true democracy, however, must flow from its citizens. so as libyans rightly seek justice for past crimes, let it be done in a spirit of reconciliation, and not reprisals and violence. as libyans draw strength from their faith -- a religion rooted in peace and tolerance -- let there be a rejection of violent extremism, which offers nothing but death and destruction. as libyans rebuild, let those efforts tap the experience of all those with the skills to contribute, including the many africans in bya. anas libyans forge a society that is truly just, let it enshrine the rights and role of women at all levels of society. for we know that the nations that uphold the human rights of all people, especially their women, are ultimately more successful and more prosperous. which brings me to the final area where the world must stand with libya, and that is

restoring prosperity. for too long, libya's vast riches were stolen and squandered. now that wealth must serve its rightful owners -- the libyan people. as sanctions are lifted, as the united states and the international community freeze more libyan assets, and as the country's oil production is restored, the libyan people deserve a government that is transparent and accountable. and bound by the libyan students and entrepreneurs who have forged friendships in the united states, we intend to build new partnerships to help unleash libya's extraordinary potential. now, none of this will be easy. after decades of iron rule by one man, it will take time to build the institutions needed for a democratic libya. i'm sure there will be days of frustration. there will be days when progress is slow. there will be days when some begin to wish for the old order and its illusion of stability.

and some in the world may ask, can libya succeed? but if we have learned anything these many months, it is this -- don't underestimate the aspirations and the will of the libyan people. so i want to conclude by speaking directly to the people of libya. your task may be new, t journey ahead may be fraught with difficulty, but everything you ed to build your future already beats in the heart of your nation. it's the same coure you summoned on that first february day. the same resilience that brought you back out the next day and the next, even as you lost family and friends. and the same unshakeable determination with which you liberated benghazi, broke the siege of misrata, and have fought through the coastal plain and the western mountains. it's the same unwavering conviction that said, there's no turning back. our sons and daughters deserve to be free. in the days after tripoli fell,

people rejoiced in the streets and ponderedhe role ahead, and one of those libyans said, "we have this chance now to do something good for our country, a chance we have dreamed of for so long." so, to the libyan people, this is your chance. and today the world is saying, with one unmistakable voice, we will stand with you as you seize this moment of promise, as you reach for the freedom, the dignity, and thepportunity that you deserve. so, congratulations. and thank you very much.

>> why, is what many agree. we have had them manage economic crisis, hundred-related crisis, office poverty-related crisis, and we see only further challenges and complications. in short, there was one good use of the arab revolution, a young arab people who went out to the streets in their discourse was one that we in the west and europe had not imagined. they did not take this -- they

did not take to the streets to say down with the west, down with france, down with the united states, down with israel. they took to the streets to say that we want jobs, we want to be able to study, we want democracy, we want freedom. and i must say that when we saw the people take to the arab street to call for liberty in and democracy, we took some time to respond, but astonished of what we were seeing given these considerable chain--- changes which is the major news, and then there was to nation, there was egypt, -- there was tun isia, there was aged, and

then there was libya. who live off the young people of libya capable to bring down a dictator -- who would have taught the young people of libya capable to bring down a dictator? the specialists? no, the specialists are not telling us that. there explain to us that the west and east -- they were explaining to us that the west indies were condemned to confrontation, and they took to the streets to say that we did not want confrontation, we want freedom. and we took actions to assist those who are bringing about the libyan revolution and we are proud of this. and you know the one makes is most proud -- you know what makes us most proud is that with us were arab brothers, libyans,

there was qatar, there is the united arab emirates, and there was jordan. if they had not had the courage to assist their libyan brothers, that would've been much more difficult, whoever was in libya could imagine this was to be a resumption of colonialism. we know history and give draw on the lessons today -- and we have drawn the the lessons today. this is a free libya. and the entire world is now turning to it. it is up to the libyans and no one else to decide what will be the future of libya.

when said with our u.s. friends and our uk friends, of course, and all our partners in the coalition, we said that we would state to do the job as long as the libyan revolutionaries will need it. something was demonstrated, which is that the revolution won, 1 -- may have been on but it took the libyans at themselves, and we ask them, tell us how long you want us to stay and stand with you and we will do that. we want to say that after having courage to free ourselves with guns, if you have the courage now to pardon and reconcile, the entire world is watching you.

and perhaps the greatest compensation was to say that we were not wrong in terms of who our friends were. when you arrest them out a, he will retry. -- a rest gaddafi, they will be tried, and when you hold them accountable, they will have the right to defend themselves. that is how you rebuild libya with all the libyans who will take part in this rebuilding. and the earliest the government will be put in place, the earlier that this libyan democracy will be in place, and the better they will be. let me conclude by saying one thing. there were many asking us, essentially, did you not fear that in the future, it will be worse than what you're removed in libya?

i like to respond to them with one thing. there is not a good counsel with that kind of reasoning. the europeans in the east would have kept the communist dictatorships for years with this kind of logic. we ourselves tolerated regimes that we never should have tolerated. freedom, is not without risks, but dictatorships bring certainty that there will be failure. i have faith in the future of libya. there will be ups and downs. but no one should want to bring the past back. particularly those to free themselves with guns in their hands. ultimately there is one of the responsibility to be shouldered. at long last arab societies are moving toward freedom. but as remain cautious and

conflicts that have gone on for 60 years should not poison the building of democracy and muslim countries. -- in muslim countries. that would condemn any form of flexibility. france's proud and pleased to have been a member of the coalition. if we were to do this again, we would do the same thing. benghazi and libya would not be the martyred cambodia by that the mere rouge. -- by they khmere -- by the kmere rouge.

all the dictators around the world should know that henceforth the international community is not condemned to just speaking but will take action and where necessary with weapons in their hands in the service of democracy. [applause] >> six months ago as is tax approached benghazi, he predicted that his opponents would be slaughtered by record he had not taken into account the principled stand of the arab league. the european union, the arab league, nato and here in new york, we showed that nations can successfully apply to concerted diplomatic and economic and

military pressure needed to protect the lives of thousands of civilians. the doomsayers who predicted a protracted stalemate or chaos and humanitarian catastrophe when tripoli was liberated have also been proved wrong. in tripoli last week, we saw the great progress that libya has made in a matter of weeks and the allied and relieve oblivion's taking their freedom. many thought it was impossible ended down about how far an occupying force and under their own leadership. i congratulate the ntc for taking up libya's the fed general assembly this week, and a growing number of countries that recognize them as the government of libya. there are three priorities to be clear about today. we should send a clear message to gaddafi and their remaining supporters that their time is up. his fighters should lay down

their arms. gaddafi must be brought to justice under libyan and international law. no country should give a bolt hole to this fugitive from justice, a man wanted for charges on crimes against him and it did in the country that does give him sanctuary should remember there is no expiring date for the charges that he faces. we look to the ntc to continue to shoulder their responsibilities to get libya back on their feet. i applaud the president and the prime minister and their colleagues on the ntc for the swift implementation of plans to meet libyas and immediate needs and bring security to liberated towns and cities and for their commitment to an inclusive and represented the future for libya that the polls human rights. if we hoped the ntc will also meet its needs to create representative and accountable structures, to take action to investigate allegations of

human-rights abuses, and to ensure justice for all libyans. finally, we as members of the international community must reaffirm our commitment to support the new libya carried we must help libya become a state where freedom kente called . if or the law hold sway and rights are respected and with the profits of economic development are shared for the benefit of all of its people. we should help stabilize the country where such help was requested. libyans must be in the lead with a wide array of international support. we in the united kingdom will continue to do our part providing humanitarian assistance, making places available in our special hospital for critically ill libyans, on freezing assets to help them pay for essential services, the oil in a military team to advise of security, and

provide places for weapons disposal in the clearing of land mines. we can gather and help preserve evidence of all human rights abuses. and we will continue with our allies to implement u.n. security council resolution 1970 and 1973 for as long as the safety and security of the libyan people remains under threat. the libyan people can be proud of what they have achieved and we can be proud of what we have done to help them already. as friends of libya, we must show the same resolve in steady this a purpose over the coming months to help them consolidate the freedom they have one and secure a peaceful and prosperous future for their country. thank you, secretary general. [applause] >> thank you very much, mr.

president. let me begin by extending my thanks to the secretary general for holding this meeting. excellencies, ladies and gentlemen, today the international community is meeting in order to support the new libya and to announce its support for the libyan people, a people emerging from 42 years of darkness. >> it is a great thing that the libyan people have liberated themselves after 42 years of darkness. as no, canada -- as you know, canada chose to robustly engaged in the protection of civilians from the reprisals of a former regime.

this choice has been vindicated as the president joins us today what the true flag of libya and the national transitional council takes its seat in the and that this nation's as the representatives of the government of libya. canada supports the and national council as it works toward a stable, inclusive society built on peace, democracy, freedom, the rule of law, and the respect for the right of a person. he continued to support the national transitional council as it supports peace, democracy, freedom, and human rights for all people. our diplomatic presence has been reestablished in tripoli and we will soon return to full operations. we of unfrozen $2.2 billion in assets for the interim libyan

government. canada stands ready to support the new government approved a coordinated united nations effort. a new security council resolution has been passed. through a un-lead process, canada stands ready to provide of pies and assistance. -- advice and assistance. we have defended core values and principles that underlie good governance, development, and prosperity. we will pursue the nato mission because elements of that q gaddafi -- and continue engaging and on resistance and we will seize the nation -- the native and a -- we will see the nato mission on to its conclusion.

let us pursue our efforts in harmony with the libyan people. thank you. [applause] >> our coverage of the united nations general assembly continues over the next few days. tomorrow on c-span 3, we will hear speeches from other leaders. president obama will be included. our live coverage starts at 9:00 a.m. eastern. today, the pentagon officially repealed the military's don't ask, don't tell policy banning gays from serving openly in the military. we will hear from defense secretary panetta and joint chiefs of staff chairman m ullin. then we will hear wedarrell -- we will hear from darrell issa.

>> eugene robinson on black america, and isabel wilkerson on african-american possum migration north and west. douglas wallace on spymasters. woodrow wilson's first lady and david mccullough on the greater journey. " our and our national foot -- our entire schedule -- look for our entire schedule at our website. u.s. military has officially repealed this policy which had an openly gay americans from serving in the armed forces. don't ask don't tell instituted during the clinton administration cost 14,000 men and women to be discharged in the last 18 years. we will hear from defense secretary leon panetta and chairman of the joint chiefs of staff admiral mike mullen for they also talk about the pentagon's budget at this 40-

minute briefing. abnormal and will retire from his post at the end of the month. -- admiral mullen will retire from his post at the end of the month. >> let me acknowledge this is a historic day for the pentagon and for the nation. as of talk 0 1:00 a.m. this morning, we had to repeal of don't ask don't tell, pursuant to lot that was passed by the congress last december. i believe we have moved closer to achieving the goal and the foundation of the values that america is all about -- equality, equal opportunity, and dignity for all americans.

as secretary of defense, i am committed to removing all the barriers that would prevent americans from serving their country and from rising to the highest lyell of responsibility that their talents and capabilities warrants. these are men and women who put their lives on the line in the defense of this country. and that is what should matter the most. i want to thank the repeal implementation team and the service secretaries along with a service chiefs for all their efforts to ensure that dod is ready to make this change consistent with standards of military readiness, with military effectiveness, which unit cohesion, and with the recruiting and retention of the armed forces. all of the service chiefs have stated very clearly that all of

these elements have been met in the review that they conducted. the review that they conducted. over 97% of our 2.3 million men in uniform have now receive education and training on the repeal as a result of these efforts. i want to thank the working group for the work they did and a report that laid the groundwork for the change in this policy, and above all, i would like to single out a person who is next to me at this table, admiral mike mullen. his courageous testimony and leadership of this issue were major factors in bringing us to this day, and he deserves a great deal of credit for what has occurred. let me also, if i can, give you a quick update on the defense budget and where that stands at this point. as you know, the department has

been under growing a strategy- driven process to prepare to implement the more than $450 billion in savings we will be required to do over the next day years as a result of the debt limit agreement. this review is still ongoing. no decisions have been made. but i am committed to making these decisions based on the best advice that i received from the service secretaries and from the service chiefs as well as the combat commanders. i have made clear that i will be guided by the following principles -- one, that we must maintain the very best military in the world, a force capable of deterring conflicts, projecting power, and winning wars. we have been through a decade of

war, and the result of that has been almost a doubling of the defense budget during that period. now i have to take on responsibility of exercising fiscal responsibility based on doing our part to confront the deficit, and i think this can be done by shaping, using this as an opportunity to shake the very based defense we can for this country as we approach the next 10 years. so that we can effectively take on the challenges and threats in the world that we face. secondly, we must avoid a hollow force and maintain a military that will always be ready, and agile, a deployable, incapable.

-- and capable. we must take a balanced approach and look at all areas of the budget for potential savings, efficiencies that trim duplication and bureaucratic overhead, to improving competition, contracting procedures, management in the operations and investment programs, to tightening and reforming personnel cost costs and areas, to developing areas that would be a smaller, more agile and more flexible force for the future. finally, we cannot break faith with our men and women in uniform, a volunteer force which is central to a strong military, and is central to our future. achieving these savings will be very hard. this is not going to be an easy process. these will involve tough decisions and trade offs. why we continue to reducing overhead and duplication, make

no mistake, these reductions will force us to take on greater risk in our mission to protect the country in time of war and in the face of growing security challenges. my goal is to try to make sure that these risks are acceptable by making sure that we maintain a strong defense and preserve our ability to protect our court national security interests. even as we take our share of the country's efforts to achieve fiscal discipline, we still face a potentially devastating mechanism known as sequester. as i try to make clear in the past month, was $1 trillion in past month, was $1 trillion in cuts would seriously weaken our military, and it would really make us unable to protect this nation from a range of security threats that we face. since the cuts would have to be applied in the congress of the

edges to every project area -- would have to be applied in equal areas to every projects, it will impact our economic strength as well. cancellation of weapons systems, the georgian province, research activity would seriously cripple our industrial base, which would be unacceptable, not only to me as the secretary of defense but to our ability to be able to maintain the best defense system for the world. while this budget environment presents some difficult chores as for our armed forces, i believe if we can avoid further cuts we have a real opportunity here to set priorities and make hard choices needed to build a stronger force for the future and to keep faith with our men and women in uniform. finally, let me say a word

about mike mullen, since this would be his last conference, at least alongside the secretary of defense. [laughter] >> i will not take that personally. >> it has been a real honor for me to be able to serve with at romanov -- with admiral marlon. he has provided strong mission in shaping the defense of this country, and as a result of that we are a stronger and more secure in nation because of his leadership. i have worked with him in this job and i worked with him in the past as director of the cia, in particular i appreciate the support he gave us when we conducted the osama bin laden

mission. it could not have been done without his support and cooperation. he has been steadfast, a passionate voice for the support of our service members, both he and his wife, and our strategy that is now bearing fruit in iraq and against an opposing great deal of its sussex to his vision, his determination, and his dedication. he is really -- he has really set a standard for the as chairman ofes and a germ the joint chiefs. i want to thank him for his friendship and i want to thank him for the men and women in uniform who i think, more than anyone else, i appreciate his leadership. >> thank you, mr. secretary, and thank you very much for your leadership and those kind words.

