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 also want to thank you for your comments at our last budget meeting where you certainly indicated your desire to work toward passing a budget resolution out of this committee, and one that would hopefully reduce our 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 we have to be mindful of our obligations under the budget act. and from 1974 and be mindful of those dates.

now, of course, 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 i think it's the minimum amount -- the minimum requirement that 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 they know the direction that 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. and it is -- they've not given

us an answer on that question. so that is 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 elmendorf 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

and debt situation. certainly as i was reviewing the testimony that will be given just here today, my concern is that we're trying to address a problem of fal 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 give the president the authority 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 that we're cutting spending or we're proposing cuts. quite honestly, nobody's 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. the house budget would have spent $4.7 trillion. i think the graph is pretty official from the standpoint we're not talking about cutting the size of government. we're just trying to reduce the rate of growth. 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 trillion in draconian cuts, that's what we're talking about, the difference between $46 trillion versus 40. but again, i'm an accountant. i can do the math easily. 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 liabilities 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 are. 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 $79 trillion. 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 actually making the assumption that the health care law will reduce health costs. and i guess the point i'd like to make is in many of our estimates here 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, cbstine eir 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.

again, we're deluding ourselves to think that this thing is going to be deficit neutral. it won't. it will add trillions of dollars to our total deficit 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 and the cbo itself says, to the extent we miss our growth target by 1%, that adds $3 trillion to our debt and deficit. we need to be concerned about that. and i think the final thing we need to be concerned about is we're trying to close the deficit. again, i think in my graphs i pretty well describe a spending problem. and i would just caution anybody that wants to increase tax rates. i want to raise more revenue but growing the economy. i want to raise the revenue by significant tax reform that is 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're going to hear in our

testimony here today. the solution in europe is trying to enact governmental policies that will promote economic growth. in the united states, we have the exact same dynamic. we have got to make sure that nothing we do here in washington detracts from economic growth. so with that, i just have one final chart. it speaks to the u.s. government in relationship to the european economies. and to me, this is an incredibly key metric. i'm a business guy, manager, accountant so i look at key metrics. certainly the size of our debt in relationship to the gdp is an important metric. but thing is even more important. when you look at federal government and its size in relation to our economy, right flow it's 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, not particularly 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. we're at the lower level of european-style socialism. norway spends 40% of its government gdp. 40%. greece, i think we're going to be hearing 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. >> good. look, there are lots of things you have said there i agree with, some that i don't. i think my sharpest area of disagreement would be the new health care law, because cbo has 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. i think it's undeniable. and it's really 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've got an obligation on this committee. we have an obligation in the

senate. the house has an obligation, the president does to try to get us on a more sustainable course. 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 have weighted it heavily on the spending cut side of the equation. but i personally believe we do 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 is 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 senator 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 designed to further cement the european union and to build a larger, more powerful economy, that 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 do. 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 i'm afraid now also in portugal, and 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. that the outcome in europe is going to be deep recession, austerity. that's the good scenario. that you have 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, on our budget, this is a huge risk.

it is a risk that 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, 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 briefing 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, welcome back. 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 senior 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 overcome 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 will do it. there are two simple reasons for that.

one reason is the ghastly history of europe. remember why they created the european union in the first place, to overcome the previous millennium of slaughter in europe, most dramatically, the first half of the last century. i happened to visit the holocaust museum again. if you've done that recently it gives you plenty of memory of why the europeans have pulled together to avoid letting europe, again, explode into kind of holocaust and disaster that they experienced. so they're going to hold europe together. in addition to that, they have an overwhelming economic interest. germany, which is the pivotal country, has a nirvana economic situation in europe, in the euro. germany is the largest surplus trading country and it bases it's whole economy on an export-led growth model. in the old days, when they had their own deutsche mark, it was

rise and they would choke off competitors and frustrate the germans. now, the germans have the world's largest trade surplus and a weak currency which, for them, is the perfect outcome and every german knows it and they'll continue it and virtually at any price would be worth paying for them to keep that situation together. if you went to a new deutschemark it would explode up in value and the whole german economic progress, which has been so impressive in these last few years, would collapse. so the bottom line is both germany and europe as a whole has a huge, huge interest in holding the eurozone together. so my conclusion, and it's, i think, supported by the evolution of the current crisis is that germany will pay whatever is necessary to keep the eurozone together. the european central bank will

put in whatever amount of resources is necessary and will play lender of last resort, even though they can't say it. now, there's one problem with this scenario. neither the germans nor the europes anenre broadly can say what i'm confident they will do. why not? it would be the epitome of moral hazard if the germans pronounced thaty everybody no matter what cost. that would take the pressure off. mario moti is speaking on friday and he'll lay it out. he wants to keep the pressure on his country so that the domestic politics will support the reform program that they all know they need so the germans and ecb cannot say they'll provide all the resources even though i'm confident they will. secondly, there's the usual gg there's four groups of creditors. germany and the other successful

the european central bank. the private banks, who are now negotiating their haircut in greece. and the international monetary fund. they're all trying to fob off shares of the rescue packages to the others, and preserve their own negotiating position to do so. therefore, none of them wants to say he or she will take care of the whole problem, even though, in fact, they will. so the result is a situation that's very unsatisfactory for the markets. the markets want to hear assurances, and firm words of rescue. those can't be given, even though i'm confident that those rescues will take place. and, therefore, the market situation is likely to remain unsettled and volatile, even though i'm confident that the outcome will be successful in the sense of successful financial engineering to avoid financial breakdown. but that's not getting to the recession and the underlying economic problem which is still there. i want to draw two or three major conclusions for the united

states and answer more questions on the european situation per se. first, as you said, mr. chairman, the united states has a huge interest in this situation being resolved successfully. so we have to do whatever we can to support a successful solution. i agree with simon that the europeans should provide the bulk of the resources to do that and they got the wherewithal but i disagree with him that the international monetary fund should not be available if necessary. we don't know yet, to lend more to help resolve the problem. the imf did pick up one-third of the original packages for greece, portugal and ireland, and i think that was very helpful, not so much in terms of the resources, but bringing the imf conditionality into play, and helping promote the necessary adjustment in the debtor countries. and incidentally, when i say necessary adjustment, i do not mean just fiscal austerity, which has to be part of it, but

structural reforms which are necessary to restore growth. what italy, greece, all the debtor countries need to restore growth is structural reform of their labor markets, the uncompetitive private sectors, l those structural reforms are needed. and the imf is helpful in promoting that given its that it can bring to bear. so i believe the u.s. should support if it turns out to be necessary, additional imf financiaroblnt on a minority basis, maybe the one-third in the previous cases, maybe less, but certainly it could be significant, and i therefore think the united states should support the en the imf to create a new fund, $500 to $600 billion, which in

conjunction with the funds the europeans are raising, would take the firewall to beyond a trillion dollars. which should convince the markets there will be enough there to avoid any significant financial disruption, even from italy or spain. i think the u.s. should support that. however, i do not think the united states itself should contribute. the funding the imf needs should be borrowed from the big surplus and creditor companies. china, japan, singapore, hong kong, brazil, russia, mexico, korea. many of those countries have already said they will lend. they should, in fact, be tapped. they have big surpluses, big reserves. we should support the effort but not put in our own money. the u.s. needs to take this as a wakeup call itself. and you suggested that, mr. chairman.