to make sure we preserve the fundamental strength, which is to make this place the most open place for people to come. if we do that well, the economy is going to grow at a rate that will be substantially faster than that of other major economies. it is likely we have a better tradition of openness and incentives for capital formation. it is that makes of things that matters to long-term strength. >> d.c. changes on the immigration front? >> i am not close enough to the politics of that. you guys are probably in a better position to speak to the visibility of those things now. >> feasibility of those things now. hang on and let's get a

microphone to you. >> can you identify what action the administration has taken to support a strong u.s. dollar? >> excellent question. my view on these things is to assure familiar with it because i have been saying for years. i hope the people in my job say it forever. a strong dollar will always be in the interest of the united states. ultimately what matters is confidence in the united states, making sure that we're focusing on strengthening the fund and it -- the fundamentals of the american economy. at least i just repairing the damage caused by this crisis but not just making sure we get our fiscal house in order by continuing to focus on things that make the underlying fundamental stronger over time. if we get those things right, we

will continue to preserve a substantial amount of confidence in this as a place to invest long term. if you look at how people price relative credibility across markets today, there is a lot of confidence and a capacity of the political system to ultimately act on those fronts. if poll we have to earn that confidence over time. it requires demonstrate the politicians in washington and solve some of these long-term problems. >> time for some more questions from the cfo's. any from the members of our network? we would get to you. >> mr. secretary, we certainly have opportunities that the federal level right now, but many states are also in crisis. obviously the likelihood of a state the fall and what you see the federal government's role in that? jetted is important for you to remind people that states are still under a lot oppressor.

those pressures are diminishing because revenue is starting to come back as growth recovers. there pressures are going to be more manageable than they were any time of the last three years. but it will take that long time to work through that. it is important to remind people about this because if you look at what happens to the american economy as we dig out of this mess, over the last six months, there is an important transition happening. in the early stages of a crisis, as the broader private sector was pulling back in a state of panic about the concern over the economy, the government stepped in and fill that gap, cleaned up the mess, righted the ship, and now the government is proceeding. you're seeing that there is a significant short-term drag in the economy as a whole and that brings down the overall growth rate a bit. overall, as the government

receipts, you see the private sector start to step up again produce a reasonably strong rate of growth in private investment, pretty good export performance, and those things are important as you look to rebalancing our economy over a longer run. >> shocked? the microphone is right here. chuck. >> it up -- you spoke about the trade agreements and some progress there. in high unemployment, some facets of the economy desirous of protectionism, honestly trading with important partners is key to growth. could you comment upon the prospects for progress there. >> we are in the last days of negotiating a solution on how to legislate these three trade agreements, korea, colombia, and panama. we need to make sure that we do

not lose market share in this country. but the bigger importance is to make sure the we of the capacity to negotiate broader trade agreements with asia, the fastest-growing part of the world, which are going to be important to sustain the healthy growth in exports in the latter stages of their recovery. but we have an economy where growth was too dependent on housing development for too long a period of time, and we're in the process of shifting out of grow as a country going forward. ultimately future growth will have to be more investment driven, more export driven, and that is exactly what we have seen in the first 18 months of the recovery so far. i think that that is very encouraging. this is still a very hard and difficult economy. any company still caught up in the parts of the economist affected by the crisis, anything

in construction, real estate, housing, in a businesses who are most exposed to individuals borrowing less and trying to reduce debt, those parts of the economy are still weak. it will take time, several more years to dig out of the problem. but if you look at the rest of the american economy, the look of what happens to businesses in general, looking at exports and productivity growth and innovation not just across how cultural put broad based manufacturing, there are classic signs of the basic resilience of this country, and encouraging signs. we want to make sure that we build on that and reinforce it. growing exports as part of that. >> by the end of year, all of those three trade agreements will be ratified for summer >> i do, yes. >> right there, final question. >> as we try to improve the

state of the economy and you work on these important issues, i am concerned a little bit about the balance between what you're doing and some of these offsetting things that are happening elsewhere in washington. some of the regulatory things that are not really pro- business, that wraps forcing some of us to look offshore and do things elsewhere. how you balance those to this. >> could you give us an example? >> the whistle-blower laws and rules, some of the regulatory lows, the energy companies. >> and it's a what i think the president's view on this and it is certainly my view, ability appeared alternately this is about balance for their parts of the american economy or regulation substantially lags behind the basic obligations of protection.

that's the sector is a classic example of that. will all live with a consequence of one countries get the wrong. incredibly damaging consequences to growth and basic business health, when you get that dimension of regulation wrong. in those areas, there is a whole other range of public safety things were regulation is lagging behind the types of risks we expose our citizens to. if we have to get that balance better, but we have to be careful we do not do -- overdo it, that we do not add to much, to quell a, to substantial of burden on an economy that is still living within the shadow of a crisis and trying to dig out of a very deep hole. we're trying to get that balance better. part of that is to make sure that the people bring a comprehensive approach of looking at the bergen, the benefit, and frankly submit themselves to a higher bar on what is the right mix of cost and benefit in this context.

i understand what you're concerned about it. we hear the concern generally and we're trying to make sure we get that balance right. >> secretary geithner, thank you very much. >> more from the cfo network conference next. we would hear from dave camp of michigan, who chairs that ways and means committee. >> why don't we did right in? alaska and some leading questions and i hope you'll be thinking of some. -- i will ask some leading questions and i hope you'll be thinking of some. could you give us a sense of how this looks from your point of view? is progress being made?

well we avoid default? is this the year that we get a framework for deficit reduction? >> we need to, because we cannot default paying if you get close to the day without a bill, what the markets may do in talking to some very knowledgeable people about it, they are concerned that if we get too close to that, we could have some more reaction. we have to do before, as much as the media has betrayed, this is an important week in those discussions. they had three meetings last week that got into the details. this is an important week to really make some progress. i think the discussions have been continuing and they are getting deeper. but we do not have a deal yet so we do need to conclude that. >> what other components of a deal that you need for you to felt comfortable and the rank- and-file in the house? >> the speaker laid out the markers that we need to see.

at least the same amount of spending reductions that you see and that increase. and then structural form, too, so that we do not get into this problem again. those are relayed that to benchmarks. >> those are really that to benchmarks. -- those are really the two benchmarks. there is going to be a short- term extension of the discussions continue, i think that is not a good idea, because it does not give it a certainty. ideally you like to get that settled and not have to be continuing. >> i've heard of framework laid out which is basically a down payment now, an agreement on the target, and an understanding that there some things that cannot be resolved before the

2012 elections. so we will fill the holes later. is that your understanding of how this will likely work out? >> there is only so much you can do on the discretionary side. you have to do the things that will take place over time. many of those are in the mandatory area, but you cannot do it all in one year. will take a series of years to really get to these target numbers. trillion as the overarching number, but there will be some steps to that the name >> do you think there will be legislative language to get to $2 trillion over 10 years, or agreement to get that as a down payment first? >> you'll have to get a down payment, and that is how we do it. >> will we have legislation that says this is how we're going to cut medicare and medicaid? >> that part is not completely determine. if you're not going to be able have every detail completed in

time for august 2. that is why there is talk of a short-term extension. how they deal with that is at that exact issue, -- how they deal with that exact issue, we will save. >> the white house says that you cannot get the deficit down to a sustainable level without increasing revenues. the republicans say we're not interested in increasing revenues. where are you on this and how we come to compromises here? >> i do not want to see higher revenues. eric cantor will have the actual response. when they talk about that, let's talk about repealing health care. those are nonstarters. the trouble is spending and we need to get that under control. if we raise revenues, it will

take the pressure off the spending side. and we know that spending increased dramatically, and under the president's proposal, we never get to primary balance, we never get rid of the dead, we never raise the balance -- so there really as the spending side issue on that. the president even a sense, and part of the argument comes because we have lower than historical revenues now, but the president's budget as it is much higher than normal revenues even without additional revenue. how much revenue of to go to the federal government is very much an important issue. >> do you think that we can get the primary balance coming getting spending equal to revenue, which is about 3% of gdp, by 2015 without increasing taxes in some way, whether closing loopholes for raising rates? >> the house-passed budget does that. >> can get to the senate and be

signed by the president was a margin we at least have a proposal on a plan. we do not see a plan on the other side to do that. >> would you rather see reaching for% even if it required some revenue increases? all would rather hold the line on revenues and settle for higher deficits? >> we do not want to have higher revenues. there issue is always reach people or over to under $50,000, which have a batting, small business, the very sector where we need to see some growth. that is the real problem. it would really be counterproductive when we're not seeing the kind of job growth -- it is mortgage revenue. as regulatory burden, uncertainty on health care, businesses don't know whether to pull back and wait for the courts to act or move forward on health care. they're all of these decisions that employers are trying to

understand and deal with. and they do not know a path ahead on some many of them. and the real problem on the revenue side is, again, we have certainty on the business side with expiring provisions of the end of this year and next year. now we've introduced a new facet to discover the uncertainty on the personal side. you have expiring provisions again at the end of 2012. they're about 50 of these provisions in the lira to 200. >> and whose fault is that? >> it is congress. that is why do not want to see the graph as a double as the revenue side of this. i call our high school physics for a system which assumes that there are -- there is no gravity.