i too am very proud of the relationship that we have enjoyed over the last couple of years, and i am grateful for your willingness to continue serving our nation. it has been a pleasure to be a part of your team as he navigated the waters here in the pentagon, and i will say this, you are a pretty quick study. this can be a very difficult culture to master, but it cannot take a very long to figure out bog can actually be a good thing, that man paths are not hideouts that we find to eat snacks. i do not think we have ever really held out of fooling the former director of the cia are. the truth is he had made an enormous adverse and our troops know you care about them and their families and they know

that throughout these lean budget times you will have their backs. i cannot agree with thinking and acting smartly as we make very difficult, very necessary fiscal decisions about force structure, personnel, and operations drisc. these must be strategy driven decisions. we must begin with a clear assessment and the joint force must continue to do for our fellow citizens. the options we must be able to provide our present and be able to curtail those missions and capabilities which did not comport with that strategy. we must consider the world as it is, the threats as we see them, not wishing away the dangers nor blowing it out of proportion of. it is because i believe that our national debt is at greatest national security threat, but i also believe we must do our part to reduce it to limit its harm.

programs that are behind schedule or woefully over budget should be considered for elimination. i think history is in port here as well. i can remember in the early 1990's when two of our major programs, the c-17 in the air force and one program in the navy were in lot of trouble. these programs now are certainly stalwarts in our defense and critical to our success. so there are programs that should be limited. we just need to be doing the deed to diligence to make sure we get the right ones. the personal accounts that make a vast majority of our -- scrapped for overhead, and those operations that do not in the end directly contribute to the commitments we see as essential must be recalculated.

the american people will get the military purchase for them. we should make sure that military is right one for the future, flexible and not to fight wars, big and small, near and far, a force that can secure our national interests and not by its size and shape defined those interests. i remain convinced that our efforts to find more than $450 billion in cuts the president has ordered over the next 10 years is achievable, and like you, i am committed to the process we put in place to do that. it is the responsible thing to do. i also share your deep tradition over sequestration and the potential for cuts so devastating and so dramatic that we placed at risk the very security we are charged her home to provide, that we hate the very reason we exist. i hope the supercommittee and the congress will recognize in the work where during to shoulder our part of the load

and look elsewhere for further reductions to. i also think they will not drive us to make decisions that violate the covenant we have made with our troops and with their families. tenures of war have not broken the all-volunteer force, but drastic budget measures that adversely affect the lives and livelihoods of our people very well might. we can afford to leose things, but we cannot afford to lose them. a word or two on the implementation of don't ask don't tell. i testified in 2010 that it was time to end this long and this policy. i believe then and i still believe that it was first and foremost than a matter of integrity, that it was fundamentally against everything we stand for as an institution to force people to lie about who they are just to wear a uniform. we're better than that. we should be better than that. and today with implementation of

the new law fully in place, we are a stronger joint force, a more tolerant toward force, a force of more character and more honor, more in keeping with our own values. i convinced we did the work necessary to prepare for this change, that we adequately trained and educated our people, and we took the proper consideration of all the regulatory and policy modifications that needed to be made. i appreciate the secretary's office in may, but today is really about every man and woman who serves this country, every man and woman in uniform, regardless of how they define themselves. and tomorrow, they will all get up, they will all go to work, and they will all be able to do that work on leslie, and earth -- honestly, and their final schism is will be safe from harm. and that is all that will

matter. >> admiral marlon mentioned that men and women in uniform are more tolerant today than when don't ask don't tell was begun 18 years ago. i wonder, how do you guard against the possibility that some will try to undermine it or reverse it by committing acts or violence against gays, and also in your opening remarks to you said you're committed to remove all barriers to equal opportunity in the military. does that include allowing women to serve in any position in the military in combat? [unintelligible] would you comment also of an elaborate on march it made this morning about the timetable for the withdrawal in iraq, which is that i believe that the u.s. would be done -- down to 30,000 to by the end of this month. is that an acceleration of the plan was recently, because it is quite a large drop, and is this

in the timeframe in which the iraqis have to make a decision? >> let him go first. >> says the plan that the general had in place, specifically, and it is a plan that gets us to under the current agreement to all the troops out by the end of december, so there's no change. >> with regards to the possibility of harassment, we have a zero tolerance with regard to harassment, and my hope is the command structure operating with the standard disciplines that are in place will implement those disciplines and will ensure that harassment does not take place and that all behavior is consistent with the discipline

and the best interest of our military. with regard to other areas and other barriers, i thinking we always have to continuewe have t them not the table. the opportunity to look at the other opportunities is something we did appe. >> i have the budget which is my highest priority. >> you did call out it as an unfair law. as you leave office, office, whs this stands in taking a break. are you comfortable leaving a merit hillary -- leading a military were a lot of them still not have access to of

care, pensions, and a supporter network. >> one of the reasons i have been in the military is because i care immensely about the people. they have been extraordinary to work on -- work with and depend on. one was timing. i happen to be the chairman when this came into intense focus. i have a express my personal views at a time that it to be asked of me. to the process has evolved. i do not think about the top 10 or top five.

this is a huge change. it hit at the heart of the issue, and the integrity of the institution. it is valued for us. it serves us well. it is a huge step in the right direction to be inconsistent -- to be consistent with those people. that is how i would describe it. i said then and today the right thing to do is done. we ought to move on. >> a lot of partners would not have equal treatment. have equal treatment. we are aware that there are

benefits which accrue to this change your specifically and directly. it went into effect at midnight. there are some of the ones you talked about. it is in compliance with the law. >> i want to talk to you. earlier today, i talked about the violence. how can we protect the leaders? what are you talking about? what kind of protection? after four high-profile attacks, is it time to say this

is more than just an seeking headlines in propaganda. is it time to take them seriously? >> we do take it seriously. i do not have the details of the them what has been reported. i cannot tell you who is behind it. there are those who would immediately the year and specifically. check in delicate that one way or another. since weeks before it cars i pose a brother was killed, -- pose a brother was killed, -- singh -- since killed, brother was

we look at practices and the involvement. that will continue. reflects the shift. they have not succeeded on the ground. their campaign has failed. they shifted to these high- profile attacks. general allan has describes the attack on the embassy as an operational failure. we take it very seriously. we know this is what the television is doing. we are doing it. we are where this will continue. -- we are aware this will continue. we do not think this is the time

to make change. we do take it seriously. >> what changes do you look at in afghanistan with the revolving threats? >> we are surely concerned about these kinds of attacks.

those of not occurred. we made progress in weakening them. we went after their leadership. having said that, i now have resorted to these types of attacks and high-level assassinations, which as i said, are of concern. and we have to take steps to make sure that we protect against that. and we are in the process to do that. we're working with afghans to discuss steps on how to provide better protection so that this does not occur. but the bottom line still remains that we are moving in the right direction, we have made progress against the taliban, but we cannot let sporadic the band's guitarist from the process. >> on the reconciliation process?

>> i regret this loss. he played an important role with regard to reconciliation. i am hopeful that that will be able to work with others to try to continued the efforts. -- to continue the efforts. >> any greater u.s. willingness to take unilateral action against the haqqani network across the border? if not, what can you do about them? >> i think we have both made the point that we're going to take whatever steps are necessary to protect our forces. i am not going to talk about particular strategies to end fact implement that commitment. but our biggest concern right now is to put as much pressure as possible on the pakistanis for them to exercise control in

their side of the border. we cannot have the haqqanis coming across an attacking our forces in afghanistan and then disappearing back in a safe haven. that is not tolerable. we of urged him to take steps. we just sat down with them to merge the same point and we will continue to do that. i think they have heard the message but we will see. >> >> on tests -- on overturning don't ask, don't tell, the majority of the combat units were concerned there repealing the ban would have a negative affect on the nation of afghanistan. was the general wrong on that base and concerns among as combat troops? what is the pentagon to

intimidate those concerns? >> general amos made this very clear back in. the second part of his sentence was, if the law changes, the marines will be the first one to do the training and comply with the law, and that has happened. so the secretary spoke to the training and quite frankly over the last several months, we have conducted the training and have not found any significant issues. the training was not to change one's view. it was to make sure that everyone understood what their rules were and the marines do that better than anybody else. i have great confidence that they will do this in general and this tells us that they are. >> i talked to general amos directly about that. he said that after doing the review and finding that there

was no impact in terms of recruitment former route, or unit cohesion, that he was committed to putting this into place and it was now on board to move on it. -- now important to move on it. it on the haqqani question, you said that the pakistanis have heard your please, and you have met with them, and we have heard that for several years down. you keep meeting with the generals over and over again. are you wrong in this strategy of not having a harder assist with them, taking a tougher stand? could something else have been done? >> the substance of the meeting just the other day as well as the vast majority of meetings that i have had with the general have been to work toward a way that we can sustain the relationship. it is going to go up and down.

we've had a very tough package over the last several months. i would reassure you did hike took up this issue very strongly with the general last friday night when i met with him. it was the heart of the discussion, that the haqqani -- the process connection to the isi, the haqqanis killing our people across the border, it has to stop. it is not a new message but one that he clearly understands and one we have to keep articulating. having met with him so many times, and the strength is that we have maintained the relationship when things are going better as well as when things are not going well. recently they have not gone well but we have been able to sustain that and start to move it in a more positive direction.

but the clarity with which i address the issues you, there can be no question and no doubt. -- this issue, there can be no question and no doubt. >> they continue to put pressure on them and that is what they have done of the last few years. sometimes it works, sometimes it does not work, but the fact is that the most important thing we can do is keep the pressure on. obviously the cooperation is in certain areas and there is other areas where we have disagreements. terrorism is as much a threat to for them as it is for us. we keep telling them, you cannot choose among killers. if you are against terrorism, you have to be against all forms of terrorism. that is something you have to continue to stress. >> asking about libya, as fighting continues in a few

places, how much longer will be united states remain in operation? and you see this as a template for future missions? >> generally this mission went well. the role that nato to if there was the right one. nato will continue to provide whatever assistance it can as it winds up. and i think that this is clearly the opposition making significant progress there. still some elements of the regime out there that they are continuing to work on. as to what future role is involved with paygo, that is something that we're going to be discussing with -- with nato, that is something we're going to be discussing with them. i've already begun some of those discussions with my nato

partners to decide what should be the next debt. >> if i can add one quick comment, i met over there this weekend, and consistent with what the secretary said and where the mission is, but also a number one out of their way to paint the united states for the support to enable them to be able to succeed to this point, extensively. the decision was to put this in a support role that was clearly critical. we are a part of nato. it is a critical alliance, has been, is, and will be for the future. >> there are reports that the state department is planning to hire 8000 security contractors in iraq by the end of the year. of hasbro mollen, are you concerned about the size of the

-- admiral mullen, are you concerned about the size of this force in iraq? will your force be too small? secretary panetta, is it wise to pull some many troops at of iraq and acheson -- and then rely extensively on contractors? >> it is important to understand that we're now in negotiation with the iraqis as to what they need. ambassador jefferies, the iraqi general, both are in serious negotiations and we're listening to their needs and their concerns. we are listening to what they think they have had in order to revive security in that country. those are ongoing discussions and it is premature to determine what the size of the force would be or if there will be any force at that time,

because it is all depended on the negotiations with iraqis. one of the concerns we always have is that concern of providing adequate security and they will be one of the issues involved in these negotiations. >> i think the secretary added that really well. [laughter] i would say the same thing. we're in the middle of negotiations so the specifics, whatever you there -- hear, the specifics are not there. there is no one that can say that right now. it is a hard process to take under consideration. obviously how the iraqis say they need -- their needs and the future, what specifics they want, and then logistics between the state department and the

defense department, we're just not there yet. again, we have looked at what the potential future mission could be and analyzed it to a fare thee well. if there are any, and i do not know if there will be saving but it will be well supported from a mission standpoint. >> if you could comment on the savings that the president announced giving $1.1 trillion? >> if yes. >> one person is colony savings phony. they are measuring against the baseline that do not include true war costs and the future, which are unknown. it has just dropped, crude

element of what it might be in the future. >> the recommendations to the super committee? >> yes. >> the recommendations that are there, our people did discuss with the general areas that were included. we were supportive of including those elements. with regards to the number is, i experienced that there are rays disputes between at omb and cbo and they're going to be people that draw different numbers in terms of the savings, based on whatever baseline you are using. i will say this -- if those recommendations are implemented, i think that there would be significant savings. as i discussed time and time again, that committee has to focus on that part of the

budget that 67% of the federal budget which has not been dealt with in dealing with deficit reduction. and that is the mandatory. that those of the areas that have to be included. the president has made recommendations and i hope the super committee will take them and build on them and hopefully include revenues as part of that package. >> you believe it that is your role to make the case to congress of all why the sequestered cuts are so dangerous. but there is a common understanding that even if they come up with the deal, if the cuts are not triggered, they could be cutting a couple of hundred billion dollars more out of the budget. could you how are you making the case? >> i met with members.

i made clear that what we are doing is for one of the billion plus. it is the way they get this the best defense. and do with the press letter out there. each additional cuts are added on top of that. or by the super committee or anybody else. they're going to do serious damage to be able to make the kind of changes and as a defense structure that irresponsible and protect this country. it is in the excess of $450 billion in reduction.

we have the opportunity to be able to implement that in a responsible way. if your series but soon with the deficit, it goes back to the discretionary accounts. it is in large measure responsible for the size of the debt that we're dealing with. >> president obama said there be no u.s. boots on the ground for the investigation. is he on the ground in libya? we see them in the option.

we provide additional assistance. that is it. we do not intend to put any comments. >> thank you. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011] >> a couple of hearings to tell you about. panel will discusswil

about the wildlife refuge in alaska. they are among those testifying. later, the chairman of google testified the judiciary committee. it is live at 2:00 p.m. eastern. >> which part of the u.s. constitution is important to you? tell us the part of the constitution that is important to you and why. be sure to include more than one point of view. there are $50,000 in total prizes.

for all the details go to studentcam.org. >> a joint hearing on the federal debt and the effect on the u.s. economy. we talk about the challenges of creating jobs in the current economic environment. this is one hour and 20 minutes. >> the morning. welcome to the committee hearing. the topic is what is the real debt limit. we appreciate the panelists we have here today. i want to commend senator demint who led them on spearheading this meeting. i would yield to him for the opening statement. >> thank you. i appreciate all of your work and your staffs where to put

this together. i want to thank all of our panelists for taking the time to be here. a couple of months ago, everyone was in a panic about the president mentioned we might not be able to pay social security and talk about reneging on payments to contractors. we talked about a pretty dire conversation with the united states here today. this debt limit was arbitrary and set by congress, we could change by a debt limit deal. my concern is where is the real debt limit? when do we hit the wall where no one will lend us any more money? perhaps they cannot even hinprit enough money. continue to finance all the debt

turn nations. their model a census stops working -- acidulous stops working because of the debt. at a coupleook se relative to the gdp. there's no way we will get that. is a buying a lot of our debt are ready? is there still a mark for the kind of debt that the united states needs to sell? it is a washington term, said the shortfall. we said we would reduce that to put $1 trillion over the next 10 years.

we're giving the impression that we're actually lowering the debt. we will continue to release the debt. if we look at our turks -- charts, i am not sure we can borrow that much money. where is the tipping point for american? beyond which the interest rates will rise sharply in economic growth will decline dramatically. as you look at the potential tipping point for greece and ireland and portugal, we see the united states is right there.

