Congressional Hearings
OVERSIGHT OF THE CONGRESSIONAL BUDGET OFFICE
Congressional Hearings
SuDoc ClassNumber: Y 4.B 85/2
Congress: Senate
CHRG-115shrg35700
| AUTHORITYID | CHAMBER | TYPE | COMMITTEENAME |
|---|---|---|---|
| ssbu00 | S | S | Committee on the Budget |
[Senate Hearing 115-589]
[From the U.S. Government Publishing Office]
S. Hrg. 115-589
CONCURRENT RESOLUTION ON THE BUDGET FISCAL YEAR 2019
=======================================================================
HEARINGS
BEFORE THE
COMMITTEE ON THE BUDGET
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
__________
JANUARY 24, 2018--OVERSIGHT OF THE CONGRESSIONAL BUDGET OFFICE
FEBRUARY 13, 2018--THE PRESIDENT'S FISCAL YEAR 2019 BUDGET PROPOSAL
MARCH 7, 2018--DEPARTMENT OF DEFENSE AUDIT AND BUSINESS OPERATIONS
REFORM AT THE PENTAGON
MARCH 21, 2018--THE ECONOMIC REPORT OF THE PRESIDENT
APRIL 11, 2018--CBO'S BUDGET AND ECONOMIC OUTLOOK: FISCAL YEARS 2018-
2028
MAY 23, 2018--GAO'S ANNUAL REPORT OF ADDITIONAL OPPORTUNITIES TO REDUCE
FRAGMENTATION, OVERLAP AND DUPLICATION IN THE FEDERAL GOVERNMENT
SEPTEMBER 13, 2018--AN UPDATE ON TRANSPARENCY AT THE CONGRESSIONAL
BUDGET OFFICE
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
35-700 WASHINGTON : 2019
COMMITTEE ON THE BUDGET
MICHAEL B. ENZI, Wyoming, Chairman
CHARLES E. GRASSLEY, Iowa BERNARD SANDERS, Vermont
MIKE CRAPO, Idaho PATTY MURRAY, Washington
LINDSEY O. GRAHAM, South Carolina RON WYDEN, Oregon
PATRICK TOOMEY, Pennsylvania DEBBIE STABENOW, Michigan
RON JOHNSON, Wisconsin SHELDON WHITEHOUSE, Rhode Island
BOB CORKER, Tennessee MARK R. WARNER, Virginia
DAVID A. PERDUE, Georgia JEFF MERKLEY, Oregon
CORY GARDNER, Colorado TIM KAINE, Virginia
JOHN KENNEDY, Louisiana ANGUS S. KING, Jr., Maine
JOHN BOOZMAN, Arkansas CHRIS VAN HOLLEN, Maryland
TOM COTTON, Arkansas KAMALA D. HARRIS, California
Elizabeth McDonnell, Republican Staff Director
Warren Gunnels, Minority Staff Director
C O N T E N T S
----------
HEARINGS
Page
January 24, 2018--Oversight of the Congressional Budget Office... 1
February 13, 2019--The President's Fiscal Year 2019 Budget
Proposal....................................................... 45
March 7, 2018--Department of Defense Audit and Business
Operations Reform at the Pentagon.............................. 193
March 21, 2018--The Economic Report of the President............. 245
April 11, 2018--CBO's Budget and Economic Outlook: Fiscal Years
2018-2028...................................................... 297
May 23, 2018--GAO's Annual Report of Additional Opportunities to
Reduce Fragmentation, Overlap and Duplication in the Federal
Government..................................................... 343
September 13, 2018--An Update on Transparency at the
Congressional Budget Office.................................... 411
STATEMENTS BY COMMITTEE MEMBERS
Chairman Michael B. Enzi ............... 1, 45, 193, 245, 297, 343, 411
Ranking Member Bernard Sanders ................... 3, 47, 195, 299, 346
Senator Charles E. Grassley...................................... 241
Senator Chris Van Hollen...................................... 247, 412
WITNESSES
Dodaro, Hon. Gene L., Comptroller General of the United States,
U.S. Government Accountability Office.......................... 348
Prepared Statement of........................................ 350
Questions and Answers (Post-Hearing) from:
Senator Patty Murray..................................... 403
Senator Chris Van Hollen................................. 404
Senator Mark R. Warner................................... 408
Gibson, Hon John H. II, Chief Management Officer, Department of
Defense........................................................ 207
Prepared Statement of........................................ 210
Hall, Hon. Keith, Ph.D. Director, Congressional
Budget Office...............................................5, 301, 414
Prepared Statement of.................................. 8, 304, 416
Questions and Answers (Post-Hearing) from:
Chairman Michael B. Enzi.......................... 36, 330, 433
Ranking Member Bernard Sanders..............................332
Senator Kamala D. Harris............................... 39, 334
Senator Chris Van Hollen............................... 42, 337
Senator Bob Corker....................................... 333
Senator Ron Johnson...................................... 335
Senator Tim Kaine........................................ 337
Senator Mark R. Warner................................... 338
Senator Ron Wyden........................................ 340
Senator Mike Crapo....................................... 435
Hassett, Hon. Kevin, Chairman, Council of Economic Advisers...... 248
Prepared Statement of........................................ 251
Questions and Answers (Post-Hearing) from:
Chairman Michael B. Enzi................................. 283
Senator Kamala D. Harris................................. 284
Senator Chris Van Hollen................................. 286
Senator Ron Wyden........................................ 289
Mulvaney, Hon. Mick, Director, Office of Management and Budget... 49
Prepared Statement of........................................ 52
Questions and Answers (Post-Hearing) from:
Chairman Michael B. Enzi................................. 95
Ranking Member Bernard Sanders........................... 147
Senator Charles E. Grassley.............................. 100
Senator Kamala D. Harris................................. 101
Senator Jeff Merkley..................................... 108
Senator Patty Murray..................................... 111
Senator Debbie Stabenow.................................. 168
Senator Chris Van Hollen................................. 171
Senator Mark R. Warner................................... 173
Senator Ron Wyden .................................... 174, 192
Norquist, Hon. David L, Under Secretary of Defense (Comptroller)
and Chief Financial Officer, Department of Defense............. 197
Prepared Statement of........................................ 199
Questions and Answers (Post-Hearing) from:
Senator John Boozman..................................... 238
Senator Charles E. Grassley.............................. 239
Senator Chris Van Hollen................................. 240
OVERSIGHT OF THE CONGRESSIONAL BUDGET OFFICE
----------
WEDNESDAY, JANUARY 24, 2018
U.S. Senate,
Committee on the Budget,
Washington, DC.
The Committee met, pursuant to notice, at 10:31 a.m., in
room SD-608, Dirksen Senate Office Building, Hon. Michael B.
Enzi, Chairman of the Committee, presiding.
Present: Senators Enzi, Johnson, Perdue, Gardner, Kennedy,
Boozman, Cotton, Sanders, Whitehouse, Kaine, Van Hollen, and
Harris.
Staff Present: Elizabeth McDonnell, Republican Staff
Director; and Warren Gunnels, Minority Staff Director.
OPENING STATEMENT OF CHAIRMAN ENZI
Chairman Enzi. I am going to gavel us in so that the
Chairman of the Homeland Security Committee can be assured that
he will be the second Republican to get to ask questions.
Senator Johnson. I appreciate that.
Chairman Enzi. We will be waiting just a few moments,
though, for Senator Sanders' arrival.
[Pause.]
Good morning. Welcome to the Senate Budget Committee's
oversight hearing of the Congressional Budget Office. I am
proud to say that, after a 30-year drought, this is the third
such installment of this Committee's continued oversight of CBO
under my chairmanship. I am glad to see that the House Budget
Committee will follow our lead with additional oversight
hearings later this month.
Section 102(a) of the Congressional Budget Act of 1974
provides the Budget Committee with the authority to review on a
continuing basis the conduct by the Congressional Budget Office
of its functions and duties. These oversight hearings present
the Committee with an opportunity to review CBO's performance
and serve as a forum of discussing ways in which CBO can be
more effective and attentive to the needs of Congress.
Congressional oversight of an office like CBO should also work
at clarifying the Office's mission while improving its
operations.
Alice Rivlin, the first Director of CBO, instructed staff
in a 1976 memo when she said, ``Our work and our publications
must always be balanced, thorough, and free of any partisan
tinge.''
More than 40 years later, Congress, other policymakers, and
the public still depend on CBO to provide objective, accurate,
transparent, and timely budgetary and economic analysis.
Now, one of the difficulties with the Office, of course, is
that they have to forecast, and that is especially difficult.
We do want to have the best possible answers. Of course, we
always want them phrased in our own way. I have been exploring
the request for more transparency, for getting to see the
models. I think that we are mostly asking for the main
assumptions used to reach your conclusions. If the assumptions
are good and pretty comprehensive, I think we will have more
confidence in the results.
This will be the first of many hearings this year. In 2016,
we held many hearings to find a better way to budget.
The ones I could do without legislation are done. The main
one was to give the budget to the minority 5 days before the
budget markup with amendments then to be submitted early so
that side-by-sides could be developed, and better yet, ones
that came from both sides of the aisle with similar amendments
could get together for even better solutions. I still have a
lot of hope for that, and I anticipate doing that again.
Now, last year was a busy time for the Senate Budget
Committee. We approved two budget resolutions and facilitated
consideration of two budget reconciliation bills--one related
to health care and one that resulted in the tax reform
legislation. This legislative activity, in addition to all the
other proposals considered by our authorizing and
appropriations committees, put intense demands on CBO. In 2017,
CBO produced more than 700 formal cost estimates, several
thousands informal cost estimates, nearly 130 appropriations
scorekeeping tabulations, and 86 analytical reports and working
papers. That is a lot of work for an agency that is about one-
tenth the size of the Government Accountability Office. While I
am appreciative of all of CBO's hard work, I also believe we
must take the time to review these efforts. We need to look
back at what went right, but also what may have gone wrong.
It is crucial that CBO keep its mission firmly in mind.
The Budget Act clearly lays out that mission in Section 202
where we can read, ``It shall be the primary duty and function
of the Office to provide to the Committees on the Budget of
both Houses information which will assist such Committees in
the discharge of all matters within their jurisdiction.''
This important section refers to CBO's role in assisting
and supporting the committees and members in the execution of
their duties, and it is always helpful to remember that CBO
exists for this purpose.
Testifying before us today is CBO Director Keith Hall.
Dr. Hall oversees all eight CBO divisions which are tasked
with producing statutorily required budget and economic
forecasts, thousands of cost estimates of proposed legislation,
and special reports as requested by Congress.
CBO's budget analysis is an integral part of the
legislative process. Dr. Hall, when you last appeared before
this Committee in September 2016 to discuss CBO's operations,
you gave us an update on the agency's progress toward several
important goals. In addition to reviewing CBO's work in support
of recent legislative initiatives, we also remain interested in
those goals to increase the transparency of agency analysis and
operations and your agency's responsiveness to congressional
needs.
I am specifically interested in learning how CBO's views
regarding modeling transparency and ways the agency can more
clearly communicate the methods, assumptions, and data that
underlie budget analysis. Dr. Hall, I also welcome your
thoughts on how CBO can more efficiently allocate existing
resources, including staff responsibilities, to satisfy these
congressional requests and expectations.
In 2018 and beyond, CBO will continue to play a key role in
supporting Congress as we consider the budget and economic
effects of proposed legislation. Its objectivity, accuracy,
transparency, and timeliness is essential to help Congress make
informed decisions. Just as CBO's role in the Federal budget
process is crucial, so, too, is this Committee's statutory
responsibility to oversee CBO.
I would like to thank Dr. Hall for joining us today, and I
look forward to our discussion.
Senator Sanders.
OPENING STATEMENT OF SENATOR SANDERS
Senator Sanders. Thank you, Mr. Chairman. And, Dr. Hall,
thanks for being here.
I think before we do oversight over the CBO, it might be a
good idea to do oversight over this Committee. It might be a
good idea for the Budget Committee to actually produce a
budget. I know that is kind of a radical idea, but maybe that
is what we want to do. And maybe it might be a good idea for
the Republican leadership, 116 days into the fiscal year, to
actually do something more than giving us short-term continuing
resolutions.
The truth is, as any businessperson in America will tell
you, you cannot run any kind of entity on a month-to-month
basis. We are a $4 trillion entity. That is what the U.S.
Government is. There are some agencies clearly that need more
funding. There are some agencies that need less funding. And
the idea that we are saying that every agency of Government
every month is going to get exactly the same amount of money as
they previously got because of a continuing resolution is
insane. And I suspect if anyone looked at it, you would find
that we are wasting tens and tens and tens of billions of
dollars funding agencies that perhaps do not need that money or
funding agencies that are clearly inefficient.
So we are not addressing that, and we keep kicking the can
down the road. That is the most important thing that we have
got to do, and that is not Dr. Hall's responsibility. He is
doing his job. His people are doing their job. It is our
responsibility.
So, Mr. Chairman, it seems to me that we have got to
address--maybe this Committee can play a more active role in
pushing our colleagues forward on this thing. We have got to
address the budget crisis that we have. Let me just address
some of the issues which I think we are all familiar with that
have got to be addressed as we desperately try to come up with
a 2018 annual budget.
First of all, we have the moral issue of 800,000 young
people in this country who were raised in this country, who
only know the United States as their home, who are on the verge
of facing deportation. And let me be very clear about this. If
we do not address this issue, I think history will look back at
this particular moment and see an incredible moral stain about
doing this to these young people.
What we have also got to do is create a budget which
provides parity. Now, I know there is a great desire to see
more money for defense, and we could argue about that. But the
bottom line is for every dollar that we spend on defense, we
have got to spend on the needs of working families. Five
minutes ago, I just came from my office where I talked to
parents and administrators in the Head Start program in
Vermont, and they are telling me, as I am sure that they are
telling you in your offices, that children all over this
country, little kids, 3, 4 years of age, are being impacted by
the opioid crisis. Kids are being taken out of their homes
because their parents are addicted to opioids going into foster
homes. We have got a crisis. We are not dealing with that
crisis.
Unbelievably--unbelievably, Mr. Chairman--we have 27
million people in this country who utilize community health
centers to get their health care, the dental care, the low-cost
prescription drugs, the mental health counseling that they
need, 27 million people, one out of four people in my own
State. We have not reauthorized the Community Health Center
Program. We have got 30,000 vacancies at the Veterans
Administration. So instead of us giving speeches about how much
we love veterans, why don't we make sure that the VA is
adequately funded and adequately staffed?
Some of you may have seen the piece in the Washington Post
last month. Unbelievable. Ten thousand people with disabilities
died last year while they were submitting claims to a Social
Security Administration that does not have the staff or the
funding to process those claims. Ten thousand Americans with
disabilities died. Are we going to adequately fund the Social
Security Administration? Or are we going to pass another
continuing resolution leaving them grossly underfunded?
In parts of my State and in parts of your State, Mr.
Chairman, I am sure, there are communities that do not have
adequate broadband. How do you bring businesses into those
communities? How do kids do their homework if there is not
adequate broadband? In other words, there are enormous needs
facing the American people, and those needs are not just giving
huge tax breaks to billionaires or trying to throw 30 million
people off of health care. There are needs that we have got to
address.
So, Mr. Chairman, I would hope that we have a serious
debate about the budget of the United States of America and we
do it as soon as we can.
Dr. Hall, thanks again for being with us.
Chairman Enzi. Thank you, Senator Sanders. I appreciate
your remarks and have made a number of notations here. We will
have more hearings during this year, and I think that I would
be interested in what different members of the Committee would
be interested in particularly pursuing in some depth as kind of
a task force for oversight for us so that we can do a better
job of budgeting.
Our witness this morning is Dr. Keith Hall, the ninth
Director of the Congressional Budget Office. Director Hall is
no stranger to this Committee, having served as CBO Director
since April 2015. Since that time he has appeared before this
Committee to discuss the CBO's work and its projections for the
Nation's fiscal situation. He has more than 25 years of public
service with the International Trade Commission, with George
Mason University, with the Bureau of Labor Statistics, with the
White House Council of Economic Advisers, with the Department
of Commerce, and an international economist for the ITC. He was
also an assistant professor at the University of Arkansas and
an international economist at the Department of Treasury. In
those positions he worked with a wide variety of topics,
including labor market analysis and policy, economic conditions
and measurement, macroeconomic analysis, and forecasting
international economics and policy, and computational partial
equilibrium modeling--which I hope he will not explain this
morning.
[Laughter.]
Chairman Enzi. He has a Ph.D. and a master's in economics
from Purdue University. This morning Dr. Hall will be talking
with us about CBO's work over the last year and the goals he
set out for this critically important agency. We look forward
to receiving your testimony.
For the information of colleagues, Director Hall will take
up 7 minutes for his opening statement, followed by questions.
Welcome, Dr. Hall. Please begin.
STATEMENT OF THE HONORABLE KEITH HALL, PH.D., DIRECTOR,
CONGRESSIONAL BUDGET OFFICE
Dr. Hall. Chairman Enzi, Ranking Member Sanders, and
members of the Committee, thank you for inviting me here to
discuss the work of the Congressional Budget Office. As you
know, CBO's mission is providing nonpartisan budgetary and
economic analysis to support the work of this Committee and the
Congress as a whole. My colleagues and I are devoted to that
mission, and I appreciate the opportunity to discuss how CBO
has executed it this year and how we plan to expand our work in
the future.
I also want to take this opportunity to thank you for your
support and guidance. We at CBO have long relied on the Budget
Committees to explain to others in the Congress what our role
is, to provide constructive feedback on how we can best serve
Congress, and to provide guidance on what legislative
developments are occurring and what the Congress' priorities
are. That work on your part has been key to our success over
the years.
In the past year, we have provided Congress with 740 formal
cost estimates and mandate statements. We have also provided
thousands of hours of technical assistance to committees, which
have included thousands of informal cost estimates, probably
more work than our formal cost estimates. We have provided 128
scorekeeping tabulations, 86 analytical reports and working
papers, dozens of files of data underlying budget and economic
projections, and numerous other publications. Many of the cost
estimates were produced under very tight time constraints and
required extraordinary efforts by our staff to meet legislative
deadlines.
We also undertook new initiatives to enhance our
responsiveness and transparency. We reorganized work processes
and shifted resources to areas of high demand. We published
more evaluations of our projections about the economy,
spending, and health insurance subsidies. We documented more of
our analytic methods--about flood insurance, pension benefit
guarantees, and health care for the military, for example. And
we gave more examples of changes in our estimates, addressing
issues ranging from Social Security to options for changing
Medicare.
In the next 2 years, CBO plans to continue to support the
Budget Committees and the Congress by producing budget and
economic baseline projections, reports about those projections,
and cost estimates for many proposals, including all
legislation reported by committees. Other major products will
include a volume of policy options that would reduce budget
deficits, reports on the long-term budget outlook, analyses of
the President's budget proposals, monthly budget reviews, and
policy analyses on a broad array of topics of interest to
congressional committees. CBO is reviewing and updating every
aspect of its simulation model of health insurance coverage,
which forms the backbone of its budget projections related to
Federal health care spending for people younger than 65. In
addition, CBO will further develop its capabilities to assess
the macroeconomic effects of fiscal policies and the ways that
changes in Federal regulations affect the agency's baseline
budget projections.
Responsiveness and transparency are top priorities of mine,
and we have plans to bolster them further. We will make greater
use of team approaches to handle surges in demand for analysis
of particular issues. We will increase public documentation of
our computer models. We will also do more to explain how
analysts employ those tools as part of the process for
producing estimates. I like to think of this as documenting our
processes as well as our models.
For a cost estimate, for example, an analyst identifies the
ways in which a proposal might affect the budget and assesses
which of them would probably have substantial effects. The
analyst also consults experts and examines the most relevant
data and research to form a basis for the estimate, which
includes determining which models to use, if any, what
information to put into those models, and how to use their
output in combination with other available information. In
short, CBO models do not produce estimates; CBO does. The
models are just a few of the tools that we use in producing our
estimates.
We will be able to make significant progress on our plans
to boost responsiveness and transparency if we receive funding
for fiscal year 2018 within the range that the Senate and House
Appropriations Committees have recommended. If we receive the
funding available under the continuing resolution currently in
effect for this year, we will make less progress. Moreover,
CBO's ability to buy data and research and to pay for other
standard activities would be severely limited under the funding
specified in the continuing resolution, and the agency's
performance of its mission would be degraded.
Many initiatives of great interest to Congress could be
undertaken only if CBO had more employees, so we have submitted
a budget request to hire 8 new staff members in 2019 to bolster
our responsiveness and transparency, as part of a plan to hire
a total of 20 additional people by 2021. The new staff would
help CBO respond to requests for information more quickly when
there is a surge in demand. They would also allow CBO to supply
more information about its analysis and models without reducing
the valuable services it provides to Congress at its current
staffing level. In the next 2 years, CBO also proposes to
expand analytical capacity by adding new health care analysts
and creating additional onsite capacity to use sensitive data
securely.
I am delighted to talk with you about our work today and
would be at any time in the future as well. I am happy to meet
with Members of Congress or to chat on the phone. In addition,
our employees meet frequently with congressional staff to
explain our analyses and to answer questions individually and
in groups, and we have plans to be in still better contact.
For instance, earlier this month, in collaboration with the
Congressional Research Service, my colleagues gave
presentations to 150 congressional staff members about how CBO
develops estimates of health insurance costs and coverage. We
are constantly looking for ways to serve your needs better, and
I welcome your suggestions.
[The prepared statement of Dr. Hall follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Enzi. Thank you, Dr. Hall.
Now we will turn to questions. Let me take a moment to
explain the process. Each member will have 5 minutes for
questions, beginning with myself and then Senator Sanders.
Following the two of us, we will alternate questions between
the Republicans and the minority. All members who were in
attendance when the hearing started will be recognized in order
of seniority on their side. For those who arrived after the
hearing began, you are on the list in order of arrival. If it
is your turn to be on the list to be recognized, but you are
not available, you move to the bottom of the list and I turn to
the next Senator to ask questions. With that, I have a few
questions.
A recent legislative proposal introduced in the House and
Senate would require CBO to publicly disclose its models and
data. You mentioned that in your testimony. The intent of this
legislation is to increase transparency and allow for outside
analysts to reproduce and replicate CBO projections. While you
have made significant strides to open up CBO's work to the
public, what efforts are currently underway at CBO to increase
the transparency further, both to Congress and the public? Do
you think that disclosing CBO models and data would improve the
legislative process and the public confidence in the final
products? And how would that vary from sharing more assumptions
that are used?
Dr. Hall. Well, thank you. We are committed to
transparency, and we have certainly been trying to increase
transparency. One of the things that we have tried to do is we
have tried to do this intelligently, treat our decisions on
transparency as good business decisions for us.
There are lots of ways of being transparent. Different ways
of being transparent have different benefits to Congress and
have different costs. With respect to benefits, who we direct
the transparency to, are we being more transparent to Members
or staff? Are we being more transparent to outside experts who
can evaluate what we are doing? And then, of course, costs.
There can be significant time and resources used to become more
transparent. So we have to make this sort of benefit-cost
tradeoff analysis when we do this.
Part of what we are doing, for example, is we have some
ideas on being more transparent. We are calling them pilots in
a sense because we want to try them and sort of see how that is
received by Congress, see if that is the sort of transparency
that you are most interested in.
One of the things that we are doing, for example, is we are
doing a complete rewrite of our main model for doing health
care insurance estimates, the so-called HISIM model. That
rewrite will happen over the next year, but to give you an
idea, since I have been on board, we had plans to completely
redo this model, and so it has been 3 years. We would have been
finished by now if over the past year we had not gotten so many
health care-related requests, so the same people who would be
updating the model were busy doing cost estimates.
Chairman Enzi. That fits in with my next question, which is
one complaint that I often hear from colleagues, that they are
unable to receive estimates on their legislation in a timely
manner, but CBO has plenty of time to release a number of other
products and reports. How would you respond to that complaint?
Are these reports the result of congressional requests or are
they agency--initiated? Can CBO provide a list of published
reports that did not originate due to a specific congressional
request or not directly attributed to a single requesting
office?
Dr. Hall. Well, thank you for asking that. As I recall,
when I first came on board you expressed concern about that. We
have not started a single analytical report since I have been
the Director without having specific congressional interest
from a congressional committee, expressed interest from a
committee with jurisdiction. So we simply do not do analytical
reports just on our own. We square that away first.
And, second, of course, is we have lots of different areas
of expertise, so when we are really busy on health care, we
only have so many people we can pull into health care. So we
have time for other people, people that work on other reports.
We do our best to not let our analytical reports at all
interfere with our work on cost estimates, for example, our
work on developing models for cost estimates and that sort of
thing.
Chairman Enzi. How do you prioritize those requests for
reports, though?
Dr. Hall. Well, we look to committees. We try not to
prioritize things ourselves. We get way more work that we could
possibly handle, so what we do is we look to committees of
jurisdiction and ask them what are their priorities, and we
follow their priorities.
One of the more frustrating things that I have to do is----
I get calls from Members sometimes who have a piece of
legislation they would like CBO to look at, and if we are
really busy with committee work, we have to ask the committee,
``Can we make this a priority?'' And quite often the answer is,
``No. Our work takes priority.'' So we have to put off work.
And I know that is frustrating, but, again, we are trying to
take direction from committees as to how to direct our
resources.
Chairman Enzi. We will be looking into whether there is a
role for the Ranking Member and the Chairman of the Budget
Committee to have more of a role in that ranking. My time has
expired almost, so I will turn it over to Senator Sanders.
Senator Sanders. Thank you, Mr. Chairman.
Dr. Hall, as we contemplate maybe someday passing a budget
here, could you help me refresh my memory here? My recollection
is that in the Budget Control Act of 2011, one of the
cornerstones of that bill was parity, equal funding for defense
and nondefense. And if I am correct, the next three budget
deals that were passed also had parity as a cornerstone. Is
that correct?
Dr. Hall. That sounds right, yes.
Senator Sanders. Dr. Hall, my Republican colleagues have
spent a lot of time this year on health care, and if my
recollection is correct, your agency has been criticized a bit
for the analyses that they provided us on various health care
proposals. So let us go over it again because I think the
consensus is that you were right in your analyses. But the
bottom line is that on January 17, 2017, CBO scored the so-
called Restoring Americans' Health Care Freedom Reconciliation
Act--Mr. Chairman, we have got to do something about these
titles.
[Laughter.]
Senator Sanders. There should be truth in advertising, too.
Which was vetoed by President Obama. CBO found that 32 million
fewer people would have health insurance after 10 years and
that average premiums in the non-group market would almost
double by 2026. Does that sound correct?
Dr. Hall. That is correct. The only thing I would say, that
is also relative to a baseline, so an expected change in
coverage and that sort of----
Senator Sanders. Right.
Dr. Hall. Yes.
Senator Sanders. On May 24th CBO scored the American Health
Care Act as passed by the House. CBO found that 23 million
fewer people would have health insurance after 10 years. Does
that sound about right?
Dr. Hall. Yes, it does.
Senator Sanders. Okay. So, in other words, what CBO did is
made the obvious conclusion that when you substantially cut
Federal funding on health care, lo and behold, people lose
their health insurance. And I will not ask you to comment on
this, but I think you came up with the obvious conclusion, but
because you came up with that conclusion, which was not
terribly palatable to some of my colleagues, you were
criticized, and I think that is unfortunate. And I think we
should let these guys do their jobs and come up with their
objective conclusions without attacking them because we do not
like the conclusions that they have.
Let me go to another area. After trying to throw tens of
millions of people off of health insurance, my Republican
colleagues then took a look at taxes in the United States. Am I
correct in saying that CBO's analysis said that the legislation
that was finally passed would add more than $1.7 trillion to
the deficit when interest costs are included? Does that sound
about right?
Dr. Hall. Yes, although I would have to give credit to our
colleagues on the Joint Committee on Taxation who did the
actual hard work.
Senator Sanders. Right, I know that. But that sounds about
right, yes?
Dr. Hall. Yes.
Senator Sanders. Am I correct in saying that the JCT's
analysis determined the legislation would add more than $1
trillion to the deficit even when we use dynamic scoring? Is
that a fair representation?
Dr. Hall. That is right.
Senator Sanders. Now, I will not ask you to comment on
this, but I will comment. But day after day, month after month,
I have heard about the world collapsing when we add to the
deficit and the national debt. That is not your issue. Some of
my colleagues apparently forgot about the lectures that they
gave us over and over again about deficit spending.
Dr. Hall, on November 8th, CBO re-estimated the effects of
repealing the Affordable Care Act's so-called individual
mandate. CBO estimated that the change would increase the
number of uninsured people by 13 million within 10 years and
increase premiums by about 10 percent in any given year. Does
that sound consistent with what you told us?
Dr. Hall. It does.
Senator Sanders. Okay. More recently, on January 11th, CBO
estimated the cost of extending the Children's Health Insurance
Program for 10 years, you projected that a 10-year extension
would actually save the Government $6 billion. Does that sound
about right?
Dr. Hall. Yes, it does.
Senator Sanders. Okay. All right. Let me just conclude by
saying, you know, I think under a lot of pressure your agency
is trying to do the objective work that is expected of you and
that I hope that some of my colleagues would refrain from
attacking the agency because the results that you produce are
not something that they are comfortable with.
Thank you, Mr. Chairman.
Chairman Enzi. Senator Johnson.
Senator Johnson. Thank you, Mr. Chairman.
Dr. Hall, I want to go to kind of the line of questioning
the Chairman was engaged in terms of who decides what you score
and, I guess who do you report to. The reason I am asking the
question is that, after the election, knowing that we were
going to be bringing up health care, I started through staff
informally requesting scores on what would happen if we would
repeal the market reforms. It did not get very far, so on March
23, 2017, I sent a letter to you signed by the Chairman and 20
of my other colleagues, 22 Republican Senators, requesting--
pretty simple. We requested the Congressional Budget Office, in
consultation with the Joint Committee on Taxation, estimate the
budgetary effects of repealing the Obamacare insurance
regulations.
Now, you are aware the reason we need that--well, first of
all, just to understand what policy might cause, but also there
is no way that we can even bring it in front of the Senate if
we do not have a score to present to the Parliamentarian. So
this is a basic piece of information we needed. I want to know
why didn't we ever get that score. Again, this is 4 months
before this really came to a head. The only response we got
was, ``Cannot do it.''
Now, you do all kinds of different things. You make all
kinds of estimates, and I am going to talk next about the
estimate of the number of people losing insurance. Just simple,
why didn't we get an answer? Twenty-two Republican Senators
asked for this analysis. What would it cost the Government if
we repealed those market reforms?
Dr. Hall. Well, I can tell you that our health group was
just working flat out for months.
Senator Johnson. This was in March.
Dr. Hall. Even in March we were working flat out for
months. One of the things that is underrated, one of the
reasons I tried to make a point about it, is we do a tremendous
amount of what I call ``technical assistance'' where we are
getting draft legislation from a committee of jurisdiction
and----
Senator Johnson. Okay.
Dr. Hall [continuing]. That is going to ultimately wind up
being real legislation.
Senator Johnson. Again, I will follow this in private with
you. Okay. I want to find out exactly why we did not get this,
Okay? I want to move on to the question of insurance coverage.
Your scores under Obamacare used the March 2016 baseline,
which, again, by law you had to do that. But it is also true
that in January 2017 you created another baseline in terms of
people in terms of insurance coverage. Correct?
Dr. Hall. Right.
Senator Johnson. Now, in your score--and, of course, this
was the grenade that the CBO threw into the health care debate
that pretty well poisoned the well. You said that in 2018, 15
million Americans would lose health insurance because of the
Senate bill. That is broken down 7 million in the individual
market, 4 million Medicaid, 4 million employer.
The problem with that is that it's comparing against the
March baseline. If you compared it to your most recent
baseline, January, the individual market, there had been no
additional uninsureds. That 7 million would have gone away. We
would have been left with 8 million--4 million dropping
Medicaid coverage, 4 million on employer.
Now, I can understand without a mandate why people might
lose employer coverage. Why would people drop free Medicaid?
Now, fast forward in terms of your estimate for 2026. The 15
million grew to 22 million. But, again, 7 million of that
should just be excluded because you already updated your
estimate that there would be nobody losing coverage on the
individual market based on your January 2017 baseline. So that
leaves 15 million people--22 minus 7, 15 million people--all
losing Medicaid.
Now, again, you can say people are going to drop basically
free coverage because there is not an individual mandate. It
makes no sense whatsoever to me. It makes no sense.
So I had a conversation, one of the most frustrating ones I
have ever had, with Mark Hadley. Now, in that I asked for the
CBO in our latest replacement piece of legislation to break out
Medicaid expansion versus Medicaid, and you did that and I
appreciate that. I think that was very helpful. It certainly
helped my analysis of it.
But I also asked a very simple thing. I said, fine, you
know, compare your coverage estimates with your March 2016
baseline. But because you also have a new baseline, why don't
you just put that as an alternate scenario?
Now, the response I got, ``Well, it was take 2 weeks.'' You
have got the baseline right here showing 19 million people
uninsured on the individual, 19 million under the Senate bill,
19 minus 19 is zero. I could do that in seconds. Why did you
refuse to provide the American people the information that
would not have been freaking them out, where we could have
really looked at this analysis and go, well, Okay, 8 million
people losing, 4 on the employer, 4 Medicaid. Really we are
probably looking at 4. Why didn't you provide that alternate
scenario?
Dr. Hall. Well, first of all, it is not clear that the
alternate scenario would have gotten the different numbers that
you suggest--let me just put it that way--because changing the
baseline had sort of two effects, right? Because the premiums
were higher while at the same time the coverage was lower.
Also, when we talk about the 15--let us go back to the 15
million drop in Medicaid. That is really--most of that is not a
decline in Medicaid, but that is a--the legislation ended the
expansion of Medicaid. So those were people primarily who do
not have Medicaid, will not get it over the next 10 years, who
would have under current law at the time. So we are not really
talking about people dropping from Medicaid, but people from--
--
Senator Johnson. Again, this is just simple math. You come
up with an estimate. You compared it against a baseline, and
you are not providing the American people with the information
they need.
Thank you, Mr. Chairman.
Chairman Enzi. Thank you, and there will be an opportunity
at the end to submit additional questions, too, that we might
want to have answered.
So next would be Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. Dr. Hall,
welcome. And Senator Sanders covered some of the issues I was
going to ask you about, but I wanted to ask you about the
impact of CRs, continuing CRs, on the work of the Congressional
Budget Office. We heard from the Pentagon spokesperson a few
weeks ago that going from CR to CR--we have now had four--
results in wasteful spending at the Defense Department and has
negative consequences for our defense.
Does going from CR to CR make your work at CBO harder? And
what are the consequences of it?
Dr. Hall. Well, it does make things harder. We have
actually put off some things. We are tending to put off some
computer work and some things like that. If we continue under a
CR, right now I think we will have to curtail our hiring. We
will have to move down a few slots. We will probably have to
cancel some training and travel and that sort of thing. So it
does have a consequence for us. It does sort of degrade our----
Senator Van Hollen. In terms of your planning, does it make
your planning harder? And does that lead to some inefficiencies
in terms of your ability to hire when you need to hire?
Dr. Hall. Yes, it does.
Senator Van Hollen. Okay. Let me ask you about the CHIP
program and the scoring, because the good news is the Congress
reauthorized the Children's Health Insurance Program for 6
years, and as was referenced, the Congressional Budget Office
estimated that it would actually save money, I think you said
$6 billion, compared to the earlier baseline. Is that right?
Dr. Hall. Yes.
Senator Van Hollen. Okay. And your analysis of savings was
not as a result of the cost of providing health care services
to these children going down, was it?
Dr. Hall. No, it was not.
Senator Van Hollen. It was the cost of the alternative
going up, right?
Dr. Hall. That is right.
Senator Van Hollen. And the alternative is the health care
provided in the Affordable Care Act exchanges primarily. Is
that right?
Dr. Hall. Yes.
Senator Van Hollen. Okay. And the reason, the primary
reason those costs went up was as a result of the fact that the
elimination of the individual mandate resulted, according to
CBO, in the cost of premiums going up by 10 percent. Is that
right?
Dr. Hall. Yes.
Senator Van Hollen. All right. So I think this is an
important point for people to understand. The reason the cost
of providing services to CHIP went down is because those
children, if they were denied that alternative through the
Children's Health Insurance Program, would have gone into the
Affordable Care Act exchanges, and as a result of the
individual mandate removal being the primary cause, the cost to
the taxpayer would go up because when those premiums go up, we
all pay a higher tax credit to help meet the needs of those
individuals. Is that right?
Dr. Hall. That is correct.
Senator Van Hollen. So that really is my--it just shows
that when you do one thing to pull the rug out of the
Affordable Care Act, when you get rid of the individual
mandate, you increase the premiums by 10 percent, and so that
meant that if you did not extend the Children's Health
Insurance Program, those kids coming into the Affordable Care
Act exchanges would have been paying higher premiums. As a
result, the tax credits that we provide people to make sure
that that health care in the exchanges is affordable would have
gone up. So, yes, it is great we extended the Children's Health
Insurance Program and we saved $6 billion, but the savings was
relative to the baseline, and the baseline costs went up
primarily because of the move in the tax bill to get rid of the
individual mandate.
So I just hope members will understand the consequences of
their action with respect to actually saving taxpayers' money
and providing an important benefit to our kids' health. And I
really do appreciate the Congressional Budget Office because
sometimes, you know, some of us agree with your analysis,
sometimes we disagree with the analysis. But, my goodness, if
we did not have some kind of referee here in the U.S. Congress,
we would have even more of a free-for-all than we already have.
And we already have a hell of a free-for-all.
So I am grateful for somebody being able to take an
objective look at this and provide an analysis that we can use.
There are too many--we are already having a dispute nationally
over what is fact and what is fiction. I am grateful that you
provide us some baseline for what is fact, at least as it
regards to the budget.
Thank you, Mr. Chairman.
Chairman Enzi. Senator Perdue.
Senator Perdue. Thank you, Mr. Chairman. Thank you,
Dr. Hall, for being here.
I want to talk about partisanship just a minute. I found
three things this morning in a bipartisan way that I agree with
the Ranking Member today, and I want to put that in the record.
Number one, I agree with his first opening comment about we
need to be serious about the budget process and recognize that
it is broken.
The second thing is we all want to find a way to solve the
DACA issue.
And, third, and maybe most important, we need to find a way
to simplify our titles of bills around here.
But I also want to agree with my colleague Senator Van
Hollen. You know, thank you that you are attempting to be an
objective source for information for modeling and anticipation
and projecting the impact of potential legislation. But I want
to talk about how to achieve that.
First of all, this is one of the most partisan committees
that I have seen. I was on Judiciary as well. It is very
partisan as well. But this is a very partisan Committee, and
unnecessarily so. But it is partisan because of the budget
process. Members of the other side of the Committee, several
members there, Senator Whitehouse, Senator Kaine, members of
this side, I think we all agree the process is broken, and it
creates a situation here because the budget is not a law, it is
a resolution; therefore, the majority crams down the throat of
the minority their political statement about what they think
that they should do in spending. You get caught in the middle.
One side likes your opinion; the other side does not like your
opinion. This will change at some point in the future. They
will be in the majority; we will be in the minority. Nobody is
going to like it. This is a broken process. We have to fix it.
But in the meantime, you play an important role, and I
think it is absolutely critical that you be as nonpartisan as
you can be. I have two questions for you very quickly.
One is I agree with the Chairman and the Ranking Member
that they should be involved in the priorities of what you are
allocating time and resources to. You heard very important
questions being asked during the health care debate as well as
the tax debate that did not get answered. How do you respond to
that? And then I want to talk about how you are assuring that
we maintain a nonpartisan position in here? Very quickly. Just
on hiring--I mean, I am sorry, on the priorities, would you
address that very quickly?
Dr. Hall. Sure, sure.
Senator Perdue. Then I want to go to one more question real
quick.
Dr. Hall. One of the difficult things for us is we do so
much technical assistance, which often leads to a formal cost
estimate, but by technical assistance, we are looking at
legislation, we are giving feedback and formal estimates. That
is so often done by a committee or leadership, and they want it
done confidentially because it is sort of technical assistance.
So we wind up doing a lot of work over time where the Budget
Committee would not know what we are working on and we cannot
tell them that.
And so what we have done is we have developed what we think
is a pretty--the most effective thing we can do, and that is
when we have--when we are jammed up on topics, we look to the
committee of jurisdiction to tell them, hey, we have got these
things going on, tell us what your priorities are.
Senator Perdue. But the ultimate priority really exists in
the--or resides in the Budget Committee, right?
Dr. Hall. Yes, that is right.
Senator Perdue. Okay. So let me go back to one other thing
then. In terms of this partisanship--and this is before your
time, so I think you can be objective to the response. The
question is how to avoid this in the future. It is one thing to
disagree with the projection. It is another to look at reality
and compare it back to the projection, which is what we do in
the real world in business.
In 2013, CBO predicted that Obamacare enrollment in the
individual market for the years 2015, 2016, and 2017 would be
13 million people, 24 million people, and 26 million people,
respectively. The actual enrollment was 11 million, 12 million,
and 10 million.
Now, when you see 100 percent error like that, it raises
questions in my mind about impartiality, particularly when the
author of those estimates, the head of the CBO's health
analysis group, was formerly part of Hillary Clinton's 1993
Health Care Task Force, I have to ask the question: How do you
ensure--you were not there then. Going forward, how do we
assure ourselves that we are getting a nonpartisan, objective
viewpoint, to Senator Van Hollen's point earlier?
Dr. Hall. Well, we do a lot to try to seek guidance and
advice from experts on both sides. We try very hard. We
actually do our best to go back and look at how we did. We went
back and looked at how the estimates turned out there.
The only thing I would say, you know, in defense, of
course, is sometimes it is really hard to estimate these
things.
Senator Perdue. Sure.
Dr. Hall. And I think one of the conclusions I would make
in going back is certainly with the exchanges we were off. We
were not as far off on things like the actual spending and some
other things. But everybody else was as well. In fact, we were
probably more accurate than most others.
Senator Perdue. That does not give me a lot of comfort.
Dr. Hall. I know it does not. But it goes to the issue of
bias, right? We can be off and we can be wrong, but hopefully
we are not consistently wrong. I am a little disturbed that we
are consistently overestimating, for example, the exchange
participation. We tried to fix it. We still overestimate. Try
to fix it--you know, I have a background in economic data. When
you are doing economic data, you do not want to have revisions
all one way. You want to revise it up and down.
Senator Perdue. Right.
Dr. Hall. That is what we would like to have. But we try
very hard to do that. We try it with the processes and try to
do it that way. We try to be transparent. That is why I
approved this transparency push.
Senator Perdue. Thank you.
Thank you, Mr. Chairman.
Chairman Enzi. Senator Whitehouse.
Senator Whitehouse. Thank you, Chairman.
First, let me echo what my friend Senator Perdue has just
said. We have seen the Budget Committee become 100 percent
partisan and zero percent meaningful. In fact, the most
important work that we do here is not even budget work. It is
simply the political task by the majority of opening the
procedural gateway to another partisan political effort down
the road in the Senate. Short of that, we do not need Dr. Hall;
we do not need staff. We do not need anything because we do not
do anything in this Committee. There is a reason that over and
over again we have Committee hearings, even nominally on the
budget of the United States, and nobody even bothers to show up
in the audience, because people know perfectly well that what
we do here has exactly zero effect. Once appropriators got
accustomed to beating a 60-vote margin in the Senate on
appropriations bills, the Budget Committee's penalty for
breaking our budget, which is you have to get 60 votes, made us
useless. The fact that we only look at appropriated funds, not
the far larger amount of money that goes sloshing out through
the back door of the Tax Code, not the health care expenditures
of the country, just contributes to my sense that we have made
ourselves a useless Committee, and it is something I am
extremely eager to correct on a bipartisan basis.
The issue that bedevils us, I think, the most here is the
health care cost issue, and, Dr. Hall, I think you have seen me
do these before. This is one of my least favorite graphs that
has life expectancy in years among the leading developed
countries and cost per capita in health care, and basically all
of our major competitors are here in this kind of bolus of
competition. We are way the heck out here. We cost a fortune
more per capita than any other industrialized country, and we
have life expectancy comparable to Chile and the Czech
Republic. So it is not like we are gaining these massive health
gains from that massive expenditure.
So you guys do some really good work, and this is to me one
of the more interesting things that I have seen. The red line
on the top is the projection for Federal health care spending
that was made back here. That was in August 2010. In January
2017, this experience, the actual green line, then got baked
into a new projection, and the new projection for this 10-year
period is lower by the amount of this green block than what CBO
had previously estimated. That reduction is $3.3 trillion in
health care savings. If we could pass something in the Senate
and in the House that gave us $3.3 trillion in health care
savings, that would be one of the most significant things that
we could do.
The problem is we do not know exactly why that happened.
That is a combination of early experience and then algorithms
that you guys run to make your projections with that we do not
have a lot of transparency into. So, to me, if you are looking
at the possibility of multiple trillions of dollars in future
health care savings, it ought to be an absolutely critical
priority, a bipartisan priority of this Committee and of your
office, to be trying to figure out and explain what are the
things that can help make that happen. What are the things that
might even dial it up a little bit? If you can get $3.3
trillion, why not $6.6 trillion?
So I hope if we are going to spend more money on staff,
this becomes a really important priority, explaining why.
Because if you can explain why, we can try to do more of it.
Now, I will say that we have accountable care
organizations, provider accountable care organizations in Rhode
Island. It is basically doctors' offices that have agreed to
sign up for placing a bet that they can give better care at
lower cost to their patients. In return, they do not just get
paid for doing procedures and prescriptions. They get a bonus
from CMS for doing a good job.
Some of the best ones in the country are in Rhode Island,
and they are seeing their cost per patient actually go down
year over year. And they are generating millions of dollars in
savings just in their little local practices.
So somehow there is a connection between being able to save
$3.3 trillion just over 10 years in health care expense and
these local experiences that we are all seeing in our provider
and other ACOs. How to maximize that to me I think is a job
worth doing in a Committee that otherwise appears to have no
purpose.
So I look forward to working with you on that, Dr. Hall.
Dr. Hall. Let me say that falls right into our category of
analytical reports that we do, and that is exactly the sort of
thing that we like to look at that is really of interest
budget-wise but explains things.
Chairman Enzi. Thank you. And at the beginning of 2016, we
said the budget process was broken, and we did 13 hearings and
had a number of things that we had hoped that we would pass
before the election so we would not know who the President was
going to be or who the majority was going to be. But we did not
have enough people involved in that process, so it got stopped
before the election. I thought we----
Senator Whitehouse. Do not give up hope, Mr. Chairman.
Chairman Enzi. I will not, and I am planning on doing some
hearings based on some task forces led by individuals on this
Committee, bipartisan ones, and I suspect that you have an
intense interest in health care.
Senator Cotton, welcome to the Committee as our newest
member.
Senator Cotton. Thank you. It is good to be here. I am
saddened to hear the Senator from Rhode Island and the Senator
from Georgia agree that it has become very partisan. I suppose
I was added to make it more bipartisan. And I want to start
with a bipartisan conversation. I think it will matter to both
sides of the aisle, because it is just about the way the CBO
interacts with members of this Committee and Members of
Congress as a whole, the way they respond to requests for
information from us.
I want to use as an example the analysis CBO did last fall
about Medicaid coverage losses under one version of our health
care bill. I am not sure which one it was. Some of your
analysts came to a Republican conference meeting to explain, I
think it was, a 5-million-person loss under Medicaid, and that
analysis turns out to have assumed that some number of the 18
non-expansion States would expand Medicaid despite their
previous decisions not to since the 2010 law, and then if our
bill had passed, those States would then decide to drop
Medicaid.
When asked which States would be doing that, and especially
if Texas and Florida would be doing it, the two largest non-
expansion States, since if you did not have one of those two
expand, you could not even get to 5 million in total
population, the analysts told us they could not answer that,
they do not make that kind of prediction. They were just going
on past programs and so forth. I found that pretty astonishing.
At root, that is more of a political judgment than it is an
economic assessment. And there is just no good explanation for
why they reached that conclusion. And I found that to be fairly
consistent with my study of CBO reports, which are usually
pretty good when it comes to Government revenues and outlays,
but leave something to be desired when it comes to things like
political judgments or market forces and incentives, or the
incentives of private individuals. And I believe that those
assumptions are rarely made adequately public or explained, and
it makes it harder for us to do our job and certainly harder
for the public to understand the kind of projections you are
making.
Let me stop there and see if you would like to respond to
that.
Dr. Hall. Sure. We are not particularly happy about having
to make that sort of assumption, but it was absolutely key to
understanding the proposal how many States will choose to
expand or not expand. If we choose no more would expand, that
is an assumption that would affect our numbers. If we chose
that some would expand, we are trying to do that. We tried our
best to look at past history, and what we did is we put States
into buckets. We had different buckets, you know, more likely
to expand, less likely, in the middle. And we actually really
did put the States in there, but our thinking was we did not
want to talk about particular States, because if you are wrong
about a State in the wrong bucket here, it should be over here,
there might be some State here that should be over there. So
the errors can somewhat cancel out.
Senator Cotton. If I could, Dr. Hall, I do not want to get
into the details of that particular analysis. My point is,
though, that was a very small universe of data.
Dr. Hall. Sure.
Senator Cotton. Eighteen data points. It is not millions of
data points, as are often used.
Dr. Hall. Right.
Senator Cotton. The kind of analysis and assumptions you
just made was not explicit in the reports we received. It took
four of your analysts coming to explain that to us in detail
for Senators to understand it and certainly for the American
people to understand it. Why not just make that kind of thing
public, you know, do something like different scenario
analysis, making your assumptions more explicit, both for us
and for the public?
Dr. Hall. We are happy to start trying to do more of that.
My only defense at this point is we only have so many people,
so much times, and these are tradeoffs. But if Congress, if you
all want more time spent on that sort of transparency, we will
do it.
Senator Cotton. How many people do you have?
Dr. Hall. Well, on health care, let me just do health care
first. Health care, complete health care, we have 40 people. So
the people who are really engaged were probably less than 20
people on all these estimates. So, you know, we have 230 people
total. We have about 40 on health care. We have lots of other
buckets we have to cover. So we are not huge. But we do have
some people, and I tell you, they were working full out on
things.
Senator Cotton. Let me conclude with a story. In the summer
of 2013, I was a new Congressman, and there was an immigration
debate going on at the time. The CBO had produced an
immigration estimate, and it was controversial I think on all
quarters for the estimates it made about future immigrant
flows, legal versus illegal, impact on population, impact on
wages and so forth. I wanted to get a little more information
about that. I spoke with your predecessor. After some time he
offered to come by. I said, ``I do not want to just get the
wave tops here. I want to get down into the details.'' He said
they just do not have the resources to do that. I said, ``I
will come to you. You do not have to come to my office.'' He
said that it was not a finished product. I said, ``Look, 2
years ago I was modeling complex economic and business problems
at a private consulting firm. I understand how to work a spread
sheet. I will sit with your analyst at her desk and go through
everything.'' And that was refused to me. Is that an
appropriate response to make to Congress?
Dr. Hall. No, no. We would like do a lot better.
Senator Cotton. So if I have a similar question about a
future analysis, then I would be welcome to come and sit at
someone's desk and walk through assumptions and modeling?
Dr. Hall. Absolutely. I have never refused to go and talk
with a Member and bring staff and talk about something.
Senator Cotton. Thank you.
Chairman Enzi. Thank you.
Senator Kaine is not here, so Senator Kennedy.
Senator Kennedy. Dr. Hall, thanks for coming today.
Dr. Hall. Thank you.
Senator Kennedy. CBO has a well-deserved reputation, I
think, as being a neutral arbiter. And I understand you work
under a lot of pressure. I get that. You and all your people
are very, very, very bright. That much is clear to me.
You are serving us, but you are also serving the American
people. And I am going to make just a couple of suggestions
about what we need but, more importantly, I think, the American
people need.
Number one, you have got to move more quickly. I know that
is easy for me to say, but for a variety of reasons, I think
the pace has quickened in many respects when we get in the
middle of discussing an issue.
Number two, you have got to be clearer. It does not do any
good--and I do not want to overstate this, please. That is why
I prefaced what I am saying here with how extraordinary I think
the work you do is. But the analysis has to be thorough, but it
has got to be written in non-Swahili so that the American
people and the press can pick it up and say, Okay, here are the
conclusions, here is why CBO reached the conclusions, and here
are the assumptions that they are making, understanding that
you are not clairvoyant and in predicting the future you have
to make certain assumptions.
Now, you can accompany that with a long, detailed Ph.D.
dissertation type document, and I am not being critical, which
I can assure you more Members of Congress than get credit for
it will read. But what is important, it seems to me, is that we
get it quickly and that the American people have an opportunity
to understand it better.
Now, that is not because the American people are stupid.
They are not. I have said this before. Most Americans do not
read Aristotle every day because they are too busy earning a
living. But they will figure it out. I am just suggesting that
we can all do a better job of helping them do that.
That is my only comment. I know it is easy to criticize and
Monday morning quarterback, and you work under a lot of
pressure. But we have got to have it faster, and I think the
American people, given your well-deserved reputation, deserve a
little more clarity. And I say that gently and with a spirit of
gratitude for the good work you do.
Dr. Hall. Well, thank you. I think you have identified the
two biggest problems I think that we have: the responsiveness
and the transparency. And, unfortunately, they sometimes
collide with fixed resources.
Senator Kennedy. I know.
Dr. Hall. And so we have been working hard to sort of think
of some ways we can improve that process-wise. And it is also
part of why we are asking for some more resources.
Senator Kennedy. Thank you.
Dr. Hall. But I appreciate the feedback. Thank you.
Senator Kennedy. I am not leaving because--well, I am way
over--no, I am not. I have got to go back to another committee,
but I want to thank you for being here today.
Dr. Hall. We appreciate any more ideas you have on how we
can do our job better.
Senator Kennedy. Will do. Thank you.
Chairman Enzi. Thank you, Senator Kennedy.
Senator Boozman.
Senator Boozman. Thank you, Mr. Chairman. And thank you,
Dr. Hall, for being here. I know that you all do work awful
hard, and our purpose is to help you get the job done.
You know, one of the things that--as you know better than
anybody, you are kind of in the central position that we simply
cannot do things many times without you all weighing into it.
One of the things that somebody ought to look at, yourself or
GAO or whatever, would be how much--not getting information,
how much that adversely affects the ability of Congress to do
its job. Again, that is a huge deal.
The other thing that I do think is important--and I know
that you have problems with resources and things like that, but
we need to measure things. And you all weigh in on bunches of
stuff. Many times that is accurate. Sometimes it is not as
accurate. And sometimes it is not because of the fact that, you
know, there is a mistake to be made. It is just very difficult
to do these things. I think it would be helpful for us to know
the areas that we can truly rely on the information versus it
is a guess. But you can only do that through metrics. You know,
you have to have the ability to check yourselves out, and I do
not think that that is happening right now.
Can you talk about that? And if you do not have the
resources to do that, then, you know, what would it take for us
to give you that ability? Because I do think, regardless of
what we do, you know, you simply--you need to have that
information; we need to have that information as we make really
important decisions.
Dr. Hall. Well, I can say one of the things that we do
every year, we call it an ``analysis of actuals,'' where we sit
down and look at all the budget categories and see what
happened during the year and what we predicted during the year.
How did we do? How far were we off? We actually sit down and go
through that, and I have a meeting. How close are we? How far
off? How are we going to adjust our view of this going forward?
One of the things that we have been thinking about--it
sounds like it may help with this--is we are going to maybe
start publishing our analysis of actuals so you can actually
see how we did in one of these budget categories.
Senator Boozman. I think that would be helpful.
Dr. Hall. The tricky part, of course, is sometimes the
budget categories are larger than pieces of legislation, so it
is hard to know about a small piece of legislation. But this
will give you an idea of where we are being more accurate and
less accurate.
Senator Boozman. And I think at times, too, we run into
disagreements. You know, there are areas where I think the
Committee staff truly are experts in particular areas, have
significant disagreements, and I would hope that, you know,
there is dialog to try and work out the differences and at
times maybe change your perspective as to what is going on.
Dr. Hall. Yes, well, one of the things that we now do--we
have always sort of done it, but we are now sure to do--is when
we get pieces of legislation and a committee has some data that
they have looked at, has some analysis that they have looked
at, we ask for that and we be sure we look at that. We always
go further to do an independent look.
Senator Boozman. Sure.
Dr. Hall. But we want to be sure that a committee feels
like we have given them a fair look at what they have looked
at. I think that is an important starting point for us to be
sure that we are unbiased and objective.
Senator Boozman. I very much agree. One of the things I
think you talked about when you were talking when you were here
last time, you talked about the problems of retaining qualified
people, and then also I think you said in your testimony that
over the past 3 years, back then, more than 60 percent of those
to whom CBO had made offers had chosen to stay in academic
positions. So, you know, it sounds like that is a huge problem,
acknowledging the funding constraints that we are under and
things like that. What do we do to help you get the people that
you need and retain people?
Dr. Hall. Well, one of the things----
Senator Boozman. Be a more competitive employer.
Dr. Hall. Sure. Actually, one of the things that has
changed is we had been capped so that all the salaries had to
be basically below a Member's salary, below my salary, while a
lot of the people were competing for senior managers in the
executive branch, they have a higher pay scale. They can make
as much as $30,000 more than I make or anybody at CBO.
We have now got a change, so we are allowed now--going
forward, we are going to be allowed to start paying our senior
managers as much as the executive scale. Not that we are going
to do it, but I think that will make us more----
Senator Boozman. But you have got that flexibility?
Dr. Hall. We now have that flexibility. I think that is
going to be an important thing for retaining our top people. So
that actually was a really good move. We are trying to be
careful on how we use it.
Senator Boozman. So retaining and then also recruiting?
Dr. Hall. That is right.
Senator Boozman. Very good.
Well, thank you, Mr. Chairman.
Chairman Enzi. Thank you. I appreciate all the input from
members today. I have got a lot of notes. There are a lot of
things that we as well as CBO need to do to improve the
process.
One thing, though, that kind of is--you had it in your
opening comments, and it kind of stuck with me, and I think it
has been echoed a little bit here but not directly. Have you
considered serving as kind of the aggregator collecting
estimates from a number of outside think tanks and things and
reporting that are part of the transparency, as well as the
answer that you come up with? Is that a potential solution?
Dr. Hall. I am not sure it is. We are happy to do what we
are asked to do, but one of the things you get with CBO is you
get consistent quality. We do high-quality work, and we work
very hard to be unbiased. And this is one of the issues, for
example, where we make models available. Part of the advantage
of CBO is not just that we have these models, but we are the
ones who run the models.
If we want to get input from think tanks, et cetera, I
think that is a good idea, and I think we do, in fact, go and
talk to think tanks and get their views on this, get their
feedback on how we do things. We are happy to try to do that
more and see if that helps.
As to whether think tanks will spend a lot of time
producing competing estimates on so many of the small things we
do, that is probably not realistic. But I do think that there
is value in having us assure you at least that we go and talk
to think tanks and spend some time getting their views on
things.
Chairman Enzi. Okay. I appreciate that. I have learned a
lot today. I think there was kind of general agreement that we
have a broken budget process. I have watched this for years now
and chaired it for a while, and I know that most of the budgets
never last more than 40 days before there is a waiver of the
budget. And as Senator Whitehouse pointed out, it only takes 60
votes to overcome it, which is usually the same amount that it
takes to pass the legislation. So it is virtually 100 percent
assured.
One of the things we had from our hearings, the 13 hearings
that we did while Senator Whitehouse was the Acting Ranking
Member, was that there ought to be a higher threshold for
higher numbers. And I think we should consider that if we are
going to have any possibility of this making a difference.
I will continue to hold some hearings, and we will go back
and review the material from those hearings that we had. From
today, some of the other things that I--I did hear that this is
the most partisan Committee, and I want people to know that it
has been the most partisan Committee since 1974 when it was
first initiated. And the process has been for the majority
party to hold opening statements so that the other side can
comment on the budget and then let them see the budget. And I
never considered that to be fair, so we have changed that
process. They now get it 5 days in advance, and I think it
helped to expedite the markup and the hearing.
Of course, in exchange for giving it 5 days earlier,
everybody has to turn in their amendments. And one of the
things I learned working with Senator Kennedy when I chaired
the Health, Education, Labor, and Pensions Committee was that
when those amendments come in early, there is a seed of
possibility in every one of those amendments. And sometimes you
have got to let them grow, and more often what you need to do
is look at the same seed being planted by both sides of the
aisle and see if the people cannot get together and come up
with the common one that will work. And that is what I am
hoping will come out of this budget process and make it less
partisan. When it does not exist, when the results do not exist
more than 40 days, then reconciliation becomes the most
important part. And reconciliation has its shortcomings, too,
because every amendment has to have a budgetary impact of some
significance. And so the rules that follow that make actual
legislation very difficult. But if that is the only way to move
forward, then that becomes the method of choice, and both sides
have used it. I think there are better ways to legislate, and I
hope that we can get to that.