if you had a simpler, better code, you not see economic growth. what we want to see is the economic growth, where our system does not score, but we believe will incur. if you at our house budget plus the fundamental tax reform within the house budget, independent economists say 1 million jobs in the first five years. >> if you look at the world from china, it looks like a food fight. you say you will not raise revenues, and they will not do anything unless you raise revenues, and that some point, you will have to compromise with democrats to get this done. i do not quite understand how we get from here to there if this is more than just a negotiating position on revenues. >> we want much lower spending and they want. there aren't going to need to be some compromises there. -- there are going to be some

compromises there. all small-business owners, raising revenues on them would be a big mistake. >> where would be the least damaging place to look? >> i cannot think the least damaging place. you certainly can and do with -- the process they're looking at is not just on what they call high income, but they also want to pluck out very provisions of the tax code and and and, not really with what this means to our competitiveness or do this and a global economy but that is a very dangerous prospect. what we need to do is to the of fundamental tax reform on the business and others. our'm sure the cfo's agenda. what would make -- what tax code would you like to see come out of this? >> we are working on instructed to do this, how low can we get

rates? where is the political senses on how many -- and you can call it tax provisions or loopholes or expenditure, what ever you want to describe it as -- how many of those can we change? a more constant effective rate? we also need to move to a territorial tax system so that we can compete around world. and that is on the business side. on the individual side, i like to see the same thing. we need to do but because most businesses are argue i -- are organized and file as individuals. if you do just the business side, you do not really get at the drivers of our economy. you do part of the economy but not where many people are organizing their businesses and filing. >> take the corporate side for a minute. what would you give up in order to get the rates? >> we have a lot of global companies, before the committee. we have a lot of hearings and

testimony is where we're doing a novel thing. we are having employers and job creators tell us what they think we ought to do. if we have a lot of good testimony. the uncertainty of things like the research and development tax credit have cause some very large businesses to say we cannot even count on this. we discount that in terms of what we're going to do. we're going to do what we're going to do anyway. we would rather have a lower rate. obviously the repatriation issue is one that i do not think that we should fix for one time. we need to fix that gm now. -- we need to fix that going forward. if this is a priority, then the rate is probably going to be although higher. and maybe you hire when we get to the end of the day. >> would you put down a bill or wait for the administration? >> i am not sure.

we are still having testimony in hearings and make sure that we have consensus and we're going to work with the senate as well. >> our business as saying that for the good of the country we will like to see a lower rate and dole will with tax breaks? or they like lower rates but not tax breaks? >> you get a lot of different views. depending on the industry, the sector, what their business model looks like, i did it that there is a dire to be competitive and they know that we're not competitive. i want to see these companies doing business around the world headquartered in the u.s., i want to see them investing and growing jobs here. and i'll tell you, the headquarters for's jobs in any community are the best jobs, because they lead the community not only in terms of in,, but they had the united way

campaigns and share the boy scouts and trying to make sure that we have the best schools. i want to see those jobs in the u.s.. but i am hearing even in those businesses that do very well with our system of tax provisions, but legacy a simpler, more competitive code, and one business' at 30 irs agents that live in their business. there does seem to be away the fun the government in a less complex way. certainly on the individual level, the complexity issue resonates very strongly. >> sick to the corporate. what is the timetable here? >> you have to try to be ready. we're trying to do the work so that we're ready if the factors come together, and i think that they might.

but the economy is not doing what it should do. it is not recovering. the president is facing reelection and i do not think he wants to go into 2012 with a narrative, if we do nothing, that taxes will go up. we worked hard on welfare reform and people said the president clinton was not cited. he did that very thing. we're facing competition from around the world and we are hamstrung and our ability. and i am relating the what business people tell me. when they make a comparison eris -- a comparison to get the rate of return that they need in the u.s. versus other countries, we do not add up. and yet we have the ability to add up. all these factors that i mentioned, the statutory rates, the complexity, all those factors, a regulatory burden and uncertainty there, it makes it more difficult for those managers to decide, are we

making a long-term investment in the u.s. with these building and people that we are in or are we going to look somewhere else? their other places that are promising uncertainty and tax policy. so we want to make a more certain code. >> what are the odds that byatt before the election -- corporate tax reform? >> the odds now could be different the next summer. now less like a very long-term project. but you do not know that for sure. it might not be done until this congress are to be in that year, but i'm trying to get the committee and certainly business leaders who have an interest of what we might need to do to be engaged to talk and comment and not let testify formally but come in and make sure that we

understand how this policy change may affect them and their employees. >> how do you increase the odds that you do something that lasts? you what the congress to pass tax cuts that expire, it is the congress this seems like the r&d tax cut that expires everyone's always generates a lot of campaign contributions. it is the congress that does not want to take anything is settled. what is the mechanism for giving a tax code but you can assure people in this room that might look like a tax code for your four years hence? >> all these provisions, and to find a way to lower rates for various sectors and industries. why not lower rates for everybody? why not give everybody the same shot at the rate? this comes in incrementally. donee last 28 years, we've

in criminal change. we really need -- incremental change. i met with secretary geithner frequently, but we need the administration to turn the levers of government to help make this happen. here really is about the future we're having. the saddle and tax policy but trade policy. when you look at the 40 + trade agreements pending, we have to read again -- we cannot do anything about. >> in 1986 with the landmark tax reform, congress was to prepare their whatever kinds of people. a lot of people a better around washington for a long time saying that that does not seem to be the leadership in the congress to say that we're going to get this done. we're going to have to be bipartisan and for someone sox and it is the good of the

country. are you confident that the congress has the capacity to do something like the 1986 tax reform? >> times do change. i do not know but i can tell you that we are working. we have a lot of hearings. the senate finance is having hearing on this every weekend. house ways and means is having meetings. we're having meetings with both parties. and you'd have to everyday get up and do your job as some point you may get there. a lot of people say to me, how do i get this bill passed? you have to go do your homework and build a consensus and tried a metaphor for that is what we're trying to do right now. but it is absolutely something we need to do. there are many that are calling out for final tax reform. but there is the business roundtable are individual companies or members of companies, there's a lot being said and the administration, the president says this bright things sometimes about this issue, and certainly the

secretary of the treasury has. relief for me, when i was ranking member before it became chairman, when the i went through that tax deal at the end of the year and there were 200 provisions on the table that we were trying to peel the onion back on each and every one of them and understand why these extended and white that happened, it was very clear to me that it was not a workable way to have employers and individuals and families understand what their responsibilities are. we've got to make a change very it was crystal clear to me before but it was driven home for that experience. that is why i feel so strongly about this issue. it is something that i'm working very hard to try to do. >> what is the holdup in getting zacharia, colombia, and panama trade deal this done? -- and the president has announced that he will not send us the agreement without taa.

we're trying to find common ground on taa. it is not something that is when it easy to do. >> what is the issue? when the trade is good for the country as altered wind up as some people benefit and some people get hurt. the economic justification for some kind at trade adjustment assistance is that the society is all compensates the losers. it is set up proper and -- to the republic is of a problem with that principle? republicans had a problem with that principle? >> if you're at a restaurant that goes out of business, you

get 99 weeks. but it for some reason you are an industry they went somewhere else, you get 150 weast. there is that fairness issue that people are concerned about. all to see that trade agreements. i think the benefits are important, even the independent itc says that the jobs of we pass these three, but the real problem is that we're losing our place in the world on these things. >> are you planning for that -- there are a lot of proposals to do a different kind of worker adjustment assistance. we had a couple of articles talking about making that point. whdis that on the table? >> the president has said that hasted the taa -- that it has to be taa.

we're close but we're not there yet. close to not really count. i want to do it, i think the administration very much wants to do it, we have this new hurdle that we have to get over. it is not insurmountable, but i agree, we will get it done this year. >> i want to ask one final question and then we will turn to the office. what is a light to be a leader in the house this time around question mark -- what is it like to be a leader in the house this time around? >> one of my early supporters, achieved in the local tribes, said that he was not sure whether he was leading or being chased. [laughter] >> we have a microphone if

someone was asked a question. -- wants to ask a question. >> an issue that has come up several times the last 24 hours, not within the jurisdiction of their committee but i would be interested undertaken a beard several have talked about in terms of competitiveness and maintaining the united states position in the global economy, the importance of reforming immigration laws. the craziness that the best and brightest come here to study and assess the graduate, they are shipped back home. many of the companies in this room feel compelled to locate facilities were the people are even though they might prefer to do it here. what are the chances political way of actually getting

something done about that? >> that is an issue that without strong presidential leadership, you not see that bubble up in the congress. but from business and agriculture, there is a need for certainty here. the real problem is that those who have come here and broken the rules, what happens there. that has been unresolved. until that gets resolved, and there is not some benefit for having broken the rules, i think it will not be done. you do not receive some benefit for having broken the rules. maybe i did not say that and the most artful way, but i will certainly hear about it on our and. >> do you hear a lot from constituents about immigration?

