tv U.S. House of Representatives CSPAN February 1, 2011 10:00am-1:00pm EST
neeone huge economical. it seems like if we could make peace over there, -- it is just frightening to think what we could do with that money here in the united states that is going abroad. host: you left a lot out there for us to think about. priscilla wants to get in. independent calller from atlanta. we're running low on time. and caller: is anybody paying attention? host: to? caller: i was wondering if anybody was paying attention to the conflict that is happening between big oil, supreme court justices, and our congress people. it is as if the major news
organizations are not picking this up. it seems that there should be some disconnect. host: what is the connection as you see it? caller: there was a meeting in florida over the weekend. i just saw it on one station. this health care thing is going to make it to the supreme court. they have made a statement that obama will be a one-term president. it seems like our elected officials and supreme court justices are getting a little bit too cozy with big oil. host: thank you to everyone who called. "washington journal" starts every day is 7:00. we take you now to the senate budget committee. there is a hearing on the u.s. economic outlook. it should last a couple of hours. enjoy the rest of your day. >> we have three outstanding
witnesses. economists who have a long history of providing valuable testimony to this committee and others. we look forward to hearing from dr. richard berner, a managing director and co-head of global economics and chief economist at morgan stanley. good to have you back. dr. simon johnson, a senior fellow at the peterson institute for international economics and professor of entrepreneurship at mit's sloan school of management. good to have you back. and dr. met davdavid malpass. we think all three of you off-- thank all three of you for making yourself available to the committee. we appreciate that. let me begin with a brief review of where we have been, my own analysis of what has brought us here and where we are headed.
let me to start by saying i believe tarp in stimulus were critically important to avoiding a financial collapse. i was in the room when the secretary of the cherry -- treasury and the chairman of the federal reserve told us that if we did not act of tarp there could be a global financial collapse and days. those were the words they use to us. the minced no words to us. they were as clear and compelling as they could have been here y. the tarp was put in place and let me put up a chart that shows the clear evidence that it was affected. this chart shows the spread of the difference between what the government can borrow for and what the private sector can borrow for and during the height of the crisis, the ted spread was nine times normal. when tarp was put in place, it
came back very markedly to more normal levels, and only now has really gone back to its historic relationship. again, the ted spread is the difference between the private sector can borrow for and what the privatgovernment sector can borrow for. one of the tipoffs that we had that we were headed for trouble in 2008 was we saw erratic behavior in the spread p in the year before. let me go to the next chart if we can. economic growth. we had a negative 8%. we now see that economic growth has resumed in the fourth quarter of 2010. we saw positive growth of 3.2%. we now have six consecutive
quarters of growth. we see the same pattern in the private sector job growth. i think we all recall in january of 2009 the economy was losing more than 800,000 private sector jobs per month. in december 2010, the last month we have data for, the economy gained 113,000 private-sector jobs. we have now had 12 consecutive months of private sector job growth. we have also seen a dramatic rebound in the stock market after the low of march 2009. it has now risen well above 11,000 and approaching 12,000. . .
of the number of jobs we would have had without the federal response. it shows we would have 8.1 million fewer jobs in the second quarter of 2010 if we had not had the federal response, specifically tarp and at the stimulus. is similar story can be told by studying the unemployment rate. the unemployment rate averaged 9.7% in the second quarter of last year. according to dr. blinder and dr. zandi, if we had not had the federal response, the on implement rate would have been 15% in the second quarter and would continue rising to there's no question that the unemployment rate has remained stubbornly high. a little over three years ago, it stood at 5%. it nearly doubled in a year's time and has fluctuated in 9%- plus range ever since. last week, the congressional
budget office issued its budget and economic outlook, projecting the unemployment rate would fall only slightly to 9.2% by the fourth quarter of this year, and fall farther to 8.2% by the fourth quarter of 2012. the economy is growing at a much slower pace when compared to past recoveries. when measured against the nine previous recoveries over the past 60 years, we see the current recovery lags considerably the nine previous recoveries. why is that? i believe it is because so much damage was done to the fiscal and financial system in this downturn. if you look at the previous recoveries since world war ii, some of them have been relatively sharp. but none have seen at the damage to the financial system done in this downturn. that dramatically affected of
the credit markets, and that dramatically affected business. that obviously affects economic growth and economic activity. you know, i will never forget when ms. romer put out her forecast that we would see 8% unemployment. i told the white house at the time and anybody listening that they could throw that forecast right out the window, because that forecast was based on the last nine recoveries since world war ii. there was no basis for comparison because there was not that damage to the financial system in the previous recoveries as we experience in this one. i thought it was a forecast that had no merit. but we are now at a critical juncture. we have been borrowing about 40 cents of every dollar that we spend. that is clearly not sustainable. spending is at its highest level
as a share of the economy in 60 years. revenue is at its lowest level as a share of the economy in 60 years. it seems to me readily apparent that we have got to work on both sides of the equation. gross federal debt is already expected to reach 100% of gross domestic product this year, well above the 90% threshold that many economists see as the danger zone. let me just recommend to my colleagues the work that has been done by two of our most distinguished economists, carmen reinhart, at the lead author of the book reviewing 800 years of a financial crisis. in her work and work of prof. rogoff of harvard, they concluded that when countries
reach a gross debt of 90% of gdp, future economic growth is reduced substantially. we are at 90% gross debt to gdp. one thing i want to be clear on, in the press you typically don't read about the gross debt. you read about the publicly held debt, about 30 percentage points lower than the gross debt. our publicly held debt today is in the 60 percentile range, but the gross debt is over 90 and will be at 100 by the end of this year. again, the work that was done by carmen reinhart of the university of maryland and dr. rogoff of harvard concluded that when you're gross debt reaches 90%, future economic growth is
impaired, impaired in such a way that translates into a million fewer jobs. that at the end of the day is what we must keep in mind. i believe that the deficit and debt reduction plan as assembled by the president's fiscal commission, on which i serve, got it about right. the plan would stabilize the debt by 2014, lower it to 60% of gdp -- let me emphasize that as on a publicly held debt measure -- by 2033, and roughly 30% by 2040. publicly held debt would first be stabilized, then be brought back from the brink, and overtime worked down to what most economists say is a far more sustainable level. there were 18 members on the commission, 11 supported the report. five democrats, five republicans, one independent. that is 60% of the
commissioners supported the conclusions of the report that would reduce the debt by $4 trillion over the next 10 years. i believed that proves that democrats and republicans can join forces when we face an imminent threat to this country, and i believe this a death threat is an imminent threat to the nation. -- this debt threat is an imminent threat to the nation. we can put together a realistic, bipartisan budget plan. this year we need to finish the job. it will require presidential leadership, and it will require a congress that is willing on both sides to come together to do things in both of us would prefer not to have to do. i hope very much we face up to this, because of failure to do so would mean a very serious
consequences for the country in the future. i will now turn to senator sessions for his opening remarks. i want to thank members for their attendance today, and again thank the witnesses for their participation. senator sessions. >> thank you, senator conrad did you have raised the challenges facing us very well. i know you have made a case that a lot of what we have done has been successful, and i understand that. but there are others who have concerns about what we have done and how well it has worked and how much we have accomplished. i would like to get into a good discussion with our excellent panel, and i'm sure we will learn a lot from them. it does appear we have been kicking the can down the road. i thought that the roundtable discussion with some of the world's biggest financial investors earlier this year raised some of the same problems
and questions that you have raised and maybe some others also that the test to a conclusion. -- that lead us to a conclusion. we are facing a very serious national challenge that i believe this committee, as you indicated in our last meeting, will have to provide leadership for. i will be glad to be with you in that effort. i had the honor to meet with the former prime minister of new zealand, who took over our country that was running the system and get for quite a number -- took over a country that was running systemic get for quite a number of years. he led the country to unprecedented economic growth. he told me recently that he believes we have to have a goal of a balanced budget. i think that is a psychological, political question for us to
ask. it is not easy for us to get there. i'm convinced we can get there, but the american people are goal-oriented. if we can articulate a real substantial reduction and show them how there may be some short-term pain but long-term gain, i believe politically we are in a better situation to accomplish that that we have been in some time. i would quote from the bar ron's round-table interview with some interesting questions. there are two worlds, the industrials were -- the industrialized world and the emerging world. the industrialized world lives of fiction that it can continue its lifestyle without going into debt. at some point, the bond markets will rise against that. the household sector, not only in the u.s., but several industrialized countries,
remains stretched financially and will continue to deleverage and reduce debt. the public sector is leveraging up. that is a threat, he suggests. bill gross, who i guess as more money than any man in the world, said that printing your way out of this is possible for some countries, but solution is not to create paper. it is to create goods and services the rest of the world wants to have. what are the prospects for that? he said it the obama administration has failed miserably in that regard. it has focused on consumption and fiscal stimulation that will give us 4% growth in 2011 -- his estimate. the estimate of these experts were from 2.5-4. he had the highest growth projection for this year. but then he adds, "it gives us nothing more than that."
is a sugar here that quickly disappears in 2012. -- it is a sugar high that quickly disappears in 2012. we face seriously grim prospects. the unemployment has not come back as well as we would like to see it. -- at the end of the ai the year, the government survey indicates that the hours worked had not increased. weekly hours are going up. that is not a good factor. wage increases were slight, very slight, this year, and low inflation. that puts our -- and below inflation. that puts our net wage income in not every good position. we have to add one order 50,000, the two staple out. we have seen job increases, not much above the level you have to
have to really reduce unemployment, and if wages are not increasing, the net money circulating isn't where it needs to be. i am worried about that. what i would like to be in a position where we were with mr. volcker -- one of his associates who just retired from the fed, at brookings -- mr. volcker said enough is enough, we have to get off this road. they protested, they ask for his resignation. he said "we knew we were right." we knew we were right. i just don't sense we have that kind of leadership today. i was disappointed that the new chief of staff, mr. daley,
taunted the republicans on his sunday show sunday, saying, " where's the beef? you tell me where you are going to cut." what does that mean? i say it means that the administration is not prepared to lead. they're not prepared to discuss the seriousness of the challenges we face, suggests that somebody else steps up and makes suggestions about how to make this deficit, they may well even be attacked by the president and his administration. i hope that is not true, but that's what it seems so to suggest to me. i did not see the kind of leadership i hope for in the state of the union. mr. chairman, you said a few things political, i said a few things political, but the truth is our country is in serious trouble. you and i both agree on that, and we will have to work together to do better. thank you for calling this hearing. >> thank you.
let me just say to members of the committee, what i said at the last hearing, i think even more strongly today, that it has got to start somewhere, in the congressional process we are in. what other committee is going to take this on? appropriations committee is not in a position to do it, finance committee is not in a position to do it. i think very clearly is going to fall to us. look, i would much prefer that there be a summit with the white house, the congressional leaders, republican and democrat, house and senate, sit down and craft a long-term plan to get us back on track. i think that would be the best way to proceed, because i think is very important this be done before we get into a debate on the debt limit extension. if the debt limit extension has to be the way of getting
results, to get up plan, that in itself has serious risks attached to it. we could lose credibility in the bond markets globally if that is the leverage that has to be used. we are much better off as a country if the plan is put in place prior to getting to the debt limit debate. but if there is not going to be that kind of the summit, i don't know of an alternative to this committee and the committee in the house trying to craft in long-term plan and to begin sort of bottom-up. again, i issue, again, a call for a summit involving the leaders of the house and the senate and the president's, or withesignee s, to come up a credible long-term plan before
we get to the debt limit crunch, which i think will probably come in may. but i don't think we can wait for that. i think we have to prepare ourselves to begin crafting a plan here. look, it is not going to be easy. but we have got a good beginning. we have an excellent hearing with the head of the congressional budget office, we have an excellent hearing today. we will turn to our witnesses. welcome back to the budget committee. i understand you will be retiring soon from this position -- not retiring, leaving his position. you have always been somebody that has been an important resource for this committee. thank you. >> thank you, senator. thank you, chairman conrad, ranking members sessions, other members of the committee, for inviting me to this hearing to discuss the outlook for the economy and outline some of the things you can do to improve its, and briefly to discuss some of our present challenges.
