it was in 2007? why should that be so hard as a share of g.d.p.? so when we use the words draconian or deep, i think about, for example, the 2011 budget, which you agreed to recently, that if the focus should be on how to get a game changer, and get another spending down so that it is credible. the problem is not trying to find ways to spend more, but less. the more you can go in that direction, the more you will demonstrate that we can get our house in order and that would be definitely beneficial to people worried about the debt, worry about inflation and higher interest rates down the road.

i would emphasize so much just taking the efforts now to get started. if you do not, it will not be viewed as credible. >> in your study, what kind of cuts to government undertaken -- did the government undertake to give confidence to businesses and consumers? >> two components were entitlement reductions and reductions in the government payroll. i think that both of those show a credible commitment to getting the fiscal house in order. you both know, mr. vice chairman and chairman, how difficult those of moves would be politically. to show that we can accomplish that would create celebration in

the financial markets. finally the u.s. is saw this big problem. i also point to the beginning of my testimony, and highlight the urgency of action. in a traditional recession that lasts 11 months or so, and then has the recovery that goes 6% in the year after we launched out of recession, you might take a percentage of growth and move it into the recession year. that trade could be something that everyone on the committee would want to consider. the differences that we know from the up earlier work that the recovery from a financial crisis is a long slog. it lasts maybe a decade. if we take the keynesian approach, the hangover from the can see in spending is going to be present in the slow-growth period.

-- the hangover from the kinsey spending is going to be present in this low-growth period. >> chairman casey? >> thanks very much. dr. stone, i wanted ask you a question that relates to part of this debate. as intel from my statement, -- as you can tell from my statement, i want to focus more on job creation. what is the optimal -- or even if you have a list -- optimum way to create jobs in the next year or two? by way of tax policy, and as you

know, we had a tax code at the end of last year, elements of " magic -- elements of which both sides really dislike. but both were willing to look past their objections to parts of the bill in order to keep tax rates where they were and features like a payroll tax cut which put $1,000 in the pockets of the average american family. when you think about government action or a strategy that has been tried or maybe has not been tried in addition to tax policy, what you think the best approach is to job creation and how would you itemize those? >> let me begin by endorsing the idea that on the budget, a game changer would be really good. my vision of a game changer is bipartisan agreement that

recognizes the reality that tax measures, starting with going after that tax expenditures, and spending cuts need to be part of a sustainable, believable, credible budget effort. there's no disagreement on the panel about the importance of putting in place a plan to get our fiscal house in order and that that matters. the issue is, if you did it too fast, does that harm the recovery? my first answer is the head socratic coach, first do no harm. do not try to do too much too fast. that does not mean that you cannot put a plan in place that is serious and begins to take affect a couple of years down the road. the most recent economic news has been disappointing. therefore we should be

considering whether we want to allow the payroll tax holiday to continue and also the unemployment rate beings killed by an unemployment insurance being the most effective measures to inject a man into an economy suffering from demand, yet it is going to expire at the end of the year. those of the two things that are already in place, probably worth while extending into next year. this is particularly true because the fed is not out of ammunition but the ammunition it would have to use to provide further demand stimulus to the economy is very unusual measures that we do not have a lot of experience with. do not cut too fast, but a credible deficit reduction plan in place, and consider extending the payroll tax and the

unemployment insurance. >> i do not know of others have an opinion on this, but we had three good private sector job growth months in a row. to 25 that -- to 25,000 jobs or a bob each month. -- 225,000 jobs each month. you'd think that we can get back to june, july, and august? >> dr. hassett said that this was a fairly standard recover from a serious financial crisis. that is why it is so shockingly different than what we have seen

in all previous post-war recessions in the united states, including the one in the early 1980's that dr. taylor was emphasizing. this is what happens when you take on a massive amount of debt. you'll have some sort of stop- start on the job site. i do not think you should be throwing roller-coaster type stimulus sen. i do not think that it works. but i would emphasize that most of the increase is due to the automatic stabilizers. you need to let them work. they are relatively weak compared to almost every other industrialized country. that is what makes sense to supplement them at the beginning of the recession. that is done now. i agree completely with doctors done for you do not want to derail the recovery now by overreacting. sure, we want debt to gdp to come down, but it will do that as the wreck, -- as the economy