>> it is a national issue. even a christmas tree farmer in my district is issue did -- interested in that issue. >> you commented on repatriation. there is a huge lobbying push of the last several months and we hear about all the time. are you willing to say with any certainty that the repatriation bill that has been put up is not going to come to your committee >> i have been here long enough to not say with certainty that something is not going to happen. can you blame people for lobbying on this issue? there is well over $1 trillion stranded overseas. if it does not come here, at its invested their and it may

never -- get that's invested their -- it gets invested there and it may never come back. i like to do this in the context of a fundamental tax reform. i hope that we do not have the same problem in five to seven years. >> but as a one-time bill, and it is not part of tax reform, can you do it? >> we did repatriation a few years ago. here we are back again with the same problem. i think it is important to change more than just one time. although would be helpful. it is something i think it is a very important to do. >> mr. chairman, the economy is growing at half the rate most

people thought it would be at this stage. you noted it was a good time to raise revenues and taxes, it would not serve the environment. under keynesian economics, it is not a good time to cut spending. but here we are. i am wondering whether you think that ought to affect the pace of spending cuts or conversely you think we're learning that keynesian economics does not work anymore. >> one of the problems with our debt is that it is one of% of -- one under% -- 100% of our economy. we had testimony from outside economists to said in 600 years, every time it gets to that level, in impacts your economy's ability to grow. they estimate 1% came off of growth. that is about 1 million jobs in the u.s. there is a direct line to debt.

that is why it is so essential that we have spending reductions. the treasury department just issued a report, and our debt is reaching 100% of our economy by -- five years earlier than they estimated. it is not that we are there but the pace that we have gotten there and the pace that our debt dramatically increases after that, the trajectory, if you will. it is also a critical part. we have to begin to bring that back as we pull out. the private side will then -- the private side then grows. >> with the extension of the payroll tax holiday, they are trying to get more diffuse into -- more juice into the economy. is that a bad idea? >> i am not in favor of that. again, i think piecemeal tax reform policy without a broader view is not the approach we

ought to take. we need a more overarching approach to our tax policy. >> ares question implies that we could have contractionary fiscal policy in a weak economy. that make the economy weaker. >> and we have contractionary economic policy because of our dead. -- debt. this is from independent experts in front of the debt commission. this is well documented. this is not just me saying this. that is also hurting i economy -- our economy. our debt has become so much a part of our economic picture. this is not the 1990's in terms of our debt. the gdp ratio gives us a different prospect. >> you have a 50 cfo's here.

i believe that all of them what -- want what is good for their companies and what is good for the united states. would you tell people in the business community they ought to do right now about the fiscal and tax issue that would make it more likely that next year for the year after, we are in a better place? >> we need a comprehensive approach to our tax code. we need some certainty. this idea that provisions expire every year or two is not acceptable. many to have a business tax that -- we need to have a business tax that is competitive. all fully that would mean to a territorial system in their mind and that they communicate that. there is a very strong voice there. it is sometimes hard to realize how strong the voices, but it is always about jobs. how do we find a way to have the private economy grows so that jobs can be created credit mark

-- so that jobs can be created? what is the best solution there? getting that information to us or any member of congress is very helpful. i think that can really create -- clear away some of the confusion on what the best approaches. -- approach is. >> we promise the congressman he could go a 1:30 p.m., and i keep my promises. we appreciate very much. thank you. [applause] >> now we will hear from georgia republican saxby chambliss and virginia democratic senator mark warner, members of a bipartisan group of senators looking to craft a long-term deficit reduction plan. they are interviewed by gerard baker of the "wall street journal." ♪ >> ladies and gentlemen, welcome

gerald baker, saxby chambliss, and mark warner. [applause] >> thank you very much, ladies and gentlemen. we had here to of the members of -- two all the members of all was originally called the gang of six. the unfortunate because of an accident, is now down to the gang of five. >> we are a basketball team now. >> if it continues, you become a gang of four. and we know what happened to the original gang of four in china. they have been too important -- two important figures in this discussion going on about measures to improve the u.s. fiscal position in the medium-

term and long-term. key members of this gang of six. as we get closer to this imposed -- the debt ceiling, which is august 2, the day by which something has to be raised, we heard this morning from secretary geithner, he talked about the discussions under the auspices of vice president biden. he expressed concern pretty extreme confidence in the likelihood that we will have a decision to raise the debt ceiling by well in advance of the august 2 date. senator warner, do you share that optimism? >> it depends on what you call ideal. -- a deal. the challenge will be, and saxby and i have been working on this four year, and senator coburn, a very valuable member of this group, we were getting at this

very naughty problem. -- knotty problem. my biggest concern right now is that in an effort to avoid a debt crisis which you would know better than most, no matter what your business line would be in terms of an interest right -- rate flight that would ensue, it would be devastating. we have run out of bullets. my concern is that we might have what appears to be a top line #that has some meat to it, but -- topline number that has some meat to it, but does not take on the issue around passeriform or -- tax reform or entitlement reform. while that might get us over the of the second hurdle, by huge

concern is that might also take the air out of addressing this problem, which we have always thought if we are not in the neighborhood north of $4 trillion of debt reduction over the next 10 years, then we have not taken on this problem. >> senator chambliss, there is some kind of deal with the general global number, but then it is not clear whether or not it is deliverable, especially in terms of expenditure cuts they're called for in vague terms. are you concerned like senator warner that we may have a deal in outline, but the devil will be in the details and we may be coming back and of all trying to figure out what this deal really means? >> we have been working on this four year between ourselves and -- for a year between ourselves and then in an expanded group that narrowed itself down to the six of us who began six months ago talking about this in great

detail. what concerns me about bumping up against the all the so that -- that august 2nd deadline for whatever the date may turn out to be with the debt ceiling, you do not have the time even if you started today to try to get entitlement reform or any kind of tax reform, which if you're talking about revenues coming to have to talk about it -- revenues, you have to talk about that in terms of major tax reform, not increasing taxes -- trying to get all of that down between now and august 2nd, where we have been in a serious and detailed discussions that we have had, would be very difficult to do. every day goes by, and makes it that much harder. this is probably a key week for the pipe in grid. -- and the biden group. >> on maker break week? -- a make or break week? >>they are forced on the short

term. we're focused more on the long term. even after you raise the debt ceiling, we will still owe $14 trillion. that is the real issue that we see out there that is looming that we have got to solve. the debt ceiling itself hopefully will get worked out. but it is short-term. >> senator warner, for the democrats, and this is where the republicans fear is coming, the -- the republicans' fears come in, the big issue is going to be any willingness to agree to significant entitlement reform, by which women entitlements cuts. we've seen the issue of medicare. when paul ryan came out with his budget, that was heavily attacked by democrats, and indeed was playing a

significant role in that upstate new york election. democrats seem eager to use the threat of medicare cuts that -- to bash republicans around the head as a result of that paul ryan budget. are you confident that any deal that can be reached before august that is going to have meaningful entitlement reform that will actually be credible and believable and will not be used by democrats to attack republicans to program the over the cliff? >> i will answer below me step back for one moment. the irrefutable facts are we are spending at an all-time high, it cannot be sustained. we're collecting revenues are roughly 14.5%, not nearly enough to fund that, and it does not take a world-class cfo of the -- to know that that is not sustainable. anyone who says that this can be solved on one side of the ledger alone, i think, either does not understand the accounting 101 or does not

understand the extent of our difficult choices. i think you have seen from some of my colleagues on the democratic side, who have seen the success on the republicans signed at drawing bright lines, and thou shalt not, but it -- look at revenues for example. a host of others in the frame of not raising taxes, generating more revenues, they deserve an enormous amount of credit. there are large number of democrats as well to realize that the math with an aging population -- is not the democratic republican fault, the numbers are irrefutable. i apologize to senator chambliss about the lines, the average life expectancy back

then was the mid 50's. it was not a bad bet. 17 workers for every one retiree in 1950. that is not anyone's fault other than a medical profession for letting us all live longer. these are commitments that have to be kept but there has to be reform if we are going to get our country's balance sheet back. >> you think your democratic colleagues, and that it be fair you'd be characterized as being on a more centrist side of the democratic party, but your colleagues to go i have been called other things, i assure you. >> with the be willing to accept medicare significant -- significant medicare cuts?