senator sessions, let me tell you that your anecdote reminded me of when i was back at the fed, because i was in the building when detractors were circling the building. in the six months since i last appeared before this committee, the economy has improved. aggressive and unconventional monetary policy and fiscal stimulus helped. while the economy remains subpar, recent additional monetary and fiscal stimulus will promote faster growth this year. but the legacy of the crisis endures lenders are still hesitant to lend, the state budgets are strained. we expected the economy to grow by 4% after inflation over 2011, and 3.25% in 2012. three factors can raise the odds of a somewhat better outcome. first, a one-two punch from the new fiscal stimulus and the fed
achieving its dual mandate, at second, a dramatic reduction in political uncertainty after this summer. three key elements in the stimulus package, it 1-year payroll tax holiday, a 13-month extension of emergency unemployment benefits, and extending business investment outlays, will boost growth this year, as you can see on the slide i will put on the screen, but partly at the expense of 2012. there are other factors promoting more sustainable growth. first, ongoing balance sheet healing, easing financial conditions and mortgage credit, second, rising output from increase hours, implement and, is slowly and white, third, stronger global growth is boosting output, and a demand for capital spending is healthy. thus, however, we have a two- tier economy, which it exports and capital spending offsetting the drag from a weak housing activity and home prices and cuts in state and local
government budgets. though inflation has promoted a low bond yields. this has helped restrain federal encrust cost. this will be changing as inflation bottoms begin to move higher. significant economic slack will depress inflation, but rising inflation expectations and will pressure on food and energy will push it higher. let me talk about six risks that still look for the economy. two of those are domestic. all prices could decline by more than 6% to 11 -- how prices could decline by more than 6% to 11%, and state and local budget cuts could be more intense than we expected four risks are gullible, more spillover from the your credit crisis, policy in china, and politics could interfere with the appropriate policy responses, as you alluded to. the last risk has a new
domestic dimension. the battle over budget priorities that seems likely to crystallize and a showdown over increasing the federal debt ceiling, which could disrupt financial markets. the outlook is improving, but we cannot be complacent. congress might consider other policies to improve the outlook for housing and unemployment and thus the economy. in testimony by this committee, i i did that tax cuts don't get his.he causes of the they can only cushion the blow. it will boost deficits and debt, adding to an negative to the economy over a longer time frame, unless we adopt policies aimed directly at the cause of our problems. what are some of those policies? america's housing and mortgage markets remain dysfunctional . reducing the principal is the right remedy.
policy options to reduce principal take two forms, those encouraging write-downs to avoid default, and those encouraging short sales, which allow underwater borrowers to sell their cows at market value without writing a check to the current lender -- but sell -- sell their house at market value without writing a check to their current letter. streamlining should set up programs would help those facing foreclosure. there is a discussion on housing finance and of the right role for government and how to inform the gse's. this overlooks the critical need to seek its policy traces. first, a focus on repairing bad loans. only then can policymakers implement reform. what about policy to improve
employment? private payrolls have risen by 1.2 million over the past year, but over the past 18 months have been essentially flat. much of that weakness is cyclical. however, there are four structural culprits involved. mismatches between skills needed and those available. rising benefit costs. uncertainty about policies in washington. briefly, fixing housing will improve labor mobility and help employment, and better training will improve workers' skills. the economic outlook has clear cyclical implications for the federal budget, and addressing our structural budget problems will improve long-term economic prospects. i would like to conclude with a couple of remarks on each. a healthier economy would directly improve the cyclical budget outlook, as we all now. more indirectly, of fixing our housing and employment problems with targeted remedies with sustained boost the economy and a narrow the budget gap.
then we could on what the fiscal stimulus now in place, further reducing deficits. reducing budget challenges by reducing entitlement allies would free up resources and capital for productive investment the budget deficit is almost entirely about federal health-care spending, directly to medicare and medicaid, and indirectly through the treatment of employer-provided benefits. addressing health care costs would improve the budget. high and rising health-care benefits provided it to the work place price of labor costs and reduces employment and hurts growth. the costs are fixed because benefits are paid on a pro- worker basis. in my view, that helps explain why american employers cut payrolls relative to gdp more aggressively than other countries. increased medicare eligibility prices state budgets. the upshot is that high fixed costs of health care benefits
have enlarged our job deficit and our budget deficits at every level of government. we do think health care costs is the next logical step in health care reform. the affordable care act includes reforms aimed at major cost savings, but more is needed to reduce the cost of health care for employers and employees alike. changing the tax treatment of health care benefits would be a good place to start. we are only starting to debate solutions for the long-term budget challenges. we need bipartisan leadership to tackle them, steps that are fair and call for shared sacrifice and benefits. proposals to freeze or cut non- defense discretionary spending do not address these challenges. in contrast, the commission you mentioned, senator, the commission's report offers sound principles and's menus for action. in the heat of those debates, let's remember that uncertainty over policy changes, including the size of prospective tax hikes, may weigh on decision to
expand it. you can reduce that by developing a credible plan to restore fiscal sustainability. we have many challenges ahead. short-term challenges to enhance more vigorous, sustainable recovery, long-term challenges to promote a stable fiscal policy and preserve important safety nets. thanks for your attention and the opportunity to offer advice and i would be happy to answer any of your questions. guest: thank you very much. we now go to dr. johnson. will come back, simon bridgette please proceed. -- welcome back, simon. please proceed. >> i would like to endorse your plan for a summit on these issues before we have a crisis. i am, among other things, a former chief economist at the international monetary fund. the imf feels constrained in what it says to the u.s. government for fairly obvious reasons. i don't feel so constrained. i would like to channel that experience and the sentiments
you would hear from them. they are very worried. they think that you face potential issue with the u.s. debt, particularly as international investors shift around the world, which as i will explain in a moment, will be happening in a shorter term towards europe and longer term towards asia. senator sessions, at your mention of bill goes in this context is entirely appropriate and exactly right. mr. gross, who is in no way responsible for the fun to crisis, was in the forefront of people in 2008 calling for various debts and for the public sector to use its balance sheet to support the financial sector -- calling for various a bailout for the public sector to use its balance sheet to support the financial sector. at that moment, his advice was fairly appropriate. now of course, we see that people like himself, people who are seeking a reasonable and acceptable level of risk, they start to look elsewhere. they start to press us.
i absolutely think that the german put the emphasis in the right place in the beginning, -- the chairmen put the emphasis in the right place in the beginning. the fiscal costs were enormous. i would like to quote the change in net federal government debt held by the private sector, the cbo baseline from early 2008 before the crisis broke out. i bought a 40 percentage point -- increase roughly a -- 40 roughly a 40 percentage point increase. most of which was the falling tax revenue you get from having a massive resection -- massive recession to a very small part of that was the stimulus to the bush administration had estimates in early 2008, and the obama administration had a stimulus in early 2009. you might like to redo the composition. it does not matter in terms of the impact on the debt.
the financial system limits of opera, and on this dimension, the financial -- the financial system blew its of all, and on this dimension, the financial crisis commission got this right. they captured the hearts and minds of our regulators and took on reckless risks. the bank of england talks of this experience, their experience, parallel to our experience and part of our experience, as part of a doom loop, where you go through repeated cycles of boom, bust, bailout, but you cannot do it indefinitely, because you run up against the debt constraint, which is what professors reinhart and rogoff have pointed out to us. if you look at where we are in this cycle, i agree with much of what dick just said, but i am less positive on even this moment in the cycle when we should be having some recovery. if you look a what is happening to employment, and compare the
same metric as you used, senator conrad, but just focus on loss of employment, compared to a peak employment before the recession started, we are down by 6%, we're still down 5% from the peak. that is not like any other recession in the postwar period. every other recession goes down by 2% or 3% and then you come back within 12 to 24 months. the 2001 recession was a slow recovery, but you did not lose anywhere near as much employment this, i would submit to you, is not a recession of the postwar friday. it is a mini-depression of the pre-1907 and friday -- variety, one a lot of balance sheet damage -- pharmas go bust in in west and midwest, and it takes a long time to climb out of the debt holes. that is what we are looking at. in terms of the employment picture, i am very pessimistic. i was in davos last weekend i
was asking everybody i could find where the jobs -- where are the jobs? the c.l.'s representing that forum are happy, but they are not hiring in the united states. they are hiring elsewhere. we have not fixed the problems in the financial sector. the financial sector still has too little capital. the view of the bank of england, the monetary policy committee put out a very influential paper last week. "financial times" has an editorial on it today. we don't have enough capital, we did not fix the other dimensions of risk in the financial sector. even after we prop them up and put them back on their feet on extremely generous terms, they don't want to lend to the small -and medium-sized business sector. and there is, i'm afraid, and incentive for them to take on exactly the same kinds of risks as they had before.
a professor at stanford university and 20 colleagues have been working on this issue and writing about it very clearly and forcefully. we don't have enough equity in our financial system. we did not learn that lesson. this is not just about the united states. it is a global problem, but we should be the leaders of this, and we are not. we are, if anything, the laggards compared to the british and the swiss, who are moving more decisively on this question. in summary, i say that while we are in a recovery phase, we should expect the next 12 months to improve and some jobs to come back, this will be very slow and very painful. this is worse than any recession we have seen, primarily because the financial sector got out of control, and unfortunately, when we had the opportunity to fix it, we did not do it completely. the financial oversight council, which has a macro economic responsibility -- financial stability is critical to overall economic policy. you cannot separate it from
fiscal policy the way we thought we could separate it over the last 40 years but the council is not, so far, doing a very good job on these dimensions. it is trying to push the banks forward with very thin capital levels, and there is too much encouragement of or allowing them to take on what i can look like irresponsible levels of risk and excessive leverage -- what, again, look like irresponsible levels of risk excess of leverage, which will, again, come back to hurt us. the financial sector will come back and hurt us again and again and again unless we really reform it. >> thank you very much. now we go to mr. mal past. again, welcome. >> thank you, senator sessions and others on the committee. thank you, mr. chairman, senator sessions, others on the committee. it is a great pleasure to be here. thank you for the invitation to testify. i think we have a full-blown
fiscal crisis. we have been kicking the can down the road. it is time now for action to hold the line on spending. i think we need a full upheaval in the culture of the spending and deficits that is controlling our government process. before turning to my testimony, i would like to give a little background. my slides are available on encimaglobal.com and a site dedicated to smaller government, so people in washington can follow on. i will go through some of the slides. as an aside, senator sessions mentioned paul volcker. i was in this room -- before i worked for the reagan administration, i was on the staff of the senate budget committee, like many people here, and i was in this room when paul volcker said "enough is enough." we are at that point where people need to be saying we cannot afford it, even though it might be a good program.