recovers. if you try to spend too much, too soon, unless you respond with a massive expansion, but i have not heard anyone make that case, including mr. bernanke. >> i am not a time. -- out of time. >> we did a recent calculation comparing the u.s. recovery to this financial crisis to the past financial crises that were studied. we have a typical experience of a country, and what was the unemployment rate he and 2018? it would be around 8%. we are in a base case that is a tough slog and a painful challenge for american workers. if we do receive we do not get serious about -- if we do not

get serious about doing something, that we're looking at a base case that is really terrible. that is probably something that we all agree you're on the panel. >> senator lead. the last lee -- senator lee. >> will be the effect of attacks raise -- a tax rate increase on our economy at times such as these? >> i think it would be very harmful. it occurred around the time of december, when the deal was made to postpone the tax increases. i think that was quite significant. would that it was permalloy does fund, but those tax increases were on the books and they were postponed. i think that i was positive.

>> what if we limited the increase is to the wealthy? could we forestall the problem by doing that? >> tax reform is also important and i'm glad there's more injured in that on capitol hill at this point, but to me the first debt is do not increase taxes. leave those tax rates alone. >> even on the higher-income brackets chris marjah and there's just no reason to increase the tax rate -- even on the higher income brackets? >> that there's just no reason to increase the tax rate. when you look at the numbers, that is really what it is and you do not want to risk the disincentive. there are enough of those four firms to invest with the regulations and that fear of

the debt problems. for that matter, monetary policy. but there are lots of reasons that investment is not as strong as it could be. housing is part of that. unless we get investment moving and firm start investing and expanding, unemployment will stay high. equipment, structures, you'll see jobs created. >> that investment is less likely to occur when those would-be investors have the promise that they will be able to keep less of that money. >> yes, you tax something more, you get less of it. these days, there's a fear of increasing taxes quite a bit because of the budget. that is part of the idea of being credible, predictable, is to recognize that the best way to do it is by not raising tax rates.

i do not see there is much interest of doing that in the country anyway. >> would be fair to conclude that as opposed tax rate that affects only the rich is a misnomer because it would end up impacting most severely those most vulnerable people, those people who most desperately need jobs would be less likely to find them because of less investment and less employment? >> if you reduce the incentives for firms to expand, you reduce the incentive for them to create the jobs. the jobs are not coming from more government purchases or even less government purchases. it is the private sector investments which the data shows. to the extent that you can encourage that by not raising the tax rates on those firms, because there are a lot of larger and smaller firms, it

will be counterproductive. and we will have this high unemployment rate, which is a tragedy, for quite awhile. >> we hear about how the failure raise the debt limit will result in this or that economic catastrophe. is there not another and catastrophe that would await us if we were to raise the debt limit reflexively as it has been raised many times in the past without any significant strings attached, without attaching it to significant binding spending caps? >> timing spending reductions to the debt increases very important. i read in the wall street journal about that a couple of weeks ago. that position taken there has been very productive. it is driven the talks in a good direction. a so-called clean debt limit increase without spending would damage credibility, especially at this point, because we had

such a surge in spending. i urge strongly for tying these together and i can see why you wanted to be claimed. but at this point in time, it would be a mistake. we stand a good chance of tainos together as the speaker originally suggested. >> thank you. >> senator sanchez is recognized. >> thank you for being before us. oh, gosh. i'm always amazed at the difference of opinions that we get whenever we talk about the economy. i am also amazed when i met events and people, and think they know all about the economy and try to tell us what we should be doing. what i've learned in the 15 years i have been here and in my studies when i graduated with an economics degree and an m.b.a.

and a former investment banker is that sometimes you just do not know. a like to say something about the stimulus, because i think it has been maligned a lot here, the stimulus package or the recovery act. yes it was a hundred billion dollars, but this certain port of that was tax cuts, not spending. you cannot have it both ways. you cannot say that the renewal of the tax -- the books -- the bush taxes in december were not spending. you just cannot say that. you cannot count spending, 33% of the spending package were not spending, and not count the bush continuation of taxes has not spending either.