>> any deal that would satisfy either all the democrats for all the republicans will not get 60 votes and the senate. -- in the senate. i will let saxo be respond, but one that -- i like to engage with the business community, but unfortunately, they're very active in this debate. -- absent in that debate. >> how happily referee that engagement if anyone wants to take the center of on a very by -- if anyone wants to take the center of on that, but let me

ask you, senator chambliss, a similar question. his numbers are so large that no one believes that this is going to be achievable by one side alone. if that deal was involved with some sort of tax reform that includes significant revenue increases, and we just had dave camp, but he made some interesting concessions but said pretty clearly that it cannot include revenue increases. if a deal is done within the biden that includes revenue increases, can that be whole -- sold to the republicans? >> i hope what he said is that we could have revenue increases without tax increases. that is a key. if any taxes are truly raised in the paris sense, and the answer to your question is no, that is not one to sell. it will not sell on the senate side nor on the house side. but what we have had to look at, and we use the dead commission -- debt commission report as our foundation.

they said you have to approach it from three standpoints. we have to cut spending, and we're spending way too much money from discretionaries standpoint. you cannot eliminate defense spending. that has to be a part of the mix. and secondly, you have to look at entitlement reform. that is the old willie sutton story about robbing banks. entitlements is where the money is. our commission is looking at some non-entitlement mandatory spending, but for them to get reforms done on the entitlement side, it will be very difficult to do. and then thirdly, if you have to look revenues we have this template 5% gap that we have to -- we have this 10.5% gap that we have to start closing. and there is only one way to do it. the figure out how to get our revenues of our we get our revenues of a bite enticing the folks in this room to get some of that $2.5 trillion off of your balance sheet and invest in your company and spread out

that tax base by putting people back to work and creating the new jobs that all of you wanted to. we do it by energizing the economy, whether taxes or through allowing you to bring some of your money back from offshore. and whether we do it by eliminating all tax expenditures, look at what tax expenditures to main a lot to you, and will allow you to create jobs and maybe put some of those back into the mix. i think it is all the above. there is no silver bullet here. it has to be all of the above. when it comes to look at a balance sheets and try to figure out what it takes to get your company back on track, what we have had to do is it that sweet spot of reducing spending and increasing revenues in the right way to get our country back on track. i think that we can do it in a way that does not raise taxes. we know if you have read the commission report, and i hope

that you all have, but when you eliminate all personal expenditures, for example, the commission recommended three different tax brackets. the lower 8%, the high of 29%, with three brackets. according to the irs, and not according to anybody on the hill, the irs says that 70% of tax dollars in america filed the short form. if you are not dependent on deductions and we eliminate all of those expenditures and lower those rates, that automatically tells you that 70% of taxpayers are going to in all likelihood been paying less in taxes. in 1986 when we had the reagan tax package that was along this similar line of thinking, with a number of people paying less in taxes.

some paid more in taxes. that is always the case. but is is that type of energizing the economy that we think needs to be done to get tax revenues of and at the same time get tax rates down. we talk about doing it on the corporate side, too, and we would be happy to get in the more specifics on that. >> but on the republican side, use of midterm election dominated by the t party movement which was adamant about cutting the size of government, cutting spending, and it seems to be equally adamant about opposing revenue. he make the distinction between revenue increases and tax increases. but any net increase in revenues does seem to be regarded as something that would be unacceptable to a lot of newly elected members of the house. in the presidential primary on the republican side, is that something of the republican party can actually unite around? >> it is not rocket science to

look at that 14.5% part of gdp we are taking down in revenues and realize you have to do something about that you're you can either raise taxes, and that is not going to happen, or you energize the economy. we have to figure out the right kind of policy that is going to do that and have the right mix that is attractive to republicans. again, mark was exactly right. if we satisfy all republicans, we're going to get 47 votes. that is going to be about it. everybody, and i emphasize this, everybody, whether corporate level or personal level, is going have to sacrifice if we're going to make this work. and it will be painful. i was in london back at the end of march and i saw the riots going on in london over the cameron policies.

they had to make hard and tough decisions. we're going have to make hard and tough decisions. you come to washington to have the opportunity to make a difference for this is one time members of the house and senate will really have the opportunity to make a difference. or is going to be tough. they're going to be difficult, and i hope people, the right frame of mind and not just to be my way or no way. >> you mentioned the importance of the corporate tax changes we're going to have to say. -- see. people and businesses generally want government to get out of the way and let the private sector create the jobs. you say that we have to cut some of these tax breaks that you get, r&d, or some of those other things, and is the old story about do not tax me, attacks that other fellow under the tree. you have a significant record to station from the business community here. is this the message that you have got for them? you're going have to get used

to some of these tax credits, losing them. >> my answer is yes. we have a gold. -- goal. we have a plan that is not finished. it is not perfect. it takes $4.5 trillion off the debt in the next 10 years. mrs. to a sustainable basis. -- if it moves us to a sustainable basis. it reflects that on the corporate side, we need to lower rates. i find that i'm not throwing stones but i'd do sometimes get some companies saying, our corporate rates are the highest in the world. they're actually paying set 35%. if you're paying that, you're

probably not doing a good job. the effective rate is quite lower. we looked on a corporate site is more revenue-neutral. i could discourage some times when i hear some of my friends saying, we need net revenue reductions on the business side. and that. other countries to less and they point to other countries. i get so frustrated when they said they will invested elsewhere. never do i hear, and we are so enamored with this third world country that we're going to move our corporate headquarters

there as well. >> but on the corporate tax side, as senator chambliss is talk about, the importance of raising revenues. on the corporate tax rate, it would aim for revenue neutrality? it would be on the individual side that there would be higher.

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on retaining confidence in the camp david accords and peace with israel, again, the government so far in our military assistance over the years, which is very substantial, $1.3 billion a year, has certainly, i think, enhanced regional stability, and we have a multiyear program with that military assistance, and yes, generally speaking, i think it would be good to have

multiyear programs for civilian assistance as well, because it gives more certainty and more steadyness to our planning and our dispersement. but we'll have to see what the new elected government does. i mean, i don't really have any better answer than that. we'll have to see how thisee involves with an elected government. again, there's no evidence that people in egypt -- there's no evidence that egyptian government officials or leading politicians don't see peace as within their interest. many of them want to get on with their own democratic and economic path, and i think the politicians to be elected will have to focus on these burning economic issues. certainly in tahir square we saw no anti-americanism and no anti-israeli statement. it was all about egypt's domestic politics. >> last question, in terms of

path forward, i'm sure the african affairs subcommittee, egypt has played a role in sudan, sometimes constructive, sometimes not so much. they received a lot of sudanese refugees. egypt is one of the continents, largest, fastest growing economies, populations, has a lot of potential. how do you think we can encourage a constructive role that egypt might play in the future in sudan? >> yes, i think that's a very accurate characterization. sometimes they play a positive role and sometimes they haven't. but we'll just have to engage with them on all levels, and one of the reasons we're having these outreach programs with nascent political parties is not only to engage on political party formation, but also to discuss -- and our embassy has been very active in this -- also to discuss the issues of the day, which would include sudan, regional engagement,

economic reform. so we'll be talking these issues up over the next few months. >> thank you very much. >> thank you very much, senator coons. >> thank you, chairman lugar. i think all of our senators have on this panel have done a brilliant job of outlining your career, and i'd like to thank you for your remarkable service to our country and thank your family members. each of them, i think, are serving or have served at key places around the world, and we also appreciate that service. ambassador, you hit on one of the things that is so prevalent throughout the middle east, this whole issue of jobs, and there's young population and a need to create significant jobs, and i think you highlighted in your testimony