Now, on the things that we did today, I think one of the
key messages was also that assumptions matter. And, you know,
when we talk about transparency, there are not many people that
are going to follow a model, you know, with all the different
arrows and things that would be involved in that, which are
even tougher to explain verbally. But assumptions, I think that
they do have a pretty good ability to understand, and if they
know what assumptions go into it, that might make the kind of
transparency that we are talking about for particularly non-
economists, which I would assume is almost everybody on the
Committee and almost everybody in the U.S. Senate.
I also like the idea that everything should be written in
plain English. And we should have some better titles for our
bills that are not quite as biased as what they might be but
tend to get people to not be able to vote against them based on
how good they sound, whether the text that follows does that or
not.
And I appreciated your comment about allowing people to be
able to sit down with the analysts and get a little better
understanding of where the information came from. I think that
particularly for people that have been an analyst, that would
be very helpful.
So thank you for being here today and for your comments,
and we will continue to work with you, and I will be trying to
engage the Committee in doing more oversight work in particular
areas that we can--not that we would legislate in, but that we
would pass the information on to the committees of
jurisdiction.
So thank you, and with that, this hearing is concluded. As
a reminder people can turn in lists of questions if they wish,
and we will send those over, and I am sure we will get a
response. Thank you.
Dr. Hall. Thank you.
[Whereupon, at 11:51 a.m., the committee was adjourned.]
ADDITIONAL COMMITTEE QUESTIONS
[The following submitted questions were not asked at the
hearing but were answered by the witness subsequent to the
hearing:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
THE PRESIDENT'S FISCAL YEAR 2019 BUDGET PROPOSAL
----------
TUESDAY, FEBRUARY 13, 2018
U.S. Senate,
Committee on the Budget,
Washington, DC.
The Committee met, pursuant to notice, at 10:01 a.m., in
room SD-608, Dirksen Senate Office Building, Hon. Michael B.
Enzi, Chairman of the Committee, presiding.
Present: Senators Enzi, Grassley, Crapo, Graham, Toomey,
Johnson, Corker, Perdue, Gardner, Kennedy, Boozman, Sanders,
Murray, Stabenow, Whitehouse, Merkley, Kaine, King, Van Hollen,
and Harris.
Staff Present: Elizabeth McDonnell, Republican Staff
Director; and Warren Gunnels, Minority Staff Director.
OPENING STATEMENT OF CHAIRMAN ENZI
Chairman Enzi. Good morning. I will call to order this
Senate Budget Committee hearing.
Good morning and welcome to the Senate Budget Committee's
hearing on the President's budget proposal for fiscal year
2019. This budget submission comes to us on the heels of a very
busy first year for President Trump. I am proud of all the hard
work and leadership that went into passing the Tax Cuts and
Jobs Act, a historic pro-growth tax bill that is already
bringing investments back to America and boosting take-home pay
for workers. With the President's new budget submission, I am
interested in learning how the administration proposes to build
on this momentum and further strengthen our economy.
One of my greatest concerns as a United States Senator is
our country's national debt, a figure that has now eclipsed $20
trillion. To secure our economy long term for future
generations, we must tackle this growing problem. While
lowering taxes is proving to bolster our economy, which will
bring in new revenue, we must more closely examine the spending
priorities and habits of the Federal Government. We have a
spending problem in America, and so I look forward to hearing
from our witness which ways the administration believes we can
use taxpayer dollars more efficiently.
Today we have the opportunity to hear from Office of
Management and Budget Director Mick Mulvaney. Director
Mulvaney, thank you for coming this morning to discuss the
President's fiscal year 2019 budget request. We look forward to
your testimony and the opportunity to discuss possible
solutions to the Nation's budgetary woes. I also want to
congratulate you on the documents that came yesterday. I want
to congratulate you on how concise they are, how explicit they
are, and the difficulty that you went to to not only explain
the budget but also to very specifically point out the major
savings and reforms that are being suggested. It is one of the
clearer presentations that I have seen, and I have seen a lot
of them.
The submission of the President's annual budget proposal
marks an important first step in what should be an orderly
budget process. Over the years, however, under successive
Congresses and administrations, this process has broken down,
leaving behind a confusing, illogical, wasteful maze of
legislation and ad hoc governing, a perfect example of which
was on display last week with the latest budget--busting
spending deal. Instead of funding the Federal Government week
by week or month by month, we must address the structural
deficiencies of our budget process, returning to a system that
actually works.
Serving on the Budget Committee for 15 years, I have tried
to work to solve our fiscal problems. In 2016, I devoted much
of the year to working on bipartisan ideas to fix America's
broken budget process. We were able to get a conversation
started through hearings and meetings with experts. While we
made some good progress at the Committee level, for a variety
of reasons we did not succeed in advancing the kind of reforms
we need. I am hopeful that, learning from our recent experience
with continuing resolutions and caps deals, the time to really
reform the budget process is now. To be successful, we have to
have bipartisan support, which is why I am again extending my
hand to the other side of the aisle looking for willing
partners to join me.
I hope this renewed call for budget reform receives support
from my colleagues in the Senate and even from Director
Mulvaney this morning. I welcome all my colleagues' ideas on
budget process reform, even on budget, and on the programmatic
proposals in the President's budget. While these issues often
divide, I believe we can find common ground and make progress.
This is the way the legislative process is supposed to work.
The way to approach the task ahead for us is to focus on what I
call the 80-percent rule, focusing on the 80 percent of issues
that we have general agreement, rather than the 20 percent that
not only lack consensus but we have been fighting over for
years. That way we are not sidetracked and can achieve real
results. That is the way that Ted Kennedy and this former shoe
salesman from Wyoming were able to get things done on the
Health, Education, Labor, and Pensions Committee in years past.
The American people are counting on us to work together to
fix the Nation's fiscal mess. We must start now because one
thing is clear: Ignoring the tough problems today will not make
them disappear, and the longer they persist, the more difficult
they will be to fix.
Every year, we spend $4 trillion--I do not think anybody
really knows how much that is, but it is a lot of money, and we
try to spend that amount, make the decisions on spending that
amount every year. We really do not make changes. We just
increase for inflation and what I call the ``panic factor.''
Well, that is not quite true. We do make changes. We add new
programs. But we do it without eliminating or even
consolidating existing programs or even updating the old
programs.
The spending deal has a provision for fixing the broken
budget process. The budget is supposed to be our road map to
the future. We talk about the need for infrastructure. The
budget is one of those infrastructures that we better be
working on if we are going to have a better budget process. It
is a tough road ahead, but I am confident that we can find
success together.
Senator Sanders.
OPENING STATEMENT OF SENATOR SANDERS
Senator Sanders. Mr. Chairman, thanks very much for holding
this hearing, and, Director Mulvaney, thanks very much for
being with us this morning.
I do not have to tell anybody that in America today there
is a lot of political demoralization. Congress has held one of
lowest favorable levels today than at any time in history. The
vast majority of the people think we do a terrible job.
President Trump's favorable ratings are the lowest, I believe,
for any President who has served the length of time that he has
served.
So people look at Washington, and they do not see much that
they feel very good about. And I think there are a couple of
reasons for that which this budget really demonstrates.
Number one, there are politicians who run for office, and
they say one thing. President Trump, when he was a candidate,
ran for office, and he said, ``I am a different type of
Republican. I am not the Mick Mulvaney type of Republican. I am
different. I am going to stand with working families. We are
going to take on the establishment,'' and so forth and so on.
Well, it turns out he did exactly the opposite, and this budget
is a clear manifestation of him doing exactly the opposite.
And, second of all, I think what the American people
understand is their one vote, their one voice matters
relatively little in a Congress which is dominated by big--
money, wealthy campaign contributors. The Koch brothers are
going to spend some $400 million in the coming campaign. And
you know what? This budget is the budget of the Koch brothers.
It is the budget of the billionaire class. And the American
people understand it.
This is a budget which will make it harder from our
children to get a decent education, harder for working families
to get the health care they desperately need, harder to protect
the air that we breathe and the water we drink, and harder for
the elderly to live out their retirement years with dignity and
respect.
This is not a budget, as Candidate Donald Trump talked
about, that takes on the political establishment. This is a
budget of the political establishment. This is the Robin Hood
principle in reverse. It is a budget that takes from the poor
and gives to the very wealthy.
During the campaign, as we will all recall, Donald Trump
told us that ``the rich will not be gaining at all'' under his
tax reform plan. ``The rich will not be gaining at all.'' But
as President, the tax reform legislation Trump signed into law
a few weeks ago provides 83 percent of the benefits to the top
1 percent, raises taxes on millions of middle-class families,
and drives up the deficit by $1.7 trillion by the end of the
decade.
And if you are wondering how President Trump plans to pay
for his massive tax cuts to millionaires, billionaires, and
large corporations, this budget answers that question for you--
by breaking his campaign pledge not to cut Medicare, Medicaid,
and Social Security. In fact, President Trump's budget would
slash Medicaid by over $1.3 trillion, cut Medicare by over $500
billion, and reduce Social Security by nearly $25 billion.
Mr. Chairman, as you know, Medicaid now pays for more than
two-thirds of all nursing home care in our country. What
happens to senior citizens who have their nursing home coverage
paid for by Medicaid if that program is cut by $1.3 trillion?
Think about it. People now in nursing homes with Alzheimer's,
serious illnesses, massive cuts, what happens to them? What
happens to their families?
And it is not just seniors. Today Medicaid covers millions
of children with special needs. We are the only major country
on Earth not to guarantee health care to all people, and this
budget would then throw millions more people off the health
insurance they have.
We have an opioid epidemic that every person up here talks
about every day, but when you slash Medicaid by $1 trillion,
you make it infinitely harder for communities, cities, and
States to deal with this terrible crisis.
During his campaign Donald Trump told the American people
that he was going to provide, and I quote, ``health insurance
for everybody'' with much lower deductibles. But President
Trump's budget would throw an estimated 32 million people off
the health care they currently have. Thirty-two million people.
And at the same time, it would substantially raise premiums for
older Americans.
Mr. Chairman, what this budget is about is a massive
transfer of wealth from working families, the elderly, the
children, the sick and the poor, and the most vulnerable people
in our country to the top 1 percent and large corporations. As
a candidate, Trump said that he understood the pain that
working families across the country were feeling. Well, Mr.
President, you are not responding to that pain when you propose
a budget that would throw over a million children off after-
school programs. You are not a champion of working families,
you are not responding to pain when your budget would kick half
a million families out of their homes by gutting affordable
housing. We have a massive crisis in affordable housing from
coast to coast. This budget would make it much, much worse.
You do not help working families, Mr. President or Mr.
Mulvaney, by throwing more than 100,000 children off of Head
Start. We need to move to universal pre-K. Every family in
America should know that their kids have good-quality child
care. You do not throw 100,000 children off of Head Start.
You do not help working families when your budget would
eliminate financial aid to more than a million and a half low-
income college students. Kids are graduating school $30,000,
$40,000, $100,000 in debt. This budget makes their problems
even worse.
You are not a ``different kind of Republican'' by proposing
a budget that would eliminate heating assistance to nearly 7
million families in this country. Let me tell the President,
Mr. Mulvaney, it gets cold in Vermont and many other parts of
this country, and many of our elderly people keep warm in the
wintertime through the Low-Income Heating Assistance Program.
Do not eliminate it.
Mr. Chairman, while President Trump tells us we do not have
enough money to help the working people of this country, he
does believe that we have enough money to provide a massive,
massive, massive increase in the Pentagon, an agency of
Government that has not been able to do an audit and where
study after study shows us that there are hundreds and hundreds
of millions of dollars in waste.
So, Mr. Chairman, the good news is this budget is going
nowhere. Everybody knows that. But it does indicate where Trump
and his friends are coming from, and the American people have
got to understand that, and we have got to stand up and say no,
these are not the priorities of this country.
Thank you, Mr. Chairman.
Chairman Enzi. Thank you, Senator Sanders.
I will now introduce the witness. Our witness this morning
is Mick Mulvaney, the Director of the Office of Management and
Budget. Director Mulvaney has held this office since February
2017 and is charged with assisting the President to fulfill his
vision through the production of the Federal budget and its
implementation across the executive branch. Prior to his time
as Director of the Office of Management and Budget, he served
the people of the 5th District of South Carolina as their
Congressman, where he was first elected in 2010. During his
time in Congress, he has served on both the Budget Committee
and the Joint Economic Committee.
For the information of colleagues, Dr. Mulvaney will take
less than 7 minutes for his opening statement, followed by
questions.
We look forward to receiving your testimony, Director
Mulvaney. Please begin.
STATEMENT OF THE HONORABLE MICK MULVANEY, DIRECTOR, OFFICE OF
MANAGEMENT AND BUDGET
Mr. Mulvaney. Thank you, Mr. Chairman, Ranking Member
Sanders. Thank you for the promotion. My mother would be glad
to know I finally did get that doctorate.
[Laughter.]
Mr. Mulvaney. I appreciate the opportunity to be here.
Chairman, I have already submitted a formal opening
statement for the record. I am going to depart from that
substantially just to say a few things before I start taking
your questions to explain really what we have sent you in the
last 24 hours.
Last year, when I sat here, I had sort of half a budget. We
had what was called the ``skinny budget'' at the time, the very
first time I came before you, which was just the discretionary
side of spending, which is not unusual during a transition
year.
This year, I have sort of come down with two budgets. What
we have sent you in the last couple of hours--actually, just
since yesterday--takes our 2018 budget and makes an effort to
bring that budget from last year sort of into compliance or at
least into line with the caps deal that you all cut on Friday.
In addition, we also have sort of two 2019 budgets. We have
the 2019 budget that we have been working on at the Office of
Management and Budget since last summer, which we have also
tried to sort of bring up to speed in light of the caps deal.
Let me make it very clear that the numbers that you get are
extraordinarily good. They are solid numbers. There is no
question about it. But it is impossible to do 6 months' worth
of work in a weekend, especially when we also had a brief
Government shutdown on top of that. So the numbers I will talk
about today, they are solid numbers, there is no question, but
still expect over the course of the next couple of weeks and
months to see additional tweaks. The example that I give,
gentlemen, is that the caps deal, for example, extends the
mandatory sequester by 2 years. It will take us several weeks,
if not months, to run that number through the system. Instead
of, however, waiting until April or May to give you this
budget, we decided to come forth with these numbers here today.
What have we done with the 2018 and the 2019 budgets? We
have tried to deliver two messages--two messages at the same
time. And the message from the administration is this----and I
recognize the fact that a budget is a messaging document. We
can sort of beat you to the punch and ask the question whether
or not it is dead on arrival. I will never forget Senator Leahy
called me last year right after I sent down the first budget,
and he said, ``Young man, do not feel bad. This budget is no
more or less dead on arrival than the other 40 I have seen
since I have been here.'' But it remains a messaging document.
So what are those messages? There are two primary messages
in what we bring to you today.
Number one, you do not have to spend all of the money that
you just allocated or provided for in the caps. But if you do,
here is how the administration would prefer to spend it. You do
not have to spend it all. And that is what we put in the 2019
budget. Yes, we have added money back to the 2019 budget, money
in addition to what we would have sent you if there was no caps
deal. But we do not spend all the way up to the caps on the
2019 budget.
The second half of that first messages is but if you do
spend it, here are the administration's priorities. That is the
2018 budget. We have taken the 2018 budget and added back, I
think, $117 billion worth of nondefense spending to 2018, to
spend up to the caps in 2018 in addition to the $26 billion we
add to our 2018 budget for defense spending. So that you have
in front of you the administration's two positions. You do not
have to spend it all, and if something happens between now and
the appropriations bill that you pass in March or the
appropriations bill that you pass for 2019 between the end of
March and September of this year, if you decide not to spend
all the way up to the caps, then you have the administration's
guidance on how we would prefer to do that, and that is in our
2019 budget.
Conversely, if you decide in 2018 or 2019 or in both to
spend all the way up to the caps and you are curious as to how
the administration would prefer to spend that money, that is
the 2018 budget. That is what we have sent to you, and we do
believe that that message still has value even though you folks
changed the numbers in the last 3 days. And we signed it. So it
is not like you did it to us. We all did it together. We
respect that.
Also, interestingly--and I say this to my Democrat
colleagues--folks have asked us if the 2019 budget is evidence
of the administration reneging on the implied agreement
regarding the caps deal. No. Again, I say that if you are
interested in spending all the way up, which is what the caps
deal contemplates, the 2018 budget is there.
Keep in mind, the 2018 and 2019 caps numbers are only $10
billion difference. The difference between--I think the 2018
number is 80 for defense and 63 for nondefense; the 2019
numbers were 85 and 68. So it is only a $10 billion difference
in the caps deal between the 2 years. So the two things do
stand as information from the administration as to how we would
spend it.
I will close by saying this: It does not balance. It does
not balance within the 10-year window. I think I said to you
folks, I know I said to my members in the House last year that
I worried that when I came to you last year that it would be
the last chance I would have to bring to you a budget that
balanced in 10 years. And I said at that time that if Congress
did not take steps last year and the administration did not
take steps last year to change the trajectory of our spending,
that I would not be able to balance the budget within 10 years
this year, and that has been the case. I would contend to you
that the numbers this year are even more solid. I know that my
good friend Senator Van Hollen from Maryland and I like to go
back and forth about the solidness of the numbers, and I can
tell you, Senator, that I am even more comfortable this year
that the numbers are more solid, that there are fewer plugs
this year because we have had a chance to digest a year's worth
of information, to put policies to numbers. And as the numbers
firmed up, it would have been possible to probably bring you
today a balanced budget if I had fudged the numbers. But I
would rather bring you numbers that are true and honest, that
set forth a better picture of our fiscal condition, than lie to
you and tell you the budget would balance in 10 years. So it
does not balance within 10 years, and we'll talk about that
today as well.
Anyway, Mr. Chairman, I appreciate the opportunity to make
an opening statement. I look forward to answering questions
from the members of the Committee.
[The prepared statement of Mr. Mulvaney follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Enzi. Thank you, Director.
Now we will turn to questions. Let me take a moment to
explain again the process. Each member will have 5 minutes for
questions, beginning with myself and then Senator Sanders.
Following the two of us, we will alternate questions between
Republicans and the minority. All members who were in
attendance when we started will be recognized in order of
seniority. For those who arrived after the hearing began, it
will be in order of arrival. And if you are not here at the
time that you are called on, you will move to the bottom of the
list. So, with that, I will begin my questions.
The broken budget process that I discussed in my opening
statement was on full display last week with the latest caps
deal. This legislative action occurred too late to incorporate
in the President's budget proposal. I appreciate your
explanation. You did release an addendum with supplemental
information on the administration's vision for spending in
light of the Bipartisan Budget Act. Can you explain how the
administration proposes to adjust spending levels as a result
of the legislation passed last week and to what extent it is
using this opportunity to address some of the more egregious
budget gimmicks?
Mr. Mulvaney. Thank you, Senator. I will deal with the
gimmicks separately. We took advantage of the caps deals,
ladies and gentlemen, in both 2018 and 2019 to do a couple
things. We moved a tremendous amount of money off of the OCO
budget and into the base. We did that in both defense and
nondefense. I think it was $12 billion in nondefense for this
year. I cannot remember what the total number was in
nondefense, but we started transition off of OCO and into the
base. As part of our longer-term projections, you will see in
the budget that we actually dramatically reduce OCO beginning
in 2020. I think we take the total OCO budget down to no more
than $20 billion in our projections beginning in the out-years.
We also got rid of a lot of the CHIMPs, which I know
immediately puts everybody to sleep, the gimmicks, for lack of
a better word, that both Houses and administrations have used
in the past to justify additional spending. So we took as much
opportunity as we could given the additional money that was
available under the caps to try and give a more transparent
view into our actual spending.
As regards to the actual spending priorities, Mr. Chairman,
as I mentioned, in the 2018 budget, when we went back to plus-
up the budget from last year to match the caps, we added $26
billion for defense, $117 billion to nondefense; $34.5 billion
of that was for infrastructure, of which roughly 20
contemplates the President's infrastructure package that was
introduced yesterday. An additional $15.7 billion went for
border security. That would bring, gentlemen, the total for the
border wall for 2018 and 2019 to about $18 billion, which is
the actual cost of the physical structure. Keep in mind you may
have heard the number of $25 billion for southern border
security. The $18 billion is for the wall. The rest of it is
for technology, personnel, and so forth.
What does that mean? That means that the proposal that we
have sent you actually contemplates a DACA immigration deal
being done, because we recognize the fact that you have no
interest in giving us money for the full border wall unless it
is part of a larger comprehensive immigration bill. So we fully
contemplate that that deal is reached.
Yes, we have asked for small amounts in 2018, $1.6 billion
in 2018, $1.6 billion in 2019, as part of the ordinary
appropriations process. But we fully anticipate in these
proposals that a DACA deal is reached and that we have full
funding for the wall.
We have $3 billion additional in opioid spending for 2018,
an additional half a billion dollars for IT modernization, not
very glamorous, not very sexy, but something that I think we
all take very seriously. We spend about $80 billion a year--
that is $80 billion with a ``b''--on IT in this administration
or in this Government. The overwhelming majority of it is for
maintenance of outdated systems.
We have an additional $9 billion for research and
development, keeping in mind that in both the 2018 and the 2019
budgets, R&D total spending increases. Do not be misled by some
of the nondefense discretionary reductions. Overall, R&D is
increased in both of the budgets.
We have mentioned already the OCO to base shifts, and the
budget gimmicks that I talked about represent almost $18
billion for the changes.
In the 2019 budget, Mr. Chairman, I will not take a lot of
time to go down, but the biggest increases would include an
add-back of almost $16 billion in Health and Human Services, of
which over $9 billion is the NIH budget. I came to last year--I
do not know if you are aware you did this or not, but I came to
you last year with a proposal to reduce the NIH budget as an
effort to try and get them to look at their administrative
budgets. And I tried to make the case that if the NIH only
allocated or only spent as much money on their administrative
portion of their grants as they did from private grant money,
we could actually reduce their spending by $9 billion but
actually get the same amount of research. Not only did that not
sway very many people in the legislature, but you all actually
added something in the April omnibus that said that it is
against the law for us to go in and look at the administrative
costs. So I know when I am beaten, and we have actually added
back the $9 billion to the NIH budget. But there is a long
list, Senator, of the other add-backs to 2019 as we try and
reprioritize, given the additional moneys that were made
available during the caps.
Chairman Enzi. Thank you for being that concise.
Mr. Mulvaney. Sorry.
Chairman Enzi. Well, that is fine. I appreciate the
information.
Senator Sanders.
Senator Sanders. Thank you, Mr. Chairman. You know, budgets
deal with trillions of dollars and thousands of pages and words
after words after words and numbers after numbers after
numbers. But the truth is, as I am sure Director Mulvaney
knows, these numbers have real meaning to the lives of ordinary
people.
Mr. Chairman, I want to put into the record, if I might, an
article from PolitiFact dated June 27, 2017.
Chairman Enzi. Without objection.
[The article follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Senator Sanders. Without going into all of what the article
says, it basically confirms that when you throw many millions
of people off of the health insurance they have, thousands of
them will die. This budget calls once again for the repeal of
the Affordable Care Act. The estimate is that some 32 million
Americans will lose their health insurance. And what study
after study shows is that when you throw 32 million people off
of their health insurance, tens of thousands of them will die.
Will die.
Director Mulvaney, tell me about the morality of a budget
which supports tax breaks for billionaires, throws 32 million
people off the health insurance they have, resulting in the
deaths of tens of thousands of fellow Americans. Do you really
think this is something that we should be doing in the year
2018.
Mr. Mulvaney. Actually, I do not think it is something that
we are actually doing, Senator. Again, I am not familiar with
the article that you have mentioned. My guess is that it
references the CBO report regarding various Republican
proposals to repeal and replace Obamacare. I do remember one of
the major points of contention regarding the way the CBO scored
the proposals was that it would assume that several tens of
millions of people would be, to use your terminology, ``kicked
off'' of health insurance by the repeal of the individual
mandate. And when we drilled down into that, Senator, what we
found was that the CBO assumed that if we got rid of the
individual mandate, that millions of people would voluntarily
give up Medicaid expansion, which is----
Senator Sanders. Mr. Director, I apologize. We just do not
have a whole lot of time. This is not----
Mr. Mulvaney. Well, if you want me to answer your
question--but go ahead.
Senator Sanders. And I understand the individual mandate.
This goes beyond. You are proposing a cut of over $1 trillion
in Medicaid, and independent analyses have indicated--we can
argue about nobody knows for sure, is it 25 million people who
are going to be thrown off? Thirty million? I do not know to be
honest with you. You do not know. But what we do know is when
you throw tens of millions of people off, they will die. Some
of them will die. Studies show that thousands of them will die.
And I would just suggest that in the United States of America,
the only major country not to guarantee health care to all
people, we should not be making a very bad situation worse by
throwing tens of millions of people off of health insurance.
Let me ask you another question. Mr. Director, according to
Americans for Tax Fairness, the Koch brothers, the third
wealthiest family in America, worth $94 billion, and a family
dedicated with a few of their billionaire friends to put
hundreds of millions of dollars into the coming election, will
receive a tax break of up to $1.4 billion a year from the Trump
tax plan. Meanwhile, this budget eliminates funding, as I
indicated earlier, for the LIHEAP program that keeps almost 7
million families warm in the wintertime, and the vast majority
of these families have children or they are senior citizens or
they are people with disabilities.
Explain to me the morality of a process by which we give
the third wealthiest family in America--a major contributors, I
might add, to the Republican Party--over $1 billion a year in
tax breaks and yet we cut a program which keeps children and
the elderly warm in the winter.
Mr. Mulvaney. Here is the morality of the LIHEAP proposal,
Senator. Eleven thousand dead people got that benefit the last
time the GAO looked at it. That is not moral, to take your
money, to take my money, to take the money from the people of--
--
Senator Sanders. Eleven thousand people got it who should
not have, correct that. But 7 million people get the program.
To say that 11,000 out of 7 million--deal with that. I agree
with you.
Mr. Mulvaney. All 50 States now have individual programs
designed to prevent the cutoff of utilities either during the
summer in the South or the winter in the North, which is
exactly what the LIHEAP program was originally designed to do.
So the program----
Senator Sanders. Mr. Mulvaney, when it gets 20 below zero--
I come from a State which tries to do its best. Vermont and
other States around this country, including Wyoming, do not
have the resources to keep people warm when it gets 20 below
zero. You have just created a situation--not you; the President
must take responsibility for this budget--created a situation
where people will go cold, some may freeze to death, and that
is not what we should be doing in America.
Chairman Enzi. Senator Grassley.
Senator Grassley. In all my years in the United States
Senate, I have never seen such positive results just because we
passed a tax bill so soon. I have seen positive results down
the road a ways, but not within a month of the passage of the
bill. So I want you to know that I appreciate the
administration's focus on maximizing economic growth as part of
its first two budgets. We simply cannot settle for the anemic
growth of under 2 percent experienced under the last
administration.
The passage of the tax bill in December is a key component
of this administration's effort to achieve annual average
economic growth of about 3 percent, which is the average of the
50 years before 2008. We have already started to see the
positive effects. Many businesses have announced pay raises,
employee bonuses, and increased investment in the U.S.
Additionally, this month employees are beginning to see bigger
paychecks as less tax is withheld.
So, you know, under reconciliation we can only pass tax
legislation for 10 years. So, Director Mulvaney, can you speak
to the importance of tax permanence in achieving long--term
sustainable growth envisioned in the President's budget?
Mr. Mulvaney. I can. Thank you, Senator. And, in fact, we
assume that for the largest portions of the tax bill, we assume
that in our budget, even though the tax bill that passed ends
the individual tax rate reduction after 5 years, we assume its
permanence. In fact, you will see that there is a variation
between the CBO baseline for revenues over the course of the
next 10 years and our budget, fully half a trillion dollars of
that is associated with that extension. We do not extend some
of the smaller tax reductions. I think there were some specific
1-and 2-year programs that are not extended. But under the
proposals in this budget, the individual tax rates and the
corporate tax rates would be permanent.
Senator Grassley. I have heard the rule that the
administration put out that for striking--or implementing
regulations, two have to be repealed. I have heard the
President speak about hundreds of regulations being reduced. I
would like to have you give me some data that will show the
benefits of such, because maybe you reduce--you are eliminating
regulations that have not been enforced for the last 20 years.
What good does that do? I am not bad--mouthing what the
President is trying to accomplish here because I think less
regulations has had a great deal to do with increasing the
economic growth. But can you put some quantifiable terms so we
can see what this is doing to benefit the economy?
Mr. Mulvaney. I can. I can do it a couple different ways.
First of all, I want to thank Congress for taking up under
the CRA revision, I think it was 15, 16, or 17 different
regulations, and I want to reinforce the fact that while the
administration can take steps to undo regulations, it can be
slow, it can be tedious, and it might not be permanent. When
you all take it up under the CRA, you make sure that no future
administration ever makes a similar rule. So I want to thank
you on behalf of the administration for the work you have
undertaken there.
The actual ratio that we have achieved, Senator, this year
instead of 2:1 was 22:1 on major regulations. We had 22 major
rules and regs revoked versus, I think, only three or four
brand-new ones total. The total number of rules, regulations,
and other limitations that were either withdrawn, made
inactive, or delayed is approaching 1,600.
The net present value benefit of that to the economy last
year was $8 billion, and that will go forward now. So we really
do believe--in fact, I think if you go back--you talked about
economic growth, Senator. We actually saw increases in economic
growth, improvements in economic growth, before the tax bill
was even actually fleshed out, let alone passed. And we
absolutely believe the work the administration and Congress did
to roll back the regulatory burden had an immediate impact on
the economic health of this country, and that that is
sustainable and structural. It is not stimulus. It is not a
sugar high. It is something that fixes the economy long term,
so it is something we look forward to continuing. The President
continues to make it a priority for the administration, and we
will continue to make it a priority as we move forward next
year.
Senator Grassley. I have got 3 seconds left. I do not
expect you to answer this question, but I want to make sure
that you know it is important to me, instead of putting it in
an email to you. As you know, the Senate has been working to
try to stabilize the durable medical equipment Medicare
benefit. This benefit is important because it allows patients
to remain in their homes, avoiding hospitalization. The Obama
Administration put in place a rule that applied competitive
bidding rates to rural and other areas that were expressly
excluded from the competitive bidding program. In some cases
these changes resulted in rates being below the cost suppliers
incur for providing services and equipment. And I was
encouraged in August last year when I saw that CMS sent an
interim final rule to OMB that would mitigate these changes.
However, this rule has been pending since then. So I want you
to tell me in writing specific steps you are taking to make
sure that the OMB reviews and releases that rule.
Senator Grassley. Thank you.
Mr. Mulvaney. Thank you, Senator.
Chairman Enzi. Senator Stabenow.
Senator Stabenow. Thank you very much, Mr. Chairman. And
welcome.
First, I have to start, Director Mulvaney, and say I cannot
believe here you go again on the Great Lakes. I cannot believe
this. Last year, the administration zeroed out the Great Lakes
Restoration Initiative, which is a bipartisan initiative
strongly supported in the House and the Senate to make sure
that we have dollars available for emergencies as well as water
quality issues and so on. And after you zeroed it out last
year, we put the full funding back in, strong support from the
entire region, and now you are back again with almost zeroing
it out.
And so I just do not understand it. I know that last year
you said this was a local issue, but believe it or not, there
is another country that cares about this right next to us
called Canada. And we have a Great Lakes Initiative with eight
States. It is funded Federal, State, local, and
internationally. But the administration does not seem to
understand that 20 percent of the world's fresh water
surrounding the Great Lakes is important. So please explain
this to me.
Mr. Mulvaney. Thank you, Senator. And you are absolutely
correct. We did zero that out last year. I believe that after
the caps deal, one of the add-backs we made either to 2018 or
2019--I cannot remember which one it was--was for $30 billion
split between that and some of the work we are doing in the
Chesapeake Bay.
What our research indicated over the course of the last
year--and you did raise this with our office, as did many
members of the area, both the House and Senate from both
parties--was that there is some Federal long-term monitoring
programs ongoing, and we propose to continue to fund that, but
also to send the message at the same time that it is just not
something that we are interested in doing long term. We do
consider it to be regional. We do consider it to be something
that the States are capable of doing and that we would very
much like to see us get out of that business in the long term.
Senator Stabenow. This is a major resource for our country,
I would just say. Have you seen the Great Lakes? Have you ever
been?
Mr. Mulvaney. Yes, ma'am.
Senator Stabenow. So we are like the ocean without the
salt. It is pretty big. One out of five jobs in Michigan comes
from the water. It is a very big deal--a $16 billion boating
industry, $7 billion fishing industry. I could go on and on.
And that is just Michigan. And so the idea of taking what is a
commitment every year of $300 million to be able to tackle
things like Asian carp, which we are trying to keep out of the
Lakes, and instead put in $30 million, again, we are going to
go right back at it again and do our level best to make sure
that this does not happen. But I do not understand why this
major natural resource for our country, where 40 million people
get their drinking water from the entire region, is something
that this administration does not understand. So we are going
to go back at it again and hopefully be able to keep the
funding going.
Something else I wanted to ask you about, and that relates
to Michigan and Canada again. We trade everything across a
bridge and tunnels and so on, except prescription drugs. We are
not allowed, and we have probably the highest prices for
prescription drugs in the world, and we can drive 10 minutes
across a bridge and lower the prices oftentimes 40 percent to
50 percent for seniors and others. So we are not talking about
luxuries here. We are talking about in many cases whether or
not people are going to get their cancer medicine, their
insulin. It is life and death.
So President Trump has made promises about lowering the
cost of prescription drugs, and the administration could open
the border right now to safe importation. And Senator Sanders
is offering a bill that I am a cosponsor of. I have taken bus
trips with seniors to Canada over the years, and I am
wondering--we have not seen any action so far, so is it fair to
say the President does not support opening up the border to
reimport safe prescription drugs into the United States?
Mr. Mulvaney. I will say this, Senator. I believe that it
is a promise that the President has already started to keep.
The things that we have done in the administration already this
year, part of the changes at CMS, have actually already saved
our seniors this year, 2018, over $300 million. And the
budget----
Senator Stabenow. Have prices been going down? I am sorry.
I am just not aware of prices going down.
Mr. Mulvaney. Prices went down either within Medicare or
Medicaid in 2017 for the first time since 2012. So----
Senator Stabenow. On reimportation, which would----
Mr. Mulvaney. No, ma'am, not on reimportation. We do not
address that in the budget, but there are other ways to get at
this issue. I believe you may have heard that the President
actually mentioned lowering drug prices in the State of the
Union address. The budget contains a series of proposals,
including a doubling of the funding for the FDA, an extra $100
million this year in order to work on generics. We have had
successes there already. We look forward to continuing those.
Senator Stabenow. Yes, and I do support generic drugs and
more competition in that area, and I think that that is very
important. But I also know there are things that he could do
right away. His own commission that looked at the opioid crisis
recommended that there be immediate negotiation to bring down
the price of naloxone, and that could be done and has not been
done. Opening up the border to be able to bring lower-cost
prescription drugs can come back. I am very concerned that at
this point we have seen--and I will conclude, Mr. Chairman--
that when we look at what is actually happening in the
marketplace for seniors--because folks are not talking to me
about prices going down. They are talking about to me about
prices going up. What I am concerned about is we have seen
major windfalls from the tax cut. AbbVie now is going to have
an effective tax rate cut to 9 percent, the corporate rate 35
to 9, and others as well. And I would just say I have not seen
anybody lowering prices because they got a big windfall in the
tax cut. And that would be something that would be very nice
for the President to focus on.
Thank you, Mr. Chairman.
Chairman Enzi. Senator Corker.
Senator Corker. Thank you, Mr. Chairman.
Director Mulvaney, welcome back. I do want to applaud you
for creating a more real budget. It seems that every year we
have these fake budgets that balance in 10 years.
It does not matter who the administration is or what side
of the aisle they are on. We have these fictitious budgets that
create imaginary things that are never going to occur. And you
did not do that, so I want to thank you for that.
I know that you and I are of the same ilk. We care deeply
about the deficits that our Nation has. I know you were a
strong proponent of balanced budgets when you were in the
House, and now you are in this position, and we as a Nation, as
you know, are on an unsustainable path. And I do not want to
get into specifics right now, and I think we all understand
where we are as a Nation. I was somewhat discouraged that the
cap deal that was reached last week was really far above what
even the President had asked for. So I think we have to say
that Congress in this particular case went way beyond what the
President was even requesting. As strong of a military
supporter as he is and I am, Congress went way beyond that,
both on military spending and on the non-military spending.
So you have had to actually jack your budget up, so as
people are giving you a hard time today about deficits, you
actually requested less money and at the last moment had to
elevate everything to take into account what Congress on its
own accord did to create even bigger deficits.
And so what I would like to ask you is, just
philosophically, where do we go? By 2028, we are going to be at
91 percent debt to GDP. I know that our military leaders would
tell us that our deficits are the greatest threat to our
Nation--not Russia, not ISIS, not the many things that we are
dealing with in the Middle East and around the world, but our
debt. I know that you care about that. So, just
philosophically, tell me where we go from here.
Mr. Mulvaney. Well, I think the budget gives some insight
into that, Senator. Keep in mind even though it does not
balance within the 10-year window, this budget still represents
a $3 trillion reduction in spending over the course of the 10-
year window. That is the second largest reduction in proposed
spending of any budget ever. The only one that is larger was
the budget that we introduced last year. In fact, but for the
caps deal, it probably would have been larger this year. That
is a $1.7 trillion reduction of that 3 in mandatory spending.
To Senator Sanders' point, I would contend to you that we
absolutely keep our promises. We do not take a look at or make
any reforms to Social Security retirement. We do not take a
look at or make any reforms to Medicare recipients, services
that they get. But there are other moneys that can be saved. We
save $1.7 trillion in mandatory spending here by looking at
things like the way drugs are priced within Medicare. We do
some tremendous new ideas, I think, on things like food stamps
and the farm bill, other mandatory spending. There are some
good ideas out there in this budget that the legislature could
take up to get real long-term savings and that could make a
dent in that GDP ratio.
In fact, I think you see by the end of our budget, even
though we do not balance, we are getting very close, and we do
bend the curve down in terms of debt to GDP. I think we are
down below 1.5 percent debt to GDP by the end of this window.
So that is a tremendous move in the right direction.
Senator Corker. And so over the longer term--I think most
of us realize that with the baby-boomer generation this is
going to go on for some time. Over the longer term, based on
the way you see Congress acting and you see the other pressures
that we have to invest in things like infrastructure, you are
actually more hopeful, because it does not feel that way to me,
that we are heading in a hopeful direction as it relates to
solving our Nation's deficits.
Mr. Mulvaney. I consider myself to be an optimist. With no
disrespect to my Democrat friends, I think one of the reasons I
am a Republican is that I am an optimist. I will tell you,
though, that there was a very interesting dynamic in going
through the plussing up of the budgets. It is a lot more fun to
spend money than it is to reduce. It is a lot harder to reduce
spending in the long term than it is to spend. And I think that
it is incumbent upon all of us to start making difficult
decisions, to decide together as a legislature and as an
administration are these deficits that we are really willing to
tolerate. We are not as an administration, which is why we have
a budget that bends that curve down in the appropriate
direction. And we hope that the legislature takes us up on some
of the ideas that we offer this year.
Senator Corker. One last question. My time is expiring.
There is a huge plus-up in several areas that take some of the
agencies that are plussed up per this last cap deal--including
the Pentagon, which, you know, I support making sure that our
military has what it needs. But the plus-up is so large that
you could have a situation where people are just rushing to get
contracts out the door to take advantage of the moneys that are
available that year. What are you all doing to ensure that we
do not end up doing multiple wasteful things in light of these
massive plus-ups in one year?
Mr. Mulvaney. I will give you one example. I think one
thing the administration is extraordinarily proud of, in
addition to increasing the spending at the Defense Department,
for the first time ever, as of September, the DoD now tells us
they are ready to be audited. We are starting that process. In
fact, we have already seen the first fruits of that. You saw a
report last week about the Pentagon's inability to track about
$800 million. That is a good thing because that was something
that we have been able to expose and now we will be able to
fix. So we absolutely take that risk seriously and hope to be
able to do better with it now that we have made some
improvements.
Senator Corker. Thank you, Mr. Chairman.
Chairman Enzi. Senator Whitehouse.
Senator Whitehouse. Thank you, Chairman. I share Senator
Corker's frustrations with where we are, and I think you, Mr.
Chairman, have expressed similar frustrations. We have a
ridiculous budget process, and as a result of that, we end up
with ridiculous budgets. This budget is going no place. We all
know that. It was cooked up in the laboratories of the Koch
brothers and a bunch of other creepy billionaires who want to
remake America in Ayn Rand's image. It was cooked up in the
laboratories of polluters who want absolutely no regulation so
they can despoil at will. It includes over $1 trillion in
Medicaid cuts that are clearly going no place.
It is completely out of step with the funding bill that the
President just signed and touted. It is off by $58 billion just
from the nondefense discretionary part of the funding bill that
the President just signed.
It knocks down HHS with a 21-percent cut as opposed to the
funding bill that we just passed, which has $6 billion in
opioid funding that I think Americans desperately need. The
funding bill we just passed added $20 billion in
infrastructure-related investments. This cuts it by $40
billion, for a $60 billion delta going the wrong way on
infrastructure. And part of the reason that these silly things
are in here is because the process is so silly. It is
completely partisan, which is why it ends up cooked up in
extremist laboratories. And it is unrelated to the funding
process because of its failures. We have a budget process over
here that ends up producing nothing, and then we have a funding
process that is led by leadership and the appropriators that
ends up actually doing the work of putting the funding measures
of Government together. And there is virtually no relationship
between the two. The budget is like a firework that goes off
with a big bang and everybody pays attention to it because it
is noisy and bright, and it has zero effect on the people who
actually make the decisions year in and year out on funding the
Government. And I think it is a shame, and I think the signals
that this is wrong are, first of all, that there is no
bipartisanship whatsoever. That has been a problem for a long
time. It is a vehicle for one party to express its political
persuasion, to express its loyalty to its big funders, and to
create a path for another purely partisan vote using the
reconciliation measure. That is basically all it accomplishes.
A budget process that worked would also look at tax
expenditures. More money goes out the back door of the Tax Code
than gets spent through most of these appropriations, and yet
we do not look at that. The health care expenditure of the
country, of the Federal Government, in the 10-year out-period
has been estimated to have fallen by about $3 trillion. That is
a big number, and we do not know why. I think it has something
to do with ACOs and with payment reform and with changes in
treatment by doctors at the local level that are actually
driving down per patient year-over--year costs, but we do not
know that. We ought to be vitally interested in trying to
figure out why we got that $3 trillion and how we can make more
of it if we are getting it by better patient care.
My God, what could be more important than improving patient
care and lowering costs at the same time instead of going after
preposterous cuts?
We have to have the budget have some parliamentary effect
if it is going to be meaningful. Right now the budget has zero
parliamentary effect because the 60-vote penalty is the 60-vote
minimum for appropriations. So we are shooting blanks. We have
absolutely no effect here. We are a null factor.
And, finally, we have got to look at revenues. I know it is
torture for our Republican friends to look at revenues
sometimes, but for crying out loud, we cannot have passion
about deficits and then at the same time abandon our passion
about deficits as soon as it runs up against the carried
interest exception that protects the biggest billionaires on
Wall Street. We cannot maintain a passion for deficits that
evaporates as soon as it bumps up against tax benefits for big
oil, for crying out loud, the companies that need the least tax
relief of any companies in the world. And yet there is this
magic disappearing passion about deficits when they bump up
against some very obvious ways to raise revenue.
Now, we each have our own politics on either side to bring
to this, and we can keep ricocheting back and forth from one
extreme to the other, but until and unless we have a meaningful
bipartisan process that actually looks at tax expenditures and
takes a responsible look at what is going on in health care so
that we can reduce costs without cutting benefits and looks at
revenues and has some parliamentary effect, all we are doing
here is noisemaking and firing off fireworks into the sky that
people look at and think, ``Oh, that must be really
interesting, look what this budget just did.'' And, in fact,
everybody who is in on the scheme knows that it has no effect
whatsoever, and the appropriators and the leaders are going to
get together and make a deal like they just did, and that is
how this is going to continue.
We have got, Mr. Chairman, to fix our broken budget
process, and one of the best things in the recent funding bill
that we just passed was to set up a bicameral committee to take
a look at how we solve a broken process. The way to a budget
that works is the path of bipartisanship. We have to create
such a road. And here endeth my statement. Thank you, Chairman.
And, by the way, I sincerely appreciate your leadership on
this particular question. You may not agree with every word
that I said, but I think we have common cause in believing that
the budget process needs reform and improvement. And I
appreciate your leadership in moving us in that direction.
Chairman Enzi. Thank you. Thank you for your comments.
Senator Gardner.
Senator Gardner. Thank you, Mr. Chairman, and thank you,
Director Mulvaney, for your time and testimony today and your
service to the country.
I agree with my colleague Senator Whitehouse about the need
for budget reform. In a process that has been in place since
the 1970's, it has worked two or three times. My gosh, this is
a disaster that is unfolding to the American people, and we
have got to find a reform that can actual hold stick and work
for the American people.
But I want to talk about something that is working, and
that is the tax cut bill. And I think today some more crumbs
were announced for the American people: $1,500 in bonuses from
a developer in Maryland; MetLife increasing minimum wages;
bonuses and benefit packages around the country are increasing.
And I think this is important to talk about, the fact that
people are earning more dollars, their wages are going up,
benefit packages are increasing. I think our colleague from
Vermont talked about utility rates. We have seen now people
reducing--we have seen utilities reducing their utility rates
because of the tax cut bill.
Director Mulvaney, what happened when people earn more
money from a revenue standpoint?
Mr. Mulvaney. It goes up. In fact, that is exactly what our
projections have shown. Senator Whitehouse has stepped out, but
one of the things he mentioned was to look at the revenues, and
one of the beneficial impacts of the tax bill is that the
revenues are actually up on our projections versus the CBO
baseline. In fact, in 2027, we expect that the Government will
take in almost $350 billion more than it otherwise would have.
Senator Gardner. Well, surely these are just crumbs, right?
Mr. Mulvaney. I have often wondered if $1,000 would be a
crumb if it came in the form of a Government check.
Senator Gardner. And so if you are looking at a utility
rate that may average $120 for somebody, $120 a month I think
is perhaps the Pepco region that we are in right here, 300,000
customers, $1,000-plus could cover a year's worth of utility.
Do you think that is crumbs?
Mr. Mulvaney. I do not.
Senator Gardner. Do you think a minimum wage boost is
crumbs?
Mr. Mulvaney. I do not.
Senator Gardner. Do you think salary bonuses are crumbs?
Mr. Mulvaney. Only a very wealthy person from San Francisco
would think that was a crumb.
Senator Gardner. Thank you, Director Mulvaney. And I am
excited for what we have here because you anticipate making
this permanent, correct?
Mr. Mulvaney. We do. Yes, sir.
Senator Gardner. I think that is important.
Mr. Mulvaney. And our assumptions assume that.
Senator Gardner. It is important to talk about.
I want to shift to some of the other ideas that are in the
legislation. One of the most important things for Colorado's
economy is the outdoor economy. It is a huge economic driver.
Last year, we passed a bipartisan bill to take a look at the
outdoor economy, make sure that it is measured as a part of our
overall economic activities, almost $1 trillion in terms of
economic development that has taken place as a result every
year of our outdoor recreation economy, consumer spending, et
cetera, 7.6 million jobs, some $65 billion in taxes.
The budget does zero out land acquisition under the Land
and Water Conservation Fund. I am concerned about that. Land
and water conservation funding does not come from tax dollars.
It actually is funded through other revenue mechanisms within
the budget, so these are not taxpayer dollars being spent in
this program. I would just like to better understand the
administration's thinking behind the budget request for
something like the Land and Water Conservation Fund.
Mr. Mulvaney. And, Senator, we have reached the point where
I do not know that one off the top of my head. I apologize.
Senator Gardner. Okay.
Mr. Mulvaney. I would be happy to reach out to you. I know
it is important to you and your district. We do a couple of
other things that we think would be beneficial out West,
including adding back some money for PILT, which I know is a
big deal for Colorado. But I do not know the answer off the top
of my head on that particular issue.
Senator Gardner. And that is very important for Colorado,
and I thank you for that. And we would also save you some rent
money if you moved the BLM office out of Washington, DC, and
you re-headquartered out in Colorado, perhaps Grand Junction,
Colorado. That would save a little bit of money, too.
Mr. Mulvaney. If only we knew the Director of the Office of
Interior.
[Laughter.]
Senator Gardner. Thank you.
Also, energy dominance, speaking of the Director of
Interior. American energy dominance I think is a great, great
thing to be proud of, to support, and to pursue. American
energy dominance I think is a very strong and powerful
diplomatic tool as well as economic driver. The budget does
have about $1.3 billion cuts to the Energy Efficiency and
Renewable Energy Office, and that could affect the National
Renewable Energy Laboratory. I want to make sure that you view
renewable energy as part of American energy dominance.
Mr. Mulvaney. We do. A couple different things. I want to
make very clear that we are absolutely satisfied that under the
proposals we have, no labs will close, number one.
Number two, what the budget does reflect, Senator Gardner,
is a refocusing, a reprioritization of basic research, and
there are places where we believe the Federal Government has
moved out of the role of basic research into more applied
research, stuff that is closer to market. And what we are
simply doing is saying, ``Look, that is the stuff the private
sector should be able to take care of. Let us refocus our
efforts on basic research in those areas.''
Senator Gardner. Thank you. I am going to run out of time
here, but I want to summarize a couple of questions that I was
going to ask.
On DACA, this week we are debating DACA. We are debating a
very important solution. There are hundreds of thousands of
workers legally right now in Colorado that are going to be
affected by the decisions this Senate makes, this Congress
makes over the next several weeks. Just back--of-the-page math,
we are looking at a population in jobs right now that could be
responsible for as much 3.4 percent of GDP. And if that was a
group of people that were to be eliminated out of the work
force, I think that would have a detrimental effect on a budget
projection of 3 percent growth or more, as we try to achieve
that. So that is something to consider as we go forward, very
important that we get this.
NAFTA, critical to our economy, critical to growth,
critical to that GDP assumption that we are building into our
budgets. Obviously, trade overall is, and I think any kind of
decision on NAFTA that could affect our trade dominance, so to
speak, could negatively affect--if it is in a negative way,
could negatively affect the GDP growth as well that we face.
And, finally, a quick question that you can get back to me
on. When we are talking about concerns over revenues, have you
given any thought or has the administration given any thought
to monetizing Fannie Mae and Freddie Mac, something like that,
what it would mean?
Mr. Mulvaney. Senator, that is a longer discussion for
another day, but, yes, sir, there is considerable discussion
going on within the administration, led in part by Treasury and
HUD, as to what to do about the Government-sponsored
enterprises.
Senator Gardner. Thank you.
Chairman Enzi. Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. Welcome,
Director Mulvaney.
First, and I cannot talk about this at length, but very,
very disturbed that the Trump administration reneged on the
longstanding plan to consolidate the FBI campus in a way that
would provide a more secure setting. We can have that
conversation later.
Back in 2016, during the campaign, Candidate Trump called
himself the ``King of Debt.'' It is pretty clear that this is
one of the promises he has kept as President of the United
States.
To my friend Senator Corker, who said this is the first
time we have seen an ``honest budget'' because it does not
balance in 10 years, actually President Obama presented budgets
that were very honest. They did not balance in 10 years, and
you and our Republican colleagues raked him over the coals for
that. But what we saw was borrowing, $1.5 trillion to give
windfall tax breaks to corporations, and since Maryland was
brought up, I would just point out our legislature is now
having to try to pass laws to stop big tax increases on
Marylanders; $350,000-plus Maryland households will see tax
increases, including 123,000 Maryland households with incomes
between $25,000 and $50,000. That is not a middle-class tax
cut. That is a tax increase on hundreds of thousands of
Marylanders.
Now, I wanted to ask you about what you say in here about
the Trump economy, because the more I look at these numbers, it
looks like the Trump administration is simply benefiting from
the continuation of the Obama economy.
You say here that Trump economics is working. You cite the
fact that 2 million jobs were added in calendar year 2017. That
is on page 1 of your testimony. That is great that 2 million
jobs were created. That is fewer jobs than were created the
previous year in 2016, isn't it?
Mr. Mulvaney. I do not have the numbers in front of me,
Senator, but I believe you.
Senator Van Hollen. It is somewhat fewer than the year
before, and it is fewer than in 2015, isn't it?
Mr. Mulvaney. Again, I do not have the historical data, but
there is no reason for you to lie to me.
Senator Van Hollen. Well, the reality is it is fewer than
in any year since 2011. So I am glad we saw 2 million jobs
created, but it is interesting to herald this as a great new
result of the Trump economy when it is less than in any year
since 2011.
I want to look at the rate of economic growth. Economic
growth last year was actually slower than it was in 2015 and
2014. And I went back and I looked at what the CBO projected,
what the CBO projected for economic growth in 2017. Do you know
what they projected in 2017?
Mr. Mulvaney. Again, I do not have the historical numbers.
I know that we projected 2.3 in last year's budget, and you
accused me of being way too optimistic.
Senator Van Hollen. Actually, I did not accuse you of being
way too optimistic with respect to that number. That was the
same number CBO had.
Mr. Mulvaney. Okay.
Senator Van Hollen. I said what you did last year, and it
sounded like you confessed a little bit to it, that last year's
budget was very overly optimistic with respect to out-years.
But let me--my question here, Director Mulvaney, is this----
Mr. Mulvaney. I think we beat last year's numbers, but go
ahead.
Senator Van Hollen. Because I am just puzzled by these
claims of how the first year of the Trump administration
deregulation brought all this added economic growth. The CBO
projected 2.3 percent growth in 2017. That was not based on any
assumptions about Trump economics. That was just based on where
they saw the economy going. And, in fact, the economy grew at
2.25, a little lower than what CBO projected. So I am trying to
figure out where your--the basis for your comment, you just
made it again, that this first year, deregulation produced all
this economic growth, when it was actually slightly lower than
what CBO projected, and they did not take into account any of
those claims.
Mr. Mulvaney. Senator, I think if you look at the last
three quarters, we had two quarters over 3 percent; the fourth
quarter was just under 3 percent, including some tremendous
financials. I think the Atlanta Fed just predicted first
quarter someplace in the neighborhood of 5.4. So I think
everybody, I mean left and right, has admitted that the economy
grew faster last year than expected.
Senator Van Hollen. Well, I do not think so. CBO projected
2.3 percent. I never quarreled with that number, and, actually,
it was slightly lower than that. So this sounds a lot more like
puffery than reality.
My last question, putting your other hat on, CFPB, as you
know, your predecessor at CFPB filed a lawsuit against some
scam artists in the payday lending area. One of them was Golden
Valley, which charged like 950 percent interest rates. I mean,
this is higher than Mafia loan sharks. It is reported that you
dropped that lawsuit, and the spokesperson for CFPB first said
that you were not part of the decision and then said you were.
A simple question. Were you part of the decision to drop the
case against Golden Valley?
Mr. Mulvaney. Yes, sir.
Senator Van Hollen. Okay. I will follow-up with that. I
think it is an outrageous decision and an anti-consumer
decision.
Mr. Mulvaney. Keep in mind, Senator, because you and I are
always very candid with each other, there is an ongoing
investigation into Golden Valley, so it would be unlikely I
would be able to answer many of your questions other than the
one you have just asked.
Senator Van Hollen. Well, it sounds like you dropped the
lawsuit.
Mr. Mulvaney. We dropped--again, let me be very clear in my
wording because I have a lawyer sitting here behind me. There
is an ongoing investigation against Golden Valley, and for that
reason, it is not appropriate for me to comment on that work. I
cannot answer the specific question that you asked me.
Senator Van Hollen. All right. Thank you, Mr. Chairman.
Chairman Enzi. Senator Boozman.
Senator Boozman. Thank you, Mr. Chairman. Thank you for
being here today, and we appreciate all of your hard work.
The administration budget projects the debt-to-GDP ratio
will begin to decline in 2023 and ultimately reduce below pre-
recession levels over the 25-year horizon. Presumably, economic
growth plays a role in this change of trajectory as well as
restraining spending. Can you explain some of the key policies
that Congress should consider in order to put our country back
on a fiscally sustainable path? And then, also, what is a
healthy debt-to-GDP ratio in your estimation?
Mr. Mulvaney. I will deal with the second question first. I
think a lot of the academic literature would suggest to you
that 80 percent really is sort of that danger zone, so if we
can keep it below that, that would be great. I would love to
see it below 60, which is, I think, back below the pre-
recession numbers. But we have too much now, I think is the
short answer to your question.
Regarding the policies that we would encourage the Congress
to consider, on the revenue side, Senator, you may not have
been here earlier when we mentioned that this budget assumes
that the individual tax rates which expire, the reductions that
expire 5 years into the current window, we assume those to be
permanent. And I will tell you that our assumptions regarding
long-term growth assume that they are permanent.
So we encourage you to keep an eye on the revenues, and if
the revenues do, in fact, turn out the way we expect them to
be--and, again, we expect revenues to decline in the short
term, as you and I discussed during the discussion of the tax
bill, but start to increase, actually increase almost
immediately and to turn positive compared to the baseline by
2023, and are almost $350 billion to the positive by 2027. So
let us continue to watch the revenue line and to continue to
tweak the tax bill to make sure we can maintain that.
On the spending side, Senator, we have offered $3 trillion
in long-term savings over the course of the budget; $1.7
trillion of that is on the mandatory side. I think you and I
share a concern that the mandatory side of the budget continues
to eat into a larger and larger share of our spending every
single year. And while fiscal restraint in any form is to be
encouraged, certainly taking a look at that mandatory spending
would be helpful.
Senator Boozman. What is a healthy GDP to deficits?
Where are we at now?
Mr. Mulvaney. Senator, right now--oh, deficits? I think we
are approaching 5 in the next year or two. We get down to 1.1,
1.2, I think, by the end of the 10-year window. That is better
than zero. I would like to see a balanced budget in the long
term. But if you are going to run a little bit of a deficit,
keeping it as low as possible would be advisable.
Senator Boozman. Okay.
Mr. Mulvaney. Actually, let us put it to you this way: I
would love to see revenues growing faster than expenses, and
that allows us to shrink the size of the deficit as a
percentage of GDP every single year. You run a business, and if
your business' expenses are growing faster than your revenues,
you are in trouble, and so is the Government.
Senator Boozman. Right. That is a good point.
Tell me, we are in the process now of the DACA voting and
things, you know, trying to get that sorted out. One of the
things that is very important to the President and very
important to myself and so many others is securing the border.
We would like to make it such that we have a significant amount
of money, you know, going that way because it is going to take
that. How do we do that in a way that we can get some money up
front and yet protect that money into the future, but also very
importantly, making sure that we have the oversight that we
need going forward?
Mr. Mulvaney. The good news, Senator, is that as we sat
down to look at the caps deal that was just signed, it does
provide considerable additional funding, and we actually take a
big chunk of that and put that toward border wall security,
border security including a wall, including the wall. In fact,
I think you may have heard me say earlier that our budget
assumes a DACA deal; it assumes an immigration agreement is
reached. We want one to be reached. I want to make that very
clear on behalf of the administration. And for that reason, we
actually explicitly assume that a deal is reached and that the
money for the wall is set aside.
One of the early proposals that we sent down for you all to
consider is to set up a trust fund so that while we have the
money available with the caps being increased this year and
next, that we set aside that money in that trust fund so that
we do not have a situation like we had in 2006 where border
security was authorized but was never appropriated.
Senator Boozman. I agree with that totally. And, again, as
far as the oversight, how do you oversee the trust fund? What
would be your proposal to----
Mr. Mulvaney. I do not know if we have gotten to the
details yet on how to do that, Senator. All I can offer you is
the examples that we have brought to some of the other
agencies. I mentioned earlier that we have finally been able to
bring the Defense Department to an auditable position after
many years of trying. I give several administrations credit for
doing that, but it was finished in September of this year. We
would encourage at least that same level of oversight, if not
more, on that trust fund.
Senator Boozman. I think it is really important. We do not
want the border wall to be the new CFPB.
Mr. Mulvaney. I absolutely agree with that, Senator. I
think one of the risks that you run if you put it in the
ordinary appropriations is not only that it is not spent, but
that it is misspent in order to get that appropriation out the
door that year as opposed to taking a longer-term view that you
might be able to take with a trust fund.
Senator Boozman. I agree, and that is why, you know, we
need to be creative and create some sort of a hybrid to make
sure that both of those are accomplished with the money being
there, but also with the good oversight that it is going to
require.
