because the senate bill was silent on so many of these issues, we need to have some idea of where the senate is coming from so we can begin to talk about how we resolve -- we know our differences, we heard today and yesterday on those issues, so i -- >> these are all member issues, all three of these big subjects are member issues, and i think the staff should work, but we need to find a way to have the fullest exchange among members. >> i think we'll be able to take care of that issue. i think there's an understanding of what's going on, and senator baucus, unless you have something to add, i'll be prepared to adjourn this meeting. >> thank you. >> we're now adjourned. >> by 2016, according to the imf, the world's leading economy will be a communist dictatorship. that's in five years time. think about that, if the imf is

right, the guy you elect next november will be the last president of the united states to preside over the world's leading economy. >> mark stein has published nine books, his latest "after america" is a new york times bestseller, he also writes the happy warrior column for the national review, and he's a frequent host on rush limbaugh's radio show. sunday your chance to call, e-mail, tweet your questions on c-span2. the senate budget committee this week heard from a panel of experts that u.s. lawmakers should pay attention to what's happening financially in europe. the eurozone crisis is a significant reason for the u.s. to cut its debt and spending. this is a little more than two hours.

>> the hearing will come to order. i want to welcome everyone to the hearing. we have three really distinguished witnesses this morning. i want to thank each of them for being here. first, we have dr. simon johnson, sr. fellow at peterson institute and professor of entrepreneurship at the sloan school of management. dr. johnson has testified before this committee on several occasions and we welcome him back this morning. we also have dr. fred berkston, director of the the peterson institute. he recently announced after 13 years of ably leading the peterson institute, he steps

down as director and focusing more of his time on research and writing and i commend him for his year of leading at the institute and wish him well in his further endeavors ppd he's testified many times before the budget committee as well. we also have with us this morning, dr. adam larrick, visiting scholar and someone deeply knowledgeable on european affairs having spent the last two years there. we look forward very much to your testimony and welcome you to the senate budget committee this morning as well. i'd like to begin by briefly reviewing the situation as i see it in europe. to be clear, what is happening in europe to be clear, what is happening in europe has ramifications across the globe, certainly including the united states. here's the front page story in the washington post last week. imf fears european crisis poses

risk of major recession. the article highlights the international monetary fund's concern that the turmoil in europe could have serious consequences for the global economy. yesterday, we saw reports that european leaders had agreed to new measures to dads the debt concerns in their -- to address the debt concerns in their countries. "the new york times" headline on the agreement. european leaders agree to they measures to enforce discipline. i'd very much like to hear the views of our witnesses on this agreement, and whether it's the right answer for europe at this moment. most economists believe the eurozone is already in recession. we can see the blue chip forecast shows eurozone economic growth falling from anemic 1.6% in 2011 to a negative .004 in 2012. at the same time, european

nations are saddled with large and growing debts that impact their ability to respond to the downturn. we can see that greece and italy both face debts well above 100% of gdp. our own circumstance, we now face a gross debt of more than 100% of our gdp. the threat to the u.s. economy is clear. here's how economists the former vice chairman of the federal reserve described the situation in his testimony before the budget committee last week. my rough outlook for u.s. gdp growth in calendar year 2012, is about 2.5%. the biggest threat to the economy is financial contagion from europe. if we get a worst case scenario, a blowup that looks sort of like lehman brothers, i think most if not all of that punitive 2.5% growth could just evaporate in a worldwide recession.

i hope that people are listening. if europe implodes, the risk to our economy is serious. we need to remember that almost one quarter of u.s. exports go to our european trading partners so what happens to the european economy could have a very real impact on u.s. manufacturers and u.s. workers. with that, we'll turn to senator johnson who is filling in for senator sessions this morning for his opening remarks and then we'll turn to our witnesses for their testimony and, again, i want to thank senator johnson for filling in for senator sessions this morning. i just say to colleagues, there are many competing meetings of other committees this morning, including mark-ups in some, which means that colleagues who would like to be here simply cannot be here and participate in the work of other committees on which they serve so, we

understand that this is a meeting in which there are many competing priorities for members of this committee. senator johnson. >> well, thank you, mr. chairman. obviously i'm here because this is my top priority. certainly the greatest threat that faces our nation is our debt and deficit issues. and all is tied into our need to really achieve economic growth and that's what the threat of europe poses to the u.s., how is that going to affect our economic growth? i want to thank you for your comments in our last budget meeting were you indicated your desire to work towards passing a budget resolution out of the committee and one to hopefully reduce the deficit by as much as $5.5 trillion. i think that's a great goal. it's one i certainly want to work with you to try to achieve. and i think one of the things we'll have to do to achieve that goal is be mindful of our obligations under the budget act