750,000 jobs a year, which is a big feat to be able to do that. and i think we all know and i think we feel that the lack of jobs then creates a fertile ground for violence and for terrorism and things like that. so my question i wanted to ask goes to -- andy touched on this a bit in terms of how we're using our money, but i understand recently that secretary clinton has done reprogramming in terms of the funds that were available for egypt, and she's moving funds from one category to the other, and i was wondering if you could outline for us we've taken money away from and then why we're doing that and what

areas we're targeting. i know you mentioned angel investors and other kinds of programs, but i think it would be helpful of the committee to kind of have an idea where do we think -- with the scarce resources we have, where do we think are the best places to invest. and i know you've said in a broad, general way that it's important to invest in good governance and also in the development of the private sector. >> thank you, senator coons. let me just say this job creation, and these issues are really rather frightening, but they can have a huge upside. pakistan, for instance, had to generate two million jobs a year for new entrance to the labor force. but in latin american, what happened was this became a huge, demographic benefit, because there were all these people in the labor force that had fewer children and didn't

have to support the elderly like many of our developed society, so it was a huge impetus for economic growth, and i don't see any reason that properly handled egypt's economy can't do the same thing. but let me outline more specifically what we're trying to do. the secretary did reprogram funds, and she took it what i would call out of egypt's pipeline economic assistance pipeline, which was not combersing very rapidly because egypt had not met the conditions for dispersement of this pipeline. so we took $150 million out of that pipeline, and we allocated $65 million of it to democracy and governance, and that's the funding source, as i mentioned, for some of our prestigious organizations. and we're going to put $100 million in essentially job creation, issues like the short-line cash for work, which is not sustainable but will, i

think, solve some short-term problems. so we have, senator, the overseas private investment corporation, which has a very sophisticated program for lending. we have our debt swap programs. again, the whole a.i.d. program will be refocused to promote economic reform and to do such things as work with think tanks and political parties to help them develop platforms on economic reform, to do job creation, to do trade facilitation. there are issues -- and this was actually a very important issue in my other post, to increase trade, you need a certain amount of infrastructure. what the infrastructure that you can build that will most efficiently promote trade flows, and as we go into more trade liberalization with egypt and north africa, this will be important, too. that's a fairly high cost and long-term project, but that's

the sort of thing we're looking at to promote jobs. >> ambassador, when you say cash for work, how does that program work? >> essentially, and we're trying not to do too much of this because it's not sustainable, but it takes young people, mostly young men, off the streets, and it pays them to do basically manual labor. and we try want to do very much of this in our assistance programs because it's not sustainable, but sometimes it's necessary in some of these countries, because it does put cash in people's pockets. >> yeah, and it's showing that i think there's a feeling that we're kind of in a -- maybe not to put it too dramatically, emergency situation, but we are in a situation where there's serious unemployment and that creates all of the other problems. if i could just -- just shifting directions briefly here, on water usage and

increasing concerns about the nile river and water shortages in the region, i know that many countries are increasingly concerned about egypt's high -- especially upstream users of the high rate of water usage. what role can the u.s. play and what role will you help to play to facilitate water conservation so the region avoids conflicts over the water resource? >> and related to your previous question, i should have mentioned this, that we do have projects certainly to promote agricultural efficiency, because most of these countries are rather -- they don't have very good water management systems, so we are working on that, too, as part of our agricultural project. but on the initiative, the department's been very active in trying to encourage the countries to come together, as has the world bank and work out a settlement among themselves. >> great. thank you very much and thank you again for your service.

>> thank you, senator udall. senator mendez? >> thank you. ambassador, thank you for your long service to our country. knowing you've had a distinguished career, and you're going to an especially important assignment in this time in history. i've heard between my meetings was glancing at the tv in my office trying to capture your answer to some of senator casey's questions, but i want to pursue that a little bit more. i want to know your views as it relates to -- what will we tell egypt as it relates to the state of relations between our countries? in materials of its adherence to the camp david peace treaty with israel? >> senator menendez, i don't think there could be the slightest doubt about our views

about egypt's adherence to the camp david peace treaty with israel. as i mentioned before, i want the egyptian government at all levels has made utterly clear its commitment to that treaty. >> now, and yet there are a series of actions that we have seen that are unsettling to some of us who believe that that is a cornerstone of u.s. foreign assistance to egypt. is this adherence to its international obligations a prerequisite for u.s. assistance? >> we entirely anticipate they will abide by the treaty, and the assistance to egypt is based on those agreements from many years ago. so if, in fact, we were to come to a conclusion that at a

certain point of time we do not believe that egypt is pursuing its international obligations to that agreement then we would not be forthcoming in terms of the money we give to egypt? >> senator, i don't think we have any reason to expect that egypt is not going to abide by its commitments with israel, but again, as i said, i think this is widely known that the assistance to egypt is essentially as a result and tied for many years to the camp david accord. >> so the reopening of the border crossing, which has been closed since 2007 due to concerns about hamas using that to bring weapons and fighters into gaza, some of the gas disruptions that have taken place, you're not concerned? i didn't say that, senator

menendez. i think what i told senator casey is we were concerned about these issues. and, in fact, that the egyptians and israeli security forces are working on these issues, that there is a very serious concern about smuggling, of course and the egyptians with con curens have put additional troops into the sinai the gas is falling again. the law and order situation is bad there, but the gas is falling again. we think this is an issue that they can work out between themselves. >> many of us have and have still high hopes for a transition here that is both more democratic and continually secular. but many of us have concerns about the actions in where we're headed, and our support,

certainly this senator's support for assistance to egypt at the levels that we have been supporting it is predicated on on a continuing relationship with a major ally of the united states important to our national security and our national interests. so i hope you understand that that there are those not ready to sign a blank check because a long-term relationship, and we will be expecting our next united states ambassador to make that very clear. >> senator, i don't think anyone expects the congress of the united states to write a blank check anymore. our financial conditions would not permit it, and i think the military assistance in particular, as well as the civilian assistance, but particularly the military assistance, a very significant amount that you all have appropriated over the years has really been a source for stability in the region. >> well, financial circumstances certainly create pressures on all of our assistance abroad, but in my mind, is beyond even the

financial circumstances of the country. it is also about whether or not egypt is living up to our expectations for which we are willing to assist it in moving in the right direction. i think i've made my case. i'll leave it at that. i want to talk about one other thing, and it is something that i am seriously concerned about. it's how coptic christians are treated inside of egypt. it is totally unacceptable. we have seen an egypt egyptian court have 16 suspects found not guilty. the two who were convicted were released on bail. you know, i look at this circumstances a sit-in by

christians trying to get a church reopened, a group of people were using firearms, knives, stones, molotov cocktails, and 78 people were wounded. so what do you see as progress being made to end sectarian violence, and what are the prospects for constitutional changes and laws that would address sectarian violence and ease restrictions, for example, on building churches? i have a tremendously productive coptic wristian community in my state of new jersey. they were very peaceful people. i don't understand this continuing violence against them. i would hope the united states makes it very clear to egypt that the continuing attacks upon people simply because of the offer that they choose to worship at is not acceptable.

>> thank you, senator menendez. yes, we've made this absolutely clear to the egyptian government on many levels. this has certainly flared up after the unrest in tahir square, and it's gotten worse. i don't think there's any question about that. that said, the military government has reconstructed the church that was destroyed and has arrested people that have attacked coptic christians. there was just a draft law the other day, and frankly, we've gotten very mixed reports on this about the construction of these churches or mosques. it may not be satisfactory to the coptic community. we just don't know yet. but we certainly expect this government and the new egyptian government to observe freedom of religion, which is in mile an hour constitution and in the universal declaration of human rights, which, of course, egypt is a significant in aer to. that is certainly one of our expectations of this government and any new government.

>> my final question, as the next ambassador, can i rely upon you to veg russly raise this question with the egyptian government? >> you certainly can, senator menendez, absolutely. >> thank you very much. >> thank you, senator menendez. if there are no more questions, we thank emboss door patterson once again for her testimony and wsh you well. i know the committee will be taking action very soon. >> up next on c-span, a panel looks at the challenge of creating economic growth, and on this morning's "washington journal," we'll get an update on budget negotiations. we'll also talk with david wasserman of the cook political report about congressional redistricting's impact on the 2012 house elections. >> this morning, the joint economic committee holds a hearing on u.s. manufacturing, which has seen growth in 2011.

we'll hear from the president of the national association of manufacturer and moody's economist. live coverage begins at 10:15 eastern on c-span3. later in the day, also on c-span3, the outgoing head of the federal deposit insurance corporation testifies about financial industry regulations. she's expected to be asked about greece's economy and the stability of the european banking system. live coverage gets underway at 1:30 eastern. >> the joint economic committee looks at how the u.s. and other countries increase the size of their economies and create more jobs. the hearing, chaired by texas republican congressman kevin brady, is about an hour and 40 minutes.