Mr. Mulvaney. I absolutely agree.
Senator Boozman. Thank you.
Chairman Enzi. Senator Merkley,
Senator Merkley. Well, thank you, Mr. Chairman.
So we have cuts in this budget, just to take four line
items: health and Medicare and higher ed and food, that is,
SNAP. There is $1.5 trillion right there. So, you know, a big
outline for America. Let us give $1.5 trillion in the tax bill
to the wealthiest Americans and proceed to cut our health, our
commitment to our seniors on health as well; cut the
affordability of college because, you know, the rich are Okay,
they can pay their college, do not worry about the rest of
Americans. And, oh, by the way, the hungry in America, too bad,
let those children go hungry. They are from poor families; they
do not matter.
What kind of a message does this send about this
administration? They say they are for working families. They
are going to address the challenges, the challenges of living-
wage jobs and health and education. And right here health and
education get hit enormously, the foundations for families to
thrive.
Or we can take some others. There are more cuts than that.
How about the $3.4 billion to heating and the offset of a tax
cut to Wells Fargo of the same amount? What is more important,
Mr. Director: the heating program or the tax cut to Wells
Fargo, which has defrauded so many hundreds of thousands of
people across this country? Which one is more important to you?
Mr. Mulvaney. Actually, Senator, I am familiar with the
$3.39 billion in LIHEAP. I think I addressed that earlier with
Senator Sanders. I am happy to review it, if you like. I am not
at all familiar----
Senator Merkley. I am just asking which one is more
important to you: the cut to heating or the tax cut to Wells
Fargo, which has defrauded so many people?
Mr. Mulvaney. Senator, I would have to challenge the----
Senator Merkley. Yes, I have noticed you never answer
questions from Democrats, so I am not expecting you to answer.
But I thought I would give you the chance.
Or how about the $4.3 billion cut to rental assistance? We
have people living on the streets in the cloverleafs and
underpasses all across America because the cost of housing over
the last four decades has gone up enormously compared to the
living wage. But you want to do a $4.3 billion cut in rental
assistance while giving $6 billion to Exxon Mobil. Which is
more important to you: people having housing or $6 billion to
Exxon Mobil? Which one?
Mr. Mulvaney. One of the things I mentioned during my
opening----
Senator Merkley. It is a choice of the two----
Mr. Mulvaney [continuing]. Statement, Senator----
Senator Merkley [continuing]. You can answer one way or the
other. I think the public would like to know.
Mr. Mulvaney. It is, but also I do not like to answer
loaded questions that are simply rhetorical and may not be
correct. I am not even sure that $4.3 billion number is right.
As I mentioned----
Senator Merkley. That is the amount in your budget, and you
should be aware of that when you testify here.
Mr. Mulvaney. My opening statement----
Senator Merkley. Let us turn to something about the after-
school programs, the STEM programs, our ability to undertake
high-tech advancements in our economy. You have got about $1
billion to $1.4 billion to the Koch brothers and a $1.2 billion
reduction in after-school STEM programs. Which is more
important: educating our children or more money for the Koch
brothers?
Mr. Mulvaney. Again, I cannot even see that part of your--
--
Senator Merkley. Do you think the Koch brothers consider it
a good investment that they say they will spend $400 million on
the next election and then they get you to give them a $1.4
billion reduction in their taxes? Is that a pretty good
investment for the Koch brothers?
Mr. Mulvaney. I have no clue where that $1.4 billion range
comes from or if it is accurate.
Senator Merkley. How about Chevron getting $2 billion while
you cut development assistance by $2.8 billion? Everything we
see in this budget is about help to the powerful and an assault
on working Americans. And although I hear a whole lot of
bragging about, ``Oh, we are going to help lower-income
Americans with a tax cut,'' but you put a provision into the
tax bill that will wipe out health care for 13 million people
and raise health premiums more than 10 percent next year for
the rest, that in itself wipes out any gains from the tax bill.
I am really disappointed to see that the philosophy of this
administration ran on of fighting for ordinary Americans became
just this is an administration by and for the powerful and
about undermining the opportunity of ordinary families to
thrive.
Now let us turn to your other role. You seem to take great
pleasure in having wiped out the payday loan rule and allow
interest rates of 500 to 1,000 percent, far more than the Mafia
ever charged. Why is that a good thing for America?
Mr. Mulvaney. Senator, I think it is inaccurate to say that
we have wiped out the payday rule. We have simply given notice
that we are going to take additional comments on additional
rulemaking.
Senator Merkley. Did you or did you not suspend
implementation of the payday rule?
Mr. Mulvaney. Again, we gave notice that--the payday rule,
as far as I know, is still in effect. We have simply given
notice that we were going to take additional comment for
additional rulemaking.
Senator Merkley. You delayed it. You can call it whatever
you want, but you prevented it from going into effect. I am not
sure why you are dancing around about it, because you seem
pretty happy about having done so to help out these payday loan
companies charging 500 to 1,000 percent.
Mr. Mulvaney. I am sorry. Was there a question there,
Senator?
Senator Merkley. Yes. The question is: When you are so
happy about having helped out the payday loan companies, why
don't you own it now? Why do you want to dodge the question?
Mr. Mulvaney. Again, Senator, we have given notice that we
are going to take additional comments for additional
rulemaking.
Senator Merkley. How about Equifax? Millions of Americans,
143 million Americans lost the integrity of their data, and you
just let them off the hook.
Mr. Mulvaney. I can----
Senator Merkley. No accountability. How about
accountability? How about that concept being embedded in the
work of what was our consumer watchdog that now is our consumer
``roll over and let the big companies scratch its belly''
organization?
Mr. Mulvaney. On Equifax, I can tell you, Senator, that
there has been no change in the position from the previous
leadership of CFPB regarding Equifax.
Senator Merkley. Yes, Okay. All right. If you are going to
make these decisions, you might as well own them and defend
them. Thanks.
Chairman Enzi. Senator Graham.
Senator Graham. Thank you. Good morning. About priorities,
I want to thank you and the President for negotiating a budget
agreement that gives long overdue relief to the military on
behalf of the men and women who have been serving who have been
asked to do a lot with a little bit. Thanks. I just cannot tell
you how important it is that we set aside the sequestration
cuts for the next 2 years and rebuild our military, and I want
to thank you and the President. That was great leadership.
Graham-Cassidy, you mentioned that in the budget. Is that
correct?
Mr. Mulvaney. Yes, sir. In fact, we assume it passes.
Senator Graham. Well, I hope it will. Can you sort of
explain to the Committee here very briefly why you think it is
important that it does pass?
Mr. Mulvaney. The way we do it, it does a couple of
different things. Writ large, it transfers control of this
issue, this very important issue of health care, to the States,
and we just think that is a more efficient way to provide that
service. You and I both served in the South Carolina State
Legislature, and I absolutely believe in my heart of hearts
that South Carolina knows better for South Carolinians on how
to provide them with health care than we do in this chamber.
And Graham-Cassidy goes to the very heart of that while
providing importantly the funding necessary for States to do
that. Oftentimes we hear folks say let us just give it to the
States, but we do not give them the funds necessary to do it,
the unfunded mandates we hear so much about at the State level.
Graham-Cassidy does not do that, so we think in a bunch of
different places, both fiscally and in terms of policy, it is
by far the best idea we have seen come down the pipe in a long
time.
Senator Graham. If I could just build on what you said,
four States receive 35 percent of the money under Obamacare
funding as it is today: Maryland, Massachusetts, New York, and
California--all great folks. They are 22 percent of the
population. Under Graham-Cassidy, we try in a 10-year period to
level out that funding, to have it per patient be the same no
matter where you live. Then we will adjust for inflation based
on region. Do you think that is a fair way to deliver health
care?
Mr. Mulvaney. No. Again, that is one of the reasons that we
support the Graham-Cassidy bill and hope that you all see fit
to pass it at some point.
Senator Graham. Well, I think every State will benefit, and
we will try to make it the least amount of pain as possible to
the four States who get most of the money compared to the other
States.
MOX, I asked three questions 2 years ago about alternatives
to MOX. Can I just send you these questions? Or should I sent
them to DoE?
Mr. Mulvaney. Copy us both, because as you and I know, we
have met together with Secretary Perry. We are very much aware
of your concerns and your interest in MOX. You are also
concerned--I think you are aware of ours.
Senator Graham. Yes.
Mr. Mulvaney. Which is that there needs to be a more cost-
effective way to do what we are doing.
Senator Graham. Right, so what I will do is I will send a
copy of the questions, the basic questions about an
alternative, to you and Secretary Perry, because from your
person view do you think it is 70 percent complete, 30 percent
complete, the MOX program? What do you think?
Mr. Mulvaney. My concern, Senator, is that I have seen
projections that say it may not be finished until the 2030's,
and I think the last time they asked the people what it would
cost to finish, they could not give an answer, and as the
budget Director, that really, really worries me.
Senator Graham. Well, I think it is 70 percent complete,
and I think I am going to get you an answer on what it would
cost to complete. I just do not think there is a viable
alternative. But the State Department: ``If you do not fund the
State Department fully, then I need to buy more ammunition
ultimately.'' That was General Mattis when he was CENTCOM
commander. Do you doubt that statement?
Mr. Mulvaney. I do not, Senator. I would encourage folks to
look at the State Department budget and realize that the
President ran on saying we were going to give less money to
other countries overseas, and the State Department budget does
contain a lot of that foreign aid, and that is what represents
a lot of those reductions.
Senator Graham. So it is a 20-percent reduction in the
State Department's budget.
Mr. Mulvaney. It is, but I think we increase spending on
humanitarian assistance. We do lower our commitments to some of
the multilateral institutions to try and right-size our
contributions to support what Secretary Haley--excuse me,
Ambassador Haley is doing. But we are very much aware of your
concerns and look forward to working with you on trying to make
the State Department more effective.
Senator Graham. Do you agree that the State Department is
really national security in another form, as General Mattis
indicated?
Mr. Mulvaney. What do they say, that war is just diplomacy
by other means? Yes, sir, the two are intricately entwined.
Senator Graham. So I will look forward to working with you
to make sure that we do not take off the table diplomatic
options, not only to prevent war, to make sure that gains on
the battlefield are not lost. And I think, again, General
Mattis said it better than I could ever say that this is a
steep cut in the State Department that will lead to
instability, put our people at risk who are serving overseas,
and I look forward to working with you. I think you are doing a
very good job, and I really appreciate the steady hand you
provided when it comes to budget matters and your willingness
to negotiate and compromise. So thank you very much. We are all
proud of you at home.
Mr. Mulvaney. Thank you, Senator. I wish I got back there
more often.
Chairman Enzi. Senator Murray.
Senator Murray. Thank you, Chairman Enzi. Before I turn to
Director Mulvaney, I do want to comment on the new Joint Select
Committee on Budget and Appropriations Process that was
included in the budget caps deal. I expect we will be hearing a
lot about that in the coming months, and I just want to make my
views very clear.
Republicans spent 2017 hijacking the budget process for two
things: first of all, a partisan attempt to take health care
away from millions of families, which, thankfully, crashed and
burned; and, second, jamming through the massive tax cut for
the wealthiest Americans and a permanent tax cut for the
biggest corporations, without even trying to work with
Democrats on ways we could help the middle class.
Now, in 2018, things have been a little different.
Republicans came to the table and worked with us on a 2-year
budget deal that increased investments in education and health
care and child care and other domestic and military priorities.
Now, finally, the Appropriations Committee has clarity, and we
are able to get to work and pass our bills by the March
deadline.
So, with all due respect to Chairman Enzi and my House and
Senate Republican colleagues, we do not need a new select
committee to tell us what the problem is. It is pretty obvious.
This Budget Committee has been unable or unwilling to do its
job. So we had to lurch into one crisis and then another before
the rest of Congress could come together and cleanup a mess. I
am hoping we can do our jobs on the Appropriations Committee,
and I continue to hope that this Committee can do its job and
not rely on new select committees that are intended to pass the
buck instead of making the tough calls, and I just wanted to
make that clear.
Director Mulvaney, if this were a normal budget hearing, I
would start off by commenting that budgets are statements of
values and priorities, and I would dig into the various
proposals, what they said about what kind of country we were,
what kind of country we wanted to be.
If this were a normal Budget Committee, I would point out
that the so-called immigration proposals it includes are
wasteful, divisive. I would point out that it is widely
misguided and simply wrong to ask low-income families and the
workers who need a hand up to bear the brunt of massive cuts
while trillions are being spent on tax cuts for the rich and
while austerity flies out the window when it comes to the
military.
If this were a normal Budget Committee hearing, I would
point out how absurd it is to cut $200 billion in financial aid
for college while students are struggling to afford college and
keep their heads above water. And I would point out serious
concerns about this administration's request for veterans'
care.
You know, if this were a normal Budget Committee, I may
even praise some of the attention that is finally being paid to
tackling the opioid crisis. But, Director Mulvaney, this is
anything but a normal budget and Budget Committee hearing.
President Trump just signed a 2-year budget agreement into law
that makes this request irrelevant. Democrats and Republicans
have ignored President Trump's budget request before in the
interest of trying to get something done, and this one will be
no different.
So it seems this budget proposal is only good for one
thing: reminding people across the country that President Trump
cares more about giving tax cuts to the wealthiest Americans
and biggest corporations than he does about investing in health
care and education and child care and middle-class priorities.
So, Director Mulvaney, for years I have heard you rail
against deficit spending. You called yourself a ``deficit
hawk.'' You claim to take our debt very seriously. You called
for balanced budget amendments. You said our debt is ``so large
as to defy description.'' Well, the debt has only grown since.
The deficit has increased under this administration,
approaching $1 trillion this year and next. And it cannot
``defy description'' because you describe it in the pages of
this budget proposal. And do not even try to hold yourself to
the standard you held President Obama to when you were a Member
of Congress.
So I was prepared to come here today and call you out on
the hypocrisy, but then I heard you on Sunday, that if you were
in Congress, you would have voted against the budget
legislation that President Trump just signed. So I wanted to
give you a chance today to step back from the hypocrisy. If you
were in Congress, would you have voted for this budget that you
are presenting?
Mr. Mulvaney. Sure, and I will give the same answer I gave
on Sunday, which is that as a Member of Congress representing
the 5th District of South Carolina, I probably would have found
enough shortcomings in this to vote against it, as did many
members of this Committee. But I am the Director of the Office
of Management and Budget, and my job is to try and fund the
President's priorities, which is exactly what we did.
Senator Murray. So you would say this as a Member of
Congress?
Mr. Mulvaney. Yes, I think I have said that before.
Senator Murray. Okay.
Mr. Mulvaney. I do not think that reflects on my opinion of
it as a member of the administration.
Senator Murray. Okay. Well, let me ask you one more
question.
Mr. Mulvaney. I am just trying to give an honest question
to an honest answer, Senator.
Senator Murray. I appreciate it. I appreciate it.
Republicans have busted our budget with trillions in tax cuts
for the rich, and this budget starts asking the middle class to
actually pay for that. You have said before that you would like
to cut Social Security and Medicare. Can you commit to me today
that you will not be asking for a penny of cuts to benefits
from either of these critical programs in future budgets to pay
for the President's tax cuts?
Mr. Mulvaney. And that is exactly what this budget
reflects. The proposals that you see that touch on Social
Security do not deal with old-age retirement benefits, do not
deal with core Social Security. As we discussed last year, we
tried to address some reforms within Social Security Disability
Insurance.
Senator Murray. What do you propose?
Mr. Mulvaney. I think, well, in Medicare, for example, let
us talk about Medicare, because it was the other thing you--we
do not propose any changes to any benefit, any benefits, any
services to beneficiaries. We tried to focus on lowering drug
prices within Medicare. The number I have heard, by the way, a
couple times today and in the press is that we propose to cut
Medicare by half a trillion dollars, $500 billion. That is just
not right. The number is $236 billion, and most of that is tied
up in drug reforms and some other proposals.
For example, Senator Murray--and thank you for the time to
do this. I do not know if you know this or not, but your
Medicare money--Medicare money that you pay in FICA that goes
into the Medicare Trust Fund--actually goes to pay for graduate
medical school tuition. It goes to pay for bad debts from non-
Medicare patients at hospitals. And we propose to move that
funding----
Senator Murray. Are you eliminating that?
Mr. Mulvaney. We do actually move that on to another part
of the budget so that we actually still pay those, but we do
not pay them out of the trust fund. And there are a lot of
folks who said, ``Well, that is a cut to Medicare.'' No, it is
not. It is actually improving the Medicare Trust fund, and I
think the proposals----
Senator Murray. And put it somewhere else where you can cut
it. Okay. I got it. We are out of time.
Mr. Mulvaney. Thanks.
Senator Murray. Thank you.
Chairman Enzi. Thank you.
Senator Kennedy.
Senator Kennedy. Thank you. Mr. Director, I am over here.
Mr. Mulvaney. You are on my right. I know that, Senator
Kennedy.
Senator Kennedy. Yes. It is the correct place to be.
Mr. Mulvaney. That is right.
Senator Kennedy. This is America. We all are entitled to
our opinion, but I think you are doing a great job.
Mr. Mulvaney. Thank you, sir.
Senator Kennedy. I know you to be a fiscal conservative. I
think you share my, I do not know, concern, disbelief,
curiosity. I do not understand why taking care of our
generation requires robbing the next generation. I want to
thank you and your budget for emphasizing our need to do
something about improper payments. As you know better than I
do, we have got $144 billion of improper payments being made
every year. Now, we are not going to stop all of them, but if
we can stop 20 percent, that is $30 billion.
I have introduced a bill with Senator Carper to try--it is
called the ``Stop Paying Dead People Act.'' I was just amazed.
You cannot make this stuff up. We have got a death file at
Social Security, but Social Security will not share it with its
sister agencies. So people are being--dead people are getting
checks, and they are being cashed. Obviously, there is fraud.
In some States you can vote when you are dead, but cashing a
Government check is just a bridge too far, as far as I am
concerned. So I hope you will continue that.
In the few minutes I have left, I want to get a little
maybe metaphysical here. We talk about the need for a balanced
budget, but sometimes--and I support a balanced budget. But
sometimes I think we conflate balanced budget with Government
spending, and here is what I mean. We have got a $20 trillion
economy. That is all the goods and services we produce every
year. If Government is spending $4 trillion--I know the
President's budget comes in a little higher, but if Government
is spending $4 trillion, the Government is taking $4 trillion
out of that, let us say, $20 trillion. Are you with me so far?
Okay. Do you think that America would be better off if we had a
balanced budget of $4 trillion Government spending and $4
trillion of taxes? Or would we be better off in terms of
personal liberty if we had $2 trillion worth of spending and $1
trillion of taxes and, therefore, we would have to borrow $1
trillion?
Mr. Mulvaney. Well, from an individual liberty side, if you
assume for the sake of this discussion that the larger the
Government is, the less individual freedom you have, then by
definition you would be better off from an individual liberty
standpoint by having that $2 trillion Government expenditure
with only $1 trillion taken out of the economy. Plus I think I
can make the argument to you, take individual liberties out of
the equation and look at the allocation of capital. If I give
$4 trillion to the Government, it is likely to misapply a lot
of that, spend it inefficiently; whereas, if I let people keep
more of their own money, they are by definition going to apply
it very efficiently. In fact, that is efficient. That is the
market. People spending their own money is the market, and
nothing allocates capital more efficiently than the free
market. So I think in many ways you would be better off by
having that smaller footprint.
Senator Kennedy. Well, I want to be clear. I support a
balanced budget, and I know you do, too. But would one way to
skin this cat be to approach legislation that would limit
Government spending to a certain percentage of GDP?
Mr. Mulvaney. Certainly, in theory, yes, sir.
Senator Kennedy. Okay. Do you think the President would
support something like that?
Mr. Mulvaney. I have not talked to the President. I know
that came up a couple times in the House, Senator. I know you
and I have not talked about this before, so we are just sort of
thinking off the top of our heads. But I think that actually
came up in the past as part of a debate regarding a balanced
budget amendment. Would we cap Government expenditures as a
percentage of the overall economy? The theory being that it was
Okay to grow the Government as long as you were growing the
economy at the same time. Go back to my comments before about
your revenues growing faster than your expenses. It is wrong to
grow Government faster than the economy of the people that can
pay for it.
Senator Kennedy. I am out of time. Thank you, Mr. Director,
for your service.
Mr. Mulvaney. Thank you, Senator. I always enjoy it.
Senator Kennedy. I am a big admirer.
Chairman Enzi. Senator Perdue.
Senator Perdue. Director, thank you for surviving another
one. It is always interesting.
Mr. Mulvaney. It was a lot easier the first time I was in
this room, I can tell you.
Senator Perdue. They do not get any easier, I am sure.
I want to make a comment, Mr. Chairman, very quickly before
I get to two questions quickly.
One is I take a different view totally than the Senator
from Washington. I respect her work over the years, and I know
we can work together, but we have got to fix this budget
process. Director, I know we have had this conversation. I
think you agree with this. I am not asking for you on the
record right now, but I want to make a comment. The budget
process has only worked four times in 44 years. It has led to
this debacle of $20 trillion. We are not going to solve our
debt crisis over the next 20 or 30 years unless and until we
fix this debt crisis.
I applaud leadership on the House and Senate, and I applaud
the White House's support of this select committee, and I look
forward to its outcome later this year.
Director, I want to comment--just a question on the debt.
The size of this Government in 2000, the last year of Bill
Clinton, was $2.4 trillion in current dollars. Last year, it
was about $4 trillion directionally. There is our problem. The
largest growth of that, though, was in the mandatory side.
Today $4 trillion, 75 percent of that is mandatory. Only about
25 percent is discretionary. That is what you have to work with
primarily.
I am concerned about over the last administration we
borrowed about 35 percent. It looks like over the next 10 years
in this budget we will borrow somewhere north of 20 percent. It
is new debt.
I know your heart. I know what you have done historically
on this. Help us understand sort of the long--term investment
return concept I know the White House has in terms of dealing
with the debt. There are things that we have to invest in
growing the economy. We have to build the infrastructure and
all that. That will yield return, as I understand it, and I
believe that.
The question is: Are we moving toward a longer-term
solution outside a 10-year window that is a directional pathway
toward getting this debt down to some more meaningful
percentage of GDP? We talk about spending. The problem with
spending is, of the $1 trillion, only 350 is non-military. Of
the $1.1 trillion discretionary, about 700 now is military,
about 200 is VA, and the balance there of 300, 350, is all the
domestic discretionary programs that we still have out there.
And they have been cut dramatically as well over the last
decade.
So give me some comfort that we have at least a north eye
on the long-term solution toward this mounting debt crisis.
Mr. Mulvaney. We do. And, fortunately, Senator, we have got
an example that works. We have actually balanced the budget
during my adult lifetime, back in the late 1990's, and----
Senator Perdue. On a per year basis.
Mr. Mulvaney. On a per year basis. I recognize there was
some funny accounting when it came to the Social Security
receipts and so forth, but if you look generally to the
concept, what happened was we figured out a way to grow the
economy faster than we expected, and we had fiscal restraint.
Democrats take credit for it, Republicans take credit for it.
But the truth of the matter is the Government grew slower than
the economy. And if you can do that long enough, revenues will
catch up. And you and I have not talked about this either, but
we have talked to the administration a lot of times about
prioritizing deficits. There are actually different types of
deficits. Deficits that allow people to keep more of their own
money because of the allocation of capital is actually a fairly
relative efficient deficit. In the middle you might have stuff
on things like infrastructure where at least you might get some
return on that. The least efficient type, from an economic
standpoint, of deficit would be something for wealth transfer
payments. So we do try and prioritize that as we look across
our deficits going forward.
But the big picture, writ large, is you have to figure out
a way to grow your economy faster than you are growing your
Government.
Senator Perdue. Thank you for that. One last question, Mr.
Chairman.
With regard to infrastructure investment, again, as you
just said, investments hopefully that will produce a return,
unlike the $1 trillion that we threw toward investment in
infrastructure back in 2011 that was not made with those
priorities. I call out one type of investment, particularly
when we talk about spending the money we are talking about in
this budget on infrastructure. The question is: Are we
prioritizing based on the return that we get in terms of
economic growth and contribution then in turn to reducing this
long-term debt? And I specifically call out an issue that I
believe is caught between current authorizations and the future
infrastructure investments. Those are in States like Texas,
Louisiana, Florida, Georgia, your home State of South Carolina,
Virginia, New Jersey. These are our ports, our eastern ports
that are all trying to accommodate the new Panamax ships that
would dramatically improve our ability to compete around the
world.
I believe those investments are caught up in the Army Corps
of Engineers' budgets being cut, but are not being moved over
to the infrastructure investments, and these port investments
actually offer a higher rate of return than some of the
infrastructure investments that I think were contemplated. Can
you address that?
Mr. Mulvaney. I would. At the risk of making a small
correction, we absolutely anticipate that the deepwater ports
be part of the infrastructure bill. In fact, the largest part
of the infrastructure bill, the 50 percent of the $200 billion,
$100 billion is sort of in our minds set aside for programs
that can contribute their own portion of the funding. And as
you know, the port of Savannah does exactly that. So we had
specifically the deepwater ports in mind when we fashioned the
infrastructure----
Senator Perdue. That is comforting. Thank you.
Thank you, Mr. Chairman.
Chairman Enzi. Thank you, and I want to thank the Director
for his comments.
I do want to ask an additional question here just from some
confusion about GDP that we were talking about earlier. The
President's budget projects a GDP growth average of 3 percent
annually with a long-term trend line of 2.8 percent. This long-
term trend is nine-tenths percentage points higher than the
CBO's 1.9 percent forecast, which was published last June prior
to the passage of the Tax Cuts and Jobs Act. There has been
downward pressure on the long-term projections due to
demographic changes. How does the administration reach its
growth projections? And how will the Tax Cuts and Jobs Act
encourage labor force participation?
Mr. Mulvaney. Thank you for the question. At the risk of
getting deep down in the weeds and showing my inner geek, we
were fairly disappointed in the GDP numbers in the fourth
quarter. We expected them to be north of 3. They were not.
But if you drill down into the details, one of the things
you will see is that the capital investment and the durable
good numbers were almost 4 times what we expected. We were
expecting something about 0.8, 0.9, and they came in just south
of 3 percent. That is how you do it, Senator, and that is why
such a critical part of the tax bill, gentlemen, was that
corporate tax rate and the depreciation rules, in order to get
the type of GDP growth that we need long term, given the
demographic challenges that we face, we need individual
productivity to increase. That comes from capital investment.
You invest in a new machine, you invest in new technology, you
invest in education, and you get individual productivity up.
And we think we have seen the seeds of that planted almost
immediately. Someone mentioned earlier that we have seen
benefits from the tax bill far quicker than we thought that we
would. Everyone pays attention to the bonuses that were given
and the wage increases that were given. But if you look even
deeper into the numbers and you see the investments that people
are making, companies are making in the United States of
America, we think we see the seeds planted for long-term
structural improvements to our productivity, and that is our
economic health.
Chairman Enzi. I am counting on that proving out. I did ask
for a static score when we were working on taxes because during
the health care debate we asked for a dynamic score, and I
found out that that was going to require 6 weeks for every
amendment to be evaluated. And we do not do legislation where
we have 6 weeks between amendments. It may seem like that, but
we do not have that.
So I want thank you for your testimony today. Your full
statement will be included in the record. I think you did an
outstanding job of presenting the President's suggestions and
priorities, and that is what the President's budget is,
suggestions and priorities, because the Constitution actually
specifies that we are the ones that are going to be doing the
actual work on that. I do hope we find a better process for
doing that actual work.
Another little inconsistency that I heard this morning was
saying that for preschool, there needs to be a program for
preschool. I have been saying that all along since I got here.
There were 119 when I started. We got it down to 45 preschool
programs. It seems to me like one or two really good ones
reviewed again and reauthorized might be better.
There were also some comments about housing programs here.
I checked. There are 160 housing programs administered by 20
agencies. Nobody is in charge. Nobody is setting goals. Nobody
is checking to see if they are being met. So how can we say
that a decrease in the housing funding would put people out on
the streets? We might actually come up with some better
solutions.
A little note that I found in reading through your
documents was a suggestion that colleges have some risk
accepted on student loans. That is kind of a novel concept. We
kind of made the for-profit schools do that same thing, and we
put them out of business. But there ought to be some kind of
risk acceptance in it.
I appreciate your comments about capital budgeting, and you
used an example of the FBI building for that. I have been
talking about capital budgeting since I got here. I think
separating that out might make our job a little bit easier.
I would mention that if anybody has any additional
questions, the questions can be submitted for the record by 6
p.m. today with a signed hard copy delivered to the clerk at
Dirksen 624. And you will have up to 7 days to respond to those
questions to get additional good information so that we can
understand this budget as well as we can so that we can do our
budget.
Thank you very much for an outstanding presentation.
Mr. Mulvaney. Thank you, Senator.
Chairman Enzi. Adjourned.
[Whereupon, at 11:51 a.m., the Committee was adjourned.]
ADDITIONAL COMMITTEE QUESTIONS
[The following submitted questions were not asked at the
hearing but were answered by the witness subsequent to the
hearing:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
DEPARTMENT OF DEFENSE AUDIT AND BUSINESS OPERATIONS REFORM AT THE
PENTAGON
----------
WEDNESDAY, MARCH 7, 2018
U.S. Senate,
Committee on the Budget,
Washington, DC.
The Committee met, pursuant to notice, at 10:33 a.m., in
room SD-608, Dirksen Senate Office Building, Hon. Michael B.
Enzi, Chairman of the Committee, presiding.
Present: Senators Enzi, Crapo, Corker, Perdue, Gardner,
Kennedy, Boozman, Cotton, Sanders, Wyden, Stabenow, Whitehouse,
Kaine, Van Hollen, and Harris.
Staff present: Elizabeth McDonnell, Republican Staff
Director; and Warren Gunnels, Minority Staff Director.
OPENING STATEMENT OF CHAIRMAN ENZI
Chairman Enzi. Good morning. I will call this hearing to
order. Welcome to the Senate Budget Committee hearing on the
ongoing Department of Defense audit and Pentagon business
operations reform.
Our Nation faces grave threats abroad and a challenging
fiscal situation at home. Given these dual pressures,
rebuilding the military and reforming the way the Pentagon does
business must go hand in hand.
As Defense Secretary James Mattis said, the heart of our
competitive edge is reforming the Department and gaining full
value from every taxpayer dollar. So I commend the Secretary
for launching a bold reform effort.
After almost 30 years, the Pentagon has finally begun its
own Department-wide consolidated audit. I will reemphasize that
the Pentagon began it, the Department-wide consolidated audit.
This is good news. The bad news is that we have all followed
the recently publicized Defense Logistics Agency audit finding
of nearly $1 billion in inaccuracies. As the Department-wide
audit continues, there will surely be some more painful
findings, but this should not deter our efforts. That is the
purpose of an audit--to find things that need to be corrected
and to save money by correcting them.
We know a successful Pentagon audit will take time. It will
also require sustained congressional oversight and a renewed
commitment to accountability at the Department. Checking the
box by completing the audit is not enough. The goal must be
improved financial management and business operations. The
audit will empower managers to make better decisions with more
accurate financial reporting systems and data.
For our troops, it will be better decision making, and that
will mean more money for critical equipment and training.
For our part, Congress needs to step up its oversight of
the consolidated audit and support its findings, but we need
the Department's help to better understand the process. Many of
my colleagues on the Senate Armed Services Committee share my
view. Several of them also serve on the Budget Committee. And
members of this Committee know that cost matters, too. The
Defense Department audit will cost almost $1 billion this
fiscal year alone.
Now, I did ask some questions and I want to thank the
Department, and particularly Mr. Norquist, for a speedy
response. We are not used to that, but really appreciate it.
And I was interested even in the costs of the audit and noticed
in the explanation that of the $918 million that are being
spent on it, $368 million is for remediation. So that is for
solving the problems that are in it. There is also $135 million
for financial system fixes and another $48 million for internal
control, which is all important. So, actually, in my opinion,
the audit is $367 million. The rest is benefits that we get out
of it by doing the fixes that are necessary. But that is why
Congress needed a full breakdown of the projected audit costs.
The Department also should provide an explanation of how it
is ensuring the independence of its contracted auditors, and we
need to know how the Department plans to remedy any problems
they find. Gaining insight into which problems the Pentagon is
fixing and why will motivate Congress to continue supporting
the audit. There may also be instances in which additional
funding up front can avoid increased costs later on, and we
need to plan accordingly.
Ultimately, reforming the Pentagon requires more than an
audit. Defense spending is now higher than at the height of
Ronald Reagan's Presidency. But we are not seeing the same
value for each defense dollar spent today. Ineffective business
processes may be a big reason.
The Pentagon will never operate like a business, but it
still must reform its business operations. The Department's
management culture, which has taken hold over the course of
several decades, frustrates everyone, including its employees
and many of its senior leaders. Notably, the Department has yet
to implement a modern work force management system, and I share
my colleague Senator John McCain's ongoing concern over the
Department's inability to tell us how many contractors work
there. Even more troubling, the Department does not possess
adequate reporting systems to measure the impact of ongoing
reforms from work force changes to the adoption of shared
services and cloud-based IT systems.
I am pleased, however, that the Deputy Secretary of Defense
has built a reform management group to oversee the development
of such issues. Mr. Gibson, as the Department's first Chief
Management Officer, will have the unique opportunity to lead in
this area. It is my hope that we can build a mutually
beneficial working relationship to help you achieve your goals.
Managing the Pentagon is a difficult task, but it is crucial to
our Nation's defense and to ensuring that we spend America's
tax dollars wisely.
Mr. Gibson and Mr. Norquist, thank you for joining us today
and for your service. I look forward to continuing the
discussion.
Senator Sanders.
OPENING STATEMENT OF SENATOR SANDERS
Senator Sanders. Thank you very much, Mr. Chairman, and we
thank our guests for being with us.
The Chairman and I do not agree on a whole lot of issues,
but I think on this one we probably do. The Department of
Defense receives far more money from the taxpayers than any
other governmental agency. We now as a Nation, as you know,
spend about--we spend more money than the next 12 nations in
the world combined. And the Congress, against my vote, decided
to add another $165 billion to the Pentagon over the next 2
years. And yet alone among all agencies of Government, the
Pentagon has not been able to perform an agency-wide audit.
Interestingly enough, Mr. Chairman, you may recall this,
that the day before 9/11--the day before 9/11--in 2001,
Secretary of Defense Donald Rumsfeld remarked that the Pentagon
could not properly account for some $2.3 trillion in
transactions. Needless to say, his remarks did not get a lot of
attention given what happened the following day. But that was
back in 2001, Rumsfeld talking about $2.3 trillion in
transactions that could not be properly accounted for.
We have seen some recent audits that tell us interesting
things. The Commission on Wartime Contracting in Iraq and
Afghanistan concluded in 2011 that $31 to $60 billion spent in
those two wars had been lost to fraud and waste. Similarly, in
2015, the Special Inspector General for Afghanistan
Reconstruction reported that the Pentagon could not account for
$45 billion in funding for reconstruction projects. And, more
recently, an audit conducted by Ernst & Young for the Defense
Logistics Agency found that it could not properly account for
some $800 million in construction projects.
I want to thank Chairman Enzi for your letter to Secretary
Mattis last month when you said, and I quote, ``Taxpayers must
have trust and confidence that their hard-earned dollars are
being spent wisely. If such trust and confidence cannot be
built and justified, it will be incredibly difficult to achieve
the 3 to 5 percent real growth in defense spending you have
identified as necessary to meet mission requirements.''
And I agree with the Chairman that it is essential that the
Pentagon demonstrates that it is trustworthy and accountable
with taxpayer dollars, and that has not been the case. And that
is why I was disappointed to read that the Pentagon buried a
Defense Business Board report from 2015 which recommended ways
to eliminate some $125 billion in bureaucratic waste. I do not
think there is any debate among anybody here that we want to be
able to defend our country, that we want to make sure that the
men and women in the armed forces have all of the equipment
they need to protect their lives. But I would hope that nobody
here believes that just because this is the Department of
Defense, we will defend an enormous amount of bureaucratic
waste.
As I think the Chairman touched on, one-half of the
Pentagon's budget goes directly into the hands of contractors.
And of that amount, one-third, or about $100 billion, goes to
the top five defense contractors in the United States, all of
which, by the way, have been convicted or settled lawsuits
relating to fraud or misconduct against the Federal Government.
So, we are dealing with huge defense contractors who have been
involved in fraud against the Federal Government.
Also, I might add--and later on I am going to have to----
I apologize, I am going to have to run out, but I will come
back. I would like to get a response from our guests today
about the fact that the CEOs of the top five defense
contractors in the United States made a cumulative $96 million
in compensation. Five CEOs whose agencies are significantly
funded by the Federal Government, the CEOs of those defense
companies made $96 million in compensation.
Back in 2011, I requested a report from the Pentagon which
detailed how the Department paid $573 billion over 10 years to
more than 300 contractors involved in civil fraud causes
against the Federal Government.
There are a lot of issues here, and your job is not easy.
The size of the Pentagon and the complexity of the budget is
enormous, and nobody here thinks you are going to solve the
problem immediately. But your job is to tell the American
people how our tax dollars are being spent, to tell us, in
fact, where the money is going--I am not quite sure that we
know where the money is going--to tell us why it is that we
continue to do business with defense contractors who give us
cost overrun, cost overrun, cost overrun. Are we negotiating
effectively, or are defense contractors simply coming in and
saying, ``We will do it for X,'' and it ends up being 3X, and
nobody particularly cares?
So there is an enormous amount of work, and I look forward
to the question period, but at this moment I have to run out.
But thank you very much for being here.
Chairman Enzi. Thank you, Senator Sanders. I will now
introduce the witnesses.
Our first witness this morning is David Norquist, the
Department of Defense Comptroller and Chief Financial Officer.
Under Secretary Norquist has been in office since May 2017 and
leads the Department's efforts on budget and audit matters. Mr.
Norquist has spent his career in budget--related national
security positions, including leading the budget and audit
process at DHS in the George W. Bush administration.
Our second witness this morning is Mr. John Gibson, the
Department of Defense Chief Management Officer, who was
reconfirmed as Chief Management Officer only weeks ago after
serving as Deputy Chief Management Officer since last November.
Prior to his service at the Department of Defense, Mr. Gibson
led several aerospace companies and previously served in a
management reform position at the Pentagon during the George W.
Bush Administration.
For the information of our colleagues, each of the
witnesses will take up to 5 minutes to consolidate his opening
remarks, all of which will be a part of the record, followed by
questions.
We look forward to receiving your testimony. Mr. Norquist,
you can begin first.
STATEMENT OF THE HONORABLE DAVID L. NORQUIST, UNDER SECRETARY
OF DEFENSE (COMPTROLLER) AND CHIEF FINANCIAL OFFICER, U.S.
DEPARTMENT OF DEFENSE
Mr. Norquist. Thank you, Mr. Chairman.
Chairman Enzi, Ranking Member Sanders, and members of the
Committee, thank you for the opportunity to provide an overview
of the Department's financial statement audit progress and
plans.
Before I begin, I would like to take a moment to thank you
and the rest of the Congress for the Bipartisan Budget
Agreement of 2018. The agreement raised the caps for fiscal
years 2018 and 2019 on defense spending to a level that will
support the National Defense Strategy and allow us to restore
and rebuild our military. The agreement is a 2-year deal, so we
will need Congress' support again, or sequestration will return
in fiscal year 2020.
When Secretary Mattis released the National Defense
Strategy, he detailed three distinct lines of effort: building
a more lethal, resilient, agile, and ready Joint Force;
strengthening alliances as we attract new partners; and
reforming the defense business practices for greater
performance and accountability.
The third line of effort relates directly to the audit. It
is an important component in the improvement of our business
operations.
We anticipate auditor findings in many areas. That is why
we are doing these audits--to find the problems and fix the
root causes.
I appreciate your interest in the audit of the Department
of Defense. It is a long-term, meaningful, and necessary
undertaking that encompasses the whole of the Department, and
its success depends on sustained congressional support. The
personal interest Chairman Enzi and others on this Committee
have shown in this issue are part of the reason DoD has, at
long last, begun the audit.
Although audits are not new to the Department of Defense,
this is the first time the Department has undergone a full
financial statement audit. A financial statement audit is
comprehensive. It occurs annually, and it covers more than
financial management. Financial statement audits include
verifying count, location, and condition of our military
equipment, real property, and inventory. It involves testing
security vulnerabilities in our business systems. It tests
system compliance with accounting standards, and it validates
the accuracy of our personnel records and actions such as
promotions and separations.
The Department anticipates having approximately 1,200
financial statement auditors assessing whether our books and
records present a true and accurate picture of our financial
condition and results of our operations in accordance with
accounting standards.
Based on my experience at the Department of Homeland
Security, it will take time to implement the changes necessary
to pass the audit. It took Homeland Security, a relatively new
and much smaller enterprise, about 10 years to get to its first
clean opinion. However, we will not have to wait for a clean
opinion to derive benefits from the audit. The financial
statement audit helps drive enterprise-wide improvements to
standardize our business processes and improve the quality of
our data.
DoD owes accountability to the American people.
Transparency, accountability, and business process reform are
some of the benefits from the financial statement audit.
Regarding transparency, the audit improves the quality of
our financial statements and underlying data available to the
public, including a reliable picture of our assets,
liabilities, and spending.
The audit will highlight areas where we need to improve our
accountability over assets and resources. By fixing property
records, we can demonstrate full accountability of our assets.
The combination of better data resulting from audit remediation
and the use of modern data analytics directly supports DoD's
effort to bring business reform to its operations. Audit is an
enabler that will drive more opportunities for reform.
The DoD consolidated audit is likely to be the largest
audit ever undertaken and comprises more than 24 stand-alone
audits and an overarching consolidated audit.
During an audit, auditors will select line items on
financial statements based on materiality and risk and will ask
for a listing of items or transactions that make up the total
amount on the financial statements. To put the scope of this
task in perspective, the Army has over 15 billion transactions
that the auditors will select from.
The auditors will then pick samples from the listing for
testing, which can include physically verifying that the
property exists and is accurately recorded.
Once the auditors have completed the testing, they will
evaluate the results and report any problems they find and will
re-evaluate the status of the corrective actions each year.
Going forward, we measure and report progress toward
achieving a positive opinion on the audit using the number of
audit findings resolved.
In closing, I want to thank this Committee for its interest
in and focus on the Department of Defense's audit. I anticipate
the audit process will uncover many problems, some of which
will be frustratingly difficult to fix. But the alternative is
to operate in ignorance of these problems and miss the
opportunity to reform. We are committed to the audit and to
implementing the necessary reforms to be good stewards of the
taxpayers' dollars, and I appreciate your support.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Norquist follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Enzi. Thank you for that and for overseeing it.
Mr. Gibson.
STATEMENT OF THE HONORABLE JOHN H. GIBSON, II, CHIEF MANAGEMENT
OFFICER, U.S. DEPARTMENT OF DEFENSE
Mr. Gibson. Thank you, Chairman Enzi and other members of
this Committee for the opportunity to testify today regarding
the aggressive work we are doing to bring greater efficiencies
to the business operations of the Department of Defense.
Any organization which receives capital for its business
has a fundamental responsibility to execute in the most
effectual manner. Given the American taxpayer has provided the
capital to fulfill our mission, we have the highest level of
fiduciary responsibility to continuously execute our operations
in the most effective and efficient manner.
The 2-year budget deal this Committee worked hard to
establish is great support to a predictable funding stream and
very helpful with all our work in the reform area. Thank you
for the Committee's hard work to establish this deal.
Secretary Mattis has outlined three main lines of effort
for the Department of Defense: build a more lethal force,
strengthen traditional allies while building new partnerships,
and reform the Department's business practices for performance
and affordability.
It is the responsibility of the Chief Management Officer of
the Department of Defense to execute the third line of effort:
reforming business operations for solvency and security,
gaining full benefit from every dollar spent.
Looking forward, the Department is not anticipating funding
above the out-year levels in the fiscal year 2019 budget, and
in order to fund incremental resources, the military needs to
achieve its mission requirements. We must lower our cost of
operations to yield these resources. The global challenges to
our military remain significant, and to best equip our men and
women in uniform to meet their mission, we must consider
significant reforms in the Department.
Foundational to our vision of success in this area is the
establishment of a culture of performance and productivity on
an enduring, institutionalized basis. The work we are all doing
today becomes a benefit for the next generations of leadership
and warfighters to come.
We are generating additional resources through efficiencies
by focusing on three main areas: shared or common services,
enterprise-wide data and cost information, and the efficient
and effective alignment of the enterprise.
We have begun the effort in shared services by forming
integrated, subject-specific teams to identify, vet, and
implement immediate efficiency opportunities in their
respective areas. Knowing the challenges to any significant
reforms, we are constantly fostering a sense of urgency,
maintaining leadership alignment at all levels, communicating a
consistent message, proactively removing obstacles, driving
immediate wins, and working to anchor all of this in long-term
behavior and culture.
As we implement the reform efforts, we are comfortable
incorporating the ``fly, test, fly'' operational tempo to allow
us to pilot, learn, and scale in each of these areas.
Fundamental to institutionalizing this effort is governance and
management. We have formed the Reform Management Group to guide
these multiple efforts. This integrated, cross-functional group
leads dedicated teams and fosters ongoing working
relationships, aligning all the stakeholders involved in the
reform efforts. As our processes mature, we will form an
integrated management board. This board will utilize relevant,
standard measures and goals, coupled with the authorities to
manage, enforce, and institutionalize a culture of performance
and productivity, all with the goal of continuous improvement
in our business operations.
The reward process is essential to success and the primary
incentive to change behavior. Typically, in the Department
efficiency efforts are stimulated by a need to backfill budget
cuts. Our current approach is to drive and incentivize
performance and operating financial efficiencies by measuring,
tracking, and reporting performance and outcomes. We will then
return the savings generated to the military departments to
reinvest in higher priorities and hold those people and
organizations accountable. We will need your input and
assistance in refining, implementing, and executing as we
further define the mechanics of the reward process.
Quality data is essential to good decision making, and we
are working to improve the infrastructure to host and make
available timely, accurate, and relevant data across the
enterprise. Additionally, we are constructing a consistent
framework that reflects cost data and analytical tools to
support efficiency-driven decisions throughout the Department.
In both efforts, we are working closely with the Under
Secretary of Defense and Comptroller to achieve success.
The financial audit the Department is undertaking is a
tremendous tool and serves as an invaluable piece of our reform
efforts. The audit process will improve the quality of our
organizational and financial data, which is essential to good
business decision making. The audit will also reveal business
systems and processes which need to be reformed and can be
incorporated into our ongoing reform efforts. By improving
these business processes, we drive improved operational
measures such as timeliness, productivity, and simplification.
Many of these processes will have direct, positive impacts on
lethality.
The third line of effort is alignment of the Department.
Many of the defense agencies and field activities have been in
place for decades, and we have the opportunity to look at the
end-to-end processes in major areas of operation and align all
of the participants in the most efficient manner. We intend to
include and leverage leadership from the military departments
and the major mission areas such as Acquisition, Information
Technology, Intel, Personnel and Readiness, Financial
Management, Research, and Policy all as part of this process.
A basis for evaluation for all our projects is establishing
benchmarked private sector measures, setting goals, tracking,
and reporting.
In addressing any of our reform projects, we are also
looking outside of the Department for further economies by
incorporating the whole-of-government.
As our efforts progress, we will be looking to Congress as
a source of support. Just as with any board of directors, we
believe Congress is our partner, understanding the shared risk
in this incredibly robust and aggressive work. We intend to
keep an ongoing dialog with you on our plans and progress and
will be seeking your input, feedback, and assistance as some of
our objectives will require mutual actions to achieve our
goals.
As the Chief Management Officer of the Department of
Defense, I consider Congress to be my board of directors.
Therefore, I welcome the opportunity to begin our dialog on the
substantial efficiency efforts we are making in the Department.
Thank you.
[The prepared statement of Mr. Gibson follows:]
TESTIMONY OF HON. JOHN H. GIBSON, II, CHIEF MANAGEMENT OFFICER BEFORE
THE SENATE BUDGET COMMITTEE
HEARING ON DEPARTMENT OF DEFENSE REFORM
MARCH 7, 2018
Thank you Chairman Enzi, Ranking Member Sanders, and other
members of this committee for the opportunity to testify today
regarding the aggressive work we are doing to bring greater
efficiencies to the business operations of the Department of
Defense.
Any organization which receives capital for its business
has a fundamental responsibility to execute in the most
effectual manner. Given the American taxpayer has provided the
capital to fulfill our mission, we have the highest level of
fiduciary responsibility to continuously execute our operations
in the most efficient and effective manner. Thank you for the
Committee's hard work to establish the 2-year budget deal.
Secretary Mattis has outlined the three main lines of
effort for the Department of Defense. Build a more lethal
force, strengthen traditional alliances while building new
partnerships, and reform the Department's business practices
for performance and affordability.
It is the responsibility of the Chief Management Officer of
the Department of Defense to execute the third line of effort:
reforming business operations for solvency and security,
gaining full benefit from every dollar spent.
Looking forward, the Department is not anticipating funding
above the outyear levels in the fiscal year budget and in order
to fund incremental resources the military needs to achieve its
mission requirements, we must lower our cost of operations to
yield these resources. The global challenges to our military
remain significant and to best equip our men and women in
uniform to meet their mission we must consider significant
reforms in the Department.
Foundational to our vision of success in this area is the
establishment of a culture of performance and productivity on
an enduring, institutionalized basis. This work we are all
doing today becomes a benefit for the next generations of
leadership and warfighters to come.
We are generating additional resources through efficiencies
by focusing on three main areas: shared or common services;
enterprise-wide data and cost information; and the efficient
and effective alignment of the enterprise.
We have begun the effort in shared services by forming
integrated, subject-specific teams to identify, vet, and
implement immediate efficiency opportunities in their
respective areas. Knowing the challenges to any significant
reforms, we are consistently fostering a sense of urgency,
maintaining leadership alignment at all levels, communicating a
consistent message, proactively removing obstacles, driving
immediate wins, and working to anchor all of this in long-term
behavior and culture.
As we implement the reform efforts, we are comfortable
incorporating the ``fly, test, fly'' operational tempo to allow
us to pilot, learn, and scale in each of these areas.
Fundamental to institutionalizing this effort is governance
and management. We have formed the Reform Management Group to
guide these multiple efforts. This integrated, cross-functional
group leads dedicated teams and fosters ongoing working
relationships, aligning all the stakeholders involved in the
reform efforts. As our processes mature, we will form an
integrated management board. This board will utilize relevant,
standard measures and goals, coupled with the authorities to
manage, enforce, and institutionalize a culture of performance
and productivity with the goal of continuous improvement in our
business operations.
The reward process is essential to success and the primary
incentive to change behavior. Typically, in the Department
efficiency efforts are stimulated by need to backfill budget
cuts. Our current approach is to drive and incentivize
operating and financial efficiencies by measuring, tracking,
and reporting performance and outcomes. We will then return the
savings generated to the military departments to reinvest in
higher priorities, and hold those people and organizations
accountable. We will need your input and assistance in
refining, implementing and executing as we further develop the
mechanics of the reward process.
Quality data is essential to good decision making and we
are working to improve the infrastructure to host, and make
available timely, accurate, and relevant data across the
enterprise. Additionally, we are constructing a consistent
framework that reflects cost data and analytical tools to
support efficiency-driven decisions throughout the Department.
In both efforts, we are working closely with the Under
Secretary of Defense for Comptroller to achieve success.
The financial audit the Department is undertaking is a
tremendous tool and serves as an invaluable piece of our reform
efforts. The audit process will improve the quality of our
organizational and financial data, which is essential to making
good business decisions. The audit will also reveal business
systems and processes which need to be reformed and can be
incorporated into our ongoing reform efforts. By improving
these business processes we drive improved operational measures
such as timeliness, productivity, and simplification. Many of
these processes will have direct, positive impacts on
lethality.
The third line of effort is the efficient alignment of the
Department. Many of the Defense agencies and Field Activities
have been in place for decades and we have the opportunity to
look at the end-to-end processes in major areas of operation
and align all of the participants in the most efficient manner.
We intend to include and leverage leadership from the military
departments and the major mission areas such as Acquisition,
Information Technology, Intel, Personnel and Readiness,
Financial Management, Research, and Policy as part of this
process.
A basis for evaluation to all our projects is establishing
benchmarked private sector measures, setting goals, and then
tracking and reporting our performance.
In addressing any of our reform projects, we are also
looking outside of the Department for further value by
incorporating the whole-of-government as a marketplace and
seeking to leverage private sector sourcing at an even higher
level.
As our efforts progress, we will be looking to Congress as
a source of support. Just as with a board of directors, we
believe Congress can be our partner, understanding the shared
risk in this incredibly robust and aggressive work. We intend
to keep an ongoing dialog on our plans and progress and will be
seeking your input, feedback and assistance as some of our
objectives will require mutual actions to achieve our goals.
As the Chief Management Officer of the Department of
Defense, I consider Congress to be my board of Directors.
Therefore, I welcome the opportunity to begin our dialog on the
substantial efficiencies efforts in the Department, and I
welcome your questions.
With me is Comptroller David Norquist, who will speak to
the Department of Defense Audit.
Chairman Enzi. Thank you. As an accountant, I cannot tell
you how exciting it is for me to have the numbers management
team before us. Your testimony is music to my ears. I want to
thank you particularly, Mr. Norquist, for your prompt letter.
Had I gotten it a week from now, I would have considered it
prompt.
[Laughter.]
Chairman Enzi. That is actually when I was expecting it,
and I will be sharing that with the members of the Committee
because there is a lot of good information in the answers that
you gave me.
We will now turn to questions, and I do not think I
probably need to explain how the sound of the gavel and
alternating back and forth works, but every member will have 5
minutes for questions. I will begin with myself, and then we
will begin the alternation process.
I will begin with my first question for Mr. Norquist. The
metrics used to measure the Department's readiness for an audit
were often very difficult to understand, even for outside
experts. Now that the consolidated audit has begun, how will
the Department help Congress to understand how much progress is
being made? Will the Pentagon provide regular interim updates
on both the findings and your remediation efforts?
Mr. Norquist. Yes, sir. Mr. Chairman, the way we will
measure progress going forward is by looking at the number of
NFRs closed. So when the auditor has a finding, they will write
it up. We will track the number of findings. We will track who
they have been assigned to for fixing them so that rather than
simply say the Department of Defense did not pass, or the Army,
we will be able to say this materiel command had been assigned
to 20 findings of which they have closed 5. This organization
has seven of which they closed seven. So you will be able to
see at a much deeper level, and part of the interest in the
audit is that level of accountability, so you can talk about
specific challenges. Is the issue with the systems? Is the
issue with fund balance with Treasury?
From our perspective, what we will do is a couple things.
One is the auditors will publish their statements on the
traditional schedule which starts about November 15th. Those
are available to the public. They will look like the same type
of financial statement reports that go out for companies. We
will twice a year, both in January and June, provide updates to
the Committee, summarizing those in easy-to-understand formats
as well as providing tracking on the NFRs.
The advantage, I think, of this one is we will not be self-
reporting our progress. I will be telling you what the auditors
have said. If they do not say we close it, then we did not
close it. You know, the issue will be--I think that
independence allows you a greater level of confidence in the
data you receive on the status of the audit and allows us to
track it. This is how we did it at Homeland Security, and it
was a very effective way of measuring progress.
Chairman Enzi. Thank you.
Mr. Gibson, I want to ask you about metrics and baselines a
little bit. Last year the GAO reported that billions of claimed
savings from Department of Defense headquarters reductions were
unsupportable. Similarly, the Department of Defense budget
request this year claimed further billions in savings from the
ongoing and new reforms, but does not provide much specificity.
Can the Department provide a more detailed breakdown of
these savings and what baselines are being used to construct
them?
Mr. Gibson. Senator, the way we intended to execute this is
we begin at the very working level. We have teams that are
subject matter experts in nine particular areas. Out of that,
they will then pick specific projects to go out that we find
are efficiency projects. Within each of those, there will be an
intended outcome, operational and financial goals that will be
based on real data. They will have a project schedule. We will
be able to track and measure how they are doing on that. We can
then compile all of those into groups and report those out.
So we intend this to be very, very specifically driven by
data that we are tracking and reporting on, and then all of
that will build out to a total of what we can account for
reform savings that we will be getting.
Also, I think it is important to mention that, in addition
to financial savings, it is very, very important that we
discuss that we are going after operational improvements as
well. Those will include, it could be, timeliness,
productivity, simplification. Those do not always have a
financial outcome, but certainly our beneficial outcome to the
overall business operations, we will be measuring and tracking
and reporting on those as well.
Chairman Enzi. Thank you.
A quick question to Mr. Norquist, because I have read a
number of stories lately about how the Pentagon cannot
responsibly spend the extra fiscal year 2018 funding from the
recent budget deal before the end of the current fiscal year.
Marine Corps General Walters said we have a year's worth of
money in 2018 and 5 months to spend it. I understand that there
are proposals to give more flexibility in spending this money,
including changing fiscal year 2018 operations and maintenance
funding from funding.
Beyond this current issue, are there other changes in the
budget process such as biennial appropriations for certain
defense accounts that could result in greater stability and
efficiency in military spending?
Mr. Norquist. I think there are two types of challenges
that we look at as you look over time, so let me do first the
2018 and then the longer period, and we can come back to this.
In 2018, there is a series of rules designed to encourage
people to spend their money earlier in the year and not hold it
until the end. One is called the 80/20 rule. You can only spend
20 percent of your money in the last part of the year. When you
get the bulk of the money or the increase late in the year,
that makes it harder. So some relief from that 80/20 rule is
certainly essential because then your deadline is not 1
October. It is 2 months earlier. All of these, though, relate
to wanting to spend the money where the highest priority is,
and as you get closer to the end of the year, you do not have
the time to go out for the contract with the competition and
the award with the amount of time that is left; or if you put
something into a shipyard for maintenance and the cost of
actually fixing it is less than you thought, so they give you
the money back, you may be too late in the year to put it
against your next highest priority, so you put it against the
next one that is available.
We would like to discourage that sort of use-it-or--lose-it
view and encourage people to put it on the highest priority
and, where necessary, look at what type of flexibilities are
required, either being able to move money between accounts with
prior notification instead of prior approval. Some of those
flexibilities help, and I think that was--and this is true
whether you are in a year where there has been a significant
increase or not. You just want to make sure people are able to
put it against the highest priority.
Chairman Enzi. Thank you. I am sure we will talk a lot more
about that. My time has expired. Senator Whitehouse.
Senator Whitehouse. Thank you very much.
Mr. Gibson, GAO has reported that nearly a third of the
roughly $1.5 trillion cost of current defense acquisition
programs is a product of cost growth over initial estimates,
which suggests that the Department has trouble either
estimating costs or holding contractors to original estimates.
Now we are looking at a proposal to spend something on the
order of $1.7 trillion on nuclear modernization, including the
development of new weapons platforms and warheads. There have
been warnings issued that if we were to do that, those
modernization plans would wipe out other defense programs, so I
guess there are two problems that I would ask you to comment
on.
One, what is the plan for funding that without
cannibalizing other programs? Is it just put it on the credit
card? We seem to be getting expert on that around here. And,
two, are there additional controls that we should put in place
over this nuclear program to make sure that the $1.7 trillion
does not have the same fate befall it that befell the other
defense acquisition programs of these massive cost overruns?
Mr. Gibson. Senator, in the area of contracting, the
particulars we are focusing on is the common purchase of goods
and services and doing that in a more efficient and effective
manner. That is an area that I am specifically focusing on. And
what this does is this takes a look at contracts from what is
called a ``clean sheeting,'' a very common private sector
practice to set the requirements and set the terms and
conditions and then look across the market to best derive
value.
We are also looking at setting requirements in, again
common services contracts so that it is the same across----
Senator Whitehouse. I am sorry, but I think what I was
trying to get at in my question is: Does a massive oncoming
expenditure like $1.7 trillion for this nuclear modernization
program give us an occasion to take a look at new and different
checks and controls specific to that program to see if we can
learn something from it and have it not fall to the same fate
as the existing defense acquisitions of massive cost overruns?
Mr. Gibson. Yes, sir, I believe the opportunity to look
across all phases of acquisition, so the area that we are
focused on, absolutely. We need to do it. It is good
fundamentals and good business. I know----
Senator Whitehouse. And you would not object if we looked
forward to this nuclear modernization program and looked at
additional ways to try to make sure that the estimation and
accounting was done better than it has been through
traditional----
Mr. Gibson. Senator, I think that is foundational to doing
things right.
Senator Whitehouse. Okay.
Mr. Gibson. I think that is how we need to do it, and I
know Mr. Norquist----
Senator Whitehouse. Let me ask one last question then.