if i may, i will go through the first slide. my testimony is broken into four parts. one is the economic outlook, which is for moderate growth. the second is the fiscal outlook, which is for lots more debt and deficit. the third part, i address the risks of this high debt-to-gdp ratio. the question is whether we are at a turning point -- a tipping point where we could see investors turned away from u.s. debt. i am going to address that in some detail. then in my testimony, i get some policy suggestions. in particular, i think we need to start cutting spending now rather than the summit approach, which has been tried so often. i think the goal should be to fight any cut you can make tomorrow or early this week -- any cut you can make tomorrow or early this week and at start the process of amending
that. -- of implementing that. second policy suggestion is that we need a debt-to-gdp limit that is not there right now. when they wrote the constitution they had no idea that people would be able to borrow $9 trillion, as we are now, and cdo's numbers put us up to $24 trillion. if the founding fathers had known that that was possible, they would have put a limit on that end of the constitution. i think they also would have said that the majority of the debt needs to be long term, -- maturity of the debt needs to be long-term, because we make ourselves it riskier by adding a short maturity for the debt. i am very concerned by the fed's policy of quantitative easing work is buying up government debt. this is a huge new role for the federal reserve that should be wound down without delay.
finally, tax reform is critical. i advocate putting a permanent extension of the existing tax rate into the baseline so that there can be an actual process where growth-oriented tax reform could be produced by congress. with a slight the way is right now, many of the attack -- with the baseline at the way it is right now, many of the tax rates the way they are, it is too high a hurdle to come up with tax reform. we have had a very severe recession. what this shows you is the gdp of the country and the hammer blow that was hit in 2008 and 2009. gdp grew to rise to 3.5% in -- i expected gdp growth to rise to 3.5% in 2011, but that will not make up for losses. we have structural problems. the tax code, the labor
barriers, and the regulatory expansion. those slowdown the private sector. secondly, we have a growth of the federal spending and debt, which is a burden on the private sector. third, the debt and credit problems still plague -- i will show you a graph on that. the next slide gives you a little bit of good news. tax receipts are rising. this is the fourth quarter of 2010 at/the fourth quarter of 20 -- fourth quarter of 2010 at divided by the fourth quarter of 2009. it is up through december. 8% higher money coming into the federal government. the problem is, that was from a very low base. in our next slide, you can see the dip in receipts. under cbo's very optimistic projections, that will gradually be made up, but even so, the
debt is yawning widely. the problem is, the growth we are envisioning does not reduce the magnitude of the deficit. the budget move into surplus in the clinton administration. what we need is to get much narrower. they increase the deficit to $1.50 trillion under the current fiscal year. this is a yawning deficit. this is the total debt of the united states. one point for concern is even though the private sector is deleveraging, the government is borrowing as fast as the private sector is deleveraging. we have 245% of gdp in debt.
the next slide shows you the break above that. -- breakup of that debt. $235 trillion in the country. household debt is roughly $13 trillion. federal state and local debt is $11.40 trillion. let's pause. where is the number going to go? the federal state and local debt is going to $28 trillion, meaning way up in the ether of this hearing room, way off the charts, in just the next five for 10 years because of the large deficits. we can also see the non- corporate businesses at the bottom here are shrinking. is there are losing credit and they're getting taken over by a bigger businesses. we have an economic policy that favors big government and big business right now, and that is hurting jobs. on the next slide, you can see
the projection. federal government debt is -- marketable debt -- growing to 100% of gdp, assuming the bush tax cuts are extended. i will go quickly through the first ones, because i want to dwell on the maturity of the debt later on. this shows you the detail to number three $35 trillion, the breakdown of the. -- this shows you the detailed numbers . $35 trillion, the breakdown of the debt gu. this is a way to tie out with the debt is really residing. >> david, can i just stop you on that point? the people that are listening maybe are able to understand, i think, the point you just made. its total debt in the united states, federal, state, local,
corporate, individual, about $36 trillion >>? -- $36 trillion? >> yes. >> if we were to have the increase in interest rates, that would add $36 billion a year in burden to the country. that is like a tax increase, right? the effect of a tax increase if we had a 1% increase in interest on $36 trillion of debt, like a $360 billion tax increase. >> that's true, it would be a burden on people borrowing money. now, the good news on the interest-rate increase is that the u.s. household sector -- i will show you a graph in a minute showing that the u.s. household sector is the biggest net creditor in the world. much of interest would be paid to people in the united states who are saving money. you are right that it would be a burden on people who are now may be growing, expanding, borrowing money.
but it would sure help a lot of seniors who are right now getting nearly zero interest, the savings. i actually favor some increase in the short-term interest rate the fed in order to bring some stability in the short-term credit markets. it is odd to have a country running with interest rates near 0. but the point is exactly right. there is a giant debt burden out there. as we think our way through this crisis, one of the hard part is we haven't reduced the total amount that at all -- we have not reduced the total amount of debt at all, and probably won't. what are the banks doing? the large banks are beginning to lend a little morbid the topline is large banks, the bottom line is small banks. there is no loan growth going on from the smaller banks. they are still under the regulatory -- a very harsh regulatory environment. >> can you tell us what the
period of time it is we are dealing with? >> this one is from december 2008 through present. just in 2009, large banks reduced their lending from $858 billion down to $650 billion. >> very dramatic. that is what i was referencing earlier in terms of a financial crisis, a dramatic effect on credit markets, a huge effect on the economy. >> that is exactly right. we are still not exactly digging our way out of that. most of the new credit that is being created in the economy is coming from the government, oil which had been stabilizing as it goes along. -- coming from the government, which at stabilizing as it goes along but creates its own set of risks. the next chart shows various forecasts.
each year, the debt-to-gdp will stabilize at an ever higher level. in 2005, they said it looked like 30% debt to gdp. 2009, 50% in debt to gdp. august 2010, the debt was expected to stabilize at 65% of gdp. now cbo is up to 77% of gdp. i am not making the point that -- no one can forecast -- i am making the point that government debt is growing at a huge rate, and cbo is reporting it. the next chart shows us the kind of get. the lower line is the publicly held debt, marketable debt. that is the $9 trillion in number. >> what pages that? >> 12. 12 on the graphs, and on the testimony, it is page 9. >> ok. >> the testament of the
background and the number is. -- the testimony gives the background and the numbers. the statutory debt limit is now at $14.30 trillion, almost at the size of gdp. certainly going to go about it. -- above it. the debt limit has to be increased it is not the right limit to regulate, because it goes up with inflation, goes up with the growth of the economy, and also with the social security trust funds and other trust funds. that number -- congress really could not use it as an appropriate limitation on the amount of debt per i am recommending that we shift over to marketable debt-to-gdp as a ratio that you could limit for the next 100 years. that number should be decided on and then used as a limitation on government debt. on page 13 that then, -- on page
13 then, i will not dwell -- you know better than i the various accounts of the spending, but this shows percent of gdp part in various parts of the budget. the interest costs are going to go up very dramatically even in they very optimistic -- are assuming interest rates stay very well behaved, not like what is going on in greece. illustra -- interest costs shoot up, and look at where the loss comes from. defense spending -- the president's budget from fy11 -- and all the spending. you not controlling medicare costs, medicaid costs, such as a dirty. it will come from huge pots -- medicare costs, medicaid costs, social security. it will come from huge cuts in
the next five to eight years. the next chart shows the same kind of presentation, but in dollar terms. what you see is the medicare and medicaid costs, $1.60 trillion. notable on the scrap its interest costs will almost overtake -- notable on this graph is interest costs will also take the entire defense budget. one point i will make on this graph is that congress should be looking at spending this way, meaning there are all these things you spend money on and it does not matter so much whether it is entitlements, mandatory, discretionary, it is all just dollars. rather than dividing the debate into entitlements and all the rest of finding a way to cut $1 billion this week and $2 billion next week, we would be at of the game. whenever it comes out of, the
public would cheer and say "good job," and you would get support for the next round of restraint. i only have a few more here. on 15, i am going to show you two or three graphs, the optimistic side of the cbo forecast. cbo is assuming tax receipts go above the 20% level that we have never got above before. by 2016, 2017, two dozen 18, 2019, we are above 20% of the economy in tax receipts. i don't think we can achieve that you kind of hit a wall for the economy. we have been talking about how huge the debt projections are coming out of cbo. i'm afraid it's going to be worse than that. the next page mentioned the one saving grace for the united states, not available in southern europe -- we have a
huge amount of assets that have been built up. this country has been growing for 200 years. people put it away in houses with the mortgages and pay off -- where the mortgage has been paid off, corporations where you have a lot of assets. for under 25% of gdp in household -- assets425% of gdp in household assets -- 425% of gdp in household assets. we can dig out of this whole if we start restraining spending. the next chart shows an optimistic cbo forecast. these are legitimate forecasts. i am not saying anything wrong with cbo doing it this way but they get guidance from the committee, from congress itself. what i am saying is that we will be lucky if we get the limits
that they are projecting, because again the word spread the net interest per debt goes up to 4.5% or maybe 5% and get -- caught or -- or maybe 5% of debt. we have so much more debt. normally, if the debt grows, you have to pay more on it. we are assuming in the forecast that we pay less than historical. i want to shift to the tipping point. the next chart shows the difficulty here. here is the cbo forecast did they show you that interest rates are expected to rise to the 4.5%, 5% yield curve. we will be bubbling at 4% on the short end and 4 but 5% -- on the long thin -- borrowing at 4% on the short end at 4.5% on the
long end. that is good, but the next chart shows the very short maturity of our debt. this is a key point, that we not only have a record amount of debt, but it is the record short-term nature of that debt, which means that if we get into a hiking cycle, we are in deep trouble i'm worried that is what we will get to. what this shows you is the effect of the fed buying back long-term debt. the treasury issues that, which stabilizes the country because we do not after roll it over. the fed finds precisely the safest debt to the u.s. government. the effective maturity on a national debt has gone down for 40 months, which is -- we are back to the 1970's level of risk in terms of the short nature of the debt. a couple more charts. if we think about how crisis happens, the tipping point happens, the yield curve or greece -- next chart -- shows
you what happened to greece. they were going happily along in 2007 with the low yield curve, and then they hit the tipping point and the debt exploded higher. the same thing happened on ireland. when they went above 90%, as the chairman noted, the reinhart- rogoff but noted it what happens when you hit 90%, and it u.s. is headed there. look at what happened to their interest rates. they spiked interest rates in 2010. that created a catastrophic problem in the budget deficit as they hit that. next chart. as we think about the tipping point, my concern is that we are going to be stuck with such a slow-growth that living standards will continue going down.
look at the 1970's and the 2000s, a decline in the median household income. that puts us at risk if we are not an economic superpower that adds to the median household income, we are in trouble as a country. that is where we stand right now. next chart shows you -- we don't want to get to this point. this is europe hitting the tipping point. deficits explode and they cannot older debt. that is what we're trying to avoid. this shows the explosion of assets, which has been distorting the market. the fed is taking up a huge amount of the fiscal deficit right now. they are using extreme leverage.
the fed has its balance sheet -- it is heading towards $3 trillion of assets, with little oversight from the normal congressional operations of this -- office. i will mention four policy points of view. we should use the opportunity of the continuing resolution to cut spending. two more every day if you can. you should use the opportunity of the debt limit increase. use that opportunity in a thoughtful way to add new controls to the national debt. i urge the debt-to-should be limits a requirement that the average maturity of the debt stay at
five years or longer. we are cheating ourselves by halving the current government issue short-term debt putting us at risk. third, the fed should wind down its asset purchases. they are shortening the effective maturity of the debt, causing substantial market disruption to, and climbing rapidly. finally, tax reform is a high priority. in order to get it done, what we should do is make the extensions of the current tax rate permanent in the baseline. that way you could have a legitimate discussion about what to do about future tax rates. thank you very much, mr. chairman, and senators. >> thank you. let me ask each of you, we have -- this committee is the budget committee. our obligation is to provide a
budget outline to our colleagues. we have a lot of decisions to make. one of the fundamental questions is how quickly do we impose fiscal discipline, fiscal austerity. the commission concluded and it is interesting, not only did the president's fiscal commission conclude this, but another commission concluded this and the esquire commission concluded this. all of them bipartisan commissions. all of them concluded for the next 18 months to two years we ought to make modest changes, but put in place a plan that over the next 10 years substantially reduces the debt at a rate of the president's commission, $4 trillion of debt reduction. another was about the same, as
was the esquire commission, all of them bipartisan commissions. what would your advice to us be in terms of a 10-year plan? how aggressive should we be on the front end with imposing austerity? how big a change should be seeking we should be be seeking to achieve over 10-year budget window? >> senator conrad, i would generally endorsed the timetable and the general tone of each of those three conditions. namely, that we don't have a short-term debt problem. we have an enormous long-term debt problem. we need to come to grips with that. if we had a short-term problem, and market participants would be reflecting that, and one of the things we can use as a barometer to gauge whether we have a short-term debt problem is the
response of markets. when markets start to question whether or not you can service your debt, then you will see a rise in interest rates and a widening spread relative to other benchmarks in the marketplace on a global basis. we don't have that yet. so we enjoy a low interest rates and we enjoyed a favorable barring turn right now. of course that will run out. the important thing is to craft a credible plan to address our long-term problems. credible does not mean saying that we are going to cut 1 billion here and have a five- year freeze on discretionary spending. credible means we are going to attack long-term problems. we are going to look at them specifically and address the root cause of our long-term fiscal problems. >> dr. johnson, what would your advice be with respect to the question of timing?