>> chairman casey and i have agreed to organize hearings for the joint economic committee during the 112th congress. prsuent to our agreement, i convened this hearing, because the once vigorous american economy is languishing. a harvard university professor entitled economy's worse than you think, laments the final sales grew at an anemic annual rate of .6% during the first quarter of 2011. the month of may witnessed the unemployment rate rising above 9% again, and a class of payroll employment gains is another wake-up call. president obama's economic policies have failed to launch a vigorous expansion. instead, this policy has increased the cost of doing business, heightened uncertainty, and detered jobs

creating investment. moreover, his policies have burdened our children with an enormous federal debt that continues to grow. one of our witnesses looked at president obama's last two spending proposals, his budget in february and his informal frame worldcom in april, and compares had with the house budget resolution. from this graph, it's clear that president obama and congressional democrats want to make federal spending a permanently larger share of our economy. whereas congressional republicans want merely to return federal spending to its prerecession share of our economy. returning to federal spending is normal and prudent. nevertheless, president obama and some in washington have embraced a radical, historically unprecedented expansion the size and scope of federal government. let me be clear. obsessive federal spending is a disease. large federal budget deficits and accumulating federal debt

are symptoms of this disease. if you cure our spending disease, the symptoms will vanish. if you treat the symptom, you may temporarily alleviate some of the pain, but over time, our economy will continue to weaken, our international competitiveness will erode, and our children will become the first generation in american history that is poorer than the previous generation. in response to these grave fiscal challenges, the house of representatives passed a responsible budget resolution that would bring federal spending in line with revenue over time. unfortunately, the senate has failed to even consider, let alone pass, a budget resolution. congressional republicans want to cure our spending disease in part by reforming entitlement programs to make them sustainablely solvent for future generations. in contrast, president obama and others have reverted to the discreditted notion that entitlement programs can largely continue as they are without reforms if we only tax the rich enough.

congressional republicans are demanding that any debt must contain substantial spending reductions and new fiscal guardrails to ensure these reductions actually take place. in response, president obama and democrats in congress have launched all-out political attacks asserting cuts in federal spending to push the economy back in a recession and destroy social programs. these false attacks must cease. americans are to come together to reduce federal spending and grow our economy. on march 15 this year, i released a j.e.c. staff commentary entitled "spend less, owe less, grow the economy." this study examined other developing countries, developed countries, our international competitors that had large, persistent government deficits and a high level of government debt. this study found the countries that adopted fiscal consolidation plans to reduce their government budget deficits and stabilize the the level of government debt that was based entirely on government spending reductions

were successful in achieving their impose, while countries that included significant tax increases in their fiscal sob doll situation plan fails to achieved their goal. this not only increased economic growth over the long term, but also provided significant, short-term boost in many cases. today, we are releasing other j.e.c. republican staff commentary entitled maximizing american's prosperity. this study examined what fiscal guardrails would keep congress on track. this study found several things. this would not counteract a bias toward higher federal spending. the federal government needs a cap with incredible mechanism.

the item reduction veto has reduced the growth of state spending by strengthening the role of the governor relative to the legislature and making spending decisions, enhanced authority would also help control the growth of spending at the federal level. sunset provisions, which have been effective in eliminating inefficient and unnecessary programs and agencies in u.s. states would be helpful at the federal level. so long as we continue to behave in politically fiscally responsible ways, american families and businesses will look to the future with trepidation. that is the concerns and issues and the reason we meet today. i look forward to hearing this testimony of our witnesses, senator. thank you for joining us. >> senator casey will be here at about a quarter after to give an opening statement as well, and we'll recognize him as he enters. at this point, i'd like to

introduce our witnesses, again, on behalf of the committee, thank you all for being here today. we welcome the honorable john b. taylor, george p. shulls from the hoover institution, and the marion robert raymond professor of economics at stanford university. he also taught economics at princeton, yale, and columbia university. dr. taylor has received the bradley prize for his intellectual achievements and the alexander hamilton award for his overall leadership in international finance at the u.s. treasury. dr. taylor is a renowned expert on monetary policy and the creator of the taylor rule for determining what the target rate of federal funds should be for price stability. he served ads the undersecretary of the treasury for international affairs during the first term of president george w. bush. previously he served as a member of the president's council of economic advisors during the george h.w. bush administration. he's also served on congressional budget offices, economic advisory panel.

dr. taylor has a long list of publications to his name and a recent book entitled "getting off track: how government actions and interventions cause prolonged and worsened the financial crisis." he's a frequent contributor to the editorial page at the "wall street journal" and other widely read publications on the state of the economy. he earned his ph.d. in economics at stanford university. welcome, dr. taylor. simon johnson is a ronald a. professor of entrepreneurship at the sloan school of management at the massachusetts institute of technology. he's a senior fellow of the peterson institute for international economics and a member of the congressional budget office of economic advisory panel. dr. johnson previously held the position of economic counselor at the international monetary fund and was the director of its research department. he's a co-director of national bureau of research africa project and works with nonprofit think tanks around

the world. dr. johnson's co-author of the 2010 book 13 bankers, who wall street takeover of the next financial meltdown. he's a regular bloomberg columnist and frequently publishes economic opinion pieces in major national, international news publications, such as "the washington post," "wall street journal," and the "financial times." he's co-founder of the blog, the baseline scenario. he earned his ph.d. in economics at m.i.t. welcome, dr. johnson. kevin is a senior fell sexow director of economic policy studies at the american enterprise institute for public policy research. before joining a.e.i., he was a senior economist at the board of governors at the federal reserve system, an associate professor of economics and finance at the grass roots school of business of columbia university. he was a policy consultant at the treasury department during the george h.w. bush and clinton administrations. he served as an economic advisor to george w. bush

2004's presidential campaign. and as senator john mccain's chief economic advisor during the presidential primary. he also served as senior economic advisor to the mccain presidential campaign. he is a columnist for national review. he earned his ph.d. in economics at the university of pennsylvania. doctor, welcome. our fourth panelist today, chad stone, a chief economist at the center on budget and policy priorities, where he specializes in the economic snals of budget and policy issues. dr. stone was the acting executive director of the joint economic committee here in 2007, and before that, staff director and chief economist for the democratic staff of the committee from 2002 to 2006. he held the position of chief economist for the senate budget committee in 2001 and 2002. previously he served the president's council of economic advisors as senior economist and chief economist from 1996

to 2001. his other congressional experience includes serving as chief economist to the house science committee. dr. stone has also worked the federal trade commission, the federal communications commission, and the office of management and budget. he's been a senior researcher at the irving institute, taught for several years. dr. stone co-authorized the book. he earned his ph.d. in economics at yale university. dr. stone, welcome today. dr. taylor, i'll begin with you , invite your testimony, and we will reserve at least five minutes for each of our panelists today. thank you. >> thank you. thank you very much for inviting notice testify. i appreciate the opportunity. i'm going to refer to a couple of -- or three charts during this opening. two years ago this month, the recession officially ended and the recovery officially began.

however, it's been a very weak recovery by any historical comparison, and that's why the unemployment rate is still over 9%. i think if you compare this recovery to the last deep recession we had in 1981 and 1982, and i show that in my first chart, it's quite striking. economic growth in the two years, seven quarters we've observed so far since the recovery began, has been only 2.8%, 2.8% average, and you can see in the bar charts, the blue line, quarter by quarter. in contrast, during the recovery from the 1981-1982 recession, economic growth averaged 7%, so more than twice as high during that same corresponding period of time. those are the red bars. you can see how much of a difference there is. so this is a weak recovery by

any definition. i think the reasons for this, in my view, are fiscal policy, monetary policy, and regulatory policy. since the focus of this hearing is on fiscal policy, i just mentioned, i think, the $862 billion stimulus package did not stimulate the economy. the increase in spending, federal spending as a shared g.d.p. from 19.7% in 2007 to over 24% now, did not stimulate the economy. things like cash for clunkers, if anything, moved spending a few months further. instead, what these policies did, along with taking our eye off the basic ball of controlling spending, is to raise u.s. debt levels to very high and they continue to go high in the future. i think these high debt levels raise a great deal of uncertainty. there's even concern of another

crisis, but there's certainly concerns about higher up nation, higher interest rates down the road. so i think the solution to this slow recovery, this weak recovery, nearly nonexistent recovery, is to do what i call restore sound fiscal policy. i think it will bring attention and allow more private sector growth, and that was where the jobs will come from. my second chart shows the quite striking correlation between private investment in the united states as a shared g.d.p. and the unemployment rate. and as you can see, when private investment goes up as a share of g.d.p., the unemployment rate comes down. right now we have low levels of investment and high unemployment. in contrast, if you look at the next chart, the third chart, you see that changes in government purchases, another component of g.d.p., have no such relationship with anything. it goes the other way. but i would say it's just not