DoD contract management has been on GAO's high-risk report
list for almost 25 years, and there are obvious concerns about
the relationship between the Defense Department, the defense
contractors, defense contractors' role in Congress. There is
kind of a loop that can exist there. And, in addition, there is
the revolving door problem between the Department of Defense
and these contractors with a view that some of the contracts
may not be managed as scrupulously as ideal.
Are there things that we should be doing to improve the
revolving door issue between the Department of Defense and
these contractors to make sure that that relationship with
these contractors remains healthy for the taxpayer?
Mr. Gibson. Senator, my specific area of expertise is not
contracting and acquisitions. However, I will say it is my
understanding that between the policies in the FAR and within
contracting, as well as our ethics, those are in place. I think
it is always our responsibility to follow those to ensure that
we truly get to the best place from a contracting standpoint
and a conflicts-of-interest standpoint.
Senator Whitehouse. Do you agree that it is vital that the
contractors should be serving the Defense Department and not
vice versa?
Mr. Gibson. I think leveraging the private sector is
absolutely invaluable to us, and that we are the customer and
they are the supplier.
Senator Whitehouse. My time is up.
Chairman Enzi. Thank you.
Senator Corker.
Senator Corker. Yes, sir, Mr. Chairman. Thanks for having
the hearing. And to the two of you, thank you for coming. I do
not think any of us could respect our men and women in uniform,
more than you, and I know you work on their behalf.
The Department of Defense can kill people remotely in Mosul
and other places, with people from far away commanding drones,
and it is remarkable that we are able to do things like that.
DoD has the capacity to turn entire countries into craters and
has all kinds of cyber capabilities. Again, you are here; you
are the messengers. We are not speaking necessarily to you at
all, but how in the world is it that in 2018, with all the
massive capabilities that the Pentagon has, this is the first
time the Pentagon is able to conduct an audit? What is going on
with the culture at the Pentagon? Mr. Norquist.
Mr. Norquist. I share your concern. You know, when this
administration came in, we made starting the audit right away
critical, and so in the very first year we have begun it. When
I was in the----
Senator Corker. Just what is going on with the culture? How
in the world could it be that the biggest, greatest fighting
entity in the world cannot audit itself? What is wrong?
Mr. Norquist. So I am speaking a little bit for those who
came before me, but there is a sense on some of the mission
focus is not as focused on the back office as you would see in
a private company. I think that there is an essential value to
the taxpayer in making sure the rest of these operations go
well, and part of the messaging that the Secretary has made
internally is to make sure folks understand that this is much
broader than just financial management. If you want to make
sure that your inventory of spare parts is correct, that your
munitions is correct, this is part of what the audit covers.
And part of that culture comes from change from two things:
One is leadership at the top. Secretary Mattis and Deputy
Secretary Shanahan have made this a top priority, and I think
that has helped to turn the ship.
And the other is, quite frankly, the emphasis from
Congress. I have found it very helpful in meeting with folks
and----
Senator Corker. That is good, but I don't care about
Congress. The fact is we have probably wasted hundreds of
billions of dollars at the Pentagon through the years through
poor management. Is that correct? That would be a low estimate,
would it not?
Mr. Norquist. I would not be able to speak to that number,
sir.
Senator Corker. Mr. Gibson, thank you for giving credit to
this Committee for passing the increase in the caps. We
actually had nothing to do with it. We had four people in a
room that bid each other up. This cap deal is going to raise
spending over the next 10 years by a minimum of $2 trillion.
Two trillion dollars.
What we are likely to see in this omnibus are some of the
most God awful taxpayer abuses that we have ever seen. Things
are being plussed up so quickly, and on the domestic non-
defense side, so much money is being pumped in that there is
going to be some of, again, the most God awful taxpayer abuses
we have ever seen.
At the Pentagon, we are raising the cap by $80 billion.
What the President requested was not good enough--we had to go
$30, $35 billion above that. We are doing the same thing on the
non-defense side, though not quite to that level. How is it
possible with 6 months remaining in the year for the Pentagon
to possibly spend the additional cap, the additional amount of
money, the $80 billion you are getting, plus, I think, $71
billion in OCO spending? How is it possible to spend that money
wisely? Mr. Norquist.
Mr. Norquist. I would be happy to answer that, Senator. So
when you look at the increase, you will find that the vast
majority of that occurs in procurement and R&D, which are 2-and
3-year money. And so when you are talking about buying
additional munitions, buying additional planes, buying
additional ships, you have time to negotiate the prices with
the contractors and make the awards.
The challenge is going to be in the operation and
maintenance account, and the difference between had we stayed
under sequestration and under the number that the Congress is
looking at is on the order of about $13 billion.
Now, some of that increase the President had requests, we
had plans for in the budget, and so the amount of adjustment
that you are making is more modest than the larger number you
are seeing because only the O&M piece has to be executed by
year-end.
Senator Corker. Well, again, we thank you and others for
what you are doing. I am happy that in 2018 we are finally
going to have an audit. That is good for taxpayers. I cherish
the men and women in uniform, like Senator Kaine's son and
others who serve. I am distressed that, for all these years,
we've known there have been massive amounts of wasted money
because you could not complete an audit. And I am glad that you
are on a path to do something good about it.
I hope we are going to have a chance, Mr. Chairman, to see
this omnibus in advance because I have a feeling taxpayers are
going to be shocked at what is in it with the massive increases
taking place in 1 year. But thank you so much.
Chairman Enzi. Thank you.
Senator Sanders.
Senator Sanders. Thanks very much. I agree with Senator
Corker. This is an enormously important issue, and the DoD must
be run cost-effectively and efficiently.
Let me ask you, to start off with a simple question, about
half of the DoD budget goes to defense contractors. Is that
roughly right?
Mr. Norquist. That sounds about right, yes.
Senator Sanders. I think at the top of the list is Lockheed
Martin.
Mr. Norquist. That would be one of the top five,
absolutely.
Senator Sanders. Okay. Answer me this one: As I understand
it--I am looking at the revenue, 2016 defense revenues that
went to Lockheed Martin, roughly $43 billion. And I am just
kind of curious. The CEO of that corporation received--what was
it, $20 million? Over $20 million in compensation. And as I
understand it, over 90 percent of the business was the
Department of Defense. In other words, we are giving this woman
roughly an $18 million salary from the taxpayers of this
country. Does that sound right to you? Is that something that
we might want to look at and say when we give--I do not know
what the salary is of the Secretary of Defense. What is it,
$150,000, $200,000?
Mr. Norquist. Yes.
Senator Sanders. Does it make sense to you that we pay the
Secretary of Defense $200,000 or less and we give a contractor
who gets 92 percent of her revenue from the taxpayers of this
country $18 million of taxpayer money? Is that something that
you might want to look at?
Mr. Norquist. Sir, I cannot speak to how the companies
compensate their executives. I know there may be rules on
those, but they are outside my expertise. The one I can speak
to, though, is that we do have--inside the office of the CFO,
we have an organization that audits the contractors. So when
they send us invoices and payments, we go through those in
order to arm the contracting officers to make sure we are not
being charged----
Senator Sanders. But if I am right--I got that. But if I am
right, that over 90 percent of the revenue for a company comes
from the taxpayers of this country and this woman is making $20
million a year when the Secretary of Defense makes less than
$200,000, I think that might be an issue that you might want to
raise. All right? Essentially, for all intents and purposes,
Lockheed Martin is a Government agency, if you like--private,
but a Government agency, virtually fully funded by the United
States Government. Is it reasonable to say that they keep their
CEO salaries in check? Or should the taxpayers be paying
exorbitant salaries?
Mr. Norquist. The taxpayers should be paying for the
service that we receive, Senator, and if the----
Senator Sanders. Do you think it is an issue worth looking
at?
Mr. Norquist. I do not know if the acquisition rules--
whether executive salaries falls within that scope.
Senator Sanders. I think that they might.
Now, let me ask kind of a dumb bunny question, if I might.
The truth is everybody supports the Department of Defense. We
all support the men and women in the armed forces. But as I
mentioned earlier, we are now spending more than the next 12
countries combined in defense. Against my vote, Congress just
voted another $165 billion to go to the military. So here is
the question: Who is our enemy? Who are we spending--we know
that there are threats out there. We are all aware of
terrorism. But I think the amount of money that we are spending
fighting ISIS, for example, is relatively small. Who are we
preparing to go to war against or defend ourselves from?
Mr. Norquist. Senator, the Secretary of Defense outlined in
the National Defense Strategy the challenges that we face. Part
of the emphasis in the strategy was the shift from a focus on
terrorism to great power of competition with a particular
emphasis on the long-term challenges of China and Russia. It
refers to both of those as opportunities for peaceful
competition, deterrence, and then the ability to prevail in a
conflict, should we have to. The strategy has both a classified
and unclassified option, but it lays out and goes through the
challenges that we face.
Senator Sanders. So we are spending hundreds of billions of
dollars defending ourselves from China while major corporation
after major corporation is shutting down in the United States
of America and moving to China. Anything incongruous about
that?
Mr. Norquist. So I think the White House and the President
and others have talked about the competition expanding beyond
defense. My expertise is more in the defense side.
Senator Sanders. Okay. Thank you very much, Mr. Chairman.
Chairman Enzi. Thank you, Senator Sanders.
Senator Kennedy.
Senator Kennedy. Thank you, Mr. Chairman.
Has the audit begun?
Mr. Norquist. Yes, Senator.
Senator Kennedy. Okay. I want to thank both of you and I
want to thank President Trump for doing what the law directs
you to do.
Under the 1990 statute, what position--not what person but
what position at the Department of Defense was responsible for
initiating the audit?
Mr. Norquist. The audit, I am not sure how the language is
phrased. The audit is conducted by the IG, and then----
Senator Kennedy. No. Who is responsible at DoD under the
1990 statute for saying, ``I have read the law; we are going to
start this audit''? What position?
Mr. Norquist. My belief would be, since it is called the
``CFO Act,'' it would be the CFO or the Secretary, depending on
how the language is written.
Senator Kennedy. Okay. Would you get me the name of every
CFO who has served at the Department of Defense since this
statute was passed?
Mr. Norquist. I can do that, Senator.
Senator Kennedy. Okay.
Senator Kennedy. I do not know where to begin. Senator
Corker is kind of the conscience of the Senate on our deficits,
and I first heard him speak about the fact that the Department
of Defense had never been audited at a meeting and, frankly, I
thought he misspoke. I could not believe it.
I cannot explain this to my people back home, every single
one of whom supports a strong defense. But when I tell them
that every other agency in the Federal Government undergoes an
audit but the Department of Defense, and it was required to do
it 18 years ago and still has not done it, they think I belong
in a straitjacket. I just found this--how did it go on 18
years? Didn't somebody ever call the CFO and say, ``Have you
started the audit yet?''
Mr. Norquist. I will try and attempt to answer the
question, though I come from your perspective, which is I
viewed the audit as essential, as something we needed to start,
and in my prior experience at DHS, that is exactly what we did.
We had an audit from the moment DHS was created.
I think the types of answers you will hear is: It is large,
it is complex, it will take longer than the tenure of the
person there.
In my mind, those are arguments to start, not arguments to
wait. There are some mechanical things you had to put in place
to make it worth starting the audit. There are things that if
you are not even able to answer the sample requirements of the
auditor, they cannot even begin, and the Department, having not
been set up that way, needed some time to do that.
I say this not to explain it but because I recognize and my
perspective is we ought to have started. And I am glad at least
that in the transition of administrations, the contracts were
set in place that allowed us to begin now rather than waiting,
putting out contracts, and not getting the benefit of the audit
for a few more years.
Senator Kennedy. Well, let me put it another way. I have
read that the Department of Defense has more Federal contracts
than all the other agencies in the United States Federal
Government put together. Is that right?
Mr. Norquist. I do not know. I do not know if that includes
grants or not, but it may be----
Senator Kennedy. Well, what----
Mr. Norquist [continuing]. Discretionary budget.
Senator Kennedy. If I ask you for a list of all the
contracts and the amount, could you give it to me?
Mr. Norquist. So that is something that we are building
called ``the universe of transactions.''
Senator Kennedy. You could not give it to me?
Mr. Norquist. Not easily. It was a very long list.
Senator Kennedy. We do not even know how many contractors
we have?
Mr. Norquist. Let me back up. There is a requirement that
the Congress has put on the Department and others to publish--
USAspending.gov--that type of information. And so you will be
seeing that is part of the emphasis on the audit, is putting
the accuracy of that data out there.
Senator Kennedy. Let me interrupt you because I have only
got a few more minutes. I see where you expect to spend $367
million this year to conduct the audit and an additional $551
million to fix the problems. Now, how do you know it is going
to cost $551 million to fix the problems if you do not know
what the problems are yet?
Mr. Norquist. I do not know how much it will cost to fix
the problems. I know how much the services have set aside to
start to take the problem on, and so we have been able to break
it out according to how much the Army, the Navy, and the others
are going to be spending on fixing problems. How long it takes
them remains to be seen.
Senator Kennedy. Well, we have got clearly some people,
some hogs who have all four feet and their snout in the trough.
And we have got to find out who they are, gentlemen. And we
need to pass legislation to require this to be done and say
make it criminal, if it is not done somebody goes to jail, or
at least somebody is fired. I would appreciate your advice on
that. I cannot explain this to my people. I cannot.
I am sorry I went over, Mr. Chairman.
Chairman Enzi. Okay. Senator Kaine.
Senator Kaine. Thank you, Mr. Chair. Thanks to the
witnesses. I associate myself with most of the comments that
have been made. Senator Corker's sense of what is wrong with
the culture, I had the same feeling. I am an Armed Services
Committee member. I joined the Committee in January 2013.
Senator King joined with me. I think of the other Budget
Committee members. I also think Senator Graham was on the
Committee at the time. And I am a numbers geek. I was a mayor
and Governor and was used to audits and financial statements.
And we were stunned to get on the Committee and find, the 1990
statute notwithstanding, that the Pentagon had not made greater
progress. They were trying to become audit-ready at the time,
but there was not really a meaningful calendar in terms of
auditability.
We passed as part of the defense authorizing act that
year--it was the 2014 NDAA that we worked on in Committee--the
timetable that you are now on to require the audit to be done
under this timetable. We should not have had to do it. It
should have been done long before. But it is good to see you
making the progress that you are making.
I think the written testimony is very helpful. You, Mr.
Norquist, talked about the scope of this audit, and it is a
beginning audit. It is going to find a lot of things wrong, and
it is not as broad as subsequent audits may be. But the 24
audits and then the single sort of consolidated audit, they are
all underway right now.
I would encourage--you did not do this in your verbal
testimony, it would have been hard, but I would encourage
colleagues to look at the chart on page 6 of Mr. Norquist's
testimony which sets out the timeline of what is to be expected
here over the next few months.
There was one item on the timeline that I did not
understand, and I am sure it has probably got a simple
explanation, but it is forthcoming. On Page 6, ``March 2018,
Submit NDAA Ranking Report to Congress.'' Obviously, on Armed
Services we are working on the NDAA right now, so I am assuming
it is some report that is coming out of the audit work that
could be helpful to us as we are working on--fiscal year 2019
NDAA? Is that what this report is?
Mr. Norquist. What the Committee asked us to do was to rank
the components by the progress they have made. So of those 24
agencies, 8 of them already have a clean opinion. They went
under audit early on and did it, so those would clearly be
ranked at the top.
Senator Kaine. I thought it was nine, but it is eight that
have----
Mr. Norquist. There may be nine total. Then there are some
that have modified opinions.
Senator Kaine. Right.
Mr. Norquist. Then you have a got a range of them that have
been audited for a couple of years, but do not have a clean
opinion yet. And then the largest, Army, Navy, and Air Force,
this is the year they start. So what we have been asked to do
by the Committee is to rank progress, and we will do that every
year so you can start to see--and the idea that the Chairman
mentioned, an easy-to-see format, who is making the most
progress on closing those open findings.
Senator Kaine. And I think that is very, very important.
This will be really the first NDAA where we will be able to
take in this audit work that is being done functionally and
really use them as part of the NDAA that we write, and that
will be enormously helpful.
The one point of disagreement I had with my colleague
Senator Corker is when he quickly said, ``I do not care about
Congress. I want to ask about the Pentagon.'' My sense is we
are not here because Congress has not insisted on it. And we
have not insisted on it with the Pentagon. You know, the
Pentagon every year, under Presidents of both parties, will
submit a budget request, and Congress will give them more than
they ask for. And I think it is sort of the same phenomenon
here. We have insisted upon it with others, but not until the
NDAA really put it on the calendar in 2014, which was 24 years
after the 1990 act, have we started to insist on it. And I
think that is obviously important that we continue to insist,
and I think you are hearing a bipartisan agreement around the
table that we should.
Just quickly, to conclude--but, again, I think that
timeline is very helpful. Your conclusion is important. I
anticipate the audit process will uncover many places where our
controls or processes are broken. I think that is true. There
will be unpleasant surprises. The DLA audit already showed
some. Some of these problems may prove frustratingly difficult
to fix. I think we have to be prepared for all of that. We are
going to get a lot of bad news out of these audits if we do
them right.
Mr. Norquist. Right.
Senator Kaine. If we do not do them right, maybe it will be
nice news. But if we do them right, we are going to get a lot
of bad news. But that is important for us to get the bad news
so that we can then--you know, your answer to
Senator Kennedy's question, How do you know the fixes will
cost $530 million? You do not. You have no idea what the fixes
will cost. That is just what is set aside. But there is
enormous upside opportunity in here for us. If you spend money
on the wrong things, then you may be underfunding the right
things. Or you may be, you know, using tax dollars that you
should not be using, that should go to some other purpose or to
the taxpayer. So this is an important thing.
I do want to close on this. You mentioned it is not just
about cost, it is about operations. And if I might, Mr. Chair,
just for like 30 seconds, an audit is not going to tell you--an
audit is not the same thing as effectiveness. We had a hearing
yesterday about air power on the Navy side in the Seapower
Subcommittee of Armed Services, and we talked about lessons
learned on the F-35. We asked Admiral Grosklags, who is the
head of naval air power, ``Has it been worth it?'' And he said,
``Fantastic capacity.'' But he just groaned. He said, ``We
should have had it 10 years ago.'' And we said, ``What are the
lessons learned?'' You know, the cost overrun and delay. And he
said part of it was, you know, putting in new technological
requirements on the software side of the F-35 has proven very
difficult, but the other part is we tried to do something a
little creative. Let us build a platform that can be used by
the Air Force, Marines, Navy, and Army and take all of their
specifications into account. And let us cost-spread by trying
to build one that we can sell to NATO allies, too, so there
will be interoperability.
But what that ended up doing was create a decision making
process that was a complete morass when you are trying to
satisfy four service branches and allies as you are in design.
It turned it into a decision making nightmare. And so did we
get some economies of scale? Maybe. Did we get some
interoperability? Yes. But the delay and the cost overrun as a
result. The audit will not necessarily answer all of our
effectiveness questions, and so we need to have a realistic
expectation about what it will show and what it will not show.
But it is necessary, and I appreciate it.
Thank you, Mr. Chair.
Chairman Enzi. Thank you.
Senator Perdue.
Senator Perdue. Thank you, Mr. Chairman. And thank you both
for being here.
I echo and support most of what has been discussed today. I
am chagrined that it has taken this long to get us to this
point. I just have a quick question, Mr. Norquist. How long
will it take us to actually get a clean opinion and identify
material weaknesses, deficiencies, significant deficiencies, et
cetera? When will we get a clean opinion?
Mr. Norquist. Senator, I do not know.
Senator Perdue. What is the range of expectation?
Mr. Norquist. So the benchmark I use is the last assignment
I had at Department of Homeland Security, it took them 10
years. The numbers of weaknesses came down steadily so you
could see the progress, but there were typically one or two at
the end that took some time.
Senator Perdue. But it is your expectation that this year
we will have an estimate of the number of material weaknesses,
deficiencies, significant deficiencies, et cetera, that the
remediation you are talking about could take 10 years. But how
long will it take us to determine what work we have to do to
remediate?
Mr. Norquist. You will know the bulk of that this fall when
the auditors finish their first audit, but I would anticipate
that, in the second year, they will be able to go deeper and
may uncover more things. So I think over the first 2 years we
will have seen the vast majority of the findings that they will
have.
Senator Perdue. So I am just a dumb business guy, but the
DoD is not that much bigger than our largest public
corporations. I just cannot imagine Walmart calling the SEC or
the IRS and saying, ``I am sorry. The quarterly statements are
not going to be in this quarter.'' Ten years is outrageous.
That is too long. We have got to find a way to close that down.
There is no public corporation in the world that would be
allowed by this Federal Government 10 years to remediate. It is
just not--it would not happen. It is not necessary. And I want
us to address that in a future conversation, Mr. Chairman.
The second thing is I want to talk about Congress. There is
one very easy reason to explain why it has taken 28 years.
Congress did not do its job. It passed a law and then did not
do anything to enforce it. And all the excuses that were used,
from systems inadequacies to no chart of accounts, were just
unacceptable and should never have been accepted. But that is
water under the bridge. I want to talk about going forward.
What have we learned--Senator Whitehouse talks about $1.7
trillion being spent. The reality is in the last decade, about
a third, just a little less than a third of what we have spent
as a Federal Government has been borrowed money. That means in
the next 10 years the current forecast, if we continue to add
debt the way we have added it the last 10 years and the way the
current budget says we will over the next decade, about a third
of what we spend will be borrowed. That, by definition,--if the
first dollar goes to mandatory expenses, which it does, that
means that every dollar that we spend in discretionary
spending--that is DoD, VA, and about $350 billion of total
other discretionary domestic spending--is all borrowed money.
That means that every dime we spend at the DoD, we have to go
to China and borrow.
So we have these situations around the world, these
bilateral agreements, like Taiwan, to defend Taiwan against
China, we have to go to China and borrow the money to go to
Taiwan and do that. This is how serious this is and home time-
sensitive.
My question is: When we talk about procurement--and a lot
of these contracting relationships are dealing with
procurement--I believe that the procurement process and the CR
impact, the CR reality of a broken budget process, adds to
that. When you do these audits, are you going to measure the
impact of continuing resolutions on the procurement process and
the billion dollars of waste that are found there or are to be
found there?
Mr. Norquist. So the audit itself does not directly do
that, but what it allows us to do, because of the type of
information we get out of the audit, is to drill down into
exactly those types of questions, because you will have the
transaction level data that will let you look at the effect.
And when you----
Senator Perdue. Right, I get that. So as I understand it,
there is no common chart of account, so that will take a while
to develop that as well, and even the system inadequacies that
do not allow different parts of the DoD to talk to you is a
hindrance. I get that, and that is part of the delay.
We want to know, if you run into those problems or
obstacles, we need to know those on the front end.
Mr. Norquist. Absolutely.
Senator Perdue. Because 10 years is just too long to get
there.
I want to talk about the sequester and also the fundamental
measurement of the effect of not having a capital budget. We do
not have a capital budget, Mr. Gibson. I know you answered the
question earlier about normal operation procurement. I get
that, ongoing replenishment of ammunition and supplies, et
cetera, et cetera. But in these big-ticket--we are going to
spend $26 billion a year for 10 years to basically recap just
the Navy. That is the current estimate. And my concern is, if
that $26 billion then goes to 4X or 5X like the past decade
did, we are talking about numbers that are unattainable. And so
my concern is: Are we in this audit looking at the procurement
process and finding the inadequacies in there to recommend
changes in the way Congress deals with funding of the
Department of Defense? There is no capital budget; therefore,
we do it on a cash-flow basis, which nobody else in the world
does. And that adds billions and billions and billions of
dollars to our procurement process, over and above overdesign
and design creep. Those are all real. No question about it, and
we have talked about that. But the one thing that I think as a
business guy looking at this, I think the bigger contribution
is to say we do not deal with this in the capital budget format
and the limitations we put on the funding from the Federal
Government create this tremendous opportunity to waste money on
the procurement process.
Would you respond to that, Mr. Norquist?
Mr. Norquist. Sure. Senator, the way the information is
currently stored, you do not have what you need for a capital
budget. But when you look at what the audit standards require,
valuing your assets, depreciating and so forth, that gives you
the basis, and so one of the questions for Congress becomes:
When you have that type of information, do you want to change
the way that you manage the funds? But you would not have that
to do today, but over the audit you will buildup exactly that
type of information.
Chairman Enzi. Thank you.
Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. And welcome to
both witnesses. And I want to associate myself with a lot of
the comments that have been made by my colleagues.
My question relates to the overseas contingency operations
account, OCO. As you know, we have funding in the base defense
budget for ongoing operations, which we expect to go on, you
know, for the indefinite future. And then we have the overseas
contingency operations account, OCO.
There has been great concern on a bipartisan basis that OCO
over the years has been used as a slush fund because OCO has
not been subject to the budget caps that have been placed on
both defense spending and nondefense spending. In fact, when I
was in the House of Representatives, I teamed up with Mick
Mulvaney, a conservative Member of the House, now the Director
of OMB, and we put language into the 2016 defense authorization
bill asking the Defense Department to adopt OMB standards at
that time for what constitutes OCO funding and what is overseas
funding.
Since then, in January 2017, GAO issued a report
recommending that the Department of Defense work with OMB to
develop criteria. And since then, in 2018, in fact, in the
defense authorization bill we passed, the Congress instructed
the Department of Defense to develop these criteria by
September of this year.
Are you on target for providing those criteria to the
Congress?
Mr. Norquist. We have developed criteria that we have
worked with at OMB to go through the OCO. Consistent with your
previous discussions with Director Mulvaney, you will not be
surprised to know that in the out-years he would like us to
shift those categories so even fewer of them count as OCO and
more of it is in base, and only the most incremental of the
costs show up, which would dramatically reduce the size of the
OCO. But, yes, we have worked with OMB on those criteria.
Senator Van Hollen. Great. And once you develop those
criteria, would you have any objection to the Congress
codifying those criteria so that we can avoid any sort of
monkey business in slush funds in the future?
Mr. Norquist. I would have to defer to OMB on the effect of
trying to turn that into legislation.
Senator Van Hollen. Okay. Let me just talk a little bit
about the whole overseas funding effort, because we all wake up
to tweets these days from the President of the United States,
and a few weeks ago he tweeted this: ``This will be a big week
for infrastructure. After so stupidly spending $7 trillion in
the Middle East, it is now time to start investing in OUR
Country!'' That was the President's tweet.
Are you aware of how much the Trump budget calls for in
overseas contingency account spending for the next 10 years,
both on the defense side and the smaller portion of the State
Department?
Mr. Norquist. I am familiar with the defense numbers. They
are around $71 billion in, I think, the 2018. Then there is a
similar number in 2019. And then they shift to move the
sustainable costs, the things that are really not incremental,
into the base. And then I think it sits at about $20 billion a
year for the next 5 years after that.
Senator Van Hollen. All right. So----
Mr. Norquist. Those are place holders, of course, because
you do not know where the conflict is headed.
Senator Van Hollen. Right. So a certain amount of that
spending, as I read the budget, based on strategy over the next
coming years----
Mr. Norquist. Correct.
Senator Van Hollen. I hope someone will point out to the
President of the United States that when I add it up, it comes
to $447 billion over those 10 years, which is more than twice
as much as he asked for in his infrastructure plan. He asked
for $200 billion a year for our country's infrastructure, as he
put it. He is asking twice as much for what he referred to in
the tweet as ``stupid'' overseas operations. I hope someone
will bring that to the attention of the President next time he
decides to tweet.
Let me ask you about the out-years, because you have, as
you indicated, the OCO funded at $66 billion through fiscal
year 2022, I believe--fiscal year 2022, 2023. And then after
that, as I see it, it goes to $20 billion a year----excuse me,
$10 billion per year after that. As you say, it is a place
holder.
Is there any basis for choosing $10 billion? As Senator
Corker said, these numbers quickly add up over time, much more
than anticipated. You are dropping it from $66 billion in
fiscal year 2023 to $10 billion in fiscal year 2024. Over a 10-
year budget window, that is a savings of $560 billion, right,
if we drop back? My question is: What is the criteria you used
to come up with the $10 billion as you look forward and
mention, you know, the Strategic Plan with respect to China,
Russia, and the other threats that may be out there?
Mr. Norquist. So our budget looks out through 2023 and is
based off more or less a static projection. So we will adjust
as the combatant commanders' requirements change on what is
required for those. I believe beyond the 5-year window is an
OMB estimate based on where they think its direction is
heading.
Just to clarify, on the original submission we built for
the budget, the expectation was around 65 going out. That is
the next 5 years is the number OMB wants to shift more to base
and only leave 20 in OCO so there is less of it that is in that
contingency fund.
Senator Van Hollen. Right. No, I think that is a good idea
to put more in base if it is really base money. The net effect
of that is to obviously reduce the overseas contingency--again,
I just wondered if there was any strategic basis for that big
drop, so we will follow-up with you.
Thank you, Mr. Chairman.
Chairman Enzi. Senator Cotton.
Senator Cotton. Thank you, Mr. Chairman.
Thank you, gentlemen, for your appearance here today. A lot
of the questions and answers today have focused on the past and
what has happened in the past and why we are where we are today
in 2018 without an audit. Both of you are relatively new to
your positions, and we appreciate your commitment to completing
that audit, so let us look forward.
Can you tell us, Mr. Norquist, in just the simplest,
briefest terms, what do you hope to accomplish with the
completion of this audit?
Mr. Norquist. I hope to accomplish three things:
The first is to be able to put more relevant and timely
information in front of senior decision makers so that when
they are trying to make decisions about the organization, they
have relevant data.
The second is to provide insights to the reform efforts
where we discover broken processes or things where we can save
money by changing the way we operate.
And the third is to be able to make great user of data
analytics because we will be able to rely on the underlying
data. And there is, of course, the underlying transparency
requirement to the American people and Congress.
Senator Cotton. Mr. Gibson.
Mr. Gibson. Senator, I find the audit incredibly beneficial
to what we are working. As Mr. Norquist said, the data is
incredibly valuable. We are looking at putting in cost analysis
tools so that once you have the good data, whatever the user
and the operator is can have good cost assessments so they can
then place assets where they need to be and manage those that
do not fit within the zone.
The second is the systems themselves. What we find is that
often contributing to some of the weaknesses are poor systems.
This fits right into one of our significant areas of reform,
which is IT. I think we can contribute there, and, again, that
contributes overall to good business processes.
And last is the ability through this process to discover
areas that the weaknesses translate into truly discovery of
good information. Already we have had discussions about how the
spares are managed in the Navy. You look at ammunition in the
Army. Just two good examples of once we have better clarity
there, we can then better manage each of those, both from a
financial standpoint but then those directly contribute to
readiness.
Senator Cotton. So the final point of your answer there, is
that what it means to a private who is out on the front lines
today in Afghanistan or Iraq, that he is going to have maybe a
little more training, maybe a little faster access to parts or
ammunition, what have you? Mr. Gibson. I think the answer is
definitely yes. All of this contributes really to the
Secretary's first priority, which is lethality.
Senator Cotton. Okay. And, Mr. Norquist, you were nodding
your head in vigorous agreement, for the record.
Mr. Norquist. Absolutely. Yes, you order a spare part, you
know it is in inventory, you know when you are going to get it.
You are able to keep your maintenance up when you need to and
be ready.
Senator Cotton. What do we think is the potential magnitude
of the savings that this could ultimately yield for the
Department?
Mr. Norquist. I think you will see savings in three types,
and for the middle section I will defer to Mr. Gibson.
In the financial side, when we automate things that are
currently manual, you streamline the accuracy, you reduce the
cost. Those will not be enormous numbers, but they will be
valuable and sustained numbers. There will be efforts that will
drive reform. And then I think the third one, which is an
unknown, understated value of the audit, is Congress passed a
law on information security standards. The auditors check
those. They do cybersecurity testing of each of our business
systems. When they find weaknesses, that is not a dollar
saving, but it is enormous cost avoidance if somebody is not
able to break into your payroll system, your logistics system,
and others. And I think there is an upside. But let me defer to
Mr. Gibson on the reform.
Senator Cotton. Before we go to Mr. Gibson, let me just put
two numbers on the table.
Mr. Norquist. Sure.
Senator Cotton. The 2019 budget request suggested that
internal business reforms could save a little over $6 billion.
A 2015 Defense Business Board report, which essentially said if
you ran the Department like a business--and that would mean
eliminating virtually all of the civil service work rules,
which I do not think many members of this Committee or this
Congress would support. But if you eliminated all those legal
requirements, you would save about $25 billion a year. So I
will put those numbers on the table and, Mr. Gibson, turn to
you. You can follow-up on what Mr. Norquist said. But I also
would like to get a sense, could the results of this audit
yield savings of that magnitude, or larger, $6 billion
according to the Department's request, $25 billion according to
the 2015 Defense Business Board?
Mr. Gibson. Well, Senator, let me attack a couple pieces of
those separately.
One, I think we have laid in $6 billion, and then OMB has
laid $46 billion across the FYDP. We are very comfortable that
we will meet or exceed those numbers. And then directly, as to
the audit, the audit is, as I mentioned earlier, a great tool
to help us get there, but it is in addition to other reform
initiatives.
And then, last, on the DBB, I can tell you I fully embrace
what they have suggested. We actually took some of the
specifics there where they said focus on what is known shared
services areas, put teams in place, and go after that. We have
done just that. We actually added three additional areas to
what they suggested.
And then the last part of that, I think that while we go
after shared and common corporate type services, we always have
to remember our main mission is the lethality of who we are. We
also have to incorporate the fact of security of what we do,
and that impacts inventories and supply chain and logistics.
And then, last, very simply, we are in a more regulated
environment than the private sector. But it should not be lost
that the spirit of what that report did we fully embrace, and I
think it has great value to us.
Senator Cotton. Thank you for those answers. Six billion
dollars in a year, $46 billion over the 5-year defense plan
would be great. I just have to point out that we just increased
the defense budget by $85 billion, though, in 1 year, and that
is the result of 7 years of living under the deeply flawed
Budget Control Act. So I admire you for taking on a very, very
big task, but it is really Congress' responsibility here to fix
this problem.
Chairman Enzi. Senator Wyden.
Senator Wyden. Thank you, Mr. Chairman.
Let me ask you a question, if I could, Commissioner
Norquist. This issue of auditing the Pentagon is the longest
running battle since the Trojan War. It has gone on and on, and
it comes now in the context, as Senator Cotton made, you know,
$85 billion more for the Pentagon, and we have got a budget
that is going to cut Medicare and Medicaid. So you have to put
this in that perspective as you face these issues.
When I was reviewing your testimony, one sentence really
leaped out at me. You said in your testimony that it is going
to take time--your words--to move from qualified audits to
clean audits. So I would like to know, are you telling the
American people with that statement that maybe it is going to
take another 20 years to move from failed audits to clean
audits? How would you explain this to the American people? How
long is this going to take?
Mr. Norquist. Not knowing the findings, I do not know how
long it is going to take. I can give you some----
Senator Wyden. How about an estimate? The public at least
deserves some kind of estimate.
Mr. Norquist. So the only benchmark I can use is Homeland
Security took 10 years, and part of the reason that makes this
a bit of a challenge is when you think about the money the
auditors are talking about, they are not talking just about the
money Congress appropriated in 2017. The procurement money that
Congress awarded 8 years ago was available for the first 3
years to obligate and 5 years to disburse. The auditors are
welcome to pick any transaction going back over those 8 years
and ask us to document and support those transactions. So when
you look at old military equipment, the ability to provide
valuation in historical records, my concern as the CFO is there
are some of these choices that I do not know that the
information that we will get is worth the expense I would
spend, and so I would want to come back to you and say this
piece of equipment is going to go out of inventory in 3 years.
Do you want me to spend a lot of time valuing or, or do you
just want to let it roll out of our inventory, its materiality
is going to decline?
Senator Wyden. At my town hall meetings this weekend, when
people are going to ask about waste and compare, as I have
done, various items in the budget, I think based on your answer
I have to tell Oregonians that it is going to take more than 10
years, based on the fact that you compared it to something
else, to move from failed audits to clean audits. Is that
correct? That is a yes or no answer.
Mr. Norquist. To get all the way to the clean opinion,
which requires fixing virtually everything, that may well be
true. But the benefit of the audit we will start to get right
away.
Senator Wyden. I am going to take that as a yes, that it is
going to take more than 10 years to get to a clean audit. And I
would really like just a yes or no answer, because the public,
it seems to me, deserves that at this point.
Mr. Norquist. Absolutely, Senator.
Senator Wyden. Is that right, over 10 years?
Mr. Norquist. Yes, Senator.
Senator Wyden. Okay. Let me ask you one other issue. We
have had several policy analysts over the years tell us that
they do not think the auditors are going to uncover new
inefficiencies of a great magnitude. Now, what is striking
about that is if an analyst says they are not going to find
many things that are that inefficient, why is it going to take,
by virtue of your last answer to me, more than 10 years to get
a clean audit? I am kind of trying to reconcile these two. So
do you agree that not very many inefficiencies are going to be
found?
Mr. Norquist. Again, we have not had the results of this
first audit.
Senator Wyden. But what is your opinion now based on the
fact you have worked in this field for quite some time? What is
your opinion today?
Mr. Norquist. That you will find places for savings, that
you will find things that you can automate to improve the
accuracy of the data, that you will find chances to improve
inventory that will save you money.
Senator Wyden. A lot of inefficiencies or a small number?
Mr. Norquist. I would not have a way of saying at this
point, Senator.
Senator Wyden. I am going to hold the record open because I
would like your best estimate on that, because obviously that
goes to the question of again trying to explain to people why
this is taking so long. Everybody else in Government gets
audited. Businesses get audited. It really is the longest
running battle since the Trojan War.
And, by the way, I want it understood, you are walking into
this. This is not your doing.
Mr. Norquist. Right.
Senator Wyden. But you are going to be the point person on
this, and that is why I have asked, I think, a little bit more
pointed questions, because the public's frustration on this
point is enormous.
Thank you, Mr. Chairman.
Chairman Enzi. Senator Boozman.
Senator Boozman. Thank you, Mr. Chairman. And thank you all
for being here. We do appreciate you all taking this on. This
is a huge task. It is so, so very important. I appreciate the
emphasis on the business practice reform approach that you are
taking, and certainly your work on the audit is going to be so,
so vitally important, the key enabler to ensure discipline
metrics that we need to enact reform. And I appreciated the
three things that you are going to get done.
On the other hand, you know, you are going to hold people
accountable, and I know our Chairman and Ranking Member very,
very well, and I think I can speak for them and the Committee
that we are going to hold you accountable in the sense that you
have taken this on. It is a huge deal.
As you have heard from the Committee, there is a lot of
frustration in this area. There is a lot of frustration not
only in this Committee but throughout Congress. And so we are
going to get this done in a timely fashion.
Now, the services had an audit, and I do not think they
have been completed for various reasons or whatever. But the
auditors got in there and made a lot of recommendations,
hundreds of recommendations. What have you learned from the
service audits, Air Force, Army, whatever, Navy? Was there
anything to be gleaned there that you can use?
Mr. Norquist. Yes, Senator, there were a couple of things.
One of the overarching findings was that there is often a gap
between what management believes is being done based on the
policies that were issued, expecting that those policies are
being followed. Then you go into the field and you discover
either the field is not or cannot operate according to those.
That information gap the audit closes and allows you to
recognize either we have got to change the policy or we have
got to change the way we operate. And so that is a valuable
tool that lets you bring better controls in.
There are some places we have seen where the----
Senator Boozman. So are we able to go ahead, you know, and
follow-up on that right now? Are we starting already?
Or do we have to wait for a timeline to----
Mr. Norquist. No, this is the point I wanted to try and
follow-up with the Senator, which is we will get those findings
each year. We will start the corrective action plans right
away. What we need to do is prioritize those. There will be
some things where the benefit to the taxpayer and the American
people is quite high; you want to get to those sooner. There
are the other ones where it is an accounting entry. I know it
is important from an accounting point of view, but it will not
save money, and you want to be cautious about how much effort
and money you spend trying to achieve that goal. And so we will
want to strike that balance.
Senator Boozman. Okay. So go ahead. I interrupted you. Are
there other things that you learned that----
Mr. Norquist. So inventory records and making sure the
accuracy of those. I think, you know, the Army found Black Hawk
helicopters that had been delivered but had not been yet loaded
in their property system. The person there may have known it,
but if the Army did a search, it would not have shown up in the
property. Air Force looked at 12 facilities and found
approximately, I think it was, 400 buildings and structures.
Again, the people in the building knew they were there, but if
you did a look at how much do I need to do to do maintenance on
my buildings, you would not have had that in the data call. So
those types of issues and some of the inventory issues showed
up at DLA. The accuracy of that effects a better operation and
it enables reform.
Senator Boozman. Good. Mr. Gibson, the fiscal year 2019
defense budget submission indicates an expectation of saving
$2.9 billion from ongoing reforms, including reforms in health
care management. Can you give us some examples? Can you talk a
little bit about health care management and some of the ways--I
mean, that is such a huge issue for not only the Department of
Defense but for the country in general. Do you have any ideas
about efficiencies or savings in that regard?
Mr. Gibson. Yes, Senator, we are looking at this in two
ways. There is the larger--I believe it is driven by the 702
requirement to look at health care. We have taken the
opportunity to step back and work with the services and with
DHA to say what is the optimal way to truly organize the
relationships. The services are responsible for providing a
ready medical force, and the DHA provides the facilities and
support to get there. That is the easy part.
The hard part is defining the roles and responsibilities
and how we would roll that out. But we are in the middle of
that right now. The goal is to end up truly with the services
having the ability to provide a ready medical force in the most
efficient and effective manner and be able to support the rest
of the medical system also using the private sector and
Government resources.
Another way we are attacking this, sir, is we have a health
care team, and that cross-functional team then looks at
specific projects which are enterprise-wide. It could be
management of pharmacy services. It could be reimbursement from
third parties. Frankly, it could be common buying of
professional services. And those we know are relevant across
the enterprise. We are looking at those and implementing those
immediately to effect savings.
Senator Boozman. Good. Thank you very much. And we do
appreciate you and your teams for their hard work.
Thank you, Mr. Chairman and Senator Sanders, for holding a
very, very important hearing.
Chairman Enzi. Thank you.
I think Senator Sanders and I have some additional
questions. Senator Sanders?
Senator Sanders. Thank you, Mr. Chairman.
Mr. Chairman, I kind of thinking that the elephant in the
room here is the relationship of the DoD to defense
contractors. I think that is the area that needs most research.
And in that regard, I want to touch on three subjects.
Number one, I want to get back to this issue of CEOs'
salaries. Two out of the top four defense contractors have CEOs
that make at least $20 million a year, despite the fact that
over 90 percent of their revenue comes from the Federal
Government. Okay? I worked hard and successfully with others to
make sure that workers who work with Federal contractors get at
least a minimum wage above $7.25 an hour. We brought it all the
way to a bit $10.10 an hour. But we said if you are working for
a contractor who is being paid by the Federal Government, you
should not get a starvation wage.
I would like a report from you as to what you can do to say
to CEOs of defense contractors that it does not make a lot of
sense that they are making now 100 times more than the
Secretary of Defense.
Now, I am aware that $20 million is a small part of these
multi-billion-dollar contracts. But I do think it sends a
message. If a corporation gets the overwhelming percentage of
its revenue from the Federal Government and gives its CEO a
large salary, it tells me they are going to do a lot of other
things to ignore the needs of taxpayers. I would like you to
get back to me with some ideas as to how you can negotiate with
these large defense contractors and tell them that they should
not be paying their CEO 100 times more than the Secretary of
Defense gets. That is number one.
Number two, that leads me to the issue of defense
contractor fraud. Since 1995, Lockheed Martin has paid over
$767 million in fines or related settlements for 85 instances
of fraud or misconduct, and since the year 2000, Lockheed
Martin has taken in more than $550 billion in Federal
contracts. Some of the fraud and misconduct that Lockheed
Martin has engaged in over the past two decades includes unfair
business practices, contractor kickbacks, defective pricing,
emissions and groundwater cleanup violations, nuclear safety
violations, Federal election law violations, procurement fraud,
and the list goes on.
In 2007, Lockheed agreed to repay the Federal Government
$265 million for overbilling on the F-35 program. And Lockheed
Martin, I should not just point them out. They are one of many.
What are we going to do after giving CEOs of these defense
companies huge salaries, tell them that they cannot continue to
rip off the American people? What strategy do you have to
prevent future fraud? Is this an issue that we should be
concerned about? It seems to me we should.
Mr. Gibson. Well, Senator, I think waste, fraud, and abuse
is always something that should be front and center. It is my
understanding in the acquisition process we have a number of
policies that must be followed, and there are checks and
balances along the way.
It is my understanding Ms. Lord is focusing on this not
only with specific contractors but across the Department.
Senator Sanders. Mr. Gibson, would it be fair to say that
we have not been terribly successful up to this point, that
virtually every major defense contractor has had to reach
settlements or has been fined for fraudulent activities?
Mr. Gibson. Well, Senator, I really do not have anything to
base an answer on, whether it is success or failure. I think--
--
Senator Sanders. Are you concerned that virtually every
major defense contractor----
Mr. Gibson. Senator, I would say that anytime we have
waste, fraud, and abuse, I am concerned.
Senator Sanders. All right. And can you tell me that this
will be a major priority, that if a defense contractor
repeatedly engages in fraud--and I have just listed some of
what one company did--that maybe they should know that they
cannot continue to get away with that with impunity?
Mr. Gibson. Well, Senator, I know this is a priority of Ms.
Lord, and I fully support and am willing to do what we can on
our side to help her in achieving this. And I will certainly
pass this along, your passion for this issue.
Senator Sanders. All right. Which takes me to the third
issue. We talked about CEO salaries. We talked about fraud. Now
I want to talk about cost overruns. Let me read from the GAO's
Assessment of Selected Weapon Programs, 2017:
``DoD currently has an acquisition portfolio comprised of
78 programs costing a total of $1.46 trillion. Of this total,
roughly $484 billion is due to cost growth above the original
procurement estimate; $259 billion of this cost growth occurred
after programs had already begun production.``According to
GAO," many DoD programs fall short of cost, schedule, and
performance expectations, meaning DoD pays more than
anticipated, can buy less than expected, and in some cases
delivers less capability to the warfighter.''
We have got a major crisis there. What are we doing about
it? Mr. Norquist, cost overruns.
Mr. Norquist. So I think one of the challenges that you
have with any of those programs is the disruption to the
budget. If you are expecting a program to cost a certain
amount--I am taking this from the perspective of CFO
Comptroller--and it goes up over time, you are disrupting other
plans and expectations you had. So we have organizations whose
expertise is cost estimating and trying to bring more accurate
discipline to the budgeting process so we have the----
Senator Sanders. No, I do not think----
Mr. Norquist. Then you have----
Senator Sanders. Excuse me. I do not mean to--you know, I
do not think that is the major issue. The major issue, if I
sign you--if I work out a contract with you, you are going to--
I used to be a mayor, so we went out with competitive bidding.
We had a contractor come in, and we are going to do the streets
of the city of Burlington for $3 million. Then 3 months later,
the guy comes in and says, ``Well, it is going to be $5
million.'' We do not say, ``Hey, that is fine. It is going to
impact our budgeting.'' We say, ``Sorry, that is not going to
happen.''
What are we doing to deal with these outrageous cost
overruns?
Mr. Norquist. I was just going to point to the--I was going
to break down the type of challenges into three parts.
Senator Sanders. Okay.
Mr. Norquist. So the first one is on the Government side
you made a wrong estimate as to what the work was going to
cost.
Senator Sanders. Right.
Mr. Norquist. We can fix that, and we have organizations
with that expertise to try and do that.
Senator Sanders. What do you mean, we can fix that? If I
tell you I am going to do something for $1 billion and I come
back to you a year later and I say it is a billion and a half,
what is your response to me?
Mr. Norquist. So this is where we have to end up--and,
again, we are in the contracting world, which is outside of
financial management, so I apologize. The question becomes:
What changed? If the answer was on the Government side I
changed the requirement, then we think of that as requirements
creep, and the answer is----
Senator Sanders. Yes, Okay.
Mr. Norquist [continuing]. Have I started to ask the person
to do different things?
Senator Sanders. Right.
Mr. Norquist. And then it is: Was it a necessary
requirement change or have we----
Senator Sanders. What happens if I do--what happens if I
have changed my requirement?
Mr. Norquist. Well, if it is a firm fixed-price contract,
for example, in the level at which I deal with it, the answer
is you bid a price, that is what you are going to perform it
for.
Senator Sanders. Has the DoD done that, or have they----
Mr. Norquist. We use firm fixed-price contracts, and we
hold the vendors--I have to defer to our lead for contracting
when she gets to talking about cost-plus and other contracts
which are particularly challenged by the type of issue you
raise.
Senator Sanders. Is your argument that most of these cost
overruns are the responsibility of the DoD who has changed the
nature of the contract?
Mr. Norquist. No, but it is one of the contributing
factors. And so when you say what can you do about it, you can
do better estimates, you can control costs, and then you hold
vendors accountable. I think those are sort of the three lanes
of how to break the problem down.
Senator Sanders. All right. And what happens, tell me what
we do when somebody says, ``Hey, sorry, you are going to have
to give me more money for the same contract that I agreed to''?
Mr. Norquist. So that is the contracting officer community,
and actually I cannot speak to that well. So I would defer to
Under Secretary Lord.
Senator Sanders. Is that an important issue?
Mr. Norquist. It is a very important issue, and so in the
types of contracts that I deal with in the financial community,
which are smaller, you are ending up with it is a firm fixed-
price contract; this is what you said you were going to do;
that is where we are. So unless it is an issue, an error we
made on our side, you are held accountable.
Senator Sanders. Okay. I apologize, Mr. Chairman, but what
I would like to get back from you is your ideas of what we can
do about excessive CEO salaries.
Mr. Norquist. Yes.
Chairman Enzi. Thank you. I want to thank everybody for
their questions. I want to thank you for your testimony.
I do want to note that this is the first time that anybody
has made this effort to do this complete audit of the Defense
Department, even though it has been a requirement for, I think,
14 years. So congratulations on that.
I appreciated the comments today about needing a capital
budget. I think absolutely every department in the Federal
Government needs a capital budget. I have kind of a pet peeve
on National Parks as I grew up in some of the National Parks.
Wyoming has Yellowstone, which was the first National Park. And
I was always disconcerted that they were running out of money
in August and talking about shutting down the park, which is
the main season. So I asked them for their list of
expenditures, which they could not give me. But I am pleased
that with pressure, after just 20 years, I have a list of not
only Yellowstone Park but every single park in the United
States, the facilities they have got, the age of them, the cost
to do them, the cost of maintenance, and I am hoping we can
continue that and get that into every department of the
Government and begin to manage what we have. Having an audit is
a beginning part of that.
I am also pushing for biennial budgeting. I think that
every agency could spend their money more effectively if they
knew in advance--that means before October 1st or whatever date
gets set for the beginning of the fiscal year----how much money
they had to spend over the next 2 years. And I think there is
substantial savings just in not trying to spend up that last
amount of money in the last portion of each year. And I am
hopeful that if we break it down so that we only cover half of
the appropriations each year but for a 2-year period, we can
get a lot more scrutiny into what we are actually buying, as
well as having the people be able to spend things more
effectively.
Now, you gave some examples about the improved financial
management in terms of costs to Senator Boozman, and I
appreciate that. Senator Wyden asked some questions about when
this process would have a clean audit. Of course, we are hoping
for a clean audit much before 10 years, but the public's
understanding of a clean audit I think is a little bit
misleading. What we are talking about is getting improvement to
the point of perfection, and typically nobody gets to
perfection. If they do, then our auditors maybe are not doing
their job. There is always something that ought to be reviewed,
and every business, including the military, has to keep
reinventing itself and are because of changing conditions
around the world. And that requires doing things differently,
and when you start doing things differently, the audit is going
to turn up some different things that maybe should not have
happened, but that are correctable. And unless we do these
audits--which the purpose of them is not to play ``gotcha''
with the Department. That is not what is supposed to be done
with it. What it is supposed to do is reduce errors as much as
possible and come up with better business plans so that the
objectives for, you know, what we are funding actually get
accomplished.
I am the Chairman of the Budget Committee, and I am just
floored by how much money it is that we spend. I really have no
concept for trillions. I am still having trouble with billions,
and I thought I had finally mastered millions, but I am not
sure about that yet either. But we spend trillions, and that is
so much money that there is not any business in America or in
the world that handles that kind of dollars, especially every
year.
So our challenges are before us, and this is kind of a
first step, and I want to congratulate you for taking the
effort. And I want to thank the Committee for the interest that
they have had in what you are doing. And I also want to again
thank you for the promptness of your response to my questions.
Now, the hearing record will stay open so that anybody that
wants to submit some additional questions can until close of
business tomorrow, and hopefully we will get a quick response
from you on those as well.
So thank you very much. This hearing is adjourned.
[Whereupon, at 12:16 p.m., the Committee was adjourned.]
ADDITIONAL COMMITTEE QUESTIONS
[The following submitted questions were not asked at the
hearing but were answered by the witness subsequent to the
hearing:]
ANSWERS TO THE QUESTIONS FOR THE RECORD FROM: HON. BOOZMAN, GRASSLEY
AND VAN HOLLEN
BUDGET COMMITTEE HEARING:
DEPARTMENT OF DEFENSE AUDIT AND BUSINESS OPERATIONS REFORM AT THE
PENTAGON
DATE: MARCH 7, 2018; LOCATION: 608 DIRKSEN
TIME 10:33 AM
Boozman
1. Mr. Norquist and Mr. Gibson, you are both well aware of
the habit we have developed of appropriating money via
Continuing resolution. How do CRs impact your ability to
account for the funding we provide to the Department? Does it
complicate the process of undergoing an audit?
Operating under continuing resolutions (CRs) for extended
periods of time complicates the execution of the Department's
plan as the CR legislation limits funding to a daily rate of
operation and prohibits starting new programs to include
construction projects or increasing the rate of production for
weapon systems. For fiscal year 8, the Department has 176
investment-related new start efforts and 27 procurement rate
increases that cannot be pursued under a CR given the
restrictions of the legislation. Limiting available funding to
a daily rate of operation and last year's funding levels
creates inefficiencies in program execution and increased
workload for the contracting and the financial communities.
Operating under a Continuing Resolution does not stop the
progress of the audit, but it creates a competing demand. Once
funding becomes available, the compressed remaining timeline
available for obligating funds increases the burden on Defense
financial management and acquisition work force.
Both the incremental nature of CR funding and the late
appropriations increase the workload on the same work force
that is working to support the audit and address findings.
2. Mr. Gibson or Mr. Norquist, this audit will be a billion
plus effort. Do you anticipate needing new or additional
business IT systems to support the ongoing audit efforts? If
so, have you already planned for those needs?
We anticipate that we will get many findings around both
our Enterprise Resource Planning (ERP) financial and legacy
systems. These findings may range from implementing simple
system change requests to deploying new tools that streamline
processes. In some cases, expediting the retirement of legacy
systems will be the most cost effective solution. We have
planned and estimated the cost of legacy and ERP system fixes
that we anticipate will be necessary over the next several
years (2018-2022). However, as we are currently undergoing our
first comprehensive audit, depending on the magnitude of audit
findings, we will have to evaluate and adjust our resource
needs accordingly.
3. Mr. Gibson or Mr. Norquist, there has been a lot of
discussion about how to provide more funding flexibility to
programs within DoD. What impact would this have on
auditability within the Department?
The flexibilities being discussed should not have a direct
impact on auditability within the Department as most of these
proposals are modifications to authorities already being used
by the Department. Such flexibilities include:
Changing the obligation limitation on annual
accounts during the last 2 months of the fiscal year
from 20 percent to 25 percent if Congress does not
enact annual appropriations bills by January 1;
Increasing the below threshold reprogramming
authority from $15 million to $25 million for the
Operation and Maintenance accounts; and
Allowing the Department to carryover a small
percentage of its Operation and Maintenance funding
into the next fiscal year as is currently allowed for
the Defense Health Program
Some of these flexibilities, however, may have a favorable
indirect impact on the audit as they will allow the Military
Departments and Agencies to do smarter execution, allow the
Department to capture the savings from negotiating better
prices that often occurs late in the fiscal year, and relieve
some of the stress and backlog in the contracting and the
financial communities.
Grassley
1. Please give us a snapshot of audit progress against
milestones as of March 1st. Are the milestones being met
across-the board? Or are you running into roadblocks? What is
the success rate? What is the prognosis?
At this point in the process we are achieving our
milestones. The consolidated audit has begun as planned and we
have begun responding to auditor requests received from both
the DoD Office of Inspector General and the Independent Public
Accounting (IPA) firms. With the leadership support of the
Secretary and the Deputy Secretary, we are receiving the
support needed from stakeholders outside the financial
management community. We are working with these communities to
respond to audit requests.
The next major milestone will occur as we begin receiving
audit findings later this year. The auditors will be inputting
their findings into our tracking tool, and we will review the
status of service corrective action plans. We will use this
tool to assign priorities and responsibilities and track
progress. Senior leaders will be held accountable using the
audit results and their progress addressing findings. Going
forward, we will measure and report progress toward achieving a
positive audit opinion using the number of audit findings
resolved.
2. Is it possible that the DoD accounting systems were
designed to be un-auditable, or did Mr. Harrison (Todd
Harrison, Center for Strategic and International Studies)
simply make an inaccurate statement? If Mr. Harrison's
assertion is inaccurate, then explain why DoD seems incapable
of fixing its ailing accounting systems after so many years and
billions of dollars?
Mr. Harrison's comment is accurate in the sense that our
legacy systems were not developed with audit in mind; rather,
our legacy systems were developed to support DoD operations. As
a result, we are focusing on retiring legacy systems and
ensuring our target environment is auditable and compliant with
Federal system requirements.
As the Department invests in new business systems, we will
be able to obtain independent auditor feedback on the system's
compliance so we can better hold vendors accountable for their
solutions. As the auditors report findings and share
recommendations based on industry best practice, DoD will use
that feedback to help ensure any system issues are identified
early on and corrected before/as systems are fully deployed--
helping minimize rework and avoiding wasteful spending.
Van Hollen
1. In the president's budget, proposed spending on overseas
contingency operations (OCO) for defense falls from $20 billion
in fiscal year to $10 billion from fiscal year to fiscal year
8. You Stated during the hearing that the Department of Defense
budget looks out until fiscal year 3, and the OCO funding
levels that begin in fiscal year come from the Office of
Management and Budget (OMB). You Stated that OMB based its
estimate on the direction it anticipated for OCO spending over
the long term.
Given the sharp decline in proposed OCO funding after
fiscal year 3, please explain how $10 billion was chosen as a
placeholder starting in fiscal year 4, instead of a larger
number more consistent with President Trump's national defense
strategy. What input, if any, did the Department of Defense
provide 0MB to substantiate this $10 billion per year estimate?
You are correct that the Department's Future Years Defense
Program (FYDP) only looks out until 2023. Numbers beyond that
point are provided by OMB.
While the OCO placeholder amounts do not reflect specific
decisions about OCO requirements in any particular year, the
estimate that future OCO costs will decline is consistent with
the change in emphasis in the National Defense Strategy.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
THE ECONOMIC REPORT OF THE PRESIDENT
----------
WEDNESDAY, MARCH 21, 2018
U.S. Senate,
Committee on the Budget,
Washington, DC.
The Committee met, pursuant to notice, at 10:31 a.m., in
room SD-608, Dirksen Senate Office Building, Hon. Michael B.
Enzi, Chairman of the Committee, presiding.
Present: Senators Enzi, Grassley, Toomey, Johnson, Gardner,
Kennedy, Boozman, Cotton, Whitehouse, Merkley, Kaine, Van
Hollen, and Harris.
Staff present: Elizabeth McDonnell, Republican Staff
Director; and Joshua Smith, Minority Budget Policy Director.
OPENING STATEMENT OF CHAIRMAN ENZI
Chairman Enzi. I will go ahead and call to order this
meeting of the Budget Committee for the purpose of hearing an
economic report of the President. Good morning and welcome to
the hearing.
I want to thank Chairman Hassett for agreeing to testify
today on the Council of Economic Advisers' contribution to the
President's report. The Council's analysis of the
administration's domestic and international economic policy
priorities is particularly relevant as Congress grapples with
the challenging fiscal outlook.
To keep our economy moving in the right direction, we need
to continue working together on a pro-growth policy. These
efforts are helping American workers, small businesses, and
families. Most notably the Tax Cuts and Jobs Act we passed last
year is producing higher wages, more dollars in workers'
paychecks, and increased domestic investment, not to mention a
new sense of community.
Returning investment to America is key to continued
economic growth. Not only does it create jobs in the short
term, but capital formation also raises productivity and
exponentially increases the amount workers make. A more
productive work force raises the standard of living for all
Americans. The results of such growth are better wages,
improved profits, and more reinvestment in America's businesses
and workers. It invigorates the communities.