>> mr. chairman, in an economic sense and not adjusting your comments to what you might think the political realities are. that is up to us to try to phrase that. we would like your best opinion on what we should do. >> if i could just add, my comments were not adjusted for political reality. >> i felt that. thank you. >> i am not in favor of the immediate fiscal austerity in the kind the british government is involved in. we will see in the quarters ahead how that program does. the data from the last quarter shows a decline in gdp, far below -- partly it was a bad weather in december and also october and november were very bad month. we don't need that kind of immediate cuts. but i think we do need
something. maybe a little more aggressive than where david is. when you are carrying massive financial sector risk, which is what we are carrying and what the irish are carrying --if you look at page 21, the irish were considered to have responsible fiscal policy, they blew themselves up on the fiscal side because it frthree banks destroy themselves and or taken over by the government. that is where we are. 60% of gdp is too high unless you want to deal with financial risk, but we did not do that. when you carry this amount of implied liability over 10 years, i want to get the debt down even lower, because i fear the market's --[inaudible] we should ask mr. gross, how long would it take for you to change your mind?
i think he would tell you it takes 20 minutes for him to move his portfolio. that is how fast the yield curve can move against us. that is what happened to the irish. >> that is what's sam friedman called the electronic curve. david? >> i think the goal is to avoid that electronic curve. actually to get the private sector to start hiring people. i feel a little differently than many economists, that if we caught a lot now in the federal government, people will perk up and take notice. global investors will start putting their money into the united states rather than moving into asia and elsewhere. i want to exercise that positive feedback mechanism from going on a diet now. if you are going on a diet, don't say three months from now we will have our plan laid out. does stop eating as much this
evening and then if you can -- >> the problem is that's not the way the schedule of congress works. you know? we have a schedule here. the schedule is we have to have a budget resolution that guides the appropriations committee. i happen to agree with you. i think it would be wonderful if we could do it, but it does not work with the schedule of congress. so we have to deal with that. that is quite i asked for a -- if we want to send a signal that america will face up to this problem, we are going to put together a credible plan, nothing would be more effective than the leadership of this country sitting down and coming up with that plan and not wait for the debt limit. you know what i'm saying? we are not going to have
appropriation bills for months because they come later in the cycle. we cannot do what you would like to see happen with i think would be helping with credibility, because we just don't get to that state until a little later. >> yes, this is a tough fix. i agree with you and with all of you on that we need a longer- term cut and a rethinking how we spend money and it needs to be rather substantial. they wonder in the market right now is whether there will be any ability by the u.s. government to actually do some of these cuts. is there some middle ground between what the u.k. did and doing nothing over the next six months? at least, that would begin to change the minds --right now u.s. corporations are taking their money outside the united states. they borrow in the u.s. at very cheap rates and invest in asia, because they are worried that the u.s. cannot cut spending.
if it is symbolic or concrete types of changes to give them reassurance, i think we would start getting jobs right away. >> my time is expired. senator sessions? >> doctor johnson, the tarp bailout has not cost the taxpayers a lot, but the stimulus bill costs $900 billion at 4% interest. that is $36 billion per year that we will pay for the rest of our lives, i suppose, because of this one effort and nobel laureate gary beck it said he did not think it would be sufficiently. i believe that he has proven to be correct, that it would be far less.
neither here nor there. -- gary beckett. i guess in one sense you decide this is not a crisis now, but i would contend that 1.5 trillion dollar deficit is a huge thing and we will pay interest on that forever, presumably. interest is crowding out so much of our future potential to invest, as the president would say, in the things we would like to spend money on. it's a point to be a big thing even if the interest-rate stays at the rate the cbo projects. mr. malpass, you did not comment, i don't think, on the rogoff-reinhart theory, but adds
that if you get debt so high, it reduces growth and puts you into a serious stagnant position. do you agree with that theory and does that provide greater urgency for us at this point in time? >> i think it definitely does. as more and more of the economy is directed by the government, as the debt goes up, that reflects the dow government directing more parts of the economy and the growth rate goes down. -- reflects the the government. we have seen that over recent decades. it is a grave concern. >> the income revenue to gdp that you referred to, i believe you referred to that, 14.8%. one thing i believe causes that -- and i have not seen any research done on this -- but we
have a skewed our revenue to high income individuals whose income tends to be more volatile. so now i understand it's down to -- expected to be 14.8% of gdp by 2015. and moody's is concerned with our debt rating. how would you comment on that? >> the slower economy hits people that were earning more and so that is showing up in the lower rates or a smaller percentage of earnings of taxes coming from high earners. i think it also means and helps to explain why job growth has been so weak. we really depends a lot on businesses and small businesses for creating jobs. so in the current environment to they are not doing that as much. they have not been creating
things like google. we are going to have this dry period of entrepreneurialism and innovation. that'll cost us in the long run. >> follow up on dr. johnson's comments about what the u.k. is doing. i think a fundamental question is are they taking their medicine now that will put them in a longer-term on a healthy growth path? is there reduction in spending and increase in taxes -- i is 3 to 0ne tax increases, is that t oo much austerity? i would like the three of you to add your views on that. >> senator, each country has to determine the pace at which they decide to impose austerity. in the u.k. they have decided to
stretch out over four years the kind of austerity that we are seeing. i think the u.k. pose particular problems in terms of growth right now relate to other things besides the fiscal austerity that they imposed. one thing we know is that they also have an inflation problem in the u.k., which is higher than ours and higher than most of the developed world. so that limits their flexibility to maneuver as well. so they have a little bit less flexibility to maneuver than we do. right now we have low interest rates, low inflation, a federal reserve that is very supportive of growth. we may not have that flexibility in the future. if the answer, i think is to -- >> with regard to the u.k., do you think in the long run they will benefit from the austerity measures? >> in the long run they will benefit from those austerity measures. the question is whether they
have the right balance given their other policies. >> i agree with that. i think we would be better off if we could move faster even in the short run on fiscal austerity. i take to heart the chairman's point that our system is not a parliamentary system. they have a way where a small group of people can say let's change the fiscal course. ours is going to take a lot of work among a lot of senators, congressmen, the administration, and so on to get it done. the pound strengthened quite a bit when the u.k. made this change. that helped them in terms of their living standard. if you think of the dollar per capita incomes in the u.k., they have gone up while ours are going down because of that changed. i don't think we should measure its only in terms of their gdp growth rate, which was weak in the fourth quarter. we have to look at jobs and future jobs that are being
created. i think by the government showing some discipline, that is attractive to the business environment and we will see the job growth is doing a little bit better even in the short run for the u.k. than what we have been experiencing here. >> the economists and thinkers and masters of the universe, the political world is unusual. it's not quite the same. the idea that we can move in and out and make changes is not accurate. it happens that there are opportunities to make changes. my firm belief is right now there is an opportunity to go further than wall street thinks it's possible in reducing spending and put us on a sound path. we don't want to do something that would be disastrous for the economy. i think we better take advantage of the opportunity to reduce spending now. i criticized the bus administration -- bush
administration. we had surpluses. it got around somehow that deficits don't matter. they forgot the political world. i am here saying that we cannot spend more because it is going to run up the debt and they are saying it does not matter. once you politically get that in reality going, it runs out of control. so the american people are wanting to be more fruitful right now. i think we better go meet them halfway and puts them a little further and take the gains we can get now. thank you. >> thank you. senator wyden. >> there was an extraordinary discussed and where they put together a meeting on the debt with senator cockburn on where the economy is headed. there were more than 30 u.s. senators there interested in actually getting into the details. you don't see many meetings like
the one that was held this morning. what i was struck by, because the numbers are a clear wake-up call. if you are spending $3.70 trillion and have receipts of 2.2, not hard to figure out the mass and what the implications are. what i was struck by was a sense that the single most important thing here is to send a major message to the country and into the financial markets that you are getting serious, that you are doing something significant. what the senators seem to get focused on was the idea that you make a substantial down payment this year isn't deficit- reduction and deal with at least one major long-term problem, one major structural problem. i admit i think the structural issue ought to be tax reform.
senator greg and i introduced legislation that would create according to the heritage foundation 3.2 million new jobs per year. i think, because of what you described in terms of the economy, what's done in terms of the long-term has to give a shot in the arm to the economy. i would just like to go down the road and ask each of you and give us your sense first of all of a number, and actual number that would constitute a real message that you are making a down payment this year in terms of deficit reduction? and then your take on what would be the major long-term issue that congress would actually tackled this year and enact into law? you already heard my judgment that it ought to be tax reform because of growth. so all three of you. also, mr. malpass spent years in
oregon and we are glad to have him before the panel. >> thank you, senator. we don't know exactly what the number is. >> just a ball park. >> 100 billion is not depressing financial markets. something quite a bit larger than that in order 400 billion or 500 billion. what is really important is not so much as the discussion that revolves around the debt the implemented today, but that you commit to a large number and you have a plan to make that number understandable and to make it credible so that financial markets will take it on board and will be positively surprised by that number. i want to say, i fully support and i fully support david's argument and yours for tax reform. there would be enormous benefits to the economy in a number of respects. i hope you find a co-sponsored, on the republican side.