we can a one way or we can at the other. we were told in december that we pass that package of tax cuts, it would give stability and businesses will start using their $1.4 trillion that they said on -- had on their balance sheets, and you know what? it hasn't. it is but a jobless recovery. we heard about keeping the taxes low, but bush is on comptroller has stated 7% of the debt and the majority of this debt was accumulated under george bush. 70% of that was due to the tax cut, over and over and over during that time. then of course we have a mother can, a couple of course i did not vote for, that that we should be out of, a couple force

that we keep spending more and more money until it takes away from investment in the future of our military because it is operational and halfway around a world and it is not money going into our pockets, it is money outside of our economy. of hearing all sorts information out there, but in the bottom line, i think we need a little of both. we need to talk about some real spending reforms, and from all lots of the house bill on the fence passed recently, that was increased significantly. everything else to cut but defense increase significantly. and it is not going to our people back home, or defense contractors building systems, they are being cannibalized and they're not being paid. they are stopping their production lines. it is going to cost us more in

the long run to retool and reset our military. i want to ask each of you, do you really think that it does not tackle little of both, some spending cuts, maybe in a moderate way, but what some commitment, and some increase in taxes to start to get this back and maybe we will start with dr. stoning go down the list. >> we do need the balance that has both. one of the things that is problematic about the bidding of the debt limit, which has nothing to do with controlling deficits, it may be a way of getting people talking, but they have to be talking about something that could really happen. and that would require a balance of the two. when you ask businesses what is the problem, they do not say -- they always say taxes, but that is the constant. what has gone up, to get doris

to add to their capacity when they do not have customers in the stores, that is problematic. we need customers in the store's first. >> in my testimony, i said it should be both. >> i completely agree with you, congresswoman, that the military spending needs to be capped over the longer run, but it is particularly health care spending as a percentage of gdp that is the big problem. i would go further. if you have the possibility of putting into place a credible limit on future health care spending as a percentage of gdp, by all means tie that to that debt limit increase. that is mostly about spending. but it is not just government spending, you have to look a general government spending and also a private sector spending. when i talked to entrepreneurs,

they are worried about health care costs that they will face in five, 10, and 20 years. that is the major burden that we have not seriously address. -- addressed. >> can i use a couple of my charts to answer this question? i guess not. ok. one of my charts shows that if we brought spending backed -- the next-to-last one, i believe. yes, this one. this is federal spending as a share of gdp. going back a few years. you can see how liberal a lot in 2008, 2009, 2010. >> how it grew a lot in 2008, in 2009, 2010. the house budget resolution,

which is the line that brings us down, it brings us about to the same level, 19.7% of gdp. and that is roughly what you need, maybe all less depending on what we think is happening with taxes, for budget balance because that deficit was like 1% of gdp in 2007. that is why i think it is a spending problem. if you look at the next slide, at first light that i did everything by gdp, because that is how economists like to think about it. but we're not talking about cutting anything. this is the total spending with did just what it is. you can see where it would go with the president's first budget, and you can see where it goes with the house budget resolution, and they all increase. these are all increases. i think you have to put that

into perspective. and finally coming your question about the tax of aara and that 2006 stimulus is very important for it when a look at the impact of the tax rebates with a onetime payments, they seem to do very little good when it comes to stimulating consumption. but the 2008, the economic stimulus that, and 2009, the tax components of those were mainly justice and money to people, tax credits from their previous earnings, and most of it was spent. it did not just that the economy for you and see that in the data. when we talk about tax rate increases, that is a different story. that will happen if you create a job or if you expand your business. the money you're going to get from doing that, or the benefits from that, at that is not a rebate from the past. it tends to get wasted,

unfortunately in terms of stimulating the economy. but the tax rate, that is why i said that tax rates raising would be a terrible mistake at this time. >> mr. mulvaney is recognized. >> i will continue on what the congresswoman was talking about. it seems it cannot find some malaria -- similarity of opinion. this is a graph that shows two of a disparate you will see a redline that shows the federal revenue as a percentage of gdp and a blue line that shows the top tax rate. as you can say, several of you may be familiar with this graph, over the course of the last 60-odd years, the federal government has taken between