In the first few months of 2018, more than 300 companies
have announced salary increases, bonuses, and/or higher 401(k)
matching, benefiting more than 4.2 million workers. The Council
already counted $190 billion in planned corporate investment
attributable to the Tax Cuts and Jobs Act. Clearly, this
investment will continue to pay dividends for all Americans.
While the tax cuts have jump-started our economic growth,
we must continue to make other policy changes that can
contribute to the Nation's expansion. We know that regulation
and structural unemployment reduce productivity. For this
reason, Congress has sought to roll back many of the
ineffective regulations issued by the previous administration,
and President Trump has set a goal of eliminating two
regulations for every new one created. So far it has been 22:1.
Last year's deregulatory actions are estimated to produce
$8 billion of savings. That is $8 billion companies can
reinvest in America's businesses and workforce. It is an $8
billion boost to productivity carried through our economy, and
that is just the beginning. This coming year's effort will be
even more effective. As we move forward, it is Congress'
responsibility to ensure that we continue to support and
advance effective policies to accelerate growth. Important pro-
growth legislative proposals include infrastructure investment,
health care innovations, and enhanced cybersecurity.
But as we consider new legislation, we cannot forget our
Government's continued overspending problem and the crowding-
out effect of our massive Federal debt. Accordingly, Government
investment in pro-growth policies must produce substantial
increases in output.
I appreciate your thorough analysis, Chairman Hassett, on
how each of these policies is projected to affect the economy.
That will be very useful as Congress debates the merits of such
proposals and their effects on our balance sheet.
Congress also must ensure that none of the policies put
forward slows or reverses the Nation's economic expansion. For
example, a number of members, myself included, have serious
concerns about punitive tariffs, especially given the threat of
foreign retaliation. We also believe efforts to renegotiate
large trade deals must be done with our economy's best interest
in mind and with congressional consultation.
I look forward to discussing the positive effects of free
and fair trade and how we can create economic growth through
trade. My home State of Wyoming exports across the natural
resources and agricultural sectors, and access to foreign
markets is vital to our economy.
Here in Congress, the Budget Committee is working to set a
pro-growth legislative path. Large policy proposals are often
integrated into our work in order to accommodate implementation
throughout the year. We will begin this discussion with how
these policies affect the balance sheet, which is highly
dependent on how they support or hinder economic growth.
I look forward today to a discussion on how we can promote
the economy, how we can create jobs, and how we can tackle our
national debt. Above all, we must continue to invest in our
economy and workers in order to address our fiscal issues.
Chairman Hassett, I look forward to hearing your
perspectives on proposals to strengthen the Nation's economy.
Senator Sanders has sent word that he will not be here.
Senator Van Hollen, would you like to make an opening
statement?
OPENING STATEMENT OF SENATOR VAN HOLLEN
Senator Van Hollen. Thank you, Chairman Enzi. I will just
make a short statement. I appreciate the opportunity. And, Mr.
Hassett, good to see you. Congratulations on your appointment
to this position.
I just want to start with one of the comments the Chairman
made regarding the deficit and debt. We passed a tax proposal
that is estimated to increase our national debt well over $1
trillion, and that is taking the growth numbers into account.
Many of us believe it will be far north of that. And the
question is: What do we get for it? And I heard the Chairman
talk about some of the changes we have seen.
As I look at all the graphs in your report, Mr. Chairman,
we are pretty much on a straight-line trajectory from the
economic growth we saw during the final 4 years of the Obama
Administration, pretty much on a straight-line trajectory when
it comes to job growth. In fact, job growth has actually
declined a little bit, as your chart shows, as we get closer to
what we believe is full employment. But the point is that this
administration inherited an economy that was growing. They
inherited an economy where jobs were growing. And as I look at
the early reviews on the tax cut, what I see primarily is a
huge benefit going to big corporations and their stockholders,
over $220 billion in stock buybacks just this year, 2018; 35
percent of that stock is owned by foreign stockholders, so a
lot of that money is going directly into the pockets of foreign
stockholders.
In my State of Maryland, over 350,000 families will
actually see a tax increase, including mostly middle-class
families, because of the elimination of the ability to take the
SALT deduction, the cap on the SALT deduction.
So as I look out at the landscape right now, it appears
that, you know, stockholders are doing very well; workers in
some instances are getting primarily one-time bonuses. But the
amount of cash that is flowing to stockholders is far higher
than the investment we are seeing in both workers and new
investment, which certainly does not meet with the predictions
that we were told about.
So I am looking forward to the conversation, but if you
look at the budget that came out of this Committee, it included
not only the plan for the tax cuts, but it also included very
deep cuts to Medicaid, over $1 trillion over 10 years, and a
$473 billion cut to Medicare. So I have got to figure a lot of
families who are out there looking at the overall picture are
recognizing that at the end of the day they are going to get
the short end of the stick, unless they are a big corporation.
But I look forward to the conversation.
Thank you, Mr. Chairman, for the opportunity to say a few
words.
Chairman Enzi. Thank you, Senator Van Hollen. I think you
did an outstanding job of filling in for Senator Sanders. I
will now introduce the witness.
Our witness this morning is Kevin Hassett, the Chairman of
the Council of Economic Advisers. Chairman Hassett has held his
office since September 2017 and is charged with providing
objective economic advice to the President during the formation
of the administration's domestic and international policy.
Prior to his time as the Chairman of the CEA, he was an
economist and scholar at the American Enterprise Institute. Dr.
Hassett holds a Ph.D. in economics from the University of
Pennsylvania.
For the information of colleagues, Chairman Hassett will
take up to 7 minutes for his opening statement, followed by
questions.
We look forward to receiving your testimony. Please begin.
STATEMENT OF THE HONORABLE KEVIN HASSETT, CHAIRMAN COUNCIL OF
ECONOMIC ADVISERS
Mr. Hassett. Thank you very much, Chairman Enzi and other
members of the Committee, including Senator Van Hollen, for
your opening statement. Thank you for coming out on a snowy
day. I know that there is a lot of snow expertise on this
Committee. I guess the one dark side is that this might forever
be known as the ``hat hair hearing.'' But having hat hair is
probably better than not having hair at all. I guess I will
just have to live with it.
I took over the job as Chairman of the CEA with a really
somber responsibility going back to 1946 of building an
organization in the White House that provides objective advice
to the President. The CEA is about facts and about analysis and
providing people with the balance of the read of the literature
when we are exploring economic policy issues.
We are also charged in the CEA with the Economic Report of
the President--looking at things that maybe people did not
appreciate were as big a problem as they have become in the
modern economy--and I would like to focus on a few of those in
my spoken statement. My written statement, of course, is in the
record.
I want to start with cybersecurity, the costly issue that
has become more and more crucial to address. In the Economic
Report, we find that in 2016 malicious actors inflicted over
$100 billion worth of damage to the U.S. economy. This $100
billion estimate that we came up with is pretty conservative,
actually, to my mind. Cybersecurity issues have far-reaching
effects. Their seriousness merits a great deal of attention
from policymakers.
The administration is focused on ways to combat cyber crime
and is encouraging public-private cooperation to reduce the
risks and costs of such attacks. But I think there is also--we
identify in the chapter a market failure that leads private
firms, which tend to face risks correlated with one another, to
invest less in cybersecurity than would be economically
optimal.
Turning to the health chapter, we focus on the cost of
health care, the economic implication of persistent public
health problems, and drug pricing. We emphasize that several
factors affect health and health care costs, such as smoking,
obesity, and opioid abuse, which have contributed to the
unusual decline of American life expectancy for the second year
in a row. I will repeat that: a decline in life expectancy.
Competition and choice could improve health insurance as
well as lower American drug prices, without undermining
American pharmaceutical innovation. The Federal Government can
also pursue policies that lead to other countries paying their
fair share for innovations--for example, among OECD countries.
Americans pay more than 70 percent of patented
biopharmaceutical profits that fund drug innovation. Seventy
percent. The administration is focused on policies that would
improve health care outcomes that lower health care costs for
all Americans.
The report also examines the economic conditions of
something I know every member of this Committee cares
desperately about: the welfare of the middle class, analyzing
the recent history of policies that have helped and hurt them.
While the new tax law's wage effects can partially reverse the
stagnation of the middle class, we must pay close attention to
the policies that contributed to the stagnation. The inflation-
adjusted labor income of the typical household at the middle of
the income distribution fell below what it was at the start of
the 21st century. Compounded by past tax and transfer policies,
the median American inflation-adjusted total household income
from working took 9 years--9 years--to recover to its pre--
recession level after the Great Recession. These policies
decreased the incentive to work and worsened labor force
participation and wage stagnation. We list a number of them in
the Economic Report, including high corporate taxes,
undermining the very middle-class households that they were
intended to help. Reduced work disincentives and rising wages
are bringing people off the sidelines and improving labor force
participation now.
I believe that the cyber, health, and middle-class chapters
of the 2018 report contain some of the most eye-opening new
insights on contemporary economic issues, and I will summarize
the rest of the chapters here. Then I look forward to taking
your questions.
The tax chapter discusses how the administration has
delivered a policy that increases growth now and improves the
well-being of Americans in the future. Developed countries have
competed to attract business by lowering corporate taxes for
years, while ours stayed at a standstill. The Tax Act lowered
the corporate tax rate and reformed the Tax Code, improving
America's ability to attract businesses that create good jobs
for our workers. Our review of the literature and our own
modeling finds that the average household could get a $4,000
pay increase from the new law once the law's full effects get
absorbed by the macro economy. And already--we are keeping
constant, steady track of this--over 4.9 million workers have
received wages, bonuses, or improved benefits as of last week
because of the tax bill. Companies have already announced
investments of over $200 billion, investments like the
increased growth in wages.
We also modeled the effects of the individual side of the
Tax Code, finding that it could increase GDP by 1.3 to 1.6
percent after 10 years. If made permanent, this will add
another $4.7 trillion to $7.4 trillion to the economy over the
next decade.
I also want to mention share buybacks. Moneys previously
offshore are being sent back to the U.S., so a one-time
adjustment of the stock of trillions of dollars of old profits
that were locked in foreign subsidiaries. No economist would
make the case that the American economy would be better off if
these moneys were still locked offshore. Share buybacks today
are not mutually exclusive to long-run wage gains that will
accompany the capital formation that will come from the lower
marginal tax rates.
The deregulation chapter documents the ways in which
regulations stifle productivity and prevent the creation of new
businesses. The year 2009 marked the first time that more firms
died than were born in the United States since the Census
Bureau began compiling data in 1978, and recent research shows
that fewer younger Americans are becoming entrepreneurs than
ever before. It is likely that regulatory zeal slowed both
dynamism and overall growth.
To put our overregulation into perspective, the CEA finds
that if the U.S. regulatory environment were the same for OECD
product market regulation as in Germany, we would increase
annual growth by 0.1 percent per year. And so we are not
talking about having a terrible environment or anything. We are
just talking about moving toward modern standards of
regulation. If we deregulate further to the level of the
Netherlands--that does not seem like a really terrible idea--we
could get growth at twice that rate, 0.2 percent per year, and
this is based on peer-reviewed literature. Liberating the
economy from the burdens of regulation can unleash economic
activity and create jobs.
The infrastructure chapter highlights the inefficiencies of
both our existing transportation infrastructure and the red
tape that prevents crucial projects from getting started.
Improving infrastructure should have wide bipartisan support.
Polls find it has the support of 84 percent of Americans, with
76 percent believing it should be funded as the President has
suggested: a combination of public funds, bonds, and public-
private partnerships. In 2014, total congestion costs peaked at
$160 billion, wasting 6.9 billion hours in delays that could
have been spent doing jobs.
Finally, the trade chapter discusses the ways in which the
administration is seeking to improve America's position. Trade
has been beneficial but left some American communities worse
off.
I should add we have one more chapter, and I am out of
time, and so I am skipping over some of my bullet points.
But the outlook chapter examines the year in review and
offers our forecast for the decade ahead. 2017 growth and real
gross domestic product exceeded expectations and increased to
2.5 percent, up from 1.8 percent during the four quarters of
2016, and so it is not exactly a flat line.
The unemployment rate has fallen to 4.1 percent, the lowest
since 2000. Our baseline forecast is that we will have 2.2
percent growth between now and 2028, but that that will
increase to an average of about 3 percent if all of the
administration policies are adopted.
With that, I thank you so much for your attention and for
inviting me. It is great to be back before this Committee, and
thank you again for inviting me. I am looking forward to your
questions.
[The prepared statement of Mr. Hassett follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Enzi. Thank you for your testimony and for being
here. We will now turn to questions. I think everybody knows
the way that we do those, except that I am going to make a
deviation this morning and call on my fellow Chairman Senator
Johnson to see if he has any questions that he wants to ask.
Senator Johnson. Well, thank you, Mr. Chairman.
Chairman Hassett, welcome. I appreciate you braving the
snow and putting a hat on.
I want to talk about overregulation. From my standpoint it
is the most significant thing this administration has done. We
stopped adding to the regulatory burden.
Now, in our Committee we have heard from experts and there
are a number of studies that put the overall regulatory burden
of Federal regulations at close to $2 trillion per year. Where
do you put that burden? Again, by the way, if you divide that
by the number of households, it is about $15,000 per year per
household. I call it the ``silent killer.'' Most people do not
really understand it, and so you are not getting a whole lot of
credit for it. But what does the CEA put the regulatory burden
at?
Mr. Hassett. You know, I would----
Senator Johnson. Is your microphone----
Mr. Hassett. Stupid me. In order to give you a precise
number, I would have to get back to you because we have
reviewed the literature, and there are some estimates as high
as $2 trillion. There are some that are about half that. And it
is one of the frustrations that we go into in the regulation
chapter, that regulation is really, really hard to measure
because, for example, if we withdraw a regulation, the number
of pages in the Federal Register can go up because we have to
write the regulations withdrawing the regulations and so on.
And so I think that there is a great deal of uncertainty of
the cost of regulation, but there is no uncertainty, I think,
about the fact that business optimism, especially small
business optimism, has skyrocketed since the administration has
put new regulations on hold. And that is something we have
thought hard about. We think that new regulations have an
unusually high cost, a disproportionate cost, because you know
as a businessman that if we give you a new reg, you have got to
hire lawyers and engineers to figure out what to do with it.
The existing reg you have kind of figured out before. And so I
think the fact that we have stopped the new regs is one reason
why sentiment and growth picked up even before the tax bill.
Senator Johnson. I will second that. You know, prior to
this administration, it is about all I heard from the business
community, is the new regulations, you know, specific ones or
just generalized. And now they can actually concentrate on
growing their business as opposed to looking over their
shoulder, wondering which new regulation----you know, how much
it is going to cost for a compliance officer or how something
could put them out of business. So I think that is the most
significant thing, as important as making American businesses
more competitive tax-wise was as well.
I do want to go back, though, because I think rather than
really taking a look at specific numbers and data, which I
like, being an accountant, can you just give a little economic
lesson? What do shareholders do with dividends? What do they do
when their shares are purchased back by--I mean, what do they
do with that money? Do they stuff it in a mattress?
Mr. Hassett. Well, there is not a lot of evidence--it is
actually one of the first academic papers I ever wrote--that
dividends increase consumption. So what it means is that when
someone gets a dividend, then they tend to reinvest it in
something else. And so a way to think about the economic
effects of unlocking all of that capital that was locked
offshore is that firms can send it home, and they are investing
it. You know, we have seen that already, announcements north of
a couple hundred billion, they are giving pay raises to people,
but they are also doing share buybacks. Those share buybacks
will likely be reinvested in other equities. It is a way to
move capital maybe from older firms that are less dynamic
toward newer firms that are more.
Senator Johnson. So it more efficiently reallocates the
capital. Rather than having it locked up in these C
corporations, now it is actually being reallocated as millions
of investors are literally making those reallocation decisions.
Mr. Hassett. That is correct.
Senator Johnson. What about foreign investors? I have
always viewed--you know, rather than foreigners buying America,
I viewed that as, you know, foreign investors investing in
America. Isn't that a good thing?
Mr. Hassett. Yes, and thank you for that. And I think the
way to think about it is that if the U.S. firm is repurchasing
a share, which is a way that they do special dividends
basically, that if they are repurchasing a share, then they are
returning cash to their shareholders, who then reinvest. If the
shareholder is a foreign shareholder who owns U.S. equities, he
has presumably done a portfolio analysis that suggests some
share of his portfolio should be invested in the U.S. And the
share buyback probably does not change that, and so I think it
is highly likely that share buybacks will be reinvested in U.S.
equities.
Senator Johnson. And, by the way, when we do run a trade
deficit, isn't the whole capital balance somewhat made up by
the fact that foreigners then take and invest in America?
Mr. Hassett. Sure, the current account and the capital
account balance, and one of the things that we talk about in
the Economic Report is that we had set up a system where firms
moved jobs offshore, moved wage increases offshore by putting
their production over there and selling it back in here to
avoid our really high tax rate. And so we estimate that that
increased the trade deficit by about 50 percent because of the
transfer pricing, inflated imports----
Senator Johnson. So one final very quick question. I just
want you to confirm numbers, because the more I look at this--I
know Wisconsin actually has a trade surplus with both Mexico
and Canada. But when I look at overall total NAFTA numbers, in
1985, prior to NAFTA, we were exporting $136 billion to Canada
and Mexico with a deficit of about $61 billion. Now we are
exporting $476 billion with a $68 billion trade deficit. So, in
other words, we increased exports, I would say because of
NAFTA, or certainly after NAFTA was passed, by $340 billion,
and our trade deficit only increased by seven. Are those
largely accurate figures?
Mr. Hassett. Yes, those sound like the correct numbers to
me.
Senator Johnson. It sounds like a pretty good deal to me.
Mr. Chairman, thank you.
Chairman Enzi. Thank you.
Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. And again, Mr.
Chairman, thank you for your testimony today.
Back in October of last year in remarks at the Heritage
Foundation, President Trump said, ``If we pass this tax cut
bill, the typical American household is going to get a $4,000
pay raise.'' Now, I have seen a sprinkling of one--time
bonuses. I have seen some pay increases. Walmart went from, I
think, $10 to $11. But your own report on page 50, in the box,
says that only 43 employers in the country have, in fact,
raised their wages at all.
So as we sit here today, can you name for me one U.S.
company that has raised the wage of their workers by $4,000?
Because we all know there is a big difference between getting a
one-time bonus and something in your base pay. Four thousand
dollars this year would be $40,000 over 10 years. So can you
give me one U.S. company or corporation that has raised their
worker pay by $4,000?
Mr. Hassett. I would have to go through our list and get
back to you to see if there is one that is that high, but I
would doubt it. If you look at page 49, there is a chart that
shows the likely wage increases that come from corporate tax
reductions, and these estimates are often based on cross-
country variation, which means that it is a long-run estimate,
maybe 3 to 5 years or something. And the way the wage increase
happens is that the firms build factories here in the U.S.
instead of over there; that increases the demand for labor
here; and then----
Senator Van Hollen. I appreciate that, Mr. Chairman, but I
am looking at the chart, and I am looking at President Trump's
statement. I did not see a little asterisk there saying it is
going to be down the road. So this is going to be after the
next Presidential election, is that right? That is your
prediction? We are going to start seeing these $4,000----
Mr. Hassett. We are seeing wage increases now, but the
entire effect does not happen in the first----
Senator Van Hollen. But I remember a lot of our colleagues,
I mean, I can roll back the video on the floor of the Senate. I
mean, this was a huge talking point, $4,000 wage increases. And
today we cannot mention--identify one company that has actually
done that. And the reality is your own report says only 43
employers around the country have actually given wage
increases, which is far short of what was advertised.
Let us talk about stock buybacks for a second, because back
in December 19th 2017, the incoming Director of the National
Economic Council, Larry Kudlow, tweeted out--this is just as
the tax plan was passed--``Companies will invest in equipment,
technology, plants, et cetera. Stock buybacks are not smart.''
That is what he tweeted out. Do you agree with that assessment?
Mr. Hassett. No, I do not. I do not. I think that firms--in
fact, I have academic papers I can send you about this where we
try to look at where buybacks come from. Buybacks tend to
happen with firms that are older firms and that already have
the plant that they want, they do not have an expanding market,
and so they are returning the capital----
Senator Van Hollen. So it is interesting. Larry Kudlow
converted, too, after that December tweet. On March 16, 2018,
he tweeted out, ``Stock buybacks are proof of the tax reform's
success.'' So in December, he said they were stupid. In March,
these were great proof of the plan's success.
I want to ask you about something in your report. It goes
to this whole question about stock buybacks and whether or not
they are really benefiting the economy. And what you say here
in the report on page 398 is, ``Although it may be admirable
for individual firms to thus return funds to their
shareholders, the rising share of paybacks to shareholders
suggests that investable funds are not being adequately
recycled to young and dynamic firms.''
Is this a rising concern of yours, the fact that we do
not--we see a lot of money parked there that is actually not
being recycled in these younger firms?
Mr. Hassett. The chart on that page refers to old data, and
I think that the tax bill has only been there for a few months.
And so the hope is that--so in the past, people did not really
want to locate their new factories here because we had the
highest tax rate in the developed world. Now they do. The
people who have lots of cash offshore can fund the new
factories with that, but many of them do not want to do that
because they already have their full capacity, in which case
they will return the capital to investors, and they will go to
innovative----
Senator Van Hollen. Mr. Chairman, as I look at that data--I
mean, I am looking at it. You are right. Actually, in 2017
stock buybacks went down, and in the first 3 months of this
year they have gone through the roof. So, in fact, you have a
lot more stock buybacks now. We can debate this for a long
time, but as of today--as of today, all the data you have got--
who is benefiting more from this: stockholders or workers?
Mr. Hassett. You know, I think that the buybacks have gone
up because the money was locked offshore. If you think about
the economic consequences of locking the money offshore, then
that hurts workers and it hurts the capital markets of the U.S.
both.
Senator Van Hollen. But in terms of the dollar value of the
tax cut, how much has gone to workers versus how much has gone
to stock buybacks?
Mr. Hassett. The worker effect comes from capital
formation, which happens over time. The buybacks are going to
be front-loaded.
Senator Van Hollen. I would just point out again, when
President Trump and lots of other folks talked about it, they
did not have a big asterisk next to the $4,000 pay raise saying
it is going to be after the next election.
Thank you.
Mr. Hassett. Could I just respond to the asterisk point,
Mr. Chairman? Only for 1 second. I think that nobody asserted
that the full effect of the tax bill would be there by March. I
do not think anyone----
Senator Van Hollen. If I was a typical American household,
I would have read the President's remarks as saying I am going
to get a $4,000 pay increase.
Chairman Enzi. To answer the Senator's question, one
company, Walmart, has given a $2-an-hour pay increase. If you
are working 40 hours a week for 50 weeks of the year, it comes
to $4,000 in increase.
Senator Van Hollen. Walmart is the example people are
using, but I go back, Mr. Chairman, to the statement in the
report, which says 43 employers. In the entire country, 43
employers have given a pay increase.
Chairman Enzi. In the first month, that is nice.
Mr. Hassett. It is now much higher.
Chairman Enzi. Senator Gardner.
Senator Van Hollen. Mr. Chairman----
Chairman Enzi. Senator Gardner.
Senator Van Hollen. Polling shows about 2 percent.
Chairman Enzi. Senator Gardner.
Senator Gardner. What I am surprised about this argument is
it is as if the Government is now run by a bunch of Eeyores who
are complaining about pay increases, complaining about minimum
wage increases, complaining about increases to pension funds,
complaining about deregulation that is resulting in new
investments coming back to the United States. It is as if
people believe tax cuts resulting in bonuses, minimum wage
increases, and pension benefits are nothing but a bunch of
crumbs. In fact, that has been used.
Mr. Hassett, Chairman Hassett, do you believe that a $1,000
bonus amounts to crumbs?
Mr. Hassett. No.
Senator Gardner. Do you believe that a pension increase, an
increase in people's pension benefits, does that amount to
crumbs?
Mr. Hassett. No.
Senator Gardner. Do you believe that minimum wage
increases, salary increases, and deregulation allowing billions
of dollars to come into this economy amount to crumbs?
Mr. Hassett. No.
Senator Gardner. And so what we hear is this
dissatisfaction with the American people making more money. We
have seen wage increases. We are going to see more. In fact,
there was an article in the Denver Post yesterday by the
Associated Press that talked about the fact that the tax cuts
are working to bring new investments, hundreds of millions of
dollars into States around the country and into Colorado,
resulting in more employment. In fact, we saw for the first
time in a very long time the unemployment rate actually
affected because more people are leaving--they are getting into
the work force. The labor participation rate is actually
increasing. Is that correct?
Mr. Hassett. Yes, it----
Senator Gardner. Is that correct? Because people are ticked
off that they got a bonus because it is just a bunch of crumbs?
Mr. Hassett. Well, the labor force participation rate is
going up, that is correct.
Senator Gardner. Because more people are working, right?
And why are more people working?
Mr. Hassett. Well, to give you data on what you were just
talking about--we keep, again, careful track of this----85
firms have offered a minimum wage increase; 46 companies have
raised another wage, which would be like a permanent increase--
--
Senator Gardner. But I guarantee----
Mr. Hassett. Three hundred and thirty have given bonuses,
and 52 have increased their 401(k) contributions. That is a lot
of firms.
Senator Gardner. You know, and, again, I had a conversation
yesterday with a group of lumber dealers in Colorado, and
Lemoine Dowd, a great family owned business in Boulder,
Colorado, they have given their employees dollars back as a
result of the tax cuts. That is probably not included in a
report like this, is it?
Mr. Hassett. I would have to ask my staff.
Senator Gardner. Yes, and so, I mean, there are businesses
around----
Mr. Hassett. We are scraping the news for----
Senator Gardner. But instead what we see right now,
Chairman Hassett--let me ask you this, because what we have
seen the Democrats unveil is legislation or at least a
legislative proposal that would increase taxes by 19 percent.
They want to increase taxes by 19 percent, corporate rate to 25
percent. What would that do to the economy if this massive tax
increase were to be passed?
Mr. Hassett. Well, it would probably be better than what we
had with the 35 percent rate, but it would at the margin chase
capital away from the U.S., which would reduce the demand for
workers and reduce wages. It is simple Econ. 101. If you want--
--
Senator Gardner. So the tax increase that we have seen from
our colleagues on the other side of the aisle would result in
fewer workers, lower wages?
Mr. Hassett. That is correct.
Senator Gardner. And do you----
Mr. Hassett. And fewer factories here in the U.S. Senator
Gardner. Do you think that they would see the new tax dollars
they are paying to the Federal Government, would that be crumbs
to people around the country? Would they see that as economic
pain that they are suffering as a result of a significant tax
increase?
Mr. Hassett. It would not be crumbs.
Senator Gardner. Thank you. Thank you, Mr. Chairman.
I understand that people are bitter that we cut taxes and
that people are upset that we actually reduced the burden on
the American people. And I understand that some people believe
it is in their best interest to increase taxes. I just do not
understand an economic policy that would actually take away
bonuses, take away wage hikes, and slow American growth as a
result. It just makes no sense to me.
Would we be less competitive if we repealed and reversed
the tax cuts that passed?
Mr. Hassett. Yes, we would.
Senator Gardner. And would we see capital no longer
returning back to the United States as a result of that?
Mr. Hassett. Yes, it would----
Senator Gardner. Do workers--you know, workers around this
country, do they benefit from pension plans that may hold
stock?
Mr. Hassett. Yes.
Senator Gardner. And do those pension plans then benefit
from dollars that go to them as a result?
Mr. Hassett. They do, and from the increase in market value
of firms because the corporate tax has been reduced.
Senator Gardner. And so we are seeing benefits to the
American people, to American workers, through rising wages, and
I do not understand why people can be bitter about that.
You note in your testimony that the most significant
component of the bill was lowering our business taxes to make
them competitive again. The Council has estimated that lowering
the corporate tax rate alone would boost average household
salary, as you have talked about. We are already starting to
see these benefits in higher wages, lower utility bills. That
has not been talked about, people with fixed incomes seeing
lower utility bills and more jobs. We have heard opponents talk
about this as crumbs. You have clearly said that it is not a
crumb. So, obviously, the American people continue to benefit
from this.
You talked about regulations and the decrease in
regulations. What would a 0.2 percent--like you mentioned the
Netherlands, a 0.2 percent in GDP mean if we were to reduce--
continue our regulatory path?
Mr. Hassett. Well, it would be 2 percent over 10 years,
which would give you 2 percent of $28 trillion, which is the
level of GDP in----
Senator Gardner. And so could you just--what would that----
Mr. Hassett. It is a lot of money.
Senator Gardner [continuing]. Mean this year in jobs? What
would that mean?
Mr. Hassett. Yes, so it would be an enormous amount. I
guess I would have to have my calculator out to give you an
exact number, but, $2.8 trillion divided by----
Senator Gardner. Thank you, Mr. Chairman. Again, I do think
we need to be concerned about this tax increase proposal, as
you mentioned, because of the impact it would have on wage cuts
and certainly more people paying taxes.
Mr. Hassett. Thank you, Senator.
Chairman Enzi. Thank you.
Senator Merkley.
Senator Merkley. Thank you, Mr. Chairman.
You have talked a lot about how wonderful these buybacks
are, and so I am curious. What percent of the stock in America
is owned by people, working-class families, who earn less than
$80,000 a year?
Mr. Hassett. I would have to get back to you with the exact
number, but it is a small percent.
Senator Merkley. Small, like 3 percent?
Mr. Hassett. It could be, yes. I would have to----
Senator Merkley. In that vicinity? So if there are $227
billion in buybacks and it is 3 percent, then how much is that
that is going to working-class America?
Mr. Hassett. The direct effect of the buyback is small for
working----
Senator Merkley. Yes, what is 3 percent of 227?
Mr. Hassett. The indirect effect is larger.
Senator Merkley. Can you do that basic math, 3 percent of
227?
Mr. Hassett. Yes.
Senator Merkley. How much is that?
Mr. Hassett. It is a small number.
Senator Merkley. Small, a little over 6 billion, I think.
Mr. Hassett. Six billion, seven.
Senator Merkley. You can do that in your head probably.
Mr. Hassett. Yes.
Senator Merkley. Okay So a little bit over $6 billion goes
to working America from those buybacks, and if there is $227
billion in buybacks, that means--can you subtract 6 billion
from 227? How much is left?
Mr. Hassett. Okay so it is 221.
Senator Merkley. Okay so $221 billion goes to the richest
Americans, and $6 billion goes to workers. Now, wouldn't it
make more sense for working America to reverse those numbers
and have $221 billion go to working America and only have $6
billion go to the already richest Americans?
Mr. Hassett. So as the cost of capital is now lower,
capital formation will increase. It is something that we
already see in the data, that higher capital formation will
increase workers' wages. There is a big literature that looks--
--
Senator Merkley. Okay wait, wait. We are talking stock
buybacks here. We will get to wages in a moment. But I think--
--
Mr. Hassett. But it seems like you're charactering----
Senator Merkley. Please do not interrupt me.
Mr. Hassett. Okay, sorry.
Senator Merkley. I think most Americans would feel that if
you have a plan designed for working America, the vast bulk of
the benefits would go to working America, not to the richest
Americans. Three percent is a very small fraction.
Now, this tax plan borrowed $1.5 trillion from our
children, and then when the benefits flow out through these
buybacks, only 3 percent goes to working America and $221
billion, as you say, goes to the richest Americans. And so that
seems like a big price tag to put on our children to the
already richest Americans, don't you think?
Mr. Hassett. I think that it is better for America that
that capital came home.
Senator Merkley. Okay. Well, let us proceed to take a look
at the bonuses that have been paid, because my colleagues like
to talk about how much in bonuses is being paid. Well, let us
take a look at it. I have got the chart right behind me here.
Wow, Okay $227 billion in corporate stock buybacks, which goes,
as you say, more than $200 billion, maybe $220 billion of it
goes to the richest Americans. Let us see down here. What do we
get for workers? Five billion dollars.
Do you think working America would be better off if working
America got this chart, this column of $227 billion and the
richest already--they do not need more money, they get this
little fraction over here? Wouldn't America be better off?
Mr. Hassett. We had trillions of dollars locked offshore.
Those trillions of dollars are now coming----
Senator Merkley. I am just saying, wouldn't the design----
Mr. Hassett [continuing]. Home, and they are----
Senator Merkley. Wouldn't working America be better off if
you design a tax decrease that actually helped working
Americans?
Mr. Hassett. Well, on the individual side, you know, that
did happen. But on the corporate side----
Senator Merkley. Okay So we clearly see that very little of
the buyback wealth is going to working America. We are seeing
very little of the bonuses going back to working America. And
we have seen that very little wage increases occurred, and you
have just indicated that you cannot identify a single company
in the country that reached that $4,000 per worker increase
that you were bragging about just a few months ago, and all my
colleagues were echoing on the floor of the Senate. You cannot
find one company in America that has done that. So that really
is a significant problem when you design a plan for the richest
Americans, try to sell it for workers, but workers get the
short end on the buybacks; they get the short end on the wage
increases; they get the short end on the bonuses. And it is all
borrowed from our children. Isn't that kind of a shameful thing
to do to the next generation of Americans?
Mr. Hassett. Senator, I think that you have misstated what
I said, and I certainly was not bragging. I was providing
analysis. But, you know, I have got----
Senator Merkley. So it is just your analysis was that far
off.
Mr. Hassett. My analysis was not off at all, Senator. My
analysis----
Senator Merkley. $4,000----
Mr. Hassett. Could I please finish my sentence?
Senator Merkley. Please do.
Mr. Hassett. My analysis was that the $4,000 would come
over 3 to 5 years. I said that on television a zillion times.
That is what our analysis in the Economic Report says. No one
said that the full phased-in capital formation would happen by
March of this year.
Senator Merkley. Well, actually, a lot of people went to
the floor, my colleagues went to the floor and said we would
see this right away in January. In January we would see these
vast wage increases. And we have not seen it, and we are well
into the year.
But let us turn to the infrastructure plan. So the
President has put forward a budget that says we are going to
reduce infrastructure spending by $240 billion, and then we are
going to have a $200 billion infrastructure plan.
Now, if I take away 240 and I put 200 back in, is that a
plus or minus overall in terms of investment in infrastructure?
Mr. Hassett. The President's infrastructure plan is to
accelerate permit approval and to make it easier for private
capital to come in and invest in infrastructure, something
private capital----
Senator Merkley. But you acknowledge that the budget has a
decrease of $240 billion in infrastructure?
Mr. Hassett. We expect that overall infrastructure spending
would skyrocket----
Senator Merkley. No, but I am just asking about the basic
budget.
Mr. Hassett. Within the budget, you are correct.
Senator Merkley. Okay Thank you. I am correct. It is a
minus. That is not infrastructure plan. Thank you very much.
Chairman Enzi. The Senator's time has expired.
Senator Toomey.
Senator Toomey. Thank you, Mr. Chairman. Where to begin?
For the record, I may be guilty of having been the Senator
who spent more time on the Senate floor advocating this tax
reform than anyone else. I did not measure it. It may not be
true, but I would be up there. I can assure all of my
colleagues that I never once said nor do I recall ever once
hearing any of my colleagues say that the result of our tax
reform would be $4,000 pay raises for Americans by March of
2018.
Now, of course, I was wrong. In the case of Walmart, that
exact thing did happen, in fact. But I did not anticipate it,
did not project it. And part of the reason why is the way I
view the mechanism that takes tax policy and over time results
in higher wages. So I wonder if we could explore that a little
bit, Chairman Hassett. Thanks for being with us today. But one
of the mechanisms is a very straightforward mechanism that we
saw that did kick in early, which is just the additional free
cash-flow of a lot of companies that resulted from a lower tax
rate was something that they decided made sense to share with
their workers, and so we saw this wave of bonuses and pay
raises and pension contributions.
But it seems to me there is a more profound dynamic that I
think we have encouraged, and that is, by lowering the cost of
capital, which we have done in a variety of ways through this
tax reform, especially fully expensing all capital
expenditures, that is going to lead to not just increasing
demand for workers to deploy that capital, to use that capital,
but it is also going to make workers more productive, which is
a necessary precondition for higher wages. But you are the
Chairman and you are the expert. Could you tell us a little bit
about how you think about the mechanism that takes us from the
tax reform that we passed to higher wages for workers over
time? Why does that happen?
Mr. Hassett. So, you know, it is very important to think
about where wages can come from sustainably. One is increased
productivity of workers from higher human capital. We could
sure do a better job at training people and retraining people
and get that human capital component up. But the second is that
you give workers more physical capital to work with. And
capital deepening's contribution to productivity growth and
wage growth in the last few years actually turned negative for
the first time in U.S. history, and it turned negative for the
simple reason that we were, with our high tax rate, chasing the
capital offshore. And so now that the capital is coming back,
if you think about it, the share buyback data are evidence that
the capital is coming back. It is not just sitting in the
subsidiary in Ireland anymore, it is going to come back, and it
is going to feed either capital formation in the firms that had
the money offshore or in the new entrepreneurial firms that
will issue equity and then invest in America----
Senator Toomey. Just to interrupt for one quick second, and
then I would like for you to continue. But if a company
repatriates money that had been trapped offshore and returns
that to shareholders, does that harm any worker? Is a worker
hurt by that process?
Mr. Hassett. No. No, it helps because what will happen is a
shareholder will reinvest it in some other firm, which will bid
up the demand for workers and increase wages. And that is why
there is such strong, striking data that we talk about in the
Economic Report linking cross-country variation in corporate
tax rates to worker wages, because capital formation is where
wages come from.
Senator Toomey. So the data actually shows a correlation
there?
Mr. Hassett. Sure.
Senator Toomey. Yes.
Mr. Hassett. And that is where the $4,000 number comes
from. It is a very modest read of the literature. I would say
the average estimate in the literature is much larger than
that. And $4,000, to put in perspective, Senator, in present
value, it is not like you get $4,000 in 1 year. It is that the
wages are going up, and they grow off the higher base.
Senator Toomey. Right.
Mr. Hassett. So the present value is something like $8
trillion of that $4,000.
Senator Toomey. My colleague from Oregon several times
alluded to this idea that this is all being borrowed from our
children. Now, as you know, the static score on the tax reform
was about $1.5 trillion. That is compared to a current law
baseline which is unrealistic in several respects. But compared
to a current policy, which is a more realistic baseline, the
static score was about $1 trillion. My understanding is if our
economy grows by three-or four--tenths of 1 percent faster than
it would have in the absence of the tax reform, Federal revenue
will actually be greater than the current policy baseline. Is
that your view, that we are----
Mr. Hassett. Yes.
Senator Toomey [continuing]. Actually going to have a
smaller deficit, not a larger deficit? Or I should say we will
have more revenue, not less revenue, as a result of the tax
reform?
Mr. Hassett. And also the debate is a little bit unfocused
to an economist in the sense that the corporate side, as you
know, once you net out all the international tax increases,
because we made it harder to transfer price profit offshore,
ended up netting $300 or $400 billion, so the $1 trillion
dynamic score is, you know, mostly coming from the individual
side. I think that the final score for the refundable child
credit, which I think many people on both sides in this
Committee supported, was $700 billion. So, again, are you
robbing from children to give them a $700 billion child credit?
It seems like it is an unfocused argument to me.
Senator Toomey. Thank you, Mr. Chairman.
Chairman Enzi. Thank you.
Senator Kaine.
Senator Kaine. Thank you, Mr. Chair, and I am going to
continue some of the discussion, Mr. Hassett, about taxes. I am
going to go to my good colleague from Colorado. Do not
associate me with those who you are saying are bitter about the
passage. Disappointed, yes. Many of us wanted to participate.
Many of us I think could have made it better. Instead of doing
tax reform like President Reagan did in 1986 where he took 10
months and got 97 votes in the Senate because it was
bipartisan, we did 41 days and there was really no opportunity
for those of us who have done a lot of tax reform to
participate and make it better.
We got a chance--Mr. Hassett, I do not know if you paid
attention to this. We did get a chance to make 1-minute
amendments on the reorganization of the American economy. And
my disappointment is largely this: that it was deep and
permanent tax cuts for corporations and modest and temporary
tax cuts for individuals. And I think that is a fundamental
mismatch.
I had a 1-minute amendment that I did make on the floor,
and I basically said this: Hey, guys, I got an idea. Let us
reduce the corporate tax rate not to 20 but to 25--or 21 at
that point, but to 25. But let us make all the individual tax
cuts permanent. And if you basically do that, drop the rate to
25, not 21, you can make all the individual tax cuts permanent,
and it will reduce the deficit effect by about $1 trillion. And
34 Democrats voted for it. We wanted to reduce the corporate
tax rate. We wanted to make the individual tax cuts permanent.
We wanted to reduce the deficit effect. But we could not get a
single Republican vote.
It is tax time now, so, you know, Virginians are doing
their tax returns, just like everybody. Now Virginians doing
their tax returns cannot completely deduct State and local
taxation, their tax payments. There is a limit to it.
Corporations can deduct the full amount. They are not limited
in the deductibility of State and local taxation. But now for
the first time, we have limited individuals, and corporations
can do it all. I just think it was a really poor balancing of
relief, that we could have given significant relief to American
companies versus relief that we should have given to the
American taxpayer.
I want to ask you this, Mr. Hassett: Did the CEA recommend
to the President the tariffs that were announced on steel and
aluminum?
Mr. Hassett. Senator, my job is to provide objective
advice. I can tell you that as CEA Chair I am a principal in
trade meetings in the Roosevelt Room, and, you know, those
meetings are confidential. But----
Senator Kaine. Let me----
Mr. Hassett. Could I just finish one sentence? Because I am
not dodging.
Senator Kaine. Yes, but I do not want to ask you what you
said----
Mr. Hassett. I provide economic analysis. Yes, I cannot
talk about what I said.
Senator Kaine. Right.
Mr. Hassett. But economic analysis of, for example, steel
or aluminum tariffs, there has been a pretty big literature
that shows that in the industries themselves, there is a little
bit of an increase in employment and output, and in the
downstream steel-consuming and aluminum--consuming industries,
there tends to be a little bit of a loss. Those two things in
the literature have been a small net negative. But the 232
announcement is a national security announcement, and I think
that the President was elected Commander in Chief. I am not a
national security expert----
Senator Kaine. So you basically say----
Mr. Hassett. He thinks it is important to have----
Senator Kaine. Let me ask you a question.
Mr. Hassett. Sure.
Senator Kaine. So you basically say the literature would
say net negative, but it might be justified by the
President's national security experts. Let me read----
Mr. Hassett. That is correct.
Senator Kaine [continuing]. You some quotes about this,
what the experts have said about the proposed tariffs. ``More
than five jobs will be lost for every one gained.'' That is the
Trade Partnership.
Council on Foreign Relations: ``Trump's steel tariffs could
kill up to 40,000 auto jobs, equal to nearly one-third of the
entire steel work force.''
Harbor Intelligence: ``Tariffs would boost production jobs
by about 1,900, but 23,000 to 90,000 U.S. manufacturing jobs
will be lost.''
MillerCoors: ``Like most brewers, we are selling an
increasing amount of our beers in aluminum cans, and this
action will cause aluminum prices to rise. It is likely to lead
to job losses across the beer industry.''
Our home builders: ``These tariffs will translate into
higher costs for consumers and U.S. businesses that use these
products, including home builders.''
Auto dealers: ``Auto sales have flattened in recent months,
and manufacturers are not prepared to absorb a sharp increase
in the cost to build cars and trucks in America. The burden of
these tariffs, as always, will be passed on to the American
consumer.''
Retailers: ``Make no mistake, this is a tax on American
families. When costs of raw materials like steel and aluminum
are artificially driven up, all Americans ultimately foot the
bill in the form of higher prices for everything from canned
goods to electronics and automobiles.''
The Business Roundtable: ``Business Roundtable strongly
disagrees with today's announcement because it will hurt the
U.S. economy and American companies.''
And the U.S. Chamber: ``These new tariffs would directly
harm American manufacturers.''
The President basically tweeted out and said it is easy, we
should--trade wars are good, and when we have trade wars, we
win big. Do you think trade wars are good?
Mr. Hassett. In the Economic Report of the President, we
have a big trade chapter that documents stuff that to me was
kind of surprising. As you know, I have been before this
Committee before but not as a trade economist. And our trade
deals really are quite asymmetric. Even Europe charges high
tariffs on our stuff, much higher than we charge on their
stuff, and China----
Senator Kaine. And they are announcing retaliatory tariffs
last week.
Mr. Hassett. And China is stealing our intellectual
property, and every President--you know, I have been in DC 20
years, and it seems like every President has talked about
wanting to improve that situation and then failed. And
President Trump is serious about----
Senator Kaine. So you think this is a good move?
Mr. Hassett. Which?
Senator Kaine. The tariffs that were just announced that I
am asking you about.
Mr. Hassett. I am a team member. I support the President,
and the 232 tariff is a national security judgment, which I am
not an expert in, national security.
Senator Kaine. Thanks, Mr. Chair.
Chairman Enzi. Thank you.
Senator Kennedy.
Senator Kennedy. Thank you, Mr. Chairman. Doctor, welcome.
I am sorry I was late.
Mr. Hassett. Thank you.
Senator Kennedy. You did your graduate work at
Pennsylvania?
Mr. Hassett. That is correct, sir.
Senator Kennedy. Great. Let me just ask you a couple of
questions as an economist. All things being equal, do you
think--who can spend money better: the people who earned it or
a well-intentioned Government worker?
Mr. Hassett. The people that earned it. Usually--in fact,
that even applies to Christmas presents. I wrote an article in
the Washington Post about this once, that you should give
people the money instead of picking a present because they will
know better how to use it.
Senator Kennedy. Let me ask you some questions about a
small business in America. Can we agree that taxes for a small
business--this is true for a large business, too, but let us
talk about a small business. Can we agree that taxes for a
small business constitutes a cost of doing business?
Mr. Hassett. Yes.
Senator Kennedy. So it is sort of like insurance and labor
and paying the utility bill. Is that right?
Mr. Hassett. That is correct.
Senator Kennedy. Okay If we were to increase the costs to a
small business, would that help them to expand?
Mr. Hassett. No.
Senator Kennedy. When you tax something, you get less of
it. Is that right?
Mr. Hassett. That is correct, usually.
Senator Kennedy. So if we wanted small business women and
small business men to expand their business, we ought to help
them control costs, preferably lower them. Is that correct?
Mr. Hassett. That is correct, sir.
Senator Kennedy. Okay. That is sort of Economics 101?
Mr. Hassett. And if you look at the NFIB Survey of Small
Businesses, which is really a rich data source, you can see
that small businesses have celebrated the passage of this bill
and that their sentiment has increased dramatically over that
time.
Senator Kennedy. Right, but, I mean, that is kind of basic
economics, right?
Mr. Hassett. It is economics, but it is also visible in the
data as well. Sometimes basic economics turns out to be wrong.
But it is nice to see it confirmed----
Senator Kennedy. But is that a principle that most people
would agree is part of just basic free enterprise economics?
Mr. Hassett. Yes.
Senator Kennedy. Okay. So unless you were in the quad
throwing the frisbee during Econ. 101, you would agree with
that?
Mr. Hassett. I think that that is correct, unless it is a
Giffen good, which is a technical thing.
Senator Kennedy. Okay.
Mr. Hassett. But we do not have to talk about that in a
Senate hearing.
Senator Kennedy. Okay. I mean, obviously, one of the
purposes of our tax cut bill was to attract foreign direct
investment, and I think a lot of investors looked at America
and said, ``God, we would love to do business there. They have
got a stable court system, free society. You know, it looks
like a wonderful place to live. There is just one problem. We
do not want to pay 35 percent in taxes.'' That is kind of a
deterrent, isn't it?
Mr. Hassett. Yes.
Senator Kennedy. Okay. Let us talk about infrastructure for
a second. We moved in our Tax Code bill to a territorial system
of taxation. Is that correct?
Mr. Hassett. That is correct, sir.
Senator Kennedy. We used to be non-territorial, correct?
Mr. Hassett. ``Worldwide,'' we called it, yes.
Senator Kennedy. Yes, We had a lot of American companies
with business overseas that made a lot of money. They
stockpiled it. They did not want to bring it back because they
would have to pay 35 percent in taxes, right?
Mr. Hassett. Yes, that is right.
Senator Kennedy. So we made them a swell deal. They can
bring it back now if they are liquid, if they are liquid
overseas profits. They are going to have to pay 15 percent. Is
that correct?
Mr. Hassett. Yes, and it was actually even a sweeter deal
than that in the sense that if a firm located a new operation
offshore, then they could transfer-price their profits say to
Ireland and post a loss in the U.S. and then get a refund on
past taxes in the U.S. So we were basically using tax refunds
to build foreign factories under the old code.
Senator Kennedy. Okay How much tax money, tax revenue is
going to be generated--roughly, just give me an answer, because
I am going to run out of time here in a second. How much in tax
revenue do you think will be generated by the repatriation?
Mr. Hassett. By the repatriation of the couple of trillion?
I would have to pull out the line item on that.
Senator Kennedy. Give me a ballpark guess.
Mr. Hassett. 150 billion.
Senator Kennedy. Okay. That is a non-recurring source of
revenue, isn't it?
Mr. Hassett. Yes, it is.
Senator Kennedy. Okay. And classic budgeting says you match
up a non-recurring source of revenue with a non--recurring
expense, right? Unless you want to create a structural deficit.
Is that correct?
Mr. Hassett. If you are looking at the present value, then
you have to consider both.
Senator Kennedy. But that is basically correct?
Mr. Hassett. Yes.
Senator Kennedy. Okay So why don't we spend that money on
infrastructure instead of dumping it into the big old black
hole of the general fund from the Federal Government where it
is spent on God knows what?
Mr. Hassett. You know, Senator, the tax bill passed with
the support of everybody in the White House, and I respect the
legislative process. They decided to do the thing exactly----
Senator Kennedy. Well, we can change that, can't we?
Mr. Hassett. I think moving forward, you know, especially
in the medium and long run, as this Committee knows and as
Senator Enzi has been a leader----
Senator Kennedy. I get all that. I have not been here long,
but I figured that part out. But, I mean, unless we----I am
sorry, Mr. Chairman. I am going to wrap it up in a second. But
unless we want a structural deficit, you do not put non-
recurring revenue into your budget, for God's sakes. My 22-
year-old knows that. You spend it on a non-recurring expense.
Infrastructure. Would there be something better non-recurring
than infrastructure to spend it on?
Mr. Hassett. Again, if you generate economic growth with a
lower cost of capital, then that is going to give you revenue,
and then that revenue is recurring----
Senator Kennedy. Yes, but it is not going to equal the $150
billion. We are not----
Mr. Hassett. It could in present value, yes. I would be
happy in QFRs to do some math on this.
Senator Kennedy. I mean, I am not trying to get you in
trouble, but you need to talk to Secretary Mnuchin, because he
keeps wanting to match up--sorry, Mr. Chairman.
Mr. Hassett. And I got the precise estimate of the revenue
from repatriation. It is $338 billion, so I guessed a little
bit low.
Senator Kennedy. All right. I heard the gavel. Man, this is
like ``The Gong Show.''
Mr. Hassett. He is tough.
Senator Kennedy. I have got to stop.
Chairman Enzi. I only let people run over by a minute.
[Laughter.]
Chairman Enzi. Senator Whitehouse.
Senator Whitehouse. It is when you said it was like ``The
Gong Show'' that the gavel really came down.
Senator Kennedy. I know.
Senator Whitehouse. Mr. Hassett, what is a negative
externality?
Mr. Hassett. A negative externality would be something like
pollution, that if there was a factory--the classic example,
textbook, is a factory next to a laundry that puts out dark
fumes.
Senator Whitehouse. And a negative externality as viewed by
economists is a bad thing?
Mr. Hassett. Yes.
Senator Whitehouse. And the customary way we respond to
that is with regulations?
Mr. Hassett. Or with taxes. You could tax----
Senator Whitehouse. Exactly. You could do a pollution fee--
--
Mr. Hassett. It is called a ``green tax.'' That is correct.
Senator Whitehouse. I want to just make a record here that
the 2017 Draft Report to Congress on the Benefits and Costs of
Federal Regulations that came out under the Trump
administration says this: ``The principal findings of this
Report are as follows:"
Number one, ``The estimated annual benefits of major
Federal regulations reviewed by OMB from October 1, 2006, to
September 30, 2016, for which agencies estimated and monetized
both benefits and costs, are in the aggregate between $219
billion and $695 billion, while the estimated annual costs are
in the aggregate between $59 billion and $88 billion, reported
in 2001 dollars. In 2015 dollars, aggregate annual benefits are
estimated to be between $287 and $911 billion and costs between
$78 and $115 billion.''
So those show very, very significant annual net benefits to
those major Federal regulations, which I suspect has a lot to
do with this problem of negative externalities.
Mr. Hassett, I want to take you into health care. I do not
know how weedsy you get on this, but I want to talk about
accountable care organizations--does that ring a bell?--or the
Medicare Shared Savings Program.
Mr. Hassett. Yes, you are getting into the weeds----
Senator Whitehouse. Okay. This is going to be a little
weedsy, but I want to----
Mr. Hassett. Okay.
Senator Whitehouse. I want to focus on it for a reason,
because your Economic Report criticized the accountable care
organization effort that was a part of the Affordable Care Act,
saying the ACA's signature cost control provisions were
ineffective and had unintended consequences, and then went on
about accountable care organizations.
So I want to make a plug for these accountable care
organizations. We have one in Rhode Island. It is called
``Coastal Medical.'' It is a primary care provider practice. It
is the family doctors, basically. It is one of the biggest
providers in Rhode Island. They, before this, were trapped, as
other providers were, in fee-for-service. You do not get any
money unless you do something to somebody or prescribe
something to somebody or call somebody in for a session with
the doctor.
Because of the ACO program, they were able to find ways to
get reimbursed, to share the savings of driving the costs down
for their patients. It has required changing the way that they
provide care. They have hired people who do things like social
work and case management. They make home visits to appropriate
patients for various things. They have nurses on call 24/7 so
if you wake up in the middle of the night and you feel badly,
you can call their nurse and get a little bit of an educated
decision about whether you need to go to the emergency room or
not.
They have hired pharmacists who are helping with
pharmaceutical management, particularly of patients who take
considerable numbers of pharmaceuticals. They have even hired
an actuary. The head of the practice, Dr. Kurose said ``Five
years ago, I barely knew what an actuary was. Now I have one.''
And all of those things have improved the care for their
patients. Patient enthusiasm for the care that they are getting
is through the roof. They absolutely love it. The doctors love
it. And what is interesting is that their per patient cost has
fallen $700 since 2011. This is not a question of the rate of
increase declining. This is an actual drop.
Now, I think that is an important model, and we can perhaps
argue about how much of the savings that have been generated
Medicare should get versus what the doctors should get. But I
hope that you would agree that where a change in the way
doctors are compensated has enabled them to improve the way
they treat their patients, and to do so in a way that has saved
$700 per patient, that is a good indicator for cost of health
care and for the direction of cost in health care.
So I do not know if you have a reaction to that, but I do
think----
Mr. Hassett. Well, thank you for the plug----
Senator Whitehouse [continuing]. If you just look at the
Medicare billing piece of that and you are not looking at the
endpoint, which is where did the actual cost of care go, you
are missing the story. The real story is follow Coastal, drive
care down by $700 per patient, and then we can worry about what
to do with those savings.
Mr. Hassett. So thank you. We did, in the report, review
the academic literature and the data, but your tip about
looking closely at Coastal Medical is a good one. As you know,
I have noticed over time that Rhode Island has been pretty
innovative in many areas of public policy, and it could be that
there is variation in the effectiveness of organizations and
that that is a particularly good one.
Senator Whitehouse. Come visit. We will show you.
Mr. Hassett. But we will look carefully at it, sir, and I
look forward to working with you on that.
Senator Whitehouse. Thank you.
Chairman Enzi. Senator Cotton.
Senator Cotton. Thank you. Thank you, Mr. Hassett, for your
testimony today.
I want to discuss wage growth over the last 40 years, also
going forward. I have a chart that my trusty sidekick here will
post in a moment, but it relates to a piece from the Harvard
Business Review last October that found that since the 1970's,
wage gains have primarily accrued to the top earners, the
richest and those with the highest levels of education in our
country, while wages for the bottom half have been stagnant and
declining. So here is our trusty chart.
You can see now what I am talking about. If you have an
advanced degree, over the last 40 years your wages have gone up
in real dollars by 36 percent; college degree, 30 percent; only
a high school diploma, it has basically been stagnant, it has
declined by 2 percent, not great; obviously, less than a high
school diploma, it has been catastrophically bad, declined by
17 percent.
I specifically want to discuss the input of immigration on
this. If the supply of labor exceeds the demand of labor, does
that not put downward pressure on wages, especially for the
kinds of wages for labor that we tend to import in the form of
immigrants or non-immigrant guest workers?
Mr. Hassett. The economics of that is accurate, yes.
Senator Cotton. Okay So the law of supply and demand is not
repealed magically in the labor market, as some people in
Congress seem to imply.
Mr. Hassett. Correct.
Senator Cotton. Today we have about a million new
immigrants in our country with a Green Card. The vast majority
of those come not through employment or education based but
through family reunification, mostly extended family
reunification and other programs. That is one reason why the
vast majority are unskilled and low-skilled.
To what extent do you think the fact that the vast majority
of our immigrants in this country are unskilled and low-skilled
has helped explain what you see on the chart here, that we are
bringing in people with--immigrants who have less than a high
school degree or a high school degree as opposed to immigrants
that have Stanford Business School and MIT Ph.D.s?
Mr. Hassett. It is certainly a factor, Senator, and there
is literature on this that, you know, I would be happy to, in
written correspondence with you, review. George Borjas at
Harvard University has studied the impact of immigration on
low-skilled wages and found pretty big negative effects. There
are some other papers that argue with his methodology and so
on.
Senator Cotton. Yes, so what do you think about--I mean, I
tend to admire Professor Borjas' work, and I think he has done
a good job of correcting a lot of the record on somewhat--what
I would consider less rigorous academic research. What do you
think of Professor Borjas' work in this area?
Mr. Hassett. He is a great economist. But, you know, all
work should be subject to careful scrutiny, and I would have to
get back to you about the criticisms of the work that is----
Senator Cotton. Let us say if we took those million
immigrants per year, and rather than being unskilled and low-
skilled workers, if we had a million immigrants a year who
were, say, MIT Ph.D.s or Stanford Business School graduates,
would it relieve some of the pressure that Americans in this
part of the income scale face?
Mr. Hassett. It would. It would also add to economic
growth, and the capital formation from the tax bill, though,
should very much help that minus 17 percent number as well.
Interestingly, in the first taxes and wages literature that
leads to the $4,000 number, Aparna Mathur and I used blue-
collar wages, so it is actually the blue-collar wages that
respond to corporate taxes because they are the ones that are
using the better machines. And I think that we are about to see
an investment explosion in the U.S. that is going to also help
very much with that number.
Senator Cotton. Why is that?
Mr. Hassett. Because the capital is going to come back to
the U.S., people are going to build plants here, and the people
running the machines tend to be blue-collar workers that do not
have college degrees.
Senator Cotton. I agree with that belief. But a smarter and
better immigration policy that is more focused on high-skilled
workers with higher levels of educational attainment who are
going to receive higher-than-average wages or bring higher-
than-average investment capital in this country would also work
in tandem with that tax policy, correct, that help get these
men and women higher wages? Which they get to keep more of now
because of the tax bill. I know you all talked a lot about the
tax bill this morning.
Mr. Hassett. That is correct, sir.
Senator Cotton. And then, finally, since we talked mostly
about permanent immigration, Green Card holders, I want to talk
briefly about non-immigrant visa holders, some of the
controversial programs like the H-1B program or the H-2B
program. Those have the same--it would have the same impact on
wages for people who are in H-2B--let us take the H-2B program,
so, you know, a lot of landscaping, a lot of resort work, a lot
of ski instructors, that kind of thing. Again, if you are
importing more of those workers, it is going to put downward
pressure on the wages for that kind of work, correct?
Mr. Hassett. That is correct, yes.
Senator Cotton. In your opinion, how big is the regional or
local effect on that? Obviously, ski instructors are not
running around Arkansas. They are in Colorado. And resort
workers tend to be in places on the coasts or the Great Lakes
or the Rocky Mountains. How big an impact is the regional
effect on those wages?
Mr. Hassett. The regional effect can be enormous,
especially close to an unsecured border, but also because of
the variation in the tightness of labor markets. The last I
checked, for example, in Colorado, there is about half an
unemployed worker per job listing, and so that No. 1 problem
for firms is finding workers. But there are other places where
that is not true.