existent, so you should not be worried in my view about a credible plan to reduce government spending. and that brings me to the last part of my opening remarks. how do we restore sound fiscal policy? i think it's very important to have a strategy to do that, a strategy which is credible and understandable to the american public. i'd say it should have four parts. first, a game changer which demonstrates a different attitude about spending, bringing spending down, starting in the 2012 budget. that establishes credibility, which is so important for the effectiveness of a program like this. number two, outline a path for spending. number three, as much as possible, legislate what's required to get that path accomplished. don't simply rely on promises in the future. that doesn't restore credibility. and number four, as you referred to, mr. chairman, some kind of cap on spending that corresponds to the path of

spending reductions. my next chart basically you mentioned in your opening, just represents what i think this amounts to. it shows you the share of spending by the federal government as a shared g.d.p., and you can see that's gone up so rapidly in the last few years. the first budget the president submitted didn't really deal with that. that's the top line. the next line below that is the c.b.o. baseline. the line of the lower part is the house budget resolution, which does bring spending down as a shared g.d.p. to levels that are consistent without increasing taxes. so, in my view, it's pretty clear the credible strategy is the one closer to the bottom, the policy that doesn't deal with the problem is the one at the open. right now, people are looking to negotiate, i believe, something in between. and if we did negotiate something in between, that will be an important step of progress, but really not enough

as it doesn't go all the way. thank you very much. thank you, doctor. dr. johnson? >> thank you very much. i'd like to make three points, if i may. first i fully support the goal of what i expect to be, everyone in the room, would like to bring the debt g.d.p. under control in the united states, the trajectory that we face going forward, if you look out, you look at the c.b.o.'s, longer projection. the numbers in the baseline are not encouraging, and we need to have medium term fiscal consolidation, meaning that debt to g.d.p. level should come under control and be brought down. the second point, though, directly to the topic of the hearing, is whether we could experience at this point in the u.s. cycle what is sometimes called an expansionary fiscal contraction, meaning if we were

to cut spending, for example, immediately this would stimulate the economy and actually help with growth directly. this is a policy, for example, that the government of the united kingdom is attempting to pursue at this moment. now, expansionary fiscal contractions, from experience around the world, and this has been studied very carefully by the international monetary fund recently, such fiscal contractions can, under some circumstances, be expansionary, but i do not think that we currently have those circumstances in the united states for three reasons. the first is fiscal contractions can help with the private sector economy if they restore confidence, if there is either a high perceived risk of sovereignty or some other concerns weighing on either consumer confidence or on firm confidence, but i don't see evidence of that right now in the united states. long-term interest rates remain low. there certain are plenty of problems with debt overhang from the credit boom, and those

are difficult problems, and i think that's the main reason why we're growing slowly in this case. but they're not going to be immediately and directly addressed by cutting spending, unfortunately. the second thing that can happen -- and this is very much, i think, the likely scenario in the united kingdom -- is you can combine a restrictive fiscal policy with a more expansionary monetary policy. i would fully expect if the u.k. economy slips back to recession, which is a possibility, i would expect the bank of england would cut interest rates and otherwise increase its so-called quantitative easing policies. now, in the case of the united states, i doubt very much the federal reserve would feel it has the space to do that. short-term interest rates are very low. there's already been a great deal of quantitative easing at the long end of the structure. i also don't think it would be a good idea for the federal reserve to continue its innovations in that direction. so monetary policy would not be able to offset fiscal policy.

the third way in which fiscal contractions can sometimes be expansionary is if they contribute to depreciation of the exchange rate so. if the value of the dollar were to fall, that would help our exports, help us compete against imports. again, that may turn out to be a factor in what we will see in the united kingdom over the next one to two years. in the case of the united states, given the nature of the dollar as a reserve currency, given the way that the world economy is developing, particularly given the problems in the eurozone, which are very severe, intending to push all the reserve assets actually toward dollars, not away from dollars, it's, again, very unlikely the dollar would depreciate whether or not we have contractionary fiscal policy. taking that all together and comparing it with the cross-country evidence, i do not consider us to have circumstances that would allow fiscal contraction, for example, in the form of spending cuts. the third point i would make in

conclusion is that we should not lose track of how we got to these problems with debt. as you said, mr. chairman, to some extent, these are longer-term problems, and i completely agree, that we must deal with those issues over an appropriate time horizon, but at the same time, debt to g.d.p. went up very sharply, as shown in professor taylor's pictures, for example, because because we had a major financial crisis. big risks were allowed to build up within the financial sector. coming from a meeting this morning at the fdic, its new advisory committee, which is a public hearing, and i have to say, the tenor of that conversation was not particularly encouraging. there are very big risks around the financial sector that pose fiscal risks and threaten, if there's another crisis, or when there's another crisis, to further push up government debt relative to g.d.p. and i hope that we don't lose track of the fiscal damage brought by past and potential future financial crises in our

budget discussions today. thank you. >> dr. johnson, thank you very much. >> thank you, vice chairman brady. over the past several decades, many developed countries have undertaken adjustments in an attempt to reduce high debt levels. these country's restructurings had various degrees of success and failure in stimulating growth. the economic literature is focused on answering two main questions in this area, what aspects of fiscal son doll addition produce lasting reductions in debt and what aspects encourage macro economic expansion. the answer to the first question is clear. based on a review. economic literature of 21 countries, two of my colleagues and i recently found that cutting expenditure social security more likely to produce a lasting reduction in debt. it's also typical that the more aggressively a country cuts expenditures, the more like it will is to successfully reduce debt in the long term, averaging across a range of methodologies, the -- the

consolidation tipped of 85% cuts. in particular, cut to the government are more likely to reduce deficits than cuts to other expenditures. there's more debate over the second question, what aspects do fiscal consolidation encourage macro economic expansion. it hinges on the balance of two effects of economic, the expectational effect is the positive effect on consumption and investment that occurs when policy is put on a sustainable path. these likely surge after a consolidation because of expectations of lower future tax liabilities. in other words, an immediate consolidation will alleviate the hoarding that a company fears of a largely tax-driven consolidation in the future. expenditure-based consolidations would provide stronger effects because there's a better chance they're successful at reducing debt and because higher near-term taxes are hardly designed to ignite optimism in investors and

consumers. this reduces demand and therefore g.d.p. growth when government spending declines. the controversy is over whether the expectational effects of fiscal consolidation can completely outweigh the effects in order to create short-term growth. there's less controversy around the view that the long-term benefits are substantial. two schools of thought have emerged in the debate. harvard economist alberto and his various co-authors argue this can lead to a burst of growth starting immediately. a team of i.m.f. economists, however, identified possible flaws in the study and claim that the typical son doll addition would be contractionary. it's beyond the scope to resolve the dispute. a fiscal consolidation optimist would believe this works correct and would expect the large fiscal consolidation to lead to near-term growth, but a pessimist points to the alternative work at the i am and i am argue the growth effects are more uncertain. it's important to note that even in this case the study

points to positive growth effects at the fiscal consolidation is correctly designed. that is, both sides of the literature find that reducing expenditures will provide a better growth outcome and increasing revenue. although the i.m.f. finds that a tax base consolidation would reduce g.d.p. by around 1.6% three years following implementation, they find that the negative effects of spending base consolidation would be insignificant. there's little to dissuade us from pursuing consolidation today. moreover, them find that consolidation focused on transfer cuts could produce positive, near-term growth effects, although those are statistically insignificant. the latter points is interesting, since the author studied entitlements. one might expect these would have a large effect on consumption behavior. the fact that expectational effects dominate even when entitlements are cut immediately suggest that spending has has a profoundly

sentiment on business and consumer confidence. this would also suggest the policy opportunity. given the mass of imbalances that exist today, it's like that will consumers have very little faith that current programs will remain in place throughout their lifetime. cuts to entitlement that is phase in gradually over time will likely have little impact on their wealth as the benefit cuts are factored into consumers' expectations. the expectational effects of fiscal consolidation could easily be expected to dominate and produce significant near-term growth, that there are few immediate cuts to benefits with significant longer term cuts. if this were paired with the tax reform to broaden the tax base and produce marginal tax bates, then a significant growth spurt would draw from the economic literature. thank you. >> we've been joined by chairman casey today with his