50% and 20% of gdp -- 15% and 20% of gdp. but while the revenue was fairly stable, tax rates were all over the map. as we talked about the importance of having a mix between spending reductions and tax increases, i did not hear anybody clamoring for dramatic increases in the income tax. i heard dr. stone mentioned tax expenditures, dr. hassett, i think you've done work on other fiscal consolidation is the focus on tax increases on consumption as opposed to productivity. i am looking for some consensus that as we look at different options available to us, is it fair to say that increasing the top marginal tax rate is probably the least desirable way to go forward?

and i will start with doctors don't. --dr. stone. >> if we are realistic about the demographics in this country, about rising health care costs and the increased interest we are now paying because of the debt incurred as the result of the recession, we will not be allowed to go direct to historic levels of spending as a share of gdp without more revenues. the president's proposal will move us back to -- it wedding clothes some increase tax rates, but move this back to the levels that we had in the 1990's, when we really did not have to address when we had our longest economic expansion and balanced budget.

very high marginal tax rates are discouraging. >> i will give everyone a chance, but i look at the rates during the late 1990's when they were an increase, and while they did represent a slight increase in the government's share of gdp, it was not marked at all. in fact, you could argue that it was actually the gdp growth that was experienced during that time that bush to the government's share of revenue. not that tax increases but the zero larger share of the overall economy. >> i do not disagree that the strong economy helped, and importantly, those tax rates did not an affair with that very strong economy. >> i agree, mr. mulvaney. it is especially urgent to address the fact that we're going to have the highest corporate tax on earth.

if they're wondering why it is a we have driven the less it is been such a long time to say a new plant, thereby being built offshore to take advantage of lower tax rates. if you look about the physical consolidations go one of the urgent desire problems will be to find the space to get the u.s. into the middle of corporate rates if we expect growth to renew here. >> i completely agree with the need for tax reform. i do not know the details of dr. hassett's proposal, but sifting in a way that relatively poor people are protected, that is a good idea. but with regard to what to do about marginal tax rates within the existing code, i do not think anyone pays the very high rate the we had in the 1963 there were many exemptions, and i do not think anyone wants to

go back to those levels. but i for one did argue against extending the bush tax cuts in december. if you have ways to control health care spending it, i would be open to that. but given that feasible choices before us, addressing all but of discretionary domestic spending will not make a difference. not extending the bush tax cuts would make a bushel of difference pedernales the time to start considering that. >> i would like 4 dr. taylor to be given an opportunity. >> your chart is very important taking account when people are thinking about raising marginal tax rates. history shows that when people can take actions, not to pay them, it does not raise the revenues that people think.

but since spending is an issue here, if you graphs spending and out into the future, it just dominates. it is like this exponential thing that keeps you alive. if you raise tax rates, it is hard to notice in the graph what it will do. so forget about that for a while. you know basically that is not the thing to do in a weak recovery. put that off to the side and look for tax reform, broaden the base, and reducing the marginal rates, always good to try to do. but in the meantime, it really seems that it is a spending problem like people say. >> mostly health care spending. >> thank-you. >> mr. mulvaney, let me ask, your opinion that spending cuts will recover this recovery. but as an economist, you are

aware of a body of work for the fiscal consolidation, and others took on forms of fiscal consolidation as many of you mentioned. and in 26 instances, they grew their economy in the short-term as well. they spend less, they control the fiscal policy, they owed less as a nation, reduce their debt mainly through targeted spending cuts. they grew the economy in the short term. the lower their country's debt by around 12%, and their economy went to 3.5% average, and sweden did this time, new zealand had along the same way.

to this theme that if we control spending, it will harm us economic recovery, dr. taylor, dr. hassett, do you believe that to be the case? you think congress is capable of such severe spending cuts that it will endanger this remarkable recovery? >> i do not think so based on the 2011 agreement was was good. the discretionary accounts, but outlays were down by less than $1 billion. that is why it is so hard. quite frankly, the credibility is very important to make sure it does have positive effects. willy-nilly, unpredictable changes in government policies is not good.

