old system where the insurance companies ran everything before, where people were thrown off

their policies because they had an illness, where because of preexisting conditions you couldn't get health care coverage, where we had this big doughnut hole that we're now closing for the elderly, but the one thing i want to focus on this morning in my brief time, mr. president, is to focus on an extraordinary element of the affordable care act that's not being talked about a lot, but which members of my committee that i now am privileged to chair, the health committee, worked so hard to include in the affordable care act. that is the away of provisions that promote wellness, disease prevention and public health. taken together, these provisions have begun to jump-start america's transformation into a genuine wellness society. they are transforming our current sick care system into a true health care system. i have said this many times. we don't have a health care system in america. we have a sick care system.

if you get sick, you get care, one way or the other. but there is very little out there to help you keep healthy and to maintain wellness and to keep you from going to the hospital in the first place. now, that would be a true health care system, and that's what we have begun to establish with the affordable care act. by preventing chronic diseases, enabling people to stay healthy, stay out of the hospital in the first place. right now, the united states spends about 75% of all our health care spending. 75% of the nation's health care spending is spent on chronic diseases. only 4% for prevention. so during the last year that we have the data for, 2005, the u.s. spent about $2 trillion on health care. of every $1 spent, 75 cents went

toward treating patients with chronic diseases, many of which are preventable. only four cents went toward prevention. now, that had to tell you something right there. that's the old system. that's the system that republicans want us to go back to, is this system. spending more and more to treat people after they get sick rather than trying to put something up forward to keep people healthy. well, in the affordable care act, we have tremendous opportunities to again move us to more prevention and wellness. we have made historic new investments in this area of prevention and public health. now, here is one example of that right here. on this chart, before our health reform bill, our law was passed, just take the issue of colorectal cancer screening, which we know if you get it early and detect it early, your chances of survival are

tremendous. if you get it too late, then you're going to be in the hospital and you're going to have cancer and you are probably -- you're not going to live. but we know by getting it early, we can prevent a lot of unnecessary deaths and illness and treatments later on. cholesterol screening. we know if people get good cholesterol screening, they get on a drug or good diet or exercise program, reducing the prevalence of heart disease. and tobacco cessation. do we need to keep repeating around here how much it costs our society from the plague of tobacco use in this country? well, here is where we were before health reform. about 68% covered by colorectal cancer screening. about 57% were covered by cholesterol screening. and only 4%