how high will interest rates go? will the fed discriminate? these are things we're trying to anticipate. since the financial crisis in 2008, the balance sheet has tripled to $2.90 trillion. we can see what the federal reserve has done. it means we are printing money and buying debt. how could the policies affect the tipping point? what can we expect?

there are lots of questions. we need to know how long they can monetize the debt before the world begins to lose confidence in our currency. my challenge to the panelists is all politics aside, our country is drowning in debt. the plan is to continue borrowing money for the foreseeable. >> i want to thank you for following today's hearing to examine the broader economy.

i welcome our witnesses to dr. lawrence ball. is located ins baltimore and the middle of my district. last week, he testified before the new joint select committee on deficit reduction. he reported that if we proceed under current law, allowing the bush tax cuts to expire the end of this year, debt will equal 61% of gdp. it is recorded between 1971 and 2010. under the baseline, debt held by the public is expected to

balloon 190% of gdp by 2035. notwithstanding, the latest long-term projections under the bush control act, interest payments on the act would create a clearly unsustainable scenario. there is no inherent contradiction between using fiscal policy to support the economy today and imposing fiscal restraint several years to now. we want to achieve a short-term economic pain and fiscal sustainability, the combination of policies will be required.

draconian spending cuts will not generate the economic growth we now. it will enable them to compete and succeed. more over, the cuts are a necessary to rein in the debt and will only serve to slow are already tepid growth. the recession that started in 2007 is responsible for more than $400 billion ever and the deficits.

one of the most effective steps we could take it today. according to the clinton ministration, which recited over one of the most sustained period of economic growth in our nation's history, she said investment in infrastructure would address the jobs gap here an extra percentage point of growth would do more than reduce the deficit during that time. an extra percentage point would add about $2.50 trillion in revenue.

while this is aimed at the federal debt, the debt is in nominal factor. it is slowed hiring. it reduces public investment in the continuing foreclosure crisis. this rather than the other way around. until we recognize this reality and to check all these challenges. >> thank you.

we will keep the time manually. this is a timer and a reduced time limit. -- this is the time limit. we yield to senator demint. >> it is my privilege to introduce are three distinguished witnesses. this is an enormous performance to the american people. he is currently a professor public policy. he previously served as a member of the economic policy advisory board.

he is a consultant to the u.s. treasury department and the board of governors. in 1999, he served as a chairman of the international finance destitution. he is the author of numerous books on economic theory and policy including a multivolume history of the federal reserve. he is a ph.d. in economics. next we will be hearing from mr. chris edwards to is currently the director of tax policy studies at the cato institute and editor of the web site. he's the senior economist for

the joint economic committee in the tax foundation from 1992 and 1994 bear he has done extensive research and writing on a variety of economic topics. it is the high inflation countries. with the specific focus is on how to best reduce inflation. he is currently a research associate at the national bureau of economic research. he was previously elected at the

imf institute a member of the federal reserve board's academy advisory panel and a consultant on the international monetary fund outlook. he told a be a in economics -- a ba and phd and economics. it is great to have the odd here today. >> my association with this committee is back to the days is senator paul douglas. he prodded them to stop holding this and hold monetary policy to do much more. today i will answer the

question that they seek to answer. i will introduce my answers with my explanations of why policy is misguided and mistaken and inappropriate. there are several reasons. in writing the three volumes of the federal reserve, i've written more transcripts and any person can endure. with rare exceptions, one looks in vain for statement of the medium-term consequences of the actions taken at the meeting. they never tried to reach agreements on the consequences of its actions to the public. it publishes a forecast. there are no clear relations between the forecast and the action.

concerns but they're mainly about the near-term. there is greater importance on the medium term. they seem to do something of a high unemployment. they neglect the fact that there's no shortage of money and liquidity. this never achieved anywhere. there's never problem with too little liquidity. last time they tried it, since some of billion dollar was added. several members said there are limits to what they can do.

money growth for the past six months is rising at an almost 15% annual raise. here is the charge. it is recently the in rate of increase. inflation is a result. it has begun to rise. prices are rising. the u.s. dollar continues to sing. there is the announcement of an enforceable inflation target to give confidence that we will not inflate. in 1977, congress gave the federal reserve a dual mandate. it pursues these goals in an inefficient way by pursuing unemployment. it is shifting to an of climate

control. -- to unemployment control. the great inflation is an extreme example. unemployment and inflation rose. it is in contrast to policy. more best follows a role that included both. in article one, it gives congress ultimate control of money. it legislates an enforceable inflation target. matter to the three questions. given the fiscal policy, will government debt crowd out private ones?

the prospect of higher tax rates is there. cash's their friends. regulatory policies deter and crowd out investment. one of the most effective things they do it is passed a moratorium on new regulation for the next five years excepting national security. >> year five and a time and has expired. will you include testimony? >> yes.

let me say this. why wait for a tipping point in a crisis that we know the debt -- why wait for a tipping point in a crisis? we know the debt does not include fannie mae and freddie mac. there is not a point that we can lock down and say after this crisis occurs we do not know. -- say "after this crisis occurs." we do not know when the crisis occurs. the market changes its mind without prior notification. we should begin. we have ample warning that we are on an unsustainable path. tot path is to say we need

reduce the deficit in a credible way. we do by announcing a plan that can put this on the path that we have to be gone if we're going to restore long-term growth rate. >> but the testimonies of three witnesses will be submitted. >> the cbo projects that federal spending will rise 24%. budget chart showed, the federal debt will explode almost 20% by

2035 unless we make reform. some people think it is ok if america raises taxes in coming years because they think we have a uniquely small government in this country. that is the longer the case. if you look at data, total federal spending in united states is 41 certification of gdp. that is only -- 41 % of gdp. that is only 4 % less. we are becoming a bloated welfare state. this is one of your charts showed. if you look at growth over the last four years, our debt has

grown the fastest. of crisis going on. we're getting up to that level. it is about half of gdp by 2035 care there are fewer -- by 2035. there are fewer. it would be really sad to lose that. there are terms of all this deficit spending. additional spending cuts in the less productive government of the economy. if the government is our is spending 4 out of every $10, it seems marginal spending is going to have a lower-return.

texas a&m public finance professor edgar browning went through the whole budget a month that federal spending. hasigures the expenst lowered by about 25%. we are above the tipping point. the second basic term is creating deficits that are to support taxes that will pinch the economy down the road. economists look to the distortions as damaging the economy. when you raise taxes because more and the economy which reduces gdp. the third harm is the debt itself. we can see this in europe.

the economic growth start slow. here's what it think a lot of people are missing. if you look at the long-term cbo projections, to show the rise, it looks bad enough. it is right worse than that. they cannot take into account the fact that the rise in debt and spending suppresses g.d.p.. as vessels analysis -- a special analysis shows that rise and is pretty scary. they show that the real u.s. income rise for the next decade or so cans that may. this is a reversal of the american income. last year they compare the road

map. it is versus the do nothing fiscal sincerity. they found that the average incomes would be 70% power under the paul ryan roadmap plan. some fear that spending cuts will hurt the economy. since 2008ve trillion o car. if you look around a real-world examples, and your staff has put this in canada and sweden. they have cut through spending. canada's dramatically cut their spending in the mid-1990's. it did not depress the economy. they boomed for 15 years.

congress should turn its attention to major spending cuts as soon as we can. we have all sorts of ideas. i do not look us spending cuts as mess and we should fear. i think it will be positive boom. thank you. >> thank you. >> thank you for this opportunity to share my views on u.s. history policy. others emphasize the dangers of debt. i will focus on a different side .f the issue appear this will be elaborated. i will argue that a reduces this

in the short and medium run. it occurs during the economic slump. this varies very widely. most textbooks teach that fiscal tightening slows the economy by reducing the demand for goods and services. some suggest that it boosts confidence in the economy. they have reasonable arguments. we have to look at the evidence. in my view it is clear. if they raise taxes today, the actions will slow economic growth and raise unemployment until 2016. this is supported by numerous studies. we will focus on these over the

past few years. many economists fear it as the best available evidence. my written testimony described this in detail. they identify 173 years in which government reduced budget deficit through spending cuts, tax increases or combination of the two. the average reduction of one% of gdp raises the unemployment by 4/10 o. higher unemployment results from longer-term unemployment. workers without jobs for 26 weeks or more. they're likely to understate the

effects in today's economy. this dampens the rise in unemployment. the federal reserve cannot reduce rates. in this situation, the evidence suggests the cost of deficit reduction are about twice the normal size. but consider one a hypothetical fiscal policy. the evidence -- the cut would

raise unemployment 2.4%. it is an additional 3.6 million americans. let me mention another appointment. it focuses on deficit-reduction turgut on government spending and tax increases. -- targets on government spending and tax increases. in one way, it is not important. the imf has separate analysis and tax increases. it is similar. can any policy rain in debt without slowing the economy? the possible answer is fiscal consolidation in which tax

increases are back over time. it is more stimulus in the short term. they got it under control in the long run. it is one example of how this might be done, one could imagine cost-saving changes in in and tied him a program such as a higher retirement age that could be phased in over time. it could occur after the economy has recovered from its current slot. this reduction will be less painful than because interest rates would be above zero. let me thank you again for your attention. >> thank you for your testimony. we will begin a round of questioning. what is the real debt limit for america?

it is dangerously near and not in our control. actions change quickly and countries that at prudently are in a better position. my question is do you think there are some lawmakers in denial about the seriousness of our debt crisis? temporarily, it is being masked by inside and outside the fence quantitative easing lower of interest rates. it creates a flight to safety. it is temporarily lower. do you think that once the true cost is revealed that there could be a more serious action by some in washington to get

this crisis under control? >> i believe steps are to get 1.5 trillion in reductions. whinnied the key -- give people confidence that their future -- we need to give people confidence that their future is bright, that we are on a stable pattern, that we are going to go back to the future that the wave -- the way that we've done the past. unlike mr. ball, what models like the imf of model leave out that if you remove the sources

of low productivity and goods, it may be very desirable for people to receive transfers from the government. i do not dispute that. but those have very low productivity use. if we transfer resources to higher productivity use, we raise the future. if we cut the deficit, we convince people that their tax rates are not going to be higher in the future. the imf model does not allow for that. it does not take into account the productivity changes and the beneficial effects of expected lower tax rates. those are important conditions. let me close by saying two things. if we look at the history of the post-war period, we find that there were three fiscal changes they're really did enormous good. one was that kennedy-johnson tax cut.

the chairman of the council of economic advisers said the most effective part was the business tax cuts they got the biggest bang for the buck. the sec that big fiscal change they worked well -- the second big fiscal giselle were well was the reagan tax cuts. and the third policy they gave people confidence or the tax increases under clinton, which assured people that their future tax rates were not going to go up. they had seen what they were going to have to pay and there would not be any more. that is important -- and give people confidence. that is what people desperately need at the moment, confidence that the policy that the government puts out are going to be sustainable. >> dr. edwards. >> i think this goes to the right point.

because we are haven for international capital and a dangerous world, the american policy makers have been able to run a vote -- running giant deficits for far too long. a smaller country like australia, the debt crisis would already have happened. in a story on bloomberg, italy has been downgraded. and the s&p noted that they were downgraded because they have a dysfunctional political system. that seems to be what is going on in the united states. canada, again, to do back to the 1990's. they hit the law and ours is up to 100% of gdp. we have been skating along because we are in this special situation. japan shows that you can run as a zombie and economy for a decade or two.

the real damage is ultimately the spending. we have to get spending under control. that has been the key to success in places like canada and sweden that have cut their deficits. >> thank you. the key is to restore consumer and business confidence by getting our financial house in order with a credible way to shrink the size of government to restore the balance. >> just adding on to what was just said by mr. brady, did i understand you correctly to say that when you talked about when president clinton raised taxes, you did not see that as a negative thing. but youme if i'm wrong, saw it as something that create a level of certainty. you're saying that the certainty is more important than some other factors? [inaudible]

we really want to hear that. is your microphone on? do not go on sodomy. >> he really had the benefits of the cold war so he was able to cut spending, being a finance person from wall street, rubin told him not to run deficits and he did not. he gave people confidence. does that mean that a tax increase now would do what a tax increase did then? i do not face of. >> let's take up on that, dr. paul. after -- during the clinton era, we produce some 22 million jobs. since 2000, by the way, they have steadily declined, which

historically low tax rates due to the 2001 and 2003 bush tax cuts. this reversal of growth has led some economists to describe a time. i between 2000-2010 as the lost decade for america's middle class. i find it particularly troubling that the government imposing austerity measures during a downturn have lasting negative impacts on income and employment levels and of the bulk of these negative effects fall on middle-class and working people. i am specifically concerned that if the select committee on deficit reduction achieves a the require 1.2 -- achieves the $1.2 jury and in cuts at with only spending cuts, this could behalf lost income for millions of americans, like those or

fiber tenures away from retirement. throughout the last decade, dr. ball, working americans have watched their incomes stagnate or spiral downward and 25 million more americans are unemployed or underemployed. are you worried about the detrimental impact that $1.2 trillion in cuts could have on the middle class? and does their recent work that -- and does the recent reports that we have so many people under the poverty level? >> i am very concerned about that. there has been the stagnation of middle-class living standards. that has a variety of causes. but there is no question that an artificial fiscal contraction right now what s acerbate that. -- would exacerbate that.