permission, we'll finish dr. stone's testimony, and then he'll be recognized for the full opening statement. dr. stone? >> thank you, other members of the committee. thank you for inviting me to testify before a committee where of a strong personal connection, as my biography showed. i have a longer written testimony for the record, which i'll summarize here. u.s. policy makers must make smart choices about taxes to craft the right set of policies to help the economy emerge from the current deep slump and sustain growth with high employment and broadly shared prosperity. making smart choices requires differentiating between, one, the longer term policies needed to produce sustainable growth at high levels of employment, and two, short-term policies needed to restore high levels of employment in the wake of a deep recession. in particular, policies aimed at reducing the deficit are a

key ingredient but will likely to be performed. this is a mainstream position as enunciated by the federal reserve chairman, ben bernanke. in the quote in my statement, fiscal sustainability is a long run concept and achieving it requires a credible, practical, and enforceable long-run plan n. current circumstances, an advantage of taking a longer term perspective is a policy makers can avoid a sudden fiscal contraction that might put the still fragile recovery at risk. at the same time, there are advantages to acting now to put in place a credible plan for reducing future deficits. the congressional budget office has made similar plans, and we have to set our priorities and believe this is the right framework for thinking about deficit reduction and economic growth. i recognize that one of the purposes of this hearing is to highlight the different point of view for what i regard as this mainstream economic consensus, but for the reasons

that i'll lay out, i think that some of the arguments that are produced to support that alternative view are unpersuasive. the premise is that we are suffering from an unwarranted explosion of government spending that's produced an immediate debt crisis, that immediate sharp reductions in government spending are necessary and could even make the economy grow faster in the short run, and that deficit reduction is more likely to be successful if it is composed largely of spending cuts. there are questions about all three of those premises. first, policies enacted since the 2008 election are not the main drivers of deficit and debt. the u.s. fiscal imbalance problem is a long-term problem that has little to do with the short-term imbalances that have emerged as a result of the financial crisis and the great recession. is the main driver over the long term is unsustainable growth in healthcare costs

throughout the healthcare system. as the charts in my testimony show, increases in the deficit due to policies enacted over the past few years are temporary and only relatively modest associated interest costs add to the longer term deficit. the reason government spending remains higher than it was before the crisis over the next decade is primarily long standing trends in health costs and large interest costs on debt associated with deficit finance tax cuts from an earlier era, deficit finance wars, and deficits arising as a result of the economic down turn itself. c.b.o. estimates that discretionary spending as a share of c.b.o. would be 2.1 percentage points lower in 2021 than it was in 2008 and that net interest costs for the reason i talked about would be 2.1 percentage points higher. second, large intermediate cuts in government spending will hurt the still fragile economic recovery. we first heard discussion about

the international evidence, and both the international monetary fund and recently the congressional research service in a report have looked at this evidence, and we at the center have also looked at it, and we're surprised to see the extent to which, when you look into the data, the examples tend not to con form to conditions that we have in the united states. the best circumstances for reducing deficits are if you're suggesting a debt crisis, monetary policy has the ability to react. as simon johnson said, the exchange rate can react. that's not the situation in the united states. third, and i should say most importantly, that when you have a situation of economic slack, such as the united states has, the degree of economic slack the united states has, deficit reduction efforts that are short and sharp are unlikely to be successful. third, on the question of the composition of deficit

reduction, international evidence has little to say about how much of u.s. deficit reduction should be spending cuts and how much should be revenue increases because it's focused on the short term t. does not deal with the long-term deficit reduction that we need. it also does not come to grips with the fact that the united states is unique in the extent to which it relies on the tax code to do what over countries do directly to spending. the trillion dollar a year of so-called tax expenditure, which are a prime place to go to find worthwhile budget savings, they should be regarded as spending or as revenues. and finally, it ignores lessons from the successful longer term deficit reduction efforts, such as the united states pursued in the 1990's when revenue measures were a significant component of the 1990 budget agreement and the deficit reduction act of 1993, which were followed by the longest economic expansion in our history and a balanced budget by the end of the decade. >> dr. stone, thank you very much. chairman casey, thank you for joining us, and you'll be

recognized for your full opening statement. >> thank you, vice chairman chasey. i apologize for being late, but i appreciate the testimony of our witnesses. and i know there are others who are going to be asking questions and making statements. i'll be brief. i wanted to first make the following insertion. i don't think there's any disagreement on this committee, and i think throughout most of the country about the need to reduce the deaf sight and have a strategy to do that. i think it's shared in a bipartisan manner, and we're all of one mind to do. that the questions that we're trying to resolve here is about the timing of that and what policies yield the best result. i think there's significant disagreement. we're having a robust debate about it as we speak and throughout the next couple of weeks and months. today's hearing is part of that

debate, and it's important we have this debate at this time. we have a lot of able economists across the country and several here today who offer their perspective. i want to provide a little bit of context in terms of the way i see this, in terms of what some of the assertions that will be made today. one assertion is government borrowing is interfering with private investment. that's one assertion. the second is the deficit reduction can promote economic growth in the short run, and thirdly, this is best achieved through spending cuts rather than revenue increases. i think a number of us would have significant disagreement with one or more of those or at least part of that assertions. but i think at the same time we can all come together and agree that we have to have more spending cuts, deficit

reduction. but we also have to be mostly concerned, i believe, about job creation. and my main concern with any strategy that might be discussed today or that we would enact into law is that we don't take a step that would derail the recovery in what we do in the next couple of weeks and months. if we do that, we take steps that will derail the recovery, it will worsen the long-term budget outlook, and it will reduce revenues and increase government spending on automatic stabilizers. the u.s. economy is recovering, and we've recorded now seven consecutive quarters of growth. but the rate of growth that we've achieved so far has been modest. the reality is that there are several major economic

challenges in front of us. 14 million americans unemployed. housing prices continue to decline. consumers have been hit hard by rising gas prices. businesses are waiting for demand to return before expanding their operations and hiring more workers. small businesses, of course, are struggling as well. and the biggest challenge we face, i believe, is job creation or, at a minimum, increasing the pace of which jobs are created. so getting people back to work has to be our number one priority. we cut this year's budget substantially by tens of billions of dollars, but there's more to do. and there is waist and inefficiency that we must cut. rooting out that waste and inefficiency is a prime way to reduce federal spending in the short run. i was the author general of pennsylvania for eight years and state treasurer for two, and in that decade, i spent a lot of days locating and

eliminating waste and fraud. so i know something about it. but i also believe that making deep, indiscriminate cuts immediately, immediately to proven strategies that we know will help our economy grow and create jobs could, in the end, be self-defeating. so i think that question of timing is critically important. let me wrap up just with a reference to someone who spent a lot of time analyzing these problems for a lot of years, chairman of the federal reserve, ben bernanke. he said recently the following, and i'm quoting, "if the nation is to have a healthy economic future, policy makers urgently need to put the federal government's finances on a sustainable trajectory." but he said, "on the other hand, a sharp fiscal consolidation focused on the very near term could be self-defeating if it it were to undercut the still fragile recovery." he goes on from there, "chairman bernanke has laid out the challenge that we must --

that we must confront. we must have a credible plan to put our fiscal house in order for sure, reducing the deficit in the medium and long term. a strong economy is critical to sustainable deficit reduction. we cannot reduce the deficit if we're want growing and creating jobs and getting people back to work is the key to that, and i'm grateful for the opportunity today to be part of this hearing and grateful to chairman brady for getting us here. >> chairman, thank you very much. i appreciate the testimony of all four witnesses today. i recently held a round of town hall meetings and asked for input on how we jump-start this economy. and i set aside my power point to focus on job creation, going through a list of ideas that come from washington, d.c. they said put away that power point, go back to the debt

crisis. because in their view, until we tackle the debt and deficit, we're not going to make decisions to create jobs, at least in our 11 counties of texas. so i want to ask dr. taylor and dr. hassett, separate questions. you talked about a game changer to restore credibility in our financial order. but weir often -- but we're oftentimes told we can't do that, that introducing a fiscal consolidation program would mimic that of the great depression, where spending reductions, they claim, created the recession of 1937 and 1938, and they use that analogy to apply to today. what is your aacceptsment of that technology, and is it important for us to engage in a serious fiscal consolidation program now in order to spur the economy? >> i think it's essential to

engage in a consolidation program now, and it will spur the economy since this recovery began, and it's hardly a recovery, growth has been only 2.8%, so the low growth is consistent with this pattern for the last two years since the recovery began. and then as i said before, if you compare that with the last time we had a big recession, the growth is less than half as much, 7% at that point. i think the low growth we have now is because of all this fiscal activism. you look carefully at the data, that increased spending we've had, and it's huge over the last two, three years, has not really -- it's the weakest recovery we've had by comparison, so there's no evidence that it has. so i think that if you start undoing that, and after all, what's so dra containion about brin