>> we will. >> i strongly support that proposal. >> very good. >> i think this is absolutely the right question at the right time. something in order of tens of billions doesn't do anything in this context. i doubt that even if you talk about hundreds of billions, it does not make that much difference. i think you need to talk about the big trillion dollar items over a 10 or 20-year horizon. there is tax reform is one of them. our tax system is so antiquated that even if you don't want to raise revenue, the% of gdp in the cycle, there are plenty of ways to improve incentives. while improving incentives, you will get additional revenue. we take in 10% up to 15% last than other industrialized countries. and the second is health care. medicare in particular. that is the big budget buster by 2030 or 24. i doubt you want to take on
medicare in this congress, but those are really your two choices. those are the two things that would really make a difference here. i did not support the tax deal at the end of last year. that was a big number over the next -- over the foreseeable future appear that was a big number in the wrong direction. that was bipartisan consensus away from fiscal responsibility, quite contrary to everything that has been said this morning. senators sessions has walked out, and sartre. somebody said deficits don't matter. i believe that was vice- president dick cheney. he specifically said ronald reagan taught us that deficits don't matter. that was what dick cheney said. i hope we reflect on how far from being a proper for today's reality is that message. >> i do think one other part of your testimony was very helpful because you convey a sense of
urgency. in this town is all about the politics of procrastination. what i wanted was a one-year extension of the bush tax cuts so that you would force congress to step up this year and actually deal with these kinds of issues. because my concern is unless you all and others can help us conveyed a sense of urgency, we will have exactly the same debate in the lame-duck session of the 2012 congress as we had during the lame-duck session of 2010. that was why i wanted something that would force action this year. mr. malpass, your thoughts, the number and the question of the big structural issue, if you get to pick one? >> thanks for representing oregon. the pundits are cynical about how much can be done in our system. so i think, as you go through
this, one of the most heartening things is 30 senators this morning, if they were together as you mentioned, that is a big step. that is the kind of change that people want or that markets will be looking for and say if you have all those people in the room, something might come out of it. my view is and i think you are hitting on it, sort extensions of existing spending where you take many bites of the apple would be a procedure that might work. so as the continuing resolutions discussion comes up, whatever the amount of spending cuts that can be done in that resolution, if you can do it multiple times in a given year, that is going to get you a lot of credibility in terms of the financial markets and the job creation from the private sector. so i am not -- i the $100 billion in neutral spending cuts would be very useful. whatever the number is, they
kind of make a pinkie promise of some kind that you are going to come back to it three months later and try to do another round of things that you can work on. as far as what's structural reform longer-term, i think tax reform, wyden-gregg was very good if you can get another co- sponsor. i recommend a baseline where you look at directing the baseline so that it gives a more level playing field. otherwise, you are sliming up the current. the normal scoring has been undercut suspect you won't be able to get a growth-oriented reform. the other procedural change i suggest is that you build a vacuum of limits. a debt to gdp limit would be very comforting to markets. market's concern right now is you are going from 60% debt to gdp, marketable debt to gdp
right up to 90 critics like we might go up to 110, right across that threshold the chairman mentioned. if we could have some new kind of limitation other than the statutory debt limit, that would give some underlying confidence. i need to make one defense of president reagan. there was the idea that his economics were not the right economics. remember what he was saying, that we cannot look at the deficit along, we have to look at the tax rate and at the spending. so we needed to cut both of those to enable the private sector. my view is that worked very well in the 1980's and created a huge amount of jobs and growth out of good, sound economic policy in those years. >> time has expired. thank you. >> senator? and >> thank you, mr.
chairman, and i would like to thank the panel for their testimony. several questions. i would like to follow-up on something mr. malpass address, which is the increase in the debt limit and you have advocated that we make some structural changes essentially to get this escalating deficits and debt under control. i happen to share the view that we should make structural changes. we might have a difference as to exactly which ones to make. but i do think it is important that we use this occasion to begin to get our long-term spending problem under control. so i am not in the camp that argues that under no circumstances should we raise the debt limit. i, also, accept your general premise that it is a rather blunt instrument and the disruptions that would occur are to be avoided if we can. however, it is very important as we approach this that we understand exactly what might occur and what would not. if there's some period of time during which we do not raise the
debt limit upon reading it. my first question as a historical and factual question. that is, is it true that we have had recent episodes in the past several decades where we have reached our debt limit, we have not raised it immediately upon reading it, and we nevertheless did not default on the marketable debt securities? issued by securities? >> yes, in the late 1990's there was a period of roughly four years. it's on page 9 of my testimony. those were unique years. one of the things that was happening was defense spending was being cut sharply. another thing that was happening was there was a temporary slowdown in the entitlement spending. it has to do with the generation -- the baby boom had not yet started to retire. on page 9 it goes through those.
also, in those years something was happening, yes. here is on the screen. fannie mae and freddie mac were really ramping upper, which operated almost like government spending. they were kind of off budget and yet they really ended up being taxpayer liabilities. that was over that period of time. i don't think we could mimic that right now. >> if i could interrupt for a second, the point is that for a short period of time the debt limit was not raised. >> correct. >> when it is not raised, is it true that tax money floods in? >> true, it floods in. >> next year something on the order of 70% of all the money that the government is expected to spend will come in, in the form of tax revenue. >> correct. >> 6% of all the money the
government is going to spend is currently scheduled for interest on our debt. the question is, is it possible for the treasury in the event the debt ceiling is not raised and acknowledging that this is in some ways a disruptive thing if that does not happen, but that the treasury could in short it, that those people holding marketable securities for this government would receive their interest payments and that those payments can be made? >> yes, that is possible. the fiscal deficit is larger now. so each month the government is getting a negative cash flow of roughly $120 billion. so what would happen each week is someone, meaning the treasury department or you members of congress would have to be deciding who not to pay. my concern is the disruption. >> i understand this is very disruptive and i've acknowledged this. do those people holding
securities necessarily need to not get their interest or principal payments? i think you are acknowledging that. >> yes, sir. >> senator, i think you are playing with fire in this scenario. one point that was not covered in david's review was the debt situation is barring from abroad. it's not just internally funded debt. we are the world's largest borrower. this is very dangerous. our alternative assets in the world. the euro zone does not look that appealing, but they are turning around. the chinese are working as well. i really don't think that you want to create potential disruptions of this kind. there's nothing that says the dollar has to be the number-one reserve assets for ever. the british pound lost its position early in the 20th century. that was -- fiscal
irresponsibility. >> their refusal to do anything about it is the worst message we can send to the markets. the fact that revenue will be more than 10 times the expected cost of interest makes it very clear to me that no responsible treasury secretary would ever allow a default to occur on our debt. it would be so destructive and so damaging to our entire economy, the millions of savers, americans as well as others, that i cannot foresee how the treasury secretary would permit that to happen when he or she would have more than 10 times the revenue needed to prevent this from happening. let me move to another question. as alarming as the magnitude of the debt that we have discussed today is, i don't -- i may have missed this, but i don't recall a discussion about another component that worries me. i would argue that it is even bigger than what we have talked about.
that is the unfunded liability that's implicit in the promises we have made through the big entitlement programs. if you quantify the present value of that shortfall, is it true that is several multiples of they actual publicly traded debt that we have? >> yes, it is, senator. different calculations will give different results. everybody agrees the present value of those liabilities is enormous. if you added medicare and medicaid and social security, you come up with an unfunded liability when added to the debt that would exceed the value of assets that david shows in the charts. beyond that, if you look at another issue which is the unfunded liability of state and local government. those which are on the books as the gap between the promises they made for their pensions and the assets that they have, as well as the unfunded liabilities for the health care promises they have made, that would ban
on top of the federal liabilities to what you are talking about. soviet answer is yes and resoundingly so. >> and the contingent liabilities arising out of the financial sector. [unintelligible] i think all of this needs to be included. i think we agree on that. >> can i add one more? i agree with those points. the actual size of government will go up. 50 years from now there will be a defense budget. and there is going to be probably a federal education budget and so on. so i think as you think about the problem, i am not as focused on dividing entitlements from discretionary spending. they are all commitments to the people that there is going to be a government in the next generation and the next and we just don't have the money for it right now. >> thank you. my time has expired.
if there's time in a future round, i would like to address another aspect that is even worse and that is something mr. malpass mentioned briefly, which is what strikes me as potentially a very optimistic forecast about the level of interest rates and when you have a huge debt, if you are wrong about your optimistic forecast, and has devastating consequences. thank you, mr. chairman. >> thank you for that, because that is one of the critical points. somehow we need to be able to persuade our colleagues of that. what is the risk of a failure? -- a failure to act? we have a benign interest-rate environment right now, very low interest rates even record low interest rates. some say that's an indication if we don't need to act. my own view is that it is giving us a period of time within which to act.
if failure to act within that period of time could lead to much more serious consequences. if you look at the 10-year cbo outlook, they are protecting a low interest-rate environment for a decade. maybe that will happen. maybe it will not. if there's one thing that is clear. we have seen that in the case of greece, ireland, everybody else that has run into one of these situations. the change in your interest rate environment can happen like that. then you are really in they soup. >> mr. chairman, a quick observation about how very optimistic this interest-rate assumption strikes me. that is, the assumption is that interest rates referred to something less than their 20- year means over the last 20 years. that, despite the fact that the fed is embarking on an
absolutely unprecedented program with the very purpose of which is to increase inflation expectations. it's my idea they will be successful at increasing inflation, quite likely increasing inflation and it is hard to fathom how interest rates don't respond by going considerably higher. that happens, all of these neighbors -- numbers changed dramatically. >> be on the inflation issue, it seems to me that one of the biggest issues that's out there is in this global environment the market participants around a world filled the u.s. has the best credit around the world. if they start to question our ability to service our debt and be our obligations, that is when interest rates and does it for inflation will start to rise and the risk premium in our debt will start to rise and that's when we are really in they soup. >> is worse than this.
thinking globally, there is a report by mckinsey global institute on real interest rates. what of our global savings going to be and what will the pattern of global investment be? a nobel prize winner led the study. in real terms looking globally, interest rates will go up. you should add your concerns about normal interest rates and inflation expectations on to the real rate. they say we are coming out of the time when we have had unusually low rates because we have had a savings. >> israel rates go up because economic performance is good and -- if real rates go up because of concerns about creditworthiness, that is where our economic performance on a long-term basis will really suffer and where the spiral becomes quite negative. >> one of the concerns i have
been listening to the discussion that's unfolding in this panel is the focus on non-defense discretionary spending. because non-defense discretionary spending is about 16% of our budget. the president used the no. 12% in his state of the union. he had an unusual treatment of homeland's security and some other things that he put in the defense pot that normally would not be there. i think he put international in the defense thougpot. domestic critic non-defense domestic is 16% of our budget. yet it is getting almost all the attention for how we solve the problem. we are borrowing and 40 cents of every dollar that we spend. you eliminate it all, you have not solved this problem. the part of our budget that is
growing are our entitlement accounts. medicare, social security, primarily the health care. much bigger than social security. that is seven times the problem of social security. somehow we don't want to talk about it. i think i know why we don't want to talk about it. if you ask the american people, they say you don't need to touch medicare. you don't need to cut social security, you don't need to cut defense, you don't need to touch revenue. i will just say this, that is through the conclusion, that social security does not have to be attacked and it is cash- today -- cash-negative today. revenue does not have to be touched? you cannot solve the problem.
it is a mathematical certainty that you cannot solve the problem. some of us are going to have to help the american people understand the unfortunate reality here. the unfortunate reality is, i believe, all these things will have to be touched. the sooner we do it, the better, because the less draconian solutions will be later on. the worst time to deal with this is when you are in a crisis. andhere's anything greece ireland and portugal should have taught us is the worst time is when you are in the crisis. dr. johnson, you are the former chief economist at the international monetary fund. nobody that i am aware of has a deeper understanding of global economics than do you. what would be your advice to
this committee with respect to the question of how you deal with this in a systematic way? what parts of the budget have to be dealt with over the longer- term? does domestic discretionary spending, defense, does that get you out of this whole -- hole? >> it does not. the imf advice would be you need a medium-term fiscal framework. you need some very clear agreed upon rules, you need a bipartisan consensus, you need to say this is what we are going to do on tax reform and on medicare. social security is a problem, but that can be addressed in a relatively straightforward way. if medicare and medical costs explode compared with gdp.