and from 1974, and be mindful of those dates. now, of course o, the president was -- in terms of following that law, should be presenting a budget on the first monday in february. we'll probably miss that by a week. okay. let's not let any other deadlines slip. this budget, this committee has an obligation to pass a resolution by april 1st and the senate should be acting on a concurrent budget by april 15th. and i think we really need to hold our feet to the fire to get that done. because it's the minimum amount of -- the minimum requirement the american people should expect from this senate is actually pass a budget, so they understand what the plan is, so they can see it on a piece of paper and know the direction the senate will take. >> if i could interrupt the senator on that point. one unknown that we still have to deal with is when we'll have cbo's re-estimate. they haven't given us an answer

on that question so that's the one unknown that is out there. i agree with you entirely. i'd like to get this done as soon as possible. obviously, we have a hearing scheduled to conclude, which is important, because we're hearing from the o & b, the cbo, the secretary of defense, the secretary of the treasury and the rest -- the secretary of transportation. but the one thing that's out there that is an unknown for us as a committee, is when cbo had provide their reestimate. >> i guess we have the director here we should ask him that question and keep his feet to the fire as well. so i'll help you do that. but mr. chairman, you've done such a good job since i've been here of providing graphs so, i guess -- imitation is the greatest form of flattery, so i brought a couple graphs here today that i've been showing in wisconsin, to basically describe

what i think is the problem facing our nation in terms of economic growth in our deficit situation. as i was reviewing the testimony that i would be giving here today, my concern is that we're trying to address a problem of fiscal manage management with monetary solutions. and i think we're seeing that in europe, and it just isn't working that way. one of the charts that i showed to groups in wisconsin, i turned smiling face into frowns is i describe the history of our debt. i like using this one because it shows in 1987, our total federal dead was 2.3 trillion. it took us 200 years to accumulate $2.3 trillion worth of debt and we entered an agreement last year to basically to increase the debt ceiling by 2.1 trillion and we'll be over that limit in less than two years and that's a little depressing. the next chart, we'll show total spending and i know an awful lot

of people use the shorthand version -- we're cutting spending, or we're proposing cuts. quite honestly, nobody's prop e proposing cuts. this is also kind of a jaw-dropping chart when i show it to groups in wisconsin because it shows ten years ago our federal government spent $1.9 trillion. last year we spent $3.6 trillion. we've doubled spending in just ten years. and the argument moving forward is -- according to president obama's last budget, he was proposing spending $5.8 trillion in 2021. trillion. the graph is pretty visual from the standpoint, we're not talking about cutting the size of government, we're just trying to reduce the rate of gloej. another way of looking at spending is on a ten-year spending level. in the '90s we spent $16 trillion over a period of ten years. the last ten years we spent $28 trillion. and then, again, the argument moving forward is according to

the president's last budget, he was looking to spend $46 trillion in the next ten years and the house budget would have spent $40 trillion. if you've heard about the $6 electrical in draconian cuts, that's what we're talking about. i'm an accountant and i can do the math. neither 46 or 40 is less than 28. we're continuing to grow government. the next to last chart is -- this is the really eye-popping one. compares the total liblabilitie of the united states to the total net private assets. and these are last year's figures. i haven't revised the chart and i'll tell you the new numbers but last year, according to the trustees and the balance sheet of the united states, the total federal liabilities, the unfunded liability of medicare, social security, total debt, and the liability to federal retirees was $99 trillion.

it's an incomprehensible figure. but if you relate it to the size of our asset base, that's household assets, large and small businesses is 79trillion. that's a definition of a huge problem right there. the latest balance sheet the united states came out shows the liabilities as $72 trillion. they revised the estimate and made some actuarial adjustments and taking a look at health care law and making the assumption that the health care law will reduce health costs. and i guessed point i'd like to make is, in many of our estimates, we're simply deluding ourselves. i don't think it's rational to believer health care law will lower the health care costs. the other assumptions we're making, cbo just released the baseline. in the baseline their assuming we're going to let these tax cuts expire, all of them. that's a $5 trillion bet. i don't think that's going to happen. the true cost of health care, i've worked with douglas on this and i've written some op eds on it.

i've taken a look at it. we're deluding ourselves to think this thing is going to be deficit neutral. it will add trillions of dollars to our total debt over the next ten years. and i think -- the other thing we have to worry about is the economic growth assumptions that are put in these baselines. we've seen a couple of studies extent we miss our growth target by 1%, that adds $3 trillion to our debt dtoe concerned about that and i think the final thing we're trying to close the deficit. i think, again, i think in my graphs pretty well describe the spending problem and i would caution anybody that wants to increase tax rates. i want to raise more revenue but growing the economy. raise the revenue by significant tax reform that's pro growth. but if we just raise rates, i think we delude ourselves to think we'll have the revenue