it makes for more uncertainty. everything that you can do to say that what we are doing as part of this long-term path, the caps on spending, tying it to debt increases, putting in legislation, everything that can make it a credible, believable deal will make it more powerful in a positive sense and mitigate the negative things that dr. stone is referring to. the credibility, to be of a plan for the future, to know that this is what government is doing, they are getting their house into order, that will allow businesses to expand. i put a great deal of emphasis on credibility. it is going to be gradual, for sure. to some extent, the statements that it will hurt the economy if we go too fast, i do not think

that helps the discussion, because it puts up this thing which is like the would-if you like a straw man, this is not where we're going. even with the most ambitious, it is not draconian changes we're talking about. >> thank you, doctor. dr. hassett? >> and present values, maybe we can estimate all the things that we are short, something like 100 trillion. if businesses expect to have to pay their normal share of tax increases to cover that $100 billion? the we're talking a tax liability bigger than $10 trillion. that is closing in on the market cap for the u.s. firms.

so the scale of the tax shortfall is humongous. it is really a larger relative to the scale of u.s. corporations. maybe they do not think it will record a cut the whole thing with tax increases, but if they think that even half would be covered with that, and that is a significant liability, implicit liability on their books. you could set of investment booms today. so the scale of the problem is such that there is and expectation of fact they could be large if it were credible, accompanied by new rules that made people believe that the spending rules are there to stay. >> which often appeared that people look to the clinton years as the golden years of the economy. i would point out that president clinton working with the republican congress for 1993 to

2000 lowered the debt to gdp ratios from over 21% to around 80% and the economy grew. it stimulates the economy in the right direction. >> a couple of things. you point out what happened in the u.s. and 1990's a new niche in the canadian experience. i will not ask that the drug be brought up, but part of my testimony talked about the canadian experience. as the expression goes, when united states -- and it is very sensitive to the economic conditions. they rode the expansion or boom of the 1990's. kennedy also start with a higher level of spending that we had,

and came down not all the way to the level of spending as us. i would be careful about the independent successful experience. you talk about the 26 episodes of expansionary contractions. it is defined in that study by being a top quarter of the 107 episodes that they studied. when you look at examples they were both expansionary and successful at bringing down our jet to deep -- gdp ratios. there are only nine examples but three are in norway, one of sweden, one of the netherlands, scandinavian economies that look quite different from ours. >> this shows it can to the's experience. -- canada's experience.

they have a very struggling economy, took on steps to reduce their debt, including a spending cap on each budget, they could not increase without commensurate spending cuts to keep under their caps. the lower their debt and grew the economy. as a neighbor, there is examples of how countries can control their spending and grow their economy in short-term as well. >> several of you have discussed the importance of credibility in the eyes of the public as we approach the debt limit increase and other decisions that will affect the spending of congress as we move afford. dr. hassett, your firm to gramm- rudman time, congress

has a certain tendency to be a walking, breathing, living waiver unto itself. we cannot speak now for what successive congresses will do. if pay go, it was a great idea, but it has been waived so many times. but there is one way we could find the future congress, by amending the constitution to require a balanced budget and to put certain restrictions on what it would take to raise tax rates. would you think about that, dr. hassett, in terms of its credibility with the marketplace? >> i would very much support such a cap.

a constitutional amendment it is not impossible to change it. >> nothing is impossible. >> especially at the spending cap or relative to something like potential gdp, so that we did not have a pro cyclical effect of the budget rule, then it could be very supportive. >> explain what you mean. >> if we were at full employment, then it would say how much gdp we could make, and if that is the magical use, then we will not have a problem that it suddenly gdp collapses, then we are heading this cap and we have to really reduce everything government does in the middle of the recession, which and make it harder for the automatic stabilizers to work. >> to reinforce that last point, that is absolutely correct if you had an amendment this is you must get a number in terms of government spending, some times

that would work fine. but you could hit a calamity or some other kinds of problems and gdp fall by 20%, this is happening in many countries. u.s. is fortunately not had that experience recently. if you have to reduce spending to hit the constitutional ratio, at the worst possible moment when you're in the economic freefall. how you define it but to gdp, who would be the arbiter? they are only as good as the congress or the equivalent body. you can always find ways to redefine potential as circumstances change is. >> that is why all balanced budget amendment proposals,

including that sponsored by 47 republicans in the senate, have provisions allowing for these restrictions to be circumvented. it just requires a higher vote threshold. >> as you know, there are a lot of states with a balanced budget requirement. they often have things like supermajority rules to increase taxes. mechanically it is often the case that a simple majority could vote to ignore the supermajority rule but it almost never happens. if you're thinking about designing a constant 0 final amendment coalition a constitutional amendment, you might want to think about a taboo that senators and congressman would not want to violate. >> interest rates are really low right now prepare substantially below their 40- year average.