other countries, if they scored their medical spending like the cbo scores for us, we will see the problems in most of western europe, also, if that is consolation. if you had the rules that were agreed upon, then you have the flip side of the point david made about us not being a parliamentary democracy, it's not easy to change our rules. if you are locked into those rules in the u.s. constitutional framework, it will take a lot to undo them. you could lock into something 10 or 15 years down the road that the markets would respect which would be hard to undo. it's hard to get there, i understand. but that's from a global comparative perspective. the chinese president paid us a visit recently to see how his money is doing, i guess, and felt ok about that. ultimately our creditors will demand this kind of change, too.
this is what the imf has demanded from highly indebted countries around world. we should do this ourselves before we are in a situation where it is a crisis and you can only do really damaging cuts that would hurt a lot of people. >> one more thing and then we go to senator sessions. i hope very much when we deal with these opportunities this year we are not just dealing with short-term non-defense domestic discretionary spending. we are talking about 60 billion or 100 billion. in one year we have a 1.5 trillion dollar problem. while that may send a useful signal, it does not touch the problem. we need a multi-year copper and supplants -- comprehensive plan that reduces the debt over the next 10 years by $4 trillion. now we are talking on a scale
that really has some credibility. senator sessions? >> thank you. this is of very difficult issue. i have been with my staff and ranking member and i still don't have a handle on it. anybody thinks it's easy to get this house in financial order is not correct, as you indicated, mr. chairman. i would note that we are not to think that we should ignore discretionary spending. i feel very strongly about that. we have 35% in state department last year, 35% increases for the epa, double-digit increases for agriculture. president bush was criticized for agriculture increases. i don't think he had a single year over 2% increases in his 10-year budget. we have 12% now.
we have 2010 levels are unusually high. we are going to have to go back to 2008 or lower. i criticized the debt commission and their work on one point. they certainly served a national purpose and i may well have voted for the product if i had been on the committee, but i would just say that their goal as given to them by president obama was to reduce to reduce to 3% of gdp over 10 years and that's what they did. i understand they predicted that deficit in 10 years, 3% of gdp, $700 billion to $1 trillion. is that a sustainable deficit? briefly, if you would? >> if that's the end of the
story, the answer is no. >> it would be good progress. >> absolutely. if the story continues and there was a continued credible commitment to make further progress so that you got the deficit down, because ultimately in order to stabilize the debt in relation to our economy if you are going to have to make further progress on this over time and that's what's important. >> i just want to make a correction. in terms of the commission, we got we did the president gave us a goal 3%, but we exceeded that. we went to 2.3 in 2015 and then down to a 1.2 in 2020. because we believed -- and i think it was a strong consensus -- that we had to go further. >> thank you, mr. chairman. i'm glad you corrected that. it was depressing me more than i should have been depressed. >> i think you should push this
as far as you can. it's a question of the risk in the global economy where you don't know -- you want to borrow the money from someone else and they may have a better use of their money and may prefer to keep their funding in another currency over a 20-year horizon. i would be surprised if the u.s. would have the same level of reserve currency over a 20-year horizon as it does today. compared with the chinese currency. somebody said during the bush administration that debts don't matter. i think that was vice president dick cheney. >> i heard that. >> didn't he say that ronald reagan taught us that deficits don't matter? >> i am not sure. i think that was a private conversation that the leaks out and became part of the agenda. mr. greenspan recently said at a luncheon i attended that in the
surpluses's we had that we could handle a little extra debt. when we went into the recession in 2001, deficits -- a little deficit would not hurt us. politically, once you lose the high ground in congress, it is hard to get it back. >> if i could reinforce that with regard to david's proposed debt to gdp, debt to gdp is the right way to think about this. if you go with a 50% limit or the europeans have a 60% limit under the inter-governmental treaty and it has not done any good at all. it is too high. you want fiscal policy to offset something that distracts you out of the blue. 50 or 60 is too big. >> maybe 40% debt to gdp ratio
would be more acceptable. what you need to do is have escalating penalties if you are above it. in other words, some discipline on the budgeting process on omb to have some kind of mechanism to give it some teeth. i have written down several -- i think, in terms of this problem as one where you should begin today, making small decisions. they are not really small, but do the things that you can. i will list several things we have talked about. one is i think the fed should wind down its buying of treasury bonds. this is a huge problem where the fed is buying a long-term debt and their foreshortening the maturity of our national debt. that puts us at risk. second, treasury should be issuing more long-term debt. we have to get our debt maturity
longer to be prepared for what comes in the future. third, the directed base line, in order to open a window for tax reform. right now the way congress procedures work is not credible to embark on tax reform because you have to soak up making permanent the existing rates. alternative minimum tax, for example, expires. yet everyone knows it is going to have to be packed into the future. if that should not be part of the baseline, the cost of that. so you need a directed base line in order to create a more level playing field. fourth, using the continuing -- >> can i stop you on that? the only thing i have heard you say today with which i strenuously disagree. the reason i do is if it is not in the baseline, what does that say to congress, that it is
free. you and i know it gets added to the debt. i am in the sessions' camp on this. as soon as you send a signal around here that you can crosslines and it does not matter and things are for free, that psychology takes a hold around here. when we crossed the line on social security and went back to raiding the social security trust fund, i tell you that broke a discipline around here. i beg to chairman greenspan -- begged chairman greenspan not to take that position because it is psychological, but it matters around here. when you cross a line around here, bar the door.o >> one thing we have not
discussed is budget process. back when david and i were working in washington to gather a, a budget process was really important. congress had a process in both houses. that process was stuck to. your predecessors came along and reinforced that process. that's something we need to restore to the discussions about the budget. we think in terms of credibility, what will help restore credibility besides the commitment, to deal with long- term structural problems is a game plan for getting there. >> the dirty truth in this town is that people do not want to deal with the budget process disciplines because the truth is they don't want to discipline. they want to be free to cross every line and it is on both sides of the aisle. i regret to say that. you are right. we should have, i think, a
return to some of the strict discipline as we had that helped us get out of the whole and 80's and in the 90's. the hole.t of absent will, no process solves the problem. >> this is fabulous. this is a serious important issue. senator mccaskill,chanic getting the votes that would have made statutory caps using the president's budget, it would take a two thirds vote to violate that would've been a far wall. i think we realize those numbers were too high. we will have to wrestle with it. this is about the economy. one question i would like to
hear a little further from mr. malpass that he made reference to is a qe-2 and the fed's action. and there was something on high tax strategy from new hampshire. it said we continued to print money. the fed buying treasurys is printing money, is that fair to say? >> it risks that. maybe a rhetorical point or a mild point, technically the fed barrault's bit from banks. and it creates excess reserves at the fed. as long as we have a stoppage in the regulatory process where banks are not lending, then there has not been an actual expansion of the amount of money in the private sector.
>> the leverage that the fed uses? >> all that has happened so far is that the fed is taking on the risk of the private sector by owning long-term debt. so they are exposed if interest rates go up. the taxpayer is exposed. on bynt lending going banks, from that point of view it has not expanded their the point is well taken that by the fed going down this line, people worry about the fed and worry about the dollar and about the u.s. >> mr. berner anke answered in a similar manner to you -- mr. bernanke. i quoted him as being 100% certain that he could pull back and not allow inflation to take off, but he said that he really said he is 100% certain that he has the tools to avoid that.
>> we should not be taking this risk. his original goal was to lower the interest rates on corporate bonds. that has not worked. what we are exposing ourselves to is the shorter maturity -- they are buying long-term bonds in. that is the opposite of the direction we should be going. >> leaving us more exposed to short-term? >> that's right. you are worried about keeping your job and the banker calls up and says wouldn't you like to move from a 30-year mortgage down to a three-year floating- rate mortgage? don't take that choice. that is what the fed is doing. they're moving the country from a long-term tax rate mortgage poor short-term floating rate mortgage at a time when we are already a little bit shaky. >> with regards to this, if any of you would like to comment, i think it is a matter out there
in the public and within the financial markets, mr. hickey says to thousands easy money led to growth imbalances and 1% interest led to a housing bubble in the mid 2000's and then the credit crisis and now the rates are zero. the fed needs to put more money. things are all right right now. but in june, the $2 million they are printing per month, it may not look so rosy. the economy has structural problems and we're not dealing with them. monti-printing will not work. that is the prescription -- money printing will not work. yet that is the prescription we keep giving the patient. there will be more imbalances' until the sense and, at some point, it will end because the dollar will fall apart and what
we are now wondering makes everything appear rosy, but it will be terrible policy for the long run. there is a perception by a lot of people that you guys are really sophisticated. let me ask you to respond to that. >> may i interject briefly? paul volcker, in this room, facing a big fiscal deficit in the 1980's said that the fed should have a looser monetary policy if congress would have a tighter fiscal policy -- meaning spend less. we are breaking the rule now in the way that you said. we are putting a near-0% interest rate on a massively stimulus interest policy. -- messerly stimulus fiscal policy. -- massively stimulus fiscal policy. >> we are running massive
deficits. overly loose monetary policy, because the fed was very accommodating after 9/11 for an extended time, coupled with the failure to regulate very risky financial instruments. warren buffett called derivatives a nuclear time bomb waiting to go off. in some ways, that occurred, certainly with aig. you had a perfect seedbed for mobil to form. -- for bubbles to form. we got a house in mobile, a commodity but full, and energy bubble -- we got a housing bubble, a commodities bubble, and energy bubble.
we really laid the foundation by loose monetary policy, lose a fiscal policy, unusual to get them at the same time. and here we are cleaning up the economic wreckage. >> morgan stanley has in as report on the so-called global power trade. i do not have it with me. the points that you are making strike me as just incredibly parallel to the debate we had in the united states between 1907 and 1913 before the founding of the federal reserve. nelson aldrich made similar points to you about the inflationary financing facilitated by an overly a loose thread. louis brandeis articulated a concern like yours, a financial sector without assurance that it would be arraigned in a
regulated and controlled, financial stability would be the ruin of us all. those individuals were right. >> i would agree with you, sir. we are using monetary and fiscal tools, which are bullet tools to solve our problems. we are experiencing the legacy of this financial crisis. as i indicated, we have not employed the tools we could to clean up the legacy of the financial crisis. if we did, the fed would not have to run the kind of monetary policy it is running. we would have a better performing economy. we could unwind some of that fiscal stimulus that we reviewed to help the economy in the short run. >> mr. chairman, your statement was one of the same statements of the causes of the crisis. you mentioned loose monetary policy, loose fiscal policy, poor regulatory policy, and
mistakes on wall street. that is the sum of it. if everyone would accept that and try to avoid that in the future, we would be a step ahead. >> we promised to end this hearing at noon for witnesses. but senator twoonie has not had his second round. we will go to him now. >> thank you. i will be brief. it seems to me that, if you look at many of the traditional measures of monetary policy, we are currently embarking on a very unusual and dangerous course. please correct me if i'm wrong. my understanding is that, prior to the recent huge purchases of treasurys by the fed, the traditional measures were already growing. if you prefer to look at the taylor role, for instance, which some do and some do not, but, by that measure, interest rates are well below where they ought to
be. if you look at commodity prices, across a very broad range, precious metals, agricultural, and other commodities, we see very high rates. it is not the cumulative evidence here -- it is the cumulative evidence here that suggests higher inflation, as cbo projects 2% over the next several years. the you think it is likely that the united states will remain at or below 2% in the coming years? >> i think it will be above. i think you're exactly right in describing the problem. we see the same problem in other countries. we're closer to commodities in their cpi basket. that evidence is there. the fed has been very wrong on that inflation estimate in the past. in 2003, 2004, and 2005, when they chairman the 71% increase
policy, -- when the chairman suggested the 1% increase policy -- >> can we stop you for people who are listening. wettest pc? >> that just means consumption. -- what is pce? >> that just means consumption. a huge mistake in the technique that the fed is using, when they look at the number today, that is based on what people bought last year. they're looking at the prices of the old lions. -- the old items. when you measure inflation on what people bought last year, those prices are going down. it is like taking a sale items,
the old-model cars. the new model cars are going up in price. after revision, the inflation was of of the fed top limit, above the 2% ceiling every quarter from 2003 to 2007. yet the fed kept saying and promising during that time that inflation was moderating. we really should not be so confident of that -- i am not confident at all that we are avoiding inflation now that the fed is very loose. >> we are not avoiding inflation. headline inflation, which is the head -- the inflation that we care about, is going up. the fed takes food prices out of its major core inflation.