increases by doing that. i think it would harm economic growth and in the end, i think that's what we'll hear in our testimony here today, the solution in europe is to try to enact governmental policies that will promote economic growth. in the united states, we have the exact same dynamic. we need to make sure nothing we do here in washington detracts from that economic growth. so with that, i just have one final chart and it speaks to the u.s. government in relationship to european economies and to me, this is an incredibly key metric. i'm a business guy, manager, accountant so i look at key metrics. the size of our debt in relation too our gdp is an important metric, but i think this is even more important. when you look at federal government and it's size and relation to our economy, 24%, you add state and local governments and total government is the 39.2% which means 39 cents of every dollar that our economy generates filters through some form of government. government does a number of

wonderful things, but it's not particularly effective or efficient at many things. i think it's a very bad metric when you compare it to european style socialist nations. congratulations, america, we've arrived at the lower level of european-style socialism. norway spends 40% of its government gdp. greece, i think we'll hear about greece and italy. greece is 47%. italy is 49%. and france is 53%. that's a metric we need to manage and reduce the size of the government. with that, mr. chairman, i appreciate the indulgence and turn it over to witnesses. >> there's lots of things you said i agree with and some that i don't. i think my sharpest area of disagreement would be the new health care law because cbo told us that will reduce deficits and debt by more than a trillion dollars in the second ten years, and i believe that's the case.

i know you don't share that view. that's what makes our democracy vibrant, we have disagreements. but there's much i agree with. and what i most strongly agree with is that we're on an unsustainable course. and i think that's undeniable that we're on an unsustainable course. we've had the head of the congressional budget office testify before this committee that we're on an unsustainable course. we've had the head of office and management and budget so testify. we've had the chairman of the federal reserve testify we're on an unsustainable course. we've had the secretary of treasury testify we're on a unsustainable course and i think it's undeniable and it's the central thrust of your argument as i hear it. and i think you're entirely right about that and we've got an obligation, we have an obligation on this committee and an obligation in the senate, the

house has an obligation. the president does. to try to get us on a more sustainable course. and, you know, it doesn't take that much to get us to balance. i said without advocating it, a 6% increase in revenue from what's currently scheduled, a 6% reduction in spending from what's scheduled would save us $6 trillion over ten years and balance the budget. now, i don't think it should be an even split revenue and spending and every body in which i've served, fiscal commission group of six, we weighed heavily on the spending cut side of the equation but i personally believe we need additional revenue but as you describe, not with an increase in tax rates. i think that would be counterproductive to our

competitive position in the world. you know, there are places where there is agreement on both sides here. my fondest hope is that we find a way this year to actually make substantial progress. i'm leaving after this year i would like nothing better than to leave behind the legacy of getting america back on track. one of the things facing us, obviously, are external issues. we're discussing, i think, one of the biggest threats to our economy and deficits and debt, is the european economic challenges, another is what could happen with respect to military engagements around the world. we'll be dealing with that at a later hearing.

let's go to our witnesses this morning. we'll start with simon johnson. dr. johnson, thank you, again, very much for being here. please proceed. we'll go right through the witnesses. and then we'll open it up to questions. and we'll do seven-minute rounds. and again, thanks to all the witnesses for being here. dr. johnson, please proceed. >> thank you, senator conrad and johnson and thank you also for placing the conversation today in the context which you just did of the u.s. budget and our unsustainable situation. i think that is absolutely correct. and i'd like to frame my remarks very much to respond to that. let me make three points. first of all, the eurozone has already failed. the eurozone was established as a bastian of stability of prosperity on the world. it was established to build a

large and more powerful economy. this has not worked. as you said a moment ago, fiscal mismanagement lies at the heart of their problems and i completely agree. they're trying to solve fiscal problems through, i think you might call it, monetary solutions. i might call it monetary innovations, a less positive word. i don't think this is going to end well. for them or for us. and with regard to your question about the new agreements, the latest rounds of agreements, senator conrad, i think this is very small steps in the right direction, but very small steps relative to the problems and relative to what they need to so i think we should encourage them to do more. but it's not just a fiscal problem, it's a fiscal problem on top of a competitiveness problem, on top of an unsustainable balanced trade, and, of course, on top of debt levels. as you well know, in greece and now in portugal, ireland and arguably also in italy, these

debt levels are not sustainable under their current arrangements. now, even minor optimistic colleagues from whom you'll hear in a moment, i think will agree. the outcome in europe is going to be deep recession, austerity. that's the good scenario. high unemployment, low growth and that's got not good news for our situation. the down side scenario that i would emphasize, my second point, is much worse. the spillovers from their sovereign debt problems to their financial system and from their megabanks that frankly, are very badly run, have far too little capital, those issues were clear already in 2007/2008 when i was the chief economist at the imf, that they have not addressed those issues, they have not made the system safer. and it's a dagger pointed directly at our financial system. and in terms of what you both care about, in terms of the direct negative impact on our