it might be as much as 350 basis points below their 40-year average. how high you think interest rates could rise in the next 18- 24 months? once quantitative easing comes to an end and other factors change, how much play you'd think there is in the intermediate term? >> right now this week recovery that are referred to before is one of the reasons why i hope we get the recovery moving with some of these policies. and it would go back to more no more rigid normal levels. you could have our real -- it would go back to more normal levels. i think the fear in the concern is that when we get behind the curve on dealing with

inflation, and that would mean that inflation would go higher, overshoot, and that would drive interest rates up dramatically pared that would be very harmful. we have not talked about monetary policy, but there is a concern with all of this overhang of reserves and money, whether the fed can pull it back out to add sufficient speed without being disruptive to prevent inflation from picking up down the road. we have already had the movement off of inflation and it will public come down a little bit. but the real concern is going back up again toward the would be the main driver of interest rates down the road. it is a concern to me. >> thank you very much. >> thank you, mr. chairman. i just wanted to read into the record, because we were talking about, dr. taylor st. that it is

not draconian to go back to the 2007 levels. we have to have some spending cuts, and we have to look at them carefully, and it that we have not cut spending on defense. my republican colleagues continue to increase it. i just wanted to read in the record that in fiscal year to us as having, the total for defense spending was $110 billion at the base, the $109 billion because we're were in the wars that we're in as a total of 2 $19 billion. in 2012, the bill just approved in the last week or two, the authorized amount is $690 billion. so $690 billion is what they

have said that with the republican-controlled house, to under $19 billion are year 2007 numbers. i think there are a lot of places to cut, and that would be one of those that would put some credibility on how congress feels about some of the spending. with respect to pay go, brought by one of my colleagues, i personally when i arrived here voted for the pay go rule almost 14 years ago as a blue dog, we were the ones who proposed it in help to get it through. i will remind my colleagues that it was actually win the republican control but the house and the senate that they let the pay go rules expire. there can be a lot talk about what we want to do. we actually had it and it was working. but when the republicans control both houses of congress, they did not want to abide by pay go

and they let it expire. i would like to have those comments in the record, mr. chairman. >> probably no chance that i can deny that one. mr. mulvaney. >> thank you, mr. chairman. the chairman informs me that i am less. it is good for me into the circumstances because i can have more than the five minutes if need be. it is a tremendous opportunity to give you all -- and get you all in one room. i'm looking forward to reading more of your work after today. let me come at a couple of different topics. you talk about canada. dr. stone, you mention something i had not thought about before. they may have been along for the ride for the economic boom and that may have contributed to their success and i had not considered that and will, going

forward. consider also that they dramatically reduce their automatic stabilizers. number one was their health care and also their unemployment benefits. we heard a lot about leaving the automatic stabilizers in place, but clearly if you look what kennedy did, they actually reduce their automatic stabilizers. as i go out and drive around and talk to employers, i hear that they are having difficulty finding people to go to work because of the stabilizers. i had several examples of them going back to folks they had laid off, offering their jobs back, and being told that they have eight months of benefits left and please call them and 7.5 months. you think that may be spending these automatic stabilizers, would have a negative impact on job growth? there are jobs going up on filled because we have

incentivized unemployment? >> i do not think that we incentivize unemployment in this country. this is a tough place to be unemployed brief it relatively no benefits and for short periods of time. i'm sure you're right that there are employers who have trouble finding the precise workers that they want. but in general the employment picture around the country is bleak. that is another disconcerting comparison with other post-war recessions. previously, the s&l crisis, when texas was in big trouble, other parts of the country were booming in people were able to move to those parts of the country. that is not available right now. we have a problem of people being under water on house mortgages and making it harder to move. with regard to canada, i was there a couple days ago working

with the canadian people, and the central bank. it is true that there were some reforms, and health care system is still far more generous to people in the u.s. system. i'm sure that you're not proposing that we go in the direction of canadian health care. >> less talk about jobs. dr. hassett mentioned that what you do not see the plants being built anymore, and i think that there is a tax component to that. a lot of what we used to do is simply illegal to deny, especially dealing with chemicals. the regulatory climate explains why we're not seeing more job growth. but i had a discussion the other day with folks in the construction business. that is what i used to do. the analysis that they go through on whether not to build a new plant his insightful. not only are they looking at the