other central banks do not do that. the canadiens take out the most volatile items. but it is very different from what the fed does. it is different from what the historical view of what drives inflation over time. in terms of purchasing power of consumers, people who consume things that are relatively commodity-intensive, poor people have a larger part of the consumption and will be hurt. rising and otherlargely countries. the fed, as you pointed out, is trying to boost inflation expectations. we do have a tug of war going on. there's a lot of slack in the economy. that is not keeping inflation in check. but the global forces, together with rising inflation
expectations, will not only lift headline inflation, but core inflation over time. a little bit of that next year would not be a bad thing. what would be a bad thing is a lot of the, obviously. but we would see inflation rise and the interest on the federal debt, as you pointed out earlier, very significantly. >> i will point out that we learned in the 1970's that we could have a lot of slack weakness in the economy and have very high inflation. that is a concern of mine. >> thank you, senator to me. senator sessions. >> forgiving if i do not think that there -- according to the complexities of the market, you would be billionaires' instead of millionaires. i do not think that mr. bernanke has had -- i do not think he deserves our credit for advising of the long easya
money to long. i will lead this as a final question. in the late 1970's and 1980's, volcker crushed inflation by applying very high real interest rates for several years. now we see the same process in reverse. just look at it several years -- just as it took several years for the market to say that a volcker's policies would lead to declines in inflation and interest rates, it will take years for the market to realize that the current fed policies are highly inflationary. any comments on that? >> i agree with that concern. i think the fed should stop buying bonds. it is a high party from both a physical standpoint and a monetary policy standpoint. as far as the risk for us of
higher inflation, one problem that we run into is that, whenever the problem is distant, people will not focus on it. when do i think we will go over 5% inflation? probably not for one year or two years. that does not give you the urgency. one of the things we're doing today is trying to say, look, we do not know what will happen next month or next year, but we do know that we're too close to the brink on the tipping point. if you can, please stop spending. try to find procedures that give us confidence about the 10-year outlook on spending as well. >> i just reiterate, senator, the point i made earlier. number one, we have the right policies to fix our economic problems in housing and other problems and the fed would not be running the policy that is running today. i agree with david that inflation is a process that works gradually. that gives us a little bit of a leeway in terms of where it will
go. of course, because it has a lot of inertia to it, once it gets going, then we need to be careful and the market reaction to higher inflation will not be kind to the federal budget. >> said there, i think there is a floor to the federal reserve -- senator, i think there's a four to the federal reserve bank. there is no mention about financial stability. there is no question about the financial dynamics and how things went wrong and what happened in the cycle. none of that is seen as their top priority. they feel the need to see this policy that makes you feel comfortable and i think you are to feel uncomfortable about it and very nervous. it would be better if we had had more physical space coming out of the last boom. you could still argue about the tax spending. but there is more space in which you could react to the financial
crisis without pushing up against the run off limit or the davis debt limit. but that is not how we ran things in the boom. as a result, we had overnight unemployment and a policy that was a huge hill mary. -- huge hail mary, if i may use a football metaphor. >> thank you. this has been an excellent hearing. i want to thank senator sessions for his contributions as well. we stand adjourned. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011]
>> coming up in judicial nominations on c-span 3. among those speaking today was what house counsel robert bauer. the u.s. senate is meeting this afternoon to consider federal aviation programs, including air transportation fees. you can see live coverage of the debate on c-span 2 starting at 2:15 p.m. eastern. the house is not in session this week. they will return next week. >> there is no other way forward. in this crisis, we simply to learn together. as california's first, members of a political party second. >> today, step by step, we are putting ourselves on a better, more sustainable path and pushing ahead on the road to
growth. >> find and watch this year's state of the state addresses, as well as inaugural from the country's governors. >> pictures of the smithsonian institution in the springtime as much of the midwest is facing a major snowstorm. two leading members of the smithsonian's board of regents said that the board gives wayne quaff his full support. some groups had called for his removal after he pulled a video from the smithsonian art exhibit. it was described as religious desecration. others described it as censorship. >> my name is sabrina from "new york times."
we want to make sure we do not act abruptly or quickly and also, in the absence of actual errors, without meaningful consultation with the curator -- interpret this for us. was a mistake made? do you act abruptly? did the museum at abruptly in pulling the video? i understand you are not tru recommending that he be removed. >> in response to the last part of the question, absolutely not. the secretary has enormous support from the regions. you heard over the course of his report, the accomplishments just in this last year and in the last two and half years he has been here. i think his performance has been extraordinary.
certainly, he has my support as well as the entire board of regents. looking back -- i prefer to look to the future -- but, as wayne has said, there are a lot of things that, with 20/20 hindsight, could have been done differently. that is a valid critique -- criticism of the way the decision was made. i think we have learned from that. i think we now move on and do a better job in the future. >> when you say things done differently, what do you mean? do you mean that the videos should perhaps not have been removed and that you worked to abrupt? looking to the future, what a video like "fire in my bellay" is something that, because of notral funding, it iyou will
feature in the future? >> it is not part of the federal government. i do not know that there's much difference, the responsibility that all public should titian's hold in various kinds of public -- public institutions holding various kinds of public trust. i do not want to go back over this one, but, no, i think that is the kind of an issue that should be part of the national dialogue. while you can critique the selection of that particular piece, inclusion as well as the way it was pulled out, i think they have a vibrant, it intellectually-stimulating institution. these are issues that we need to confront. we see it in climate change. we sit in human evolution. we have a human evolution exhibit at the natural history museum.
those are issues that are important for national institution to address. >> we watched the video in their regions. again, we did not go back and say, less a vote on whether or not we should have done this. we did say is that we will be faced with doing this number of exhibits with opening a museum on african-american history and culture. we clearly have to be dealing with slavery. we need to be dealing with immigration across this organization. we need to be dealing with climate change. we looked very closely at the role of the national museum and said, not only because of the quantity of average we will do, but also the sensitivity of many of the topics, we will both, of course, do something to ensure prevention, make sure that things that are chosen are coherent, makes sense on a scholarship basis, really do help eliminate and extend a conversation on the -- help
illuminate an extended conversation on the topic. but controversies do happen. again, this is an exercise where we looked at a longtime of controversies, not only at the smithsonian, but across the museum industry, the museum sector. it is clear that, in order to fulfill our mission, there will be controversies in the future. not everyone will agree with the current exhibit at the renwick, with the current exhibit at any given museum at any time. really, just a developing processes, our muscles, our decision-making expertise in dealing with the controversies is part of the conversation. but to a region, they recognized that dealing with controversial -- but to a regent, they recognize that dealing with controversial material is something that we ought to do at
the smithsonian and we accepted the report. the report includes a recommendation that, once the exhibit opens, absence, actual error, things should not be removed without a consultation process. we use the experience largely to guide us forward. >> christian cats, "washington city paper." >> we started discussing this issue shortly after november 30. at that time, we decided and have continued to stand by our decision to support the secretaries decision at that time -- the secretary's decision at that time. >> tbb.
trustees of the hardhat issued hershhorn hasf the her shor released a statement. >> these are all active advisers to that institution and to the smithsonian as it relates to the contemporary art. they felt strongly that they wanted to make an expression of their thoughts and views on what you would do with a controversy like that with contemporary art. we really respect that. in the interest of open dialogue and release and freedom of expression, we have learned from the discussions we have had
back and forth with that board and other board members across the institution along the last eight weeks. even that process of a dialogue we have had in the last eight weeks begins to rebuild the trust. they disagree with us on this issue. but they also, if you read that letter, expressed their support for the idea that this exhibit is open and having record numbers and that the secretary and this institution have a breath of activity and effort. i think the dialogue has been good. we appreciate that board came down in a different place. i think it shows you that it is the kind of institution that listens to its board, that it is sitting on the smithsonian website today. >> the smithsonian has only 30 advisory boards. we do not expect our advisory boards to agree with everything
at the smithsonian on a daily business. i appreciate what the hirshhorn board had to say. i think the dialogue was good. i think we learn from that experience. i think they appreciate that. they appreciate a number of things we propose to do, including developing an advisory. it will be very good and the hirshhorn will participate in developing that forum. >> is a small point, but their leadership is also helping shape the public forum identified as an important discussion. in that process, again, they're getting to express the issues that they want to talk about.
and they will be able to express them publicly because they will be participants in that. >> rich simon with "the l.a. times." even if there was no error, the exhibit could still be removed if there were objections from capitol hill, for example. but your new processes that there will be greater consultation. could you walkthrough the protocol in little bit. say you have a controversy again involving capitol hill. congressional leadership begins calling. then you call the regents? >> we're not talking about -- it is very tricky. hindsight is cheap. it is hard to predict what will happen in the future. we would call for a general protocol. absent error, no removal, and then the commutative process to
move forward. -- and then a consultation process to move forward. it depends on the issue. some issues, you have the luxury of a lot of time. there has to be consultation with the leadership of the regents. when has already agreed to consultation with the leadership of the advisory boards. that usually means the whole board. then the leader can consult. a big part of what we were saying is that the museum director and the curator or the first lines of consultation and consideration for shaping a response for consideration of what the objections are and for determining the path forward. >> obviously, we just got the report ourselves. our next step is to think about how we actually implement some of the findings and some of the recommendations. they are very sound
recommendations that we can implement that makes sense. if we look back, we can see that these recommendations would have helped in the last incident. we look forward to working with the regents on the implementation. >> tyler green from "modern art's and modern painters." which was more damaging for the smithsonian, being in the show or the removal from the show. >> several important pieces are in the show, as you might know. in the mid-1980s, there was generally a low level of attention from the political institution, the medical institutions, and basically a range of institutions to the aids epidemic. some of the art he produced at that time was very influential
in all of our opinions in actually creating the kind of dialogue, sometimes discomfort, certainly consideration of the pain, the unhappiness, and the let down that artists and loved ones were having and experiencing and their belief that the political structures and other religious structures and others had failed them. so we see his contribution to that exhibit as essential. what wayne did was respond to a very specific objection to the crucifix. but i still believe that the peace that he has an exhibit are among the most powerful of what is a very powerful exhibit. damaging to the institution -- was it more damaging to the institution that
it came out? >> i am not a gambling movand woman. i do not know where the odds are on that. wayne's judgment call was that it would be more damaging to have it stay in. >> obviously, it was a very difficult and painful decision. this is not a situation we want to see replicated and we will work diligently with regents and curators to beef up our ability to get out in front of these issues and think about these issues much more thoroughly. obviously, to have a response as well. we want to work with more people. there were people who were upset with both sides of this issue. we need to engage more people in the dialogue about what we're doing. that is one of the things we will seek to do. >> imply in your question, if via understand it, is should we just have prevented the controversy altogether?