Senator Cotton. So that is one reason why we have so many
H-2B workers in places like ski resorts in Colorado or beach
resorts in North Carolina or Florida, or what have you. That is
one reason why when you go there, you hear and meet so many
people from Eastern European countries like Poland and Czechia
and Slovakia and Austria and so forth who come and hand out
towels as lifeguards in the summer or work on the ski lifts in
the wintertime. Those people could also come in from Izard
County or Jefferson County, Arkansas, couldn't they?
Mr. Hassett. In principle. But one of the things that has
been a puzzle to us as we study the current job market is that
mobility from places that need jobs to places that have jobs is
very, very low right now, and I think that might be related to
the variation of real estate prices and a number of other
factors.
Senator Cotton. I know a bunch of 18-year-olds in Arkansas
who would love to hand out towels at Palm Beach in the
wintertime.
Mr. Hassett. It looks pretty good today as well with all
the snow outside.
Senator Cotton. Okay. Thank you, Mr. Hassett.
Mr. Hassett. Thank you, Senator.
Chairman Enzi. I have not taken a turn yet, but I will call
on Senator Johnson.
Senator Johnson. Thank you, Mr. Chairman.
Can you leave that up for a minute? Can you leave up the
chart?
Senator Cotton. I am going to leave the chart up.
Senator Johnson. Okay. I appreciate that.
So I do not run out of time, I want to first ask a question
that Senator Kaine raised about the lack of permanence in terms
of individual and passthrough entity tax cuts. I obviously
fought pretty hard for the approximately 95 percent of American
businesses that pass through their income to the individual
owner. Is that something--first of all, making those tax cuts
permanent, is that something the administration would support?
Mr. Hassett. Yes, of course. In fact, it is a key
assumption in the President's budget.
Senator Johnson. So it would probably be a pretty good idea
maybe if the House and the Senate were to propose that and
hopefully get Democrat support to make those tax cuts
permanent. We obviously ran out of the static score that we
were operating under with the budget resolution, correct?
Mr. Hassett. I am very grateful that it passed the Senate,
and I understand that is difficult and depends on complicated
budget rules. But if it was permanent, the economic effect
would be higher.
Senator Johnson. And the administration would absolutely
support making those tax cuts for individuals and passthrough
entities permanent?
Mr. Hassett. Yes. Director Mulvaney said that in this
Committee room a few weeks ago as well.
Senator Johnson. Good. Is there any caveat to the
information that Senator Cotton put up on that chart?
Mr. Hassett. Sure. You know, even in articles that I have
written that it is not clear that price indices are always
measured well, and so I think that, for example, if you were to
ask a typical person with less than a high school diploma in
2016 would they trade their consumption bundle with the
consumption bundle from 1979, then they would say no.
Senator Johnson. But, again, in terms of----
Mr. Hassett. So I think the basic point is correct, but
whether people are truly worse off than they were in 1979, I
think that that could be related to problems in price index----
Senator Johnson. But those are accurate numbers in terms of
wage growth?
Mr. Hassett. They are accurate numbers.
Senator Johnson. Okay. So here is the conundrum. Like you
mentioned in Colorado and Wisconsin, in the 7 years I have been
a United States Senator, there is not one manufacturing plant I
have visited--and I come from manufacturing; I have this
experience myself--that can hire enough people, not even close.
We developed this project taking folks from the inner city,
busing them up to Sheboygan County, where there were 4,000 jobs
just in that one economic zone that were going unfilled. So
what is causing the labor shortage?
Mr. Hassett. Well, we believe that labor force
participation is going to recover. The previous administration
preached that it was all the retirement of the baby boomers,
and we think that there are a number of other factors,
including opioid abuse, that have reduced labor force
participation. So I think that that is one of the things that
is a near-term opportunity. I think that if you are in a tight
labor market area, then one thing that you should do as an
employer is probably advertise with, you know, targeted
messages for people in groups that have left the labor force,
like people above 55 and so on, to get workers back.
Senator Johnson. I came under a fair amount of criticism
for work our Committee did talking about the opioid crisis
somewhat being funded by Medicaid where individuals use their
Medicaid card, you know, the people that are permanently out of
the work force in the 25-to-54 age cohort. They are using their
Medicaid card obtaining opioids and selling those on the open
market to supplement their income. Isn't part of our problems
our welfare system that pays people not to work, that creates
the lack of mobility?
Mr. Hassett. There are two waves in the opioid crisis. The
first one was really from 2000 to 2010 and was based on
prescriptions, while the price of prescriptions was dropping a
lot in part because of generics, but also because of Medicare
Part D and expanded coverage. After 2010, it seems like the
dominant factor or one of the dominant factors is the switch
toward illegal opioids, like fentanyl, that are very, very
cheap. So I think that there are multiple factors, but
Government policy certainly is one of the contributing factors.
Senator Johnson. I mean, we have really limited the number
of work requirements in transfer payment programs, correct?
Mr. Hassett. Yes.
Senator Johnson. Isn't that a big problem, we literally pay
people not to work? We require no work requirement?
Mr. Hassett. I think that work requirements that are easy
to understand as well and apply across lots of programs, a
universal type work requirement would be something that I think
would be consistent with the discussions I have seen in the
administration.
Senator Johnson. Certainly Senator Cotton and Senator
Perdue have been suggesting a far more merit-based immigration
system, legal immigration system I completely support. But I
would consider part of high skills, people who want to work
hard as well.
Anyway, that is all I have, Mr. Chairman. Thank you.
Mr. Hassett. Thank you, Senator.
Chairman Enzi. Thank you. Thanks for being here through
almost all of the hearing. I am going to have some questions
now. Quite a few things, a few that I have to clear up some
possible misunderstandings on before I get into my questions.
There were some comments about the deductibility of taxes
being limited. The deductibility of taxes for 2017 is not
affected.
Mr. Hassett. It is next year, yes.
Chairman Enzi. Everybody that is paying their 2017 taxes
are still filing under the old laws using the old forms and do
not have the same limitations that there will be when they file
on their 2018 taxes.
I would also comment that there is this comment about the
tax cuts being temporary for individuals and then permanent for
companies. When we were making the decisions on that, there was
a definite reason for that, the biggest reason being that
companies prepare a lot longer into the future in making their
economic decisions than individuals do. In fact, individuals
are pretty much on a year-to-year basis, except with some of
their investments, which might get into the higher income.
Is there a definition for ``rich''? We keep talking about
what we are doing for the rich and against the poor. Can you
tell me exactly where that level is?
Mr. Hassett. I could not, Senator.
Chairman Enzi. I cannot either. I thought that one of the
benchmarks was established at $80,000 as being--if you are
below $80,000 you are not rich, and if you are above $80,000
you are rich based on some of the comments here.
And then there were the comments about people not realizing
these benefits yet that have been projected. Should it take a
while? How long did you anticipate that it would be before we
really saw differences from the Tax Cuts and Jobs Act?
Mr. Hassett. Yes, again, I think that the literature on
taxes and wages that allows us to look at timing suggests that
it is 3 to 5 years. But many of the papers are long-run, which
means that the full effect could be a little bit larger but
take longer, so that there are papers in the chart that I waved
a while ago that say there is $10,000, but maybe that is the
full long-term effect. Say you get to $4,000 in the fifth year,
and then you grow from there. Then you could imagine that--it
depends on how far out you look, how big the effect would be.
But, again, I was very clear throughout the debate about where
that estimate came from and how long it would take, and it
should not--I guess at Walmart it already did, but the full
effect should not be there yet because it depends on the
capital formation. And as you said, that is why the corporate
tax is permanent. Capital formation is kind of a 20-year
decision for a firm. They are deciding to locate a new plant
someplace, and that takes a little bit of a while. A lot of the
capital goods that firms would want to order in order to
increase productivity take 6 months to get delivered. And so it
is not something that even if they, like January 1, went crazy
ordering stuff, then the odds of it being in place and
affecting wages right now are pretty low.
Chairman Enzi. So you did not feel compelled to do an
analysis over what would happen because of the tax cuts in the
first 2 months?
Mr. Hassett. I did not, sir.
Chairman Enzi. Thank you.
The Economic Report describes the central infrastructure
problem that we are looking at. It is clear that demand for
that spending is not going to subside anytime soon. There seem
to be two general options for the Committee to consider. One is
reducing the spending to match incoming revenue or increasing
revenue to match desired spending. Is there a better option for
the economy? What distinctions would you make between user
charges and taxes?
Mr. Hassett. I think that there are pluses and minuses from
every approach, and we go into that in great detail in the
Economic Report of the President. I think that the headline is
that if folks up here get it right, then it can be a big
positive for economic growth. And then the question is, you
know, how does one get it right, and there are lots of
different attempts to finance infrastructure across the world
and across the U.S. We mention things like user fees and tolls
in addition to the gas tax if funding is one of the ways--
increased funding is one of the ways you want to go. And I
think that that is something that inevitably Congress is going
to have to address because as we move toward higher fuel
economy and electric cars and so on, then the gas tax is not
going to be able to fund all the potholes that we have to fix.
Chairman Enzi. I always note that the Simpson-Bowles plan
was to raise the gas tax a nickel at a time for 3 years, and
that would have put us in pretty good shape. Now I think the
President is proposing a nickel a year for 5 years to get us to
the same point we would have been at had we done that, and I
have made several speeches on that over the period of time. But
is that a specific revenue option that the administration is
supporting?
Mr. Hassett. I know that it is something that I think is on
the table. I think the administration--the President has spoken
about the gas tax. That is, you know, a public record. But I
think that in the Economic Report we explore all the options
and try to present economic analysis that helps you decision
maker decide what the best path is.
Chairman Enzi. Of course, I keep referring to that as the
``gas user fee.''
Mr. Hassett. Yes.
Chairman Enzi. You do not drive, you do not need to pay it.
But last week 67 Senators voted to pass a bipartisan piece of
legislation that would help out community banks across America,
and we have not gotten into that today. Can you tell us about
the benefits the Council believes will come from relieving the
overly burdensome regulations that have been placed on the
Nation's smaller banks over the last 8 years? And could you
speak to the Council's projection for benefits of increased
financial stability, particularly in rural communities, when
they have that greater access to credit?
Mr. Hassett. Right, the administration has issued a SAP in
favor of the bill. I understand that, you know, there is
ongoing negotiations with the House, and I think that, you
know, respecting the legislative process is important.
As for the economics, I think that one of the most striking
things, in addition to the low wage growth, that I see in the
data is the sharp decline in entrepreneurship in the U.S. and
an especially sharp decline in rural areas that a Harvard
professor has written a study that suggests it is related to
the decline in community banks associated with big increases in
regulatory costs. But I think that entrepreneurship in rural
areas, really if you are outside of the top 20 big cities, it
is really, really hard to be an entrepreneur now because you
just do not have access to the relationships and the finance
that you used to. So I think that there is a big economic
growth upside, which is mentioned, I think, in the SAP from the
bill like the one that is being considered in the Senate.
Chairman Enzi. So if something like that passes, do you
think that will have an effect on the GDP?
Mr. Hassett. It certainly would, and I have not done a
precise estimate. I cannot say it is 0.1 versus 0.3 or
something like that, but the literature suggests that the
decline in community banks has really harmed entrepreneurship,
and entrepreneurship is one of the factors that especially
contributes to total factor productivity growth, which has been
especially disappointing. And so I would guess that once we did
the full entrepreneurship estimate that we would potentially
increase our total factor productivity growth estimate.
Chairman Enzi. Thank you. And thank you for your testimony
and answering the questions. We do leave the ability to ask
questions open a little bit. I do not see my instructions here
on how quickly that has to be in. Today? So by close of
business today, we need to have any questions that anybody
wants to submit to have answered, and we would appreciate a
speedy response on that.
Mr. Hassett. Thank you so much for inviting me. It is a
great honor to be here.
Chairman Enzi. We appreciate your vast knowledge on this
and also the concise answers you gave to the questions, which
is very helpful, too.
Mr. Hassett. Thank you, sir.
Chairman Enzi. So thank you for your testimony. The hearing
is closed.
[Whereupon, at 11:59 a.m., the Committee was adjourned.]
ADDITIONAL COMMITTEE QUESTIONS
[The following submitted questions were not asked at the
hearing but were answered by the witness subsequent to the
hearing:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
CBO'S BUDGET AND ECONOMIC OUTLOOK: FISCAL YEARS 2018-2028
----------
WEDNESDAY, APRIL 11, 2018
U.S. Senate,
Committee on the Budget,
Washington, DC.
The Committee met, pursuant to notice, at 10:32 a.m., in
room SD-608, Dirksen Senate Office Building, Hon. Michael B.
Enzi, Chairman of the Committee, presiding.
Present: Senators Enzi, Grassley, Crapo, Toomey, Corker,
Gardner, Boozman, Cotton, Sanders, Wyden, Whitehouse, Merkley,
Kaine, Van Hollen, and Harris.
Staff present: Elizabeth McDonnell, Republican Staff
Director; and Warren Gunnels, Minority Staff Director.
OPENING STATEMENT OF CHAIRMAN ENZI
Chairman Enzi. Good morning, and welcome to our hearing on
CBO's budget and economic outlook for fiscal years 2018 through
2028.
Dr. Hall, thank you for this report. As you know, this
update was delayed from its normal release in January due to
congressional activity at the end of last year. I appreciate
CBO's dedication to integrating into the final product analysis
of last December's Tax Cuts and Jobs Act as well as the 2018
Bipartisan Budget Act and the omnibus appropriations bill. It
is vital that this Committee have the most up-to-date
information in order to understand the fiscal impact of the
policies being implemented.
This year's report, like so many before it, shines a
spotlight on our country's unsustainable fiscal outlook.
Automatic spending programs like Social Security and Medicare
are growing disproportionately to the revenue and outpacing the
economy.
Consider this: Automatic spending will soon consume all the
taxes and revenues the Federal Government collects, and that is
before one dollar goes to providing for our national defense
and other priorities funded through so--called discretionary
spending as part of the annual appropriations process. And 70
percent of the total increase in outlays over the next 10 years
is from Social Security, Medicare, and net interest on
America's debt.
Congress must come to terms with this overspending. Our
Government makes promises to pay for those programs without
identifying a source of funding to ensure their sustainability.
Dedicated taxes and fees are currently paying for less than
half of the total mandatory spending.
To really address this fiscal imbalance, we can either
reduce spending or increase our projected economic growth, but
preferably some combination of the two. The Tax Cuts and Jobs
Act passed last year was a good first step toward growing our
economy. It is already producing higher wages, more dollars in
workers' paychecks, and increased domestic investment. And
while we may have disagreements over the extent of its impact
on the economy, both the Joint Committee on Taxation and CBO
have confirmed that the tax cuts will have a positive impact on
GDP growth.
The Budget Committee continues to work toward setting a
pro-growth legislative path for the upcoming year. Part of that
has to be the process by which Congress budgets. We cannot
continue to make last-minute deals that only add to our debt
and ignore the structural policy changes needed for long-term
sustainability or to spend money from the end of the 10-year
period in the first year.
The threat of a Government shutdown should not be used to
increase spending, but, unfortunately, since the 2011 failure
of the Joint Select Committee on Deficit Reduction that was
created by the Budget Control Act, we have seen this outcome
time and again, most recently culminating in the Bipartisan
Budget Act of 2018. This new law raised the caps on regular
discretionary spending by $296 billion over fiscal years 2018
and 2019. CBO estimates that if appropriations were to grow at
the rate of inflation after 2018 rather than returning to the
Budget Control Act's lower caps, discretionary spending would
be $1.7 trillion higher over the next 10 years than it is under
CBO's baseline.
Many members of this Committee have supported reforms to
the budget and appropriations process, including automatic
continuing resolutions and biennial budgeting. Senator Cotton
has proposed eliminating the Budget Control Act's discretionary
caps to end what he called the ``bust--and-boom budget cycle.''
We need to reform our budget and appropriations process to end
the specter of Government shutdowns that lead to overspending.
The truth is, however, that annual appropriations make up just
a fraction of our total spending. To really address underlying
problems, we need more time and effort put toward oversight and
reducing the rate of growth of mandatory spending.
Congress needs to focus more on addressing these autopilot
programs in order to make them more effective and eliminate
duplication. We need to set long-term goals to ensure a
sustainable debt-to-GDP ratio so our overspending does not
ultimately bankrupt the country. The continued growth of our
national debt is something this Committee and Congress needs to
address. A balanced budget is the best outcome, but as the
President's fiscal year 2019 budget shows, it is getting harder
and harder to produce. While the correct debt-to-GDP goal is
debatable, I think we can all agree this report's projected
path approaching 100 percent over the next 10 years is not a
good outcome.
Dr. Hall, I look forward to your thoughts on what actions
Congress could take to foster a stronger U.S. economy and
reduce spending.
Senator Sanders.
OPENING STATEMENT OF SENATOR BERNARD SANDERS
Senator Sanders. Thank you very much, Mr. Chairman. And,
Dr. Hall, thanks very much for being with us again.
Mr. Chairman, over and over again, President Trump, his
administration, and many of my Republican colleagues have made
the claim that the tax plan that was passed that gave massive
tax breaks to the richest people in this country would
magically pay for itself.
On September 28th, Secretary Mnuchin, the Treasury
Secretary, said, ``Not only will this tax plan pay for itself,
but it will pay down debt.''
On October 22d, President Trump said this about his tax
plan: ``If we pick up one point on GDP, that is $2.5 trillion.
It more than pays for everything.''
On December 4th, Senate Majority Leader McConnell said, ``I
not only do not think the tax bill will increase the deficit, I
think it will be beyond revenue neutral. In other words, I
think it will produce more than enough to fill that gap.''
And, Mr. Chairman, on December 19th, you said, Mr.
Chairman--see, I am quoting you.
Chairman Enzi. Thank you.
Senator Sanders. That is how much I respect your work here.
``I am tired of the accusations the Republican budget hawks--
and that definitely includes me''--i.e., you--``are willing to
throw in the towel and accept a trillion and a half dollar
deficit over the next 10 years. I am still a deficit hawk. And
here is why: Claims to the contrary that this tax bill will go
unpaid for are based on an incomplete analysis of the tax
bill.''
Fair quote?
Chairman Enzi. Fair quote.
Senator Sanders. Okay. Well, Mr. Chairman, the results are
in, and the nonpartisan experts at CBO tell us that not only
will the Trump tax plan not pay for itself, it will add nearly
$1.9 trillion to the Federal deficit over the next 11 years,
even after taking economic growth into account. And the Trump
tax cut is not the only Republican policy that has increased
the deficit and the national debt over the past 17 years. There
are wars, there are massive increases in military spending that
have added to the problems.
So here we are, and this is a point, Mr. Chairman, that I
want to make. When we talk about the Government, we have got to
talk about the American people, not just the Government. We
have got to talk about a declining middle class. We have got to
talk about 40 million people living in poverty. We have to talk
about the massive level of income and wealth inequality that
exists in America.
You just talked about it, if I may say, really about the
necessity, in your view, about cutting Social Security and
Medicare. And I think that that is a very, very wrong idea.
When you have got millions of seniors in Vermont, Wyoming, and
all over this country trying to get by on $12,000, $13,000,
$14,000 a year, what we should not be doing as a Nation is
giving unbelievable tax breaks to billionaires, and then say,
``Oh, we have got to cut Social Security or take away health
care benefits from the elderly in this country.'' That is a
warped sense of priorities, in my view.
So I think when we talk about the budget, we have to talk
about it in the broader context of what is happening in
America. And what is happening in America is we are seeing a
massive increase in income and wealth inequality. Does anybody
here want to defend the fact that three people in America now
own more wealth than the bottom half of the American people? Do
we want to defend the reality that a very significant amount of
new income today is going to the top 1 percent?
So our job is to create an economy that works for all of
us, and you do not do that, as the President proposed, by a $1
trillion cut in Medicaid, $500 billion in Medicare. You do not
do that by cutting Social Security. What you do do is say to
the wealthiest people in this country, who in many ways have
never had it so good, you recognize the fact that income and
wealth inequality is worse today than at any time since the
1920's, you say to those people, ``Start paying your fair share
of taxes.'' And maybe we also may want to think about why we
are expanding, increasing military spending by $165 billion
over the next 2 years when you have veterans in this country
sleeping out on the street.
So the bottom line is, Mr. Chairman, the President's tax
plan is not going to lower the deficit. According to the CBO,
it is going to increase the deficit. And the time is long
overdue for us to get our priorities right, start protecting
working families and the middle class, not just wealthy
campaign contributors.
Thank you.
Chairman Enzi. Thank you, and I appreciate you quoting me.
But later, when you said that I said cut Medicare and Social
Security, I have never said cut them.
Senator Sanders. Okay. Then what did you mean when you
talked about entitlement programs, when you talked about those
programs? What do you mean by that?
Chairman Enzi. I think you missed the part about some of
the duplication and effectiveness of making those programs, and
I did not rule out an increase in the revenues for them.
Something has to be done, and it needs to be a combination, is
what I said.
Senator Sanders. All right. If I misquoted you, then I am
sorry. But some of your colleagues, especially in the House,
have talked about cuts to Social Security and Medicare.
Chairman Enzi. Thank you.
Our witness this morning is Dr. Keith Hall, the Director of
the Congressional Budget Office. Earlier this year he appeared
before this Committee to discuss CBO's work and his efforts to
increase responsiveness and transparency at the agency. This
morning Dr. Hall will be talking to us about CBO's latest
projections and the challenges we face as a Nation. We look
forward to receiving your testimony.
For the information of colleagues, Dr. Hall will take up to
about 7 minutes for his opening statement, followed by
questions.
Welcome, Dr. Hall. Please begin.
STATEMENT OF THE HONORABLE KEITH HALL, PH.D., DIRECTOR,
CONGRESSIONAL BUDGET OFFICE
Dr. Hall. Chairman Enzi, Ranking Member Sanders, and
members of the Committee, thank you for inviting me to testify
about the Congressional Budget Office's most recent analysis of
the outlook for the budget and the economy. My statement
summarizes CBO's new baseline budget projections and economic
forecast, which the agency released on Monday.
In the Congressional Budget Office's baseline projections,
which incorporate the assumption that current laws governing
taxes and spending generally remain unchanged, the Federal
budget deficit grows substantially over the next few years.
Later on, between 2023 and 2028, it stabilizes in relation to
the size of the economy, though at a high level.
As a result, Federal debt is projected to be on a steadily
rising trajectory throughout the coming decade, approaching 100
percent of gross domestic product by 2028.
Projected deficits over the 2018-2027 period have increased
markedly since we issued our last budget and economic
projections in June 2017. The increase stems primarily from tax
and spending legislation enacted since then, especially the
2017 tax act, the Bipartisan Budget Act of 2018, and the
Consolidated Appropriations Act of 2018.
In our economic projections, which underlie our budget
projections, inflation-adjusted GDP or real GDP expands by 3.3
percent this year and by 2.4 percent in 2019. Most of this
growth is driven by consumer spending and business investment,
but Federal spending also contributes a significant amount this
year.
Growth of real GDP exceeds the growth of real potential GDP
over the next 2 years. This marked cyclical path in real GDP
will occur in large part because the recent legislation
provides significant fiscal stimulus at a time when there is
very little slack in the economy. Those effects, as well as the
larger Federal budget deficits resulting from the new laws,
exert upward pressure on interest rates and prices. During the
2020-2026 period, those factors, along with slower growth in
Federal outlays and the expiration of reductions in personal
income tax rates, dampen economic growth. After 2026, economic
growth is projected to rise slightly, matching the growth rate
of potential output by 2028.
Between 2018 and 2028, real actual output and real
potential output alike are projected to expand at an average
annual rate of 1.9 percent. In our forecast, the growth of
potential GDP is the key determinant of the growth of actual
GDP through 2028 because actual output is very near its
potential level right now and is projected to be near its
potential level at the end of the period.
Potential output is projected to grow more quickly than it
has since the start of the 2007-2009 recession, as the growth
of productivity increases to nearly its average over the past
25 years. Nonetheless, potential output is projected to grow
more slowly than it did in earlier decades, held down by slower
growth of the labor force, which results partly from the
ongoing retirement of baby boomers.
In our projections, the effects of the 2017 tax act on
incentives to work, save, and invest raise real potential GDP
through the 2018-2028 period. Over the same period, the tax act
is projected to boost the level of real GDP by an average of
0.7 percent and nonfarm payroll employment by an average of 1.1
million jobs.
Our current economic projections differ from those that we
made in June 2017 in a number of ways. The most significant is
that potential and actual real GDP are projected to grow more
quickly over the next few years. Projected output is greater
because of recently enacted legislation, data that has become
available after our previous economic projections were
completed, and improvements in our analytical methods.
Over the next decade, the unemployment rate is lower in our
current projections than in our previous ones, particularly
during the next few years, when economic stimulus boosts demand
for labor. Also, both short-and long-term interest rates are
projected to be higher, on average, from 2018 to 2023.
Turning to the budget projections, we estimate that the
2018 budget deficit will total $804 billion, $139 billion more
than the $665 billion shortfall recorded in 2017. In our
projections, budget deficits continue increasing after 2018. As
deficits accumulate, debt held by the public rises from 78
percent of GDP, or $16 trillion, at the end of this year to 96
percent of GDP, or $29 trillion, by 2028. That percentage would
be the largest since 1946 and well more than twice the average
over the past five decades.
For the next few years, revenues hover near their 2018
level of 16.6 percent of GDP in our projections. Then they rise
steadily, reaching 17.5 percent of GDP by 2025. At the end of
that year, many provisions of the 2017 tax act expire, causing
receipts to rise sharply--to 18.1 percent of GDP in 2026 and
18.5 percent in 2027 and 2028. They have averaged 17.4 percent
of GDP over the past 50 years.
In our projections, outlays for the next 3 years remain
near 21 percent of GDP, which is higher than their average of
20.3 percent over the past 50 years. After that, outlays grow
more quickly than the economy does. That increase reflects
significant growth in mandatory spending, mainly because the
aging of the population and rising health care costs per
beneficiary are projected to increase spending for Social
Security and Medicare, among other programs. It also reflects
significant growth in interest costs, which are projected to
grow more quickly than any other major component of the budget,
the result of rising interest rates and mounting debt. By 2028,
net outlays for interest are projected to be roughly triple
what they are in dollar terms this year, roughly double when
measured as a percent of GDP. In contrast, discretionary
spending is expected to decline in relation to the size of the
economy.
For the 2018-2027 period, we now project a cumulative
deficit that is $1.6 trillion larger than the $10.1 trillion
deficit that we anticipated in June. Projected revenues are
lower by $1 trillion, and projected outlays are higher by half
a trillion.
Laws enacted since June 2017--above all, the three
mentioned earlier--are estimated to make the cumulative deficit
$2.7 trillion larger than previously projected between 2018 and
2027. However, revisions to our economic projections caused us
to reduce our estimate of the cumulative deficit by $1 trillion
over the same period, mainly because of the expectations of
faster growth in the economy and in wages and corporate
profits. Other changes had relatively small effects on the
projections.
CBO also analyzed an alternative scenario in which current
law was altered to maintain major policies that are now in
place, so that substantial tax increases and spending cuts
would not take place as scheduled under current law, and to
provide more typical amounts of emergency funding than the sums
provided for in 2018. In that scenario, far larger deficits and
much greater debt would result than in CBO's current baseline
projections. Debt held by the public would reach about 105
percent of GDP by the end of 2028, an amount that has been
exceeded only once in the Nation's history. Moreover, the
pressures contributing to that rise would accelerate and push
debt up even more sharply in subsequent decades. Such high and
rising debt would have serious negative consequences for the
budget and the Nation; in particular, the likelihood of a
fiscal crisis in the United States would increase.
I appreciate the invitation to testify today about CBO's
budget and economic outlook. I would be happy to answer
questions.
[The prepared statement of Dr. Hall follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Enzi. Thank you for your testimony and even more
for the expanded documents that you do to help us to know where
things are going.
We will now begin a round of questions, and I think
everybody knows how we alternate back and forth, and it is
based on being here at the sound of the gavel or arrival since
that time. So I will begin my questions.
The Tax Cuts and Jobs Act has already stimulated the
economy, putting more dollars in the hands of hardworking
Americans and businesses for investments. As we look forward to
the reduction in the business tax rates, they are incentivizing
more work and higher investment. And I noticed in your chart on
Table 2 that revenues grow every single year. I noticed that
outlays grow every single year, too, and more substantially
than revenues do, which is the problem that we need to solve.
Can you expand on the expected individual and business
response to the tax bill in the medium term?
Dr. Hall. Sure. We have forecasted that the tax act will
encourage savings, investment, and work. The reduction in the
lower tax rates and the bonus expensing we think will lower the
user cost of capital, increase investment in the economy, and
boost GDP growth. We also see that the effective marginal tax
rates on labor income is also down. We think that will increase
labor force participation, hours worked, and increase
employment throughout the 10-year period.
We also think that the reduction in effective marginal tax
rates on both capital and labor will have a significant effect,
and I think our average boost to GDP over the 10--year period
is 0.7 percentage points higher over the 10-year period because
of the tax act.
Chairman Enzi. Excluding intergovernmental transfers and
counting only income from sources outside the Government, such
as Social Security payroll taxes and Medicare premiums, you
estimate that the trust fund programs will add to the deficits
through the 2019-2028 period by amounts that grow from $655
billion in 2019 to $1.5 trillion in 2028. These trust fund
programs will add a total of $10.2 trillion to the deficit over
the 10-year budget window.
Is the current trajectory of these programs fiscally
sustainable? And without legislative action, which year do you
project that the Social Security Disability Trust Fund and
Medicare's Hospital Insurance Trust Fund will be exhausted? Not
that I am suggesting cuts in those. I am suggesting solutions.
Dr. Hall. Well, the aging of the population and the rise in
health care costs we think will--are the major forces driving
the big increase in the deficit over the next 10 years and
beyond. That is exactly right. The Health Insurance Fund, for
example, we think is going to run out of money in 2026. We have
not re-estimated the Old Age and Survivors Insurance Program,
but our last estimate was that that will be exhausted in 2031.
Chairman Enzi. Thank you. The latest baseline includes more
than $14 trillion in discretionary spending over the next 10
years. While the Armed Services Committee is able to authorize
its spending each year, many of the nondefense programs remain
unauthorized, a problem that persists. I know that CBO prepares
a report each year on unauthorized appropriations, but this
year it was released prior to final appropriations being
enacted.
Assuming defense continues to be authorized on an annual
basis, do you have an estimate of what portion of this $14
trillion in your current baseline is unauthorized?
Dr. Hall. We really do not. The last estimate we did was
2016, and it was a pretty large number. It was about $310
billion. We have not updated the estimate. We do not really
want to forecast too much because, obviously, Congress decides
what to authorize going forward, so that number could change.
Chairman Enzi. Okay. I think we will be interested in
getting that number, anyway.
Dr. Hall. Okay.
Chairman Enzi. The Tax Cuts and Jobs Act made the corporate
rate permanent to ensure long-term investment decisions that
businesses have to make over the show the U.S. as a competitive
market.
Dr. Hall, does the lower statutory corporate rate encourage
firms to locate their establishments domestically?
Dr. Hall. Yes, we do believe that the overall effect of the
tax act is to make the U.S. a more appealing location for
business activity. So we actually do see that the reduction in
corporate rates and some of the changes in the international
tax system will boost investment and actually increase
investment in the United States from abroad.
Chairman Enzi. Thank you. My time has expired.
Dr. Sanders.
Senator Sanders. Thank you for the doctorate.
Chairman Enzi. Sure.
[Laughter.]
Senator Sanders. I barely made it through college, though.
Dr. Hall, as you know, President Trump and some of my
Republican colleagues said over and over again that the tax cut
bill would pay for itself. On page 128 of your report on the
budget and the economy, however, the CBO projects that the
Trump tax plan will increase the deficit by nearly $1.9
trillion over the next 11 years. Is that correct?
Dr. Hall. That is correct.
Senator Sanders. Okay. So, my friends, at the end of how
many hours we have sat in this room hearing about the benefits
of trickle-down economics that magically, if you give tax
breaks to billionaires, it is going to create all the growth,
and tax revenues will increase to overcome the deficit, turns
out not to be true.
Dr. Hall, President Trump, among others, has claimed that--
this is a quote from Trump--``The rich will not be gaining at
all with this tax plan.'' But according to the Tax Policy
Center, by the end of the decade, 83 percent of the benefits of
the Trump tax plan go to the top 1 percent and 60 percent of
the benefits go to the top one-tenth of 1 percent. Is that
roughly accurate?
Dr. Hall. I think that is their estimate. We have not done
a similar calculation, though.
Senator Sanders. So, in other words, what we are talking
about is a tax plan that significantly grows the deficit and
almost all of the benefits go to the very, very wealthiest
people in this country.
One of the issues that concerns me is that what we are
seeing happening to working families all across this country--
and, Dr. Hall, I do not know if you have even seen it, but a
report came out literally today from the Bureau of Labor
Statistics, and the report tells us that the average worker in
America has seen zero wage growth over the past year after
adjusting for inflation.
In March 2017, the typical non-manager in America made
about $22.60 an hour. In March 2018, that same worker made the
same $22.60 an hour. Does that sound roughly right to you.
Dr. Hall. It does sound roughly right, yes.
Senator Sanders. So what I would say--and, Dr. Hall, while
we are at it, talk a little bit about income and wealth
inequality. Is it true, based on your understanding, that the
three wealthiest people in this country now own more wealth
than the bottom half of the American people?
Dr. Hall. That I do not know. We did just release a report.
I do not have the numbers in my head. We did just release a
report in the past few weeks, actually, about income inequality
that is worth looking at.
Senator Sanders. Okay. Well, we will do that.
My colleague from Wyoming, the Chairman, talked about
Social Security and Medicare. I introduced legislation that
would lift the cap on taxable Social Security income for people
making $250,000 a year or more. Now, everybody is concerned
about the financial future of Social Security. That is a
legitimate concern.
Correct me if I am wrong here, but according to the Social
Security Administration, if you lift the cap on income of
$250,000 or more, which is just the very highest income earners
in this country, Social Security will be solvent for the next
60 years, and we can increase benefits for lower-income Social
Security beneficiaries. Does that sound right to you?
Dr. Hall. I do not know if that is true or not. I have not
looked at----
Senator Sanders. According to the Social Security
Administration. So for all people who are concerned about the
solvency in Social Security, the answer is not to cut benefits,
but at a time of massive income and wealth inequality, to ask
the people on top to start paying their fair share of taxes so
that we can protect the many, many millions of people today who
are struggling to keep their heads above water in my State, and
I am sure in every State represented in this room. And we do
not talk about this enough. Mr. Chairman, it might be worth a
hearing on this. You have got a lot of elderly people who are
cutting their prescription drugs in half, cannot afford the
medicine that they need, cannot afford to keep warm in the
wintertime. We have a real crisis in terms of poverty among
elderly people in this country, and the answer is not to be
talking about cutting Social Security or Medicare. The answer
is to be strengthening those programs through a fairer tax
system.
Thank you very much, Dr. Hall, and thank you, Mr. Chairman.
Chairman Enzi. Senator Grassley.
Senator Grassley. Thank you for your work, Director Hall.
Sorry that there is such a bleak picture painted. Having the
public debt go from 78 percent to 96 percent of gross national
product is not very good news. I hope Congress thinks about the
impact on our children and grandchildren with that debt and
deficit.
My colleagues on the other side of the aisle want to make
this all about revenue and the historic tax cuts that we
enacted. I think that that completely disregards the positive
economic effects of these reforms that I think you pointed out
in your exchange with the Chairman.
So my first question is kind of carrying on where the
Chairman left off: Is it not accurate, based on your analysis,
that the tax reforms enacted last year will increase economic
growth, lead to lower unemployment, increase hours worked,
increase capital investment, and increase wages?
Dr. Hall. Yes, those are all true.
Senator Grassley. So then I have to conclude that when
Democrats say that they want to repeal tax reforms, they are
really telling the American people that they want fewer jobs
and lower wages, and no American is going to think that is
acceptable.
Based on your analysis, how would allowing the individual
tax reforms to expire after 2025 impact the economy?
Dr. Hall. Well, we think that would be sort of the opposite
of stimulus. We actually do think it will help slow growth. One
of the reasons we did the alternative scenario was to assume
that some of those things like the tax rates do not expire and
they continue, to give you an idea of that.
Senator Grassley. Okay. Instead of asking a question,
unless you disagree with this percentage, I am going to say
that revenue as a percentage of GDP has averaged 17.4 percent
over the last 50 years. According to your analysis, what will
revenue as a percentage of GDP be in 2025, which is prior to
the expiration of the individual tax reforms?
Dr. Hall. I forget the number. I think it is somewhere
north of 18 percent of GDP, so it is a bit higher.
Senator Grassley. Well, if you are saying north of 18
percent, then that is even better than what I thought it was
going to be, 17.5. So even with the tax cuts enacted last year
fully in effect, revenue as a percentage of GDP will exceed the
historic average.
Dr. Hall. That is right, and I did misspeak. I got the year
wrong. You are right, it is 17.5 percent in 2025. I was looking
at the next year.
Senator Grassley. Now, turning to spending, is it correct
that over the past 50 years spending has averaged about 20.3
percent of GDP?
Dr. Hall. Yes.
Senator Grassley. And what do you project spending to
average over the next 10 years as a percentage of GDP?
Dr. Hall. I do not have the number right in front of me, I
am sorry, but it is something north of 21 percent.
Senator Grassley. Yes, I think quite a bit north.
Dr. Hall. Okay.
Senator Grassley. I do not know whether these figures come
from you, but I have down here 22.4, reaching 23.6 in 2028.
Dr. Hall. That sounds right. I am sure that is----
Senator Grassley. And what are the primary drivers of
spending growth?
Dr. Hall. Well, the primary drivers are things related to
the aging population and health care costs. So it is things
like Medicare, Medicaid, and the entitlements because of the
aging population.
Senator Grassley. And I think I agree with that. I do not
know whether these percentages are accurate, but they take up
12.9 percent of GDP today, and that is going to go up to 14.9,
while discretionary spending, that part that we appropriate
every year, is projected to fall 1 percentage point.
So, in sum, revenues, even with tax cuts, will remain on a
par with historic averages, but spending is set to increase
significantly over historic norms. It seems to me that if we
are going to get control of our growing debt and deficits, our
focus needs to be on the spending side, particularly mandatory
spending programs.
I yield.
Chairman Enzi. Senator Wyden.
Senator Wyden. Thank you, Mr. Chairman. Dr. Hall, good to
see you again, and your professionalism is always appreciated.
Here in this room, a bipartisan tax reform bill was
produced by then-Chairman Judd Gregg, and I was proud to be one
of the sponsors of it. Our approach would have put the bulk of
the tax relief into the pockets of the middle class rather than
the multinational corporations. Unfortunately, our colleagues
on the other side rejected that bipartisan approach, and
others, and decided to put the massive tax cuts for the
multinational corporations on the national credit card. So let
me keep you clear of politics and let us just walk through a
couple of numbers so we can be clear about this.
In the updated outlook, you all estimate that the Trump tax
law is going to increase the deficit by almost $1.9 trillion
over the budget window, even after taking economic feedback,
economic possibilities into account. Nearly $600 billion of
that cost is due just to bigger interest payments on all this
new debt.
So here is my question, and just apropos of the numbers:
Besides slashing Social Security, Medicare, and Medicaid, I do
not know where else Republicans could possibly go to pay for
this $1.9 trillion in debt largely going to the multinational
corporations. In fact, when I sort of strip the budget down, it
would seem to me that cutting the defense budget would be the
only other realistic option.
What is missing here with that analysis?
Dr. Hall. Well, you know, I do not want to make
recommendations, I suppose, on how to fix the problem.
Senator Wyden. I do not want you to. I just want to hear--I
mean, I guess when I looked at it last night, I said maybe they
could cut everything discretionary like NIH, and we would lose
the prospects of research. But, basically, other than the
Defense Department and cutting that, where else would they go
or could they go other than Social Security, Medicare, and
Medicaid?
Dr. Hall. I actually have one of my favorite figures here
that gives you a little bit of insight from the report, Figure
4.3. Right now net interest alone is about 1.6 percent of GDP,
and that number is going to triple, just the net interest
payments is going to triple over the next 10 years, and that
will become about 3.1 percent of GDP. That is bigger than all
of defense spending, discretionary spending. It is bigger than
all of nondefense discretionary spending. So my point is that
the interest cost is starting to just swamp things like defense
spending and nondefense spending. So whatever the fix is going
to be, it needs to be something that is pretty big.
Senator Wyden. So you cannot just wave your hands and sort
of throw up fairy dust and say you are going to drive down the
debt. I am just looking at three ranges of kind of numbers. One
of them, when you have that amount of debt, is--and this is
where I think they are going, is Social Security, Medicare, and
Medicaid, and I base that on their budget proposal for this
year. Then I think you could wipe out the discretionary budget,
NIH and parks and the like. But I cannot see any other
budgetary real estate.
I know my time is almost up. Can you give me some examples
for other possibilities than what I mentioned?
Dr. Hall. Well, I think looking at that figure, it gives
you some idea of sort of where the buckets are. But even that
is sort of underestimating the problem because that is just the
interest cost. That is just getting a deficit down toward zero.
We then would have a huge amount of debt sitting out there. So
I think the problem is even more extreme than that.
Senator Wyden. Well, I am not going to pummel this any
longer, and you have certainly made a very good point with
respect to the debt. But when the growth projections are
nowhere near what was promised, No. 1, the middle class are not
seeing what they were told they were going to get, which was a
$4,000 pay raise, and the middle class drives 70 percent of the
American economy, I do not see how growth is going to get you
close to paying for that $1.9 trillion that was put on the
credit card, and it still leaves us with a safety net and
defense, unless you want to cut the discretionary programs, and
I do not see that being proposed either. So I will look forward
to talking with you about this more, and I certainly share your
view about the debt.
Thank you, Mr. Chairman.
Chairman Enzi. Thank you.
Senator Corker.
Senator Corker. Mr. Chairman, thank you. And, Dr. Hall,
thank you for being here. I have several committee assignments,
like most people here, and this has nothing to do with our
leadership. I find this to be the least serious Committee that
I serve on, but we thank you for being here today. And it seems
like it is always sort of a partisan, whoever is in charge, tit
for tat. None of us have covered ourselves in glory. This
Congress and this administration likely will go down as one of
the most fiscally irresponsible administrations and Congresses
that we have had.
My best vote, one of the best votes I have made here was
the Budget Control Act of 2011, and we did not finish the work
by leaving in the sequester, by making the cuts that needed to
be made. I was not on the special committee. I do not know if
anybody here was. But we did not finish our work, and so we
ended up with a sequester. But it was the best vote that I have
made in that we at least capped domestic spending for a period
of time. It would have been better if we did our work.
You have talked about the cost of this tax bill, and if it
ends up costing what has been laid out here, it could well be
one of the worst votes I have made. I hope that is not the
case, and I hope there is other data to assist, whether it is
jobs or growth or whatever, but I want to get back to that in a
moment.
But the thing that is never talked about here is we--the
bipartisan budget--Maya MacGuineas' group just did an analysis
on the bipartisan budget agreement that we just passed. You did
not do that in your papers because it had just happened. But I
think you are saying that the tax bill could add $1.9 trillion
in debt over the next 10 years. The spending bill that we just
passed, if policy continued, would be $2.1 trillion. Would you
say that what we did in fairness, passing the spending bill we
just passed, would add about the same order of magnitude of
indebtedness over a 10--year period as the tax bill?
Dr. Hall. Yes, actually, we do have a bit of an estimate. I
think the add to discretionary spending from those two bills is
about $650 billion over 10 years.
Senator Corker. The what?
Dr. Hall. The Bipartisan Budget Act and the omnibus, they
combine to add about $650 billion to the deficit over 10 years.
Senator Corker. Not under current policy.
Dr. Hall. That is under----
Senator Corker. Surely do not tell me that, or you are
going to lose all credibility. $650 billion in debt, current
policy over what we just passed?
Dr. Hall. Yes. About $305 billion of that is from exceeding
the caps, and then another $330 billion to spending not subject
to the caps.
Senator Corker. So if you add $150 billion a year in
spending over 10--we added $150 billion to the baseline, did we
not?
Dr. Hall. You mean in----
Senator Corker. We just added $150 billion to the baseline.
How could you multiply that by 10 and come up with $650
billion? I mean, with any growth at all, it is going to be in
the $2 trillion range when you include debt service.
Dr. Hall. Right, right. If you look at Table A-1, we have
got the change, changes in our budget forecast since June 2017.
If you look under discretionary outlays, you will see that we
have a forecast here of discretionary outlays adding around
$650 billion to the deficit over the 10 years that did not
exist before.
Senator Corker. If you keep current policy in place?
Dr. Hall. Right. That is right.
Senator Corker. I want to followup with you on that.
Dr. Hall. OK, sure.
Senator Corker. That cannot be accurate. I mean, you just
do the math, you add $150 billion to the baseline, you multiple
it by 10, it cannot be accurate.
But, anyway, the point is that we have had both spending
that has increased the deficit and tax reform that has
increased the deficit. Is that correct?
Dr. Hall. That is right.
Senator Corker. So, really, we have had both sides of the
aisle--the only three people on this Committee that have not
been involved in increasing the deficit over the last 15 months
are Senator Harris, Senator Sanders, and Senator Merkley. And I
do not think it is because they are fiscal conservatives. I
think it is because they did not agree with the priorities that
were in these bills. But they are the only three that have not
participated in increasing the deficit. We all have
participated. I voted against the spending. Some of you voted
against the tax bill. But let us face it, I mean, both sides of
the aisle are totally remiss as it relates to deficits. And, I
mean, I listen to this partisan bickering over blaming people.
It is ridiculous. We are absolutely not capable of dealing with
our country's finances. And, of course, a big part of it is the
American people do not really want it to be controlled.
I want to get back with you on the numbers, and I know my
time is up. The thing that is confusing to me, I noticed that--
and I will close with this--On page 117, you have got the
growth at 0.7 percent, an average increase growth of 0.7
percent over the 10-year period. And we were looking at an
average growth increase of 0.4 percent paying for this bill
that was passed, the tax reform bill. And I am just confused as
to whether that is just a seven-tenths increase in the baseline
and there really is not that much growth. I am confused over
that, so I want to get back to you on that. I know my time is
up.
Dr. Hall. One thing that might be confusing you, that is a
level. So we think GDP on average the level would be seven-
tenths higher over 10 years on average.
Chairman Enzi. Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. And, Dr. Hall,
I want to start by thanking you and your team for your
nonpartisan, professional work. And as your report clearly
indicates, the claims that the recent tax cut would pay for
itself were pure fantasy. You indicate here that even with
additional economic growth, the debt will increase by close to
$2 trillion over 10 years.
I want to dig down a little bit into the different impact
this tax bill has on gross domestic product versus gross
national product, because both are measures of our economy, but
am I correct in saying that gross national product is a better
measure of the income that comes to the people of the United
States?
Dr. Hall. That is right. Gross domestic product focuses on
where things are made, and gross national product focuses on
who gets the income from what is made.
Senator Van Hollen. Right. So to the extent that the
Republican tax law boosts gross domestic product more than
gross national product, it is because some of that income from
increased economic activity is flowing to foreigners instead of
Americans, right?
Dr. Hall. Right, and one of the big reasons is the big
increase in borrowing that we are having to do, both privately
and publicly. It is coming from abroad, so when you borrow
money, you owe interest payments, and those interest payments
are income that flow out of the country.
Senator Van Hollen. Right. And it is also a fact that if
you look at the stock of American companies, 35 percent of that
stock is currently owned by foreigners, so when there is a
stock buyback, that is money that flows directly into the
pockets of somebody overseas, non-Americans.
In fact, if you dig into your report, you find that by
2028, CBO concludes that the Republican tax law boosts gross
domestic product by 0.5 percent but boosts gross national
product by only 0.1 percent. Is that right?
Dr. Hall. That is correct.
Senator Van Hollen. All right. So doesn't this mean that
roughly 80 percent of the income from the increased activity of
the tax plan in the final year when it has fully kicked in is
going to foreigners?
Dr. Hall. I am not sure I would characterize it that way,
but I get your point about----
Senator Van Hollen. Well, Dr. Hall, you just said that GDP
is a measure of the total economy, and the difference between
GNP and GDP is the amount that is going to foreigners.
Dr. Hall. Sure.
Senator Van Hollen. So you are finding that GDP is growing
a lot faster in year 10 than GNP, right?
Dr. Hall. That is right.
Senator Van Hollen. And, in fact, it is five times faster,
right?
Dr. Hall. Right.
Senator Van Hollen. All right. So I just want to be clear,
Mr. Chairman: 80 percent of the benefit of increased economic
activity from the tax law is going into the pockets of
foreigners. So every dollar of increased economic activity in
2028, 80 cents of that is not going into the pockets of
hardworking Americans that the Chairman referred to. It is
going into the pockets of foreigners. Right?
Dr. Hall. Well, you know, I think--your calculation is
right. I am just not sure that is exactly how I would look at
the benefits of or the impact of the tax act by just----
Senator Van Hollen. Well, as you said, it is in your
report. Let me ask you about----
Dr. Hall. I am not trying to argue with you. I am just----
Senator Van Hollen. Let me ask you about two parts of the
plan that I tried to spend a lot of time on the floor warning
my colleagues about, and this has to do with the foreign
minimum tax. Here it is called the ``global intangible low-tax
income,'' GILTI for short.
Dr. Hall. Right.
Senator Van Hollen. You are familiar with that piece?
Dr. Hall. Yes.
Senator Van Hollen. And then there is another part that is
a deduction for profits from foreign sales, which they call the
``FDII,'' or ``fiddy,'' right?
Dr. Hall. That is right.
Senator Van Hollen. Okay. And on page 109 of your report,
you state, ``By locating more tangible assets abroad, a
corporation is able to reduce the amount of foreign income that
is categorized as GILTI. Similarly, by locating fewer tangible
assets in the United States, a corporation can increase the
amount of U.S. income that can be deducted as FDII.'' And you
conclude, ``Together, the provisions may increase corporations'
incentive to locate tangible assets abroad.''
Just to translate into English, when we talk about moving
tangible assets abroad, we are talking about things like plant
and equipment and that kind of thing, right?
Dr. Hall. Right, although I do not want to exaggerate that.
Part of what we were doing there is pointing out that it is
pretty complicated, and it----
Senator Van Hollen. Dr. Hall, I am just reading from your
report----
Dr. Hall. I understand.
Senator Van Hollen.--and your findings here are consistent
with that of lots of economists, as you know, that this
provision, the way this provision was written creates this
perverse incentive to shift jobs overseas. And if a corporation
does succeed in lowering its tax bill by moving its factory
overseas along with the jobs, then they are effectively getting
a tax break by moving plant and equipment overseas, aren't
they?
Dr. Hall. Yes, I just want to put it into context, though.
We think overall the tax act is going to encourage investment
in the United States on the whole, not abroad.
Senator Van Hollen. But part of that investment, as we
talked in the earlier question, is from foreigners, and
foreigners----
Dr. Hall. That is right.
Senator Van Hollen.--in the year 2028 are getting 80 cents
of every dollar of increased income from economic activity.
Dr. Hall. Part of that money will be foreign----
Senator Van Hollen. So, yes, more foreign investment and
more profits for foreigners in a bill that was sold as
something that was going to help the American worker.
The final question relates to the other half of the GILTI,
which is the FDII. Would you agree that is a tax expenditure?
Dr. Hall. Well, it is not our call. It will be the Joint
Committee on Taxation. They will followup with that.
Senator Van Hollen. Is that the kind of thing that you in
the past have said is sort of a tax break that some people get
but others do not?
Dr. Hall. Actually, we have not. We rely on the JCT to make
that determination.
Senator Van Hollen. I just find it ironic, Mr. Chairman,
that we have got now what is a Government program that
encourages the people to move plants and equipment overseas. I
thank you.
Chairman Enzi. Senator Cotton.
Senator Cotton. Thank you, Director Hall, for your
appearance and your testimony. There has been a lot of talk so
far about the macroeconomic picture, about budget, debt and
deficits, and economic growth and so forth. Let us bring it
down to the micro picture, what this means for families.
The CBO outlook projects an unemployment rate in 2019 of
3.3 percent, historically low, so that is good news. Maybe even
better news, CBO projects an increase in hourly wages and
attributes that to increased competition for labor among
businesses because the bidding up of wages is necessary to
attract new employees and retain existing workers.
Director Hall, what are the policies fostering that
competition and leading to the increase in hourly wages?
Dr. Hall. Well, we are ending the slack in our economy, but
we have a lot of stimulus from the tax act and the other two
bills, so that stimulus really is pushing GDP growth above
potential and so we are getting this very low unemployment
rate, we think, and higher employment.
Senator Cotton. And does that mean that some of the gains
from that growth, whatever it may be--we have our differences
between the two parties, but some of the gains from that growth
will accrue to a greater degree to labor than it will to
capital since you are seeing wage increases for people's labor?
Dr. Hall. Well, yes, there will be benefit for labor, and
we do see actually a decline in the marginal tax on labor as a
result.
Senator Cotton. Well, I think that is a good thing given
that labor for many decades now, especially unskilled, low-
skilled laborers, people who are getting out of high school and
going straight into the work force or maybe not getting a high
school degree have not seen their wages increase.
I also think one important policy that we need to continue
is immigration enforcement, and I think that we need to take a
look at our immigration levels, because obviously we could
increase our abstract GDP simply by bringing in millions of
more workers. The way you increase your GDP is more
productivity or more workers. But that would not necessarily be
good for America's families. It would not necessarily be good
for GDP on a per capita or a per household basis.
I want to turn now to something that I did not see in your
report. I looked at your report; I looked at your testimony. I
did not see much, if anything, about national defense and
military spending. Did I overlook that, or did you not put much
focus there?
Dr. Hall. You know, I think we did not put a ton of focus.
We did our usual.
Senator Cotton. And I raise that because I want to make the
point that I do not think our military is responsible for
driving much of these deficits and the debt we face now, and I
think your report makes that clear, in part by not discussing
the increase in military spending. There is no doubt that we
increase military spending substantially this year and next
year, but as your report makes clear, the long-term debt
picture is driven primarily by retirement, especially health
care spending. Is that right?
Dr. Hall. That is right.
Senator Cotton. And I would even make the case that in the
long term, military spending is essential for controlling our
deficits and ultimately our national debt because it creates
the international system in which our economy operates. I have
a few figures here from the end of World War II about
international trade and investment, that trade expansion in the
United States has produced roughly $2.1 trillion in economic
gains. That translates into more than $7,000 per person and
more than $18,000 per household, and that our economy is about
13 percent larger than it would have been absent that increase.
It is hard to imagine that kind of increase in trade
happening if we had had a conflict on the scale of World War II
again. No doubt there has been many wars, and our Nation has
participated in many of those wars. But certainly we have not
had the kind of great power conflict in this world that we saw
from 1939 to 1945. The Federal Reserve Bank studied the effects
of war on trade and concluded that it not only severely
diminished trade in the long term for countries directly
involved, but even for neutral countries, you saw declines in
trade of up to 10 percent. And it is the United States military
that has been creating that environment, that has been
patrolling the seas, securing critical choke points, forcing
our allies to conciliate or mediate their differences so their
small conflicts do not rise into big conflicts, as well as
deterring first the Soviet Union and now some other peer
competitors from the kind of adventurism that launched us into
World War II and before that World War I.
So we spend a lot on our military, and we spend a lot more
than every other nation, many of the closest nations combined,
but that is in part because military competition is so
destructive of economic growth and prosperity and, therefore,
we cannot afford to skimp on it. I took that to be the message
of the absence of much discussion of military spending in your
most recent report in your testimony, that the military is one
of the most fundamental things our Government spends taxpayer
dollars on and that we have to continue to do so if we have any
hope of achieving the prosperity that we all hope for our
country.
Thank you.
Chairman Enzi. Senator Harris.
Senator Harris. Thank you, Mr. Chairman. Good morning.
Dr. Hall. Good morning.
Senator Harris. I reviewed the CBO's outlook for the next
decade, and I am deeply concerned about the increase to the
deficit, as many members of this Committee have expressed. I am
especially troubled that much of the deficit increase can be
attributed to the Republican tax plan that was passed a few
months ago which will add nearly 1$1.9 trillion to the deficit.
According to the CBO's analysis, the debt will exceed the
size of the entire United States economy in just over a decade,
2 years sooner than you forecasted in June, the debt problem
created by a massive giveaway to the wealthy and corporations
and by making the individual tax cuts expire in 2025 while
making the corporate tax cuts permanent. This was a pure
giveaway to the corporations and the top 1 percent of the
United States. And when Congress talks about how we fix this
deficit increase from the tax plan, some of my colleagues on
the other side of the aisle discuss the need for entitlement
cuts. Entitlement cuts really mean cutting Medicare, Medicaid,
and Social Security. It means cutting the main programs 4.3
million seniors in my home State of California rely on, seniors
who deserve to retire with dignity.
For my constituents, retiring with dignity means being able
to afford their prescription drugs. It means not living
paycheck to paycheck and having the peace of mind that
Government will not take away the benefits promised to them. At
a time when so many seniors cannot afford their life-saving
medications, we need a budget that allows Medicare to negotiate
drug prices. What we do not need is a budget that cuts $500
billion from the program over the next decade. When trying to
repeal the Affordable Care Act this past year, congressional
members proposed cutting Medicaid by $700 billion, the same
program that cut six out of ten seniors' nursing home uses.
Nearly two-thirds of California seniors depend on Social
Security for at least half of their annual income, an average
of $21,300. With cuts to Social Security, millions of seniors
would struggle to make ends meet. So when we discuss balancing
the budget, we need to speak the truth: that this tax plan has
ballooned the deficit for the purpose of delivering billions of
dollars to the top 1 percent while putting access to affordable
health care and a shot at a decent retirement at risk for
anyone else.
So, Dr. Hall, my question is: Based on your updated budget
outlook, can you tell me whether the effects of this tax bill,
either directly or indirectly, impact the future solvency of
Medicare and Social Security?
Dr. Hall. Well, certainly anything that adds to the deficit
and the debt is going to have an impact on things going
forward. If we get a little boost in economic growth, that
might extend the exhaustion dates. But the basic problem is
still there, and the basic issue of the debt getting to an
unsustainable level is maybe more intense than it was before.
Senator Harris. And will you agree that it is going to have
a disproportionate impact on senior Americans?
Dr. Hall. I mean, certainly changes in Medicare and that
sort of thing would have a disproportionate effect. I guess it
depends upon how Congress decides to deal with the problem.
Senator Harris. All right. Thank you.
Thank you, Mr. Chairman.
Chairman Enzi. Thank you.
Senator Merkley.
Senator Merkley. Thank you very much for coming and
bringing your expertise to bear on our economic situation.
I was looking at numbers from the Joint Committee on
Taxation, which laid out that $17 out of every $20 in the
benefits from the tax reductions goes to richer Americans, or
roughly 84 percent. That did not include the estate tax, by the
way, which was specifically excluded, which goes 100 percent to
the very richest Americans.
What is your analysis of the percent of the tax benefits
that go to those who earn more than $100,000?
Dr. Hall. We have not updated those numbers. In this
baseline we have not sort of tried to reproduce that. So I
could not tell you anything different than what JCT has on the
topic.
Senator Merkley. Do you have any reason to think JCT is far
off the mark?
Dr. Hall. No, I do not.
Senator Merkley. And would you agree that if you include
the estate tax, the numbers would be even worse?
Dr. Hall. That sounds right.
Senator Merkley. Well, I think that is an important point
because something that was sold as beneficial to the middle
class is actually beneficial to the best-off. And that brings
me to the second point, which is your analysis shows that from
10 months ago until now, the annual deficit has grown from an
estimated $563 billion to an estimated $804 billion, or roughly
a $241 billion increase from 10 months ago.
Dr. Hall. That is correct.
Senator Merkley. Okay. And if it extends it over 10 years,
I think your numbers were about $1.6 trillion?
Dr. Hall. Yes.
Senator Merkley. Of just additional on top of the baseline
that existed 10 months ago.
Dr. Hall. That is right.
Senator Merkley. And how much of that is the tax bill and
how much of that is the spending bill?
Dr. Hall. That is a good question. The tax bill is a big
part of that. I think the tax bill is--I am sorry. Let me look
it up quickly.
Senator Merkley. You bet.
Dr. Hall. I can tell you the spending part of it. The
spending part actually is 40 to 45 percent of that increase, so
it actually is a pretty significant part. But the remainder
is--and probably more than the remainder is the tax bill.
Senator Merkley. So a great share of the tax bill, even if
you include some growth projections, is funded through
borrowing?
Dr. Hall. Correct.
Senator Merkley. Okay. So essentially we have a bill that
has borrowed from our children, because they are the ones that
inherit the debt, to deliver the vast bulk of the benefits to
the richest Americans.
Dr. Hall. That is a way of looking at it.
Senator Merkley. Well, not just a way of looking at it, but
that is a fair reading of the numbers?