economy and our budget, this is a huge risk. this is a risk we can take steps to mitigate. we cannot solve the european's problems for them. that would be an illusion and it would be extreme arrogance on our part to presume. but we can build better protections for ourselves. first and foremost around the stability of our financial system. the financial services roundtable has a report out claiming that all the well in our banking including our big banks and we have fortress balance sheets in those banks and that's not true. it's not an accurate depiction of the level of capital, the level of equity financing relative to debt, the buffers against losses that we have in our banks. the federal reserve is well aware of this. you showed us the remarks of former vice chair blinder and i'm sure mr. bernanke and his colleagues share those

sentiments in private with you, but they must take the logical step of suspending bank dividends. it makes no sense to allow the banks to pay out the capital. they should keep it on their balance sheet and build up their equity relative to the losses they could face, for example, if the euro market collapsed which i would say is a real possibility, if that market were to collapse, we need as much of a buffer as possible in our banks. and the suspension of bank dividends ordered by the federal reserve applied on a blanket basis would stabilize and help strengthen our financial system. secondly, we should be scoring. your point, senator johnson, we should be scoring for you, the fiscal impact of financial calamity. and particularly, the dangers posed by a financial system that is run irresponsibly. they do score for you important contingent liabilities including as you showed us, medicare. that's a contingent. we don't know what exact costs will be for medicare in 30 been 40 or 50 years and the cbo takes a hard look at that and gives

you a sensible baseline read and they should do the same for our financial structures as exposed to europe. what would happen if there was a serious sovereign debt problem, for example, italy? how would that affect our economy, even the principal holds with no direct cost from bailouts it could still cause a massive recession and lose a lot of tax revenue and it would push up the borrowing at the federal level and state and local levels to the extent that's possible. we should be scoring that, you should be looking at it. i'm not proposing you hold up this year's budget on that basis, but when you talk directly and in private, you should impress upon him, i'm on the cbo panel of economic advisers, i made this point to them. i think they'll be receptive if congress pushes them hard in that direction. there are serious unfunded liabilities for us in this area. third and finally, with regard to the international monetary fund. the imf should be working to build a firewall, not within the eurozone.

they should not lend more money into the dangerous and counter productive situations we now see in the eurozone. the europeans run a reserve currency, the euro. they are perfectly capable of sorting out this problem for themselves. they haven't done it yet, i grant you. they need a lot of encouragement, and they're getting some of it from the executive branch. mr. geithner has been very good on this of late. and more encouragement from congress would be helpful. but the imf should focus on protecting other countries. build a firewall outside the eurozone and protect the innocent bystanders. and let them sort it out and help other countries with whom we do a lot of trade that have financial systems intertwined with ours. help those countries buffer themselves against calamity that may arise in a situation. the imf have taken this up and issued a paper to their membership. it was a secret paper, the

details are poorly related. they have created conflicting opinions. and i strongly recommend you bring the imf in for a private hearing and communicate their intent. and i urge you and your staff to impress on them at every available opportunity, build a firewall outside the eurozone. not attempt to fix the eurozone. the europeans should do that for themselves. thank you very much. >> thank you, once again, excellent testimony. >> mr. bergsten, please proceed. >> thank you, your very kind remarks at the outset about our stewardship of 30 years, but i'm not leaving. i'll stay on as a scene juror

fellow and hope to continue to participate in activities like this. one of the great privileges i've had over that period is to work with you, this committee many times and i thank you for the opportunity to do so again. i share with you that simon expressed, you've expressed, senator johnson have expressed, europe is in deep economic difficulty and no doubt they're headed for recession that may be prolonged. europeans have failed to get ahead of the crisis and failed to restore market confidence. however, and here's what passes for optimism these days, i take the view that none of apocalyptic forces will be in place. i don't think the euro will break up. it is a possibility that greece might drop out or be kicked out. but i don't think there will be any widespread defections from the eurozone. in fact, as i'll indicate, i think europe will come out of the crisis stronger and over time, will restore its position as a key player in the world economy. why do i say that? three reasons. i've watched the evolution of

the whole european integration project for the last 50 years. they've faced a series of crisis. frequently existential crisis to threaten the continued existence of europe. they've come out of every one and come out of them stronger and moved on forward and better. secondly, if you look at the current crisis, at every time it's reached a pivot point, where there was much commentary, it's going to collapse if they don't shape up, every time that's happened, they have done enough to avoid the apocalypse. they've kept going-forward, they've built new institutions. they built a firewall. avoided financial disaster and i think that will continue. for a very simple reason. the overwhelming imperative in all european countries is to hold the european union together. and that now means holding the eurozone together. that has become, for all practical purposes, the definition of europe. they know europe is wrapped up in sustaining the euro and they