when there is a cut in spending , there's every reason to think that the shift in income and jews -- income distribution away from workers as well as of fall in total. as far as unemployment, no one is a lecture on how terrible problem is. there is a lot of research but it is also obvious battle losing your job is especially difficult, especially during and back -- an economic downturn. it takes a long time to find a new job. we have half the unemployed who are unemployed for six months or more. i could go into some of the social science research about the damage that that does to families, health, of course, children's performance and

skills -- in school, but you know that. >> we constantly hear to get rid of regulation, and it seems like i wonder that when we get rid of all these regulations, does that guarantee that jobs are going to be added? you make it easier for the employer to take away safety measures from the public, it easier to make more money, but is that a guarantee that we will then see jobs expand? >> no, absolutely not. under regulation, there are a lot of pros and cons about the benefits. but as a way of dealing with the current slump, 9% unemployment, that is honestly not a factor. what we have is a classic short fall in demand. normally when that happens historically, the federal reserve has cut interest rates,

and at the top -- if the economy does recover, it cuts interest rates more. what is problematic about the current situation is that the interest rates are at 0% and so the federal reserve has run at its usual ammunition. we need to think about some other way to get investment on spending. >> may add to that? i may add to that? briefly. cutting regulation and giving people the assurance about future taxes does a great deal. what it does is if you are a businessman and you want to invest, the first thing you do, you go out and figure out what is the expected rate of return going to be. you cannot do that because every day or every week there are new regulations. the health care, finance,

labor, and also for the environmental and the president is out campaigning for higher tax rates. so you do not know what you're going to face, and so you sit on a bundle of cash and wait. we have never seen so much cash in the hands of banks and businesses as we do now. so we have asked ourselves, why is that? and the answer is, because there dreadfully on certain and lacked confidence about what the future is going to be. they do not know what that future is and they cannot estimate what the expected rate return is. if they invest, they create jobs. most of the jobs created are created by firms that start of and in the first three use -- they start up and in the first three years hire and expand. >> thank you. >> dr. ball, you have reference

to an imf study. is it fair to assume that it includes many nations with the government workforces that are of a larger percentage than the u.s.? >> yes. >> so with a determination of cutting spending, those governments would have higher unemployment because of that, because the spending directly affects the government work force. >> i do not quite that that follows. it is very careful in trying to measure a spending cut of a certain amount relative to gdp, what are the average attacks on unemployment. >> will we see with our deficit spending over the last two years, is maintaining government employees at the state levels, teachers, others, but it seems to me that that deficit spending is good for the spending and cutting that spending would cause higher unemployment, that using the study were most of the nation's have a greater percentage of

government workers as part of the work force, it may not necessarily be accurate. do you not see the american economy, our free-market capitalist system, as different than most of the other nations of the world? >> this nation -- the study includes kennedy and a variety of the world's most advanced countries. -- can adapt and a variety of the world's most advanced countries -- canada and a variety of the world's most advanced countries feared it would apply to europe and to australia. >> a lot of the people who wants to be more like centrally planned european economies, that as part of our different world views that we're dealing with right here. but maybe a question to the whole group, mr. edwards and dr. meltzer, maybe i will go to you

first on this. we're clearly uncharted territory right now. we can have different opinions on that, but the federal reserve interventions are unprecedented. stimulus spending is at the end of unprecedented levels. the week and almost nonexistent recovery, and despite the incredible levels of spent -- of stimulus spending, is unprecedented. so out of these factors affect the nearness to the tipping point? we cannot determine where that is, but where are we going to borrow the money from? we are projecting a trillion dollars a year that we have to borrow or print. we're is that going to come from? are we in such uncharted territories now but we need to do more than just sound an alarm? orion might unnecessarily rigid

or am i a necessarily seeing a bleak situation? -- or am i unnecessarlily seeing a bleak situation? is to enter at percent of gdp in has been for a couple of decades. -- 200% of gdp and have been for couple of decades. that is a real problem. as the cbo points out, if we keep this up, we will produce gdp but a bigger chunk of that will not be going to americans, but to foreign creditors. that is why our standard of

living will be suppressed by this buildup of debt. i must say that hitting the tipping point -- that is not the end of the store. ireland hit the tipping point, but recent news reports indicate that they have taken good policy actions, cutting spending, and they are on the brink of recovery. they are -- they are in a much different situation in greece, even though both had mass of spikes of debt. ireland has taken the right policy courses and they are headed in the right direction. again, i do not think the biggest issue facing you is where the tipping point is. stopping the bleeding as soon as we can. >> i am almost out of time. >> ireland did not have a large debt. it got a large dead because it assumed that the debt of the banking system. it descended as a public debt. that was a huge mistake.

-- it assumed its as a public debt. that was a huge mistake. when greece hit the -- joined the ecb, it hit some of its debt. suddenly that same situation gave rise to a loss of confidence. that was a tipping point. why did not occur two years, five years earlier? i do not think anyone can answer that. >> senator mcculvane is recognized. >> i have learned not to get in a battle of wits when i'm woefully underarmed. it has been a long time since i've taken economics. let me try not to make a big of a fool of myself. do you believe that there is such thing as a tipping point in

the size of this debt? >> absolutely. all three of us agree there is a tipping point and we do not know where it is. it would be prudent not to find out. by no means to want to say that we should not be very concerned about long run sustainability. >> that is where i was hoping we could get. if we get past that point, it would be much worse than the situation we find ourselves in today. is that a fair statement? >> probably. because the u.s. is special and this is an president, when it would happen or how bad it would be, again, it is the kind of thing we do not want to learn about. >> and that is one of my frustrations with the classical yesian.cion's -- ken

we sit with the board of experts regarding entitlement, two republican witnesses, an independent witness, and a democratic witness. they give as between two years and five-years, and one of my concerns is when i read your analysis and when i read your testimony, we lack any type of this long-term outlook. we're simply looking at the next quarter and an effort to try to boost the gdp. you go to the end of your testimony and you talk about wide printing money an expansionary policy might not have the same type of inflationary outcomes that we have seen. but many of us, including members of this board, because you say businesses do not monitor that that balance sheet

and they do not base their pricing decisions on changes in the monetary base, i use to run of business and i can assure you that i did not watch their respective tariff policies. but i watched my costs. when my costs went up, i had to raise my prices. i was not watching the fed, but the brokers in food and fuel certainly were. it might cost one up because of expansion or policies, i had no choice to raise my prices or go out of business. he saw hyperinflation without -- and there was high unemployment at that time, fairly low and productivity, and we had tremendous inflation. what i fear when i look at your proposal is that we are underestimating the risk of inflation and hyperinflation.

take a minute and tell me why i can sleep tonight. >> on the fiscal issues, you talk about the long run in the short run, in the long run we are all dead, something that people are embarrassed about now. but the long run is important. there is a lot of agreement about the long run dangers of the debt. but we need to be realistic about if we are very aggressive right now at cutting the debt, there will be major costs. >> if we believe that we were closer to the to pinpoint rather than further, if we believe that we were closer than you may the, is an entirely rational for us to take steps that we're doing? >> at some level, the right steps are obvious. everyone could even agree. it is addressing the looming -- there is a cbo charge of that debt going off, primarily because of entitlement programs.

in a perfect world, congress would get together and have a friendly discussion and figure out some nice moderate compromise on how to fix entitlement programs. that would solve the long-term problem without giving a big negative jolt to the economy today. if we address the deficit by willy-nilly spending cuts over the next decade, maybe and i am not going to save rare that that is overall a good bad, but there is owned by higher unemployment, they're going to be costs. >> you mentioned willy-nilly cuts and i agree with you, simply going in and cutting randomly might have a different outcome than cutting specifically. the canadian example has been mentioned. going back and looking at history, it appears that there cuts focused on wealth transfer programs and not infrastructure. would you agree with the premise that cuts and wealth transfer

programs might have less of an impact on unemployment and cuts to infrastructure spending? >> i think that is plausible. infrastructure spending has a substantial cut back on unemployment. -- the impact on on employment. -- effect on employment. when an economy is overheated, workers push for higher wage increases, firms are in capacity, so they can raise their prices. an overheated economy is the last thing we need to think about right now. >> mr. campbell of california is recognized. >> i have been talking about the real debt lemon and i have been saying that we have all lot of

debate and dispute here in congress over the statutory debt limit, but it is an arbitrary number and a real debt limit is when we reach what we're all calling the tipping point. but the push back and get on that from some people and allied have dr. meltzer and mr. edwards to respond, we are a long way away from that. look at treasury debt right now. it is dropping down below 1.9% and so forth, the auctions are there, there is a tremendous appetite for treasury debt. this is an indication that we are a long way from that tipping point. what either of you like to respond to that? >> first, i would say the size of the unfunded mandate does not -- is thought included in most of the numbers that we talk seven timessix to

the size of the deficit, depending on what interest rate you use. that is an enormous amount, just as the chart shows. mr. ball and i agree. is the medicare and medicaid expenditure -- if is the medicare and medicaid expenditure that is going to cause the problem. it pales in in significance compared to medicare and medicaid. there are a lot of things that we can do. and they do not require taking away promised benefits to people. but changing them -- for example, and one of many, we have to ask why do we spend about 50% of medicare money on people who are within six months of dying?

for some there is a benefit, but there is no co pay attached to that. we attached a copiague and graduated accorded income, we will produce a lot. >> just because i have time, how the respond to those people who said that in spite of all of this, we have considerably more debt that we can run up, and the evidence of that is the appetite for and a low-interest rate on treasury bills. >> the reason we have the low enforcement -- we have a low interest-rate is because the fed in forces said. the dollar has appreciated by 15% against the weak currencies like the euro, and even larger against the japanese yen. the most recent inflation number was 3.8% well above the fed's target. i do not buy the argument that in a weak economy, you do not get inflation.

you gave the example of germany. spain has 20% unemployment. prices are rising. britain has a high unemployment rate. prices are rising. there are other sources other than the labor market to give you inflation and we are going to get them. >> mr. edwards. >> there are the gigantic negative risks if something been in bad happens to the american economy, and we do not know what it is. look at the january 2008 cbo projection for data not project a recession. they actually projected growth would be strengthening in the coming year. we're going to be surprised hong how the next negative factor comes up. what if we have a gigantic recession a few years from now, another major recession, tax revenues plunging again, unemployment soars, they will want to do with giant stimulus and we will be in a spiral

downward of debt and poor economic growth. we have to start planning now buried their risk factors are all on the negative side. european countries our horrible demographic problems and their debt levels are going up. -- how hot -- have worse demographic problems than ours and their debt levels are going up. the risks are all on the ugly side. >> my last 15 seconds, anyone want to comment on the same -- changing maturities that they hold? >> it will not do much. back in the 1960's, they had big experiment and it did not work. that is their own research at the fed. it did not work.

if you suppress long-term rates and raise short-term rates, what the market people going to do? they will go the other way. >> my time is expired. >> the chair recognizes dr. bird from texas. >> you're not meant to speed today, dr. burgess. >> your referenced a moment ago about the costa care for patients in the last months. -- the cost of care for patients in their last month. the principal problem it is the patients. they do not tell us when the last two weeks began. but along those lines, we talk about the cost drivers contained

within medicare and medicaid. you talked about changing things so that they do not take away future benefits. i submit within the health-care realm, there is problem $1.3 jury in an immediate savings that will not take away future benefits, and that would be delaying the implementation of the affordable care act which no one seems to seriously consider when they have a deficit commission or talk to the president. is that something that this congress should take under serious consideration? >> yes. >> thank you. and for any of you, i thought to number my community members, and the community bankers tell me that they are hampered high that fact that they must keep their loan to deposit ratio under 80% or will they -- or they will

invite a visit from a bank examiner and it may not be pleasant. they take pains to not go that last 20%. as a consequence, they are not making money on that 20% of the depositors. the community is deprived from the loans. is that a bigger problem of what has been talked about before? >> i think that that is a problem. depressed lending by community banks is one factor, holding back the recovery. perhaps regulators could change their attitude a little bit, or to think of creative ways to encourage lending and help recapitalize community banks. >> but we of gone the other way in the past 18-24 months. rather than making the regulations, perhaps clarifying

them, we have made them more heavy. we frighten people with the regulatory environment they are going to encounter. that is one of the reasons that cash is staying on the sidelines? >> that is one of the reasons. generally regulation. as speaker boehner said so well the other day, you can move your plant to china but you cannot move it to south carolina. that sounds funny, but at the same time, it really tells us a serious thing about regulation does to the attitude business. >> the president is talking about raising taxes to create jobs. and yet this is the same white house that just this weekend said that lockheed and fort worth cannot sell to taiwan, that the national labor

relations board said that you cannot build aircraft and south carolina, and the biggest jet purchase in the history of the country is buying non-boeing products for the first time in the company's history. american airlines is buying non- american produced jets. 18 power plants are closing in texas on january 1 because of the cost of air pollution rule, a significant detriment on jobs. the white house simply will not make a decision whether they say yes or no, drilling in the arctic for oil, they will not make a decision. the problem i see it is that taxes are not-not bad at -- that there white house is so risk averse, they are afraid to act. >> i agree with that completely. you do not know what the future is going to be, cash is your friend.

focusre's been so much by policy makers on macroeconomics. misguided focus in certain ways, in my view. microeconomics is extremely important bird go back and look at what margaret thatcher did after a decade of stagnation in the 1970's. she got the macroeconomics and order, but she did a whole lot on the microeconomics side. tax reform, deregulation, privatization -- it is hard to quantify the impact on the economy but there is no doubt that fast growth economies are getting but the macro and micro economic range. >> i'll let the second that. i worked with mrs. thatcher for some of the time. she was a real leader, willing to make tough decisions. >> thank you. we're going to undergo a second round of questions by mr. cummings and senator demint. mr. cummings is recognized.

>> to what extent are dead as is being driven by slow economic growth? -- our deficits being driven by slow economic growth? and the proposal, the most recent job proposal presented by the president, i wanted to know your opinion of those might be? and did you feel that they would be helpful as many economists have projected? >> no question that the main driving force behind the big run-up in the budget deficit is the economic slump. someone else referred to lower tax revenues, high and high unemployment insurance, it is as strong regularity that deficits go up in recessions and we have had a main recession. the stimulus program added to the debt.

but it was a secondary thing compared to the recession. restoring growth is the best protect the grid -- deficit reduction plan. as far as the president's jobs plan, i have not studied it in detail. it seems like a step in the right direction. we face a huge problem and whether it is that jobs plan for paris deregulation or the things that the fed can do, it is not clear that any of the measures that we have hardly sufficient. when they have to try something more radical or accept that we live with high and a plumber for quite awhile. >> mr. coming, that jobs plant cost $200,000 per job.

my wife was not an economist and listen to that and said, what we just give them a hundred thousand dollars -- hundred $50,000 and we will be ahead of the game. we're not going to get out this problem by spending $200,000 per job. sayingmeltzer, you're that you cannot -- one of the things that bothers me about all this, you look at something like infrastructure. in maryland, they have a sink hole developing every eight minutes. every eight minutes. we have bridge is falling apart. i felt some people the other day, you can erode from the inside. you can die from the inside. if you're not educating your people, if you're not innovating, you cannot be competitive, so at what point -- it seems to me you have got to

spend, you have to spend carefully to get the economy going and get people moving carefully, but at the same time, you cannot die in the process. the time you get out of the mess, you do not have a country. do you agree with me? >> i agree that the infrastructure in the united states is bad. i live in pittsburgh. i will match you for -- bridge for bridges and all have a lot left over. but if you have confidence that you would take bricklayers and convert them to road builders overnight, you're kidding yourself. building a bridge is a big job and it requires people who are trained in steel. let's take some of the unemployed construction workers and make them road builders? if you want them to build roads, they use heavy equipment. you have to learn had a drive that. that will not be a solution.

i agree, the long-term problems of infrastructure. we have to do what we can about infrastructure. that is a constructive thing. we waited wait too long to do something about it. education, if we really have tried with education. it is terribly important. the gap in incomes between the port of is driven mainly by the fact that technology has changed. i was a corporate officer or director and if you did not have an education, you could not read the computer, that was aside your workstation, you swept the floor. that is a loss of people. we need to do something about that. i wish i knew what we needed to do. >> if thank you very much.