Dr. Hall. Well, obviously, it depends upon who winds up
fixing the deficit, I suppose, as to who bears the burden about
how Congress decides to deal with it. But delay is certainly
pushing the burden back in time.
Senator Merkley. I want to point out a pattern that I found
quite interesting. Under President Carter, we had essentially
him closing out with the same deficit that existed the year
before he took office despite the oil shocks, about $73
billion. Under President Reagan, the deficit increased from 73
to 149, or roughly doubling. Under President Bush, the first
President Bush, we had another near doubling, going from 149 to
290. Under President Clinton, we had a reduction from 290 to a
surplus of 236, so obviously a vast decrease in the deficit--in
fact, a surplus. And so we were reducing our national debt.
Under Bush the 2nd, we had an increase from 236 to 458, so
another rough doubling. And under President Obama, the results
of the recession his first year in office, $1.4 trillion in
deficit reduced down to 584 when he left office.
Why is it that the deficit decreases under Democratic
leadership and increases under Republican leadership?
Dr. Hall. I would not want to offer an opinion on that.
Senator Merkley. Have I read the numbers accurately?
Dr. Hall. That sounds right.
Senator Merkley. Well, I do think it is an important point
to make because what we have seen for a pattern that has
increased our debt vastly has been Republican leadership has
repeatedly taken us deep into the red, Democratic leadership
has reduced that damage, and yet all we hear from our
Republican colleagues is how they are fiscally responsible. How
can one square the rhetoric with the reality?
Dr. Hall. I would not want to offer an opinion.
Senator Merkley. It is not your responsibility to offer
that, but I am glad you confirmed that my numbers were
accurate.
I will just close by saying that our children are now
financing the biggest theft of money delivered to the wealthy
in America, and this is what you normally see in corrupt,
irresponsible, Third World governments, not the United States
of America.
Chairman Enzi. Senator Kaine.
Senator Kaine. Thank you, Mr. Chair. Dr. Hall, good to be
with you.
I want to just draw your attention to page 33 of the
report, and I will just read a quote. I want to ask you about
trade. Changes to trade agreements or tariff policies on the
part of the United States and its trading partners that impede
trade could have significant adverse effects on aggregate
economic activity; whereas, the removal of trade barriers
between the United States and its trading partners could
improve aggregate economic conditions.
We had a hearing recently where the head of the Council on
Economic Advisers Kevin Hassett appeared before us. It was
immediately after President Trump had indicated he was going to
impose tariffs on imported aluminum and steel. It was before
any of the subsequent potential retaliation discussion back and
forth.
I asked Kevin Hassett at the time, based on my
understanding that the number of workers in American industries
that make aluminum and steel is dramatically smaller than the
number of workers that work in American industries that make
things with aluminum and steel, I asked his economic opinion
about whether the imposition of these tariffs would be a plus
or minus for American workers, and he said that the economic
literature would suggest that just looking at it that way,
before you get into a retaliation discussion, it would likely
have a negative effect on jobs. Do you agree with that?
Dr. Hall. I do.
Senator Kaine. And then if we get into the subsequent
retaliation issues, the aluminum and steel issues matter at lot
to Virginians because I have got, you know, Coors beer and
Anheuser Busch, you know, big breweries that are buying
aluminum for cans. And I also have a Dublin truck plant in
Pulaski that is--it is the only manufacturer of, I am sorry,
Volvo trucks in Dublin. Pulaski County, Virginia, is the only
manufacturer. It is going to raise their costs, raise costs to
consumers. So there is some effect just on the aluminum and
steel issue in Virginia. But over the course of the last couple
of weeks, I have been on recess traveling around, a lot of
concern in Virginia on the ag side, the announcement by China
that they would retaliate, especially with respect to things
like soybeans and pork and some other agricultural products are
very challenging to Virginians.
Talk a little bit about--and I do not know, have you at the
CBO started to do any analysis of what either the tariff on
aluminum and steel or more broadly, if retaliation were to
occur, what would the effect on American workers and American
farmers?
Dr. Hall. We have not, and, in fact, our economic forecast
closed about mid-February, so we really have not taken any of
that on board. Certainly that is the sort of thing we would pay
attention to and see how things turn out and would be something
we would include in our baseline economic forecast at a later
date next time we do it or whenever significant changes are
made.
Senator Kaine. You did generally agree with the Hassett
conclusion that the import tariffs on aluminum and steel are
likely to be more negative than positive on American workers.
Do you have an opinion about if there are retaliatory tariffs
against the United States in the ag sector, you know, is that
going to be a net good or a net bad in terms of the workforce?
Dr. Hall. Well, to be fair, you know, the real solution,
how it winds up is sort of how it winds up, you know, rather
than just this one act like that. I do think a lot of the
concerns--I find them interesting because they are the inverse
of the benefits of freer trade. Having trade negotiations or
trade agreements, the idea is that you can have lower prices,
you can have lower cost of production, you can have access to
the foreign markets with good trade agreements. So undoing
those can have the reverse effect. But, again, to be fair, we
have to sort of see where we wind up.
Senator Kaine. Some of the retaliation discussion is still
kind of at the rhetorical level.
Dr. Hall. Right.
Senator Kaine. I guess the actual tariffs have been imposed
on aluminum and steel, so that is real. But the retaliation
discussion is a little bit rhetorical right now.
Dr. Hall. Right, right, and we do not really know what sort
of tariff changes the U.S. is likely to make or may make going
forward.
Senator Kaine. Well, I am just going to conclude and say I
think it is interesting that the Constitution gives Congress
really plenary power over trade in the Commerce Clause. We
delegate to the President through fast-track, which I support,
the ability to negotiate trade deals and then set up a process
for bringing those back for a congressional up or down vote.
I think it is interesting that we want the say over a trade
deal, but we allow Presidents to start trade wars without a
vote of Congress, even though the Constitution suggests that
trade is ultimately for Congress. I do not think a President
should be able to do a trade deal or start a trade war without
Congress giving it an imprimatur. And I hope to work with my
colleagues to maybe come up with some improvements in the
process so that there cannot be a unilateral executive decision
to start a trade war when the Constitution reserves trade
powers to Congress. But that is just my opinion. You need not
comment.
Thank you, Mr. Chair.
Chairman Enzi. Thank you.
Senator Whitehouse.
Senator Whitehouse. Well, Mr. Chairman, it looks like I am
bringing up the rear here. It is just down to us and Dr. Hall.
Dr. Hall, you and I have talked before about the health
care spending projections graph.
Dr. Hall. Right.
Senator Whitehouse. And this is the one that I have used
before. But guess what? We have a new one. A new year has gone
by, and just for the record, back here when the Affordable Care
Act passed, CBO did the yellow-line estimate of what mandatory,
Federal health care spending was expected to look like. Then as
time went on and we had the experience of the Affordable Care
Act and we had whatever else took place, we got this actual
result, which came in below what was expected. And then here
there has been a new projection that is made going forward. So
this is the old projection. This is the actual through this
period. And this is the new projection.
Now, in the graph that I used to use all the time, this
savings delta was $3.3 trillion in savings between the expected
spending and the new projection. In this, the number goes up to
$4.2 trillion. Now, I believe that about $300 billion of that
relates to the repeal of the individual mandate, so you could
back that out, but that still leaves $3.9 trillion in savings
up from $3.3 trillion in savings just in the intervening year.
And I think it is important to try to do whatever we can to
figure out what is going on here.
So I ask you to keep working with us on that. This has a
particular emphasis now because, as you know, there is a
bicameral select committee working on trying to reform our
budget process, and nobody has been more eloquent than Chairman
Enzi in understanding how broken our existing budget process
is. It is one of the areas where he and I have considerable
common cause.
I think that one of the ways that we need to fix our
existing broken budget process is that we need to have all of
the elements that mathematically add to the debt to be
considered in our budget process, so not just appropriated
spending but also health care spending, also tax expenditures
and also revenue. That is what mathematically leads to debt and
deficit.
As a general proposition, do you agree with me that those
are the four key elements that mathematically lead to our debt
and deficits?
Dr. Hall. Yes.
Senator Whitehouse. So if we are going to look at health
care, we really need to start looking at ways to address this.
And I completely disapprove of and will fight to my last breath
to prevent attacking Medicare and Medicaid and other Federal
programs and taking benefits away from people in order to
achieve savings, because I think there are better ways to
achieve savings. I think there are efficiencies that can be
gained. We are seeing some remarkable results out of some of
the accountable care organizations, and it is very hard to
extrapolate from Coastal Medical in the State of Rhode Island,
a provider practice that has now reduced its per patient per
year cost by $700, while dramatically improving the experience
and the care that their patients get, to $3.9 trillion in
savings. But I suspect that there is something going on out
there as we improve the payment system for the health care
enterprise so that it is diverted less toward doing things to
people and prescribing things for people and seeing people than
it is to doing the things that keep people healthy so they do
not need those things in the first place. And I just want to,
first of all, ask if you concur with that as a general thought.
And, second, will you keep working with us, and if there are
any ways that we can be helpful, to try to figure out what is
behind--you know, $3.9 trillion, that is a lot of money.
Dr. Hall. Right.
Senator Whitehouse. And it ought to be a matter of real
priority to try to figure out what is working that has made
that difference in this period.
Dr. Hall. We are interested in that topic. We are
interested. We are trying to do some work on that. I know you
are interested beyond this, but if for no other reason, we keep
getting the forecast wrong. We keep having to lower our
estimate of health care cost growth, and if we understood that
better, we could give you a better forecast of future costs.
So we are working on that. We would be happy to follow up
and talk to you a little bit about what we are doing.
Senator Whitehouse. I know my time has expired, but may I
ask an additional question, Chairman?
Chairman Enzi. Sure.
Senator Whitehouse. Does your work to look at that look at
any--can you look kind of in any way down through to the
experience of, say, a Coastal Medical or a Rhode Island Primary
Care Physicians or a provider group where they are actually
seeing that cost not just not go up so fast, they are actually
driving the cost down for their patients. And maybe that is too
big of an extrapolation, but what does that look like from your
perspective?
Dr. Hall. We will have to do that. I think that is
certainly where we start working on this, is talking with
providers and their experiences to get an understanding of what
is happening at individual providers and see if we can find
some common factors in there. So that is certainly going to be
part of our methodology.
Senator Whitehouse. Great. Well, thank you, because,
surely, Mr. Chairman, if we could save $700 per person per year
on health care expense while providing better care for people,
that would be a pretty serious win-win.
Chairman Enzi. Yes, it would, and I thank you for your
comments at the last hearing regarding that and then sharing
the information that you did with me. I will have to get
together with you and ask a few questions about that, though,
to get more detail on how it actually works. And I thank you
for your work on the special budget task force as well. We are
really relying on you. as you did working bipartisan before, to
come up with some solutions that maybe we can fix that process
and make this----
Senator Whitehouse. Well, we are much inspired by you, Mr.
Chairman, and Senator Perdue and I, who are both on this
Committee, are doing our best to channel your concerns and your
wishes into that process.
Chairman Enzi. I appreciate that. And I want to thank you,
Dr. Hall, for your testimony today and for all of the documents
that you oversee the preparation of, and your full statement
will be included in the record.
As information to all Senators, questions for the record
are due by 6 p.m. today, with a signed hard copy delivered to
the Committee clerk in Dirksen 624. Under our rules, our
witness has 7 days from receipt of the questions to respond
with answers.
With no further business to come before the Committee, the
hearing is adjourned.
[Whereupon, at 11:54 a.m., the Committee was adjourned.]
ADDITIONAL COMMITTEE QUESTIONS
[The following submitted questions were not asked at the
hearing but were answered by the witness subsequent to the
hearing:]
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GAO'S ANNUAL REPORT ON ADDITIONAL OPPORTUNITIES TO REDUCE
FRAGMENTATION, OVERLAP, AND DUPLICATION IN THE FEDERAL GOVERNMENT
----------
WEDNESDAY, MAY 23, 2018
U.S. Senate,
Committee on the Budget,
Washington, DC.
The Committee met, pursuant to notice, at 10:33 a.m., in
room SD-608, Dirksen Senate Office Building, Hon. Michael B.
Enzi, Chairman of the Committee, presiding.
Present: Senators Enzi, Grassley, Boozman, Sanders, Van
Hollen, and Harris.
Staff present: Elizabeth McDonnell, Republican Staff
Director; and Warren Gunnels, Minority Staff Director.
OPENING STATEMENT OF CHAIRMAN ENZI
Chairman Enzi. I will go ahead and call to order this
hearing of the Senate Budget Committee. Good morning and
welcome. I call this hearing to order so that we can focus on
the Government Accountability Office's annual report to
Congress on reducing Government fragmentation and redundancy. I
like that word ``fragmentation.''
By acting on the recommendations in this report, Congress
and Federal agencies have the potential to improve Government
performance and stewardship of taxpayer dollars. This is a goal
I believe both parties share, and I hope we can work together
to advance solutions to the problems identified in this report.
It is no secret that the Federal Government spends beyond
its means. Our national debt has eclipsed $21 trillion, and the
Congressional Budget Office projects annual deficits will soon
return to more than $1 trillion.
Key to addressing this chronic overspending is diligent
oversight of the programs, agencies, and activities currently
being funded. That means routinely reviewing programs and
reauthorizing, reforming, and eliminating them as appropriate.
It also means getting appropriations bills done on time and not
resigning ourselves to massive catch--all spending bills that
are subject to little review from the body.
GAO's annual report on fragmentation, overlap, and
duplication is one tool on which Congress can and should rely
as we undertake this work. Each year GAO calls attention to the
numerous examples of inefficiency and redundancy across
Government. One example is the graduate science, technology
engineering, and math, or STEM, education. GAO began
highlighting the duplication in these programs in its 2012
report and does so again this year. In 2016, 13 Federal
agencies spent approximately $3 billion on 163 different STEM
education programs. You can see how many agencies are engaged
in STEM education on this chart that is on the screens.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
psGAO noted that nearly all of these programs overlap to
some degree with at least one other program. A key feature of
GAO's report is that it does not just highlight problems; it
identifies solutions. Since GAO began issuing this report in
2011, it has identified more than 700 actions across 278
programs that Congress and the executive branch could take to
make the Federal Government more efficient and effective. Of
those recommendations, 551 have been partially or fully
addressed by executive or legislative action. GAO estimates
these transactions have saved the Federal Government $178
billion.
But as GAO's 2018 report indicates, more work can be done,
and I would direct your attention to this chart, which is
probably too small to read, but it is duplicated in the
testimony that we have, too. It provides a breakdown of
partially addressed and unaddressed agency-specific actions
since GAO began producing this report. The light blue color
represents those that have been partially addressed while dark
blue represents those that have been unaddressed.
As the chart shows, the Department of Defense leads the
pack with the most pending recommendations followed by the
Department of Health and Human Services, the Internal Revenue
Service, and so on down the list. I wanted to highlight this
chart as a reminder that Congress must be diligent in its
oversight efforts.
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As I have said before, I want to work with members of this
Committee to make our Government more efficient and responsive
to all Americans. If there are issues in this report you would
like to address, let us work together. Tackling Government
inefficiency and overspending is not an easy task. I believe
the issues identified in the GAO's report, which we will talk
about this morning, represent a good place to start.
Our witness, the U.S. Comptroller General, will provide
additional information about the report and GAO's
recommendations. Additionally, GAO's subject matter experts are
in attendance this morning, prepared to answer any specific
questions from Committee members.
I might mention, though, that the National Defense
Authorization Act is also being marked up at this same time
this morning, and a number of members of the Committee are on
that, so we will make sure that they pay some special attention
to this report and this testimony.
Welcome to all of you, and I look forward to the
discussion.
Senator Sanders.
OPENING STATEMENT OF SENATOR SANDERS
Senator Sanders. Thank you, Mr. Chairman, for holding this
hearing and thank you, Mr. Dodaro, for being with us today.
I know that my friend, the Chairman, has long been
concerned about the deficits and the national debt facing this
country, and I would just remind folks that the recent tax bill
that was passed, supported, I believe, by almost every
Republican, will increase the national debt by $1.9 trillion,
and that at a time of massive income and wealth inequality, 83
percent of those tax benefits by the end of the 10-year period
go to the top 1 percent. So some of us do not take my
Republican colleagues all that seriously now when they talk
about the need to deal with the national debt.
But, Mr. Chairman, the point of this discussion today, this
hearing, is a very important one, and that is that a budget as
large as the Federal Government's, there is no question but
there is an enormous amount of waste, fraud, abuse,
duplication, and I think it is a good idea that we take a look
at how we can deal with those issues.
One of the agencies that I think--and I suspect you, Mr.
Chairman, will agree with me--deserves to have people take a
hard look at is, in fact, the Pentagon where over half of our
discretionary spending goes. That is kind of the elephant in
the room. And this year we are spending $700 billion on the
military, more than the next ten countries combined. I mean, it
is a good debate that we do not have enough of, how much we
should be spending on the Defense Department. Everybody
believes in a strong defense, but when is enough enough?
Meanwhile, while we spend so much on defense, we have tens
of millions of people in this country with no health insurance,
parents cannot find affordable child care, hundreds of
thousands of kids cannot afford to go to college, and we have
people talking about making cuts in programs for working people
but expanding military spending by $165 billion over 2 years.
But I think--I appreciate very much, Mr. Chairman, the
hearing that you held in March on the need for an audit of the
Department of Defense, and I think there is widespread
agreement that there is something wrong when the Pentagon is
the only Federal agency in the country that has not been able
to pass an independent audit 28 years after Congress required
it to do so. And I appreciate you holding a hearing and
focusing attention on that.
Twenty-eight years does seem to be enough time for the
Pentagon under Democratic and Republican leadership to maybe
get its act together and give us an audit, and we hope that we
will have some success in seeing that soon.
Further, Mr. Chairman, as the GAO has told us, there are
massive cost overruns in the Defense Department's acquisition
budget that we have got to address. According to GAO, the
Pentagon's $1.66 trillion acquisition portfolio currently
suffers from more than $537 billion in cost overruns, with much
of the cost of the cost growth taking place after production.
So this is a huge issue that I think requires bipartisan
analysis. I do not think anybody thinks it is a great idea to
see these huge cost overruns.
GAO tells us that ``many DoD programs fall short of cost,
schedule, and performance expectations, meaning DoD pays more
than anticipated, can buy less than expected, and in some cases
delivers less capability to the warfighter.'' You are a former
mayor, I am a former mayor, and I think, you know, when we let
out contracts, we held the contractors accountable. I would
presume it is the same thing in Wyoming as it is in Vermont. If
somebody says they are going to do something for $2 million and
then they say, ``Oh, it is going to end up costing $4
million,'' that is not acceptable. But I think there has not
been that type of oversight over the Department of Defense that
needs to take place.
Another major subject that we should be looking at today is
defense contractor fraud. Today, Mr. Chairman, about half of
the Pentagon's $700 billion annual budget goes directly into
the hands of private contractors. It is a whole huge issue. I
think many people think when we spend money on defense, it goes
to the soldiers and the planes. But a lot of that money goes to
private contractors. Meanwhile, over the past two decades,
virtually every major defense contractor in the United States
has paid millions of dollars in fines and settlements for
misconduct and fraud, at the same time while making huge
profits on these Government contracts.
In 2011, I requested a report from the Pentagon on this
very issue. Incredibly, that report showed that hundreds of
defense contractors and their parent corporations that had
defrauded the United States military or settled allegations of
fraud received more than $1.1 trillion in Pentagon contracts
over the previous decade.
For example, since 1995, Boeing, Lockheed Martin, and
United Technologies have paid nearly $3 billion in fines or
related settlements for fraud or misconduct. Three billion
dollars, collectively. Yet those three companies received about
$800 billion in defense contracts over the past 18 years.
Finally, Mr. Chairman, we need to take a serious look at
the excessive and obscene executive compensation of defense
contractors. It is an issue I raised at that hearing on the
need for an audit. You have defense contractors which, for all
intents and purposes, they are private companies, profit-making
companies, but they are really agencies of the U.S. Government
because almost all their funding comes from the United States
Government.
Last year the CEOs of Lockheed Martin and Raytheon, two of
the top four U.S. defense contractors, were each paid over $20
million in total compensation. Moreover, more than 90 percent
of the revenue from those companies came from worldwide defense
spending. So you have companies in which 70 percent of their
revenue comes from the U.S. Government, at least from the
Department of Defense, and then they pay CEOs 400 times what
the Secretary of Defense makes. I do think that is an issue
that we may want to look at, because it is not only the money
that goes to the CEOs, it sets a pattern. If you can have a
company paying its CEO 400 times, or whatever it is, what the
Secretary of Defense gets, it tells you or it should tell us
that these guys are not terribly serious about taxpayer
dollars.
So those are some of my concerns that I will be raising,
Mr. Dodaro. Thanks for being here. Mr. Chairman, thanks for
holding the hearing.
Chairman Enzi. Thank you, Senator Sanders. When you
mentioned the mayor thing, I was recalling my mayor days when
we worked on cost overruns, because I told my project engineers
that if the bid came in above their estimate, they would have
to do the job for what they said it would cost.
Senator Sanders. Right. And we did something similar, and I
think mayors all over this country look at it, and we should
ask why the DoD does not.
Chairman Enzi. There is no extra fund to dip into if you do
not have the money. Hopefully the people that are not here that
are at that markup are making note of that anyway.
Our witness today is Gene Dodaro. He is the Government
Accountability Office--and actually holds the title of
Comptroller General of the United States. Mr. Dodaro testifies
frequently before Congress. I am pleased to welcome him back to
this Committee. GAO has done great work over the years
identifying waste, fraud, and abuse in Federal spending and has
been a great service to this Committee in its oversight of
Federal spending and the budget. He is the eighth Comptroller
General of the United States. He was confirmed in December 2010
after serving as Acting Comptroller General since March 2008.
He has been with the GAO for more than 40 years. He served for
9 years as the Chief Operating Officer, the No. 2 leadership
position at the agency. Prior to that, he headed GAO's
Accounting and Information Management Division, which
specialized in financial management, computer technology, and
budget issues.
Comptroller General, please begin.
STATEMENT OF THE HONORABLE GENE L. DODARO, COMPTROLLER GENERAL,
U.S. GOVERNMENT ACCOUNTABILITY OFFICE; ACCOMPANIED BY MICHAEL
SULLIVAN, DIRECTOR, DEFENSE WEAPON SYSTEM ACQUISITIONS
Mr. Dodaro. Thank you very much, Mr. Chairman. Good morning
to you, Ranking Member Senator Sanders. Good to see both of you
again. I appreciate the opportunity to be here today to discuss
our eighth annual report on this topic of overlap,
fragmentation, and duplication in the Federal Government. We
also add our ideas for cost savings and revenue enhancements,
which we think the Congress should consider as well.
In the first 7 years on this effort, we identified 724
recommendations in this area. So far, as of March, 52 percent
were fully implemented, 24 percent were partially implemented,
and as a result of the actions by Congress and by the executive
branch, financial benefits have either occurred or will accrue
of $178 billion. And I believe much more savings could be
realized by addressing our open recommendations.
This year, we identified 68 new recommendations for
congressional consideration in addition to the 724 we already
identified.
For example, the Department of Defense could save over $500
million over 5 years by eliminating unnecessary overlap and
duplication among U.S. distribution centers that provide goods
to servicemembers.
The Department of Energy could potentially reduce risk and
save potentially tens of billions of dollars by testing and
using alternative approaches for low-level treatmenting nuclear
waste at the Hanford site in Washington.
The Department of Veterans Affairs could save tens of
millions of dollars in purchasing medical and surgical supplies
by using best practices that private sector hospitals use in
that area.
Also, the Coast Guard could save millions of dollars by
closing unnecessary overlapping and duplicative search and
rescue stations. They have already identified ways that they
could do that.
So there are many opportunities yet to provide savings. We
have 365 open recommendations of where savings could be still
yet realized. And many of these, I would point out, are in both
the Defense Department and the Department of Health and Human
Services, Mr. Chairman, which you identified in your opening
statement. One of the reasons there are so many recommendations
open in those two areas is that is where the money is.
Medicare, Medicaid, and other programs are over $1 trillion a
year right now, and we have a number of recommendations that we
think could save tens of billions of dollars in Medicare and
Medicaid expenditures; and also at the Defense Department; and
we think there are also opportunities for IRS to take actions
that could result in additional revenue collections that should
be implemented as well.
So I appreciate very much you holding this hearing and
providing a platform for discussing these issues, which are
very important, and I look forward to responding to your
questions. Thank you.
[The prepared statement of Mr. Dodaro follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Enzi. Thank you. Particularly, thank you for the
testimony, which is a summary of the full report, which we will
be encouraging people to read.
We will now do rounds of questions, 5 minutes for
questions--although that is not very strict for the two of us.
[Laughter.]
Chairman Enzi. And it will be in the order that people
came. That will be easy to keep track of, too.
Before I start my questions, I would like to thank you
again for the report, and, of course, what we need is action on
the report. That is what you have been suggesting, and there is
some action on it, but we will have to figure out if we can
come up with some ways to accelerate that.
I am going to ask about the 160 housing programs, some
health care improper payments, inefficient VA purchasing, the
163 STEM programs, identifying theft, duplication, disability
claims, redundant reviews, and I know that instead of
Washington, DC, bureaucracy, we need to get the money out to
where the people are with the programs that they are designed
to help. And your report is outstanding at that.
I will start with the housing one. You found that there are
160 housing-related programs that overlap, and the money could
be saved by combining them. It is an area ripe for reform. As I
said to HUD Secretary Carson when we met to discuss the issue,
reform done right would mean less money going to overhead and
more directed to providing assistance. What benefits can be
recognized by streamlining duplicative, overlapping, and
fragmented housing assistance programs? Has the GAO estimated
how much could be saved by such streamlining?
Mr. Dodaro. The benefits could be both cost savings and
greater efficiencies as well as reducing the burden on both
property holders and tenants. For example, the Department of
Housing and Urban Development and the U.S. Agriculture
Department both operate multi-family programs, housing programs
in that area, but they set different requirements for both the
property and tenant eligibility for those programs, and they
manage the programs very differently. So if you are a property
owner and you want to use a multi-family dwelling and
arrangements with HUD or USDA, you end up dealing with two
different sets of requirements. You also could have multiple
inspections with different inspection standards, and this
creates a lot of inefficiencies in those program activities.
In the single-family housing area, there are opportunities
for their loan guarantee programs. A lot of them operate in
similar markets, so they could be consolidated or at least
improve the coordination among the programs, and this would
provide further streamlining opportunities.
Now, we have not made estimates because there have not been
specific proposals put forward by the executive branch. We have
encouraged the executive branch agencies to come up with
streamlining and consolidation options. In recent discussions I
have had with OMB, they have said that they are using our prior
work on overlap and duplication as input to the President's
reorganization proposals that are due to be submitted sometime
soon. So we will see if they have addressed these areas. I will
continue my discussions with them.
Chairman Enzi. Thank you. Your report also states that the
Centers for Medicare & Medicaid and the Internal Revenue
Service can save money by strengthening controls related to
improper payments for the premium tax credit. The Congressional
Budget Office estimates that that cost is $605 billion over a
10-year period or about $60.5 billion a year. Why is it a
challenge for these agencies to detect improper payments? What
can the Federal Government do to achieve cost savings for
improper payments?
Mr. Dodaro. Well, first of all, we found that the Centers
for Medicare & Medicaid Services as well as the IRS, who are
both charged with different responsibilities under the
Affordable Care Act for the premium tax credit, really did not
design internal controls effectively in order to make sure they
were only paying subsidies for eligible people, that people who
are receiving the benefits of the advance premium tax credit
were filing their tax returns as required and doing the
necessary reconciliations between the two figures. And so we
made several recommendations, eight to CMS and three to IRS, to
design better internal controls so that they would operate
their programs more effectively.
The only internal controls that we found effective at CMS,
for example, were the controls they put in to make sure that
the payments went out to the insurance companies. But in terms
of reviewing eligibility and doing the reconciliations that
were required, they were not effective.
Now, CMS has done a risk assessment that said that its
advance premium tax credit program is at high risk of improper
payments, but they need to follow-up. They have said they are
not going to begin making estimates until 2022. I mean, that is
not acceptable. That is too late. They need to move on that
area, and I would encourage the Congress to weigh in there and
provide support for that as well. IRS really did not do a good
assessment. We have made suggestions to them to improve that
effort.
Now, from a broad standpoint of improper payments across
Government, what we found in 2017, 27 programs did not even
report improper payment estimates even though they had
determined that their programs were highly susceptible to
problems or were required by law to report estimates, including
the Temporary Assistance for Needy Families Program and the
Supplemental Nutrition Assistance Program, SNAP. And both of
those programs are large programs, and so the Congress needs to
make sure agencies follow the process, make the estimates, have
good corrective action plans.
One suggestion I have for the Congress that has not been
acted upon yet that I would encourage Congress to consider is
there is a Do Not Pay list that the Department of Treasury
operates, and they are to check against several other databases
before they make payments, one of which is the Death Master
File from the Social Security Administration, because we and
others have found in the past payments keep going even though
people have been deceased, and that causes all sorts of
problems. But the Social Security Administration does not
provide the full Death Master File to the Treasury. They
believe they are not permitted by law to do that. And I would
encourage Congress to clarify that and to make that file
available to the Treasury Department. It does not serve
anybody's interest to send out improper payments when we know
that they should not go out.
Chairman Enzi. Thank you. Excellent. My time has expired in
the first round, so I will defer to Senator Sanders.
Senator Sanders. Thank you, Mr. Chairman.
Given the fact that DoD spending is well more than half of
discretionary spending, I think it is important that we focus
on the elephant in the room, which is the Pentagon. You are
talking to two ex-mayors, and when we would let out a contract
for the streets to get repaved in Burlington, Vermont, and
somebody said, ``Well, we can do so many miles for $3
million,'' and they came back and said, ``Well, actually it
cost us $6 million, you owe us another $3 million,'' neither I
nor the city council would have given them the light of day.
``You said you could do it for $3 million. That is what you are
going to get paid.''
Mr. Chairman, similar in Wyoming?
Chairman Enzi. Absolutely.
Senator Sanders. All right. So I want to know why it is
that a handful of defense contractors--and we have relatively
few of them--are able to run up over $537 billion in cost
overruns. If somebody says if you go out to whatever degree we
have competitive bidding--and I understand not everybody on the
block builds F-35s, right? It is a little bit different than
paving roads. I got that. But, nonetheless, if somebody says,
``I am going to build you this weapons system for $5 billion,''
and then they come back and say, ``Oh, I am sorry, it cost $10
billion,'' is there somebody at the Department of Defense that
says, ``Well, you are going to have to eat it, guys, because
you told us you could do it for $5 billion''? Why do we run up
$537 billion in cost overruns?
Mr. Chairman, is that a fair question?
Chairman Enzi. I think so.
Senator Sanders. Okay. It is a bipartisan question then.
[Laughter.]
Mr. Dodaro. All right. I will give you a bipartisan answer
to the question. Then I will ask our expert in weapons
acquisition issues to elaborate.
Senator Sanders. Okay.
Mr. Dodaro. Because he has studied all these programs over
time.
Senator Sanders. Good.
Mr. Dodaro. Now, part of the problem is that the
requirements are not set. If you were a mayor you would have
exactly how many streets you want paved and what kind of
material you want to use. This information would foster
competitive bids.
Senator Sanders. Yes.
Mr. Dodaro. That does not happen in a lot of these
contracts because the requirements keep changing, they are not
set up front. The other thing is defense----
Senator Sanders. Well, requirements keep changing. I
understand that.
Mr. Dodaro. Yes.
Senator Sanders. I am not minimizing the complexity of
weapons systems.
Mr. Dodaro. Right.
Senator Sanders. But, you know, I presume the DoD tells the
contractor what they require, what they need. I mean, it is not
quite a good enough answer to say requirements keep changing.
Mr. Dodaro. Well, no----
Senator Sanders. Is that a problem or is that the nature of
the world there?
Mr. Dodaro. Well, it is the way they operate.
Senator Sanders. But should they be operating that way?
Mr. Dodaro. Well, we have made suggestions on how they
could improve their process for setting requirements and
approving technologies to go into production. You know, you
mentioned, as we did, a lot of the cost increases after
production. What we have found is that a lot of times they will
send things into production, even though the technologies are
not mature enough, and so you discover new problems when you go
into production that then have to be corrected, and then that
requires a lot of additional money later, and----
Senator Sanders. But, presumably, Mr. Dodaro, doesn't
somebody at the DoD know that, know what you are talking about?
Mr. Dodaro. They know it, but they have to make sure that
they follow the process. We have made many recommendations for
best practices----
Senator Sanders. Let me interrupt you here just to ask you
a simple question. Is this issue that we are focusing on--it
seems to me to be a major issue when we talk about unnecessary
expenditure of Federal funds. Am I right in saying that or not?
Mr. Dodaro. It is a significant issue. It has been on our
High-Risk List since 1990. So we have been focused on it. We
have made recommendations. Congress passed major reform
legislation in 2009 implementing many of our recommendations.
We have seen improvements in weapons systems going into
production post-2009 reforms that Congress passed and better
performance in those areas. So there are a lot of systems that
are still in the area, but I will let Mike explain.
It is an important issue. We have been focused on it. There
have been some improvements, but more needs to be done.
Senator Sanders. Okay.
Mr. Dodaro. Mike.
Mr. Sullivan. Yes, Senator. So just to go back a little
bit, it is a matter of, as the Comptroller General said,
weapons systems are very complex, cutting edge, oftentimes
bleeding edge kind of technologies. And in order to get the
contracting world and the industrial base to sign up to do
things, like a B-2 bomber when it was done or currently a Joint
Strike fighter or the satellites. The federal government uses
contracting methods that more or less open the door to a lot of
cost inefficiency. It is called ``cost-plus contracting'' for
development. And it more or less became the way to do business
in the late 1970's----
Senator Sanders. Does cost-plus, for the laymen here, mean
I am going to give you a $2 billion estimate, but if it costs
me more, I am going to bill you more? Is that what cost-plus--
--
Mr. Sullivan. Yes. Basically, it's ``I will send you the
bills.''
[Laughter.]
Mr. Sullivan. And the plus part of that is actually an
award fee. They put criteria in the contract, if they do this
faster, they get extra money on top of that. It was a cultural
issue--still is, basically the way that they do business----
Senator Sanders. Did you say ``cultural''?
Mr. Sullivan. Yes. It really----
Senator Sanders. All right. Let me stop you.
A couple of years ago, Mr. Chairman, I had somebody from
the DoD in the office, and he said--this is what he said. He
said, ``Look, the truth is''--this is 5 years ago----``we have
a whole lot of money, and people were not watching that money
very, very carefully.'' And when you talk about cost-plus, you
and I are going to do business, I am going to tell you I am
doing it for X, but, by the way, I am going to charge you more,
and that is not a problem. That seems not a particularly
efficient way to do business. Yes? Am I missing something?
Mr. Sullivan. It is--obviously if you have a urgent, urgent
need and nobody knows how to do it, that is when you do this.
Senator Sanders. Yes.
Mr. Sullivan. And that is how the Department operated when
some of the Cold War weapons that the government bought that
were not urgent needs, it did it that way. And so, for example,
if you look at the B-2 bomber, the F-22, F-35, any of these
big--I do Air Force work, so I look at that, but ships, same
thing. They would go in with an--take the estimate that would
call for--I think in the F-22 case, they probably estimated
about $10 billion for the development cost, and it turned out
to be over $20 billion. One of the reasons for that is, as
complex as it was, when they wrote the requirements, they did
not really do the due diligence that they need to do, the
systems engineering, the prototyping you have to do ahead of
time.
Senator Sanders. Who, the contractor?
Mr. Sullivan. The contractor and the Government both. But,
yes, the contractor accepted requirements that it did not
really know how to do, and they do not do a lot of trading--you
know, there is space before you start a program where you can
look at cost----
Senator Sanders. Let me interrupt you. You said this
cultural thing. You know, the Chairman made a point. Again, you
are talking to two ex-mayors. What you are really suggesting is
they did not fully understand what they were getting into.
Mr. Sullivan. That is right.
Senator Sanders. And, unfortunately, it was the taxpayer
who had to pick up the difference.
Mr. Sullivan. That is right. The taxpayer----
Senator Sanders. But in the world that we lived in, it
would be the contractor would have to pick up--``Sorry you
screwed up, guys. You have to eat it.'' Yes?
Mr. Sullivan. Yes.
Mr. Dodaro. You might want to mention the tanker.
Mr. Sullivan. Okay, yes.
Mr. Dodaro. There is one program that they are doing that
now. I would ask Mike to explain that, where the contractor is
picking up the tab for it.
Mr. Sullivan. Yes, it is the KC-46 tanker, which the
Government really scrubbed the requirements, did a lot of cost
and performance trade analysis before they let the bid for the
contract. Boeing made the bid, and it was a fixed--price
contract, which means anything over the bid, is Boeing's. As a
matter of fact, right now the program is a little bit behind
schedule. No real issues performance-wise, and it has gone
above Boeing's cost estimate. It hit the ceiling, and Boeing is
paying I think as much as $1 billion for that now.
Senator Sanders. But isn't that a sensible way to proceed?
Mr. Sullivan. Yes. We think that is the way to do product
development. We are talking about what procurement should be
and it usually is fixed price. They sign fixed-price contracts
for lots of the F-35s right now. It is in development where
they use these contracting methods that really places all the
cost risk on the Government.
Senator Sanders. Yes, Okay. Thank you, Mr. Chairman.
Mr. Sullivan. But the tanker is an example of a direction
they are moving in now.
Senator Sanders. Good.
Chairman Enzi. To follow-up on that a little bit, I
remember running into a guy that built office buildings, and he
told me that what he really relied on, he did a nice tight bid,
but then he always tried to encourage them to do some changes
to their plans after the bid, and then he could charge extra
for the changes. And, evidently, on the KC-46 we are not making
a lot of changes then, so they cannot----
Mr. Sullivan. One of the keys was that the Government knew
exactly what it wanted, did its homework up front, and there
have been no increased requirements, so the contractor has not
been able to reopen their contract.
Chairman Enzi. Thanks. I am going to switch to the
Department of Veterans Affairs, the VA. They launched a new
program to streamline the way its medical centers buy supplies
for treating 7 million veterans. The GAO found that the VA
lacked any overarching strategy, and the rollout of the program
ran counter to practices of leading hospitals. As a result, the
list of available products did not meet medical center needs,
and the program has yet to achieve the key goals of cost
savings and greater efficiency.
Can you tell me a little bit about if the VA is making any
progress on establishing a formulary that meets veterans' needs
and follows the practices of hospitals, for example?
Mr. Dodaro. In the short term, what VA is trying to do now,
from what we understand, is increase the number of items on the
formulary from 8,000 to about 37,000 items, so to put more
items available there. Now, one of the problems we found
earlier is they had not selected all the proper items to put on
the list, so hopefully they are doing a better job of doing
that.
In the longer term, they are trying to come up with a whole
new strategy, and part of that longer-term strategy will
involve the clinicians, the people with the clinical skills who
know what items they really need. This is one of the
recommendations that we have made to them. My understanding is
this week the House has passed legislation that would require
VA to ensure that the clinicians are involved in deciding what
items are needed.
What we found is because they were not involved earlier,
even though they had this central formulary that was supposed
to drive down cost, it did not include all the items that they
needed, so they were using purchase cards and emergency
purchasing services at the medical centers to get the supplies
they needed, because it was not coming through this central
purchasing authority.
So I would say they are in the very early stages of trying
to address our recommendations and improve this process, but
they still do not have a good long-term strategy.
Chairman Enzi. They are increasing it from 8,000 to 30,000
or--are they eliminating any?
Mr. Dodaro. Yes, well, what I understand is they are
focusing initially on items they know they need every month for
surgical supplies and medical supplies. So these are known
needs.
Now, the question is whether or not the data that they are
drawing from is accurately showing what those needs are,
because there are a lot of different purchasing vehicles. So we
will go in, and we are going to follow-up, we are going to work
with them and hopefully move them in the proper direction in
this area. They are trying new approaches, and they just need
to address the recommendations that we have made, and we are
going to follow up.
Chairman Enzi. Okay. I appreciate that. Some helpful
outside research.
Your report also states in regard to the Federal STEM
education in 2016 that spending totaled almost $3 billion for
163 programs in 13 agencies and nearly all of those programs
overlapped with at least one other program. We do need strong
STEM programs in order to move forward as a country. What kind
of checking are they doing to see if the programs are effective
and to reassign them so that there is more direct oversight?
Mr. Dodaro. They are not doing what was expected of them.
There is a Committee on STEM Education that was created by the
Congress and the Office of Science, Technology, and Policy in
the White House that is required to review program evaluations
that were supposed to be done on the STEM education programs
and to document them and to evaluate how well they are
performing in this portfolio of programs. And that has not been
done, and we recommended that they go forward and do that.
Now, the Congress also passed additional legislation last
year to require them to report on this analysis and to go
forward. As a result, while some individual STEM programs have
been evaluated, many have not, and there has not been this
portfolio review done where it is documented and then there
could be action taken to consolidate programs that may not be
working effectively or eliminate some of the programs. So
without that fundamental performance information on how well
the programs are doing, they cannot make informed decisions on
how to change the portfolio.
So they have agreed to implement all our recommendations,
which should put them in a better position to be able to know
which programs are working effectively or not, and then take
appropriate action, which could include consolidating or
eliminating some of the programs or redesigning them if they
know what the design flaws would be.
Chairman Enzi. For over 25 years, I think we have had some
requirements on the Government Performance and Results Act. Is
anybody actually doing that?
Mr. Dodaro. Some people are, but what we find in some cases
where they are doing the evaluations, they are not using it to
make decisions going forward. In this case, Congress set
specific requirements for this Committee on STEM Education, and
they have not fulfilled those responsibilities yet, and that is
what we have recommended that they do. This is separate and
apart from the Government Performance and Results Act. But it
is consistent with that, Mr. Chairman, as you point out.
So there have been strides where there has been greater use
of performance measures or greater development of performance
measures, but what we find when we do surveys periodically of
Government managers is that the results of those evaluations
and studies are not being used as effectively as possible.
Chairman Enzi. Thank you.
Senator Sanders.
Senator Sanders. Thanks.
The Chairman talked about VA, which is a huge $200 billion
operation. The VA negotiates drug prices with the
pharmaceutical industry, and if I am not mistaken, I think they
pay the lowest prices in this country for prescription drugs,
much lower than Medicaid or Medicare. Have you guys done any
studies about how much savings would accrue to the taxpayers if
all Government agencies paid the same amount of money as the VA
did for prescription drugs?
Mr. Dodaro. We have been asked to look at that issue and
compare VA, Medicaid, Medicare. I do not have the information--
--
Senator Sanders. By the way, the drug companies tried to
keep this--what do you call it?--confidential, what is the--
proprietary.
Mr. Dodaro. Yes.
Senator Sanders. And what you will find is they are all
different prices. The same drug, the VA pays X dollars for it,
Medicaid pays Y dollars for it.
Mr. Dodaro. Yes, and DoD.
Senator Sanders. DoD pays----
Mr. Dodaro. Same thing. I would be happy to provide a
summary of our work.
Senator Sanders. All right. Let us work on that. Will you
do me a favor?
Mr. Dodaro. Sure.
Senator Sanders. Let us talk about how we can go forward.
Mr. Dodaro. Okay.
Senator Sanders. I am curious about that.
Let me ask you just a question. My understanding is that
since 1995 Boeing, Lockheed Martin, and United Technologies
have paid nearly $3 billion in fines or related settlements for
fraud or misconduct. That is a lot of money, and that is
above--we are not talking about cost overruns here. This is
illegal behavior. Do we have an epidemic of fraud and illegal
behavior within the defense contractors industry?
Mr. Dodaro. That is not an area we have looked into. I
would be happy to consider what we could do to look at the
information that you provided.
Senator Sanders. You know, I am not aware that we have the
most vigorous fraud enforcement--you know, people looking at
these issues. But $3 billion from major contractors, it seems
to me that we may have a serious problem above and beyond cost
overruns.
Mr. Dodaro. We will consider how we could take a look at
that.
Senator Sanders. Okay.
Mr. Dodaro. And, also, you know, to look at that in
perspective to other industries as well, too.
Senator Sanders. Okay. Could we drop into your office and
maybe chat about this?
Mr. Dodaro. Sure.
Senator Sanders. Okay. Let me get back to an issue that I
raised a moment ago. You have major contractors like Lockheed
Martin and Raytheon. They receive 90 percent of their revenue
from national defense, 70 percent from the U.S. Government, 20
percent from other governments buying military equipment, and
they pay their CEOs over $20 million in total compensation. I
asked the DoD about that, and they wrote back and they said
basically with regard to what companies decide to pay their
executives and employees is within the purview of the owners or
boards of directors and shareholders.
Do you think that if the U.S. Government provides 70
percent of the revenue for Lockheed Martin or Raytheon and they
provide their CEO with 100 times more salary than the Secretary
of Defense, is that a proper issue for the U.S. Government to
look into?
Mr. Dodaro. We were asked to look at this issue a few years
ago, and based on our report, the Congress decided to set a cap
on how much executive compensation could be charged to the
Federal Government, and it was initially set at $487,000, and
it is to be indexed over time. Currently, the current cap for
2017 was $1.1 million. Clarification: This limit, which was set
by the Office of Federal Procurement Policy officially at
$1,144,888, is the amount that contractors may charge the
government for compensation costs--not only for executives but
for all employees--incurred during 2018 for contracts that were
awarded before June 24, 2014. The limit that contractors may
charge the government for compensation costs incurred during
2018 for contracts awarded on or after June 2014 is $525,000.
So, whatever they decide to pay their top executives, they can
only charge the Federal Government about $1 million for
contracts awarded prior to June 24, 2014 for compensation costs
incurred during 2018; if the contract was awarded on or after
June 24, 2014, however, contractors may only charge the
government $525,000 for compensation costs incurred during
2018.
Senator Sanders. They could add the other $19 million to
the cost of their F-35s, can't they, pretty easily?
Mr. Dodaro. Well, it is up to the Defense Department to
scrub their analysis of the costs that they charge the
Government and to be audited by the Defense Contract Agency and
make sure they have proper cost accounting systems. But I am
just saying what the requirement is.
Senator Sanders. Okay. All right. Those are my questions,
Mr. Chairman. And, Mr. Dodaro, we will give you a ring, and if
you can come in, we can go over some of these things.
Mr. Dodaro. Sure. I would be happy to discuss those issues.
Senator Sanders. Okay. Thank you very much.
Mr. Dodaro. You are welcome.
Senator Sanders. Thanks for your good work.
Mr. Dodaro. Sure. Thank you.
Chairman Enzi. Senator Boozman.
Senator Boozman. Thank you, Mr. Chairman. And thank you
very much for being here.
In your testimony, you discuss many of the challenges of
the Veterans Health Administration that they face.
Specifically, you mention issues with human capital, medical
supplies procurement, IT operations, maintenance, and the list
goes on and on. As a member of the Veterans' Affairs Committee,
I noticed that the Department of Veterans Affairs was rather
high on the list of agencies with not addressed or partially
addressed actions.
Have you identified road blocks at the VA that have
prohibited them from implementing your recommendations?
Mr. Dodaro. No, Senator. I have made it a priority to meet
with each Secretary of Veterans Affairs since I have been in
this job. I met with Secretary Shinseki----
Senator Boozman. You met with a bunch of them lately.
Mr. Dodaro. Yes, McDonald and Shulkin, and I plan to meet
with the new Secretary once there is one in place. And each
time I met with them, I encouraged them to implement our
recommendations. In many cases they agreed with the
recommendation, but then it was not implemented. And I told
them they are not getting the benefit of implementing the
recommendations.
So with the last Secretary, Secretary Shulkin, we set up
quarterly meetings. We were meeting with their staff to try to
encourage them to implement the recommendations. So they are
making some progress, and there is no real barrier. I am very
concerned about the VA. I think it needs leadership. It has
some of the most serious management problems in the Federal
Government, and I look across the whole Federal Government. So
I have made it a high priority. In 2015, added veterans' health
care to the High-Risk List that we keep for Congress of the
highest risks. The disability portion was already on the High-
Risk List for many years. And we are looking now at veterans'
health care and focused on contracting activities.
So they need some leadership. They need follow-through and
some fundamental management reform.
Senator Boozman. One of the issues is that not only--and,
again, I am excited about the prospect of us confirming the
President's nominee. I think he is going to do a very, very
good job. But one of the problems I have got now is just the
fact that there is just so many open spots, you know, in key
leadership positions.
Mr. Dodaro. That is an issue. They have somebody now
finally at the VBA, and I am going to be meeting with Paul
Lawrence and talking about our recommendations there. But they
do not have somebody at the VHA and in other areas, the CIO.
They have a big contract for the electronic health care
records. So that is an issue. When I say leadership, I do not
just mean the Secretary. I mean throughout the Department.
Senator Boozman. Right, very much. In a related situation,
according to GAO's report, Congress and the executive branch
have not addressed or resolved approximately 25 percent of
identified items. Why do so many items remain open? And
approximately how much money could be saved by--what do you
estimate are the dollars that could be saved by implementing
GAO's open recommendations?
Mr. Dodaro. These are recommendations across the board. We
were talking about the open ones. For those Senator, I believe
there are tens of billions of dollars that could be saved by
implementing our recommendations. It depends on specifically
what needs to be done, but easily tens of billions of dollars.
And these would be savings that would generally not adversely
affect the provision of services. Some of them are revenue
enhancements that would bring in additional revenue that
Congress could decide how to use. So there are lots of
additional opportunities to save money.
Senator Boozman. Very good. Thank you, Mr. Chairman.
Chairman Enzi. Thank you.
It will be my turn again. Mr. Dodaro, the GAO report
highlights millions of dollars in duplication of Federal
agencies' provisions for identity theft services in response to
the data breaches that we have had. The report notes that the
Office of Management and Budget, OMB, is responsible for
coordinating these services across agencies. What steps should
OMB take to better coordinate the provision of identity theft
services to ensure that agencies do not waste the taxpayers'
dollars by offering duplicative theft help?
Mr. Dodaro. Well, first, OMB should track and keep a
central repository of all the Federal agencies' efforts to
offer identity theft services to make sure that before an
agency goes forward with a new decision, that they know to what
extent the Federal Government has already provided services to
specific populations.
Second, OMB should issue some guidance that should go to
agencies about identifying alternatives to identity theft
services such as credit freezes and fraud alerts that may be
cheaper and more effective over time. What we found is that
some of these identity theft services will cover some out-of-
pocket costs. They will not actually cover, material losses if
something happens where the information is inappropriately
used. So there are typically only reimbursements--so far from
what we have seen, a few thousand dollars that they are getting
reimbursed, where it is costing millions of dollars to provide
these services to the Government. So there may be a better
cost-benefit analysis, and OMB should require agencies to
conduct a cost-benefit analysis of alternatives before deciding
how to move forward.
Now, OMB mentioned some concerns about keeping central data
bases in terms of secrecy or privacy concerns, but we think
that this could be overcome properly. This would be a better
value to the Government.
Chairman Enzi. You are a wealth of information on this, and
I have got another question or two, but Senator Grassley has
joined us, and as head of Judiciary alone, he has got a really
busy job, but he is also on a number of other committees, and
he is probably one of the best attendees at any of them, so if
you have got some questions.
Senator Grassley. Thank you. We just finished five nominees
just now, so I am glad to be able to get here. Thank you, and
thank you for the good work you do.
You have identified ways to reduce fragmentation, overlap,
and duplication. You report Congress and the executive branch
have partially or fully addressed 76 percent of the action
items identified in the 6 years of your report. That is 551
altogether. So that leaves 122. I hope this is not too
difficult a question. Let us say you are not going to get all
122 items done. Could you tell me two or three that are the
most important or urgent for Congress to take action on that
you would suggest?
Mr. Dodaro. Yes, Senator. To address that question, as an
appendix to my testimony, there are 50 open matters for
congressional consideration that I consider high priority, so
they are spelled out in the appendix. For example, we have just
one area alone we think could potentially save tens of billions
of dollars, and that is to provide the Department of Energy the
ability to consider alternative methods for treating nuclear
waste at the Hanford site. Congress has already provided this
authority for the Savannah River site, and we think these
alternative methods can treat the waste faster--and this is
low-activity waste. We are not talking about high-level waste,
which Congress and Federal law requires to be vitrified or
turned into glass before disposal. There is a cheaper method
called ``grouting'' that can use a concrete-like mixture for
low-activity waste. And if they are allowed to switch to this
treatment method they could potentially save tens of billions
of dollars. Environmental liabilities right now are estimated
in the Federal Government to be almost half a trillion dollars.
And we are spending tens of billions every year, and the
liability keeps going up.
Then we have a number in the Medicare-Medicaid area. For
example, there have been demonstration projects approved over
the years where about one-third of total Medicaid spending
right now has been provided through these demonstration
projects, they were supposed to be budget--neutral. They are
not, based on our analysis. So we think tens of billions of
dollars could be saved by bringing them into a budget-neutral
position.
On Medicare, for example, we think giving equal treatment
to these cancer hospitals that they were initially developed in
the 1980's when cancer therapies were first being developed.
They are reimbursed at a different rate than if you go into a
teaching hospital and receive the same cancer therapy. If you
equalize the rates, you would save $500 million a year.
Also under Medicare, if you go in and see a doctor and if
the doctor's practice is owned by a hospital, they get
reimbursed at a higher rate than a doctor in a private practice
not owned by a hospital. If you equalize those rates, you would
save $1 billion to $2 billion a year.
So those are some of the areas, but we have many others.
Senator Grassley. Okay. My last question. Since 2014, your
organization has recommended that Congress enact legislation to
better coordinate Social Security disability with unemployment.
While proposals have been offered to address this issue over
the years, enacting such a proposal has been met with
resistance by some. Could you elaborate on why GAO sees this as
a duplication meriting correction?
Mr. Dodaro. Yes. Our work identified people that were
receiving both benefits. Now, both benefits try to compensate
you for not working, whether it is unemployment or disability
insurance, and we believe that, people should have support if
they have lost their income for a legitimate reason. But they
should not receive both benefits at the same time. And so we
think the Congress ought to consider rectifying that situation.
Senator Grassley. Okay. Thank you, Mr. Chairman.
Chairman Enzi. Thank you.
I want to ask a question, too, on the Social Security
Administration because in your testimony it mentions that there
are five quality assurance reviews of decisions on appealed
disability claims and that it spent $11 million on those
reviews in fiscal year 2016 alone. In December 2017, you found
that some of these reviews may overlap and that the Social
Security Administration has not evaluated the efficiency and
effectiveness of the reviews.
Why does SSA have five different quality assurance reviews?
And what is the agency doing, if anything, to streamline those
reviews?
Mr. Dodaro. This is a classic case of what we find when we
find overlap and duplication, that these quality reviews were
added for different purposes over time. The first quality
reviews were done in 1940, so they have added these other
programs to deal with different issues, and they have never
really gone back and done a systematic look to see whether some
of them could be consolidated.
They have agreed with our recommendations. They have
already started taking some action to consolidate some of the
reviews within a certain program office, and they are looking
at how they can consolidate the reviews further over time. But
this is a pattern we have seen. That is why you have 160
housing programs, why you have, 160-some STEM programs. They
get added over time, and it is very rare something gets taken
off the table. And that is the benefit of our recommendations.
Chairman Enzi. Nothing has quite as much longevity as a
Federal government program.
[Laughter.]
Chairman Enzi. Well, I want to thank you for your
outstanding answers. I remember when this was called the
``Government Accounting Office,'' and I thought that it should
have stayed that as an accountant.
[Laughter.]
Chairman Enzi. But after hearing your answers, I am glad
that it went to ``accountability.'' I think that is going to be
much more effective than the other. I am fascinated with your
vast knowledge. Your experience and years of doing this really
show. I appreciated the comment you made earlier about
prioritizing the suggestions that you have in order of dollars
of savings. That shows that you are doing at your agency what
you are requiring the others to do as well, and I appreciate
that you meet with the different agencies, but that you also
meet with the appropriators. I hope everybody is taking
advantage of that.
You have some other expertise with you there as well, and I
appreciate that. If you could supply the record with the full
names of your experts for a part of the record today, too, that
would be appreciated and helpful.
Mr. Dodaro. I would be happy to do that, Mr. Chairman. We
have terrific people at GAO.
Chairman Enzi. You must to produce these reports that you
are putting out.
Mr. Dodaro. And we still do all the accounting work.
[Laughter.]
Chairman Enzi. Yes. Your full statement, of course, will be
included in the record, and my staff will be working to see if
there are other contacts that we can make to get that
information out to more people that can suggest to the decision
maker the answers that you have suggested.
As information for all Senators, questions for the record
are due by 6 p.m. today with a signed hard copy delivered to
the Committee clerk in Dirksen 624. And under our rules, GAO
has 7 days from the receipt of the questions to respond to the
answers.
If there is no further business to come before the
Committee, the hearing is adjourned.
[Whereupon, at 11:36 a.m., the Committee was adjourned.]
ADDITIONAL COMMITTEE QUESTIONS
[The following submitted questions were not asked at the
hearing but were answered by the witness subsequent to the
hearing:]
QUESTION FOR THE RECORD FROM SENATOR MURRAY
QUESTION 1
One area where cross-agency collaboration has been lacking
is improving the data collected on medical implants to both
reduce patient harm and costs. While medical claims submitted
to health plans-including Medicare-are increasingly used as a
key pillar to create a learning healthcare system, claims lack
information on the brand and model of medical implants,
including artificial hips and cardiac stents. A new tool
created by the Food and Drug Administration (FDA)--called the
unique device identifier-indicates the brand and model of
implants, and could be integrated in to claims data to support
analyses on the long term safety of those products. The Office
of the Inspector General of the Department of Health and Human
Services (HHS OIG) has recommended adding device identifiers to
claims after finding that the failure of just seven types of
cardiac implants cost the Medicare program $1.5 billion and
beneficiaries an additional $140 million in out-of-pocket costs
to get care associated with those faulty products. The Medicare
Payment Advisory Commission (MedPAC) has also recommended
adding device identifiers to claims, as have dozens of health
plans, hospital systems, clinical societies and other key
organizations. While the FDA has indicated that adding device
identifiers to claims is a key element of its device safety
strategy, the Centers for Medicare & Medicaid Services-which
supported this policy in the previous administration-has
recently stated that it is still reviewing this proposed
change. As part of GAO's forthcoming report on cross-agency
collaboration, have you evaluated whether to join HHS OIG,
MedPAC, FDA and many other organizations in recommending this
common sense policy that can improve patient safety while
reducing costs?
GAO RESPONSE
In our 2012 report on certain implantable medical devices,
we noted several shortcomings that arose from Medicare not
having information on the specific devices implanted in
patients. \1\ We stated that CMS generally intended to link
payment to the quality and efficiency of care provided--a move
toward value-based purchasing in Medicare--but that one of the
principles of value-based purchasing is having good data on
performance and that such data generally were lacking for
specific brands of implantable medical devices. We reported
that there were registries of postoperative outcomes for some
cardiac devices, but none for orthopedic or spinal devices
outside of specific organizations such as Kaiser Permanente.
Furthermore, we stated that because hospital data currently
were embedded in multiple data systems--such as medical
records, operating room logs, purchasing department records,
and billing systems--it could be difficult to match which
device brand was used with a particular patient. Finally, we
noted that efforts to improve information about patient safety
and medical devices would be supported by the implementation of
unique device identifiers and that the Food and Drug
Administration Amendments Act of 2007 required the promulgation
of regulations establishing a unique device identification
system.
---------------------------------------------------------------------------
\1\ GAO, Medicare: Lack of Price Transparency May Hamper Hospitals'
Ability to Be Prudent Purchasers of Implantable Medical Devices, GAO-
12-126 (Washington, DC.: Jan. 13, 2012).
---------------------------------------------------------------------------
QUESTION 1-6 FOR THE RECORD FROM SENATOR VAN HOLLEN
QUESTION 1
According to press reports, the Executive Branch may be
withholding some of the funding that Congress has appropriated
to the National Labor Relations Board (NLRB), which is the
agency responsible for protecting the rights of workers in the
private sector. At a hearing of the Senate Appropriations
Subcommittee on the Legislative Branch on April 25, you
indicated to me that the Government Accountability Office was
looking into this as a potential impoundment of funding at the
NLRB, which could be in violation of the Impoundment Control
Act. Is GAO still examining whether there is an impoundment
taking place at NLRB, and if so, when do you expect to report
to Congress on this question?
GAO RESPONSE
Our work on the potential impoundment of funds at NLRB is
ongoing. We expect to provide your staff with an update by the
end of June 2018.