tax returns and so forth, not only are they looking at the regulatory fireman, but they're looking for the value of their present investment. they have to focus sharply on the discount rate. it was dr. johnson who said that one of the things you're concerned about is a long-term implication of what we're doing. you're seeing that raise its head in the discount rate. in it could be higher than reported, since we took energy and food out, but businesses look at what we're doing and recognize that there is going to be inflation. businesses look at us and say, they're going have to print money in order to get out of this, never will be able to agree on tax cuts or increases, or spending cuts, and it will end up printing money. the discount rates that they are looking at are dramatically different that someone from an

academic standpoint would. would you agree that by continuing to run up these dramatic deficits, we are discouraging investment in this country? is there anyone who disagrees with that statement? >> i agree completely, but in 2050, we have massive deficits much more than any other country. it is mostly due to uncontrolled health care spending. that is the primary driver. if you can fix that, you will be heroes whatever side of the political spectrum you come from. >> health care costs are the game. if you control them in the economy, then the problems are manageable. the other thing driving those horrible long-term numbers is if

you are running deficits now, it you are incurring debt. a huge amount of what is going on is spending on interest payments, and if you control the deficits now, whether with taxes or spending, you get rid of a lot of the spending problems due to interest. to finish.ing ready if you could bring up dr. teller's figure number three? i was trained as a keynesian and i've come to see the light. but i cannot ask people not to explain to me where it becomes an honest graft. the less where it comes in on the graph. -- explain to me where it comes in on the graph.

>> those two numbers are perfectly correlated. tell me, gentlemen. what i am seeing in the real world, and the reason i no longer came here, when the government spends left, business spends more frequent business spends more, people go back to work. the exact opposite is also true. what are we still clinging to the concept of when the government needs to spend more in order to be -- put people back to work? >> you have asked that question and i am not an unreconstructed keynesian. and a former chief economist of the national monetary fund. i'm a fiscal conservative by any reasonable standard around a world proof what is happening in the united states is that the financial system blew itself appeared we had a huge crisis and we can argue about the causes, but that is the fact of

the matter. it dries up unemployment and causes the economy to contract. when you have a calamity coming you go to have government spending rise relative to gdp. if you have some reasonable automatic staplers, not super strong, that is the consequence certainly of the big changes that you're seeing grid over longer periods of time, it makes sense to keep tax burdens down to allow them to get a better return on their investment and have less uncertainty about the value of these taxes. >> you may have hit on my point main. the reason i am no longer on your side are dr. stone's, we have been doing this forever. we have been in a keynesian stimulus for the past 20 years.

we have been pumping the system full of kids in cocaine for the last 25 years. ynesiansee in -- ke cocaine for the last 25 years. there is no question that spending tended to outrun revenue in this country for a long time. and how we finance these deficits, increasingly by selling bonds to foreigners. we have so many aircraft carriers around the world, no one else has one. selling debt to china will not prove all to millis sustainable. >> i have one of my patience

with my chairman. it has been a privilege. >> no, it was a good line of questioning. and i think we all would have. we really are are looking for a game changer. how do we do it and what is the best approach? you provided very good ideas and insight as we go forward. thank you for that testimony, thank you to our members for being here as well, and with that, this hearing is adjourned. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011]

[inaudible] >> this morning, the joint economic committee holds a hearing on manufacturing. we'll hear from the president of the national association of manufacturers and mark zandi. live coverage at 10:15 eastern on c-span3. and then the outgoing head of

the federal deposit insurance corp., sheila bair, talks about regulation. she is expected to be taught -- asked about greece's economy. >> the c-span networks -- providing coverage of politics, public affairs, nonfiction books, and american history. it is all available to you on television, radio, online, and on social media networking sites. find our content anytime through the c-span video library. we take c-span on the road with our digital content bus. it is washington your way. the c-span networks -- now available in more than 100 million homes, created by cable, provided as a public service. >> up next, "washington journal," with a look at today's news in your calls. the house gabbles back in this rn