>> senator demint is recognized. >> i want to thank congressman cummings and dr. ball for bread is ending before presenting the alternate view today. we have a big difference of opinion in washington what we need to do to fix the problem. i do not think that i'm looking at this to a political prism. i'm thinking of as a guy who was in business for many years. i consulted with a number of other business people. my political perspective is really not a political perspective. what i am looking at today, by any measure, from a business perspective, our nation is bankrupt. if you look at the balance sheet. we have a negative cash flow projected continuously. most of our operating capital

are us money. every new program that was just has to be borrowed or rented. our fate is in the hand of our creditors. that is a worrisome situation. i do not know how we can get around that. and a solution to use a business parallel, it tasted for% of americans to make over $200,000 also make the most of our jobs and give the most charity. they are the ones making things happen, and taking more money from them and giving more money to those who create the debt does not the same to make a lot of common sense. when a business is revenue is down and they decide to raise their prices, that is what we're talking about doing here. our business is down, our revenue is down, so we want their raise the prices on our customers, those creating their revenue for us. that is a difficult thing to swallow when we know in our economy, and it may not be true

an imf economist, but we have an economy where 3% of americans are paying over half of the taxes, they're creating the jobs, providing investment capital, and that will not solve our problem if you look at the data for the last 10 years. the increase in our deficit is mostly attributable to an increase in spending. and that includes a lot of discretionary spending. social security does not contribute to our debt it all. we have not barred $3.6 trillion from social security, we would be a lot more in debt and we are today. this is a belief that we need to direct the economy and the difference of opinion is that the government is the primary stimulator of the economy versus those of us to think there reason america was so exceptional and prosperous was that we re bottom up economy but millions of people starting businesses, innovating, being entrepreneurs. those of the people we seem to

want to attack right now. 40% of those who haven't come over $200,000, 40% of their income is small business income. i understand the need to balance revenues. as well as spending cuts. but we can get new revenue by making the economy grow. looking at the 20-year data coming you can raise taxes as much as you want but the revenue will be about 18% of our gdp over time. i appreciate all of our panelists helping us to talk through this. to me, this is a situation where like all of these said, let's do not wait to find out. all i will take is for china to say they will not lend us more money, to dump our debt and 80 cents on the dollar, and that faith that keeps this up, and we have to remit that, the only thing keeping our dollar of and what economy we have going is

faith in the fact that the other economies are worse off than we are. thank you for helping us talk for is. to the committee staff, i appreciate the work that you have done and the folks who've answered questions. i hope that we will follow-up with the size of action to solve our problem origin -- to solve our problem. >> we appreciate the thought provided by our panelists. it is clear the real debt limit is upon us now. we have to let credibly to reduce that debt now. we need to get washington out of the way of our recovery now. with this, the meeting is adjourned. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011]

kent conrad of north dakota chairs this two-hour hearing. [inaudible conversations] >> the hearing will come to order. i want to welcome everyone to the senate budget committee today.

today we will begin focus on the economy and additional steps that can be taken to strengthen the recovery and to create jobs. we are fortunate to have three distinguished witnesses here today, dr. alice rivlin of course, is well-known to this committee and has testified here many times. she currently serves as director of the greater washington research and brookings institution as well as cochair of the bipartisan policy centers, debt reduction task force. she was the founding director of the congressional budget office, served as director of the office of management and budget in the lens administration and held the position of vice chair of the federal reserve. she has also served with me last year is a member of the president's fiscal commission. i can attest to the extraordinary contribution she made there. dr. rivlin is truly a giant in the budget world.

we are delighted that she could be with us today. dr. harry holzer is professor of public policy at georgetown university. dr. holzer served as the chief economist at the labor department during the clinton administration. delighted that you could be here as well. and dr. j.d. foster is a senior fellow in the economics of fiscal policy at the heritage foundation. dr. foster serves as assistant director for economic policy at the office of management and budget during the george w. bush administration and i understand he will be here shortly. thank you all and we look forward to your testimony. i would like to just begin by putting things in perspective. and i want to begin with a brief overview of the economic situation as i see it. it is important to remember what has happened to the economy. in january 2009, the economy was

losing more than 800,000 private sector jobs a month. private-sector jobs, growth returned in march of 2010 and we have now had 18 consecutive month of growth. however, in august, we gained only 17,000 private sector jobs, which is clearly not enough. we face a very real threat going back into a recession. that is why i believe we need to take steps to generate near-term economic growth and jobs while we simultaneously address the long-term debt threat. the unemployment rate remains far too high and as of august the unemployment rate was 9.1%. long-term unemployment is up sharply. in august, long-term unemployment, those unemployed for 27 weeks or longer, with 3.9%. that is up dramatically from the .8% average over the period from

1948 to 2007. the median duration of unemployment is also up sharply, climbing to almost 22 weeks in august. we know that some of the drag holding back the recovery is caused by the nature of the recession that preceded it. economists have found the following recessions that were caused by our company, a severe slew of man -- financial crisis. the recoveries tend to be shallower intake much longer. the two leading economist, the two reinhart's dr. carmen reinhart and dr. vincent reinhart found in their research and i quote, real per capita gdp growth rates are significantly lower during the decade following the severe financial crisis. in a ten-year window following severe financial crises, unemployment rates are significantly higher than in the decade that preceded the crisis. the decade of relative prosperity prior to the fall was

importantly fueled by an expansion of credit and rising leverage that spans about 10 years. it is followed by a lengthy period of retrenchment that most often only begins after the crisis and lasts almost as long as the credits surfed. we also know that federal response to the recession and financial crisis helped to pull the economy back from the franken made the recovery stronger than it would have been without it. one of our witnesses last week, dr. mark zandi come along, long with dr. allen blinder the chairman of the federal reserve, completed a study last year that measure the impact of federal actions to shore up the economy. including both the fed's monetary policy actions in the fiscal actions taken by the congress and the administration. here is a quote from their report. we find that its effects, it being the federal response, on

real gdp, jobs and inflation are huge. and probably averted what could have been called the great depression 2.0. when all is said and done the financial and fiscal policies will have cost taxpayers a substantial sum, but not nearly as much as most of fear do not nearly as much as if policymakers had not acted at all. the comprehensive policy response save the economy from another's depression. as we estimate they were well worth their cost. this chart, the next chart, shows dr. zandi and dr. blinder's testament of the number of shows we would have had without the federal response. it shows we would have stayed million fewer jobs in the second quarter of 2010 if we had not had the federal response. we see a similar picture in the unemployment rate. if we had not had the federal response, the unemployment rate would have been 15% in the second quarter of 2010 and would

have continued rising to 16.2% in the fourth quarter of 2010. this again according to sandy and blinder. in addition to helping create jobs it is also worth noting the importance of the 2009 recovery act in strengthening the nation's social safety net. according to an analysis of census bureau data unemployment benefits kept 3.2 million people out of poverty in 2010. medicaid and chip expansion insured half a million fewer children were uninsured in 2010 than in 2007. snap, formerly known as food stamps, kept 3.9 million people out of poverty in 2010. and the turned on come tax credit capped 5.4 million people out of party in 2010. i hope our witnesses can comment on the importance of these

programs and their impact on their recovery. with that we will turn to senator sessions. for his opening remarks and then we will turn to our witnesses for their testimony. >> thank you chairman conrad for holding this hearing. i think it is helpful for us to meet and continue to discuss these issues, although we are not working on a budget unfortunately. and thank you dr. rivlin for all you have done for your country and for being with us again today and dr. holzer and dr. foster for joining us to share your insights. i know dr. sandy is a good man and he insisted that we have a plan and demanded that we have one. and we got one and it didn't do what he predicted. now he says if it hadn't passed it would have all been a disaster. i am not unaware of the fact that dr. sandy is capable as he is, in january of this year predicted we would have 3.9%

economic growth this year. when the first quarter came in at or tenth and the second at one point and now his prediction has dropped to 1.6, a stunning reversal of his predictions. so i guess i would just say mr. chairman that when you are running up unprecedented debt it is easy to say we borrow and spend and is going to create growth but it didn't create much growth, that's for sure and not as much as dr. zandi and others predicted. there is one thing we can agree on i think and we are suffering from unaccepted leann persistently high unemployment. millions are unable to find jobs and millions are unable to find jobs on a full-time basis and that are now working part-time. our economy has experienced anemic growth this year and unexpectedly high unemployment this year.

america's gross debt is rising to dangerous new levels. i do, however, have a confident feeling about our future. i believe that if we meet the challenges of our current crisis, we will struggle but we will rise from it with a new vibrancy and strength. no workforce on earth is more skilled or more productive or dynamic than the american workforce and no business community is more effective. no nation can compete with the men and women to make up this economy. that is as true today as it ever was and there is some indications that if we do things right, we may take back a reduction of manufacturing that america has lost in past years. america's private sector is just waiting to grow and expand, but unwise government policy continues to stand in the way.

unpredictable federal intervention is fostering a climate of fear and uncertainty. businesses are threatened with constant -- a constant slew of new taxes and regulations and roast debt now 100% of gdp, hangs over the economy like a dark gray cloud. a prominent study by secretary geithner indicates that are dead and the dead level today already cost us growth and jobs. we need policies that create a better environment for job creation, and ones that don't add to the debt. that means more american energy production, the elimination of harmful and costly regulations, and growth oriented tax reform. all three committee witnesses last week democrat and republican agree with the wisdom of those ideas. since taking office president obama has served their gross federal debt nearly $5 trillion

in three years. nondefense discretionary spending spikes 24% during the first two years of his presidency, and his february budget calls for further dramatic increases in spending -- discretionary spending next year, increase, doubled digit. france as he has requested a increase in educational spending following a 70% increase in total education spending since taking office. the president routinely talks about the roots -- make government investments i.e. spending but if it gets to mention just how much we have already spent. yesterday he made his fourth attempt this year to offer a credible fiscal vision but i was disappointed to see he again failed to present an honest budget plan america deserves and our economy needs. the white house says that the president's plan achieves $3.2 trillion in deficit

reduction. the actual deficit reduction is only 1.4 trillion. less than half of what the white house said. note, this is $1.4 trillion in deficit reduction, not spending reduction. even the 1.4 that is achieved, this has become the pattern. the president understates the depth of our fiscal danger and overstates the impact of his plans. consider the astounding disparity between the levels of taxation claimed versus those actually contained in the proposal. the white house has served $2 in cuts for every 1 dollar in tax hikes. the true figure is nowhere close to that. the president's plan is comprised of tax hikes alone in reality. there is not a single penny of net spending that is cut. yesterday the president said this. quote i'm proposing real serious

cuts in spending. when you include the $1 trillion in cuts that i have already signed into law, these would be among the biggest cuts in spending in our history. "matt. in reality and are the president 's planned the net change in spending is an increase. and in fact the president's plan is to keep spending more. part of this as a result of of the presidents need for the stimulus jobs program, but there are three additional accounting tricks the white house used to get these inflated figures. first, or funding. the plan shows $1.1 trillion in savings from putting a cap on the war costs but those costs are going to decrease as the war effort in wines, whether or not there are caps in place. they do not represent actual spending cuts from what we project, or a new policy to achieve future savings.

the president proposed cabs simply manipulate a slime concepts that show the savings as a policy choice, which inflate the spending cuts in the president's plan. congress rightly rejected this accounting process as part of the deficit reduction during our recent debate. the doc fix. the administration lionel so assumes a medic or doc fix which is the payment for our physicians, an increase in spending of $293 billion. over 10 years compared to the current baseline. this gimmick of pounds accounts for the higher spending and big rather than a policy choice that needs to be offset. without this gimmick the president's health care savings of $320 billion becomes a health care savings of only $27 billion. interest savings. the president counts of savings

the net interest reduction that results from his proposed tax hikes. becomes that is a spending cut. when you are in a crisis, you must deal honestly with the american people. a president more than anyone should have credibility with the american people. you must present the facts with a credible solution. americans are good, decent and hard-working people who will accept a difficult course of action on honest terms but the white house is trying to be clever at the expense of being credible. the debt is destroying jobs today and if we are going to restore confidence and growth and credibility, growth credibility as one asset we cannot afford to borrow against. america deserves an honest fact-based approach to our economic challenges, one that controls washington spending and grows the private sector. i hope today's hearing will move

us in that direction. thank you mr. chairman for leading us and calling us together with this good panel of witnesses. >> thank you senator sessions. obviously we don't have complete agreement on this panel. [laughter] you know, we certainly disagree as to how we got here. i don't think the current administration created this problem. they inherited it. they inherited an economy that was on the brink of financial collapse. and that was that we were brought to the brink of collapse by the set of policies that i see being repeated by her friends on the opposite side. it's the same nostrand they offered before that brought us to the brink of financial collapse. don't have regulation that they'd financial institutions. that is what led to the collapse of the financial sector.

don't regulate derivatives. we saw what happened. aig, the biggest insurance company in the world, fail. had to be taken over during the bush administration. and the debt skyrocketed as a result of those failed policies. give tax cuts that disproportionately benefit the wealthy are the answer, we would have had the main economy at the end of the bush administration. instead, we were on the brink of financial collapse. i was in the room. the secretary of the treasury and the bush administration came to tell the leadership of congress, republican and democrat, that if they didn't take over aig the next morning there would be a financial collapse within days. barack obama was not the president. george w. bush was the president. so, the place we do agree it is, we have a death threat that must

be confronted. it must be confronted. this is the place we do it. we have got to find a way to come together to both deal with the short-term crisis we confront in terms of one in every six americans be on them floyd or underemployed, and the harsh reality that we have a debts that is to hide and is growing too fast and must be dealt with. so, that is where we are. >> mr. chairman, there is much truth in what you say. i remember you hammering president bush with the charge week after week on the floor for overspending while in effect, democratic colleagues were simultaneously criticizing a the republicans for not spending enough. but, we did put our country at

risk, and decisions were not correct over a period of years including the democratic blocking of president bush's request to have more regulations of freddie and fannie. had that been done, we may not have had anything like this serious problem we have. so the regulations were proposed by senator shelby, my colleague, pastor of the committee on a partyline vote, but blocked on the floor. but you are correct, we have got to now focus on the future. and i just would say to you, i believe my statement was hard this morning but i believe it was correct, and holding the president accountable for resenting now a fourth planned

that does not seriously address our problems. it is essentially a plan to raise taxes on a weak economy and as dr. hassett said previously, in our previous hearing, that it would take -- we may be going a long time with very slow growth and he is spending now to borrow will come to roost before our economy has come back. that is a dangerous path. thank you for having this hearing and i appreciate your leadership. >> can i take under one minute because the finance committee is going to a markup. i just want to offer one quick thought because i think it can help bring us together. mr. foster is here and he is with a heritage association. mr. foster i'm not sure you are aware that heritage scored our tax reform bill. the legislation i have had with senator gregg and senator coats. here are the numbers. heritage said that bill would

create 2.3 million more jobs per year, increased disposable income by $4100 per year for a family of four, raise foreign investment in the united states y. $292 billion a year on average and boost real gdp by an average of $298 billion per year. let a offer this up because i've listened to this kind of discussion. we have a chance with the bipartisanship here, senator warner in particular and mr. chambliss is done very good work and miss rivlin has done some very good work. i'm trying to go to -- it back mr. chairman but i just wanted to bring that up because i continue to believe we can bring that together particularly around growth oriented policies and my apologies to my colleagues for imposing. >> mr. chairman? senator wyden, truly worked hard on a complex piece of legislation that has the potential for bipartisan support

and does have some very fine parts of it. i congratulate you senator wyden for trying to come up with some ideas that can make this country better. >> i thank senator sessions for that observation. i add my voice to that. this session as senator sessions started with senator gregg who was the ranking republican on this committee. he and senator wyden work together in a very collaborative and intense efforts to look at the tax code, which is a monstrosity by anyone's definition. we appreciate the work. let's go to the witnesses. alice rivlin really needs no introduction before this committee. welcome, please proceed. >> thank you mr. chairman, senator sessions and members of the committee. i'm delighted to be back here and want to reinforce what has been said, that there is a

chance for why partisan cooperation now. this is a critical moment for this committee to focus on employment and job creation and for the congress to take action. the future of the united states is a prosperous economy and is a world power depends on getting people back to work in productive jobs. unless employment accelerates sufficiently to keep up with a natural increase in the labor force and gradually absorbs the unemployed and the hidden labor force of discouraged and part-time workers, we are doomed to stagnation and standard of living. this fate is not necessary. we have jobs that need to be done in both the public and the private sectors and elliott to people who want to do them. it would be unbelievably stupid to allow capacity to sit idle. worker skills to atrophy and workplaces to become museums and out of date technology for lack of imagination and political