QUESTION 2
In 2015, GAO recommended that Congress take action to limit
the extent to which wealthy individuals could accumulate
massive amounts of money in tax-advantaged retirement accounts
such as IRA and 401(k) plans. These accounts are critical tools
that help millions of middle-class families save for
retirement, but some very wealthy individuals are abusing the
rules for these accounts to turn them into a tax shelter with
account balances that can reportedly exceed $100 million. Would
President Obama's proposal to ``Limit the total accrual of tax-
favored retirement benefits'' have addressed GAO's
recommendation for this issue? \2\ And did the recently enacted
tax overhaul (Public Law 115-97) take any action to address
this recommendation from GAO?
---------------------------------------------------------------------------
\2\ Department of the Treasury, ``General Explanations of the
Administration's fiscal year 2017 Revenue Proposals,'' February 2016,
available at https://www.treasury.gov/resource-center/tax-policy/
Documents/GeneralExplanations-FY2017.pdf.
---------------------------------------------------------------------------
GAO RESPONSE
The Obama Administration proposal would have addressed one
option that we suggested in that it would introduce an overall
cap on retirement contributions and savings in tax-preferred
accounts. \3\ The Administration's Fiscal Year 2017 proposal
was to limit additional contributions beyond the amount
necessary to provide the maximum annual annuity permitted for a
tax-qualified defined benefit plan. If a taxpayer reached the
maximum permitted accumulation, no further contributions or
accruals would be permitted, but the taxpayer's account balance
could continue to grow with investment earnings and gains. At
the time of proposal, the maximum annual benefit was $210,000,
and the Administration stated that the maximum permitted
accumulation for an individual age 62 was approximately $3.4
million.
---------------------------------------------------------------------------
\3\ To promote retirement savings without creating permanent tax-
favored accounts for a small segment of the population, GAO suggested
that Congress should consider revisiting the use of IRAs to accumulate
large balances and consider ways to improve the equity of the existing
tax expenditure on IRAs. Other options could include limits on (1) the
types of assets permitted in IRAs or (2) the minimum valuation for an
asset purchased by an IRA. See GAO, Individual Retirement Accounts: IRS
Could Bolster Enforcement on Multimillion Dollar Accounts, but More
Direction from Congress Is Needed, GAO-15-16 (Washington, DC.: Oct. 20,
2014).
---------------------------------------------------------------------------
We have not assessed an approach for limiting contributions
to defined contribution plans and individual retirement
accounts (IRA) based on the actuarial equivalence calculations
used for defined benefit plan accumulations. \4\ However,
according to Department of the Treasury's February 2016
estimates, the Administration's fiscal year 2017 proposal
limiting the total accrual for tax-favored retirement benefits
would have generated an estimated $30 billion from 2017 through
2026. In July 2016 using Congressional Budget Office economic
assumptions, the Joint Committee on Taxation estimated that the
Administration's 2017 proposal would have generated about $4.4
billion over the period.
---------------------------------------------------------------------------
\4\ GAO, Tax Expenditures: Background and Evaluation Criteria and
Questions, GAO-13-167SP (Washington, DC.: Nov. 29, 2012) outlines a
series of questions and criteria--economic efficiency, equity,
simplicity, transparency, and administrability--that can be used to
evaluate the performance of a tax expenditure or a proposal to modify
an existing tax expenditure.
---------------------------------------------------------------------------
In December 2017, Congress enacted and the president signed
Public Law 115-97 which included significant changes to
corporate and individual tax law. \5\ In February 2018, the
Internal Revenue Service announced that the recent tax
legislation made no changes to the section of the tax law
limiting benefits and contributions for retirement plans.
Although the new law made changes to how cost of living
adjustments are made, after taking the applicable rounding
rules into account, the 2018 limit amounts remained unchanged.
\6\ For employer-sponsored defined benefit plans, benefits are
limited to amounts needed to provide an annual benefit no
larger than the lesser of a specific dollar amount or 100
percent of the participant's average compensation for the
highest 3 consecutive calendar years. \7\ Employer-sponsored
defined contribution plans have annual contributions limits,
and similar contribution limits exist for IRAs. \8\ However,
there is no total statutory limit on IRA accumulations or
rollovers from employer-sponsored defined contribution plans.
---------------------------------------------------------------------------
\5\ Pub. L. No. 115-97, 131 Stat. 2054 (Dec. 22, 2017).
\6\ IRS Notice 2017-64.
\7\ For 2018, the limit for an annual benefit from a defined
benefit plan is $220,000.
\8\ For 2018, the contribution limit on an employee's elective
deferral is $18,500, and the overall defined contribution limit, which
includes the total of all employer contributions and employee elective
deferrals, is $55,000. For 2018, the maximum contribution for all
traditional and Roth IRAs in total is $5,500.
---------------------------------------------------------------------------
QUESTION 3
One of the issues this report examined is the Social
Security Administration's lack of coordination with the
Department of Education to monitor the extent to which
individualized education programs (IEP) are being used to
connect transition-age youth with disabilities with vocational
rehabilitation services. Leveraging a student's IEP to link
them with vocational rehabilitation transition services--as
well as work incentives and benefits planning--could help
create a continuum of services into adulthood to bolster
employment and higher education outcomes in the long-term. But
of course, in order for that to be a successful model, children
on SSI need to have IEPs in the first place. According to a
2005 National Survey of SSI Children and Families from SSA, 32
percent of children on SSI did not have an IEP. As part of this
review, did GAO examine how many children receiving SSI do not
have IEPs at all? If so, does GAO have more recent data that
you can share?
GAO RESPONSE
As part of our work, we made inquiries to determine whether
we could match Social Security Administration (SSA) data on SSI
recipients aged 14 to 17 with data on students with IEPs. \9\
Because student files do not always include Social Security
numbers, we were unable to identify a reliable source of IEP
data to match with SSI recipient data to determine the extent
to which youth receiving SSI have IEPs. Further, we learned
that SSA only collects IEP information in certain cases--for
example, when it is reviewing an SSI recipient for continued
eligibility--and therefore lacks complete information to
systematically determine whether youth receiving SSI have IEPs.
As a result, we could not determine the proportion of youth on
SSI who lacked an IEP.
---------------------------------------------------------------------------
\9\ GAO, Supplemental Security Income: SSA Could Strengthen Its
Efforts to Encourage Employment for Transition-Age Youth, GAO-17-485
(Washington, DC.: May 17, 2017).
---------------------------------------------------------------------------
QUESTION 4
Once children on SSI have an IEP in place, I agree that we
need to understand the extent to which IEPs are not being used
to connect students with these services. From GAO's
perspective, what value would this data provide?
GAO RESPONSE
While data on connections to vocational rehabilitation
services made through IEPs may be useful for evaluating the
effectiveness of IEPs, our work did not focus on this issue;
rather we examined whether or not youth on SSI had IEPs that
could connect them to vocational rehabilitation and found that
data to make such determinations are unavailable. We
recommended that SSA work with the Department of Education to
determine the extent to which youth on SSI are not receiving
transition services through schools that can connect them to
vocational rehabilitation agencies and services. SSA partially
agreed with this recommendation, noting some on-going
collaborative efforts with Education and expressing concerns
about the legality of sharing privacy data. However, SSA's
current collaborative efforts with Education are not designed
to determine the extent to which youth on SSI are receiving
transition services through schools or being connected to
vocational rehabilitation services. While we acknowledge that
legal and privacy issues can present challenges to
collaboration, we believe that SSA can explore approaches that
take into account such legal issues.
QUESTION 5
In its response to GAO's recommendation on IEPs and
transition services, SSA stated that sharing the data necessary
to identify students with SSI who are not receiving transition
services in schools may raise privacy concerns. However, GAO
noted that SSA has overcome privacy concerns and found work-
arounds to share similar data in the past. Can you provide an
overview of some of those situations and how those work-arounds
could be applied to take action on this recommendation? In your
view, is there anything that Congress can do--or should be
doing--to help facilitate SSA and the Department of Education's
coordination and implementation of this recommendation?
GAO RESPONSE
SSA has addressed privacy concerns related to data sharing
in the past through several methods. For example, as part of
the Promoting the Readiness of Minors in Supplemental Security
Income (PROMISE) initiative, SSA obtained consent from the
youth and his or her parent or guardian to participate and
assigned each youth a separate unique identification number for
use instead of his or her Social Security number. In addition,
at the time of our report, SSA was conducting an initiative to
share encrypted data on SSA beneficiaries eligible for
employment services with employment networks via secure
messaging. \10\ Such data could then be used by the employment
network to conduct outreach to these beneficiaries.
---------------------------------------------------------------------------
\10\ GAO, Supplemental Security Income: SSA Could Strengthen Its
Efforts to Encourage Employment for Transition-Age Youth, GAO-17-485
(Washington, DC.: May 17, 2017).
---------------------------------------------------------------------------
SSA has the authority to implement our recommendations and
Congress could help by highlighting our recommendation to SSA
and the Department of Education.
QUESTION 6
GAO's recommendation to SSA focused on better coordination
on vocational rehabilitation services for transition-age
children on SSI. Did GAO also examine the extent to which IEPs
are integrating other goals around transition that are crucial
for SSI beneficiaries, including work incentives and benefit
planning?
GAO RESPONSE
Our work was mainly focused on SSA's efforts to encourage
employment for youth on SSI, rather than on the effectiveness
of the IEP transition process. We did review SSA efforts to
administer work incentives with respect to youth on SSI, and
its efforts to provide related information to youth on SSI and
their families. Based on this work, we made two
recommendations:
We recommended that SSA determine why a large
proportion of transition-age youth on SSI with reported
earnings did not benefit from the Student Earned Income
Exclusion (SEIE), SSA's primary work incentive for this
population. SSA agreed with this recommendation, but as
of June 15, 2018 has not reported taking any actions.
We recommended that SSA analyze options for
improving its communications with transition-age youth
and their families about available SSA-administered
work incentives and the implications that work earnings
may have on the receipt of SSI benefits. SSA disagreed
with our recommendation stating, in part, that it found
no indication that staff are not providing youth with
appropriate information, despite our findings that such
information is not consistently provided. SSA also
noted that a newly developed brochure provides
information on work incentives. We acknowledged that
the brochure is a positive step, but that it could
contain additional information and that written
communication may not be sufficient to convey such
complex information.
GAO has conducted other work related to transition services
for students with disabilities, for example,
GAO-17-352--Youth with Autism: Federal
Agencies Should Take Additional Action to Support
Transition-Age Youth, and
GAO-12-594--Students with Disabilities: Better
Federal Coordination Could Lessen Challenges in the
Transition from High School.
QUESTION FOR THE RECORD FROM SENATOR WARNER
QUESTION 1
As you know, over the past few years agencies have been
working to implement the DATA Act, a bill I authored back in
2011 and was signed into law in 2014. GAO has a critical role
in overseeing implementation of that law as agencies seek to
fully integrate their systems with the statutory requirements
of the law. I have appreciated GAO's continued vigilance.
(a) Once fully implemented, how will the DATA Act help in
addressing the issue at the core of this hearing--finding ways
to make the Federal Government work more efficiently?
GAO RESPONSE
The DATA Act holds great promise for improving the
efficiency and effectiveness of the Federal Government, and for
addressing persistent government management challenges.
Expanding the quality and availability of Federal spending data
will better enable Federal program managers to make data-driven
decisions about how they use government resources to meet
agency goals. Reliable, detailed budget information is critical
to estimate the cost savings that could be achieved should
Congress or agencies take certain actions to address identified
fragmentation, overlap, and duplication. Absent this
information, Congress and agencies cannot make fully informed
decisions on how Federal resources should be allocated and the
potential budget trade-offs.
Moreover, implementation of the program inventory
provisions of the GPRA Modernization Act of 2010, in tandem
with DATA Act implementation, could also provide vital
information to assist federal decision makers by enabling
program managers to crosswalk spending data to individual
programs. \11\ A comprehensive list of federal programs along
with related funding and performance information is necessary
for improving the effectiveness of federal decision making, as
well as for identifying potential fragmentation, overlap, or
duplication among federal programs. Currently, there is not a
comprehensive list of all federal programs and agencies often
lack reliable budgetary and performance information about their
programs. Without knowing the scope, cost, or performance of
programs, it is difficult for executive branch agencies or
Congress to gauge the magnitude of the federal commitment to a
particular area of activity, or the extent to which associated
federal programs are effectively and efficiently achieving
shared goals.
---------------------------------------------------------------------------
\11\ Pub. L. No. 111-352, Sec. 7, 124 Stat. 3866, 3876 (Jan. 4,
2011) codified at 31 U.S.C. Sec. 1122(a)(2). GPRAMA updated the
Government Performance and Results Act of 1993 (GPRA), Pub. L. No. 103-
62, 107 Stat. 285 (Aug. 3, 1993).
---------------------------------------------------------------------------
(b) How will the DATA Act assist policymakers, watchdogs,
and others identify duplication, and waste, fraud, and abuse?
GAO RESPONSE
Our work examining fragmentation, overlap and duplication
in federal government programs has demonstrated the need for
more reliable and consistent federal data, which the successful
implementation of the DATA Act should produce. As we have
reported, better data and a greater focus on expenditures and
outcomes are essential to improving the efficiency and
effectiveness of federal efforts. The open data provisions of
the DATA Act should also enhance the federal Government's
emerging use of data analytics capabilities to conduct incisive
analysis to support oversight, improve decision making by
federal program managers, and foster innovation by making more
federal data available to the public. This oversight will
include, but not be limited to, the detection and prevention of
fraud, waste and abuse, as well as analysis of improper
payments.
Improper payments--payments that should not have been made
or were made in incorrect amounts--remain a significant and
pervasive government-wide issue. From fiscal years 2003 through
2017, improper payments have been estimated to total about $1.4
trillion government-wide. \12\ For example, the size and
diversity of the Medicaid program make it particularly
vulnerable to improper payments. In fiscal year 2017, improper
payments were an estimated $37 billion of federal Medicaid
expenditures. As we have previously reported, a fundamental
challenge to the oversight of the Medicaid program is the lack
of complete, accurate, and timely data. This challenge has
hindered the ability of the Centers for Medicare & Medicaid
Services (CMS) to ensure the appropriate use of federal and
state dollars for beneficiary care. Without reliable data, CMS
is unable to effectively monitor who is providing services, or
the type of services provided. \13\
---------------------------------------------------------------------------
\12\ GAO, Improper Payments: Most Selected Agencies Improved
Procedures to Help Ensure Risk Assessments of All Programs and
Activities, GAO-18-36 (Washington, DC. Nov. 16, 2017) and Financial
Audit: fiscal years 2017 and 2016 Consolidated Financial statements of
the U.S. Government, GAO-18-316R (Washington, DC.: Feb. 15, 2018).
\13\ GAO, Medicaid: Opportunities for Improving Program Oversight,
GAO-18-444T (Washington, DC.: April 12, 2018).
AN UPDATE ON TRANSPARENCY AT THE CONGRESSIONAL BUDGET OFFICE
----------
THURSDAY, SEPTEMBER 13, 2018
U.S. Senate,
Committee on the Budget,
Washington, DC.
The Committee met, pursuant to notice, at 10:30 a.m., in
room SD-608, Dirksen Senate Office Building, Hon. Michael B.
Enzi, Chairman of the Committee, presiding.
Present: Senators Enzi, Toomey, Gardner, Van Hollen,
Merkley, Kaine, and Harris.
Staff Present: Elizabeth McDonnell, Republican Staff
Director; and Joshua Smith, Minority Budget Director.
OPENING STATEMENT OF CHAIRMAN ENZI
Chairman Enzi. Good morning, and welcome to the Senate
Budget Committee hearing on the transparency efforts of the
Congressional Budget Office. In many ways, this hearing is a
follow-up to our January CBO oversight hearing at which Dr.
Hall highlighted many new and expanded transparency initiatives
at the agency.
More than 40 years since CBO's inception, Congress and the
public have come to depend on CBO for its budget and economic
analysis--analysis that we all agree must be timely, objective,
accurate, and transparent. That means ensuring the agency's
work is accessible and well understood.
While this Committee has conducted oversight of CBO's past
performance, today is an opportunity to discuss what the agency
is doing to improve congressional and public understanding of
the processes and products moving forward. Testifying before
the Committee today is CBO Director Keith Hall. In his role as
Director, Dr. Hall is responsible for managing the operations
of the Budget Office and its more than 200 full-time staff.
Since taking the helm of CBO in April 2015, Dr. Hall has been
committed to cultivating a culture there that, among other
competing demands, prioritizes greater transparency.
Last month, the agency released a report that provided an
update on the work it has undertaken as part of this effort,
which we will be examining this morning. This report includes
updates on CBO's numerous efforts to better explain analytical
methods, to release relevant data, to compare agency estimates
to actuals, to visualize data, and to conduct outreach.
Dr. Hall, thank you for being here. As you know,
transparency of your office's analysis and operations has long
been a priority of mine. I have raised the issue with you in
previous hearings and in private meetings throughout your
tenure. I am encouraged by the progress in this area that is
detailed in the recent report and, in particular, the work CBO
performed at my request. These items include an analysis
comparing the agency's spending projections with the actual
outcomes and the supplemental data CBO now releases on more
than 1,000 appropriations with expired and expiring
authorizations.
I was also pleased to see the release of the new
interactive tools including one that allows the public to
estimate the cost of customized plans for different military
force structures, building upon a report the Committee
requested several years ago. I look forward to hearing more
about specific plans to bolster transparency at CBO and how the
agency will track and evaluate the progress of its efforts
going forward.
In addition to learning more about developments like these
over the last year, I am especially interested in learning
about CBO's plans for the future. In particular, I would like
to know more about any plans for making CBO's models more
available to the public, specifically in the area of health
care. I am aware of the major work the agency is currently
undertaking to develop a new health insurance simulation model.
Certainly, there is no better area to focus on transparency
than one as complicated and controversial as health care. And I
would be interested in hearing about CBO plans to release
details of this new model to the public to facilitate a broad
peer review process prior to its implementation next spring.
Dr. Hall, I welcome your remarks about CBO's recent report
on transparency as well as any thoughts you have on other
issues I have raised. I have no doubt that CBO will continue to
play a critical role in the support of the congressional budget
process. In my view, efforts to increase transparency at CBO,
where possible, will only help to protect and buildup on the
agency's strong reputation and the credibility it has already
established over the years.
I thank Dr. Hall for joining us today, and I look forward
to our discussion following his testimony. But now I will give
the floor to Senator Van Hollen for some comments from that
side.
OPENING STATEMENT OF SENATOR VAN HOLLEN
Senator Van Hollen. Thank you, Chairman Enzi, and thank you
for holding this hearing. Today Ranking Member Sanders cannot
be here, but he wanted me to extend his best wishes to you, Dr.
Hall, and I want to thank you because I know that focusing on
transparency was also one of your own initiatives, and I want
to congratulate you on the progress that you have made in this
area.
I do think that in the interest of transparency, it is
worth highlighting some of the recent reports that CBO has come
out with, including within the last 2 weeks, finding, Mr.
Chairman, that for the first 11 months of fiscal year 2018 we
are going to expect close to a $1 trillion deficit,
specifically $895 billion just in the first 11 months of this
fiscal year.
As we know, these soaring deficits are highly unusual given
the fact that the economy has been growing for more than 9
years. Now, typically we see deficits shrink during strong
economic times as the need for Government services decreases
and tax revenues rise. In fact, in the year 2000, which is the
last time the unemployment rate was at its current level of 3.9
percent, the Government ran a surplus, meaning tax revenue
exceeded all Government spending. When you look under this, you
find a number of elements, but one thing that jumped out in
this most recent report is that corporate tax receipts have
fallen by 30 percent in the aftermath of the passage of the
Republican tax bill.
Now, I remember, Mr. Chairman, when lots of our Republican
colleagues criticized the analysis and scoring from CBO and JCT
with respect to the Republican tax plan because our Republican
friends said that those corporate tax cuts were going to pay
for themselves. And, in fact, just this week the Chairman of
President Trump's Council of Economic Advisers, Kevin Hassett,
made the bizarre claim that somehow the corporate tax cuts were
paying for themselves, despite the obvious data, which is no
longer a projection but real-world data, showing corporate tax
payments have dropped by 30 percent.
I hope, Mr. Chairman, we will ask the OMB as well as some
of the President's economists to present us with some of the
background on their methodology, because that was sorely
lacking during the discussion of the tax cut debate. We demand
excellence from CBO, as we should, but it seems to me we should
be getting more than one-page papers from the administration
when they are talking about major tax changes. And now we know
that CBO is right, and, in fact, if you look at the deficits
that we are seeing today in real time, just last May the CBO
projected pretty much the deficits that we are seeing right
here in month 11 of this fiscal year.
The final point I would make, Mr. Chairman, is that while
CBO clearly has a role to play in transparency, so do we as the
Congress. The Congressional Budget Office needs both the time
and the resources to do comprehensive analyses in a quick and
transparent way. In fact, Director Hall testified before this
Committee in January, and I quote, ``There can be significant
time and resources used to become more transparent.''
CBO works as quickly as possible to produce scores while
bill are being written and rewritten, and Congress often does
not want to wait for the Congressional Budget Office to write
out a full explanation before we rush to action and rush to
vote. In fact, during the debate over repeal of the Affordable
Care Act, several CBO scores for the Affordable Care Act repeal
were simply tables with no narrative because--so we knew
millions of Americans were going to lose coverage, but Congress
did not give CBO the time to provide the full and transparent
explanation about how those bills were going to impact the
American people.
During the tax debate, we heard claims from our Republican
friends that tax cuts for big corporations and wealthy
households would pay for themselves with additional economic
growth. In fact, I remember a big deal being made about the
need for so-called dynamic scoring that takes into account
economic growth when you do a tax analysis. But the House and
the Senate both rushed to pass final legislation before the
Joint Tax Committee could do a dynamic score that would analyze
whether that claim was plausible. And, in fact, it was only
after Congress passed the bill--because we rushed before the
public could get the benefit of that analysis--only after
Congress passed the bill that JCT published a dynamic score
that found that the bill was nowhere close to paying for itself
with economic growth, and later the Congressional Budget Office
published a report finding that the tax bill would cost nearly
$2 trillion even after taking into account the economic impact.
That, of course, includes interest payments on the borrowing.
So I am really glad to see CBO do its job in working to
increase transparency. But, Mr. Chairman, what we need is for
Congress to increase our transparency and give CBO the time and
the resources to do their job for the American people, and I
look forward to this hearing.
Thank you.
Chairman Enzi. Thank you, Senator Van Hollen.
Our witness this morning is Dr. Keith Hall, the ninth
Director of the Congressional Budget Office. He is no stranger
to this Committee, having served as CBO Director since April
2015. Since that time, he has appeared before this Committee to
discuss CBO's work and its projections of the Nation's fiscal
situation many times. This morning, Dr. Hall will be talking
with us about CBO's work over the last year and the goals he
set for his critical, important agency. We look forward to
receiving your testimony.
For the information of colleagues, Dr. Hall will take
whatever time he needs, and then we will go to opening
statements for questions.
So, Dr. Hall, please begin.
STATEMENT OF THE HONORABLE KEITH HALL, PH.D., DIRECTOR,
CONGRESSIONAL BUDGET OFFICE
Dr. Hall. Thank you. Chairman Enzi, Ranking Member Sanders,
and members of the Committee, I am delighted to be here today
to discuss transparency at the Congressional Budget Office. The
transparency of our work has always been a priority of ours,
and this year we have added and shifted resources to redouble
our efforts in that area.
Transparency can mean many different things, so let me
begin by highlighting CBO's three goals in being transparent:
First, we aim to enhance the credibility of our work by
showing how it relies on data, professional research, and
expert feedback.
Second, we seek to promote a thorough understanding of our
analyses by sharing information in an accessible, clear, and
detailed manner.
Third, we want to help people gauge how our estimates might
change if policies or circumstances were different.
Over the past year, we undertook many activities supporting
progress toward those three overarching goals. Almost all of
CBO's employees spent part of their time on those activities,
and last month, we published a report summarizing them. I would
like to highlight a few, and I think there is a handout. I have
got a little summary here--hopefully you have got them at your
tables--of the accomplishments on transparency.
First, we created several interactive tools: one that lets
users add or subtract brigades, ships, aircraft squadrons, or
other units to see the effects on the squadrons, or other units
to see the effects on the Department of Defense's total
operation and support costs and the size of the military; one
that shows how we project spending on discretionary programs;
and one that allows users to enter alternative economic
scenarios and see the budgetary results.
Second, we published information about important models
that we use, including our microsimulation tax model, our long-
term projections model, and our health insurance simulation
model.
Third, we posted computer code to help analysts understand
and replicate parts of our analyses in papers about the
distribution of household income and about macroeconomic
output.
Fourth, we published analyses of the accuracy of our
spending estimates for fiscal year 2017 and of our projections
of subsidies for health insurance under the Affordable Care
Act.
And, fifth, we published a report on how we produce cost
estimates, as well as a detailed description of our formal cost
estimates and the information that they contain.
We also reached out to provide information about our work
to congressional staff. Last week, for example, we answered
questions at an ``open house'' for House staff convened by the
House Budget Committee. Tomorrow, we are making a presentation
to congressional staff--jointly with the Congressional Research
Service--about CBO's baseline budget projections and how they
are produced.
In addition, we have reached out to many experts for
feedback on our analyses. For example, last week we announced
the formation of a technical review panel to advise us on the
development and testing of the next generation of our health
insurance simulation model.
In response to interest expressed by the Congress, we plan
during the next year to publish more overviews and
documentation of some of CBO's major models and more detailed
information, including computer code, about key aspects of
those models. The models are used to simulate choices about
health insurance, project long-term budget outcomes, forecast
business investment, and estimate Medicare beneficiaries'
costs. We also plan to update our template for cost estimates
to make important information easier to find and read. And we
will continue to evaluate previous estimates in order to
improve future ones.
For example, we are currently examining how our estimate of
the effects of the effects of the American Recovery and
Reinvestment Act of 2009 on spending for the Supplemental
Nutrition Assistance Program compares with what actually
happened.
As we undertake these efforts, it will be important to
understand which ones are particularly valuable and informative
to Congress and which ones have less value. Being transparent
has costs, and CBO must, in essence, make business decisions
weighing the benefits and costs of devoting resources to
different activities. We welcome your feedback about what you
find most useful and your suggestions about other ways in which
we can provide more information about our work.
Let me close by thanking you for your support and guidance.
We have long relied on the budget committees to explain our
role to Congress, to provide constructive feedback on how we
can best serve Congress, and to provide us with guidance about
legislative developments and congressional priorities.
Thank you.
The prepared statement of Dr. Hall
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Enzi. Thank you, Dr. Hall.
Now we will turn to question. I think all the members of
the Committee understand the process that we do with each
member having 5 minutes for questions, beginning with myself
and then Senator Van Hollen, unless you are replaced by Senator
Sanders, and then alternating back and forth in order of
arrival and seniority. If you have any questions, you can ask
me about that. I will go ahead and begin the questions.
I appreciate the effort that you have gone to and the work
that you have done. I know you are currently building a new
health insurance simulation model that the agency plans to
begin to use in early 2019. Can you discuss the most important
differences between CBO's existing health care model and the
new health care model the agency is building?
Dr. Hall. Well, sure. The model itself is going to be an
upgrade and is going to be an update. We have changed some
features of it that will allow us to actually assess some
different health care changes. One of the most important things
about it is that we are going to be able to use actual data in
the model.
The previous health insurance model--in fact, even now--it
does not really rely on a current data basis, so it actually
has this interesting situation where it takes us from current
situation back to pre-ACA and then forward back to our
replacement, if we are looking at repeal and replace.
The new model will actually use--we start using 2015 data,
actual data from the ACA operations, and so we think that will
really help things, and we think that will make things more
efficient going forward.
The other thing that is going to be really different is how
we are creating it. We are doing it in a very transparent way.
We are writing detailed documentation as we go, and we are
doing something that is rather rare. We are actually making
presentations on the model as we are producing it and getting
feedback. We have done that a few times now, once publicly at
the Bipartisan Policy Center, and then we have our technical
advisory group, panel, and we are going to make a presentation
to them and get some feedback from them. And, again, we are
doing it while we are developing the model so that, one, we can
incorporate comments into the model as we are producing it;
but, two, it will add transparency. People will actually
understand what we have done even before we start using the
model. That is a really important feature for us.
Chairman Enzi. You mentioned soliciting feedback. Are there
specific groups that you are working with to solicit that
feedback? Or do you plan to release the model to the public
prior to putting it to use? How does that part of the process
work?
Dr. Hall. Well, we have already talked with the Bipartisan
Policy Center. We have talked to a couple of other groups--the
Urban Institute and the Rand folks, who have themselves done a
lot of work on health care and health care modeling. It is a
technical exercise, so we are looking for people who have
actual modeling experience. And then we just released a list of
names. If anyone takes a look on our web site, you see a list
of names that we have added to our Technical Advisory
Committee. You will see a very diverse group of people there,
all of which have particular technical skills in the modeling.
So we are pretty confident that we are going to have people who
can make useful comments to us and give us real advice going
forward.
When we first use the model, we will have some pretty
detailed documentation out. And I think when we first use the
model, we are going to use it next year for the baseline
estimate. We are going to try to make--we are planning on
making the code that is used to produce the baseline available
as sort of a ``show your work'' sort of aspect to it. And in
between the increased documentation and making some of that
code available, I think we will already take a big step
forward. Then we will sort of see what the feedback is like and
see if we can provide other information on the model.
Chairman Enzi. Do you envision this getting like the
military program where people can go in and add and subtract
and have some instance feedback that way? I know it is more
complicated than the military acquisitions.
Dr. Hall. No, I think for some models we can actually do
that, and we do have plans on trying to become--change our
modeling style that will encourage that.
The health care model itself may not be a good candidate
for that. We can talk about it, but part of the trouble with
the health care model is that it is just a piece of any
analysis. There is so much individual input into it, and the
output of the model is used in other models. That may not be as
good a candidate for that. But we have other models which are
pretty straightforward where the output of the model is what
we, in fact, use in estimates, that we are going to try to do
that with.
Chairman Enzi. Thank you. I will reserve the balance of my
time. Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. And, Mr.
Director, again, thank you for your testimony.
I appreciate the analyses that CBO has done over the years.
It is a fact that, you know, we do not always agree on the
result, but I always appreciate the integrity of the process at
CBO. And I am interested in making sure the public understands
what your findings are.
We have a President that likes to tweet a lot about the
most recent economic indicators. I do not think it surprised
anybody that, after you do a $2 trillion tax cut, you are going
to see some kind of sugar high reaction in the economy. The
unusual thing about that tax cut is we usually reserve those
stimulus efforts for times when the economy is really in bad
shape, like we did in a positive way with the economic recovery
bill and not when the economy is already on the upswing as it
was when the President took office.
We all would like to see our economy continue to grow, and
we know there are lots of elements to that, including the size
of the work force and the number of people who are working,
productivity. And I think we should focus on investments in
things like infrastructure and education. But just providing
sugar highs will not do it. And, in fact, I think if you could
tell us, Director Hall, as the CBO looks forward in your
projections, starting in the year 2020, is there any year in
which the Congressional Budget Office projects that real
economic growth will exceed 2 percent?
Dr. Hall. No, there is not. And the situation as we see it
is that we have, in fact--we are, in fact, receiving quite a
lot of stimulus in an economy that has got zero slack. And
while we are going to see some significant growth for a couple
of years, the pressure on interest rates and inflation and a
number of things is going to cause the Fed to act and going to
cause us to go through, frankly, a mini cycle. Not a business
cycle, but a bit of a slowdown in growth. So we do, in fact,
see growth slowing pretty significantly for 2 or 3 years as we
sort of work through this extra stimulus and get back to a more
sustainable, long-run growth rate.
Senator Van Hollen. And I think that is the sober analysis.
You know, economists I think across the spectrum agree that we
are seeing a sugar high right now put on top of an economy that
was already doing very well coming out of the deep recession in
2008 and had a steady climb. And, in fact, I know the President
likes to talk a lot about economic growth during certain
quarters. If you look from the period of 2009 to 2016, when
President Obama was in the White House, did we see a lot of
quarters where the growth exceeded 3 percent?
Dr. Hall. Yes, we did see a few.
Senator Van Hollen. Yes. In fact, by my count there were
eight quarters under President Obama. So looking from quarter
to quarter is just a snapshot, isn't it?
Dr. Hall. That is right. That is right. And also at that
time you have us coming out of a pretty severe recession, so
you, in fact, expect to see above-trend growth, you know, as
you do away with slack in the economy.
Senator Van Hollen. Yes. The other thing I noticed was just
today that the Bureau of Labor Statistics came out with their
most recent report. One of the things we were told was that
with the tax cut, as it accelerated, the economy gave a sugar
high that all of a sudden regular folks were going to get an
increase in their real wages, their purchasing power. But just
today the Bureau of Labor Statistics has released its latest
numbers showing that for production and supervisory workers,
which represent eight out of ten workers in America, they have
actually seen a slight decrease in their real wages over the
last year, and that is a trend we have been seeing month after
month.
Can you just talk a little bit about the difference between
nominal wage increases and real wage increases? And when you
are looking at your own pocketbook and your purchasing power,
what is the most relevant figure for an American family?
Dr. Hall. Sure. One of the reasons that we look at real
data is, of course, if you want nominal wages, you want them to
grow at least as fast as inflation does. And so the real data
does a nice comparison of how fast our--for example, with the
wages, how fast are wages growing relative to prices. So it
gives you a truer picture of whether you are having an increase
in buying power going forward.
Senator Van Hollen. And what these numbers tell us is that
when it comes to real buying power, people are actually
slightly worse off this month compared to this time last year,
and that has been a continuing trend, at least for supervisory
and non-production--production and supervisory workers.
Mr. Chairman, I thank you for the opportunity. Director
Hall, thank you for your testimony. And, again, I think having
CBO as the referee is really important. Thank you for your good
work.
Chairman Enzi. Senator Kaine.
Senator Kaine. Thank you, Mr. Chair, and thanks, Director
Hall. I echo the comments from Senator Van Hollen. It is
important to have you as the referee. I remember once sitting
with President Obama at the White House and having him kind of
muse, ``I wonder why we have let CBO be the master arbiter of
the economic effectiveness.'' And as Democrats, we often do not
like the numbers you come up with and find cause to complain,
but I am not aware of President Obama ever saying that we
should get rid of the CBO, that we should not allow it to
continue to operate or not at least take into account CBO
analysis. I have noted a number of individuals, especially the
OMB Director, describe CBO scoring of the House Republican
health care bill as ``absurd''; ``the days of relying on some
nonpartisan Congressional Budget Office to do that work for us
has probably come and gone.'' And former Speaker Gingrich
called for dismantling the CBO because ``the Congressional
Budget Office is simply incompatible with the Trump era.''
I am very glad you are doing what you are doing, and thanks
for grappling with the transparency issue.
On transparency, I just want to put some facts on the table
about the current U.S. economy. The private sector has added
private sector jobs for 102 straight months. That is the
longest streak of private sector job growth in the history of
this country, at least as we have measured it. Eighty percent
of that streak occurred under the Obama administration; 20
percent has occurred under the Trump administration. President
Trump has commented accurately that more people are working
today than at any point in the history of our Nation, but that
comment has been true since May 2014. Each month sets a new
record for the number of people working in the country.
Job creation: In the first 19 months of the Trump
administration, we have averaged created 189,000 jobs per
month. The 19 months of the Obama Administration that preceded
these months of the Trump administration, we averaged 208,000
jobs per month. The number of jobs being created per month has
slowed under this administration.
Hourly earnings growth: In the first 18 months of the Trump
administration, hourly earnings growth has increased by 1.1
percent. The relevant period, the last 18 months of the Obama
Administration, it was 1.3 percent. Wage growth, hourly
earnings growth has slowed under the Trump administration.
And so if you look at these facts--and I think in the
interest of transparency it is good to--job creation and wage
growth have actually slowed under this President for many
causes, but it is interesting to see that they have slowed even
with the tax cut that you were discussing with Senator Van
Hollen, which has had a significant deficit effect. And as you
indicated, Dr. Hall, in your testimony, I think we have to be
aware of this. As we look out, the projections are that growth
would slow even more if the Fed takes various action with an
economy near to full employment. We would potentially see that
is slower.
I want to ask you this--Will Rogers used to say, ``I only
know what I read in the newspapers,'' and I have been reading
newspapers recently, and there have been discussions of two
potentially late-breaking election eve additional tax
adjustments that might be contemplated. The House Ways and
Means Committee unveiled three bills this week that say that
they indicate compromise tax--comprise tax reform 2.0. That
would be an additional tax cut bill for some. In addition, the
White House has reported in the last 2 weeks that it is
considering undertaking a tax law change through executive
action that would index capital gains to inflation, basically
allowing the basis that somebody claims when calculating
capital gains to adjust upward by inflation. That was actually
announced the same day as the President indicated he wanted to
take away the cost-of-living adjustment for Federal employees
in their salaries.
Has the CBO been asked yet to do scoring of either of those
proposals that I have been reading about, either the tax reform
2.0 that the House Republicans are talking about or the capital
gains indexing that the Trump administration is reportedly
considering?
Dr. Hall. We have not, but I believe on the tax proposal
the Joint Committee on Taxation--they are the ones who do the
estimation on revenue legislation. I believe they did just
complete an analysis of it.
Senator Kaine. According to that analysis--and I think it
is preliminary one--extending the expiring Trump tax cuts on
the individual side of the Tax Code through 2028 would increase
the deficit by about $627 billion. I think that is the
preliminary analysis they have done. I do not believe the JCT
has costed the potential for indexing capital gains in the way
that I have described.
Dr. Hall. No.
Senator Kaine. But Penn Wharton did an indication
suggesting that it would cost between $100 and $200 billion
over a decade, with 86 percent of the gains going to the top 1
percent. Have you looked at that Penn Wharton analysis of the
capital gains indexing proposal?
Dr. Hall. No, I have not.
Senator Kaine. All right. Thank you, Dr. Hall.
Thanks, Mr. Chair.
Chairman Enzi. Thank you.
Senator Merkley.
Senator Merkley. Well, thank you, Mr. Chairman, and thank
you, Director, for being with us.
I wanted to understand the impact of the 2017 tax bill and
estimates that were made at the time. The Joint Committee on
Taxation estimated $1 trillion of cost added to the deficit.
Penn Wharton estimated $1.4 trillion. The Tax Foundation
estimated $516 billion, so half a trillion. What did CBO
estimate?
Dr. Hall. I believe our number came out to be pretty high:
$1.8 trillion, I believe, something like that. Is that what you
have?
Senator Merkley. I have $1.4 trillion, the same as the Penn
Wharton study, but based from an article, not from a CBO
report.
Dr. Hall. Okay.
Senator Merkley. But perhaps the 1.4 was after you took
into account the impact of dynamic scoring.
Dr. Hall. Right, right.
Senator Merkley. So as you stand now, as we look this many
months in, what is your revised estimate of how much it is
going to cost?
Dr. Hall. Actually, so far--and I am not sure we have
changed much at all. In fact, our forecast for the deficit this
year is pretty much on target. We will probably do a re-
estimate--certainly a re-estimate of the baseline in January
just to see how that works. But I do not think we are seeing
anything surprising that is going to make us change things.
Senator Merkley. So within the analysis CBO did to get to
their estimate, be it 1.8 or 1.4----
Dr. Hall. Yes--I am sorry.
Senator Merkley. There were different lines, different tax
provisions.
Dr. Hall. Right.
Senator Merkley. I had difficulty getting the numbers on
the individual tax provisions, what they would have costed, to
better understand individual policies. Are you now taking a
look at those individual policies that were in that tax bill
and analyzing, well, here is what we thought that piece, say
the expansion of the estate tax exemption.
Mr. Hall. Right.
Senator Merkley. That is what we thought it would cost. Now
we see it is different--or another provision. Are you looking
at the individual provisions to see and are you planning to
give us a report showing kind of in general what you estimated
on these individual policy pieces and then what it looks like
now a year later?
Dr. Hall. Well, the answer is yes. That is sort of part of
our normal process. Every time we do a baseline, we go back and
look and see how our previous baseline is doing. I do not know
how much detail we will have, but that is especially important
in tax bills because implementation can be one of the harder
things to forecast how Treasury actually does things.
Senator Merkley. Yes, and that is my point, that it is
particularly important in a tax bill to have the individual
provisions and understand what each one costs as we look to
future tax changes or revisions. And so when you started to
answer, you said yes. Does that mean we can expect a report
that will look at those different provisions, what they are
costing within that $1.4 to $1.8 trillion?
Dr. Hall. I am not sure you will have it very quickly. We
will adapt our baseline in January. There will be some changes
there that----
Senator Merkley. So here is my frustration.
Mr. Hall. Okay.
Senator Merkley. As you may know, I used to work for CBO. I
did analyses for Congress. The modeling that I did, I knew
every provision within that model, what it cost. You cannot get
to an overall score without adding up the impact of the
individual tax change provisions. So the analysis at CBO has
that information. Why should Congress not have that information
on what the individual policy's impact is?
Dr. Hall. Well, if you would like, we can certainly look
and see what sort of detail we can provide from our forecast of
things. The reason I am slowing down a little bit on a look at
sort of how it is actually working out is tax data is very slow
to come out, and so it literally will be a couple years down
the road before we get enough data to really understand what is
happening now with the tax data.
Senator Merkley. Okay. Well, that is a fair point. But my
point is that initial analysis, be it $1.4 trillion or $1.8
trillion, to get to that analysis CBO had to look at each
individual tax provision and what it would cost, and that is
the type of information that you already have, CBO already has,
because it was necessary, and we want it and we should have it.
And I am asking you for it.
Dr. Hall. Okay. Well, I will tell you, I am happy to
follow-up with you and see what we have got and see what we can
provide. If we have got it, we are happy to provide it.
Senator Merkley. Thank you. And if you do not have it, how
did you possibly get to an overall score if you did not cost
out the individual provisions, right?
Dr. Hall. Right.
Senator Merkley. Okay.
Dr. Hall. Understood.
Senator Merkley. So at this point, if one looks at 2027
when this tax bill is completed, what is your sense of the
percentage of the benefits that goes to the top 1 percent?
Dr. Hall. I do not know that. There was some work done by
JCT in the original bill. They did do a distributional analysis
of that. We did not do that for our outlook report, so I cannot
tell you. But I think if you go back and look at the JCT work,
you will get a picture of that. I am sorry, I do not----
Senator Merkley. I have gotten the picture from other
organizations. I wanted it from yours.
Dr. Hall. Okay.
Senator Merkley. The Tax Policy Center looked at it, and
107 percent of the benefits goes to the top 1 percent by 2017.
A hundred and seven percent. In other words, the entire cost of
the bill plus another seven percent goes to the richest
Americans. And, meanwhile, more than half of Americans would
pay more than they would have under existing law. It is just
shocking that when we look around the world and we see
countries where the legislature and the executive branch work
with an elite to essentially raid the national treasury and
distribute that money to the richest among them, we call those
``corrupt countries.'' And yet the very same thing happened
right here in America, one of the biggest tax heists or bank
heists inflicted on the United States of America, on the
citizens of the United States of America, in that 2017 tax
bill, raiding the treasury for the benefit of the very
wealthiest Americans.
Thank you.
Chairman Enzi. Some interesting math, 107 percent of the
benefit.
Senator Harris.
Senator Harris. Thank you.
Dr. Hall, I share your belief and agree that we need more
transparency across the board in our Federal Government and,
frankly, government at all levels. So on that point, children
make up 24 percent of the population of the United States, yet
in fiscal year 2017, Federal spending dedicated to children
reached an all-time low of 7.75 percent, and total spending on
children's programs decreased by 5.5 percent between 2014 and
2017. To me this trend indicates a critical need for a clear
and accessible tool so that we can monitor and measure on a
frequent basis Federal decisions around spending on children in
the United States.
So I hope we can agree that CBO is well equipped to be that
agency that would actually create and implement such a tool,
and, in fact, I introduced a bill that would require the CBO to
provide estimates of legislation's expected impact on children.
It would also require that you would produce reports on Federal
spending for children and develop a public web site on Federal
spending for children.
So my question to you is: Do you believe that these
measures will complement your goal and CBO's goal of bolstering
transparency not only of CBO's analyses and processes but also
of the economic impacts associated with Federal policy
decisions?
Dr. Hall. Sure. If there is sufficient interest, we could
put resources into that. You know, we want to----
Senator Harris. Well, the children are certainly interested
in it, but, unfortunately, they do not vote and they do not----
Dr. Hall. I am talking about congressional interest. I am
talking about in particular congressional committee interest.
Senator Harris. Do you need congressional committee
interest to do it, or can you do it----
Dr. Hall. We need congressional committee interest in
particular. We do not take on--certainly do not take on
analytical work unless we have a clear customer for it. I can
look into the idea and sort of see--get some feel for what we
could do and see if there is some interest.
Senator Harris. Well, as a point of information, Mr. Chair,
does the Committee need to vote on something like this? How do
we express Committee interest? Because as a member of the
Committee, I am certainly expressing an interest. Is there
something more that is required?
Chairman Enzi. Yes, the committee of jurisdiction has to
have the interest in it and request to CBO. I believe that is
the way it works.
Dr. Hall. That is right. Right, and there are two sides to
every committee, though. There is the majority and then there
is the minority, and the minority side has standing to ask us
to do work.
Senator Harris. Okay. So I will follow through on that. And
then are there other ways that you believe that the CBO could
enhance Congress' and the public's understanding of how Federal
spending impacts children?
Dr. Hall. Well, this sort of report sounds like it is
something that we could undertake, it is something we could
look at. We always start with how much data is there and that
sort of thing. I think it would be hard to do anything too
real-time. You know, if we looked at a piece of legislation, it
would be really hard to separate out the effects like that. But
as sort of an analytical piece, that seems to me like topic-
wise, that is in our ballpark, I think.
Senator Harris. That would be great. Well, let us plan to
do a follow-up with my staff and yours, and then I can present
something to the Committee as a follow-up.
Chairman Enzi. As a follow-up on your question, it usually
has to be based on some kind of legislation as well, not just--
--
Dr. Hall. Right.
Chairman Enzi [continuing]. A general thing of how----
Senator Harris. And I have a piece of legislation.
Chairman Enzi. Okay.
Senator Harris. Thank you.
Senator Enzi. We will do a second round of questions if
people are interested. I am interested, so I will do another
one.
Director Hall, I would like to ask you about CBO's latest
monthly budget review for August 2018, which was brought up
earlier in this hearing. For the first 11 months of the fiscal
year, revenues are $19 billion higher than for the same period
last year. Is that correct?
Dr. Hall. That is right.
Chairman Enzi. But spending is up $240 billion. Can you
tell me what is contributing to that increase in spending.
Dr. Hall. Sure. Actually, it is quite a number of things.
It is almost across the board. Net interest payments are up
quite a bit over last year. The military spending is up. Social
Security benefits are up; Medicare and Medicaid are all up. So
you are right that a lot of that increase or that change over
last year is from the spending side, outlay side.
Chairman Enzi. But there is an increase in revenues.
Dr. Hall. That is right.
Chairman Enzi. I have been traveling Wyoming and was
listening to a number of people. I tried to get into some
businesses to see how they work because any business that I
have not been in looks pretty simple. And I know that people
that have not been in any business, it looks even simpler. So I
have been trying to find out what kind of effects these things
have had, and I had one fellow who said, ``You know, I have
been doing a bunch of construction now, and I have given my
employees more wages, and I am going to have to pay a million
more in taxes this year than I did last year.'' But he said,
``That is because I am making more money.''
So that is how the tax thing is working, and I think we
will get September--September normally is a big time for tax
payments on estimates, and we have not gotten that yet,
obviously, because it is still September.
Dr. Hall. Right. And, in fact, September usually reduces
the deficit for the year because revenues are very high in
September.
Chairman Enzi. Thank you.
Now, CBO and the Joint Committee on Taxation, JCT, are the
two entities Congress relies on for estimating the budgetary
impact of legislation. Comparisons are often made between the
time it takes for the two agencies to provide technical
assistance and produce cost estimates.
Can you discuss any differences between CBO and JCT models
and the types of analysis that they produce that might explain
this discrepancy?
Dr. Hall. Sure. In a lot of ways we are very similar. The
big difference is that the JCT focuses on tax issues, so they
really work for a couple of committees. We work for almost
everybody. We wind up working for a lot of committees, and our
coverage areas are much, much larger. So we have a much broader
waterfront of things. That is one of the biggest differences.
And then, of course, in that big waterfront are things that are
fairly complicated. It can be anything from ag bills to the DoD
to lots of things. So we have a big variety of things, and that
is really one of the biggest differences.
We have hundreds of models that we use on these different
topics, so we have a very diverse set of models. We have a very
diverse set of data. But I think we share the same sort of
challenges, though, when there is a major piece of legislation.
I think JCT has to work very, very hard to get it done, and I
think we have to work very, very hard to get it done
oftentimes.
Chairman Enzi. So are you saying that JCT can just stick to
the code, but you have to stick to all of the other
legislation? Did I get that right?
Dr. Hall. Yes, that is right. It is the breadth of work
that is fairly different. So at any point in time, we have
quite a large number of estimates that we are producing. We
produced 740 estimates last year on a huge variety of topics.
JCT I am sure was nowhere near that because they are focusing
on the tax issues.
Chairman Enzi. Yes, thank you.
In your report you discuss how CBO often attempts to
compare its estimates to those of other entities. In some cases
those comparisons are to the administration's estimates, and in
other cases it is comparison to private entities. Can you
please explain some of the challenges that are inherent in such
comparisons?
Dr. Hall. Sure, sure. Well, we do comparisons, and we do
our best to do them. The biggest single thing--for example, in
our economic forecasts, we compare economic forecasts to OMB
and we compare it to private sector--is we operate under
current law. And so our forecast is the current law compromise
only. Other folks are different than that.
For example, that was really relevant in the buildup to the
tax bill. We literally had to ignore the fact that tax
legislation was possible or likely and had to pretend it was
not going to happen. And so in our forecast, none of that
happened while in the private sector forecast that did happen.
And that is mostly it. You know, we have our revenue and
spending forecasts. We do compare those to OMB. We compare very
favorably, I think, to everybody in our forecasting.
For individual pieces of legislation, that gets even
trickier because we have to read the legislation very carefully
and try to model all aspects of it. The private sector folks
can sometimes give you a quick number. We sometimes give quick
numbers. But to actually do the work carefully and get all the
detail and put it into a format that we can model the budgetary
impact is generally a heavier lift certainly than the private
sector has.
Chairman Enzi. Thank you. My time plus the time that I
reserved has expired.
Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman.
Who has a more transparent open process with respect to
what the public knows about how they go about their work, CBO
or OMB?
Dr. Hall. I am trying to be diplomatic.
[Laughter.]
Senator Van Hollen. Please. We are trying to be transparent
here, Dr. Hall.
Dr. Hall. We try to be very transparent. For example, when
we do an analysis of the President's budget, we tell you what
our picture is of the economy before and after so you know what
our baseline is. That does not typically happen at OMB, even
though they probably have to do the work. It is that sort of
thing.
Part of the issue, at least a little bit, is that we report
to all of Congress.
Senator Van Hollen. Yes. No, I understand. I mean, I think
it is pretty clear that is the case. How about with respect to
the tax plan? Did you ever get a detailed analysis from the
Trump administration with respect to the impact of their tax
plan?
Dr. Hall. No.
Senator Van Hollen. No. Neither did the public. If I
recall, we got like two pages, Mr. Chairman. And so it is not
surprising that the projections that this administration made
could not be justified. If they could have justified them, they
would have presented them to the public. Your data you present
to the public, and so far your projections are right on track
with respect to the impact of the tax cuts.
So, yes, the economy is doing well. We talked about the
fact it has been growing strongly for over 9 years now. So it
is not at all surprising that, even with some tax cut with that
kind of economic growth, there is some revenue coming into the
Treasury.
What percent of--revenue represents what percent of GDP in
2018, according to CBO? Do you know?
Dr. Hall. I can look it up in 1 second here. I think I
brought the right----
Senator Van Hollen. My number--I do not know if this----is
16.6 percent.
Dr. Hall. I can now verify that.
Senator Van Hollen. Got it. Thank you. And the last time we
had a balanced budget, do you recall what the revenues were as
a percent of GDP?
Dr. Hall. I do not offhand. I suspect it was higher because
it was at a time of very strong economic growth.
Senator Van Hollen. I think it was in the range of 20
percent of GDP. And we had a balanced budget for about a 3-year
period, and then we had the Bush tax cuts and a number of other
things happened. We had the Iraq war and other things.
Dr. Hall. Right.
Senator Van Hollen. And if you are looking at the long
term, I mean, what does CBO look at mostly--the percentage of
revenue? When you are looking at whether we are balancing the
budget as a percent of revenue, of GDP?
Dr. Hall. Yes, that is right. That is certainly part of our
forecast, and we do a lot of comparing where we are and where
we are going to be relative to historical levels and that sort
of the thing.
Senator Van Hollen. And what is your calculation of 11 the
loss in revenue over the next 10 years as a result of the tax
cut, right? I mean, you have the number, right?
Dr. Hall. It was $1.8 trillion.
Senator Van Hollen. $1.8 trillion. And that, if I recall--
did that include the interest on the debt?
Dr. Hall. Yes.
Senator Van Hollen. That included it, Okay. So close to $2
trillion with interest on the debt.
Mr. Chairman, I do not think it is surprising that there is
additional revenue coming in. The reality is, though, we will
have $2 trillion, $1.8 trillion less in revenue coming in as a
direct result of the tax cut, and that takes into account any
additional economic activity.
I wanted to ask you, Director Hall, because I asked you at
one of the earlier hearings, about what share of that increased
economic growth would actually go to benefit foreign accounts
compared to our fellow Americans? And it was really shocking.
You determined that on average between the years 2018 and 2028,
43 percent of the income from increased economic activity
linked to these tax cuts flowed into foreign accounts, right?
Dr. Hall. That is right.
Senator Van Hollen. And by 2028, an astounding 71 percent
of the increased economic benefit went into foreign accounts,
right?
Dr. Hall. Yes.
Senator Van Hollen. Mr. Chairman, I think that the public
needs to know that, and in the interest of transparency, we
will do our best to let them know. And part of that is the
benefit of these huge stock buybacks, right?
Dr. Hall. I think so. I am not sure that we got a lot in
there about the stock buybacks yet because we are not sure of
what actually is going to happen.
Senator Van Hollen. Right. Well, as of our count right now,
there has been about $700 billion of funds that we were told
were going to be used for greater investment in plant and
equipment and higher wages, you know, like $4,000 a-year wage
increases. Instead of going to that purpose, they are going to
stock buybacks, and foreigners own a 35-percent share of the
value of U.S. corporate stocks, so they are getting a lot of
that.
The last thing I would just ask, Mr. Chairman, is you
mentioned the projected increased deficits on top of the $1.8
trillion we would see if we extended some of the other tax cuts
as has been proposed by House Republicans. I believe you said
the JCT number was $657 billion. Now, that is only additional
for the 3-year window. Is that right?
Dr. Hall. I believe that is right.
Senator Van Hollen. Right. And I would like to put in the
record, Mr. Chairman--it was referenced earlier--the Penn
Wharton budget model, which estimates that if you do what the
House Republicans want to do, you would increase the Government
debt by over $5 trillion over the next 20 years, and actually
reduce GDP because of the drag on the economy.
Senator Van Hollen. My final question, with your
indulgence, would just be if the Director could talk a little
bit about how large debts like that can actually be a drag on
the economy and reduce economic growth?
Dr. Hall. Sure, absolutely. One of the issues clearly is
debts and deficit are a drag. Part of it is that with the
Federal Government borrowing, there is crowding out because
they are borrowing, and they are borrowing on rising interest
rates over what they normally would be, and that raises the
cost of capital to the private sector and can reduce investment
over what it would be otherwise. So in a sense, this is sort of
working against something like a tax bill, which gives
incentives for companies to invest. But if you finance it
through deficits, you undo some of that.
Senator Van Hollen. That is even more true when the economy
is doing well, right? Because there is less slack in the
economy.
Dr. Hall. That is right.
Senator Van Hollen. Thank you, Mr. Chairman.
Chairman Enzi. Thank you. And since we have gotten pretty
far away from looking at transparency of the CBO, I will not do
another round. I appreciate all the participation on the
Democratic side and the interest that they have shown and some
of the spectacular things that you have mentioned.
Senator Van Hollen. I am just citing CBO.
Chairman Enzi. There are a lot of comments about the last
time that the budget balanced, and that is the one that really
bothers me because most of the revenue from that came from
Social Security payments. We had an excess of Social Security
coming in compared to the people that were retired. And there
is no way in the Federal Government to save that money. We
tried talking about lock boxes and stuff, but you cannot do
that. And, consequently, we spent that Social Security money,
and we put bonds in a drawer over in Maryland that say that we
owe that Social Security money. But that is where the revenues
came from that shows this magnificent balancing of budgets. And
that is why before 9/11 they decided they needed to reduce some
taxes so that things could be a little more honest. I do not
know that they would have been. But we had 9/11, and that did
cause a lot of expenses that we had not anticipated.
Senator Van Hollen. Mr. Chairman, with all respect, we have
just heard that we are going to face close to a $2 trillion
revenue shortfall as a direct result of what was passed.
Chairman Enzi. Well, we will see if that happens or not.
Senator Van Hollen. We will.
Chairman Enzi. The economists that did some alternate
evaluations on it came up with some different numbers, and we
had that statically scored.
Senator Van Hollen. I would like to see the same
transparency in their methodology that we are requiring of CBO
in theirs, and JCT.
Chairman Enzi. Well, I think they would be willing to do
that.
Senator Van Hollen. I would love to see it. I know the
White House has not shown us a thing.
Chairman Enzi. So anybody who has additional questions--and
I do have additional questions--they can be submitted by 6 p.m.
today. We hope that you will answer those expeditiously, and
those will be a part of the record as well.
Chairman Enzi. With no further business to come before the
Committee, we will adjourn.
[Whereupon, at 11:28 a.m., the Committee was adjourned.]
ADDITIONAL COMMITTEE QUESTIONS
[The following submitted questions were not asked at the
hearing but were answered by the witness subsequent to the
hearing:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
[all]
| MEMBERNAME | BIOGUIDEID | GPOID | CHAMBER | PARTY | ROLE | STATE | CONGRESS | AUTHORITYID |
|---|---|---|---|---|---|---|---|---|
| Sanders, Bernard | S000033 | 8270 | S | I | COMMMEMBER | VT | 115 | 1010 |
| Wyden, Ron | W000779 | 8265 | S | D | COMMMEMBER | OR | 115 | 1247 |
| Murray, Patty | M001111 | 8237 | S | D | COMMMEMBER | WA | 115 | 1409 |
| Stabenow, Debbie | S000770 | 8261 | S | D | COMMMEMBER | MI | 115 | 1531 |
| Enzi, Michael B. | E000285 | 8328 | S | R | COMMMEMBER | WY | 115 | 1542 |
| Toomey, Pat | T000461 | S | R | COMMMEMBER | PA | 115 | 1594 | |
| Boozman, John | B001236 | 8247 | S | R | COMMMEMBER | AR | 115 | 1687 |
| Van Hollen, Chris | V000128 | 7983 | S | D | COMMMEMBER | MD | 115 | 1729 |
| Whitehouse, Sheldon | W000802 | 8264 | S | D | COMMMEMBER | RI | 115 | 1823 |
| Corker, Bob | C001071 | 8294 | S | R | COMMMEMBER | TN | 115 | 1825 |
| Warner, Mark R. | W000805 | 8269 | S | D | COMMMEMBER | VA | 115 | 1897 |
| Merkley, Jeff | M001176 | 8238 | S | D | COMMMEMBER | OR | 115 | 1900 |
| Gardner, Cory | G000562 | 7862 | S | R | COMMMEMBER | CO | 115 | 1998 |
| Johnson, Ron | J000293 | 8355 | S | R | COMMMEMBER | WI | 115 | 2086 |
| Cotton, Tom | C001095 | S | R | COMMMEMBER | AR | 115 | 2098 | |
| Kaine, Tim | K000384 | S | D | COMMMEMBER | VA | 115 | 2176 | |
| King, Angus S., Jr. | K000383 | S | I | COMMMEMBER | ME | 115 | 2185 | |
| Perdue, David | P000612 | S | R | COMMMEMBER | GA | 115 | 2286 | |
| Harris, Kamala D. | H001075 | S | D | COMMMEMBER | CA | 115 | 2301 | |
| Kennedy, John | K000393 | S | R | COMMMEMBER | LA | 115 | 2303 | |
| Crapo, Mike | C000880 | 8289 | S | R | COMMMEMBER | ID | 115 | 250 |
| Graham, Lindsey | G000359 | 8335 | S | R | COMMMEMBER | SC | 115 | 452 |
| Grassley, Chuck | G000386 | 8316 | S | R | COMMMEMBER | IA | 115 | 457 |
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