one thing that the region's really stressed was that -- that the regents really stressed was that we are often in the business of doing exhibits about flashpoints in american history, flashpoints in global culture. and we have to accept that, with that responsibility, comes some controversy. we do not want curator's or others to think that, above all, avoid controversy. i think it is still in the things thatheone of the your panel said -- "avoid blandness." there will be controversies in the future. try to predict what if you did not have it or if you did have it, that is too much for us to figure out. >> i was trying to get more to
an acknowledgement that mistakes were made, just trying to get to what the fundamental mistake was, that it was in the show or that was taken out of the show. >> inclusion in this show, i do was a mistake. had we had time to get into the iconography, not only what patty was talking about with hiv/aids in the 1980's when so many of us lost friends in that period and we can understand the depth of the motion, but down in mexico, in the culture of a latin country and the representation of the crucifix and the and had
an interpretation to it, i believe in his mind, that was not sacrilegious. alternatively, it may have been very deeply religious. it might have been that, on reflection and taking time to explain that to the critics, we might have worked through this. what we're talking about time for deliberation. first of all, it is the independence of the curia later as to what to include. second, if there are controversies that emerge, understand all the dimensions of what went into the artists decision and what that artist is trying to communicate. >> the one thing i would add to that is that, we did not go around the room and as which
regions thought it should stay in and which body should be taken out. there is clearly -- this is one of the issues that clearly people see it quite clearly on one side and some see it quite clearly on the other and people fall somewhere in between in the range. the focus of our declaration and are -- of our deliberations in our discussion was that did we look at it right? with more time and more consultation, we would feel like we were standing on more firm ground about the decision that was made. >> at the regents' meeting, was very direct discussion of the
calls for the secretary to resign? how will you go now forward with those particular critics? >> we feel that our mission is to a broad range of people. the secretaries or where of the press, the general sentiments philanthropy. they have been aware of much of that as it has unveiled. we did not consider anything besides wayne's leadership over the past two and a half years and the the years ahead have been a critical part of strength intion's
culture building, donor-based building of the entire mission being served better than we were doing before he got here. we appreciate that it is a complex job that he is doing. the recovery process has begun from the time that we picked up the phone and we have started a series of dialogue. are there people who still come down on different sides of this decision? there are. we hope we can see them see the breadth of the responsibilities of the job of the secretary of the smithsonian and the very strong job at the secretary has done in fulfilling that. in fact, this issue is one of
hundreds of decisions he makes in any given month. agree with the decision or disagree with the decision, it is part of a bigger picture. >> we have learned a lot of what individuals have been thinking. we like to do everything we do and treat every moment like this as a learning moment. i want to hear from people. i want to hear what disturbed them. i would like to know what they think for the future. i want to hear from all sides of it. i have made hundreds of phone calls through all kinds of individuals and i have learned from that. i would like to think that i am a little wiser than i was six months ago or three months ago. >> and, to be clear, when wayne says a wide range of people, there were an awful lot of
people, whether it is in the donor community, the philanthropy committed, etc., that supports the decision that he did make. >> "associated press." how did calvert regents decided to address future political concerns? >> first of all, time, seconal, inclusion, and hearing all kinds of viewpoints. the exhibition on human origins that resulted last year at the museum of natural history. there was a set of strong
criticism about that exhibition. there was an opportunity for people to express opinions. we saying here that inclusion from a broad variety of voices. we talked about the curriculum that wayne mentions, at 80 + missions, that are mounted. these are all three years and four years ahead of time. the inclusion of many voices of those exhibitions can be helpful. once there is conclusion of something that is mounted, i
think it is appropriate for that exhibition to stand as mounted. >> developing a relationship to congress -- we have six congressional regents who are supportive of the smithsonian. we need to take better advantage of their thoughts as we move forward and to keep them informed. again, as we look back on this, we could have kept them better informed on this exhibit. we will do that in the future. we can build our mission to put congress, especially starting with the congressional regents. part of our job is to inform congress that we do so much, 85 exhibits per year. a lot of people do not know that. communication, communication, communication.
>> tony harvey with "the encounter newspaper." i am intrigued by the first of your recommendations, that the boards should be actively involved in exams and issues and may be consulted on challenges. my question is on the fact at the museum boards are vitally involved in the exhibition and educational and other programs now. they raise the money. they generate what you refers to elsewhere as how the board's bar and the enthusiastic supporters of these programs at their respective museums. what is it that your task force is recommending that the boards do that they are not now doing.
>> if we take this specific example, it is involvement and information that a controversy like this has emerged. when there is a controversial issue, the inclusion of those boards in the deliberation. the other thing that we talked about today at the region's meeting is have we encourage those boards and recognize the value they provide. we conclude that we needed those regents to do more of that and to appreciate the kind of roles that those boards have. as wayne has said, this is a complex set of institutions. in chicago, i have responsibility for one institution, one building. i look at the complexity of the smithsonian, across the 19 and
21, a whole range of different kinds of involvement of the advisor report, some are deeply involved and others are perhaps a little more distant. but building that museum board community, as regents, is something we should emphasize, especially as we go into these next years. >> you seem to really been putting emphasis on that people should not remove things in the future. is that the possibility that this incident has trained congress to make a stink if they do not like something? sorta related to that, the resolution says that you need to explain federal funding to the public. is that so they ended stand that you may have to make some compromise in the future?
-- so they understand that you may have to make some compromise in the future? >> on the contrary, the federal support and the financial support, these are hybrid institutions. we received two-thirds of our budgetary support from the government. at the same time, the support of the arts community, the philanthropic community, and of the nation as a whole, across a whole range of political and religious and other spectrum is critical for us. that is the point of really reaching out and explaining the nature of this institution, which, if you look around the world, there's nothing like this. it is something to be prized and enhanced and celebrated. i think we could do a more effective job communicating with the congress. we could do a more effective job
communicating with the day, liberal, and trans gender community, with the art community, those who are concerned about freedom of expression, and make everyone aware of this wonderful, natural resource that we have here with this hybrid support, both from the congress and from the community in general. >> we already have internal discussions about how we reach out to the religious community. objects from religious history will show up in our exhibition. we know we need to treat those with respect. we need to find ways to communicate those. our job is to engage the largest amount of people possible. it is to help them learn about these issues that our nation bases in our history. we have to be aware of the religious communities that are
there and respect that and work with a larger group of those folks so that we can really engage and get more input on what we're doing there as well. >> that was probably the majority of our deliberation, the fact that the significant part of the miscommunication came from the fact the people did not understand enough about who we are and what we do. so there was a significant amount of a discussion on deepening our relationship with people coming into congress and the people across congress. and also the religious committee, the arts community, a whole range of people. we were starting with too little awareness by so many about what the smithsonian does, who we get funding from, why would the national portrait gallery have an exhibit like this, what does it mean, and the reservoir of understanding was not what it should have been to withhold the
inevitable next controversy. that was one of our ah-ha's. we hope that people will understand this better and that whatever the next controversy is, is part of a much richer and broader institution. >> thank you. >> the u.s. senate race this afternoon to consider a federal aviation program, including air transportation fees. you can see live coverage of that on c-span 2 that gets underway at 2:15 p.m. eastern.
the u.s. will return to session next week. they are not in session at all this week. >> the c-span network provide coverage of politics, public affairs, nonfiction books, and american history. it is all available for you on television, radio, online, and on social media networking sites. find your content any time through c-span video library. the texas ban on the road with their digital box and content vehicle, -- and we take c-span on the road with our digital box and content vehicle. >> every weekend on c-span 3, experience american history tv, starting saturday at 8:00 a.m. eastern. your his -- hear historic speeches by national leaders and eyewitness accounts of the events that shaped our nation. visit museums, historical sites,
and college campuses as top district oppressors and leading historians delve into america's past. american history tv every week and all weekend on c-span 3. >> the migration policy institute released a report this week finding that local law enforcement officials have used their immigration enforcement powers to target non-citizens for misdemeanors and traffic stops. representatives from law enforcement, the migration institute discuss their findings at this event. >> if all of you could take a seat. good morning to all of you. i would like to welcome you here on behalf of the migration policy institute. thank you for spending the last monday of the first month of 2011 with us.
this report is part of the research and u.s. immigration and integration policy. other reports include information and can be found on our website, www.migrationpol icy.org. we have a distinguished panel here to present the report and give comments on the report. i co-author and my dear colleague will discuss the findings of our report. we will then hear from randy kirk guard from the metropolitan police department and jerry
gonzalez of the association of elected officials. we are glad that these members are with us. their biographies are at your chairs. feel free to read them. i also wanted to let you know that we will have a brief question and answer period. i also wanted to know that this is being videotaped. so any questions that you ask will also be video taped. we're glad that c-span is here. before i ask our speakers to speak, let me tell you very quickly how and why we got here.
i think most of you know that the evolution of immigration enforcement policies from the federal to state governments is one of the most important developments in our immigration policy in the last two decades or so. a mild stone happen in 1996 when the changes in our immigration policy gave birth to a new section to our immigration nationality section. section 37 d authorizes the federal government to enter into agreements to carry out certain aspects of immigration enforcement. although it was put on books in 1996, not a single contract was signed for the first six years of its existence. the state of florida signed the first one in 2002. by the end of 2005, there were
only three agreements in effect. by the end of 2006, there were only eight agreements in effect. not only was there a very small number, but the focus of these agreements was targeted to a special interest of populations but they were supposed to target. something suddenly happened in 2007 and 2008. about 26 new agreements were signed in 2007 and about 28 new agreements were signed in 2008. the number of this increase, but something else happened. they were getting more generic in nature and they were increasingly becoming instruments to pick up any unauthorized persons in localities as possible. by the time the administration took office, there was speculation that they would terminate the program. in 2009, the d.h. secretary
noted they not only continued the program, but added a few agreements. the program would be reformed. at the heart of the reform were two elements, a new standardized agreement issued to not only included additional to restrictions, but all the earlier traditions would sign onto the new agreement. and the new agreement established a hierarchy of immigrants who are of interest to the immigration customs enforcement in terms of the targets for these programs. in one way, there was one speculation that in the implementation, it was coming full circle, back to the earlier days of the program, when it was focused and targeted. when we realized in 2009 that this program was going to stay, we decided it was time to look at the program, both in terms of
impact and in terms of its actual implementation on the ground. 71 agreements in effect at all, we decided to do a city that we are now issuing the report about today. there were obviously other reasons to do a report at that point. one was that it was clear that, in this evolution of immigration authority from fedele to the state level. the program provides a very important lessons to look at other populations between ice and state localities. the importance here is the new program that has gotten to 20 new jurisdictions and will be a national program by 2013. it was clear that these
programs would be an increasing element of the relationship between states and the federal government. the other reason to do this was that, by 2009, it was being clear that any comprehensive immigration reform will not happen anytime soon. so immigration enforcement policy would be the center of immigration and policy in general for the future. so we launched ahead with our study. how did we do this? first, we looked at the new agreement compared to the old agreement. we issued a report about the nature of the new agreement and how it would be expected to prevent -- then we decided to pick seven sides of the story. there were one of county and
cobb county in georgia, frederick county in maryland, prince william and the neighboring counties in virginia, lhasa vegas metropolitan police department, and county jail in los angeles. it was a combination of a bigger and smaller programs. it had some geographic diversity. it was also a combination of the jail and the task model. we reached out to ice and ask them to share some data. we got cooperation in terms of releasing data about the characteristics of the people for whom detainers were placed by these local enforcement authorities. then we went out on the field. we met with the senior staff. we met with the sheriffs and the local officers in charge of the