will. however policies to accelerate job growth and prevents a double-dip recession must be part of the simultaneous strategy to stabilize the projected increases in the national debt and return the federal budgets to a fiscally responsible path. rather than conflicting these two sets of policies complemented reinforce each other. the faster we get people back to work, the zierdt will be to move toward a sustainable budget. if the recovery stalls and unemployment rises again, prospects for stabilizing the debt will deteriorate rapidly. it will be worse than temporary increase in in the near-term deficits to avoid getting into another downward spiral of falling jobs, sales investment confidence. at the same time the faster we can put a firm plan in place to reduce looming future deficits

by reforming entitlements and the tax code to enhance things incentives for growth, the more sustainable the recovery will be. we cannot afford to wait until the economy recovers before acting to reign in future deficits. these deficits reflect the oncoming tsunami of retirees combined with rising health costs. they can't be blamed on president obama or president bush. the sooner we put fixes in place, either on the spending side or on the tax side, the less disruptive these changes will have to be. if we continue postponing actions to stabilize the debt, we undermine confidence at home and abroad and the ability of our political system to face problems and solve them. a spike in interest rates and even the sovereign debt crisis that could permanently damage the power and prosperity of the united states. no one should underestimate the

difficulty of crafting policies that will effectively create jobs and the daunting economic circumstances we face. it will take the best efforts of the public and private sectors working together plus cooperation and compromised across party and ideological lines, which is hard to achieve in the current polarized political atmosphere. the recession is deeper and more intractable than most economistn the obama administration, including mark zandi and almost all the other economists that i know realize that the time that employment and incomes were plummeting in 2008 and 2009. recessions precipitated by financial crises tend to be deep and long, as scholars like the reinhard's have shown but this one is likely to be especially

hard to pull out of quickly. it was precipitated by an uncontrolled and i believe in moral frenzy of overleveraged trading and complex derivatives based on unrealistic expectations of continued value increases in the very assets that american households depend on most, their homes. after the plunge and those overinflated values, we should not be subprized that complements as low end consumers and businesses that depend on them are deeply frightened of eating overextended. the large stimulus package enacted in 2009 helps the economy -- helped keep the economy from sliding into an even deeper recession. i don't know whether these andy blinder numbers are exactly right but we surely would have had millions more people out of work if we hadn't done

something. together with aggressive monetary policy, the stimulus help reverse the downward spiral of falling demand and layoffs. the congressional budget office and many other analysts have rarely shown that the economy performed substantially better than it likely would have in the absence of fast and aggressive administration and congressional action. the growth, though positive, has been modest and unemployment remains high is evidence of the deep and intractable nature of the recession. not that the stimulus didn't work. the events of the last year have shown that more action is needed. justice the direct impact of the stimulus begin running out additional negative forces hit the economy. the rising energy crisis, the effects of a the japanese nuclear disaster, slowing growth in the rest of the world then worrisome disarray in your. the president is absolutely

right i believe to propose a new package of tax cut extensions with incentives to boost employment, help for the long-term unemployed and infrastructure investment. this package was carefully designed to incorporate many policies that appeal to both parties. it included a proposal to redesign unemployment compensation, to facilitate getting workers into jobs. i believe this congress should take the proposal seriously, but incorporate it into a long-run deficit plan as the president suggests. any action to create jobs right now either through spending or tax increases will increase the deficit and add to the debt. we can afford to do this as the immediate actions are part of the legislative package that stabilizes the debt irish

forming and simplifying the personal corporate tax codes, reducing the rate of growth of medicare and medicaid in putting social security on a firm foundation. variations of such a grand bargain were recommended by the simpson-bowles commission and the domenici rivlin task force. indeed, any serious bipartisan group seeking to stabilize the debt is forced by the arithmetic of the situation to a similar solution. the residents beach yesterday speech yesterday voiced his clear commitment to the double strategy of creating jobs and bringing in future deficits. the new joint select committee, which i think of as conrad gregg come to realize, as the power to go beyond its initial mandate and make the grand bargain a legislative reality. the best thing that could happen to prospects for american growth and jobs both long-run and short run, would be for this committee

with a strong the strong support of the current president congressional leadership to go big, to use their extraordinary powers to put into law an immediate jobs creation program incorporated into a grand bargain to stabilize the debt. mr. chairman, you and your former colleague senator judd gregg and many others worked tirelessly to get the congress and the president to this point. i honestly hope the select committee will prove able to finish the job. thank you. >> thank you dr. rivlin. dr. holton. >> thank you and good morning chairman conrad, senator sessions and senator warner. i would like to make several points this morning about the unemployment rate and also about the u.s. labor market situation in the next several years and i would like to make 5.2 by me. point number one, as we all know the great recession created high unemployment that will persist were several years to come and will have lasting negative

impact on millions of workers, even after the economy goes on. as senator conrad pointed out over 40% of the unemployment already have suffered lengthy stalls of unemployment of six months or longer and will make it harder for them to re-enter the job market and find labor, find jobs when job creation actually picks up. low earnings will scar millions of young workers for years to come even when the labor market recovers. point number two, even before the recession began most american worker workers suffered from a stagnant earnings growth in very high earnings in the quality. during the full economic cycle in 2,002,007, median earnings stagnated or declined for most groups of american workers. many of those hit hardest during the downturn, less educated men, were staring quite badly before the recession began because of declining -- disadvantaged workers who are broadly

suffering only from high unemployment but also from low wages and limited labor market activity even when the economy was small. among many other problems the education of skill levels of many of these workers have failed to keep pace with the rising demand for skills and good-paying jobs in our economy. point number three, policy efforts to improve labor market outcomes for labor workers should focus both on creating jobs and reducing unemployment caused by the recession in in the near-term as well as improving the skills and earnings of american workers over the long-term. to create more jobs and reduce unemployment, i support many provisions in the jobs act including reduced reduce payroll taxes for workers, targeted payroll taxes for employers for expanding payrolls and additional spending on infrastructure, school construction and layoff prevention of state and local government employees. personally i would prefer the tax cuts for employers to be

more generous than those proposed by the upon administration but at the same time much more targeted on employers whose payrolls have expanded. this would improve incentive and limit the windfall for employers who don't change the behavior and pocket the tax cuts anyway. at the same time we also need to take action to improve the education and the work worse preparation of american workers so that they are more able to build good paying jobs and that leads me to my fourth . to improve worker skills we need to develop more effective education and workforce systems. better targeted to its growing and high-paying sectors of the u.s. economy. burning supplements for disadvantaged and dislocated workers who are actually taking low-wage jobs could be expanded while the unemployment insurance system could be more closely tied to skill building efforts. i would like to elaborate on those proposals. the current workforce system funded by the workforce investment act appears to

generate employment services and job training quite cost-effectively but it has been starved for funds for many years and should not be further reduced in the context of the budget cutting efforts. we also need to better integrate career services and occupational training in our high schools and in our colleges and to make institutions more responsive to the demand side of the labor market. for high schools this means generating high-quality career and technical education, not as a substantive for higher education but as another means of preparing students for higher education labor market. career academies have demonstrated the value of such education especially for at-risk young men. turning to american colleges, most never compete any educational -- which i define ethers and occupational certificate. too often they are not in the fields by the labor market.

that is often not the case for them. rigorous evaluation shows that sectoral training in which youth or adults are prepared for specific sectors of economy the economy and which employers are actively engaged can provide improvements for the disadvantaged while meeting employer needs for skilled workers. these programs can and should be especially supportive to take the high road and provide good-paying jobs are less educated workers. dislocated workers including the long-term unemployed can also derive substantial benefits from technical training targeted towards growing fields in the economy. now i believe all of this could

be supported by a competitive grant program provided to the states that more actively integrate the education and the workforce systems to make all of the more responsive to the labor market and especially the deeds of good paying employees. this program should actively reward states for building on their effort and leveraging many other sources of funding. any new funding should not become yet another excuse to cut back funding for existing programs. for disadvantaged workers or dislocated workers who don't benefit from training, supplements to their low ratings could be expanded. these would include the earned income tax credit, which right now benefits adults without children too little, who are also wage ensures for the dislocated to have taken lower wage jobs than the one for help before and i believe a variety of the unemployment insurance system might encourage more employers and more training to be provided. finally my last section deals

with the budget issue. all of these measures could be undertaken with modest new federal expenditures over time. they are not inconsistent with sensible efforts to limit our budget deficits over the long run. which should primarily focus on raising federal tax revenue below its historically low level right now and reducing spending on entitlement programs especially for future retirees and that is where where i think the bulk of the long-term savings on the budget chart -- side should be made. thank you nick. i will stop there and look forward to our question and answer session. >> thank you very much. dr. foster. >> chairman conrad ranking member sessions thank you for the opportunities testify. my names jb foster and i'm a senior fellow at the heritage foundation. the views i express or manage it not be construed as representing an official position of the heritage foundation. the rest of the economy today are great and so our focus on jobs and economic growth is

critical. two years after the end of the great recession as the economy should be accelerating economic growth and job growth have ground to a hault. mr. chairman as you noted, when a recession is fundamentally involved with financial markets and they are troubled, they are at the epicenter of the recession you are going to have a very troubled recovery, absolutely correct that you will have recovery. two years on, we should be in recovery. not flat-lining, not heading toward a double dip possibly. while financial markets may explain the early troubles in the recovery i don't believe they provide much of an explanation for today. speculation, richtman patient theorizing and models are now are relevant on this simple point. the data before us agree on the underlying message from the president's recent jobs speech. they'll test to the simple incontrovertible fact that the president stimulus policies have failed utterly and completely.

i take no pleasure in pointing out this fact nor an affected we predicted the policy failure two years ago. i would much rather have been wrong and for millions of my fellow citizens be gainfully employed in all the jobs the president promised a gray. to understand what policies might be helpful today and it is important to assess why the economy is not recovering. the fundamentals of our economy remains sound and natural productive tendencies for american workers. investors an american dr. murderers remain undiminished. there are of course the initial headwinds such as the follow-on effects of japan's devastating earthquake and tsunami. the economy faces and overcome such headwinds even the best of times. headwinds there are to be sure but they are not an explanation of the economies lethargy. the economy suffers from two categories of troubles. the first or structural which to primarily reflects the housing sector till and deep

disequilibrium and many urzua country. there is little substantive way the government can do to return the housing markets to normal and heaven knows congress and the president have tried just about everything. that is part of the problem. governments well-intentioned meddling has delayed and distorted the essential requirement for normalization of the housing markets. on balance these policies have set back the housing recovery by months and perhaps here and there is an important lesson there. the second category of trouble is what might be termed environmental. not the natural impairment that the economic environment. most relevant to our discussion today is alternatively a shortage of confidence or excess of that uncertainty. those who could make the decisions and take the actions that would grow the economy lack the confidence to do so. even today the economy bounce bounds and opportunities for growth. turning potential into reality requires action in action requires confidence. confidence in the future, confidence in the specific

effects of government policy and confidence government can properly carry out its basic functions like a green tool budget. america severs a competent shortage and washington is overwhelming the cost. confidence in turn is lacking because of an excess of uncertainty, uncertainty about the future but also insert me about the effects of government policies, tax, regulatory monetary, trade. insert the actual course in the future is always uncertain. but there is good uncertainty and that uncertainty much as there is good cholesterol and bad cholesterol. good uncertainty for example presents opportunities for-profit. bad uncertainty arises largely when investors amount of printers have real questions about the consequences of government policy. tax policy provides a good example of that uncertainty. the president's repeated insistence on raising taxes on the high income workers and investors slows the economy without the policy even being enacted. it does so by raising the uncertainty about the tax cuts

for various actions. does not stop all subsections but it stops some and therein lies the difference between growth and stagnation. the president's insistence is a twofer in terms of bad uncertainty, the specific is that taxpayers don't know what the tax liability will be. the general is that suggesting raising taxes on anyone in the face of high and rising unemployment suggested gross lack of ms.-- understanding about how it and economy works. that is the source of bad uncertainty that afflicts the entire economy not just those threatened with higher taxes. in this environment congress need not enact bad policy to weaken the economy. threats suffice. the federal government should adopt a simple guiding principle for deciding what to do next. that principle is, do less harm. do less harm. there is very little in terms of concrete actions government can do at this stage that would help and a great deal of the intended help would harm either by raising the deficit to no good

effect or by creating more uncertainty in slowing the economy's natural healing process. do less harm means getting spending under control and thereby cutting the budget deficit. americans are worried about spending and the deficit. that worry by itself is debilitating. do less harm means policymakers should stop threatening higher taxes. we can have debates about who should pay what and how much. in the meantime, this thread is holding us back. do less harm means stop new regulations. the recent pullback of epa's ozone regulation was a good example. even the threat of a regulation creates bad uncertainty for those affected, freezing them in place. again we can work through these regulations when americans are back to work. do less harm means policymakers should stop meddling with economy. there is almost no limit to the harm washington can do to the economy and its efforts to do something for the economy. the patient is in recovery.

the difficult recovery to be sure that in recovery, slowed by the incessant products and procedures of washington's policy doctors. the patient doesn't need another procedure. let it heal, do less harm. let me talk briefly about one philosophy that has been driving a lot of our policy, the model of keynesian demand management. this is a perfect example of a policy that fails do less harm. the philosophy is very simple. the economy is underperforming in demand is too low. the government budget deficit is a component of demand surges reza. it is an equation. huckabee wrong? raise government to deficit spending and a commie should recover. the reason this fails is the economy is a little more complicated than a simple equation. the model it is based on ignore something else in the economy a process called financial intermediation. basic function of financial markets. the problem is that when

government runs more deficit spending it has to borrow the money. when it borrows the money that money is not available for private sector you say you have not increased total demand. all you have done is shifted around. now advocates for this policy will say yes but there is so much saving and people are doing anything with it. corporations are sitting on the money. yes they are but that is not an issue. they don't put it in the mattresses. they have put it available to the financial system which intermediates it to those who needed. it is fiscal -- adding to the headwinds and economy. this is a perfect example of a policy that fails, do less harm. thank you mr. chairman. >> thank you. we are going to go to senator warner for the first round of questioning, because he has got other obligations, as do -- this is a meeting i would say to our witnesses, this is the morning in which other committees in which budget committee members

serve have mark-ups, so you are going to be seeing senators, and go to accommodate that. i know senator warner has other obligations as well as does senator sessions. senator warner. >> thank you mr. chairman. thank you for the courtesy. i would like to thank the panel. a couple of quick questions. while we have a diversity of views on the panel, think in a traditional books we would normally say in periods of recession that the two major tools that a national government has is monetary policy and fiscal stimulus. we can gauge how effective they both been but we basically use both of those bullets, and i am curious, the one thing i haven't heard many of the witnesses quantified, and from across the spectrum is that as someone who liked the chairman and others has been working on and feels

very strongly about the deficit reduction and debt reduction, the added cost of the debt of the stagnant economy. have we been able to equate per point of increased unemployment what that translates into in terms of lost tax revenue, additional mandatory government spending in terms of unemployment insurance and medicaid and other government support programs, so that while some would advocate immediate cuts regardless of effect, we bump up an extra pointer two of unemployment, what direct effect is that have on the current deficit? >> higher unemployment and less growth, clearly cuts into tax revenue, and adds to costs and programs like unemployment compensation. the cbo and others have done that calculation. i don't have the numbers at my

fingertips. >> does anybody have that number kind have been off their heads ballpark number? >> i don't have the exact number but i do know that people have looked at the growth of the debt over time. attributed a good part of that growth not to specific policy choices made since 2008 at in fact to the recession and automatic declines in tax revenues and automatic increases in spending programs. they don't provide any choices that we have made that is added several billion dollars, trillion dollars, i'm sorry to the current level of debt. that is likely the deficit by further reducing tax revenues and raising spending. >> dr. foster. >> yes senator this is one of those rare moments when we are in agreement which is rather pleasant. to read what dr. rivlin said

there's there is a chapter in the analytical specter of the president's budget in which there is a table. i believe it is chapter 3 and perhaps table 3.11 which goes to a budget sensitivity analysis you can see in their various divergences of economic performance from the president's economic assumptions and the consequences for revenues and outlays over 10 years. while i don't have the numbers i can tell you at least where you can find them. it would be nice to be able to have this kind of one of our normal talking points, how that adds to the deficit. i guess dr. foster is two things, and i understand your perspective but and you are concerned about kind of the do no harm theory. would that do no harm theory in terms of the revenue side also apply to the immediate government spending side? i mean, would not immediate cuts

at this moment in time with the verge of a double-dip in front of us also fall into that category of harming the economy? >> in general i don't believe so senator because i believe that government spending which is being funded by bob harling is simply moving demand around in our economy. is crowding out in the old expression, certain other spending. now if you quickly switch from formal spending where the economy has predicted capacity built up to deal with that like defense spending, where we have defense contractors who are geared up to produce certain weapon systems so suddenly cut them off. obviously that is going to require -- require changes in cost but otherwise no i don't believe reducing the spending would be harmful. in fact there is so much concern about the deficit and debt that is one of the factors eroding confidence are building up bad uncertainty in the economy and it is what is holding us back.

not only would we not suffer a downside to such a policy but there would be an actual game to the economy by reducing the uncertainty. >> but are you saying that transformation in terms of cutting defense spending might be bad but cutting state support of infrastructure or teachers or others would not be bad or would not have any ill effect? >> the point i'm trying to make as some would have transitory effects that would be harmful and others would not. defense is a simple example because you often have large examples to produce a large aircraft. >> is easy to understand it would be transition cost from cutting babette but there are others as well where you have a profit economy geared for a customer. the federal government cuts out the customer and there's going to be a transition cost but purchase of goods and services are relatively small portion of spending. there's an awful lot of spending that would not the subject to that limitation. >> purchase of goods and services, cutting off direct

employment would not a bad? >> that would not have that transitional effect, that is correct. >> one of the of the things i was questioning is i concur with your point that capital sitting on the sidelines does not simply sit in a vault. it is impressive but i would question in terms of particularly with record low interest rates and a lack of willingness to invest that there are more productive uses of this corporate tech -- capital than investing in t-bills in terms of generating job growth and generating investment, taking greater risk with larger rewards. i am not sure -- . >> there is no doubt there would be more productive very soon i am sure corporate america would love to deploy his best resources more productively. they lack the opportunity to do so in the current economic

environment. we have a very uncertain future and sitting on the sidelines. that is not to say you are going to get a better outcome because government puts its hands on and decides to decide suspended itself. >> let me take one last question since the chairman was kind enough to give me the time and i would talk -- love to hear dr. rivlin and dr. hold 'em comment. i generally agree with your prescriptions but one thing i am talking about is it seems even what the president has proposed there were a few things that are going to get as immediate and short-term and i completely concur with you on the training initiatives and, but i constantly so much of what we try to do appear as well-intentioned the lag time to where it has an effect on immediate job growth or spurs really takes much longer than i would like. and again my tank is to the chairman. >> just a brief comment. i believe what is holding back

investment is not crowding out by the federal borrowing, but lack of demand. and possibly some uncertainty, but lack of demand is the basic album. if you don't think you can sell your product you are not going to make more of it, and the way to increase demand in the short run is to get money into people's pockets that will spend it. that is the argument for extending and increasing the payroll tax cut. it goes to wage earners all over the country. they won't spend all of it because they are trying to repair their balance sheets but they will spend some of that and that is a way to get demand up. >> i think that there were efforts along the line with the american jobs act. we are looking at the rest of this decade but eventually of having very stagnant growth in

sufficient demand. i think a lot of this proposal for instance, the payroll tax cut targeted towards employers. again i would targeted much more. i think that could actually raise higher even at this level the demand quickly. not enormously in a cost-effective way. i think some of the spending proposals like preventing a layoff of state and local employees has been a huge drag on economy and the employment growth numbers and that could occur relatively quickly as well. i think within a reasonable timeframe many of these policies could be effective and also cost effective. i want to take issue with my colleagues analysis. this notion that government spending has a one for one crowding out effect on private spending especially with the recession is not a new idea. has been debated for 70 or 80 years i my profession. i think most economists in this kind of an economy would not

subscribe that pointed most economists would not read the evidence as supportive and indeed many conservative economists republican economist like my former teacher martin bell john and economist certainly did not subscribe to that point of view. i think we should put those opinions and perspective is very much a minority viewpoint within our profession. >> senator whitehouse. >> thank you very much mr. chairman. as some of you who have been here before no, i take a very keen interest in the burden that our health care system plays on our economy. the president's council on economic advisers said he could take $700 billion a year and costs out of the health care

system without harming anybody's quality of care. the lewin group which is pretty well-regarded in this area and george bush's treasury secretary, secretary o'neal, who knows a fair amount about this from his work in the pittsburgh regional health initiative and as the ceo of alcoa, they both have agreed that is actually a trillion dollars a year. .. exports carry a huge cost in their pricing, which foreign competitors dodge by having a national health-care system, and

an export system that helps them dodge other tax methods. that creates a huge competitive burden on an american export product compared to competitive products exported to the same international markets. it is frustrating when we have a panel of experts to talk about our economy and nobody talks about health care. and we have had this discussion before, one what -- and everyone says that is true, but because of the nature of the reforms required to begin to unload those excess costs, the 18% versus 12% of gdp differential that we carry in our health care law economy, because of the health care reform, we use the word that would only matter in

washington, unscorable. we're not going to look at that. that was true in bowles-simpson, i believe it was truly ain domenchi-rivlin. it does not lend itself to analysts and it is impossible to score because it is a process of learning and trial and error and yet there is still a game to be made from where we are in a country as a country and where our competitors are. and there is bipartisan agreement on that subject. that subject, so i keep sending and a flair whenever we do one of these hearings think for god sake can we please consider health care costs and particularly delivery

system reform is the way you deal with health care cost without harming some individual intending on a particular benefit so i would love to hear your reaction to that ms. rivlin or dr. foster. >> thank you. as you know, senator whitehouse, i agree with you that the rising health care costs are a huge part of the problem i talk about this almost every day. not always in eight minutes, but the -- it's clear that it is the major health care programs driving the deficits and that we compared to our competitors or other advanced countries spend a lot more on health care per patient, per anything. >> those are relatively crummy outcomes. >> that's all right. >> with respect to what to do about it i think the problem is

not just that we know what to do but it doesn't score a goal, but lots of things that look promising such as many of the pilot programs and experiments with different payment systems and so forth that are included in the affordable care act haven't shown clearly that they deliver lower costs and better quality. the way we handle that in the domenici rivlin plan was we did propose a major restructuring of medicare known as premium support which is a defined contribution plan coupled with competition on exchanges among health plans and we think that

it's better outcomes in the long run from the competition among the health plans to the score above the and the defined contribution that you can say that unless health care costs come down welcome in any case, the federal government will be -- contribution will be defined by the congress and once you do that it is perfectly scrabble so it doesn't mean you could never change it. congress can change any time they want to but i do think there's an advantage in getting medicare on to a defined a budget that you vote on and you know what it is. >> we are below two minutes. i apologize to you and dr. foster. >> i will say briefly in terms of how these pack on the labour market of only to the costs, and lemurs' which makes it harder for them to hire more workers but one of the ways to deal with that is to take it out of the

workers' paychecks ultimately bear most of the cost and indeed i think as much as -- the previous decade might have been eaten up by the rising health care costs in the u.s. which is one of the major reasons why the high productivity growth didn't show up in the paychecks so that's why i agree there's an enormous problem affecting these issues my sense and i defer to alice rivlin i say a lot of promising efforts to reduce the health care costs during the the debate on the health care package that politically seems very unpalatable. things like rethinking the very favorable tax treatment at least from the caps on the favorable tax treatment and the benefits and i think we are going to have to return and make harder choices in the future to get those costs under control. >> dr. foster? >> another one of those happy moments in basic agreement. it's no question that the rising

health care costs are taking the biggest bite out of the workers' paychecks and the need the cash and that is a fundamental problem. we also have a plan similar to what dr. rivlin described as the premium support model. we think that is ultimately the way to go and it's a very an incremental approach to medicare reform. it basically says a lot of the things that are currently done in medicare is simply done incompletely and we need to make them a complete model based on the premium support. >> thank you. my time is expired. >> i'm going to take my time now and go to senator begich next. we had a couple of references to the economist mark azande who testified before this committee at the last hearing, and i just want to say first of all its important to know his background and the adviser to the mccain campaign in the last election i

think he made clear at the last hearing his forecast was off as were many economists because we've had a series of events which he described in some detail last week which i think in fairness we ought to remind people loved and the disturbances in the middle east that have a dramatic effect on all but oil prices. oil prices went up and that meant gasoline prices went up and the fuel went up that operate like putting a tax on the american economy and the global economy so that had an effect on slowing things down. second we had a tsunami in the resulting nuclear disaster in japan. that had an effect on the global demand. that had an affect on manufacturing.

then we had the european debt crisis. we read about that every day. greece, ireland, spain, portugal, increasingly italy, that has had an impact on confidence and without confidence as i think all of you have set at various times in your testimony businesses sitting on a trillion dollars in cash are reluctant to invest. the final point i would like to make is what kind of downturn are we having here? in part because i believe it's a balance sheet recession that is because the financial firms had to rebuild their balance sheets. they've had to pull back from extending credit and i hear about this almost every day i'm home from small businesses in terms of securing credit, and that is what the reinhardt's

found in their study and i would say to you, dr. foster you say to -- two years is too much for recovery. they were up to 200 years of economic history. 44 countries. what they found is that it takes eight to ten years to recover, not two years, eight to ten years. we are two years into this. as we are in a very different situation when a garden variety recession, when you have what is in part a balance sheet recession you have weak aggregate demand. we have we can aggregate demand where is it going to come from? of the federal government doesn't put in a store there is no other place big enough to give a lift. that is my own belief. i also believe that whatever is done to give left has got to be

in the context of a plan that is credible and serious to get our debt under control because the reinhardt's also found once you get to the gross debt of 90% of gdp your future economic prospects are reduced. so we're in a very tough situation and it's a complicated situation. dr. rivlin, let me just ask you do you believe that it would be harmful to at this point have dramatic cuts in federal spending? >> i do. >> and why? >> because it cuts into the demand. you lay off people from a federal -- from the federal work force or from the state work force but are supported in part by a federal grants.

you cut back on payments going directly to people as unemployment compensation or food stamps or the other programs, safety net programs. nobody's going to cut those first, but some of the extensions. so, people have less money to spend, and they don't spend it and the recession gets worse. i believe that is why the first package of the stimulus package prevented a worse and a deeper recession although it wasn't perfectly designed to do that. >> what do you believe? >> i agree. i think that's that large and immediate cut in spending certain kinds of spending or more stimulant than others. it's quite interesting to me that we have delayed extending

unemployment insurance. we know -- again on the employment insurance and a healthy economy could convince workers not to take jobs but in this kind of economy the unemployment is hard to make that case, and the money is a very powerful stimulus for safe food stamps and other things. and i find that really puzzling that some economists will say well, any talk of the tax increases anywhere at any time has a terrible depressive affect but cutting spending right now is perfectly fine. that flies in the face of anything i've learned about macroeconomics. spending increases and cutting taxes really have relatively similar effects in the macroeconomic models to say that one is terrible it really doesn't make any sense and i think flies in the face of the evidence we have. immediate cuts in spending of the kinds talked about what have depressive effect on the

economy. >> dr. foster? >> thank you, senator. but you see here is two very different concept of how the economy works. this isn't it the ultimate this is and partisanship, but different views on how the economy works. i believe a lot to me, i believe when you start with lead to end up with lead and you don't end up with a gold. when government increases its spending and increases its borrowing the money had to come from someplace. it's not like the fed which actually converted dollars, the treasury doesn't print dollars it had to come from someplace. if it's going to come from someplace it is not there anymore. it's not there. maybe it would have been consumers buying cars are buying in-house. the trade deficit would have been lower and was given to to import as much capital from abroad. we will never know where the money came from sweet cannot wave a wand and produce purchasing power by running the budget deficits.

it's not a question as a city all of your partisanship. it's a very different conception of how the economy works. >> i think that's fair. >> and its healthy to discuss these differences. it's amazing as some of my colleagues want to suppress these debates i don't think they should be suppressed. a think it's critically important we have these debates and have these discussions. i think it's entirely healthy. senator sessions. >> i do, to mike and thank you for allowing us to do so. we've had some good hearings on policy earlier last year and it's helpful today. we are supposed to have more time and senator alexander was talking and he decided not to participate in the leadership but be enacted kucinich really is the question of the fierce debate and noted the history and the fights in history and the doles and the senate so he said

we need to work together to accomplish the common goals but could debate is healthy. >> mr. foster, i remember before the first stimulus package passed reading of the nobel prize laureate gary becker who'd written and not in "the wall street journal" saying this was not going to work. he predicted it wouldn't work. you predicted it wouldn't work. you sort of touched on it, but the essentially when you borrow money to spend money, that money comes from somewhere, and i believe you just some of the problem that has a negative impact also. now our chairman mentioned the reinhardt study that said gross debt reaches 90% of gdp then you

have consequences on. the 1% growth is lost. i think the study said one to 2% was lost. perhaps it's coincidence, but we have 90% of gdp in every part of this year, january and the growth of people, the omb and the cbo projected growth this year to be 3.1%, and it's not going to be close to that. it's going to be about zero-point or to be lewd act. dr. zandi i teased and yesterday he predicted 3.9%. now moody's analytics firms is predicting for the year 1.6. i have my doubts we are going to

reach that so 1.6 is about 2% below what he predicted. do you think it is possible, i ask all three of you, that the unexpected fall and growth projections from the blue chip economists and the government and dr. zandi, do you think that could be because we've already reached this debt limit that empirical studies indicated what cause a decline in gross? dr. rivlin, you want to start and just if you have an opinion. >> i do have an opinion. i think it is interesting, but totally irrelevant coincidence, and the reason i think that is the study which is a fascinating piece of work as you know, but

it looks at averages over all kinds of different countries over several hundred years, and it certainly doesn't indicate that all countries are the same, and the united states on unfortunately in my opinion has a very strong ability to borrow money cheaply. we have abused that fact by borrowing too much money cheaply for a long time, but you look at a country like greece right now or even a italy or spain they are in trouble because they can't borrow more money except at very high interest rates, and that's killing them. that's not happening to us. i don't see any mechanism that is causing us at some particular size of debt to face the market

reaction. that doesn't mean we should go on increasing the debt forever. i think that's very a deleterious but this coincidence i think it's just that. >> thank you. so you see it as different maybe this time. >> different for the united states because the world thinks that we are the safest place to put their money, and i never hope we disabuse them of that. islamic that is an advantage we have. doctor, do you have any connection between the unexpectedly low growth and the study? >> i don't think hitting the 90% figure -- i don't think my reading -- >> its 100% now. >> that having read that book and it is a fine study, i don't think that reinhart intended for us to believe the magic cliff as soon as we draw the line of the

recall this is a rough estimate of the point at which these difficulties start to grow on average over many economies and many periods of time. nothing in their analysis suggests a cross this line and terrible things start to happen. we agree we have a major long-term debt problem and there is no dispute about that on this panel, but i wouldn't -- i see no evidence that the capitol markets are reacting in ways right now that are leading because you cross that line that that is leading to slow growth. i think what is happening in other parts it simply says that when the financial bubble bursts you have the deleveraging in most sectors of the economy that deleveraging is the demand and they predicted a very slow recovery from this. i think what we are seeing is in line with exactly what they predicted. not to mention all these other deleterious effects in the last year. i think they've contributed very

importantly, and i think of course a lot of the turmoil here in washington, d.c. i think has contributed to a lot of the uncertainty and the unwillingness of the young players to step forward and do more to the estimate dr. foster. headwinds in the economy and the oil prices and the tsunami and so forth, the low forecaster put out a forecast assuming no had when this. the headwind seven of the time and the strong economy overcomes them. one of the head wind could be the 90%, but not in the manner that the study suggested. as dr. rivlin pointed out the studies suggested that you cross the threshold which is proximate, and you get a good interest rate so we are not seeing that today. it's not a mechanism of which there's an effect that there is an effect and that is on about uncertainty. the american people are worried. we may think they should be worried and we may think they shouldn't be worried. they are worried and that is that uncertainty. it's a bad uncertainty and training of the vitality of our

economy. so it does matter but not for reasons suggested. >> you raised the point let's take the first stimulus. the money has been spent, correct? >> every stimulus we got is gone now. what are the permanent costs of the $825 billion expenditure right now? >> as the carrying cost of the service cost from the interest so that is certainly quantifiable and then there's the unquantifiable, which is the end pediment that there is that uncertainty making the decisions the would result in the stronger economy. >> thank you. >> thank you, senator. >> senator begich? >> chairman, thank you very much. i actually want to follow the ranking member's line and then i

have a couple other questions on housing over all. but, you know, what are the permanent results? let me describe -- if this was a man is a pro-government, the stimulus, the 300 billion or so, shy of that was in for the capital prevoyance debt financing like any other local government like i did as the mayor we would build a road, the money would be spent. that's correct, you're absolutely right, but here this the results. there's the road, economic development occurs. i will give you an example of the stimulus money, and i am glad we are getting more of this debate because i agree with a ranking member the money is gone but here's a result can tell you from alaska. i can't tell you from alabama or other states but i can tell you from alaska we build a hospital to be completed in alaska to employ 170 additional people, provide quality health care making a more livable community in the area of alaska which

would have growth. it built some roads which mean a new economic development in the private sector investment which means more tax revenue which means more money being generated which means more bills being paid and so forth and so on. we are invested into helping a shipyard which now landed 150 million-dollar construction of a new ship or senior housing they will provide housing which is paid for by the individuals who live there which generates revenue stream. the way the federal government does the budget is the goofiest thing i've ever seen and i am hopeful as the chairman and the ranking member talked a reforming it is to types, the capitol budget and the operating budget because you do bar for the capitol, private sector does it, public sector does it, federal government is just a

convoluted mess. you shouldn't borrow for the operational but nothing borrowing for the capitol investment and recovery money was predominantly that. then there was about $300 billion which was tax money that we took from people but we gave it back sofer money to the payroll deduction. we gave it back to them. so mr. foster, i'm trying to -- so there's no permanent value for investing in this and it infrastructure investments when you use the recovery money or -- help me understand what -- i don't get that. >> in my written testimony which i didn't put in my eight minutes of reading i pointed out that i wasn't commenting on what the appropriate level of infrastructure spending is from what you say it sounds like alaska may have had the only shovels ready products in

america. >> when they say only and no jobs created, that is an opinion it is not based on fact. >> i would say that is based on the simple set of logic you spend the money you created the infrastructure jobs were created while they were building infrastructure no doubt about that in those locations you distribute can show people working. so you can definitely show that those jobs were there. what you know was you had to borrow the money and when you borrow the money it wasn't available to be used elsewhere by somebody or something. ayman of people to to camera crew to show that jobs destroyed but i know they were there. >> let me ask if you borrow that money in the theory i'm not an economist, a person that's been in the business world since the age of 14. so, if you have so much more money available and you see that so much is taken out by that kind of borrowing and effective than what would happen is the rates would go up to start controlling the expenditures because obviously to be flexible

if i have a product it's selling off my shoulders like crazy i'm going to increase the price to the customer until we hit a certain point the interest rates went the other way, the flattened so it didn't do what you said, what it did do with certain banks don't lend money, they hold it because they can do other things with it but they are not getting out to the economy so the argument really doesn't hold up because it is flat and then at the lowest levels in decades if the money was less interest rates would go up. the problem is one of the things about the interest rates is they are a great many influences on interest rates and right now the dominant influence, our interest rates and i don't mean just today but by 2010, to doesn't mind, in fact growing up in 2000 were other forces at play for instance china's buildup of the foreign exchange reserve is putting downward pressure on

interest rates. that's been a factor long time. right now we have the euro crisis and money is flowing into the country driving down the interest rate so the interest rate is not a sign of what i said not being true. >> but, cheap money for business is good money if they are expanding so that hasn't been the problem. it has been a problem of the people that control faucets. i'm telling you from reality, not from a study and research and all that, i'm talking about a person that has had to go through this who still goes through it. on the rates capital for a very high-risk enterprise in the central retail business and economy that is fragile, so i don't buy your argument always want to do is make sure assure what you are saying. as of the businesses -- let me move on to housing because this to me is a big issue and there's a piece of legislation pending.

i don't understand why we don't do that and that is a couple of us in fact my colleague who is not accurate not senator merkley and i advocated this two years ago. two years of a bad economy is improved but it's still rough out there but then you have some people that have been paying on these loans and their mortgages for two solid years of not missing a payment, at - equity. banks have no incentive to refinance them, not one incentive because why? they are paying. why would they change the now and give them a lower rate? unless they are a big customer and will to keep their business but if you're an average working-class it is tough so why not just say to these folks here is what we are going to do. for you pay last two years in using this as a hypothetical by the this is fair and survived the last two years paying your payment to have negative equity and seven present whenever the loan rate might be, we want to give you the ability to

refinance the the market rate which is about 4.25, and the federal research will buy those papers from the banks. so there is no worry of the market tried find out if they would buy them or not, just wouldn't do that because of the default the welcome back to us any way. let me start from here and then go down. your comment on that? would put an enormous amount into the economy. >> i agree with that. it would lower debt payments of those families. you can't do it for everybody, but where you have evidence of having made the payments and they are under water but you may have to have a limit on how much they are under water but i think enabling them to refinance is a very good thing to do. i'm not sure that i did have the federal reserve by the paper you've got feeney and freddie still there. >> hanging on by a thread but

that's okay they will tell us we have no control over it does that affect the yonah 90% of them. >> but you agree with that concept? >> it's hard for me to comment on the specific proposal because it's outside of my area of expertise to i would say this is clear that housing is an enormous drug on the economy. the efforts to date to improve it has been hugely insufficient i think to deal with the level of problem we have and to stabilize the market and to stabilize the market the would be a major drag on the economy for many years to come. so i welcome the proposals along the line but i think that a general level they do make sense and it's a much needed area to make more effort than we have. >> i think that is fundamentally correct. people that have been making their payments on time for an

extended basis cannot refinance their mortgages. with the best mechanism a share dr. ruslan's concern the best way to do this there may be simple regulatory adjustment, but why people of proven they are able to make the payments shouldn't be allowed to make smaller payments. >> so you agree on the concept? yes, sir. skype i left my question with three people agreeing on something with potential. i better stop while i am ahead. >> that's really good when you can get all three agreeing. >> senator. >> thank you mr. chairman. thank you, appreciate all of you coming to testify before the committee today to read dr. rivlin, i want to ask about reforms to entitlement programs specifically medicare. as understand in the november 2010 proposal in which you did some work with

congressman loci -- paul ryan, there was a recommendation in that proposal that we raise the medicare eligibility age incrementally by two months per year to the age of 67, and i wanted to get your views. one of the concerns i have is that as we look at where the rising health care costs where an entitlement spending is going we need to make some responsible decisions in ways that protect the programs around here to make sure that they are preserved for those relying on that particularly with the recent medicare trustees' report that came out saying that essentially goes belly up in 2024. wanted to get your view but there you think we should gradually raise the age and what ought to have for medicare to make it more sustainable for the future generations?

>> the work that i did when congressman ryan focused on seeing we never had a complete proposal but seeing if we could get a bipartisan proposal on the premium support, and i had forgotten that he had raising the age that isn't part of what he and i were working on, but i do believe a version of the premium support particularly the one i worked up with senator domenici and our task force which is actually different from what paul ryan was talking about, anyway, i think it is a very good approach to the future control on medicare. raising the age possible for a long period doesn't save a lot of money because the young seniors between 65 to 67 are not

terribly expensive as people my age are more expensive, and the -- most of them are not working and don't have coverage, so you might then transfer those costs to the exchanges on the affordable care at as they get set up, but that's not an advantage to the federal government. so i'm a little skeptical of raising the age although it certainly ought to be in the mix of things considered. >> do you believe we fundamentally need to reform what we are doing with respect to medicare in order to preserve it? >> i do. and i can't there are several fundamental reforms possible, but the one that i have come out in favor of which is a very bipartisan.

>> we can get a medicare provider kutz? >> nope. >> does anyone else on to comment on that on the panel? >> dr. rivlin is exactly right. we are providing medicare right out of existence where people when they are my age and they start to think about where you might retire to you have to start thinking about if you move how your doctor is going to see you. dr. availability is an issue in this country because we keep pushing these provider cuts. we are killing a program that we need with provider cuts and we have to start shifting the structure of the program to make it affordable in the manner i think essentially dr. rivlin was describing. >> i appreciate your answers on that. i want to also ask about the concept of tax reform. dr. rivlin, you participated in the president's fiscal commission, as did my predecessor who might have great

respect for, and to the fiscal commission recommended as did i believe the chairman of the committee recommended in its proposal tax reform that would simplify the tax code, and lower rates in terms of how we would reform the tax code. do you still believe that that is the best way to go forward on tax reform? >> i do. i think that we have an enormous opportunity because there is bipartisan support for the city and there has been for a long time. the tax code quite drastically to get rid of almost all of the special provisions or transform them in a way that is more pro-growth and that we can lower their rates and raise more money. and i believe we do need more

money, and that a tax reform is the path to doing that. schenectady believe tax reform -- i would also like the other panelists to comment on this, but if we do tax reform and in that manner that we can actually help in terms of when we look at our economy competitiveness in terms of using the tax code as a way to help our economy? >> i agree simplifying the tax code and lowering the rates and getting rid of a lot of the special provisions that cause distortions in the economy is a good thing. >> i would agree that broadbased, that kind of comprehensive tax reform of the lower rates and closing the loopholes is a good thing and should be a big part of this discussion, but again i would add important caveat to that. number one, like alice rivlin it's important to use this as a

mechanism to raise revenue. given the crisis and the debt we all agree on to having the revenue neutral tax reform efforts makes no sense at all. it's an opportunity to raise more revenue they need to to get advantage of that opportunity. and second i think it is possible to make the tax system even more progressive than it is right now by an employee does mechanisms. tens of billions of dollars currently go in the tax expenditures to the very high income americans that provide no positive benefit to the economy and exacerbate the jury and come inequality. we have incredible levels of income inequality that this country hasn't seen since the gilded age that's unmatched anywhere in the industrial world. a lot of it is grown within the last few decades in a way that is not reflective of any productive activity in the economy. this kind of tax reform i think would be yet another possible mechanism of addressing that. so i say for that kind of broad based comprehensive tax reform

but those provisions used to raise revenue and improve the progress of the same time. >> to be very clear we use the concept of tax reform and you are suggesting that they be used as a way of raising revenue except from the economic growth you gain and thereby use fraud. tax reform means revenue neutral. we can have to be bates let's have a tax system and let's have more revenue. the to the gates to keep them separate or you want to either. i don't mind not having that tax increase part but as dr. rivlin suggested that is something the would be important for the economy but it's not in the context of the tax reform just about the lower rates. you also have to correct the tax base. it's not just what your tax so when we talk about getting rid of the tax expenditures and broadening the base your heading down the wrong road and you're going to create the benefit from their rates and exacerbate the problems by eliminating everything you can find 50 years ago as a tax expenditure.

the concept should be the neutral tax base so you eliminate the distortion because you properly define them at a lower rate. thank you. >> thank you, doctor. >> thank you, senator. senator nelson. >> you can start with the concept of financial basic tax reform. but then if you get additional revenue of seven growth, and i want to ask you all about the growth and the scoring of a, you could do a tax reform the you get new revenue and could be used to a very salutary purpose which is deficit-reduction. it doesn't mean it has to go to spending. it can go to deficit reduction. so let me ask you all. one of the problems on the question that is revenue neutral

do we have a problem on scoring with cbo as to whether or not it's been to be revenue neutral? in other words, each of the three of you talked about what the senator asked that simplifying the tax code, lowering the rates because you got rid of a lot of the preferences will cause economic growth. economic growth is going to produce new tax revenue. do we have a way of scoring that new tax revenue as a result of growth? >> i think you have to be careful of bigot claims, how fast the economy would grow if you lowered the rate. i believe that it would come and i believe that the

simplification would help. but once you get into making claims that this particular thing is going to grow the economy like gangbusters, then somebody else like my colleague mr. holzer might say that if you improve the skills of the american public dramatically of workers isn't that going to contribute to growth? , and you have to be a little conservative about additional growth but i also believe we need additional revenue because we cannot observe this tsunami of retirees and the higher health care cost even if we are successful in reducing the rate of growth without more revenue or we will close on the whole rest of the government. >> just this one footnote. i agree with all of that but the federal government revenue, federal revenue as a percentage of gdp i believe are the lowest

levels since about 1950. we keep seeing the political rhetoric about the taxes and there is no question there are ways of structuring the tax system devotee probably more beneficial of economic growth like if all of us were designing the tax system we would move more in the direction although i believe the tax productivity, but the federal government is now taking less than 15% of gdp relative to the burden of spending that we are committed to as the baby boomers retire. it really makes no sense not to talk about the revenue enhancement and makes it impossible to talk about seriously dealing with the deficit without being serious about the revenue enhancement. >> of course we are up about 14.5% of gdp because the recession and congress continues to push additional tax relief at the payroll tax relief. if you look at projections further out, you end up closer

to the traditional 18.5% gdp as a revenue. so the current measure of the revenue is no indicator of whether we need additional revenue what everyone thinks about additional revenue and senator, to answer your question directly we do not really have the capacity credibly right now the federal government at the joint tax committee or the congressional budget office to do a credible economic analysis and doing a great many years with little progress, but we don't really have that and dr. rivlin is right we have to be careful of these claims about what the different tax reform proposals would do for the economy and we would all agree since the reform would produce a stronger economy the would generate additional revenues the could be used for deficit reduction is we don't have the ability we are developing the ability very rapidly at the heritage foundation and the senate for the analysis but even there this is an art form wear